Thoughts on Components

October 1, 2012

Looking over my past investments, I am struck by how much harder it is to develop a company that is selling components to OEM’s rather than a product to the end market. I have had two companies pivot to making the product that they were initially just enabling others to make – one did it in time and it is working great, the other did not succeed (and went out of business a few years ago).

Why are component companies harder?  Several reasons: OEM’s are tough negotiators (low margins), the markets are often smaller (lower exit value) and you are constantly at risk of being swapped out (higher risk to revenues = financing risk). Also, a component company struggles to build a brand that the end customer recognizes (and if they can, it can be very expensive to do so). Maybe most importantly, you don’t get the direct connection to the end customer that is needed to understand when to make the right decisions about what is important about your product, what benefits are key, how the product really needs to improve. If a company is not well connected to the end buyer, can end up being (mis)guided into pursuing technical improvements rather than customer benefit improvements and they are not always the same thing.

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