micah t collins

The “Fabless” Gadget Firm…

Chris Dixon posted a perspective on horizontal specialization, titled “Making industries ‘garage ready’ for startups,” and this notion of fablessness, referencing the fabless semiconductor business model’s positive impact on entrepreneurial innovation.

I thought I’d re-post my comment which I posted at his blog:

Companies, small and large, that make gadgets have been operating “fabless” for a while. CE brands in particular have been outsourcing the manufacturing – and even some low-value-add aspects of integration and compliance – for devices in much the same way fabless semiconductor firms draw their lines between the make and the buy. Beyond the critical aspects like hardware design, specification, and acceptance disciplines, “fabless” gadget firms can further differentiate themselves with brand, distribution, platforming, and application software/UI/user experience. 

As an aside, consider that Apple takes “fablessness” to an extreme, being “fabless” on manufacturing devices, but also traditionally fabless on microprocessor ASICs. Lab126/Amazon is another model of the “fabless” gadget, and indeed it’s aiming in Apple’s direction.

Also consider that there are plenty of mature consumer electronics brands, which as small to medium sized businesses, leverage the “fabless” gadget business model in order to scale. Firms like these typically find it harder to innovate, though, because their core business is so addictive, being able to simply crank – with sometimes very quick sub-9-month returns on investment and positive, yet fairly slim, margins. Still, some of the longest standing medium-sized CE companies understand the need for “intrapreneurship” and can reinvent themselves often enough, and just-in-time, to avoid commoditization, and death.

Hopefully, “fabless” gadget startups will be an evermore common reality in years ahead. I’ve found that early stage investors often balk at business models that involve hardware of any kind, even “fabless” approaches, due to a lack of experience with it, or a perceived lack of precedent for a break-thru success – even though cases can be made that Roku, Aliph, Boxee have all leveraged the “fabless” gadget model to get where they are today, and there are plenty of lower tech projects on kickstarter showing signs of life as well. 

There are both perceived and real risks involved in sourcing from contract manufacturers (CM), but experience with gadget sourcing by an investor, or in the founding team, can mitigate both false perceptions, and real risks. So in some sense, it speaks to the “people” aspect of valuing an opportunity. It also helps when founders/entrepreneurs have actual experience in design, spec’ing, and verification of sourced hardware, as well. Founders who have existing relationships with manufacturers can also greatly help bridge gaps and mitigate risk in the early days.

On the other side of sourcing deals lies the CM. It is helpful to work with CMs who have an appreciation of disruptive product concepts, making such CMs amenable to lower MOQs and less risk-pricing tactics. This can significantly reduce some of the capital intensive inventory risk for a startup. Adventurous CMs might even accept warrants in lieu of NRE fees! There are also innovations in distribution to be explored that can offer means to reducing working capital, like selling direct, or taking (kickstarter-like) advanced orders.

Speaking again to a lack of strong precedent, maybe we are only a couple shining examples away from increasing the activity in the “fabless gadget” startup sector.

As for this happening in NYC area, I see no reason why it can’t, because “fabless” gadgeteering is already here, just not yet at volume in startup form.