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The Real Economy

The dot-coms have faded. Is that the end of high-tech start-ups?
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Small Business 2001

High technology can seem like the land of the quick or the dead: either a company grows rapidly to dominate its industry or else it dies aborning. The rocketing tech businesses that turn up on stock pickers' lists of hot companies fit that image to a T. To fans the businesses are tomorrow's Microsofts and Dells. To skeptics they're candidates for dot-com-style flameout. Whichever the outcome, everyone agrees: they won't stay small for long.

But that picture is incomplete. For every Microsoft there are a thousand small, specialized software companies churning out programs for niche markets. And for every eToys -- the #2 site on the Web during the holidays last year and now in bankruptcy -- there are any number of small shops actually making money on the Internet. "Tens of thousands of small businesses you've never heard of are quietly making a go of it online," reports Business Week's Robert D. Hof. Example: ElectricShaver.com, a sales, service, and repair outfit that does 90% of its $1 million in revenues on the Web.

And when you step out beyond the usual confines of big computer companies and the Internet, you see still more of what small companies do in high tech. They pioneer technologies that big companies haven't yet begun to explore. They make the parts and provide the services that make places like Silicon Valley hum. Two reports from the field:

MEMS the word
Ever hear of MEMS? The acronym stands for microelectromechanical systems. Rick Snyder, CEO and cofounder of Ardesta LLC, in Ann Arbor, Mich., a venture-capital firm that describes itself as an "accelerator" for the industry, calls MEMS "small tech." Hundreds of small private companies, many affiliated with research labs, are working to make this new technology as pervasive as semiconductors.

MEMS are components -- superminiaturized machines that can be used as pressure sensors, for example, or as part of an optical switch. The tiny machines are having an impact on industries ranging from telecommunications and biotechnology to ordinary manufacturing. "There are at least 1,000 different MEMS products and prototypes, and up to 20 variations on each of those," says Steve Walsh, director of technology entrepreneurship at the University of New Mexico and cochairman of an international MEMS conference. "There are at least 15 of them in a new car, and more than 100 in the next-generation John Deere tractor."

Walsh can rattle off a list of small companies around the world that are working on commercial MEMS applications, including many of the 70 or so businesses that are using the technology to develop an all-optical switch for the telecommunications industry. Why hasn't a larger company taken the lead in this expensive research? "People who are winning in an existing industry don't want to reinvent themselves, because they don't want to lose their existing position," says Walsh. Snyder agrees: "Large companies have traditional ways of doing things that work. The industrial and consumer markets will be gigantic, but it's going to take longer for larger-scale companies to say, 'We need it.' "

Out of the spotlight
While it seems that every day a new small company from Silicon Valley makes its debut in the public eye, plenty of neighboring businesses toil in the background -- never the hot IPO, never the subject of a "companies to watch" article, but critical nevertheless to the valley's health. Among them are the hundreds of contract electronics manufacturers (CEMs) that build the parts inside PCs, networks, and printers. "You don't hear about them because they don't put their name on any labels," says Doug Henton, cofounder and president of Collaborative Economics, in Palo Alto, Calif., an economic consulting company focused on community development. In a study a few years ago, Henton found, more than 500 companies of all sizes were doing contract electronics manufacturing in the region. "It's one of the largest sectors we have here," Henton says.

A few of those manufacturers -- Solectron Corp., for instance -- are giants. But there are far more small companies in the contract industry than large ones. Pamela Gordon, president and founder of Technology Forecasters Inc., a high-tech market-research company in Alameda, Calif., says that only about 70 of the roughly 3,000 CEMs in the world have sales greater than $100 million. One that just crossed that line is Flash Electronics Inc., in Fremont, Calif. Last year it was 19th on the Inc. 500 list, with an eye-popping five-year growth rate of 5,050%. In 2000 Flash stayed on the fast track, as its revenues jumped from $37 million in 1999 to $125 million.

The 2001 State of Small Business issue


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Last updated: May 15, 2001




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