7 Places Manufacturers Should Raise Capital
If you have an innovative concept for making a real product in America, you might just be in good company. Some of the coolest businesses going revolve around innovative products: New thermostats (Nest), fusion technology (Tri-Alpha Energy), electric bikes (Motoczysz), green buildings (Treehouseonline), pop-up shops (BirchBox), sustainable agriculture (Fforest farm), cool surge protectors (Quirky), awesome pants (Bonobos), bio-fuels (Amyris), stun guns (Taser), and thousands more. But if you need to get your business funded, probably one of your greatest challenges is finding backers.
Where have famous makers gone in the past? You might look at the tactics of Rockefeller, Vanderbilt, and Carnegie--three great forefathers of American manufacturing. Their ideas were breakthrough products, and in hindsight they seemed to be able to raise the start-up capital they required. But they started their businesses at a time when they were the growth industries in America. Today, there is competition for capital that seems to give information businesses a distinct advantage.
Let's look at two equations. The first is manufacturing forefathers, such as Andrew Carnegie. How did they do it?
Their inputs: lots of money, armies of workers, tons of natural resources, hectares of land, and little regulation.
Their outputs: railroads, fuel, paper, and steel to build the world.
Next, let's look at how the information scions, such as Bill Gates, did it.
Their inputs: modest amount of money, plus an office building of programmers.
Their outputs: services to empower the world.
Think of these equations from the point-of-view of an investor. If you had money and were trying to make more of it by investing in one of the two scenarios above, which would you choose? Current wisdom says the information guys have it by a large margin. Certainly, most Silicon Valley investors would have you believe it that way. After all, they are looking for the greatest return on partner-capital and, at last count, there are very few of them that advertise a focus on investing in makers and industrialists. They should know, shouldn't they?
Well, the facts might say something different. A recent CNN Money analysis examined peak wealth of company founders as a percentage of existing national GDP at the end of their lives. This statistic is a good way to level across different time periods and to control for exogenous effects after death. From this study, it turns out that the makers are clearly in the lead as they occupy eight of the 10 wealthiest positions in U.S. history (the two loan hold-outs were a banker and a software guy). Further, 70 percent of these makers came from families who had nothing but the shirts on their backs. They built their empires from scratch. This means that their total return on invested capital is comparably large. Bottom line, it may be that the best bets to date have been on makers and industrialists and not the information and services tycoons.
So if you are a maker, take heart! The odds are in your favor from the point of view of ultimate return on capital. The problem is still that you need to find the capital to get your widget factory going. Here are the seven most likely places to look for capital and the relative advantages and disadvantages of each.
1. Venture Capital
Advantage: They are the most obvious of capital providers, as they have shingles hung out in every major city.
Disadvantage: Most of them fear capital intensity and do not have the time, experience, or mandate from their limited partners to invest in manufacturing.
Bonus fact: There are some intrepid VCs, who, if you can find them (much like the "A-Team"), like backing makers as a mantra. For example, O'Reilly AlphaTech, Valor Equity Partners, Founders Fund, and Khosla.
2. Angel Investors
Advantage: This is perhaps the easiest to approach, as these angel investors have been there and done that, and they only have to consult themselves to make a decision.
Disadvantage: Often they do not have the investment size to take you the whole way, and they tend to be toughest on founders…after all, they are giving you use of their money. They made it and you haven't yet.
Bonus fact: Some of these folks have gotten together and pooled their resources. For example: Tech Stars, Beacon Angels, RedSwan, Y-Combinator, and even your wealthy neighbors.
Advantage: With this capital you don't have to give up ownership.
Disadvantage: Most debt providers require collateral or equity cushion in order to loan you money and terms can be expensive.
Bonus fact: There are a few early stage or venture-debt providers who are willing to talk. For example, Triple Point, Silicon Valley Bank, and Square 1 Bank.
Advantage: These are corporations that have some business interest in what you do. For them, getting in early can be a huge innovation boost.
Disadvantage: You might think of them as the biggest potential competitor known to man: Goliath.
Bonus fact: Often you can find “strategics” who need what you do, but in a parallel industry (i.e. you make wheels for cars and they need the same technology for airplanes). Maybe you can share.
5. Private Equity
Advantage: These teams have great operating experience because they specialize in operating businesses and are completely comfortable with machinery and how much it costs.
Disadvantage: Usually these investors need you to have something like $30MM in last 12mo revenue before they will consider an investment.
Bonus fact: There are some who have multi-stage investment vehicles who can back you early and take you all the way through growth capital. For example: Bain Capital, Fidelity, and WR Hambrecht + Co.
Advantage: Lately the US federal government has become the nation's largest start-up investor.
Disadvantage: You might become a public whipping-boy like Solyndra.
Bonus fact: It is not just the Feds; certain states are dying to attract businesses that employ blue-collar skilled workers. You could be their huckleberry and get some distinct perks.
Advantage: Absolutely the No. 1 preferred source of start-up capital if you are nimble enough to get the money before you have to deliver the product.
Disadvantage: Important reminder: it is not a good idea to spend un-earned revenue on research and development.
Bonus fact: There are some nifty funding vehicles that have aggregated consumers in a framework where they can back businesses who are only at the idea stage but who promise to make a super-cool product. We call 'em "prosumers," and they include Kickstarter, Profounder, and The Domino Project.
So there are plenty of options, the question is more about whether you have the force of vision to explain the power of your business and your plan to get it built to an audience of risk-a-phobic capital providers of the world.
No doubt, us makers have it tough because we need to provide so much more in the way of inputs just to get going. But job creation is on your side. There are plenty of skilled workers ready to join your cause. You can even leverage the information guys to accelerate the IT side of your manufacturing plan. When you get it right, the rewards are unmistakable.
Get on with it and build great things!