Manufacturing – Venture Capital vs. Private Equity

When I started planning my first venture capital fund, I really had a difficult time explaining to LPs how I was going to create a venture capital fund which invests in contract manufacturing. I really didn’t know what to call my unique brand of investing.

As I started to get out into the field I began to get more and more inbound inquiries from manufacturing, robotics, IIoT, and automation engineers that didn’t know where to start. If you are a software company its easy, you just find a local incubator or accelerator and drop in. If you are developing hardware, you might need $100,000 – $200,000 just for the equipment. This doesn’t fit the incubator model.

If a robotics startup gets to revenue and profitability, they have their choice of venture capital funds or private equity funds to choose from but when they are just starting out it is not as easy.

Venture Capital or Private Equity

Venture capital funds normally invest in fast-growing startups. Private equity firms normally invest in established manufacturing firms. There are quite a few “hardware” incubators, accelerators, prototypers, etc. but nothing remotely close to startup contract manufacturing. If you had to do a poll of how contract manufacturers get started, I think 99% have a machine in their garage or poll barn to build clients on the side. Who invests in manufacturing startups and why?

Financial Arbitrage

Private equity firms typically pay a multiple of EBITDA. Let’s generally call it 5x. When you purchase a manufacturing machine, you are strictly paying for the machine. A good rule of thumb for manufacturers is that you would like to get your machine paid off in 2 years. Granted EBITDA and the amount you pay for your machine are not the same thing but if you can put down 20% on your machine, pay it off in 2 years (5x) and then sell the company for a multiple above that, returns can rival those of a venture capital firm.

Manufacturing Platform

With manufacturing comes jobs. Most economic development groups are interested to help manufacturing operations get going. The fund will develop a platform to help startup manufacturers get off the ground. We will have small manufacturing suites available for low rents or for free with investment. We will have bank relationships that know how to work with startup manufacturers. We will have tool shop space and machines available to startups for standard equipment (mills, lathes). We will work with software and machinery providers to provide discounted prices to startups. We will work with manufacturing reps to identify markets and opportunities.

Why Now?

We feel that the current industry trends are creating fast mover advantages. Off the shelf automation components can help create a pardigm shift for even old and entrenched manufacturers. We stay on top of current trends in automation to help our portfolio companies grow.

Manufacturing Network

Several of the key players in the platform also help create the network. Banks, engineers, sales reps, economic development, investors (manufacturers) and most importantly the other manufacturing startups. By building a network of manufacturers with a common thread, we should be able to help each other grow through knowledge sharing, networking and job sub-contracting.

Manufacturing Startup Bank Loan

If you are a manufacturing startup, that cannot get a bank loan, even based on assets, don’t hesitate to reach out. We work with a handful of banks to help manufacturing startups get going. If you are in the Milwaukee area we also can help you find some space.

More to come… Do you have thoughts on this concept (good or bad) feel free to email me at research@forwardcapitalfund.com.