Even though it’s a vast sector in the midst of transformation, manufacturing is often overlooked by early-stage investors. We surveyed top VCs in the industry to gather their perspectives on the challenges and opportunities facing manufacturing.
Traditionally, manufacturing companies are capital-intensive and can be slow to implement new technology and processes. The investors in the survey below acknowledge the long-standing barriers facing founders in this space, yet they see large opportunities where startups can challenge incumbents.
These investors noted that the pandemic is bringing overnight change in the manufacturing world; old rules are being rewritten in the face of worker safety, remote work and the need for increased automation. According to Eclipse Ventures founder Lior Susan, “COVID-19 has exposed the systemic vulnerabilities inherent to manufacturing and supply chain and, as such, significant opportunities for innovation. The market was lukewarm for a long time — it’s time to turn up the heat.”
- Lior Susan, founder and managing partner, Eclipse Ventures.
- Ajay Agarwal, Bain Capital.
- Greg Papadopoulos, venture partner, NEA.
- Dayna Grayson, co-founder and general partner, Construct Capital.
Lior Susan, Eclipse Ventures
What trends are you most excited about in manufacturing from an investing perspective?
Digital solutions that offer manufacturers greater agility and resilience will become major areas of focus for investors. For example, manufacturers still reliant on manual assembly were unable to build products when factories closed due to the coronavirus lockdown. While nothing would have kept production at 100%, the ability to quickly pivot and engage software-defined processes would have allowed manufacturing lines to continue building with a skeleton crew (especially important for any facility required to implement social distancing). Such systems have remote monitoring capabilities and computer vision systems to flag defeats in real-time and halt production if necessary.
How much time are you spending on manufacturing right now? Is the market underheated, overheated or just right?
Manufacturing and supply chain represent a significant portion of the Eclipse portfolio including companies such as Bright Machines, Instrumental, Clearmetal, Symbio, VulcanForms and adjacent industrial spaces like predictive maintenance for machinery such as Augury. For years, these industries have been neglected by the venture community because historically they were capital-intensive and slow to implement new technologies. They are also incredibly complex, requiring a deep understanding of their ecosystems. COVID-19 has exposed the systemic vulnerabilities inherent to manufacturing and supply chain and, as such, significant opportunities for innovation. The market was lukewarm for a long time — it’s time to turn up the heat.
What are you looking for in your next investment?
We’ve said this before, but the Silicon Valley mantra of “move fast and break things” simply doesn’t work in physical, revenue-generating environments such as manufacturing. These industries are intricate ecosystems; therefore, an app or single piece of technology is not enough to dramatically improve operational efficiency. In fact, adding new technology in isolation, without integrating into existing systems and processes, will most likely result in chaos or failure. So, we look for teams with a deep understanding of the industry’s processes, existing systems, and (most importantly) that industry’s pain points. When we invested in 6 River Systems, it was clear from the beginning that we had met a founding team fully conversant in the problems facing the warehousing and logistics space, this accelerated both technical development and customer engagement. The company was acquired by Shopify Inc. four years later for a deal valued at approximately $450M.
Are there startups that you wish you would see in the industry but don’t?
Foundational systems: On the whole, techniques for “design for manufacturing” haven’t seen much innovation. Most existing processes rely on a patchwork of fragmented systems to take a product from concept design to a manufacturing line. Integrated, holistic solutions would yield incredible efficiency for manufacturing companies.
Supply chain: manufacturing and supply chain are inextricably linked. There’s significant focus on the “factory of the future,” and while we certainly need that (and we need it now), without efficient supply chains, the problem is only partially solved. The industry needs more centralized, real-time visibility across its supply chains, down to the subcomponent level. It’s difficult for teams to make informed decisions or analyze potential issues without easy access to data. Mitigating supply chain emergencies is a crucial element of industry resilience.
Training and education: We want to bring more manufacturing back to the USA but we have to acknowledge the reality that the industry looks a lot different know than it has in the past. Industry 4.0 requires different technical skills. In addition to implementing efficient new solutions, we need to train people to use them.
How has COVID-19 impacted the manufacturing investing landscape?
I believe we’ll see much more interest in the manufacturing space. It’s an enormous market opportunity, typically overlooked by early-stage investors. If the current environment shows us anything, it’s how desperate manufacturing is for modernization. It’s time to accelerate digital transformation in one of our most essential industries.
How has COVID-19 impacted manufacturing startups operationally?
Startups in this space face an interesting duality. First, they must be as prudent and disciplined as any other startup with regards to cash burn and overall operational efficiency. Additionally, however, we work with startups focused on the digital transformation of manufacturing that are experiencing significant tailwinds for their businesses as customers seek resiliency via onshoring or remote deployment. Manufacturing can’t weather another crisis in the short term, therefore will we see extensive innovation.
What part of manufacturing do you think is most apt to adopt technology?
Even before COVID-19, many parts of the manufacturing industry were experiencing detrimental labor shortages. The use of automation and other systems that allow for distributed manufacturing would permit greater flexibility in where manufacturing sites were located.
Materials and additive manufacturing are additional areas ripe for innovation. Our everyday products have been improved considerably — for example, the all-electric car, yet the systems used to build these cutting-edge products are stuck in a previous decade. Innovation in spaces like high-speed metal additive manufacturing would pave the way for even better end products of the future.
Ajay Agarwal, Bain Capital
What trends are you most excited about in manufacturing from an investing perspective?
We are excited about several trends in manufacturing that are creating opportunities for young companies:
- Additive manufacturing — We are several years into the hype curve, and as the technology matures, we are interested to see 3D printing move from use solely in prototyping, increasingly into production. That may require advancements in software (e.g., CAD), as well as new hardware (e.g., metrology).
- Atoms to bits — Sensors and wireless connectivity are more affordable than ever, and companies want results, not just data. Solutions providers are moving from monitoring into management, workflow and optimization.
- Automation — We’re seeing more and more manufacturing environments where cobots are working alongside humans. Is Universal Robots the end-all-be-all provider? What software could be necessary to program and orchestrate the assembly line?
- New talent — The most compelling insights often come from both domain expertise and a willingness to reconsider the problem. We are seeing thousands of engineers reinvent manufacturing for Tesla, SpaceX, Rivian and more. What products and companies will those experiences lead them to build?
How much time are you spending on manufacturing right now? Is the market underheated, overheated or just right?
I think the market is underheated. We see very few new companies in this space, relative both to some hot themes of the moment (low-code platforms, productivity software), and to the size of the opportunity. We would love to see more founders bring a fresh perspective to the space.
What are you looking for in your next investment? Are there startups that you wish you would see in the industry but don’t?
The questions we often find ourselves asking manufacturing technology companies are:
- Manufacturing is a heterogeneous category — there can be big differences from one kind of manufacturing to another. How big is the market opportunity for your solution, depending on who it’s effective for?
- Deployment of technology in manufacturing environments is often risky, slow, and requires a lot of services and configuration, which is often not compatible with venture outcomes. Do you have a model that can drive faster adoption cycles?
Some areas that feel like whitespace for innovation:
- Next-generation manufacturing execution system. Most systems used today were built 30 years ago and not designed for our current era of real-time collaborative software in the cloud, leveraging modern data processing for machine learning and AI.
- Robotics programming and orchestration. When we first invested in Kiva Systems over a decade ago, there weren’t many vendors in the industrial environment. That’s changing, with a bevy of autonomous drone, arm, vehicles and other form factors filling a growing range of roles. How will manufacturers manage this environment in the future?
How has COVID-19 impacted the manufacturing investing landscape?
We are seeing several clear implications of this crisis:
- Sanitation — Manufacturers are moving quickly to keep workers safe and lines running by procuring PPE and cleaning supplies, reconfiguring workstations and revising leave policies. We expect this to have an impact on companies providing healthcare services or technologies to the blue-collar audience.
- Reshoring — Geopolitics is increasing the risk of a far-flung supply chain, and more companies are opting to manufacture in North America. Given higher labor costs in the US, that is a tailwind for automation specifically and improving productivity broadly.
How has COVID-19 impacted manufacturing startups operationally?
In our experience:
- Short-Term Uncertainty — As their customers deal with volatility in facility operations and end-customer demand, manufacturing startups will see some adverse impact to new bookings and sales.
- Remote Implementation — Given that many facilities are cautious about having contractors or third-parties on site, this is complicating any required onboarding and installation. However, there could be a long-term benefit if companies are required to figure out how to sell and implement remotely.
- Tailwinds to Digitization — In the medium run, we are optimistic about a tailwind, as digitization and automation are now not only differentiators, but frankly necessary in order to operate and thrive.
What advice do you have for your portfolio companies facing unprecedented surges right now?
For any company that is facing unprecedented demand, our advice has been:
- Invest in processes for remote hiring, onboarding and training, so that you can bring on new team members in sales, customer support and other essential functions to sustainable growth.
- Consider extending your cash runway, incorporating not only the dollars you will need to get through the economic recovery, but also capital you may need to double-down on your momentum. Plenty of dry powder remains on the sidelines, and we haven’t seen significant declines in valuation for companies that have momentum in this crisis.
What are the biggest cracks emerging through this overnight adoption of manufacturing?
As more manufacturing moves on shore, the top gap is likely to be in talent and training programs after several decades in which manufacturing declined relative to services share of the US economy. Operating modern manufacturing facilities requires significant specialized expertise, and we may need greater capacity in upskilling or reskilling our existing workforce.
What part of manufacturing do you think is most apt to adopt technology?
We generally see three philosophies, of which the first two are most common, but the latter is an emerging path that we are excited about:
- Enterprise — The largest manufacturers often represent multimillion dollar contracts and have meaningful innovation budgets, as well as dedicated teams for piloting new technology. However, they also move more slowly on commercial decisions and may lack a clear path from pilot to true deployment.
- Mid-Market — Medium-sized manufacturers are often more nimble in decision-making (may be owner-led) and need to innovate to survive. However, many companies have encountered a high level of price sensitivity (including aversion to recurring revenue), and these businesses may be more specialized or niche in their operations.
- Engineers — Increasingly, we are seeing a trend where individual engineers and teams within factories are looking for their own solutions and empowered to purchase. While they possess the least buying power, positive experiences can lead to virility within the organization, enabling an inbound sales strategy.
Greg Papadopoulos, NEA
What trends are you most excited about in manufacturing from an investing perspective?
Broadly speaking, automation, additive and digitalization. All of these conspire to create a huge opportunity for modern software as the new foundation for innovation in manufacturing. There are transitive effects on supply chains (they get collapsed), labor arbitrage (access to inexpensive labor pools becomes less important) and redistribution of manufacturing closer to the point of consumption. Somewhat longer term is on-demand manufacturing and mass customization.
How much time are you spending on manufacturing right now? Is the market underheated, overheated or just right?
An increasing amount: about 20%. Some of the additive and automation parts are short-term overhyped, but longer term under appreciated. We love the possibilities of all manner of new products springing from the revolution in the additive manufacturing of metals, plastics and composites. Much more investment is warranted in automation, digitalization and the deeper implications of AI.
What are you looking for in your next investment?
Companies that are central to the shift in the geographic manufacturing base and ones that have software as an essential building block. We are especially keyed into network effects where the bigger a company’s customer base, the better the software models it can build that leads to an ever-improving product. We are just barely scratching the surface of AI/ML. Automation and digitalization are key themes.
Are there startups that you wish you would see in the industry but don’t?
They are out there, but it would be great to see more startups in sustainable manufacturing in the Cradle-to-Cradle sense AND where there is compelling ROI. This double-bottom line is not only possible, but we should increasingly insist upon it.
More multimaterial and integrated mechanical/electronics would be interesting. All of this tied together with deep amount of software plus AI/ML expertise. There is HUGE untapped potential in “closing the loop” around AI-driven design (e.g. generative) and AI-driven manufacturing techniques (both additive and conventional) plus, of course, AI-driven automation. Again, we are super early in extracting gigantic value from AI and data network-effects in manufacturing.
How has COVID-19 impacted the manufacturing investing landscape?
COVID-19 has clearly disrupted investing across the spectrum and manufacturing is no exception. We do, however, see intense interest in “remote anything” — for example, remote monitoring and operations.
How has COVID-19 impacted manufacturing startups operationally?
Because many manufacturing startups make things as part of the products or services that they offer, there is the specific challenge of performing R&D work that requires access to labs and equipment. Often there is a need for several engineers to cooperate on shared physical prototypes. These aren’t exactly work-from-home activities, but there is also endless creativity at these companies and they are finding a way to safely proceed in many cases.
There is also the expected uncertainty in end-customer demand. That is highly dependent on how hard a customer’s sector is hit (or accelerated) by the pandemic.
What advice do you have for your portfolio companies facing unprecedented surges right now?
It’s amazing to see how people are rising to the challenge. Some portfolio companies are dealing with overwhelming demand either directly or in the their customers. The number one thing on our mind is the health and safety of everyone involved. Like many others, we have seen step-wise productivity increases, especially in software-intensive jobs. That isn’t long-term sustainable, however, and we are advising people to focus on the well-being of themselves and their family.
What are the biggest cracks emerging through this overnight adoption of edtech?
Video now is where the web was in 1995; a ton of promise but huge limitations. The most acute one is moving beyond interacting with people and including the artifacts or systems they are working on. This is more like the challenges in tele-medicine. It’s a tremendous and beneficial step-wise change for projection care, but the camera on your phone can only go so far. There are enormous opportunities here and we will be on the lookout for them.
What part of manufacturing do you think is most apt to adopt technology?
What you make (design) and how you make it (automation & digitalization). We are also seeing greatly accelerated interest in remote monitoring and management. The key accelerant is when a startup can demonstrate hard ROI, ideally with less than a year payback and no net cash from the customer (you save them money within their budget cycle). Presenting a startup’s product as-a-service can be a key to unlocking adoption. There is a reflex to assume the model is different and therefore adds friction, but if the economics pan out, it can become a big accelerant to adoption.
What will happen to manufacturing when it’s no longer a necessity in schools? What will stick and what do you think won’t?
To the contrary, universities have widely embraced the maker movement and have opened prototyping labs and sophistication test equipment to teams of undergraduates. It is amazing to see how multidisciplinary these students are — they are just as willing to incorporate metal 3D printing as they are to using DNA synthesis. Robotics, and automation in general, are vibrant topics in schools. It is the generalization of manufacturing into a bits+atoms system that will be the academic future of making things.
Plus any other thoughts you want to share with TechCrunch readers.
Think bits and atoms.
Dayna Grayson, Construct Capital
What trends are you most excited about in manufacturing from an investing perspective?
I’m very excited about the need to add distributed, lighter weight, lower cost forms of manufacturing. I have been investing in 3D printing companies such as Desktop Metal and Formlabs for a while now. Both produce end-use quality parts vs prototypes opening up the possibility of alternative forms of production and advanced manufacturing. I think we’ll see the need to eliminate single points of failure in the supply chain and advances in manufacturing are a big part of this. We’re at the beginning stages of introducing smarter ways to build new products and 3D printing is only one promising new technology.
How much time are you spending on manufacturing right now? Is the market underheated, overheated or just right?
I think it’s still underheated. Investors may turn their attention here over the coming years — similar to how they turned their attention to new consumer platforms or enterprise SaaS after the Global Financial Crisis — but it’s a difficult space to understand and to navigate. I look for companies who can offer products that have immediate ROI or cost savings to enterprise buyers. Capital expenditures and budgets are hard to get through.
What are you looking for in your next investment?
I am interested in companies that can take proven technology, such as robotics, and repackage commoditized parts and market them to businesses serving consumers. This is the “service robotics” space. I’ve seen interesting ideas using commoditized hardware in robotics and layering on a smart software system to collaborate with other workers in a commercial space, such as a restaurant’s kitchen. This is a very interesting space for robotics.
Are there startups that you wish you would see in the industry but don’t?
I am also very interested in companies attempting to disrupt the processed foods space with a vertically integrated system and brand — and maybe even an advance in the food ingredients themselves. Advanced production hasn’t touched the processed foods space in a while. I’ve seen entrepreneurs take on farming in recent years, and I think there is lots of potential in food assembly and packaging too.
How has COVID-19 impacted the manufacturing investing landscape?
The supply chain has definitely been disrupted. I think the biggest effect of COVID-19 on the manufacturing space is that enterprise budgets for capex have been halted, but, in the meantime, demand for everyday products has remained strong. Entrepreneurs need to think through this conundrum and ways to enable enterprises to purchase and integrate new technology more cost efficiently.