Venture Capital Strategies for Additive Manufacturing (Part 2)
On December 8th, I started a series of posts introducing strategies that startups / venture capital firms can employ in the additive manufacturing (3D printing) space, beginning with The Full Stack. In part two, I introduce how additive manufacturing is poised to make (and in many cases, is already making) hardware startups more viable for venture capital investment, while unlocking scientific discoveries in our universities’ research labs.
Investment Strategy: Reinventing the Hardware Startup
Over the last decade plus, software (to include social platforms, mobile, etc) has dominated the venture capital scene, in part because of its scalability, but also for its adaptability to a business model favorable to venture capital. Relatively little investment (especially dedicated to capital expenditures) is needed to achieve a minimum viable product, thus allowing software startups to quickly establish whether the business premise is viable (fail quickly). The same has not been true of hardware startups, which typically require significant capital investment and time before the first product and the customer market can be truly tested.
The “Lean” Hardware Startup
Additive manufacturing, in concert with complementary markets / distribution channels such as KickStarter, Shapeways and i.materialise, can significantly reduce the disadvantages hardware startups face. Viability of hardware startup ideas can be tested before large capital outlays are needed in the following ways:
- Proof of concept – Using additive manufacturing for prototyping, concepts can be tested and sold to customers without the need for expensive molds or creating costly, surplus inventory.
- Access to customers – The aforementioned markets / distribution channels offer a platform for startups to understand consumer demand, without having to spend large amounts of time and money engaging traditional, brick-and-mortar retailers or developing their own sales force.
- Revision – Because changes in product design (when producing through additive manufacturing) simply require tweaking the CAD file on the computer, hardware startups using additive manufacturing have the opportunity to quickly revise products based upon customer feedback, helping them to find the “sweet spot” faster.
By embracing these advantages, hardware startups can get off the ground quicker, with less capital outlay and more interaction with customers, iterating until they find the best version of their own product.
As additive manufacturing continues to develop and gains traction, hardware startups will become increasingly attractive to the venture capital community. Tenets of the Lean Startup philosophy now start to become applicable to the hardware world. This creates an appetizing scenario for venture capital firms, whereby seed money goes further, failing ideas are uncovered quicker and big bets can be made based on more information from early adopting customers.
Dens of Innovation
One of the most interesting aspects of additive manufacturing is its accessibility. The “maker” movement, spearheaded by groups such as the Fab Foundation, has pushed for a democratization of resources, to include additive manufacturing equipment. At the same time, a number of companies have pushed innovation in the desktop printer segment, driving down costs and increasing capabilities along the lower end of printer market. The result has been more printers available outside of traditional manufacturing and industry settings. Printers are found in universities, garages, workshops and in open user facilities, such as TechShop and Fab Labs. Additionally, online platforms, such as 3D Hubs, have made it possible to connect remotely and share printer resources.
These user facilities are of particular note, as they offer a nexus to exchange ideas and expertise while innovating in the hardware space. While initial interest at many labs has mainly centered on developing products for personal use, commercial interests are beginning to develop as users move further along the learning curve and additive manufacturing becomes a cornerstone in the creative process of young entrepreneurs.
This has a very important implication for venture capital. A preview of tomorrow’s hardware startups is available at the local additive manufacturing user facility. Developing positive relationships with such user facilities can help identify promising entrepreneurs and projects at a very early stage and pay dividends down the road.
Unlocking University Research
I spent six years providing university professors with research grants to develop new technologies in the materials and energy space. Over that time, one of my greatest frustrations was that academic research is not set up to reward the scaling of technology, instead focusing only on initial scientific discovery. (This is largely due to the scientific journal industry and the incentive system that exists in academia.) Many times, potentially game-changing technologies are left on the lab bench because they cannot be easily scaled (and those working on them do not have the proper incentives to overcome the challenge).
Additive manufacturing has the ability to lower the barrier between the lab bench and commercialization by making scaling and prototyping easier and more cost-effective. As the technology improves, becomes universally accessible and users develop proficiency, graduate students and professors will have the power to take scientific discoveries and easily direct them into application. By simply lowering the barrier to scale, whether it be eliminating the need for costly fabrication equipment or enabling iteration on a design, additive manufacturing has the power to unlock countless scientific discoveries.
Translating that into the commercial world, there will be an increasing number of opportunities, outside of computer science departments, of which venture capitalists will need to be mindful.
Implications for Venture Capital
The hardware startup space is rewriting itself with the introduction of additive manufacturing. Innovation and product development cycles can be compressed with access to these techniques. Capital requirements are significantly reduced. Startups can iterate on designs to identify customer preferences or develop customized solutions. Network effects will be realized at user facilities. The barriers between scientific discoveries and scaled commercial applications will be lowered.
These are all very good things for the venture capital world.
In particular, hardware startups will become viable investment targets for smaller, seed funds that lack the ability to take large, long-term bets. Angel and seed funds will certainly be able to carry hardware-based startups farther than ever before in shorter time periods, de-risking later investments, or perhaps making them unnecessary. Venture capital and angel investors executing this investment strategy should look to user facilities and platforms such as KickStarter to generate deal flow. Universities are likely to prove increasingly fertile grounds for hardware startup ideas as well, as academic science is unlocked with increasing ease.