Over the last few months, Manufacturing Disruption has published a series of articles describing opportunities created in the additive manufacturing / 3D printing industry and how VC firms can capitalize on these opportunities. The genesis of the research began with an independent project I began at London Business School during my Executive MBA and the more I got into the topic, the more promise it showed.
My research has shown four distinct strategies for value creation and capture arising from additive manufacturing technology, with corresponding opportunities across the venture capital industry, from small seed funds to corporate VC funds, all the way up to major top-tier firms. Each strategy is summarized below and includes links to in-depth articles:
Part 1 – The (Printed) Full Stack
The (Printed) Full Stack strategy plays off two forces. First, there are technology gaps at the upper end of additive manufacturing, such as simultaneous printing of multiple disparate materials, more effective construction using biomaterials, embedding electronics, just to name a few. Second, aerospace, defense and biomedical are high-margin industries that push the technology envelope and value customization with relatively low batch volumes. By pushing the boundaries of printing technology, additive manufacturing can enable the production of new high-value products. The question then becomes how to maximize value capture from those products.
By adopting a full stack approach (introduced by venture capitalist Chris Dixon), a company can control the entire vertical and capture more of the product’s profit margin (among other advantages). For an additive manufacturing startup, that means developing the printer technology, but instead of selling it to a third party to develop/manufacture products, it would use the technology itself to produce and sell to customers. The printing technology itself is very specialized to a specific class of product, and thus would have a limited customer base. However, by adopting the full stack approach, the company opens itself to a potentially much larger market: aerospace/defense/biomedical products. An example of this strategy is currently being tested by by Organovo, which is developing bio-printing of human tissues for the purposes of drug testing.
This type of strategy is likely a long haul and probably very capital intensive. Only startups with significant backing and patient investors will likely succeed, meaning that corporate spinoffs or startups with heavy, high-powered VC support are most suited to engage in a full stack strategy.
Part 2 – Reinventing the Hardware Startup
Reinventing the Hardware Startup with the aid of additive manufacturing is being accomplished in a number of ways.
- Historically, software startups have enjoyed a significant advantage over hardware startups in that they have appreciably lower capital requirements to reach a minimum viable product and thus verify the customer value proposition. Hardware startups typically required large outside investment and long lead times before the first product launch, making them comparatively more risky investments for venture capital firms. Additive manufacturing shrinks this gap by making it cheap and easy to prototype, allowing for a quicker and more cash efficient path to achieve a minimum viable product. Having hardware startups get real products in the hands of early customers (in the initial stages of the customer development process) de-risks investment for venture capital firms. Furthermore, moving to production quickly (even at limited batch numbers) allows hardware startups to have customers fund growth (instead of having to reach out to VCs). In combination with pre-sale distribution channels, such as KickStarter, hardware startups can adopt a lean startup philosophy in a way previously impossible.
- Customization was once the enemy of profit margin for hardware startups. Individual customization might require unique and expensive molds or tooling, eroding the economic viability of a business. However, for 3D printed products, the cost of customization is only the time and effort of editing a digital CAD file. This unlocks opportunities for high-margin products where customization is key to the product’s value. The medical industry is already proving the viability of this business model, but other industries may benefit in the future as well.
- The chasm between science and commercialization has always been tough to cross, so any technology easing the process of scaling scientific discovery will create a tremendous amount of value. Additive manufacturing technologies are becoming more and more prevalent in research laboratories (both academic and commercial) and consequently, we will expect an increasing number of scientific discoveries being unlocked and commercialized.
By making hardware startups increasingly viable, additive manufacturing is creating a number of opportunities for venture capital firms and angel investors to score wins in areas which were once too pricey and/or risky. Decreasing the capital needed to grow a hardware startup allows smaller VCs and angels investors to be more active in the area. Furthermore, deal sourcing becomes straightforward – innovation will gravitate to where printing capabilities are abundant and available: universities and user facilities (such as TechShop and Fab Labs).
A good example of this strategy already beginning to work is early-stage hardware-focused venture capital firm Bolt. The firm has hit a winning combination by mixing venture funding, prototyping capabilities (including additive manufacturing resources) and hardware expertise/mentoring.
Part 3 – Innovating Internally – Corporate Venture Capital
Innovating Internally – Corporate Venture Capital is the realization that despite the media attention that desktop, consumer printers (like MakerBot) have generated, additive manufacturing will realize the most (at least, near-term) impact within the traditional hardware manufacturing sector. Through prototyping, manufacturing simplification, adding valuable complexity to parts, weight reductions, on-demand inventory, digitization of replacement parts, simplification of logistics chains or added functionality – traditional manufacturing companies stand to gain tremendously from incorporation of additive manufacturing technology. That said, driving the additive manufacturing industry to create the technology to fulfill those needs and then incorporate said new technologies into existing processes is not easy. This is where active corporate venture capital can pay large dividends for large manufacturing incumbents.
By incentivizing startups to evolve to satisfy their additive manufacturing needs, corporate venture firms can play a big role in the story of how 3D printing will benefit traditional industrial powers. Although some firms are likely to develop capabilities in-house (through internal R&D), it is difficult (if not impossible) to develop disruptive technologies internally. Therefore, the role of corporate venture capital becomes tremendously important by injecting outside innovation. This is very true in the advanced manufacturing arena and major players like Siemens and GE are already playing a proactive role through their venture arms. These corporate VCs create environments where additive manufacturing startups focused on industry-specific problems can succeed.
Part 4 – Growing the Additive Manufacturing Ecosystem
Growing the Additive Manufacturing Ecosystem creates a more powerful and efficient path from idea to production, while maximizing the benefits of additive manufacturing and making it easier for users to access these benefits.
Opportunities exist across the value chain but in particular can be found in the following areas:
- Digitizing ideas – making the transition from idea to digital file can sometimes be one of the most difficult steps (at least to do it well), so making the process easier and more accurate presents a number of entrepreneurial possibilities. Of course, traditional CAD programs like Solidworks (Desault) and AutoCAD (Autodesk) dominate the area, but as niche and less experienced users demand solutions, opportunities are presenting themselves. The transition of users/designers away from desktops (and laptops) and towards tablets and smart phones is likely to greatly impact the market. Meanwhile, 3D scanning offers an alternative for digitizing 3D designs. Considering the processing power and camera quality that are now housed in our phones, there are software-based opportunities (using existing consumer hardware) to go along with the need for novel hardware-based scanning systems.
- Interfacing with printers – transferring a digital file to a 3D printer may seem straightforward, but given the myriad of printers that exist and their range of capabilities, realizing the physical incarnation of a digital design can be difficult. Making this interface as seamless as possible certainly presents entrepreneurial opportunities, but perhaps the greater prize exists in allowing users to access any printer with capabilities to match their ambitions. Print services such as 3DPrintUK, 3D Hubs and Stratasys Direct Manufacturing are already engaging this space, but there is still plenty of room for innovation.
- Creating new marketplaces – novel distribution channels tend to grow hand-in-hand with disruptive technologies and the rise of additive manufacturing is already giving birth to new marketplaces. Creating platforms for users to upload, store, share and profit from digital designs will grow in importance as more people/companies have access to their own printing capabilities. Traditional and non-traditional marketplaces, such as Amazon (in partnership with 3DLT) and Shapeways, are creating places for printing entrepreneurs to sell their printed products. Of course, pre-payment distribution channels like KickStarter have already proven important to the development of 3D printing. That said, marketplaces are still relatively immature, leaving room for new entrants, especially on the B2B side. The question of how an all-digital exchange will work (and appropriately profit file-creators) still looms and presents opportunities.
Ecosystem investment introduces a number of positives, but also challenges for VC firms. While software and platform startups fit well into existing VC investment strategies and expertise, there exists a number of strong incumbents in each area. Additionally, because of the accessibility of the underlying business model, VCs are likely to pay a premium (due to competition) for top startups. Strong marketplace startups likely will need heavy investment and backing by strong VCs with patience to achieve victory in a long term play. Despite the obstacles, there are a number of very large wins that will cut across all direct digital manufacturing technologies and have the potential to change the way we approach manufacturing in the future.