Thursday, April 24, 2008

Early Stage Capital and US Manufacturing - Is a new paradigm on the horizon?

On Monday of last week, I profiled a profound article covering the upsurge of American Manufacturing Startups at the same time as a decrease in Manufacturing jobs.

As I have thought about this state of affairs knowing what we have learned in the last several years, it has occurred to me that there is an opportunity in the capital markets - an opportunity to provide capital in a market which is underserved.

Though anecdotal, think of a famous venture capital firm - any firm, and think of the type of investments they make....IT, medical, biotech, greentech, material science, IP, information mgmt, software, internet technology, etc. However one business type that does not EVER come to mind is Manufacturing. Often, people will glibly say this absence in the market is because these businesses need too much capital and therefore the IRR is too low and the risk is too high. If this were true, none of these business would get started, but then how do you explain the 67% upsurge in US manufacturing startups, and where is the capital coming from to fund them.

There are larger capital institutions, like investment banks, who are equipped to provide capital to the manufacturing industry, but they rarely if ever reach into the early stage capital business.

Perhaps it is the case that more informal networks of capital providing are beginning to pick up this slack in the market. Again it is anecdotal, but I can say with certainty that people within our network of capital providers at Local Motors take specific interest in those businesses with whom we do business. Together, we vet business ideas and teams, and it makes for an interesting counterpoint to your typical VC firm, as this review often spawns new investments for our investors

We will naturally keep an eye on this trend.

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