Fun fact, I've enjoyed sailing since I was a little kid. Though, this article not about that.
And, for those of you that don't know what a DNVB is, Andy Dunn wrote a great post on them about 5 years go that will give you a good primer.
Now, let's get to it...
Manufactured goods are in short supply these days, with pent-up demand surging and the U.S. economy reopening amidst a struggling global supply chain that continues to be put under tremendous strain. The Institute for Supply Management recently reported a 37-year high in its index of national factory activity, signaling a boom for the sector and economy.
Manufacturing makes up 11.39% of the total output in the economy, but it can be a risky bet for both investors and entrepreneurs. A high barrier to entry, coupled with unique business challenges and startup costs, can make it hard to get even a small production off the ground.
My great friend and CO-CEO, Matt and I know these challenges well. Over the past five years, we’ve launched and scaled two manufacturing brands, DIY Hairpin Legs and Semi Exact. Both brands offer high-quality steel furniture components for DIY consumers and furniture retailers worldwide where we are on a mission to make it easy for our customers to say, “I made it.” We believe that it means more when you make things yourself and there should be a better way to purchase, enjoy and re-use furniture.
I’ve been fortunate to be a part of starting a number of ventures over the years. Manufacturing, by far, has proven to be amongst the most challenging, yet most rewarding of them all. Along with the expected operational challenges around securing equipment, materials and labor, there are three main challenges that we’ve learned are specific to this sector:
Investors' Obsession with Tech Startups: Investors are looking to find the next big tech win, rather than invest in the manufacturing of tangible goods.
Capital Can Be Limited: Traditional lenders require personal guarantees, making it more risky for founders.
Manufacturing Startup Resources Are Scarce and Fragmented: The knowledge base is limited for early-stage manufacturing companies.
Challenge #1: Investors Are Obsessed with Tech
Over the past 30 years, global investment has seemingly been obsessed with the next tech company or B2B SaaS startup. We saw the tech boom and bust of the 90s, and again in the 2000s. In today’s markets, we are beginning to see a common practice of mega-backed tech ventures and startups that position themselves as tech companies to attract investors, when their core business is actually something else. Investors want tech companies, and companies such as WeWork positioned themselves as such in order to raise significant funding.
When we hit the one million dollar mark in revenue relatively quickly, investors were eager to hear more. Interestingly, interest waned when we dug into the details of our direct-to-consumer business that manufactured steel components to make it easy for people to build their own furniture.
It didn’t seem to matter if you operated with a healthy margin and were running a successful company. With a million dollars (keep in mind, that’s relatively small in the grand scheme of things) of capital equipment on the books, the traditional early-stage investment sources seemed to be spooked. The majority have an interest in e-commerce; however, the next evolution of industry 4.0 for startups and digitally native vertical brands (DNVBs) is not yet well understood by the venture community. I believe this will change dramatically in the years ahead as more consumers desire to have products made to their specifications.
Challenge #2: Capital Can Be Limited
Traditional financing sources typically lend to companies that have been in business for over five years. Startups, by their very nature, don't have that credit history established yet.
In terms of assets-based lending, it's possible to secure lending. Lenders require personal guarantees for the majority of these debt instruments, putting founders and their families' well-being on the hook for millions of dollars in guarantees against capital equipment.
In investors' language, we’d hear quips such as, "Oh, you’re running a real business.” The classic chicken-and-egg conundrum applies as manufacturing startups can't sell goods without materials, supplies and a facility. The more efficiencies that are gained, the better the margin - and that takes front-loaded investment. Yes, there’s the question of “how do you know your sales forecast and mix.” Here’s the thing, manufacturing requires real front-loaded costs that are different from scaling on-demand resources such as people and knowledge, common to the tech or professional services industries. There are numerous ways of leveraging technology to better predict product mix than ever before.
Challenge #3: Manufacturing Startup Resources Are Scarce
When we embarked into founding DIY Hairpin Legs and Semi Exact, Matt and I were fortunate to bring prior experience in founding and growing companies. However, just like many new (ad)ventures, there was much to learn. Neither of us had spent time prior to this company building teams that were focused from the jump on lean, made-to-measure manufacturing. To complicate matters further, we started by producing items on demand, one by one, to ship directly to customers. We still do this today, and have learned a LOT since then, much in part due to trial and error, and from our great advisors, such as Eric Van Dam, that continue to help us along the way.
Our business model followed some of Amazon’s thinking surrounding consumer preferences, but we didn't have a global inventory to draw from. Of the 136+ manufacturing companies we’ve talked to over the years — suppliers in China, Taiwan, Europe and the U.S. — only two were willing to entertain the idea of manufacturing on demand and shipping to customers. Once that happened, we knew we needed to do something about it.
In terms of resources specific to manufacturing startups, a simple Google search offers visibility into availability and some very old resources that are relatively outdated for today’s consumer driven, tech-enabled purchasing journey. Fun example - take a few minutes and search “how to found a tech startup," and you’ll find nearly three times as many results as searching “how to start a manufacturing company.” Not only will you find a lot more information in the tech space, you’ll also find more relevant information for today’s times.
What you're producing also determines the amount of available resources and investments. We learned that furniture was one of the market categories with the least investment in innovation over the past two decades. Other industries, such as food and beverage or fashion, simply have more pathways and a larger ecosystem of support. Much of this has been driven by the offshoring of manufacturing over the past 40 years. Yet, where many people saw empty resources, we saw, and continue to see, opportunity.
Challenges Abound, Yet It Can and MUST be Done
There are no shortage of challenges to starting the new wave of consumer companies — this new wave of companies will operate in a direct, technically savvy, and vertically integrated manner that will ensure they are focused on consumer choice. This front-loaded investment in capabilities will provide a foundation to respond to customer change patterns in real time. The journey is more than possible, even enjoyable, if you can roll with the punches and operate with determination, humility and humor. We’ve joked in the past, “Good for us, we ventured out into a vast blue ocean, where no one wants to play…” and in reality - that is a good thing if we can continue to navigate it well, with the right resources and support. It indeed takes an army… though, maybe a better analogy would be that it takes a true blend of armed services with capabilities to build the next great type of company - driven by consumer choice, on demand, made-to-measure with real meaning in delivery.
I’d recommend leveraging a couple of existing frameworks and platforms such as Startup Rocket (go team Prota!) and Shopify. Our board of advisors has been critical in helping fill knowledge gaps and there are proven methodologies such as the Toyota Way to rely on as well.
Today, after navigating the storm of COVID while growing sales over 300 percent from the prior year, standing-up a new manufacturing facility to service the growth and develop new products, we are ramping up again for more growth. New products are coming down the line, and new collaborations are taking place with DIY furniture designers and influencers.
The bottomline that we believe is… tech is enabling the growth of our category of companies that will ultimately be disruptive to the industries they enter. Consumers will continue to demand more, faster and with a higher level of choice/customization than ever before. The companies, like ours, that are positioning themselves in order to support these consumer choices are the ones that will win.
Here’s to you, the Maker… let’s keep creating!