
Recent challenges in the 3D print world revolve around investment issues, but what’s really going on?
You may have heard of the challenges encountered by most 3D print companies: they just can’t get investment recently. There are a number of factors involved, such as interest rates, but one of the biggest issues has to do with how investment firms actually work. This is not always understood by everyone, and sometimes not even by the companies receiving the investment.
Let’s take a look at how a typical investment fund works, and then compare that to the 3D print scenario.
Investment Process
A venture capital fund is raised by fund managers from parties seeking growth of their money. The investors believe the fund managers are competent in selecting companies to invest in that will provide that growth.
However, it’s all about risk. The play by many VCs is high risk for high gain. In other words, there is a big possibility the company being invested in may fail miserably, losing the investment. However, if they succeed, they could grow very significantly.
This is how these funds work: they invest in a portfolio of companies to spread the risk over different ventures. The fund managers understand that most companies will fail, and a typical ratio is that only one in twenty startup companies may actually succeed.
It’s hoped that the five percent of companies that succeed will succeed so well that they pay off the losses of all the failures, making the fund ultimately successful when it closes. Typically, funds exist for a fixed period of time, after which the original investors want their returns. Ten years might be the period, for example.
This puts fund managers into several constraints. They have to select companies that at least have a possibility of becoming very large. Companies that have only a small market to grow into are not worth investing in because even if they succeed, they can’t pay off the other high-risk failures.
The other constraint is that the fund has to return the money at the end of the term to the original investors. This means that somehow they will have to sell off their portions of the successful startup companies in order to transform that growth into cash. This may or may not be good for the startup companies.
In order to achieve that high sale price, the valuations of the startup companies have to be pushed as high as possible. This is done via additional investment rounds. Here’s how it works, in a simple example:
- The VC buys 10% of a company for $100,000. This implies the company is worth $1,000,000 if all shares were sold.
- The VC or startup company raises an additional amount. Let’s say they sell 5% of the company for $1,000,000. That implies the company is now worth $20,000,000.
- At that valuation, the VC’s original investment of $100,000 is now worth $2,000,000, a 20X growth.
- This process repeats with subsequent raises, pushing the valuation higher and higher.
Often the money raised through these moves isn’t even required for the company to grow; it’s simply to establish a new valuation. If someone is willing to pay X for those shares, that tells us the new valuation. Real money changed hands.
Over time the original VC valuation will grow significantly, and then it’s time to cash out. On one of the subsequent investment rounds they may, for example, sell their shares to the incoming investor and get out of dodge.
That’s how it’s supposed to work, anyway. But in practice many companies fail to grow enough to warrant further investments. At that point everything stalls out, because the VCs will realize that this particular company is not going to be the “unicorn” they needed. There’s little they can do at that point, aside from focus on other startups that can still become unicorns.
3D Print Investments
This is what has happened with several of the big-name 3D print companies. They attracted investment with the promise of huge growth, largely associated with manufacturing. That’s because that’s where the money is: the manufacturing market is supposedly US$12T, much larger than the professional prototyping market and vastly larger than the hobbyist market.
However, as things played out, the technologies used by the companies didn’t really meet the needs of manufacturing, at least the scale required by the VCs for growth.
Investment stalled, and a reputation was born: 3D printing isn’t a good investment. Or at least it hasn’t been a good experience for VCs. That sentiment has caused many investment funds to shy away from the technology, resulting in the funding shortage.
Meanwhile, the companies that did receive huge investments haven’t really achieved what the VCs wanted: growth. In some cases, the cash seems to have been spent inefficiently.
Some individuals have made out quite well during all this, but in the end, we are left with the big players really haven’t plugged into that juicy manufacturing market yet, and up-and-coming startups that have technology that looks more promising are having trouble getting investment to grow because of the industry’s reputation.
What will it take to break this dilemma? I believe what needs to happen is one of the newcomers must actually gain traction in manufacturing without VC investment. This would counter the existing reputation, and possibly open up VCs to further investment in the industry.
But to do that, they must have a very powerful technology that really and truly works for manufacturing.