Successful companies often convey the image that they are living a fairy tale which might sound like honey in the mouth to those who like fairy tales. To me, the most beautiful part of a company’s journey is the path it takes to get there, a path where one of the most daunting hurdles is often that of financing.
With humble beginnings, start-ups with brilliant business ideas invest efforts; prove the worthiness of their business model and products thanks to the generosity of friends, family, and the founders’ own financial resources. As their customer base begins to grow, their business begins to expand its operations and its objectives; companies start looking for additional capital through rounds of external funding.
This stage provides external investors the opportunity to invest cash in a company in exchange for equity or partial ownership of that company. This process of growing a business through outside investment is very common across industries, including the Additive Manufacturing industry.
It becomes essential to have a look at the process AM companies are getting into when looking for capital, when we know that last year has been marked by a great number of funding rounds across the industry. AM Ventures alone, a venture capital firm that only invests in forward-thinking AM companies conducted a dozen of funding rounds across the entire AM industry in 2021.
What does this process imply? What should AM companies take into account when looking for additional capital? How can they better prepare themselves in this process? Or what are the different resources they can leverage to look for money?
This article ambitions to draw AM companies and entrepreneurs’ attention on the mindset they should have and the precautions they should take, when looking for money.
Despite the challenges that a company may face in being qualified for a loan, it should be noted that companies have so many routes to explore when they look for options to fund their start-up. In the AM industry, in addition to founders’ financial resources, we have seen companies benefit from support from incubators, angel investors, and Venture Capital (VC) companies.
Replique for instance, is a Mannheim based venture of the BASF business incubator Chemovator. Spanish metal 3D printing company Triditive took part in the Stanley+Techstars program before raising money from Stanley Ventures. However, most AM companies that raise money in this industry do so via a Venture Capital (VC) firm – which is the perspective we would like to focus on in this article.
“What does it mean to acquire VC money”?
This is the question AM Ventures first asks entrepreneurs who are looking for financing. This might sound trivial, yet is very crucial when exploring the VC route.
The thing is, every (successful) company usually goes the bootstrapping route first before management accepts venture capital or other means of external funding. Reality is, “VC funding is a game-changing process. It can be a dramatic acceleration of the business and it comes with certain expectations. A partner from a VC firm will not only invest his/her own money, they will invest money that they borrow from their investors”, Arno Held, co-founder and Managing Partner of AM Ventures states from the outset.
Held’s first statement highlights a standpoint that we rarely mention in funding processes. Each VC firm promises their investors a certain performance from the companies they are investing in and has to ensure that injected money is not going to be wasted. Therefore, it is crucial for start-ups to work out well thought through promises that they can achieve and that the investor can and will hold the founders accountable for. In most cases, it might be of great value to onboard VCs that understand the industry and markets a company operates in, and thus knows about how to set the bars right.
In the end, having a win-win deal for both parties – the funder and the funded – requires the right investor and the right expectations/objectives.
“Especially in early stage funding, it is highly important to align expectations very early in the process. But we at AM Ventures are convinced that we have the knowhow and the competences to help founders define clear, and measurable objectives that they can achieve with a specific amount of money”, Held adds. Remember how AM Ventures started. Before co-founding AM Ventures, Held built extensive experience within Additive Manufacturing company EOS. Therefore, he and his team know a thing or two on product development, commercialization and R&D.
“We know it takes at least 6 years to develop a good hardware for AM, so we know how to help founders build realistic plans when it comes to product development. Furthermore, there should be a good timing between funding rounds. It’s much more important to deliver a well-thought promise and ensure that your organization grows healthily. We saw some investments that have been made around a certain hype; investments that are made based on unreasonable expectations. And overpromising is easy to make when you have an investor who believes that promise. On the contrary, an investor who understands the game will not only help build a promise that you can deliver, but he/she will have the patience to go through difficult times”, Held explains.
In what scenario do AM companies often find themselves when they want to raise funds (series A, B, C, D)?
First, let’s remember that the path for each company is somewhat different, as is the timeline for funding. Company X may spend months or years in search of funding, while Company Y will move through the process more quickly. In the AM industry, the process of finding capital often seems to go fast as technology solutions are often “revolutionary” and/or these ideas are often attached to innovators who have a proven track record of success.
Moreover, the more a company is mature, the more it advances through the funding rounds. Therefore, a company may begin with a seed round, and continue with A, B and C funding rounds.
Before they get there, founders often go through the process of “Pre-Seed Funding” first, where they get their operations off the ground. There is no real exchange for equity as investors here are often relatives or founders themselves.
Seed funding comes next. This first equity funding stage represents the first official money that a business venture or enterprise raises. Sometimes, money entrepreneurs get in seed funding, helps them develop market research, product development, acquire new equipment and target industries for commercialization. MetShape, a manufacturer of indirectly 3D printed metallic components, went through this process last year.
In a series A funding round, the company has already built first traction in its market. The company already has here a Minimum Viable Product (MVP), an initial user base, consistent revenue figures, or other key performance indicators. It is now looking for money to further increase this user base and its product offerings. In 2018, 3D printing company DyeMansion secured $5M in series A funding to implement an internationalization plan. In 2020, Medical 3D Printing Company Kumovis secured €3.6 million in a Series A funding round to enter new markets and more recently it was Conflux Technology that raised AUD$8.5 million to develop 3D printed heat exchangers.
Companies that undergo a Series B funding round are a little more established, and their valuations tend to reflect that. Usually, they already went through seed and Series A funding rounds and want to accelerate their performance on a larger scale. At this level, the company value is assessed based on revenue forecasts, assets like intellectual property, or the company’s performance. For investors, there is less risk in investing at this level, and the funding amount is usually bigger. Last year saw a funding round of $25M in Series B secured by Mantle. In the construction 3D printing industry, we also saw ICON raise $200 Million in Series B Funding to meet Demand For 3D-printed Construction.
In a series C funding round, it’s fair to say the company that finds itself in this situation is already a successful business. Those who secured money at this stage want to develop new products, expand into new markets or even acquire other businesses. Sometimes, the interest for certain investors here consists in receiving more than double the amount they injected back. Also, cash flow at this level often comes from hedge funds, private equity firms or investment banks. Last year, LightForce Orthodontics, a provider of custom 3D printed orthodontic brackets, raised $50 million in its latest round of Series C funding for example. In another segment, ARRIS, an advanced manufacturer specializing in high-performance composites, raised $88.5 million in Series C funding last year.
Funding rounds can continue with series D or E. Companies that look for more capital at this level, may do so to achieve certain objectives before going public or may be looking to achieve the goals they failed to achieve in their previous funding round.
According to Arno Held, “AM companies that secure money for the first time in seed funding often look for capital that is between 700 000 and 2 million euros. In a series A, they often secure between 3M and 7M€ while series B funding rounds target a volume that is between 8 to 15 million €”. Interestingly, the expert outlines that these figures are just typical for Europe. In the USA, they can easily multiply. In the end, parameters that define the amount of money a company can get in funding rounds include the technology segment, the targeted industries or the geography.
The “valuation” question
Whether you secure money through funding rounds or not, your company’s value grows as long as it exists and performs. However, Held invites companies to be cautious:
“Normally, a funding round increases the company’s value. Indeed, with one funding round, you often acquire money to reach a certain target. You use the funds to achieve that target; you grow the organization as a whole. If things go as planned, the valuation will grow. If the plan is missed by a lot without good reason, this means that the last valuation was not justified.” The possibility of a “low valuation” refocuses the debate on performance and promise set at the beginning of the investment (and this article). Held points out that at some point, the promise must be re-evaluated, if the company performs well, and most importantly, if it did not perform well. He then insists on the fact that “early-stage start-ups are not cash-flow generating organizations. Therefore, each valuation a founder makes is based on hypotheses. Since they work on these hypotheses, it’s of paramount importance to set a realistic valuation so that in the end, both parties should not find themselves arguing on an unrealistic promise that can’t be achieved.”
Where is the market heading?
As we set eyes on what 2022 holds for the AM industry, we can’t help but think that 2021 has been marked by over 53 acquisitions (reported by 3D ADEPT Media), 16 companies that went public be it via a SPAC or a traditional IPO process (Statistics of September 2021 reported by 3D ADEPT Media) and a great number of funding rounds.
While these changes can be described as a sign of maturity and/or a sign of recovery for the AM market, the most impressive observation in Held’s opinion is the growing number of applications-based companies that receive fundings.
“It is a clear sign that people have realized what they can do with AM. We are finding ourselves at a major inflection point. There are hundreds of applications in the making right now, 50% of the startups scouted by AM Ventures in 2021 are based on additively manufactured products. Moving forward, I am very optimistic about the first half of the year. All teams in our portfolio have successfully raised funds or are about to close rounds. We could not be more proud of these entrepreneurs and it is very exciting to see how all companies are performing very well. The second half of the year is very hard to predict but we remain very bullish about the overall outlook for our industry. ”, he concludes.
This exclusive content has first been published in the 2022 January/February edition of 3D ADEPT Mag.