Feature first published in the January/February 2023 issue, with Stephen Butkow (Stifel), Arno Held and Alexander Schmoeckel (AM Ventures). Their analysis concerns funding conditions at that time; roles and figures are those reported in the interviews.
“Raising funds is going to be challenging.” That observation recurs in our interviews with additive manufacturing financiers. Following a year of high inflation and monetary tightening in 2022, founders needed to adapt their plans to investors’ expectations. This feature explores the approaches discussed for funding and growing an AM company.
A couple of years ago, just before COVID-19, trade press of our industry were full of headlines announcing “Company X” raised money, leading to rapid growth, leading to more money being raised and so on. With those headlines, it was easy to feel we were living in an era of “free money” that fostered a “growth at all costs” mindset among many companies. These headlines had somehow defined “growth” as an important factor to get funded, to give credibility to a product that was not always or necessarily viable.
“If I look at investors perspectives – [understand here VC investors, private equity firms or public institutions] – and what they might be looking for at a given time, I would say they are currently being driven by the macro environment. During the last 5 to 10 years, we lived in a world with low to no interest rates, that was flush with liquidity, and that translated into to a very low cost of capital. Often times, high growth investments are in favour in that type of environment, and that had driven investors, especially VC investors, to embrace this “growth-at-all-costs” mentality. The idea is, if you grow and establish something, you don’t have to worry about profitability today as there would always be an abundance low cost capital in the future when it was needed. Profitability and cash flow generation could follow further on down the road”, Stephen Butkow, Managing Director at Stifel Financial Corp explains.
Lockdowns in China, supply-chain disruption and higher energy prices weighed on the economy in 2022. Central banks raised rates to address inflation. The ECB’s 2022 Annual Report describes the tightening of financial conditions; the interviewees explain what it meant for their sector.
“The problem is not always the fact that the rates are so high, but the fact that they expanded so fast. This has caused a massive rotation out of high growth sectors, such as Additive Manufacturing, which has made the fund raising environment more challenging for everyone”, Butkow continues.
Interestingly, the comment of Arno Held, Managing Partner at AM Ventures, completes in a certain way Butkow’s explanation, as he encourages to avoid generalization:
“Not only was this “growth-at-all-costs” mentality mainly observed before the crisis, it was also mostly observed in certain cultures/areas. Across various industries, some VC investors were looking for founders with such type of mentality to fund start-ups. However, today, the paradigm shift in the analysis process of VC firms and other financing companies puts on the forefront that there are more important goals to achieve within a start-up and these goals (sustainability, healthy revenues for instance), are often the ones to make the balance tilt in favour of an investment – thus making the “growth-at-all costs” mentality gradually become a thing of the past”.
“Growth-at-all costs mindset had this assumption that capital will always remain readily available and cheap. An unseen amount of VC money therefore was entering the ecosystem, changing the value-risk appreciation of investors across the VC ecosystem. With the current macrotrends, this has changed, leading investors to focus on sustainable growth. However, most importantly, growth and profitability have not to be mutually exclusive.”, Alexander Schmoeckel, Associate at AM Ventures adds.
Alongside funding rounds, mergers and acquisitions feature prominently in our industry coverage. Our 2021 review recorded more than 53 transactions, including SPAC combinations, and our 2022 review mentioned more than 21. These editorial counts are neither exhaustive nor necessarily comparable datasets. An acquisition may also pay existing shareholders without directly bringing new funds into the company.
An acquisition can serve several purposes: access to technology, a broader offering, additional expertise or business consolidation. Growth of the acquired company is therefore not the only consideration.
In the end, for who exactly are M&As a growth strategy, for the buyer or the seller?
For representatives of AM Ventures and Stifel interviewed, these are interesting but very complicated questions that absolutely require to look at both sides of the story: the acquirer and the seller.
“If done well, this can be a growth story for everyone”, Held points out. “Acquisition in itself is a capital investment. Now, the reasons of the acquirer always vary from one company to another. The acquisition can serve a very specific growth strategy in mind: [product development – new products in existing markets-, market penetration -existing products in existing markets-, market development -existing products in new markets- and diversification]. It’s a very rational decision that involves a thorough analysis that goes beyond financial resources to encompass the timing and go-to-market capabilities”, he states.
Butkow on his side lays emphasis on the seller side of the equation and his analysis pinpoints 4 items that in my opinion, should always be analyzed together: management strength (business acumen vs technology acumen), ability to scale, cost to access target market, definition of success or accomplishment – i.e. how far they want to scale the business. He explains:
“We surround ourselves with a lot of brilliant people who are typically mechanical engineers, computer science engineers or a mix of all of them, who have developed and turned great products into commercial business. And it’s very rare for a person to be an expert in one niche be an expert in everything. So, just being a fantastic engineer does not necessarily mean you’re a fantastic business person. The fact is, it takes a village to be successful, and grow a business. In this vein, it’s almost always accurate that a founder that takes a business from 0 to 10 million euros in revenue, is not the person that takes the same business from 10 million euros to 100 million euros, and so on. It requires a different skill set for every single milestone. That’s why there is very often a change in leadership every time a company achieves a milestone. Management quality is therefore as equally important as technology. It cannot just be overlooked.
On another note, our industry has failed many times because founders have been able to develop a viable technology but they don’t have a sound business model. Therefore, they found themselves in a position where they either have to constantly raise capital to scale or sell their technology to another company that already has all the infrastructures in place to implement a go-to-market strategy. At that particular moment, the founder is certain their technology is going to survive; it won’t survive in the exact form they initially planned, but at least it won’t die because of a lack of capital. It comes back to what was said earlier: the founder was the right person to move the business from 0 to 10 but is often times not the right person to move it from 10 to 100.”
Butkow’s explanation somehow opens up a more personal question every founder should ask themselves: what would make my business successful? Or how do I measure success? I know a couple of founders who take pride in building their company from scratch, every step of the way. I also know a couple of founders who are proud to have developed a technology, and scale it with the support of a parent company.
As Schmoeckel notes, “an entrepreneur might define [success] according to whether the new venture achieves personal fulfilment, an investor considers success more from a financial perspective, for example, whether the portfolio firm generates the desired rate of return. The most appealing approach to measuring success is by profitability. However, such data is largely unavailable to privately held companies. Differences between various investments in product and market developments enormously affect reported profitability. In addition, performance measures such as return on sales or net profit are more relevant for companies in their later stage. Early-stage startups are different, as they may initially have little or no revenue to report, and growth rates do not fully represent the real value of an early-stage firm”.
Milestones discussed include a Series A round, an IPO or an acquisition. Staff growth can indicate expansion but does not by itself demonstrate profitability. Success criteria depend on strategy, cash requirements and each investor’s time horizon.
Held suggests planning around an 18-to-24-month funding interval in this context: “This timeframe should be the ideal way to go. This means that founders should establish business plans that last about 24 months – knowing that money always goes faster than expected.” This is a planning reference offered in the interview, rather than a requirement or a funding guarantee.
What should founders prioritize?
So, yes, with the macroeconomic projections, there are potentially some very challenging times ahead. Some companies will struggle to raise further capital but this does not mean it will be impossible. As Held says, “we should be careful not to fall into a big “panic” move”. No matter what the projections say, “at the end of the day, investors are buying risks. The most-risky investment in the world is a start-up. [However,] investors need to understand why the solution they invest in, needs to exist. [There must be a compelling customer value proposition]”, Butkow states.
Butkow’s wording emphasizes start-up risk; it expresses his view rather than a quantified ranking of financial risks.
The interviews highlight the following considerations for the 2023 environment:
- Opportunities may remain in private markets despite tougher financing conditions.
- The interviewees emphasize applications and customer adoption.
- A credible path to profitability matters more than overly optimistic assumptions; timing depends on the company.
- Team experience, a clear account of the business and leadership capable of supporting its next phase are considerations, rather than guarantees of funding.
- The business model and leadership should support value creation and the team.
- Public companies face expectations for both growth and profitability.
- Cash discipline becomes particularly important when capital is more expensive.
- Return expectations depend on uncertain future value discounted to the present.
- Consolidation may reflect valuations relative to 2020–2021, access to capital and the scale needed to improve profitability.
The contributors and their organizations
AM Ventures invests in additive manufacturing businesses working on materials, software, hardware and applications. At the time of these interviews, it reported 17 portfolio companies. It emphasized choosing a suitable investor and considering collaboration.
Stifel operates in wealth management and investment banking, among other areas. According to information supplied for this 2023 feature, it had participated in more than 20 AM-sector transactions over the preceding two years, including advising ExOne on its sale to Desktop Metal and 3D Hubs on its sale to Protolabs.
This article was first published in the January/February 2023 issue of 3D ADEPT Mag.
THE 3D ADEPT WEEKLY NEWSLETTER
The industry moves fast. Stay ahead.
Every week, the latest additive manufacturing news, in-depth features and real-world applications, straight to your inbox. Plus, be the first to know when a new issue of 3D ADEPT Mag is out.
Free · One email a week · Unsubscribe anytime
Clicking loads our email provider’s sign-up form, including its analytics and Google’s anti-bot protection. You’re only subscribed if you complete the sign-up. Read our privacy policy.