When CIF conferees gathered, the subject was capital (its lack) and the prescription was scale up.
FocalPoint Partners LLC’s Mike Del Pero reported that risk-averse investors are holding as much as $500 million in uninvested capital, but predicted that access to these funds should be easier in 2012.
CompositesWorld hosted its annual Investment Forum Oct. 17-18, colocated with the SAMPE Tech conference in Ft. Worth, Texas. Speakers explored the state of the venture capital market and the expectations of venture capitalists, noted successful startups in the composites industry and examined the overall health of the composites market from an investment perspective.
Like members of any profession, investment bankers and merger and acquisition specialists have a language all their own, peppered with terms like “market space,” “organic growth,” “scalability” and, in wake of the recession, “idle money.” However, during the forum’s panel discussion, the dominant phrase used to describe the composites market was “inadequate scale” — a reference to the composites industry’s large number of relatively small companies.
The panelists were David Finley, partner, Sverica International (Boston, Mass.); Alex Gutierrez, business development director, Zephyros Inc. (Greenville, S.C.); Mark Mansour, partner, MCM Capital Partners LP (Beachwood, Ohio); R. John Stack, managing director, Brick Road LLC (Wichita, Kan.); and Mike Del Pero, VP – Composites & Advanced Materials, FocalPoint Partners LLC (Los Angeles, Calif.). The consensus of the panel was that the composites industry won’t attract more investment money until smaller companies scale up. What’s the right scale? Greater than $10 million in revenue and more than $2 million EBITDA (earnings before interest, taxes, depreciation and amortization). That set the tone, and for the balance of the conference participants addressed this basic issue: How to position a technology-based firm to grow and attract new investment money.
Tim Dick, general partner at Startup Capital Ventures (Palo Alto, Calif.), walked attendees through the venture capital market, reviewing the stages of investment, expectations of investors and strategies for attracting venture funds. Although venture capitalists typically are in for the long haul (10 to 12 years) and understand the risks (7 of 10 investments will fail), Dick noted that composites processors are hobbled by long sales cycles and slow revenue growth. However, investors are attracted to the material science market, and a company that has a firm grasp of process, a proprietary technology and the personnel to support expansion can attract venture funds. “I think, categorically, that material science will go through the roof,” Dick predicted.
Jon Fox-Rubin, CEO of successful thermoplastic composite molding start-up Fiberforge (Glenwood Springs, Colo.), walked attendees through his company’s history as it transitioned from research and development (R&D) firm into a full production manufacturer. He emphasized some insight into the basics of early R&D development, including the importance of recruiting a diverse group of employees, investing in innovation and developing a technology that meets a specific market need — in Fiberforge’s case, a fast, inexpensive method to produce lightweight thermoplastic composite structures. The key, he noted, is turning an R&D effort into a sellable product. Fox-Rubin said Fiberforge’s initial plan called for development and sale of Tailored Blanks, unidirectional thermoplastic tape laminates that customers would use to manufacture finished products. What Fiberforge learned, however, after the Tailored Blanks failed to sell, is that customers want application engineering and finished parts, so Fiberforge shifted gears and developed the RELAY Station, the thermoplastic composite manufacturing equipment it now sells. Once the company moved through its R&D phase, Fox-Rubin emphasized the importance of customer development: Protecting technology and intellectual property is important, he noted, “but you can’t stay in stealth mode forever. At some point you have to get in front of customers.” Thus Fiberforge began an aggressive campaign to market itself to the composites industry. Along the way, Fox-Rubin learned a few things that have application for all up-and-comers: Hire smart people, protect intellectual property, get good legal help, be visible in the industry, develop a quality board to help guide the company, invest in quality systems, say “no” to projects that don’t fit your business model and beware of customer concentration.
One firm that’s been notable for its startup success, carbon fiber recycler Materials Innovation Technologies (MIT, Asheville, N.C.), has relied on unique and proprietary technology development as well as a mix of unusual funding sources that has helped guide the company through initial launch and into production. Rather than pursue venture capital investment, however, CEO Jim Stike reported that the company has relied on a series of grants from multiple government sources, including the U.S. Department of Energy (DoE), the U.S. Department of Defense (DoD), the U.S. National Science Foundation (NSF), the State of North Carolina and Florence County, S.C., where MIT’s production facility eventually was established. MIT has had particular success winning Small Business Innovation Research (SBIR) grants from DoE, accruing since 2005 a variety of Phase I, Phase II and Phase III SBIR grants with a total value of $4.2 million. From DoD MIT has won $1.35 million, with another $1 million coming from NSF. All told, said Stike, MIT has invested more than $20 million since its launch, growing from two to 34 employees in two facilities offering five process and product types based on recycling of carbon fiber composite materials.
Del Pero provided his take on the investment environment in composites, noting that there are record levels of uninvested capital (estimated at $400 million to $500 million) sitting on the sidelines right now, primarily because investors are risk averse in view of continuing economic uncertainties. Financing, however, is starting to loosen up, he said. Small companies that want to grow quickly, he suggested, should seek joint venture and merger opportunities that will help them make the jump to the midsize-company category.