Do Entrepreneurs Overlook Manufacturing?

Oct. 11, 2012
To the dismay of venture capitalists, the business-to-business space is often ignored by start-ups in favor of the consumer sector.

Significant business opportunities in the business-to-business (B2B) sector are being passed up by entrepreneurs clamoring to be the next Mark Zuckerberg. The lack of attention given to the B2B space by entrepreneurs even has the venture capitalists shaking their heads.

At the TechCrunch Disrupt conference in San Francisco last month, Jim Goetz, a partner at Sequoia Capital, said he's “floored that so few entrepreneurs are focusing on building products for businesses, given how successful those startups have been.”

In the Business Insider article where I first saw Goetz’s comments, he says: Twice as many enterprise startups have become billion-dollar companies compared to consumer startups. At Sequoia, upwards of a hundred entrepreneurs a week present and, if we're lucky, maybe a dozen of them are focusing on the enterprise. In the last 10 years, there have been 56 IPOs in the enterprise space that have gotten north of a billion [dollars in market capitalization] and just 23 in consumer. Enterprise remains an enormous opportunity because companies are spending about $500 billion a year with legacy enterprise companies and those budgets are ripe for the plucking.

For help in better understanding why the B2B sector, and manufacturing in particular, is so largely ignored by entrepreneurs, I spoke with Arnav Anand, research scholar, instructor and entrepreneur-in-residence at UC Berkeley’s Fung Institute for Engineering Leadership. Anand is also involved with developing technologies for the White House’s Reshoring initiative. In the interest of full disclosure, I am working with Anand and UC Berkeley on agenda development for The Automation Conference 2013.

Anand says there are three main reasons why entrepreneurs, particularly in Silicon Valley, tend to favor the consumer sector.
1. The B2B sector is simply not as sexy as the consumer sector. “There are more prominent role models, like Zuckerberg, in the consumer sector for entrepreneurs,” says Anand. “The B2B sector just doesn't get highlighted in media as much.”
2. Expertise is more limited. “You need to have domain expertise or access to people within the industry to be able to identify specific issues before you can solve their problems,” notes Anand. “In the B2C space, you feel the pain yourself” just as most everyone does. In B2B, entrepreneurs are typically looking to solve problems experienced by a well-defined business group in which they typically have work experience.
3. Due to the above-mentioned factors, the need for problem identification and customer discovery is longer which translates into higher capital and persistence requirement. The cost structure for B2B start-ups is more integral to an entrepreneur’s B2B plan “because of the scaling necessary to prove the business model,” Anand says. “In B2C you can easily show investors how several million users could take part; but to create a robust business model in B2B is more difficult.”

Given that Goetz sees so many B2B opportunities being ignored and Anand’s observation about the expertise requirements in B2B, it would seem that significant market opportunities exist for engineers who truly understand and can solve manufacturing issues. So I asked Anand what advice he would give to entrepreneurs looking to target the manufacturing space.

First off, Anand suggests adapting technologies for manufacturing that have been proven elsewhere. “Sales and marketing have become well adapted to adopting new technologies like mobile, cloud and social,” he says. “We’re going to see this in manufacturing too; legacy manufacturing is already transforming to smart IT-enabled manufacturing” as entrepreneurs develop products for this market.

As manufacturing becomes more IT-enabled, Anand says the area of digital manufacturing would present tremendous entrepreneurial opportunity. Three areas where he sees the biggest potentials for digital manufacturing entrepreneurs to have an impact are:  Pre-Manufacturing — the design and ideation phase before the product enters manufacturing software; Manufacturing Optimization — using digital tools to train technicians and address the lack of skilled labors; and Post-Manufacturing — servicing of machine parts using "big data" and smart analytics tools for prognostics (e.g., predictive maintenance).

Anand adds that “ we are already seeing the paradigm shift in innovation moving from flashy Internet start-ups to business-focused start-ups. With the immense opportunity in the $1.4 trillion manufacturing sector, we will soon experience large successful ventures created in the digital manufacturing space.”

To learn more about the hottest start-ups going right now, Anand suggests reading a recent Wall Street Journal article that ranks the top 50 start-ups.

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