Niche Manufacturers Still Attract Big VC Funds

Dec 29, 2014

Later stage manufacturing companies are not, as a rule, high on the venture capital radar. According to PriceWaterhouseCoopers MoneyTree Report, only three out of 53 VC financing transactions in Connecticut went to manufacturing firms last year. Of this, two were established businesses with a revenue-making product. So how are some manufacturers bucking the trend and attracting big VC investments? 

Chris Heyl manages operations for CiDRA Corp.
Credit Sujata Srinivasan
"I do think that niche manufacturing is certainly where it's at in Connecticut." Chris Heyl

Macton in Oxford makes turntables and rail equipment. Peter McGonagle, president of Macton, gives me a tour of the shop floor. The equipment here is worth several million dollars and can create high-precision parts with tight tolerances. But a few years ago, there was very little manufacturing in-house. McGonagle reversed that strategy and brought work back under Macton’s own roof. The reason? Most of the company’s customers are in the U.S. and Canada and they prefer suppliers in North America. That’s because a glitch in a turntable, for instance, could jeopardize their entire process.

"We saw that recently with a customer CSX. They had problems with a giant turntable system. It caused a bottleneck along their entire rail line and for them that could be millions of dollars per day," said McGonagle. "If they were relying on a supplier in China, or Japan or India, it could be a lot more challenging for them if they had to wait for three weeks, six weeks [or] ten weeks."

Re-shoring – bringing back work from overseas – has helped increase sales by threefold in the last eight years. But that’s not all. "We can continuously innovate because if you’re sending a certain type of manufacturing out on a system to a third party, they’re not going to innovate for you the way you’re able to. So that was important for us," McGonagle said.

But Macton has struggled to raise capital from traditional sources. McGonagle said that’s because lenders like banks look for consistent performance. A bad year, like the one they had in 2012, could close doors to funding. VCs on the other hand can take that risk and bet on dark horses. Enhanced Capital in Stamford has VC investments in about a dozen established manufacturers in Connecticut, including Macton.

"If you invest in very early stage companies, very often it’s in product development," said Liddy Karter, managing director at Enhanced Capital. "Here what we’re seeing is product growth – expanding the types of businesses that they can apply their products to as well as expanding the number of companies who buy their existing products. So our capital is put to work immediately."

But there’s no such rule as one size fits all. Unlike Macton’s re-shoring strategy, CiDRA in Wallingford has become more efficient by sourcing components externally. The company makes products that measure the flow of air and fluid in industries from energy and mining to waste management. "We try to build most of our components from our local supply base," said Kevin Didden, CEO of CiDRA. "About 80 percent of our components are built here in Connecticut. We then integrate and test the final products here at CiDRA and then ship them to our customers. It makes us very efficient, very lean, and very very flexible."

CiDRA has grown by 30 per cent year-on-year, but after a downturn in the mining industry, the company’s key sector, Didden now wants to expand globally. His strategy? Addressing the high level of inefficiency. Mines deliver only 85 percent of materials produced onsite to the refinery. CiDRA is focusing on the wasted 15 percent by providing equipment that in real time can manage and control the process. Chris Heyl, who manages operations for CiDRA, says the company owns or licenses more than 200 patents. "I do think that niche manufacturing is certainly where it’s at in Connecticut," Heyl said. "That if you have a niche product, if you have a product offering that’s unique and it’s well protected from an IP standpoint, that’s how you can really thrive in Connecticut."

CiDRA was born and nurtured on VC money but has been self-funded since 2011. The quasi-public Connecticut Innovations in Rocky Hill has an active investment of $1 million and owns less than five percent of the company. David Wurzer, chief investment officer at CI, said he’s impressed by how the company has broadened its technology across both spin-off companies and industry sectors. "CIDRA has been a company that we find has great opportunity to take an original technology idea and expand it across multiple uses," he said.

Wurzer said anecdotally, he’s seeing that smaller local manufacturers are choosing to retain their resident technology here. The state’s large defense industry is unique to those manufacturers and can be helpful in supporting new industries like medical devices – a growing sector in Connecticut.