Angel II Investment Model for Manufacturing

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David ColeDr. David Cole is the Chairman of AutoHarvest (autoharvest.org), a web based tool to accelerate innovation in the auto industry. Dr. Cole is Chairman Emeritus of the Center for Automotive Research and a former Professor of Engineering at the University of Michigan where he taught courses related to the automotive field for over 25 years. He is a fellow of the Society of Automotive Engineers, Engineering Society of Detroit and Society of Manufacturing Engineers and was recently elected to the Automotive Hall of Fame.

There is universal agreement across our economy that innovation is a critical success factor for any enterprise. However, the challenges are many in creating an innovative culture in an organization from “Not invented here” to “We don’t understand the technology”. The challenges are particularly severe in the manufacturing environment with its high capital costs, tough schedules and shortages of skilled people to name a few of the problems.

One particular challenge is the interface with smaller Advanced Manufacturing Technology (AMT) companies that are often the source of some of the most significant innovation. In general, it is difficult for large organizations to relate to smaller ones, particularly very small ones that are often the source of cutting edge technology. The complex structure of large organizations is really quite formidable and often hampers effective introduction and utilization of new knowledge. The elephant and the mouse typically find it difficult to establish a relationship.

The challenge is amplified where a third party organization, existing supplier to the elephant, is present that doesn’t want a competitor in what they view as their space. We could think of this company as a wolf who wants to kill the mouse for messing up their game. Or they may end up buying the mouse. In any event this makes the mouse’s task more difficult.

We are seeing a significant increase in the application of cutting edge technology by smaller start-up companies, many of which are focused on advanced manufacturing. Most start-ups depend on the financial support of friends and family and then angle investors to move the company forward. The dilemma often encountered by these young companies as they attempt to work with larger organizations, particularly in the manufacturing area, is that start-up funding can run out before they reach positive cash flow. We have seen a number of instances where the innovation process is stifled in large companies because of this problem. Furthermore, the existing internal technical groups or a current large supplier of technology are often threatened by the mere presence of a potential competitor. Furthermore, complex and time consuming internal decision processes are often a very high hurdle.

The concept of an Angel II investment model may be worthy of consideration. In this model the large company or companies (it may be useful to think in terms of a collaborative model where suppliers/competitors are involved) the organization(s) would create a fund to invest in smaller companies. Since the funding at this stage is typically fairly small for these tech organizations,

the total value of the fund would be modest. They would fill a financial role that venture capital, VC, often plays. The VC is looking for a significant financial return on the investment which is likely different from an Angel II investor who would see the application of the technology as the real goal with its cost savings and efficiency improvements.

There are a number of ways something like an Angel II fund could be developed but one idea that could be considered is to utilize retirees of the large organization to staff it. Those selected would have a deep understanding of manufacturing technologies and how to work through the complexity of the internal business systems. They might be compensated as consultants or even take a small equity position in the small companies. There are really a number of ways to “skin the cat” but the idea is to do something that would stimulate and support manufacturing innovation.

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