Community Financing Breathes Life into a New U.S. Manufacturing Firm

[FRED]

Community Financing Breathes Life into a New U.S. Manufacturing Firm

by Eric Janszen
Harvard Business Review
February 24, 2012

Even in this contentious election year, all sides agree on one issue: The loss of American manufacturing jobs over the past decade has been a disaster for the U.S. economy.
It would be unrealistic to imagine a return to low-value-add, low-skill, low-wage production in the commodity industries that employed millions of Americans a century ago. But it is realistic to envision the growth of high-value-add, high-skill, high-wage manufacturing industries like the microprocessor and computer-networking businesses that Intel and Cisco launched in the 1980s.

Trouble is, two recessions in 10 years have cut the capital fuel supply to the tech-company-creation engine.

Seed-stage financing for technology start-ups fell from 16% of total annual private equity investment in 1995 to just 1% in 2002 and recovered to only 4% in 2011, according to data compiled by PriceWaterhouseCoopers and the National Venture Capital Association.

Where did all that money go? Some of it vanished when companies failed during those recessions. Some of it was sent elsewhere as investors, burned by repeated cycles of bubble and bust, swore off putting money into start-ups — especially companies making tangible products.

In 1995, nine out of the top 10 industries that received 85% of private equity funding were U.S.-based product and services businesses that also tended to manufacture and deliver their products via U.S.-based labor.

By 2011, only three out of the top 10 industries that received 90% of PE funding were industries that tended to build products in the United States.

The result has been the loss of millions of U.S. manufacturing jobs. Combine that with the offshoring mania among established manufacturers, and you've got a full-blown crisis.

But don't blame private equity for underinvesting in seed-stage manufacturing companies and thus failing to prepare the ground for the next Apple, Cisco, or Intel. Investors' aversion to physical-product start-ups is understandable — the two recent asset-bubble-induced recessions proved that these companies' need for materials, supply chains, distribution networks, and labor hampers them from responding quickly to sudden declines in sales. Very logically, investors are a lot more excited by social-networking and daily-deal web sites, whose small payrolls and nonexistent warehouses enable them to quickly reduce costs and ride out a recession.

The real issue is whether anything can be done about this investment trend. The answer is yes.

The way to increase seed- and early-stage financing for physical-product start-ups is to reduce individual investors' risk by improving the quality of due diligence and spreading risk across a larger number of investors. Consider, for example, TruTouch Technologies and the $3 million in funding that was financed by the SEC-accredited, paid subscriber community of my web-based economics and finance-services company, iTulip.

TruTouch, based in the United States, has developed and is commercializing a sensor that instantly detects a person's blood-alcohol level with the touch of a finger. continued...

[doom&gloom]

Re: Community Financing Breathes Life into a New U.S. Manufacturing Firm

I have always wondered why you do not see more community based investment in the US. For example, when a steel mil or lumber mill clses because wages and costs are too high, it has always amazed me that more communities do not band together to take over such plants, agree to sell output at a specifivc price to the previous employer over say a ten year agreement, and then adampt to the circumstances. I HAVE TO BELIEVE THERE ARE PLENTY OF COMPANIES THAT WOULD BE HAPPIER TO FOIST OFF SOME AGING INFRASTRUCTURE AND THE ASSOCIATED LAYOFF COSTS to a well managed group of employees who are willing to bite th ebullet where necessary.

[Mega]

Re: Community Financing Breathes Life into a New U.S. Manufacturing Firm

France is just passed laws on this subject, is there going to be a share offering soon?
I can see this BIG news, airlines will use it, cars will also at some point.....i wonder if they could detect weed?
I wonder if the company has a Video to show?
Mike

[dbarberic]

Re: Community Financing Breathes Life into a New U.S. Manufacturing Firm

Catherine Austin Fitts has been discussing community/local based investment groups in her interviews for quite awhile (years), although I don’t believe it has ever materialized into actual formation of one.
Take your average small town and all its citizens who are sending their money to Wall Street to manage investments in their 401K, pensions, taxable accounts, and consider the total sum of their deposits at the large banks and the loans they have at those banks. Instead of sending the net flow of funds outside the community for investment that returns little to nothing back, an alternative can be established, a community based venture fund.
Citizens would have an option to invest their money directly into a fund that benefits their community. The venture fund would then seek opportunities specific within a defined local area. For example, it could make loans to small/medium sized local businesses at rates comparable to market, but the profit earned is returned to the community through the fund. If an asset in the city is going to be privatized (or a lease back deal), the fund could do a leveraged buy-out and acquire the asset. Or, it could take a PE role through partial ownership of a local start-up that has a lot of opportunity. Basically, any investment bank technique can be used, but locally focused, locally managed, and funded by local investors.

In addition, a local community that has a venture fund would have a key differentiator to attract businesses and start ups. There are not very few communities that can say they have the ability to provide capital.

A side benefit is that the investor will be able to see the impact of his investment in his own community. He can watch as businesses on Main Street are able to expand through loans provided by the fund. He can get involved in mentoring a local start-up that that venture fund has partial equity ownership in. Furthermore, the investor can choose to spend his own money as a customer of those businesses, thus helping to support his own investments.

[cjppjc]

Re: Community Financing Breathes Life into a New U.S. Manufacturing Firm

I have always wondered why you do not see more community based investment in the US. For example, when a steel mil or lumber mill clses because wages and costs are too high, it has always amazed me that more communities do not band together to take over such plants, agree to sell output at a specifivc price to the previous employer over say a ten year agreement, and then adampt to the circumstances. I HAVE TO BELIEVE THERE ARE PLENTY OF COMPANIES THAT WOULD BE HAPPIER TO FOIST OFF SOME AGING INFRASTRUCTURE AND THE ASSOCIATED LAYOFF COSTS to a well managed group of employees who are willing to bite th ebullet where necessary.

http://news.yahoo.com/blogs/driven/j...195149281.html

Tony Lee always dreamed of owning his own business and sending his kids to college. Today, he's co-owner of Ring Masters, a company that makes engine rings for industrial use, and his daughter is heading to college next fall. Tony is hoping she'll be the first college graduate in the family.
Tony has achieved some of the biggest goals he set out for himself and his family, which are impressive, given he grew up in a low-income neighborhood with limited opportunities and never went to college. But what's even more inspiring is Tony Lee's journey to get there.
After leaving the Army in 1997, and a short stint at American Steel, Tony took the only decent job he could find. Tony accepted a janitorial job at an Eaton Corp. factory in Massillon, Ohio in the heart of the rust belt. Like a lot of U.S. manufacturing centers, Massillon has suffered from closed factories and thousands of lost jobs. Tony was grateful for the opportunity and made the most of it, rising from janitor to foreman in four years.
But Tony was just getting started.
In 2002, Eaton started shutting down divisions of the factory, one by one. Soon over 1000 workers were down to just 35 in Tony's division, which was slated to be closed at the end of 2002.
But Tony refused to let the factory die. He spent hours at night in the local public library studying. Despite never going to college, much less business school, Tony wrote a business plan detailing how his factory could survive and prosper.
Against all odds, he convinced a group of investors to buy the factory and keep it running. Members of the investor group and Tony's co-workers all say they were inspired by Tony's leadership, passion for the business and drive to keep it alive. Everyone, it seemed, was rooting for Tony to succeed.
But there was one big catch: The investors wanted Tony to have some "skin in the game," so he had to raise $25,000 to purchase a stake in the factory.
For Tony, this was just one more obstacle to overcome. After taking a second mortgage on his house, selling his motorcycle and literally scrounging for loose change, Tony had the money and was in on the deal. Actually he was "all in;" failure was not an option for Tony.
Now, 9 years later, Ring Masters is a thriving business with over $4 million in annual sales. From 15 workers at the start, the company now has over 20 employees, a growing list of clients and plans for further expansion.

[flintlock]

Re: Community Financing Breathes Life into a New U.S. Manufacturing Firm

I don't see how investment is the answer when the products built by most of these companies cannot compete on price with global markets. At least not for long. Its a myth other countries cannot build high tech. Look how far China has come in such a short time. Can we really be so arrogant to think only we can do high tech? There still may be some niche manufacturing industries in the US for now, but given time, if nothing changes, there will be no advantage to making anything here.

I watched a news show this week on a factory where the owner had invested $100 million in a factory to make transmissions for windmills. Only now things are slow, waiting to see if the government is going to continue subsidies for Green energy. The workers don't know it they'll have a job next year or not. Sad when you have to rely on subsidies to justify making the initial investment. Can a broke US continue to prop up these type of factories? I doubt it.

We need to look past the next election cycle and start looking at the long term. What will become of the US worker in 20 years? It doesn't look good. We need to lose the tunnel vision and look at the big picture.

Sounds very FIRE to suggest financing is the answer. "Build it and they will come", huh? How about, " Build it on a level playing field or you are not bringing your product back into our country". Nor is our military going to continue to protect your overseas assets for free if you continue to export production. Its not protectionism, its a level playing field that we need. Short of this, nothing will stabilize until the average US worker is making what the average global employee is making. Only subtract the cost of our added regulation, environmental, and legal compliance in the US. So US workers will have to make that much LESS than the average world worker makes. That's the real end game. That's where it all ends up in 5, 10, 20 years? Unless something radically changes.

I'm not suggesting we lower all our regulations. Rather that we require universal compliance to some degree. The US is still a huge market. Do we really need to sell stuff to Kazakhstan to make ends meet? Its as if someone is afraid the US will dry up and blow away if our corporations can't be masters of the universe. I'm not anti-business but it seems to me that we are edging into some sort of alliance between our government and large multi-national corporations, to the determent of most Americans. Does the economy exist to serve the people or the other way around? I suppose that is the question. The solution is a political one, and one that will be hashed out in the voting booths and possibly the streets of America in the next decade.

[flintlock]

Re: Community Financing Breathes Life into a New U.S. Manufacturing Firm

http://news.yahoo.com/blogs/driven/j...195149281.html

Tony Lee always dreamed of owning his own business and sending his kids to college. Today, he's co-owner of Ring Masters, a company that makes engine rings for industrial use, and his daughter is heading to college next fall. Tony is hoping she'll be the first college graduate in the family.
Tony has achieved some of the biggest goals he set out for himself and his family, which are impressive, given he grew up in a low-income neighborhood with limited opportunities and never went to college. But what's even more inspiring is Tony Lee's journey to get there.
After leaving the Army in 1997, and a short stint at American Steel, Tony took the only decent job he could find. Tony accepted a janitorial job at an Eaton Corp. factory in Massillon, Ohio in the heart of the rust belt. Like a lot of U.S. manufacturing centers, Massillon has suffered from closed factories and thousands of lost jobs. Tony was grateful for the opportunity and made the most of it, rising from janitor to foreman in four years.
But Tony was just getting started.
In 2002, Eaton started shutting down divisions of the factory, one by one. Soon over 1000 workers were down to just 35 in Tony's division, which was slated to be closed at the end of 2002.
But Tony refused to let the factory die. He spent hours at night in the local public library studying. Despite never going to college, much less business school, Tony wrote a business plan detailing how his factory could survive and prosper.
Against all odds, he convinced a group of investors to buy the factory and keep it running. Members of the investor group and Tony's co-workers all say they were inspired by Tony's leadership, passion for the business and drive to keep it alive. Everyone, it seemed, was rooting for Tony to succeed.
But there was one big catch: The investors wanted Tony to have some "skin in the game," so he had to raise $25,000 to purchase a stake in the factory.
For Tony, this was just one more obstacle to overcome. After taking a second mortgage on his house, selling his motorcycle and literally scrounging for loose change, Tony had the money and was in on the deal. Actually he was "all in;" failure was not an option for Tony.
Now, 9 years later, Ring Masters is a thriving business with over $4 million in annual sales. From 15 workers at the start, the company now has over 20 employees, a growing list of clients and plans for further expansion.

That's an inspiring story, but should Americans have to risk the entire financial security of their family just to make a business work today? For every one of these stories their are ten of those that didn't make it, with the resulting divorce, bankruptcy, etc. Business in the US didn't used to be such a gamble. I guess that is what its become these days.

I see little retail shops popping up around here every now and then. Sad little last ditch efforts by out of work people trying to make a living for themselves. People investing the last of their shrinking savings in the forlorn hope that they can beat the odds. I point them out to my wife saying, "that place will be gone in six months". Unfortunately I'm almost always correct. Its not the same America that our parents knew, is it? A time when anyone with a good work ethic could usually make a good go of it.

[cjppjc]

Re: Community Financing Breathes Life into a New U.S. Manufacturing Firm

That's an inspiring story, but should Americans have to risk the entire financial security of their family just to make a business work today? For every one of these stories their are ten of those that didn't make it, with the resulting divorce, bankruptcy, etc. Business in the US didn't used to be such a gamble. I guess that is what its become these days.

I see little retail shops popping up around here every now and then. Sad little last ditch efforts by out of work people trying to make a living for themselves. People investing the last of their shrinking savings in the forlorn hope that they can beat the odds. I point them out to my wife saying, "that place will be gone in six months". Unfortunately I'm almost always correct. Its not the same America that our parents knew, is it? A time when anyone with a good work ethic could usually make a good go of it.

That is a great question. The financial, as well as the non financial reward has been great for Mr. Lee. Sometimes we get back what we put in. Sometimes things don't work out. If there were easy answers to these hard questions, I would be able to pontificate on what should be done in all matters. I can only say Mr. Lee seemed to be motivated by more than the material in this instance. Maybe there is an answer in that.