A Phoenix Rising: Modern Manufacturing Software is Here to Stay
Manufacturing is finally getting a revamp and Counterpart is excited to invest in founders capitalizing on emerging trends.
By: Tanvi Narain and Eren Bozbag
The pandemic accelerated the manufacturing sector’s growth through a waterfall of changes including supply chain shocks and government intervention. Manufacturers are now in a better position to update their technology infrastructure, further advancing digitization.
Manufacturing start-ups are getting their day in the limelight. They are challenging incumbents who have enjoyed a majority market share for several decades. This is driven by an appetite by buyers to leverage modern technology architecture, cloud adoption, and focus on improved user experience. The main “word on the street” is speed to market, shortened implementation timelines and flexibility across the entire manufacturing value chain. Similar to other heavy process-oriented industries with delayed automation, AI is having its moment within Manufacturing. With platforms like ChatGPT, Jasper and Langchain making LLM models more accessible, there seems to be more applicability within the space of workflow efficiency tools such as product lifecycle management & supply chain analysis. [SITE]
Fundraising Landscape
Both the number of startups and amount of funding raised by digital manufacturing solutions has risen in recent years. Before 2020, quarterly venture deals averaged around 80 per quarter and funding was at approximately $1B per quarter. These have since grown to an average of about 100 per quarter and $2.7B per quarter respectively (Site). Both specialist funds with a focus on manufacturing and generalist funds have increased their focus on digital manufacturing. Startups like Uptake, Augury, Sparkcognition, and Tulip have been able to raise later-stage rounds at sizeable valuations, while others such as Onshape and Plex have been acquired by large corporates providing healthy returns to their investors. It is important to recognize however, the headwinds of the 2023 macro-environment do impact the manufacturing sector as well, as the average post money valuation has been on the decline.
Manufacturing is a broad category with many use cases and technology solutions around the distinct supply chain processes. We at Counterpart Ventures have spent more time examining PLM (Product Lifecycle Management) and MES (Manufacturing Execution Systems). Combined, these categories account for more than one-third of the digital manufacturing space and are ripe for disruption and further growth.
Product Lifecycle Management (PLM)
What are the challenges?
Although ‘PLM 4.0’ is here and incumbents are growing capabilities with increased Cloud adoption, product teams still face significant challenges across the ‘cradle-to-grave’ management of their products. The largest challenges they report facing include
- Silozation, or poor communication as data splits between steps of the product’s lifecycle
- Collaboration across design, engineering, manufacturing, sales, and support teams
- Tool adoption across the enterprise (Site)
What are the key trends to watch?
Verticalized PLM solutions are on the rise as they provide great benefits to specific industries and product use cases by reducing customization requirements. Reduced customization leads to easier implementation for customers, which lowers switching costs to the newer systems.
Tip: These solutions are especially useful for small and medium-sized businesses that are seeking rapid growth and more effective management of their product lifecycle. There is a heavy concentration of incumbents tackling the largest enterprise solutions with long implementation timelines and high costs. This ultimately opens up an opportunity to penetrate verticals with customer profiles of mid-market/SMB. Companies that are tackling this problem are Duro Labs (Hardware Tech), & Circuit Mind (Semiconductors).
To address the siloization and collaboration challenges, cross-domain collaboration systems have risen to the occasion. Traditional solutions were designed to operate within their functional silos and broad ecosystems, leaving significant gaps in the product lifecycle space. A few of the cross-domain collaboration solutions include requirements gathering, bill of materials (BOM) management and change control. It is important, however, to point out the risks/ challenges such as increased complexity and customization with scale and high switching costs. As companies move upstream to an enterprise buyer, their switching costs increase.
Manufacturing Execution Systems (MES)
What are the challenges?
The MES market is dominated by a small set of incumbents who have lagged in Cloud adoption compared to other Manufacturing SaaS domains. Presently, 63% of MES systems are hosted on-premises software — leaving just 37% of systems hosted on the Cloud. However, considering ongoing efforts to migrate to the Cloud, an additional 29% of systems are expected in Cloud by the end of 2024 (Site). Within this landscape, the greatest challenges for MES systems are related to the the usability of the software:
- Composability, or the flexibility of the interconnected assets
- Managing, and monitoring and integrating internet of things (IoT)
- Ability to re-architecture and incorporate emerging technologies
What are the key trends to watch?
Manufacturing operations management solutions tackle these usability and composability issues by establishing capabilities that can plan, execute, and track end-to-end manufacturing operations. There is a degree of verticalization involved for these solutions as well, as certain capabilities are built by manufacturing type (discrete, continuous, batch, etc.) and by industry. These systems also easily integrate digital threads between other systems along the manufacturing value chain such as PLM or ERP (enterprise resource planning) in order to effectively carry insights across stakeholders.
Machine and Plant insight systems capitalize on the growing availability of IIoT as well as AI and ML technologies. Newer solutions incorporate PaaS or low/no-code solutions to address usability issues and increase adoption across their customer organizations to provide the most value. These solutions leverage data that is produced during the operations of a machine or plant in order to fuel a variety of analytical capabilities. These capabilities can drive digital twin adoption, preventative maintenance, and much more. Since overall equipment effectiveness (OEE) is such a critical metric for manufacturers (especially in high labor and energy cost settings), these solutions promise to provide great economic benefits for their customers through driving high OEE.
Tip: The buyer universe is similar to that of PLM, wherein there is an easier adoption by SMBs due to the reduced complexity of processes. That being said there is definitely an opportunity to work upwards by targeting smaller factory manufacturers & working to create a connected supply chain, as seen by companies like Pico MES.
Pico MES, a recent Counterpart Ventures investment, helps factories rapidly improve their operational efficiency. Factories with fewer than 500 employees produce the majority of goods in the US. These factories face three common pain points: (1) the largest labor shortage on record (2.1M unfilled jobs projected by 2030), (2) fragmented global supply chains (90% of enterprises are reshoring or dual sourcing components), and (3) they operate half as efficient as world class (40–60% average station efficiency vs. 85% target). The Pico solution is “plug & play” and typically can go live as fast as 2 weeks on a customer’s factory floor. The bigger picture for Pico is ultimately creating a connected supply chain. They plan to equip Enterprise OEMs to de-risk their supply chain and capture an entirely new level of efficiency gains. This is top of mind for many enterprise leaders as they are focused on stabilizing their supply chain while their staff seek greater operational efficiency (SITE)
Again, it's important to recognize the risk factors in play here with penetration into factories with old machines requiring hardware which can lead to long implementation cycles if not executed well and moving upstream to larger buyer profiles can be highly costly from a customer acquisition standpoint.
Conclusion: Underserved players rising in Manufacturing SaaS
Incumbents have enjoyed market dominance with systems that have been architected many decades ago. Small and medium-sized manufacturers have been underserved, but are now gaining greater market share — akin to a phoenix rising from the ashes.
The rise of IIoT, AI, and ML technologies presents a great opportunity for new players to enter the market with newly architected SaaS solutions and greater value than ever before. With macro trends boosting manufacturing focus globally, we believe there is a strong imperative to invest in companies pioneering the digital manufacturing landscape of the future.
If you have a product in the spaces, we would love to connect with you and learn more. Write me at tanvi@counterpart.vc if you would like to discuss further.
