Many of the best investments turn out to be in areas that others have neglected because they are more complex, require specialist knowledge or the outcomes are particularly unclear.  The manufacturing industry is, we think, an example of an industry traditionally starved of venture capital but one where there are great opportunities and potentially great outcomes.

Manufacturing is typically regarded as complex, capital intensive and frankly something better left to other countries that have cheaper pools of labour and higher density of existing suppliers. The Australian Federal Government has realised that there is an advantage to having some manufacturing capability on shore and has released a strategy accompanied by priority areas and Government investment. State Governments (eg Victoria) are also keen to provide manufacturing jobs and assemble centres of excellence and precincts built around capabilities in particular target industries. 

I'm not about to predict a resurgence of Australian manufacturing across all sectors, however I do see the potential for Australian businesses to bring knowledge, resources and vision to become the future leaders in specific areas of manufacturing while creating a vibrant export industry that is globally competitive. If done right this should be a boost to local entrepreneurial activity in the sector and further benefit the Australian economy while building greater self sufficiency.

In How Nations Succeed there is interesting data to suggest that in most industrialised economies, over time the share of the primary sector (agriculture, forestry, minerals and fuels) and the manufacturing sector falls to 10%, with services making up 90%. The services sector provides employment while most of the gains in productivity and innovation come from manufacturing. Note that this differs from the common political narrative about jobs and growth particularly in the primary sector.

There are many reasons for business and Governments to focus on manufacturing and not all of these are economic. Other benefits include reducing emissions (including CO2), recycling rather than importing raw materials (improving sovereign capability and reducing dependency on external supply chains) and demonstrating real Environmental, Social and Governance (ESG) credentials.

In software, we've had big changes over the last few decades - making it easier to bring new products to market and reducing the cost to do so. Some changes include: lower cost global hosting solutions (replacing servers and dedicated hosting), APIs and code repositories (replacing the need to write a lot of software from scratch) and no code tools (democratising access to non-technical folk). 

For hardware there are similar forces at play from 3D printing, microfabs, a growing number of suppliers who can produce specialised items and products in relatively small runs and a growing network of capabilities that can be drawn upon by entrepreneurs to launch new products without having to build everything from scratch themselves. Onshoring, offshoring and just in time supply chains also play their part in allowing innovation, cost improvements and reliability.

While not specifically seeking out manufacturing related solutions, we've found ourselves equally captivated by the opportunity to improve the human condition and ultimately build great businesses from Australia. There is an increased interest in the space albeit often from non-traditional VC sources that have a more flexible investment mandate and a broader outlook than enterprise SaaS.

So far we've invested in the following manufacturing oriented investments:

1. The iconic Heaps Normal which is changing drinking culture by making non-alcoholic beer a genuinely fun and great tasting alternative to booze. It has managed to establish an amazing brand that, if you read the consumer reviews, delivers on its promise. In fact, Heaps Normal has been outselling normal beer in some of the country’s most popular craft beer outlets. This team has such passion for the space and have already begun exporting the product beyond Australia's shores. There’s a cult-like following brewing around Heaps Normal and I’m constantly approached by people keen to tell me they've tried the beer or wanting to know where they can get their hands on some.

2. A cloud manufacturing leader, Atelier, democratising the product creation process for brands who want to launch health, wellness and beauty product ranges. A hidden benefit is that they have a network of Australian and overseas suppliers that can be brought together for all aspects of the new product's design and manufacture. Think of them as a virtual product design, strategic sourcing and supply company that uses technology to take a lot of cost and confusion out of the creative and procurement process. Increasingly the products that you buy and the ones that earn export dollars for our most successful brands will be produced by companies like Atelier, that allow a faster time to market, more well rounded products, and higher margins to brands and retailers. Atelier has already brought new business to Australian designers and manufacturers - previously foreign brands would have been unlikely to discover these businesses or be able to readily engage with them.

3. Our first investment in the recycling / circular economy space - Bardee (formerly BeyondAg). Bardee uses insects (black soldier flies) to convert tonnes of food waste a day to valuable fertiliser and food grade protein. Bardee's founders are impressive and have managed to build a state of the art processing facility in Melbourne which is the envy of the world in terms of its productivity and the scientific innovation on which it is built. As they scale up their facilities, we can foresee a new normal where tons of CO2 are no longer created and valuable raw materials (in this case food waste) doesn’t end up in landfill.

4. Our most recent new investment in the space is in Defy, an innovative company recycling post consumer plastic into beautiful functional items (eg self watering pot plants, combs, dog leads, coasters, etc). It uses a decentralised, localised mini factory model and some clever applied technology with injection moulding to sustainably produce specialised high value plastic items from the hundreds of plastic items each of us discards each year. In effect Defy enables a virtuous cycle of value-adding which is sustainable. The mini factory model builds domestic capability where previously, for cost related reasons, most of our plastic waste has been exported to less developed countries and often ends up in landfill. Local manufacturers and brands can improve their green credentials by partnering with Defy and consumers can live the brand knowing their products are made from recycled material and designed to be reclaimed and recycled again.

These companies are all involved in transforming matter into new forms whether through recycling or value adding production processes. Often these companies bring new thinking, new processes and new technology to this transformation of matter - enabling new business business models, economics and products. The technology component in these businesses isn't always obvious; often it is embedded in the processes of production rather than the end product itself.

There are many challenges Australian manufacturing will face over the next decade and the success is not guaranteed. Our investment and support of these companies is our small contribution to supporting exciting entrepreneurs, a more prosperous economy, and growing Australia’s capabilities and ambition.

Of course there are software solutions to manage supply chains, ERP tools and others which do fit neatly in the software category which so often receives venture capital backing but I'm not talking about those here. That market is well established and a thriving one. Australia needs more funding and support for manufacturing oriented businesses that create and transform raw materials into processed products.