The following article appeared in the Pitchbook-NVCA Venture Monitor report. Read other articles and learn more about our partnership.
It’s hard to find a successful company of any size that doesn’t have at least some global exposure and is affected by today’s trade tensions.
The trade wars, tariffs and stricter US government standards for foreign investors in US-based companies are adding new layers of complexity, prompting tech, life sciences and healthcare companies to consider different strategies.
Some startups are simply baking in the higher costs of doing business, squeezing margins or raising prices. Others have found silver linings in volatility and are innovating on the manufacturing process itself to make US-based operations a competitive alternative.
Whatever the case, trade tensions are clearly on the mind of startups. Silicon Valley Bank surveyed startups in Q4 2019 as part of the bank’s annual Startup Outlook report and found that half of US startups are somewhat or very concerned that trade policy between the US and China will have a negative impact on their businesses in 2020.1 Anecdotally, they tell us they are devising new strategies to expand market share, meet supply chain or manufacturing needs and gain access to capital.
New CFIUS rules set to become permanent in February
Stricter rules handed down by the Committee on Foreign Investment in the US (CFIUS) are prohibiting or delaying some foreign investment into US companies. At SVB, we are seeing a decline in China’s involvement in US tech venture and a smaller impact on the healthcare sector.
With CFIUS rules set to become permanent in mid-February, new questions are emerging about whether to solicit foreign investment from some countries. The February 2020 rules, which fill 319 pages, are considered by many to be the strictest standards of any advanced economy.
Since fall 2018, CFIUS has been given additional powers from Congress to review deals involving foreign buyers—and even minority investors and board members—in US-based companies that could give them access to technologies and data that might pose a national security risk. For example, a Chinese owner of a US-based company that collects patient data was forced to sell the business, and high-profile semiconductor deals have been scuttled. AI is another example of an emerging technology that is receiving heightened scrutiny.
For smaller companies, even trying to figure out whether they could be subject to review can be time-consuming and expensive, hindering growth plans and putting pressure on fundraising and valuation dynamics. In one case, an SVB client spent $40,000 alone to obtain a legal opinion that they could indeed accept investment from an Australia-based investor.
Finding opportunity amid uncertainty
Some of our clients are identifying opportunity in the evolving global trade and tariffs landscape: The increased focus on supply chain economics, for example, has led some startups to fine-tune strategies that in fact are saving them or their clients on manufacturing costs and time to market.
Tempo Automation—a San Francisco-based electronics manufacturer that builds prototype and low-volume quantities of printed circuit board assemblies—reports a growing preference among clients to switch to domestic manufacturing partners instead of contracting overseas. Reasons cited include the advantages of geographic proximity and certifications pertaining to information security and manufacturing standards, as well as guaranteeing the authenticity of all electronics components that are used.
“So far, the gyrations in geopolitics are benefiting us. In addition, we are uniquely able to address the growing need among enterprises for accelerated product realization that traditional contract manufacturers simply can’t accommodate,” says Joy Weiss, president and CEO of Tempo Automation.
Using proprietary software to drive the user experience and smart factory, Tempo Automation addresses a wide range of industries, including the high precision needs of aerospace, medical, semiconductor and industrial technology companies. Speed to market and a “first time right” quality are critical for customers. “Look for a manufacturing partner who can handle rapid iteration and help you get from prototype to pilots and production while protecting your intellectual property,” Weiss says.
How planning pays off
Startups that source subcomponents overseas but manufacture their finished products in the US have seen a lighter financial impact from tariffs. Tariff rates on components tend to be lower than rates imposed on finished goods. This results in a lower “blended tariff” for companies leveraging US manufacturing. Nevertheless, the added cost from raw material tariffs can still be significant.
Density, a producer of proprietary workplace sensors, took a different approach and turned the notion that a Series B company can’t afford to handle its own manufacturing on its head.
Density CEO and co-founder Andrew Farah says the company had a choice of leaving most of the manufacturing in the hands of others but instead decided a few years ago to take the bold step of constructing a manufacturing site in upstate New York. Density spent just $68,000, taking it from a concrete shell to a fully functioning high-tech assembly site. The company added in-house manufacturing expertise to bring its operation online, incurring upfront risk and expense uncommon for startups.
The decision to manufacture in the US has paid off in spades. The company assembles its sensor, comprised of over 800 subcomponents, in Syracuse, New York. Clients include Fortune 50 companies that use Density for real-time, accurate and anonymous people count to improve efficiency and understand how people utilize space. Not only can Density continuously improve its sensor by controlling the most critical parts of its supply chain, but it has also significantly reduced costs by iterating on the manufacturing process itself.
“We’ve reduced the time it takes to assemble, calibrate and test a unit from an hour to under just eight minutes. And we’ve cut our cost by 51% along the way,” Farah says. “We’re manufacturing at a lower cost than if we were in China and we avoid traditional finished goods, contract manufacturing mark-ups.” Density has paid 25% more for its aluminum enclosure as a result of recent tariffs, but because the final assembly is being done domestically, he reports the tariffs have added only 3% to total the company’s total product costs, “and that is remarkable.”
1US Startup Outlook 2020, Silicon Valley Bank, Fall 2019 survey