As hard tech gets more and more attention, we’re seeing founders pitch venture-backed solutions to "capacity problems" in manufacturing. But we think capacity expansion is a poor use of venture capital, and something better suited for other forms of private equity. Here’s why:
If demand outstrips supply, prices rise, making it profitable to expand using known methods and lower cost financing sources like corporate cash, debt, or private equity. The steel industry is a prime example. When demand spikes, new plants or expansions meet the need. No advanced tech required, just straightforward economics. If a true capacity issue existed, and the economics made sense, industries would simply build more capacity using existing technology.
Venture funding should instead target areas where technology offers a clear advantage, not just more capacity. Think of "creative destruction" from Schumpeter. VCs should back innovations that revolutionize processes or create entirely new markets. Here’s some examples:
Robotic assembly lines
AI-driven quality control systems that catch defects in real time
3D printing for custom parts manufacturing
These innovations offer more than just increased output; they have the potential transform industries. Solving capacity problems with venture-backed tech is usually impractical. Instead, delivering venture returns is about focusing on transformative innovations that deliver industry-wide cost savings or better performance.
