The world of manufacturing today is undergoing an upheaval due to the marriage of digital intelligence and machines. The core changes that are bringing us into a ‘Smart Manufacturing’ era are connected to innovations in materials and production processes, as well as information technology.

Silicon Valley is the best-known global hub for high technology and innovation. With so many notable companies in this area, manufacturers are maneuvering their way into the planning of a 'cyber-physical system' for the next phase of industry. Almost any product you can think of is being reorganized along its chain through some application of the Internet of Things (IoT), cloud computing and artificial intelligence.

California, the innovation hub of the world

Even though the most celebrated enterprises in California are giants like Google or Facebook, companies in the manufacturing industry – which might sound too heavy and material to have a place in the valley – also gather in this area and are leading the technology and transformation opportunities.

From the data that EqualOcean collected about smart manufacturing-related PE/VC investments in California from 2015 to 2019, we found that the primary market has shown great interest in this sector since 2017 and most investments were in the early stage or late stage in 2019.

This trend shows a similar result to our previous report, wherein we found that, as the emerging markets keep making efforts to catch up, advanced economies such as the U.S. are taking actions to bring factories back. After years of falling output and a diminishing percentage of the labor force, the U.S. has seen renewed growth since 2017.

According to the advocacy group Reshoring Initiative, the number of jobs being reshored by U.S. companies has increased more than tenfold since 2010, and each company has its own reasons for consolidating manufacturing operations in the United States.

In California, the top 10 cities absorbed over 70% of venture capital raised within the state over the past five years. It is worth noting that, while NCIDIA's post-IPO round led by Softbank can be considered an outlier, San Francisco, the pearl of innovation, attracted most capital in the past five years.

Most attractive startups and active investors

In California, smart manufacturing companies are concentrating on several subsectors, including robotics, 3D printing, machine vision and aerospace, while some are also working on software solutions for factories' transformation and upgrading. Data shows that nearly half of the capital raised in 475 funding rounds by early-stage startups went to the 10 largest companies, and 9 of them are in the sub-sectors mentioned above.

Topics like the Internet of Things (IoT), Industry 4.0, smart factories and the Industrial Internet of Things (IIoT) are also attractive for investors, as they thrive at the intersection of operational technology and information technology. The Smart Manufacturing concept’s solid early applications concern monitoring of physical processes in factories and the use of data to make predictive, corrective and adaptive decisions, improving operational costs. 

The capital market has shown great interest in this sector since 2017; most investments were in the early stage or late stage. Among all the PE/VC investments, we list the most active institutional and corporate investors in California. Sequoia Capital and Intel Capital ranked at the top.

The widespread application of information technology and the improvement of technical barriers have accelerated the rise of smart manufacturing. Government agencies, investors, and enterprises have joined forces to promote the transformation. EqualOcean used data from Crunchbase to compile a list of smart manufacturing startups in California which are high in potential, based primarily on the fundraising amount.

Our previous article illustrated the smart manufacturing-related PE/VC investment trends in the Greater Bay Area, China. The San Francisco Bay Area, which is more famous as an innovation hub, is leading the technology upgrade. The reasons it remains at the top of the innovation hub are mainly in three aspects: venture capital, innovation and R&D centers and disruption. Currently, there are about 90 unicorns in this bay area, and we expect to see more smart manufacturing companies grow in this field.