Financial Support for Reshoring
It’s About the Money, Honey!
The United States has real financial troubles, and faces a crushing reckoning sometime in the near future. Neither political party has a serious plan to address it, and the current national debt is just the tip of the iceberg, since the $35 trillion dollar debt does not include the future costs of social security and massive government pensions. The government has no qualms about creating cash out of thin air in the name of fiscal policy. The mismanagement is criminal – no publicly traded business could operate this way and remain in business.
So, the government’s financial house is in complete disarray, but there’s another financial house that seems to be doing just fine – the Private Equity Industry. The Private Equity Industry currently holds over $13 Trillion dollars of investments(1) , and the impact on the nation’s economy reflects their outsized influence. The Private Equity industry is sitting on $2.6 Trillion dollars of “dry powder” capital, which is just money sitting around looking for a place to be invested. Dry powder has grown every year since 2010(2). The private equity industry has more money “doing nothing” than the combined budgets of every single state, which was roughly $2.3 trillion in 2023. That’s a lot of cheddar!
Besides Private Equity, there’s other trillions of dollars sloshing around in Venture Capital Firms ($3.5 Trillion(3)), Angel Investors, Wealth Management Companies ($128 Trillion(4)), and, of course, banks ($23 Trillion(5)). With all that money, you’d think funding the reshoring of job-creating factories would be an easy ask, right? Nope.
Cash is King
Today, let’s quickly talk about the various ways a reshoring enterprise like HermitCrab can raise funds. For the sake of round numbers, let’s venture a guess that the first proof of concept factory will require startup capital in the neighborhood of $10 million dollars, depending on the product to be reshored. There are several ways to raise those funds – here’s several examples:
Bank Loans: Traditional bank loans are a common way for businesses to raise capital. They involve borrowing a set amount of money from a bank, which is then repaid over time with interest. This method provides immediate capital that can be used for various needs, such as purchasing equipment or securing property. Banks may require collateral, and approval often hinges on creditworthiness and business plans.
Pros: Established process; Fixed interest rates provide cost predictability.
Cons: Requires strong credit history; Collateral might be needed, risking personal assets.
HermitCrab Perspective: No one on the HermitCrab team is prepared to use their home or personal assets as collateral – banks will be a great (and preferred) option once the proof-of-concept phase of reshoring is complete, and the customer will sign a letter of intent.
Venture Capital: Venture capital involves raising funds from investors who exchange capital for equity in the company. This method is ideal for startups with high growth potential, as it involves an infusion of significant funds which can be used for expanding operations, hiring, and innovation. Venture capitalists often bring industry expertise and connections, aiding growth.
Pros: Access to large amounts of capital; Investors often provide business advice and networking.
Cons: Dilution of ownership; High pressure to achieve rapid growth.
HermitCrab Perspective: The products that HermitCrab intends to focus on are mundane and low-tech, so probably not going to generate too much interest from the VC community. Also, the first few HermitCrab factories need to be nurtured, so the pressure for high returns is a steep burden to bear.
Government Grants and Subsidies: These are financial awards provided by government bodies to support specific business activities, such as reshoring manufacturing. Unlike loans, grants usually don't need to be repaid, making them highly attractive. However, they come with strict guidelines and require comprehensive applications demonstrating how the funds will support economic or community goals.
Pros: No repayment, thus cost-effective; Support from local government initiatives.
Cons: Competitive application process; Restrictions on how funds can be used.
HermitCrab Perspective: Government grants and subsidies are certainly a target for HermitCrab to raise funds, but it is unlikely that the first HermitCrab factory can be 100% funded by state, local, and economic development funding alone.
Crowdfunding: Crowdfunding raises capital by collecting small contributions from a large number of people, typically via online platforms. It's ideal for startups looking to validate product ideas or reach niche markets early on. Success depends on a compelling story and strong promotional efforts to generate interest and enthusiasm among potential backers.
Pros: Validates business idea by securing early customer interest; Low-risk funding without needing collateral.
Cons: Uncertain funding results; Requires significant marketing effort.
HermitCrab Perspective: The marketing effort to crowd-fund a HermitCrab factory would be pretty large, and managing the hundreds (or thousands) of investors will be a full-time job, not a luxury for HermitCrab in the beginning.
Private Equity: Private equity involves selling ownership stakes in your company to private investors. This method can provide significant funds for start-ups ready-to-scale operations. Investors typically expect a high return and may take an active role in guiding the company to maximize their investment, combining financial resources with strategic insight.
Pros: Strategic guidance from investors; Can provide significant capital.
Cons: Loss of some control over the business; Complex deal structures.
HermitCrab Perspective: Similar to Venture Capital – Private Equity will likely demand too much control and too much return in the early stages. This is a possibility down the road when a PE firm’s network can provide a potential stream of reshoring customers.
Supplier Financing: Supplier financing allows startups to defer payments to suppliers, acting as a short-term loan to enhance liquidity. This method can free up cash flow to be invested elsewhere in the business, such as hiring or purchasing essential equipment, reducing immediate financial pressure without taking formal loans.
Pros: Helps manage cash flow; No interest compared to bank loans.
Cons: Limited to supplier limits; Can strain supplier relationships.
HermitCrab Perspective: This is 100% dependent on the product to be reshored, but is a decent option for a portion of the funding needed. For example, if HermitCrab focuses on a wood-oriented product to be reshored (picture frames, wood parts, etc.) then a company like Felder Group or Hoffman Machine might invest equipment in the name of getting a new customer.
Angel Investors: Angel investors are wealthy individuals who provide capital for startups in exchange for convertible debt or ownership equity. They typically invest in promising early-stage companies, often providing not just funds but also mentorship and advice, leveraging their experience and networks to help startups grow.
Pros: Can provide vital early-stage funding and mentorship; Often more flexible than venture capital.
Cons: Equity is given up, diluting ownership; Limited to investors interested in your specific industry or vision.
HermitCrab Perspective: This is a solid choice, especially since HermitCrab is focused on specific states and specific industries affected by offshoring. Wealthy southeast families that lost their businesses to offshoring (textiles, furniture, ceramics) might be inclined to offer their support to bring their legacy back to life.
Every one of these choices is viable and easily understood. Now let’s look at a provocative new way to fund the reshoring program.
HermitCrab’s Bank – The Customer
An often-stated HermitCrab truism on offshoring is that companies that sent their manufacturing to other countries had no intention of bringing it back, so they made no allowances for reshoring any time in the future. The farther back the time you go, the less likely a company has the will or the gumption to even consider reshoring, despite the much better economic rationale and the accompanying less tangible reasons to do so.
Outsource the Reshore
The management consulting industry is astonishingly large - over $1 trillion in size in revenue of the last three years. The industry boomed on the back end of COVID, when every industry sought advice on how to manage the impact of the pandemic and getting things back on track. In an Internet Era, where every fact ever learned is a key stroke away online, C-level executives and boards rushed to pay Accenture, Deloitte, Bain, and McKenzie millions of dollars to tell them what to think. It's neither good nor bad, it's just the way things are - companies love to outsource everything, including important strategic business decisions.
This state of mind should be applied to reshoring manufacturing. C-level execs and boards do not need to get in front of a whiteboard and produce a plan - there's plenty of consultants ready to help, including the Hermitcrab Team. The main difference is that HermitCrab actually goes a step further - we will plan the reshoring program, then actually own and run the factory. And the best part? Our customers pay for it - with operational expenditures (OPEX). This is a new and different approach, and HermitCrab’s preferred funding model. Since accounting ratios targets are sacred for many companies, keeping capital expenditures (CAPEX) to a minimum is a golden rule.
So, let's consider all the costs of launching a reshoring factory that will be expensed as operational costs:
Strategic Planning and Execution Management: There is ample expertise in the previously aforementioned management consulting industry to provide reshoring strategic planning and execution management services, all of which can be treated as an operational expense.
Renting versus Owning: By renting a building, instead of purchasing it, our customers can classify lease payments as operational expenses. This avoids the capital expense of owning real estate, which must be capitalized and depreciated over a longer time period. Since target locations are in distressed counties, favorable long-term leases are likely, plus significant tax credits to the customer.
Equipment: Leasing equipment, instead of buying, allows these costs to be treated as operational expenses. Lease payments are typically considered operating expenses, providing the benefit of preserving cash flow and reducing taxable income. The makers of the essential equipment for likely HermitCrab products have been in a decades-long stagnation, so flexibility on terms is also likely.
Raw Materials: Raw materials can often be classified as cost of goods sold (COGS) once they are used in production. However, during the procurement stage, we can treat them operationally by incorporating relevant costs under supply chain or management expenses depending on the accounting policies.
Service Agreements: Instead of investing in equipment maintenance services as a capital expense, we will engage in service agreements that qualify for operating expense treatment.
Payroll and Training: Payroll for workers, as well as training costs, are typically treated as operational expenses. This includes salaries, wages, benefits, and other associated costs, which are essential parts of running your operations.
It's Just Another Corporate Project
HermitCrab’s business plan addresses the customer paid approach in the first half of the plan. Once a partner or customer has stepped forward, and a product is identified and a site selected, then a proof-of-concept project will commence that rolls all of the costs of getting the building ready, landing the equipment, securing suppliers, hiring and training the workforce, and operating the restored factory as an operational expense.
Think of this as a paradigm shift. This is no different than the glory days of large ERP implementations, where large companies would spend tens of millions of dollars to implement SAP, Oracle, or some other software package to run their business. Based on that way of thinking, reshoring is actually easier. There is less direct involvement from the end customer, and once the new factory is operational, HermitCrab will assume responsibility for the leases and operational expenses.
Will the work be challenging? Of course. Will there be bumps in the road? Sure, but ask anyone who implemented large scale ERP if that went smoothly. The benefits…jobs, cost savings, environmental benefits, marketing gold... make the project worth pursuing. Let's get started.
Conclusion: The HermitCrab concept just needs a customer to get started. A company the size of Home Depot or Hobby Lobby can fund the entire end-to-end reshoring of a currently offshore product for less than .01% of their SG&A expense(7), and this is the kind of project that will garner shareholder support and enthusiasm. Money is where the “rubber meets the road” - nothing happens without cash flow, but the process can start with a HermitCrab Reshoring Strategy Project - nothing but a rounding error expense for most large enterprises.
Writing this class makes me excited about the future of HermitCrab and reshoring manufacturing back to the US. We've proven there's no shortage of money earlier in this article, and tons of it is just sitting on the sidelines, looking for a place to be invested. Reshoring is that place.
Thank you for reading! This can work - we just need to stay focused on the process of building the brand and getting the leads. Tomorrow's topic, Day 22: Raw Materials: let's focus on what's already available to use for production. We need to work on consuming raw materials that are plentiful in the Carolinas and Georgia, and the good news is that there are many possibilities.
Thanks for reading,
The HermitCrab Team
Footnotes:
https://www.chronograph.pe/the-evolution-of-venture-capital-fund-sizes/
https://www.financial-planning.com/list/advisor-count-hits-all-time-high
https://www.statista.com/statistics/1234833/global-management-consulting-services-market-size/
https://www.wsj.com/market-data/quotes/HD/financials/annual/income-statement (assumes HermitCrab needs $25Million to achieve proof of concept factory, where Home Depot’s SG&A for 2024 is currently listed as over $25Billion)
