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Monday, 26 October 2015 00:03

Modustri’s capital raise leads to partnership with Caterpillar

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Brian Steketee, CEO, Modustri. Brian Steketee, CEO, Modustri. PHOTO: Katy Batdorff

Like many startups, Grand Rapids-based Modustri LLC began as an idea on the back of a napkin.

Modustri, which officially spun out of Agent X in 2014, saw a market for digital diagnostic tools that would efficiently track the integrity of high-wear components and minimize downtime by providing real-time data to heavy equipment operators.

However, as the company grew in size through a series of small-scale equity raises, CEO Brian Steketee knew that it would need additional capital to fully commercialize its product and attract a strategic partner to grow the business to the next level.

“As time progressed, we invested more in the product and recognized that we didn’t have the capital internally to truly fund the development and the sales and marketing cycle necessary to put a transaction together,” Steketee said.

To grow the company, Steketee opted to recapitalize the company with a mezzanine raise and take Modustri from the startup phase to fully commercializing its software and digital tools. Ultimately, the recapitalization made possible a partnership with global heavy equipment supplier Caterpillar Inc. (NYSE: CAT).

The company’s strategy to find capital to invest in its growth and secure the partnership earned it the inaugural ACG Growth Capital Award, a part of the 2015 M&A Deals and Dealmakers Awards from MiBiz.

The new partnership with Caterpillar gives the company a direct line to the industry leader’s customer and distribution network. In addition, Modustri can leverage the much larger organization’s expertise in intellectual property protection, international tax laws and other areas to which a startup would not typically have access.

The new round of funding also allowed Modustri to significantly increase its workforce and recruit experienced talent from other industries to further grow its business.

“The deal structure enabled us to take what started as a four-person team that grew to an eight-person team when we recapitalized, and (then) gave us the firepower to really invest heavily into building out our group here in West Michigan and bringing in top-tier talent,” Steketee said.

Modustri recently hired a COO who had previously worked at GE Aviation. The company currently employs 24 full-time workers in West Michigan, plus a number of contractors. It plans to double its staff in the next year as it continues to build out its technology and as the partnership with Caterpillar progresses.


DEAL STRUCTURE

Modustri opted to pursue mezzanine financing to keep its initial shareholders involved in the business while still adding more capital, Steketee said.

“Going the mezzanine route was a good approach for us to allow our original shareholders to retain their equity, but (we) also understood the need to bring in capital at a higher rate in order to get us to that next phase,” Steketee said. “We really looked at it as a bridge.”

Instead of turning to a bank, Modustri raised the mezzanine funds from a series of business owners in West Michigan, allowing it to tap those local investors for business knowledge and expertise as it progressed with its fundraising and entered the partnership with Caterpillar, said Dan Fuller, a tax partner with BDO USA LLP.

Fuller advised Modustri on its partnership with Caterpillar.

“The mezzanine debt didn’t come from some bank — it came from a business owner or relationship. It’s the community supporting the community,” Fuller said. “All of them brought intellectual capital as well to the table.”

Modustri declined to disclose the total dollar amount of its mezzanine financing. Previously, the company closed on an equity raise valued at $145,000 in 2013 when it was still part of Agent X, according to a previous MiBiz report.

As part of the mezzanine financing round, Steketee exited Agent X LLC, a Grand Rapids-based firm he co-founded that developed the technology behind Modustri, so he could focus more time and effort on growing Modustri.

“When we got to the mezzanine round of funding, that’s when we made a pivotal change in the company,” Steketee said. “It was a scary, yet exciting (change).”


DECISION MAKING

While Modustri knew about the possibility of partnering with Caterpillar prior to its round of mezzanine financing, the company had also initially entertained courting investors from the venture capital community.

Steketee said the company would have had more options by going with venture capital funding versus weeding through a much smaller pool of strategic partners who fit Modustri’s criteria.

However, as the company explored its options with venture capital and strategic partners, Steketee and the rest of the Modustri team quickly realized a strategic partner was more aligned with its long-term vision.

Since Modustri had validated its technology with MacAllister Machinery, a Caterpillar dealer based in Indiana that also owns Saginaw-based Michigan Cat, the company had already formed a close relationship with the heavy equipment manufacturer, Steketee said.

“We looked at Caterpillar, the global footprint they had, their commercialization capability and the resources they could bring to bear,” he said. “As we got to know them better, it just seemed like an absolute no-brainer to partner with the number-one player in the space.”

Steketee advises other entrepreneurs always to choose a partner that aligns with their company and brings more to the table than just capital.

“(You want) someone that understands the space and can see the value but also participate in creating that value quicker,” he said.


RECIPE FOR SUCCESS

To ensure a successful round of financing as it looked to scale up the business, Modustri relied on a handful of best practices, primarily focused on the product it was offering.

In the beginning, the company went to great lengths to ensure that it had a working product that had demonstrated a return on investment for its initial investors. They also needed to prove there was interest from the marketplace before reaching out to raise capital.

That way, when it came time to launch its mezzanine round of financing, Modustri could make a strong case to investors, Steketee said.

“If you can hit that in five slides and show there’s an interest in demand, but also be able to come in with a product that you already have a customer champion who can speak on behalf of it and the value it’s created, then … that’s going to really make a difference,” he said.

On the industry partnership side, Steketee advises other entrepreneurs to identify those potential alliances and communicate with the those companies early in the process.

“If you are looking for synergetic partners, you want to start courting them early and let them see the benefit of what you’re doing,” he said.

Going forward, Modustri plans to remain focused on its strategic alliance with Caterpillar. Depending on how that relationship, Modustri’s technology, and the overall equipment market develops, the company may expand its products into the larger fleet market.

Likewise, the company is also keeping its options open for additional capital raises, Steketee said.

“As we look at adjacent markets in the future, there’s an appetite (for capital) — whether we’ll be able to self-fund or whether we’ll see the opportunity that requires additional financing,” he said. “Those are still questions that are down the road for us. We’re always going to be considering, though.”

Read 2834 times Last modified on Monday, 26 October 2015 16:29
John Wiegand

Staff writer

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