[Update September 1, 2020: Light Guide Systems was formerly known as OPS Solutions. The post below has been lightly edited from the original in January 2017.]

OPS Solutions produces an augmented reality solution for manufacturing employees.

How Did I First Connect with OPS Solutions?

I cold called Paul Ryznar (CEO of OPS Solutions) after seeing OPS on a list of attendees at a conference in Michigan. The deals I see can be approximately split into three buckets with different quality characteristics:

Sourced from my network: 25% of deals annually, 75% high quality and 25% low quality
Sourced from trade shows/conferences: 25% of deals annually, 10% high quality and 90% low quality
Sourced from research/thesis driven: 50% of deals annually, 5% high quality and 95% low quality

OPS was one of the rare, high quality companies from the “research/thesis driven” sourced category. (I included them here instead of the trade show category because I did not meet them or hear the pitch). Like many venture firms we prize referrals from our network because they often pass along high-quality companies. But I personally love cold calling new potential portfolio companies. It strikes me that if everyone focuses on investing with friends or friends-of-friends it must encourage regression to the mean.

Initial Research

I started researching OPS in December 2011. I looked at Paul’s background (knowledgeable in the space – positive), the Company’s performance (some revenue – positive), and the competition (including pick-to-light which suffered from enormous limitations and delivered questionable value – also positive). After determining the idea might have some legs I reached out to Paul in March 2012. For some reason Paul decided to take my call, and have several follow-up calls with me alone. This was unusual because (1) Paul was not raising money and (2) I was a lowly analyst with little understanding of the manufacturing market.

I was becoming more and more excited about the company. I pestered my boss, one of several at the time, Alvin Vitangcol to meet OPS and he connected with Paul in mid-May. Alvin had a very positive meeting and diligence was proceeding smoothly. Then we spoke with some of our close advisors and experts. They had a problem.

Robots

Our advisors believed that robots do everything and that soon no one would really “work” in a manufacturing facility in the United States anymore. Two graphs seemed to prove their thesis:

So what to do? One of the most important aspects of venture investing is clarifying what is true. It sounds stupidly simple. However; it is entirely possible to base an investment decision on a belief about the world, and then how a company will change it, and end up failing, not because of how the startup tried to change the world, but because your belief about the current state of the world was wrong.

I started calling and printing 10-Ks.

More Cold Calling

I cold called small manufacturing shops. I cold called snowmobile makers. I cold called large public companies. I spoke with people who had no horse in the race about whether the fund should try to invest in OPS. A lot of people hung-up on me, but a surprising number of them were willing to chat. Over-and-over they told me the same thing – robots do a tremendous amount of work in factories, but there are still people doing manufacturing and there is not a great way to automatically ensure quality, improve cycle times, and gain visibility into the process.

I then went through every company in the S&P 500. I identified 113 companies that had a service or product that involved a manufacturing process with some potential relevance to OPS. Then I counted their manufacturing facilities and searched for any and all information about those plants. For these companies I kept coming back to the same questions: how many manufacturing employees are there? Can I identify plants that could use this product? What can I learn about these plants and their automation deployments? Part of the summary spreadsheet:

I then looked at major Wisconsin companies and created a separate spreadsheet with the contact information and automation status of specific plants. These would be diligence sources and potential customers. The results were clear: robots play a huge role in the manufacturing process, but there is still work being done by people, and there was potential for OPS to sell into this market.

Trends

After conducting full diligence we ended up investing in OPS Solutions in October 2012. A major reason we invested was because we could credibly answer the question of whether humans had a role in the factory versus complete automation. There is also an interesting angle if you think about OPS Solutions from a trends perspective.

What does this company really do? It is an augmented reality/virtual reality play for any manual process. Our investment thesis was not predicated on “virtual reality” becoming a trend, but it did:

Source: retrieved from Google on January 5, 2017

Capital Midwest does not invest based on trends, but we have found that many of our successful companies end up in the vanguard due to a combination of technology advancement and customer-oriented product development.

Summary

The team and product at OPS have grown tremendously over the past six years. The features of the Company are ones I hope to find over and over again:

Management – honest, results-oriented, and knowledgeable about their industry
Product – validated with revenue from an arms-length customer transaction
Technology – solving a problem in an unconventional manner, often from a different angle than comparable start-ups (i.e. not another robotics play, but understanding where robotics does not apply and tackling that problem)

Light Guide Systems – Investment Process and Rationale

Due Diligence