Analysis | The industrial future is taking shape. The VCs are missing

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The battle to dominate industrial technology intensifies as government intervention in economies becomes more widespread. Investors – once enamored of low-capital, high-return ventures – had better be prepared to invest billions of dollars in this area or risk being squeezed out.

This is not just a reaction to the fallout from the Russian war in Ukraine and the geopolitical tensions between the United States and China. The past two years of goods shortages and labor shocks have exposed weak and clunky supply chains across the globe. To make sure we don’t end up there, governments are beefing up their multi-billion dollar industrial policies to incubate the next generation of hardware, including chips, 5G base stations, electric vehicles, batteries and high-tech machines and systems.

At the same time, they attract – and encourage – companies with the know-how. Big companies are also spending. Japan’s Ministry of Industry announced this month that it is teaming up with some of the country’s biggest companies, as well as International Business Machines Corp., to develop chips for quantum computing and artificial intelligence. Along with providing grants, Tokyo is seeking more funds to build state-of-the-art manufacturing facilities. In the United States, S&P 500 companies recently announced record $222 billion in capital expenditure on new machinery, buildings and technology – a sign that they have a positive view of future consumption despite fears of a impending recession. Investment in equipment increased by 11% while that in intellectual property increased by 7%. The past few years have shown how expensive industrial malfunctions can be and no one wants to be left behind.

As governments and corporations bet on the physical industrial future, venture capital and private equity firms have largely stayed on the sidelines, having been burned on bets that either ran their course or didn’t. based on reality. Some make smaller deals, but that capital is not plentifully invested in areas such as energy storage, grids and mining, where it is needed to address issues such as power shortages. electricity and materials and lower productivity. For example, in 2021, 77% of all venture capital funding in the United States went to software, e-commerce and cloud companies, while energy and manufacturing only accounted for 4%.

This has perpetuated because private investors typically stick to pattern recognition when making decisions, backing proven companies with red flags and predictable returns. Meanwhile, they stay away from hard tech because it takes a long time to sell and capital-intensive products.

However, with soft technologies no longer in vogue, there are not many options for private capital. Avoiding this industrial upgrade cycle can be foolish. Of course, interest rate hikes are likely to put pressure on this kind of money. But in the long run, investments that relieve pressing problems like the energy crisis and fractured production chains are bound to prove lucrative because there aren’t many affordable ways to solve the problems.

This support is important. Governments may be good at seeding strategic sectors, but they’re not so good at picking winners or picking the right technology. Long-term capital allocation is also not their forte, nor is building and growing business models that work. Moreover, the state cannot afford to finance such industrial enterprises indefinitely, especially in difficult economic times.

Some long-term investors are trying to tackle the problem. A climate fund founded by Bill Gates recently backed technology that uses electrical surges to break up rocks and minerals to reduce energy and emissions at mines, investing 12 million euros (12.3 million) in the business with Robert Friedland’s I-Pulse Inc.

Governments know that these ambitions come with enormous financial needs. China’s securities regulator recently announced that it will allow state-backed companies to issue long-term debt securities for technology development and innovation. In the United States, the Department of Energy’s loan office has been active, funding startups ranging from hydrogen storage to other next-generation ventures. Yet they are limited in their ability to take the necessary risks and assess whether businesses can grow from a proven and viable business to a profitable business.

Without the private capital and expertise that do their part, we face many more failing technologies, high costs and frequent shortages.

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