The Industrial Future Is Taking Shape. VCs Are Missing Out


The struggle for dominance in industrial technology is increasing as government intervention in economies becomes far more common. Investors — who were once enthralled by asset-light firms and high yields — had better be prepared to commit billions of dollars to it, or risk being squeezed out.

This is not only a reaction to the aftermath of the Russian war in Ukraine and the geopolitical tensions between the US and China. The last two years of commodity shortages and labor shocks have exposed weak and sluggish supply chains around the world. To ensure we don’t end up there again, governments are beefing up their multi-billion dollar industrial policies to develop 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 companies with the know-how – and promote them. Big companies spend money too. Japan’s Industry Ministry announced this month that it is teaming up with some of the country’s largest companies, along with International Business Machines Corp., to develop chips for quantum computing and artificial intelligence. In addition to providing subsidies, Tokyo is seeking other funds to build advanced manufacturing facilities. In the US, S&P 500 companies recently reported record investment of $222 billion. Equipment investment grew 11%, while intellectual property investment grew 7%. The last few years have shown how high the costs of an industrial outage can be and nobody wants to be left behind.

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While governments and corporations bet on the physical future of industry, venture capital and private equity firms largely sit on the sidelines, having been burned on gambles that either ran their course or were not grounded in reality. Some have smaller businesses, but that capital isn’t flowing on a large scale into areas like energy storage, grids, and mining, where it’s needed to solve problems like energy and material shortages and declining productivity. For example, as of 2021, 77% of all VC funding in the US went to software, e-commerce, and cloud companies, while energy and manufacturing accounted for just 4%.

This has continued as individual investors tend to stick to pattern recognition when making decisions, backing proven companies with predictable red flags and returns. Meanwhile, they stay away from hardtech because selling products takes a long time and is capital intensive.

However, with softtech now out of favor, there aren’t many options for private capital. It may prove foolish to avoid this cycle of industrial upgrading. Sure, rate hikes are likely to put pressure on this kind of money. But in the long run, investments that alleviate pressing problems like the energy crisis and disrupted production lines prove lucrative as there aren’t many affordable ways to fix the problems.

This support is important. Governments may be good at seeding strategic sectors, but they’re not as adept at picking winners or picking the right technology. Long-term allocation of capital is also not their forte, nor is building and evolving business models that work. In addition, especially in economically difficult times, the state cannot afford to finance such industrial companies in the long term.

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Some long-term investors are trying to address the issue. A climate fund set up by Bill Gates recently backed technology that uses electrical shocks to shatter rock and ores to reduce energy and emissions in mines, investing €12 million ($12.3 million) in the project with Robert Friedland’s I-Pulse Inc.

Governments know that these ambitions come with huge financial needs. China’s securities regulator recently announced that it would allow state-backed companies to issue long-term debt for technological development and innovation. In the US, the Department of Energy’s Credit Bureau has been active, funding startups ranging from hydrogen storage to other next-generation ventures. Yet they are limited in their ability to take necessary risks and assess whether companies can move from established and viable to profitable businesses.

Without private capital and know-how, we are faced with many more failed technologies, high costs and frequent bottlenecks.

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• How the 1970s changed the US economy forever: Noah Smith

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Anjani Trivedi is a columnist for Bloomberg Opinion covering industrial companies in Asia. She was previously a reporter for the Wall Street Journal.

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