The Industrial Future Is Taking Shape. VCs Are Missing Out


As government intervention in the economy becomes more widespread, the struggle to dominate industrial technology intensifies. Investors — once attracted to asset-light firms and high returns — must be willing to pour billions of dollars into it, or risk the rush.

This is not just a response to fallout from Russia’s war in Ukraine and geopolitical tensions between the US and China. The last two years of commodity shortages and labor shocks have exposed fragile and flawed supply chains around the world. To make sure we don’t stop there, governments are stepping up their multi-billion dollar industrial policies to incubate the next generation of hardware, including chips, 5G base stations, electric vehicles, batteries, high-tech machinery and systems.

At the same time, they attract and promote knowledgeable companies. Big corporates are also spending. Japan’s Industry Ministry announced this month that it is joining some of the country’s biggest companies with International Business Machines Corp. to develop chips for quantum computing and artificial intelligence. In addition to providing subsidies, Tokyo is seeking more funds to build advanced manufacturing facilities. In the US, S&P 500 firms recently reported record capital spending of $222 billion on new machinery, buildings and technology — a sign that they have a positive outlook for future consumption despite fears of an impending recession. Equipment investment rose 11% while intellectual property rose 7%. The past few years have shown how high the costs of industrial decline are, and no one wants to back down.

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While governments and companies bet on the physical industrial future, venture capital and private equity firms have largely sat on the sidelines. Some are doing smaller deals, but this capital is not flowing in a big way into sectors like energy storage, grids and mining, where it is needed to address problems such as power and material scarcity 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 is perpetuated as private investors typically stick to pattern recognition when making decisions and back tested businesses with predictable red flags and returns. Meanwhile, they shy away from hard tech because it takes too long to sell products and is capital intensive.

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With soft tech out of favor right now, private capital doesn’t have many options. Avoiding this cycle of industrial innovation may prove foolish. Of course, interest rate hikes are likely to put pressure on this type of money. But in the long run, investments that avoid pressing problems like energy crunches and broken production lines are bound to prove profitable because there aren’t many affordable ways to fix the problems.

This support is important. Governments may be good at seeding strategic sectors, but they are not so good at picking winners or choosing the right technology. Allocating capital over the long term is not their forte, nor is building and growing business models that work. Also, the state cannot afford to finance such industries forever, especially in tough economic times.

Some long-term investors are trying to solve the problem. A climate fund founded by Bill Gates, which has backed technology that uses surges of electricity to break rocks and ores to reduce energy and emissions in mines, has invested 12 million euros ($12.3 million) in Robert Friedland’s venture i-Pulse Inc.

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Governments know that these ambitions come with huge financial demands. China’s securities regulator recently announced it will allow government-backed firms to issue long-term debt for technology development and innovation. In the US, the Department of Energy’s loan office is active, financing startups ranging from hydrogen storage to other next-generation ventures. However, they are limited in their ability to take the necessary risks and evaluate whether firms can turn from proven and viable to profitable.

Without private capital and expertise doing its part, we are left with more failed technologies, higher costs and frequent shortages.

More from Bloomberg Commentary:

• Sweden on Rethink: Adrian Wooldridge

• Robot M&A may be in the post-pandemic future: Brooke Sutherland

• How the 1970s Changed the US Economy Forever: Noah Smith

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg opinion columnist covering industrial companies in Asia. Previously, she was a reporter for the Wall Street Journal.

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