A New Era for Hard Tech

A New Era for Hard Tech — Full Paper

The industrial and economic leadership of the Western World in the post-War era was founded upon a common will to lead in the top industries of the day — aeronautics and aerospace, automotive and the highway system, telecommunications and GPS, electronics and computing, material science and industrialization, and more.  The government invested in these industries, the education system trained people in them, and the economy was built on them.  Even today, most of the most valuable companies in the world are companies who make physical products.

Over the last 30 years the Western World has lost its way, over-indexing very narrowly on an information economy while dismissing advancement of physical products and hard technology.  While client server and internet and mobile computing continued to advance, we unceremoniously surrendered these other sectors to other countries.  Today, if you list the top 15 industries you believe we ought to be in to be competitive for the future, whatever your list, 12 of the 15 are guaranteed not be software, AI, or fintech.

A Re-awakening

The great news is that in the last few years the Western World has re-awakened its awareness of the need to catch up and overtake again in these other industries — sectors such as as clean energy generation, distribution, and storage; clean and sustainable consumer and commercial transportation; manufacturing automation and re-industrialization; next gen communication; new space; new agriculture; material science; more sustainable food production; smart cities and mobility; and so much more.  And we have seen governments seek to create incentive programs and policies to help promote these industries, and introduce concepts like “re-shoring.”

The less great news is that a generational gap is hard to address without a generational investment.  Generational investment that requires greater education, capital investment, and  industry focus, in addition to government policy and incentives.

Education — the US only produces 3000 PhD’s in ALL engineering fields combined its the US each year across all universities, and only 1/3 of those conferred degrees are to US citizens and another 1/3 historically are foreign nationals who remain in the US.  The numbers of bachelor and master STEM degrees are higher but pale in comparison to non-technical degrees.  Meanwhile the last generation that heavily invested in these hard tech industries has approached retirement age, and much of the last 30+ years of manufacturing experience is getting lost with them.  By comparison, there are multiple metropolitan areas in China alone with orders of magnitude more young people who have been educated in all the skills needed to manufacture things - design, manufacturing, production, logistics, and so much more.  There is a reason why they are able to take Western World innovation and productize it en masse and sell it back to us cheaper and better.  And nowadays they are pretty good at the innovation skills as well, and investing more there in many fields.

Capital investment — historically 98% of the investment of the fabled venture capital industry has been in software, every year, for a very long time.  Everything else, from Allbirds sneakers to satellites, is the last 2%.  It has been virtually zero.  And this, for industries that are actually more capital intensive and require great capital investment to be successful, not less. The great news is that the last few years, there has been a relative renaissance in the number of VC firms with 100 to 600M in assets under management investing in hard tech, climate tech, sustainable tech. And i the last two years there has been a concerted bump in green and related investment. So nowadays it has been at least relatively easier to get seed, Series A, or possibly Series B funding.  However, the growth equity investment industry for hard tech is anemic with only a handful of impressive, mission-driven investors who are very appreciated but by definition can only write a  limited number of checks per year.  The result is many hard tech companies that do have great promise end up either going bankrupt, or selling for pennies on the dollar to a strategic, for lack of an adequate growth industry to support their continued growth once they reach the commercial ramping stage.  Yes, hard tech is harder than software — it requires greater technical understanding, operational know-how, and commercial experience.  But that just means the investment community needs to bring a better game, and include more people with these skills than they have needed for 30 years of a mostly software-dominated portfolio.

Industry focus — in the last era where the Western World had leadership in hard tech, the portion of corporate revenues reinvested in R&D was far greater. In a software era, these re-investments have atrophied and fallen off in investor benchmarks.  In addition, in software there is an extremely large and polished bench of experienced senior executives that can partner with innovators to help them scale their company. In hard tech, that bench is much more scarce. We are starting to see an initial wave of execs coming out of the Tesla, Space X, Apple, etc wave, as well as execs coming out of traditional industrials learning to “scale down” to growth-sized companies, but there is still a massive supply gap of experienced hands to help foster the growth of our newly reawakened sectors.  This gap is at every level, not just senior leadership.  Functions such as supply chain, operations, new product introduction, reliability and test, etc lack the capacity to feed an emergent generation of start-ups as they emerge from commercial pilots and are ready to grow.

Government focus — incentive programs and trade policies are helpful, but national priorities and longer-term programs are needed.  And historically government has been an early adopter of technologies to give growth companies an initial market in which to grow and scale.  It has been a long time since the government had this re-investment focus in infrastructure, last seen when this country focused on power and water, roads and bridges, the internet and telecommunications. Those old models worked because those government agencies were a sustained source of support, and less volatile based on elections and sound bites.

The Mission

Today, the Western World has an opportunity to re-leverage its education, capital industry, industrial, and governmental might to more solidly burnish its leadership across a host of industries that we all know are vital, but sit on the razor's edge while we see other countries surging ahead with greater speed, numbers of people, and dollars at work.  We have the opportunity to exploit our own innovations more fully here.  But this will require promotion and re-inflation of STEM degree programs; a re-energized public sector that invests in technology development again in addition to just basic R&D; a capital investment industry that brings sufficient capital AND a massively improved skillset to hard tech, and mature industries willing to develop more operations and business leaders to helm these sectors.

Bovine Ventures seeks to be part of this mission by working with investment firms to bring greater skills to identifying and investing in promising hard tech companies; helping those companies directly with the technical, operational, and scaling skills and experience they often initially lack; and bringing insight back to the public policy arena to help inform how to better to spend the next generation building the skills we have under-served in the last.