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Financing the New Industrialists

Financing the New Industrialists

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Summary → This rough draft memo discusses the intersection a few ongoing threads:
  1. How does the playbook for building (and evaluating) “new industrialists” need to evolve from the software playbook which dominated the last 20 years?
  2. What type of capital formation will be required to scale solutions at the intersection of bits and atoms — both climate-related and aimed at other critical problem areas?
  3. What does a financial institution built natively to scale solutions at the intersection of bits and atoms look like?

The backdrop for all of this is the need for Europe and democracies around the world to raise the level of Industrial Ambition across society.

Document Index

Overview

We are at a critical juncture in which transformational technologies need to be developed and deployed at scale in the service of solving complex societal problems, most notably climate change. On the heels of intersecting health, production, and security crises, doing this requires us to raise the level of Industrial Ambition – how we innovate at the intersection of bits and atoms – across society.

The energy transition provides us with one example where present and future outcomes are being shortchanged by our lack of collective ambition. For the world to achieve net-zero emissions and progress to the levels of energy abundance that support long term growth, trillions of dollars need to be reallocated towards scaling renewables infrastructure, reshaping the way we use land, and reconstructing industrial processes.

Without radical reinvention of the pathways for capital and talent formation, value creation, and value assessment, the scientific, technological, and operational progress being made in labs and by emerging companies will fail to reach full potential and we will be forced into increasingly unpleasant societal trade-offs.

In order to build radical solutions that scale at the intersection of bits and atoms – climate focused or otherwise – a new playbook is required.

To win in this era, “emerging industrialists” need to effectively coordinate complexity across physical and digital systems and across entire value chains, all while navigating unique regulatory and capital ecosystems.

The requisite knowledge, infrastructure, stakeholder bases, and organizational models represent a fundamental departure from the shared playbooks used to build enterprise and consumer software companies over the last two decades.

The Emerging Industrialist Bundle

In each previous technological and industrial paradigm shift, novel bundles bringing together financial tools, networks, and expertise were developed by purpose built, service-driven, financial institutions in order to help companies scale more effectively.

These institutions then became persistent centers of gravity for the industrial eras they enabled.

If JP Morgan was the "technological revolution-native" financial institution for early 20th century industrial progress (steel, electricity, automobiles, oil), and a firm like Andreessen Horowitz bills itself as the JP Morgan of the software revolution (venture capital financing being the native funding model as software eats the world), what does a financial institution built natively to scale solutions at the intersection of bits and atoms look like?

The jump from a "JP Morgan" world to the "a16z" world was substantial — for example, the zero marginal cost nature of software businesses forced a fundamental shift in thinking about speed and scale. A similar paradigm shift is required to make the next leap, and thus the assumption is that doing so would run counter to the capabilities, incentives, and ambitions of incumbents (across asset classes).

As bits and atoms converge, we need to draw on the infrastructure-type investments of the JP Morgan era and on the capital-efficient ones of the software-era, with the added recognition that a change is needed to accommodate what now are considered externalities in the distribution of value (carbon-related issues being the primary, but not only example).

While our assumption is that this institution would incorporate elements of venture capital — so as to build relationships and align incentives with the highest potential emerging companies — the model would scale through technology-enabled project development, debt, other forms of capital formation or market making, go to market “packaging”, infrastructure development (ex. land access), and new models for risk assessment.

Building the New Bundle

To build such an institution, we would need to have ambitions of unlocking tens of billions in capital in under a decade. Anything less is sub-scale in relation to the scope of the problem and opportunity.

As we explore this opportunity, one question we need to answer is why it makes sense to attempt to bundle such a broad set of capabilities under one roof?

The short answer is fragmentation of capital, networks, and expertise.

There is currently no center of gravity for companies seeking to scale transformative technology at the intersection of bits and atoms. This contributes to a disjointed and “expensive” experience for companies trying to scale.

There are parallels we can draw between this potential approach and what we have observed with a company like Rippling and its ”Compound Company” model.

  • Pricing Advantage → With an integrated offering rather than a point solution, there are opportunities to undercut the market on the price of each “product” and effectively compete with capital providers that only focus on one thing. This is critical as the entire objective of such an endeavor would be to drive down the average cost of capital for these types companies.
  • Talent Density → Developing and applying this set of financial tools would require an incredible collection of entrepreneurial experts that currently does not exist under a single roof — scientists, infrastructure specialists, financial engineers, regulatory experts, and investors. Today, this expertise is fragmented across banks, labs, companies, and investment firms making the search costs for acquiring this expertise high for founders.
  • Integration as the Product → Bringing these people — and these capabilities — into a single, integrated institution would unlock new networks and new information flows that would map to the type of support “emerging industrialists” require across the company life cycle. This would feedback to create a compounding data advantage that would contribute to better pricing/underwriting and unique insight into new growth opportunities.

Why Now? The Case for Industrial Ambition in Europe

The emergence of this new class of companies — and the opportunity to develop a new financial institution to serve them — comes at a time of geopolitical reshuffling that is rapidly shaping and cementing the future fortunes of countries and regions.

The fragility created by decades of underinvestment in domestic industrial capabilities, a drive for maximal efficiency across the economy, and ignorance of key social and environmental externalities has been exposed by a confluence of events — redistributive policies in response to Covid, a push for sovereignty and self sufficiency among geopolitical blocs, war in Ukraine, and the overriding energy transition.

The impact has reared its head in the form of skyrocketing energy prices, manufacturing disruptions, supply chain breakdowns, and resource shortages – driving us to the brink of serious recession.

Europe has been particularly hard hit and has been forced to face down the reality of its economic and geopolitical situation. Energy insecurity, critical manufacturing dependencies, and sclerotic defense capacity leave no easy paths to growth and prosperity.

What started with major steps towards economic integration to combat the health and financial crises created by Covid and progressed into solidarity in response to Russia’s invasion of Ukraine risks backsliding into a cycle of zero sum behavior amongst policymakers and between countries.

On the back of a decade of stagnation, Europe risks an extended period of stagflation, a diminished role in geopolitical affairs, and internal fracturing (driven by desperate self preservation among member states).

Without a significant boost to the European economy’s productive capacity — led by breakthroughs in science and engineering unlocked and scaled by novel tools, networks, and expertise — this structural undersupply will persist, critical dependencies will become more severe, and economic growth will suffer.

It is within this context, and at this critical juncture, that we believe there is an opportunity to explore the development of a new type of financial institution, purpose built to serve emerging industrialists and with the aim of becoming the center of gravity for a new era of Industrial Ambition in Europe and across democracies around the world.