By: Camila Key Saruhashi
This week I joined Construct Capital, an early stage venture firm dedicated to founders that are reinventing what we coined as the “foundational industries” in the US. We are talking about the backbone of our country: manufacturing, logistics, supply chain, and so on. Although they represent more than half of the GDP, they only get a fraction of investment dollars. Not only are they under invested, but are poised to be disrupted. Let’s unpack why.
Founders are born to solve problems. There are problems everywhere, but many times the big ones can only be solved when something meaningful changes the status quo. I believe there are three types of changes that allow that and can unlock new value creation: Breakthrough Technology, Regulatory & Policy Changes, and Paradigm Shifts.
- Breakthrough Technologies: this one seems obvious, but it was a new technology that allowed Silicon Valley to be born: the semiconductors. New technologies allow us to solve problems that could not be solved before. Think the internet, cloud, mobile, smartphones. They change the status quo on efficiency, performance, distribution cost, unit economics, and so forth. At Construct, we are especially excited about AI that can be applied to foundational industries such as Supply Chain, Manufacturing, Mobility and Critical Infrastructure. Here are some examples on what we are digging in.
- Regulatory & Policy Changes
- Government is the elephant in the room no one should ignore. U.S. government spending represents 37% of the GDP. Not only does it spend roughly $6T per year, but it also sets forth the policies, financial and tax incentives, and regulations that dictates the playing field that founders are building in. Regulators increasingly aren’t just reacting — they are being proactive, anticipating innovations and even encouraging them.
- Some acts enacted by the current administration that will impact many years to come are the Bipartisan Act ($550B in new spending in the next five years to upgrade our transportation network and core infrastructure, the CHIPS Act ($280B to bolster US semiconductor capacity) and the Inflation Reduction Act ($400B in federal funding to clean energy). Just to illustrate how fast these acts impact industries: within a year of IRA, the private sector has announced more than $110B in new clean energy manufacturing investments, including more than $70B in the electric vehicle (EV) supply chain and more than $10B in solar manufacturing. This means an acceleration in the adoption curve and new investments and talent to these foundational industries.
- I am particularly curious about how the upcoming election, and, hence, new administration, will impact investment flows. Plus, I wonder what the Supreme Court’s upcoming decision on agency deference will do to agencies’ ability to implement any regulation. Shoot me a message if you have any good insights!
- Paradigm Shifts: paradigm shifts are significant changes that happen when the usual way of thinking about or doing something is replaced by a new and different way. Sometimes they are as simple as changes in generations and their associated behaviors such as GenZ and the way they now do research on Tiktok. Sometimes they are transformative like the pandemic. At Construct, I am particularly interested in the following shifts that need to be urgently addressed:
- Climate Change: we have all been feeling the effects of climate change. It feels like a “slow then fast” phenomena and now, “all of the sudden”, everyone has been feeling the hotter summers and the colder winters.
- 21st Century Infrastructure: these weather changes have been severely disrupting our built world: roads and airport runways are buckling due to the extreme heat, train tracks are warping, bridges are swelling, the Panama Canal is so dry that ships can’t go through it, ports are being overtaken by the high sea level, and so on. There are numerous challenges, because most of our physical infrastructure was built using the temperature records of the mid-20th century. With this, new businesses must emerge to rebuild our infrastructure to the 21st century reality. Think AI for discovering new materials, software to optimize power grid, sensors to monitor water levels, and so on.
- Resilient Supply Chain: the impact of supply chain disruptions, intensified by events like the pandemic and conflicts such as the Red Sea crisis, has prompted a crucial shift in the supply chain landscape. Beyond prioritizing efficiency, the focus is now on resilience.
- Nearshoring: many companies are strategically relocating operations closer to their markets to mitigate disruptions and meet heightened consumer expectations for faster product delivery. This paradigm shift, known as Nearshoring, has positioned Mexico as a significant beneficiary. Just last year, Mexico surpassed China as the largest exporter to the U.S. and has become its primary trading partner with almost half trillion dollars of good exchange. There are four states that touch the borders of Mexico: California, Texas, Arizona and New Mexico. The four of them combined have a GDP that would put them as the 3rd largest economy in the world. They are big, but can they handle the new volume of supply chain inflow? What systems need to be in place (hardware and software) to streamline operations?
Our foundational industries are under the “perfect storm” of technological, regulatory, and paradigm shifts that will transform and re-shape our built world. And just like my colleagues at Construct, I am convinced that the next set of defining companies will come from founders who are solving the big problems and tackling the opportunities in the space. Hit me up at camila@constructcap.com if you’re one of them and let’s solve them together!