The Foundational Industries of our American economy have been neglected, sacrificed, and nearly forgotten for decades.

From manufacturing to logistics, defense to energy, these sectors are the backbone of our GDP — the industries that produce the goods and services we consume daily and provide critical infrastructure that keeps us safe and productive. They have been underinvested in for decades, not only by venture capitalists and entrepreneurs, but also by corporations and governments. That is changing. Great founders are turning their attention to Foundational Industries. The opportunity lies in classic disruption: incumbent industrial corporations, once the leaders in production, have become too big to innovate with little incentive to compete — in many ways frozen in the 1990s from their operations to technical infrastructure to mindset. Construct Capital’s mission is to find and back the best entrepreneurs building technology that transforms our Foundational Industries with modern, software underpinnings.

We must build a new bedrock of tech-first industrialization to support an enduring economic future.

This is a once-in-a-generation opportunity. Technologies of the last 25 years — let alone the most recent advances — have not been applied to these spaces. There are trillions of dollars of available spend in this category, and the corporations that control production are nowhere close to as forward thinking as they could be. They are laden with heavy and aging assets, and operate in an analog world where data is rarely even kept and simple processes take way too long. The result? The foundation of the US economy is critically unstable.

But, with wide availability of cloud services and edge computing, and now the promise of generative AI, software defined systems and robotics, there is no excuse for remaining in the past. This is where technologists in the U.S. shine as being best in the world. The tech entrepreneurs we work with every day excel at building these types of systems. We believe this nexus of know how and opportunity is poised to transform our national output and make America more resilient and efficient.  

When entrepreneurs backed by the investors who understand this potentia get this right, the public markets of the future will be dominated by industrial tech-first companies. In fact, they can create the next great tech sector that shapes our economy.

But before we look at where we need to be going, let’s first take a look at how we got here and the circumstances we face.

Foundational Industries have been neglected, forgotten, and sacrificed

Since the Industrial Revolution, certain areas of the U.S. economy (like GDP) have seen steady and consistent increases. But the last 50 years has been a rocky period of waxing and waning across the Industrial sectors. While the post-WWII boom was still going strong, new industrial starts (e.g. machine shops) began to decline precipitously in the 1960s. The 1970s and 1980s saw a resurgence of innovation in our domestic production capabilities as American factories pursued the age of computerization and the first wave of industrial robotics. The 1990s reaped the rewards of this technology and productivity output surged. But the advances were short lived. Following the burst of the “tech bubble”, U.S. manufacturers quickly offshored production capacity and maintained this approach even as the IT sector rebounded in the mid-2000s. Technical investment into Foundational Industries that would maintain productivity improvements slowed significantly and entrepreneurs fled the space. New manufacturing firms represented 12% of all new company starts in the 1990s. Today, that number is less than 5%. In 1997, U.S. manufacturing as a percentage of GDP was 16%. It dropped to 11% by 2021. In the same time period, technical adoption and innovation continued abroad: China grew 6x faster than we did during the same period.

Meanwhile, US consumers continue to drive skyrocketing demand for better products and services. The nation’s underinvestment in innovation has had wide ranging effects, but one of the most pronounced is our increasing trade dependence on other nations (as a reminder our trade deficit is $773.4B). In 2006, the U.S. current account deficit relative to GDP reached a historic high of 5.8%. Our GDP has not relied on domestic production for several decades and given the underinvestment, it would be risky to do so now. The American worker needs 106 hours of work in 2023 to produce what needed only 100 hours in 2013. The top domestic suppliers can no longer efficiently provide goods and services.

American pocketbooks feel it in the form of higher prices of goods and services and the public markets recognize it. These domestic manufacturers are valued by investors at a multiple to revenue at barely 1x revenue on average. Burdened with aging assets and inefficient operations, and coupled with an institutionalized fear of change, investors are understandably reluctant to back these incumbent companies.

During this same period, the global supply chain requirements increased in complexity, having to support international trade and stronger demand. But the supply chain was not built for resilience. The lack of connectivity and visibility yielded inaccuracies that could only be supplemented with increased spend; in 2021, in turn, we saw the freight industry balloon in response to the surges in demand spiked by COVID. We had to overbuild freight capacity overnight and as a result, the freight industry has suffered from a glut of supply resulting in 8% or 88,000 of carriers going out of business in 2023 alone. Changes in the geopolitical environment and our climate are increasing the frequency and magnitude of shocks. We saw these whipsaws again in the Russian-Ukraine war and through weather disasters. 28 weather disasters in 2023 resulted in damage of more than $1 billion each and the most recent storms have created upwards of $30 billion in damages.

There is finally wide recognition by corporations and the government that supply chains and manufacturing capabilities need to be more rebuilt for resiliency. A recent study found that 86% of manufacturers are restructuring their supply chains to find onshore or nearshore suppliers and are opening locations closer to customers over the last two years.

But, doing this is not straightforward and it must incorporate technical innovation. In the contraction of industrial spend in the 2000s, we sacrificed training and building our workforce. Manufacturing jobs in America plummeted 34% in the 2000s, a loss of more than 5.8 million jobs, and haven’t returned. We are now faced with simply not having a base of U.S. workers ready to perform the jobs we need to fill the gap. Deloitte and The Manufacturing Institute estimate between two and five million manufacturing jobs will be unfilled in the U.S. by 2030, and this doesn't even include the additional expected jobs created and from new waves of near and on-shoriring. Innovation and automation must be embraced because we cannot find enough domestic human labor to add productivity we need to independently support our economy.

What Competitiveness, Output, Production and Resilience look like in a New Future

Historically, casting and machining, trucking and shipping, and process and discrete assembly have been at the core of manufacturing, and the US has lagged behind our peers for over two decades. But now, a new wave of innovators is poised to revitalize the industrial sector. Tech entrepreneurs are turning their attention to these massive spaces and they are experts at applying automation, cloud hosted software, and advanced technologies. These founders have lived the disruptions in the IT space by leveraging cloud infrastructure, mobile platforms, machine learning, and process automation. The application of this knowledge to the industrial sector puts us in the unique position to not only catch up but to once again jump ahead of other countries in these industries and to do so faster than we have in other spaces. Companies like Copia, Telegraph, and H2Ok Innovation are already demonstrating how much progress can be made by applying cloud, developer workflows and automation — relatively ubiquitous technology within the IT world — to the industrial world.

Copia's Software for Industrial Automation.

The vast data collected in logistics and manufacturing systems create a fertile ground for new generative AI capabilities to co-pilot, design, or run new processes in the industrial world. This could no doubt be how we leapfrog other nations with huge productivity gains. We can now harness the vast amounts of data that has been sitting in disconnected, local machines and disperate spreadsheets and use the combined learnings to transform areas like supply chain, procurement, chip design: companies such as Advex, Didero, and Sphere are already doing this today. When you start using software systems and reinforcement learning instead of people to run factories and production, operational uptime and efficiency compound to quickly surpass the most productive and largest offshore factories, which simply have three people-driven shifts around the clock. Companies like Hadrian, Chef, and Atomic Machines are showing these automation capabilities and producing strong returns on investments in physical, onshore factories.

Hadrian's Software-Defined Factory.

The potential industrial advancements are far reaching into energy and national defense infrastructure as well. In the wake of electrification, new battery technology continues to develop and our domestic capabilities rival those around the globe. But, they need to be applied not only to consumer transportation (EVs), but also to critical technologies that power our cities and our defense technology — areas that have no other reliable sources to rely on when needed most.

There is a lot more to come here as the systems, processes, and data are unlocked and become ready to be applied. This is how we jump start our industrial sector and make up the time we’ve lost in keeping pace and updating our staid infrastructure. We do this through entrepreneurship bringing software, automation, and new technologies to the largest markets of our economy.

Chef's Robotics augmenting Humans.

Just how big can the economic impact be if we succeed?

As venture investors, we are focused on partnering with entrepreneurs who are creating  enduring companies that grow for decades, shaping public markets for the future. We look for bold founders who can break the negative cycle that halted the lack of progress in these Foundational Industries more than two decades ago. We are dedicated to this mission and created our firm around this massive opportunity.

We believe Foundational Industries can and must transition into tech sectors to restore American resilience and productivity.

Using the lens of the public markets as a tool to approximate the impact of transformation (although the reaches are much further into society), the opportunity reaches trillions of dollars.  If you look across a standard index of public industrial companies — spanning logistics, manufacturing, critical infrastructure, and transportation companies — there have only been a couple new additions over the last two decades. This is in stark contrast to other indices such as the S&P, where the top 20% of companies have been replaced by tech-native corporations.

The standout and only addition as a top holding in most industrial ETFs is Uber, whose growth shows that when tech companies are successful, the results are swift and meaningful. Uber succeeded because it is structured to fundamentally innovate and does so quickly. Uber is asset light and digitally native, and the results have been tremendous, even though personal “taxi” transportation is only a very small part of our industrial world.

Across the industrial ETFs, in addition to Uber, more tech-first companies are slowly being added: these companies stand out because they spend an average 5x more on R&D as a percentage of sales than the other industrial companies. Moreover, the tech-first industrial companies’ average NTM growth rate of 19% is meaningfully higher than not just the other industrial companies, but also higher than the general tech companies — including the FAANG and SaaS companies (forecasted to grow only 11-12% YoY), largely due the scale of the opportunity they are pursuing.

Even if you were to assume that the tech-first industrials companies’ growth slows to that of the larger tech indices (11-12%) through 2050, and the rest of the S&P continues to expand as it has historically, the market cap of the Industrials Sector could grow from a mere $3.7T today to $55T in 2050. Industrials would make up 29% of the S&P 500 (from 8% today). If we can continue this trend and support the best tech entrepreneurs as they turn their attention to the industrials space, we can completely reshape our public market by 2050 — and reach further into jobs growth, boost the GDP, and create outsized production in the U.S.

How Construct Capital is investing a new future of tech-driven Foundational Industries

Disruptive forces of change are not new in venture. The best founders understand these opportunities and we aim to bring our experience and expertise to partner with the best. We do not claim industrial innovation is a simple task. In fact, it’s quite daunting. Investors have to understand decades of context in these spaces while picturing how technical possibilities — AI, SaaS, software-defined hardware, automation, robotics, cloud services, edge computing, and technologies coming around the corner — will impact productivity gains the most.

The stakes are high. We have a profound opportunity to fundamentally transform the very foundations of our economy into a technology sector.

With this comes the potential to unlock unprecedented economic value — 25 years of unrealized opportunity in the largest sectors of the economy — driving both productivity and resilience across critical areas like manufacturing, logistics, and energy. We can close the gap between consumption and production, rebuild domestic capabilities, and restore America’s competitive edge on the global stage. It’s a chance to build a stronger, more self-reliant economy that is equipped to handle future challenges and set new standards for innovation. We’re humbled by our role of partnering with founders to make this future a reality. Our world is too advanced to be suffering from industrial and infrastructure failures. Domestic reliance is a must, and the time is now.