Re-Investing In Innovation

…and filling the hole left by venture capital

by Robert Cote

Our nation is built on breakthrough innovations, from planes, trains, and automobiles to the telephones, computers and semiconductor chips of the last century, to thousands of other new physical products that were invented here first… and then shared with the world.

And it is through manufacturing, the inventing and building of new things that benefit humanity, that America has led the world and grown strong.

But something has fundamentally changed within our country’s preeminence. We have off-shored our manufacturing industries, the old growth forest, while venture capital has moved away from funding emerging new growth.

This is our nation’s new generation of companies that are building new physical products based on breakthrough innovations – deep tech, the kinds of companies that made America strong, providing good-paying jobs to our highly skilled workers.

We need to fund more of these manufacturing companies so they grow and thrive. We need to fund more pioneers like Elon Musk who can bring the future forward through manufacturing, and more companies like SpaceX and Tesla that can build game-changing new products and factories and make giant leaps forward.

Fallen From Its Roots

Since the internet boom of the late 1990s, venture capital has shifted its focus more and more to investing in companies that make new digital products – software products.

While great fortunes have been made investing in companies like Google, Facebook, and Uber, these stories of legend are far and few between. Investing in “software eating the world” – digitizing the world – may look like a good investment at first, until competition shows up and changes the game.

Most software companies are based on incremental innovations with lower barriers to entry to competitors that make it challenging to exit them in the end. These software companies do not bring the high barriers to entry to competitors that come with new physical products based on breakthrough innovations, that require long development timelines and years of deep science and engineering to reach markets.

While paper valuations may rise for years, enabling venture capital firms to raise new funds on seemingly strong performance, exits are not happening, and, when they do, not at prices that match valuations, so investors are not realizing the expected returns.

The Telltale Signs

Take the collapse of Silicon Valley Bank. The bank has been a great friend to venture capital, providing loans to startups with the promise of repaying those loans through exits.

But without exits or exits that are priced right, too many of these software companies have become challenged in paying back the principal and interest on their loans. So it’s little wonder the bank became a bank in distress and in need of a government bailout.

Another telltale sign that something is wrong is seen in venture capital firms encouraging the CEOs of their startups to make a run on the bank for their deposits.

This change in focus by venture capital to software companies has left a giant hole in meeting the funding needs of a new generation of technology companies that can transform our future and keep our nation strong through advanced manufacturing. This shift in focus has also shown us that venture capital is not the best fit for these manufacturing companies, lacking the right investment model, skills and incentives for investing in the capital-intensive, hands-on world of scaling advanced manufacturing.

Yet, the future of our world depends more now than ever on these advanced manufacturing companies that are changing how we manufacture and use products. These companies are readying every industry for a transition to sustainable, circular, and renewable manufacturing practices, to a greener world that is more efficient in its use of resources, which means a higher-growth, highly profitable business.

Green Is The New Gold

Green is where investors will find higher returns and where a business will find the higher profits to support the jobs needed for our nation’s highly skilled workforce. Green is not just good for the environment, it’s simply good business and good for people, too.

One example is a company that has developed proprietary manufacturing equipment and a menu of process recipes through years of research that can turn textile waste from the factory floors of major clothing brands, purchased for pennies on the dollar, back into virgin quality fibers for use in making the same high-end clothing products.

A second example is a company that has developed breakthrough nanocarbon materials made up of carbon molecules (each a billionth of a meter in size – think invisible “grains of sand”) applied in coatings to glass windows and glass building facades that can turn every building into a solar panel you cannot see with your eyes.

A third example is a company that can make highly efficient coated glass that reduces the energy needs in homes by up to 50% for a more sustainable use of resources.

These are all companies you have never heard of that are changing our world and turning manufacturing into a high-growth, highly profitable industry that does not need to be off-shored to low cost labor markets – it can grow and thrive here, too.

Manufacturing may not have a sexy sound in venture capital, but it’s where the gold is.

IP Capital Model

IP Capital, a new investment approach that we developed, is an alternative to venture capital for making investments in these and many other companies that have developed breakthrough innovations – IP – that can have an impact in the world for humanity through advances in manufacturing.

While a new venture is naturally limited by its team’s capacity, the venture’s IP assets are unbounded and can create value wherever they go in the world through licensing and other forms of partnership that allow more teams to create value for the company.

By analogy, while venture capital invests in a new venture’s team and what they can do on their own (“corporate stores”), IP capital invests in scaling use of the venture’s IP assets, too, including its new product designs, manufacturing equipment and know-how, to unlock the value of these assets through other teams globally (“franchised stores”).

With almost 8 billion people in the world, holding the IP assets close to the vest is limiting the company and its growth for both entrepreneurs and investors. After all, this is how the empire was built in the first place, by sharing our innovations with the world. The model shares in revenues rather than relying on the lottery ticket of holding equity, which requires investors to wait years for an exit to see returns, with cash flows going one way – flowing out from investors, not back in – until and unless there is an exit.

Revenue sharing is better for investors – they get paid to wait, while still holding a percentage of an exit to buyout the revenue share – and entrepreneurs own more of the business they are building to incentivize the hard work required to build it. The capital-intensive nature of these manufacturing companies means a pure equity model like venture capital is misaligned with needs of companies, leaving the entrepreneurs building a business with little ownership in the end. Not good.

IP capital also brings with it the skilled services to help these companies protect their IP assets and scale use of those assets for widespread adoption, to deliver greater revenues and impact in the world, faster, and de-risk the investment at the same time.

Changing the Mindset

Our Founding Fathers recognized that the more value we create in the world through broad adoption of breakthrough innovations, the more value we create for our nation.

Venture capital is part of a broader shift in the mindset of our society to a focus on short-term results and incremental improvements, rather than investing in long term growth and making the sacrifices required to secure our future and lead the world.

Without a change in how we invest in our future and a return of the immigrant mindset that built this country, we cannot sustain our prosperity long term in the face of global competition, nor will our freedoms endure, putting our nation’s future at grave risk.