The age of sustainable progress: Rebuilding our systems of production

In an economic paradigm running on the dividends of 20th century innovation, it’s now time to reaccelerate.

Key ideas explored in this writeup:

1. The decoupling of America and its innovation engine

2. The greatest challenge of our century

3. (Re)accelerationism

4. Thoughts on what to fund, and what shouldn’t be funded

It’s a bit of a contrarian belief these days, but the progress we’ve enjoyed since the 1970s has been staggering.

The data does not lie: Global poverty rates have dropped from a staggering 60% to a mere15%. The world’s GDP grew from $3 trillion to $100 trillion in that same timespan. Humankind is bound to continue its relentless population growth. And it will most likely reach 10 billion people by 2050.

GDP per capita (constant 2015 USD) — Source: World Bank

But there’s a not so slight issue. The thing is, this remarkable progress has largely relied on the dividends of 20th-century research and industrial growth, as well as a rapid globalization of trade. And back then, our economies largely operated in an unconstrained resource environment (or at least, that could be solved through global exploration), seeking to maximize output-per-dollar, while ignoring any other form of externality and long-term sustainability.

The decoupling of America’s innovation engine

It’s no secret that the systems of production behind our economy largely rely on pollutive and extractive processes set in the early to mid-1900s. The time since has been mostly characterized by a lack of fundamental breakthroughs, a reduction in innovations and scientific discoveries brought to consumers.

Exponential growth did not take place in the primary and secondary sectors of our economies, leaving energy production, food production and transportation largely unchanged. No Moore’s law for those areas.

The WSJ wrote a great article on the topic. It highlighted a few tangible examples:

• A large part of the world’s electricity is generated by steam turbines — Their efficiency has improved by only 1.5% over the last 100 years.
• The growth in battery energy density since 1900 has averaged 2% a year. Boo.
• Rice harvests in Asia have increased at 1% per year.
• The annual decline in energy use for steel production averaged less than 2% since the 1950s.

The American economist Tyler Cowen dubbed this era the “Great Stagnation”, arguing that America had reached a technological plateau. No low-hanging fruits were left and the country seemingly lost its way around innovation. Even worse, the country underinvested in the deployment of some of its core achievements: President Nixon pushed for the financing of 1,000 nuclear plants by 2000 to provide 200% of the US’s forecasted electricity needs by… 2022. But only 93 were built.

While a comprehensive explanation is complex and lengthy, a few reasons can be pointed out:

First, the federal government decreased its R&D budget from 1.2% of GDP in 1976 to 0.8% in 2016. If we bring it back to the inflation in research costs (a paper by Milton found a five-fold increase in expenditures per technical person between 1920 and 1964), the amount of intellectual capital dedicated to research dropped significantly.

Second, we faced the beginning of cost curves that made the diffusion of certain innovations uneconomical at first. At the same time, our industrial sector failed to innovate on its inputs like it did in the previous century. It kept on using the same materials. Polyethylene, the most common plastic, was invented in 1898 in a German lab. In 1886, the Hall-Héroult process (discovered independently by Charles Martin Hall and Paul Héroult around the same time) made industrial-scale aluminum production possible. Not much has happened since.

Third, America’s industrial sector, which had largely benefited from its access to cheap energy, faced an inflation crisis in the 1970s, which shifted the centers of production away to more competitive countries, such as Japan, and later China and South Korea.

The greatest challenge of our century

The world has gradually become aware of a previously unrecognized type of external cost related to our climate. Indeed, we are now on course to alter what has been a relatively stable climate over the 10,000 years of human civilization.

The rate of climate change is orders of magnitude above any in the last 65 million years. Temperature anomalies have become an uncomfortable norm in the last few summers: In September 2023, the ocean temperature anomaly value (+1.87°F) reached new all time records.

It is no longer only about videos of penguins running across dislocating icecaps. We’re now having to adapt our consumption patterns and habits to extreme weather events.

Direct effects of climate change. Source: McKinsey

Creating a sustainable environment to allow humanity to continue to prosper is, undoubtedly, our era’s greatest challenge and opportunity.

Behind this opportunity, the risk of stalling progress looms large, due to finite resources. The previous eras of technological surge (industrial revolution, steam and railways, steel & heavy engineering, oil & automobile) and pace of acceleration could have looked very different in an environment faced with resource scarcity.

In the 21st century, progress and sustainability will be intricately linked.

The pace of progress has traditionally depended on the cost of energy, ease of access to raw materials and our ability to efficiently convert these elements into outputs.

If we don’t rewire the way we build things, some of the key gains in global well-being could be reversed. A staggering data point confirms this: According to EDGAR, material productivity (defined as GDP $$ for each kg of material used) has been the slowest grower amongst labor productivity, energy and GHG productivity in recent decades. The analysis is uncompromising: In the past 10 years, Western economies have failed to increase their manufacturing productivity, remaining glued around Pre-2007 levels.

The stakes are high: the status-quo in business operations, marked by disrupted supply chains and fluctuating commodity prices in the last 2 years, is becoming increasingly unsustainable, impacting company bottom lines and generating stronger core inflation. In addition, trade tariffs and deglobalization inevitably led to a deadweight loss resulting in higher costs for customers, an econ 101 intro class topic.

Alongside historical macro trends, the phenomena of urbanization and rapid population growth are fundamentally altering our resource consumption patterns, edging us closer to the brink of scarcity. Newly breached technological frontiers, such as generative AI, will create unprecedented strains on our underinvested electricity grid (38 gigawatts of demand for incremental data center needs alone).

The timing is now to alter our trajectory: 4.8 billion people could be facing water scarcity by 2050. Earth overshoot day, which marks the date we have used more than our planet can produce in a year, is now falling on August 2nd. Ecological limits will soon become central to political and consumer-decision making.

(Re)accelerationism: The opportunity, and where it lies

This context sets the stage for the next innovation cycle, one that seeks to create abundant, renewable resources, thereby unleashing human progress and removing any barriers on the near horizon. The essence of the investment thesis revolves around identifying and nurturing businesses that enable this paradigm shift, particularly those that drive ‘green premiums’ into negative territory.

The opportunity is incredibly large too. In its 2024 call for startups, Y Combinator highlighted that the opportunity in climate tech could be worth $3-$10 trillion in EBITDA. Some have begun to call the climate transition the 6th industrial wave.

Then vs. now: YC’s request for startups. Source: Leo Polovets

The systems of production behind our society will need to shift to adapt to the urgency of our climate crisis. “Progress” means a paradigm shift, implying technology going much further than the current status-quo to drive true change without compromising on recently secured societal gains.

Significant shifts in industry cycles require distinct driving forces to succeed and act as disruptors, emphasizing the importance of a well-timed “why now”. My experience at Ara Labs exemplifies this. The company ventured into the in-car economy a decade prematurely, anticipating a future where autonomous vehicles would create new in-car ecosystems centered around essential human activities.

Luckily for us, the early 2020s brought to life a wealth of catalysts to power that change. Therefore, while the trend of innovation in production processes have not been all that impressive, recently breached technical barriers promise to unlock a flurry of innovations.

The late 2000s clean tech boom and bust served to establish the basis for the current cycle. The pioneers behind it were not wrong in saying that “going green could be the biggest economic opportunity of the 21st century” (A quote from legendary KPCB’s John Doerr), they were just a decade early. But the billions invested served to attract the talent base and financing solutions. We are now able to leverage this infrastructure for the next generation of innovation.

We’ve also ridden multiple cost curves down in that timeframe, enabling new business models to become viable in 2024 (from the same Leo Polovet’s blog as above)

Solar panels are 10x cheaper per watt1 and 1.5x-2x more efficient.2

Lithium-ion batteries are 10x cheaper3 and 10x more energy dense.4

LiDAR is about 100x cheaper.5

GPUs are 1000x cheaper per GFLOP6 and 2000x more powerful.7

Genome sequencing is 100,000x cheaper (!!) and gene synthesis is 100x cheaper.8

Launching a kilogram into space is 10x cheaper.9

Industrial robots are 100x more precise than 40 years ago, 5x cheaper than 20 years ago.10

Hard drives and RAM are each 40x cheaper and much higher capacity.11 And there are amazing options if you’re space constrained (a few of these in 2004 vs one of these in 2024).

Finally, there are several catalysts simultaneously converting to unleash the renewal of our systems of production. These are not just acceleration coefficients for existing companies that enjoy benefits from scale, information, or distribution. They promise to deliver true disruption, giving new entrants a strong advantage relative to incumbents that suffer from a powerful innovator’s dilemma. Especially in hardware companies, which have traditionally been slower to embrace shifts.

The key drivers of this new phase of innovation include:

• The imperative of net-zero laws and the incentives created by government tax credits and carbon accounting, including the Inflation Reduction Act’s $1.7 trillion for climate initiatives in the US. These are more efficiently connecting companies to their climate related externalities through a mix of incentives and penalties.
• The evolving preferences of consumers towards more sustainable choices, a true North for the broader economy, driving corporate commitments, especially in the consumer sector. As of 2023, 60% of the global assets have net zero targets, 40% of the materials sector, and 50% of the utilities sector.
• The rise of climate unicorns, attracting talents and creating blueprints for large wealth creation.
• In parallel, the emergence of a new generation of engineers, trained at the likes of SpaceX, Tesla, and Apple, who understand how to develop hardware cost efficiently and rapidly. Hardware startups are becoming “sexy” again in the silicon valley.
• A US infrastructure system living on borrowed time: In private water utilities alone, the EPA says that the US will face $470Bn in costs over the next 20 years to upgrade its water infrastructure alone.
• The emergence and standardization of a new system of records, penalties and incentives, around co2 emissions, progressively having a bottom line impact on corporations (EU-UTS requirements in Europe, for instance).
• An increase in funding mechanisms and non-dilutive financing, notably at the state level, to address the front-loaded technical risk of hardware.
• A rising willingness to embrace private sector innovation from public entities.

There is a conflation of several factors shifting the current status-quo: New manufacturing order volumes are growing again. The US manufacturing PMI was 50.3 last month (March 2024), reaching its highest level in the last 16 months. Rare are the areas where we see bipartisan alignment, but American dynamism / reshoring production is one of them. Venture capital money is slowly dripping into deep tech innovation again, with sectors such as manufacturing and defense seeing record funding levels.

And change is also happening at the Federal level. The 2022 CHIPS act and the IRA both show that the US government is putting big bucks behind reshoring, which it sees as a opportunity to reinforce American economic hegemony in an increasingly polarized world. Even the US commerce secretary recently used the tagline “Make hardware sexy again”.

Looking at the reasons why production systems moved away from the West towards Asia, cost-of-labor arbitrage is a fundamental part of the answer. Other elements to complement it were rising payrolls due to Union pressure, increasingly restrictive regulatory frameworks, and rapidly decreasing shipping costs.

With the rise of robotics, we see a direct path to reducing the arbitrage to a level that will propel a shift back towards ‘Made in the West’. Recent disruptions and cost volatility in containerized shipping, coupled with geopolitical instability, have made shipping and the associated longer lead times a significant supply chain risk.

Of course, to power all of this innovation within a larger macro trend of deglobalization, attention will need to be put on our strategic supply chain. Chinese refineries, in particular, control up to 90% of the volume in certain critical clean energy metals.

Source: Bessemer’s eight lessons from the first climate tech boom and bust

Behind these macro-trends, there are several enabling technologies that have reached or will reach in the near term the level of maturity needed for large scale deployment:

• Advances in computing power and storage, enhancing the ability to process and analyze vast datasets for deeper insights and improved forecasting.
• The proliferation of physical world sensors and satellite imagery, significantly improving our ability to monitor environmental changes with greater precision and frequency. With that, the reduction of the cost per kg sent to space, enabling a new generation of satellites.
• Innovations in CRISPR and synthetic biotechnology, enabling customization of materials and inputs for specific needs, as well as biomining and bio manufacturing.
• The integration of IoT and cheap high-speed internet, fundamentally altering the landscape of industrial production and broader connectivity to bring intelligence to the edge.
• Developments in advanced manufacturing, spatial computing, robotics, and 3D printing, which are liberating the workforce from repetitive manual tasks.
• The emergence of more economical battery and motor technologies, pivotal in the shift to sustainable energy sources.
• The utilization of generative AI and machine learning, empowering computers to synthesize and correlate vast amounts of information, increasing the rate of learning for robotic and self-driving systems.

Now is the time to build in those verticals and unlock the vast potential promised by the emergence of these technologies. I’m very excited to meet any founder looking for an active, high-conviction fund to unlock the next era of sustainable progress at scale.

I would not be surprised if 30 years from now, we will look back at the 1990s-2020s period and think:

1. Not much innovation happened in that period on a relative basis.
2. Some of the production systems will look plain decadent and inefficient. Just like how we look at the coal-based industry today.

As an aside - I definitely think that mass-cattle production will fit in the second category. Growing a whole cow to slaughter it 18 months later for meat will look very stupid once lab-grown meat becomes the new status-quo. And make no mistake, I love meat…

At Bleu, we’ve already started to apply those beliefs in our investment strategy. Traces of that thesis can already be found in our more recent investments, including Hubcycle (food waste to value), Nova Carbon (composite recycling), Tekyn (on-demand production), La Vie (alt-foods), and For Days (enabling layer for circular fashion). My personal investments also include Exodys, a company recycling nuclear waste.

So, if you want to ride the next wave of innovation, opportunities will be found in new materials and chemicals discovery and production, energy inputs, manufacturing and waste-to-value, food systems and land use, as well as the mitigation of climate change and adaptation to its consequences. All along the value chain. These shifts are tailwinded by a mix of incentives and sticks, from the reshoring of these systems of production in the west to recent shipping lane distributions.

One last note: Where to invest, and not to invest

In a capitalist framework, the winning solutions are those that combine low cost with high scalability, and durability, as these characteristics are essential for impactful, large-scale economic advancement. The most efficient methods of production will be the ones adopted. Relying solely on wishful thinking of large-scale social change and hopes of government interventionism is not a viable option, both from an asset allocation standpoint, and from a climate standpoint. But connecting businesses with the cost of externalities will shift some of the investment decisions made.

The ventures capturing the largest share of economic returns will have to converge these criteria to deliver on our overarching goal of creating abundant resources at scale. And in a venture capital framework, high ROIC is the the required financial output to achieve venture returns. To do that, we have to focus on the harder problems. Companies solving those will be able to build stronger competitive advantages, eventually being able to expand and capture their entire value-chains to build the leaders of tomorrow’s economy.

Therefore, venture dollars should primarily focus on innovations that are good regardless of climate opinion (ie with high ROIC and potential for scale), with the added bonus of being able to deliver said climate benefits at scale. Not the other way around. Hardware solutions in areas of production and energy will offer potential for large returns as we seek to overhaul our primary and secondary sectors. Bessemer has a good article on the 8 lessons from climate tech 1.0, the first one being to “avoid relying on altruism to scale”.

Another climate investor once shared in conversation that he would only invest in businesses that “a climate skeptic would love to buy from”. This is the exact essence of how scale can be achieved. These clients will strictly care about return on invested capital, time to profitability, and gross margins when making investment decisions. None of the companies that will achieve durable emission improvements over the status-quo will manage to do it with green premiums. Therefore, better unit economics are mandatory.

Many, in Europe notably, have suggested that the change needs to come from consumers restricting some of their consumption patterns. Such as slowing down on plane flights, eating locally and avoiding car travel. While this bridge will surely bring us closer to the right path from a short term view, it indirectly suggests that restraining recently gained progress is the way forward.

At Bleu, we believe the systems of production (industry, agriculture…) and their inputs (energy, materials) have the largest share of responsibility, economic opportunity and potential impact to power that transition. This industrial shift will only happen if the medium to long-term economic benefits outweigh the required upfront capital expenditures.

A final note on hard tech, a vertical I’ve discussed before. Climate targets won’t be achieved with carbon accounting software or ESG data software alone. Most in the venture space would agree. But few have become comfortable enough with the elephant in the room, hardware-first businesses.

I wrote a longer form essay on the topic to explain why I think that any climate investing strategy should be largely made of hardware businesses. By investing in hard tech, we can unlock the potential of a sector that — data from investors like Leo Polovets of Humba suggests — might yield returns comparable to software, given the right understanding and framework. Apple, for instance, only raised $3.5M by the time it went public in December 1980 at $271M. Not a bad equity to capital raised ratio.

-Julien