Industrial Resilience
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Not a day passes without headline news coverage of the brittleness of global supply chains, the need to invest in the US’ eroded manufacturing infrastructure, and the urgency to re-calibrate industrial value chains. After decades of relegating manufacturing overseas, the US and its allies have a compromised industrial ability to fulfill national strategic priorities amid escalating geopolitical pressure. More pressing, the long-standing division of knowledge-based work and physical labor—and the offshoring of the latter—overlooked an important consequence: expertise, data, and IP would also drift overseas.
Last year, we published our thesis on Global Resilience, arguing for the need to modernize critical infrastructure in society amidst burgeoning global power competition. Since then, the outbreak of multiple global conflicts and proxy wars, breakthroughs in artificial intelligence and machine learning, coupled with a more challenging geo-economic environment, underscores the imperative to build a more robust and resilient industrial base. Many global examples have been widely discussed: Europe faces a generational workforce crisis, with Germany’s labor supply growth rate expected to decline -1.2% p.a. between 2020-2030. Meanwhile, the US Navy cannot sustain its shipbuilding efforts, while a single Chinese shipyard is reported to have the capacity equivalent of all American shipyards combined. At General Catalyst, while we believe that urgency and scarcity are important market drivers, what excites us more is that there are fundamental changes in the opportunity to create value in the industrial economy, which we believe will lead to a renaissance of innovation.
Here is why we believe we are at the forefront of an industrial renaissance:
1. Old is not new again - the industrial automation stack has unmet needs
Industrial production environments have visibly become more advanced over the last few decades. The proliferation of sensors, the improved dexterity of robots, the increased accuracy of predictive analytics – each serve as milestone of innovation. Yet core segments of the industrial automation stack have remained relatively unchanged, reflecting the “built to last” philosophy that accompanied their design and installation in the 80s. Today, a handful of incumbents have accumulated gargantuan footprints, locking in customers with local and manually programmed hardware, proprietary protocols, and a patchwork of siloed solutions. With every innovation, a data infrastructure problem is next. As cloud and edge computing adoption grows across the sector, we believe startups are uniquely positioned to build modular and scalable offerings tailored to the needs of the next generation. We saw this in our portfolio company, Tractian, an industrial operations platform that solves deeply rooted pain points within asset health monitoring and maintenance. The founders - Igor, Gabriel, and Leonardo - grew up around manufacturing plants. While predictive maintenance has been a long-standing problem, few vendors have taken a modern, friction-free, and user-centric approach to this critical need.
2. Step-changes in technology advance the art of the possible in industrial
Advancements in communication networks, computing power, and AI/ML applications enable not just new paradigms of data processing but also further the promise of fundamental shifts, an example being the virtualization of hardware. Cognitive robotics and enhanced human-machine interaction are now closer within reach. Automakers are working on EV motors that eliminate the need for rare earths, the production of which China largely controls. It’s no longer just about faster and cheaper; industrial resilience is also about delivering advanced core competencies to the end-customer that legacy players are either missing or de-prioritizing. This past year, we announced our investment in PhysicsX, a simulation software platform that employs deep learning surrogates to explore the complete design space of an object. While we believe most simulation software today is assumptions-based and constrained by input parameters, PhysicsX and its team of scientists expand what engineering can achieve, predicting the physics of a given object or system with high fidelity and in a much faster time frame.
3. Hardware-native talent is vital—and they’re building for themselves
The public rise of companies like SpaceX has reinvigorated enthusiasm for building in the physical world. Founders in small aerospace hubs across the country are swapping offices for factories and desks for production stations, sharing in their ambition of industrial self-sufficiency. As we see it, of the many areas to capture value in the trillion-dollar global industrials sector, accelerating the velocity and scalability of production and assembly processes with technology is high on the list. One such company is Senra Systems, which reimagines the production and assembly of critical wire harnesses for the aerospace and defense sector. In doing so, the team is building new tools and capabilities for themselves to match the speed, flexibility, and collaboration afforded to software engineers. We see this software/hardware rapid iteration mentality also driving the culture at Charm Industrial where Peter Reinhardt leverages his decade-plus experience building a multi-billion dollar software business at Segment to bring about rapid innovation for hardware-engineered decarbonization.
4. Education and workforce training are critical pieces of a resilient industrial base
The US manufacturing employment base alone has experienced a longstanding decline since the 1980s, with 20 million workers back then, falling to roughly 13 million today. Critical subsectors for aerospace & defense, like casting and forging, are struggling against retiring workforces and institutional brain drain exacerbated by the pandemic. In parallel, China’s dominance in these areas grows more pronounced, with the country controlling 56% of global casting production today. The impact on national security, especially in the US, is clear. The Department of Defense, as an example, relies on a single US foundry for large titanium parts, which are essential to defense sub-sectors such as hypersonics and ship-building Globally, we see an immediate opportunity for technologists and educators to come together to attract great talent. This starts with curriculums and helping students understand what it means to work in a factory today, as well as initiating workforce development, on-the-job training, and career development.
5. Radical collaboration and public-private partnerships change the game
Decoupling long-intertwined supply chains requires radical collaboration with a consortium of stakeholders - technologists, entrepreneurs, research institutions, national labs, policymakers, and international partners. The US government is investing heavily in domestic production capacity, with billions of dollars allocated to the rebirth of industries such as semiconductors, EVs, and batteries via the CHIPS Act, the Inflation Reduction Act, and the Infrastructure Investment and Jobs Act. Some of the most innovative startups we see in Global Resilience focus early on partnering with their governments. It requires a different kind of commercial muscle. Still, the opportunity to apply for non-dilutive funding or to access frontier technology within the National Laboratories represents differentiated strategies. We see both an imperative in working with domestic stakeholders and also an opportunity for global partnership. India is already playing a role in expanding manufacturing capacity for global businesses. Our recent portfolio company, JEH Aerospace, a B2B marketplace delivering components to global aerospace companies, is helping to resolve supply chain bottlenecks and, more broadly, facilitating a robust India-US corridor.
6. A founder archetype now focused on the overlooked and underserved industries
Our mission at General Catalyst is to invest in positive and powerful change that endures. What excites us is seeing more and more founders with clarity, mission, and extraordinary depth of domain expertise choosing to bring their skills to bear on society’s toughest problems. Building in industrial resilience surfaces unique challenges distinct from typical technology sectors, whether understanding the problems, accessing customers who aren’t digital natives, building user empathy, enduring long sales cycles and pilot purgatories, or leveraging hardware and software in parallel. At GC, we’re fortunate to have Catalyst Advisors like Andy McCall, former CRO of Samsara - the leader in Connected Operations, and Teresa Carlson, former head of Amazon AWS Worldwide Public Sector and Regulated Industries who led their expansion into defense, aerospace, and energy industries. To transform these hard industries, the best companies we see combine technical excellence, deep customer and domain empathy, and commercial rigor.
In light of these factors, there are several themes we are investing behind:
- Software Purpose-Built for Hardware Workflows: Hardware engineers and industrial organizations are culturally more operational than software organizations. They favor thorough process, 100 percent coverage, and care about significant digits. They want automation coupled with consistent checks, balances, and high-priority alerts. Meanwhile, SaaS businesses have traditionally represented the opposite; they sacrifice operational coverage in favor of velocity ("move fast and break things"). Today's tools reflect this mentality and aren’t seamlessly ported over to an Industrial environment without significant wrapping. We believe there to be a meaningful opportunity to partner with companies building robust, intelligent, and collaborative capabilities specifically tailored to hardware-based workflows and individual functions.
- Supply Chain Traceability: The pandemic highlighted the vulnerability of global supply chains and simultaneously accelerated their regionalization. The widespread electronics component shortage continues to loom over the industry, while the challenge in tracing the origins of these components also remains unresolved. While demand builds, suppliers and startups alike weave through offline inventories, disparate datasets, and complex disclosure requirements to meet the design requirements of their hardware teams and certify their products. In a survey of aerospace & defense leaders, a sector buoyed by thousands of suppliers, just 16% of companies surveyed use digital tools to trace components. We’re excited by the next generation of companies bringing greater visibility and traceability to global supply chains to dissolve bottlenecks for SMBs and large enterprises (and even the DoD).
- The Agile and Secure Industrial Stack: Against the backdrop of new wireless networks and early edge computing adoption, we are excited about the possibility of more flexible, interoperable, and scalable industrial automation stacks. Select applications of AI/ML are still in their infancy, and we see myriad other problems to work on, from data infrastructure to networking to testing and measurement, and quality assurance. We also know that manufacturing saw the highest number of cyberattacks of any vertical in 2022. The attacks weren’t just on small manufacturers; major publicly traded companies lost millions in production downtime. As industrial companies continue to digitize more of their manufacturing environments, the need for sophisticated cybersecurity solutions is an imperative.
- Raw Materials and Critical Resources: Today, China dominates access to and production of raw materials, metal alloys, and other critical resources foundational to automotive, battery, aerospace & defense, and semiconductor supply chains. OEMs face greater pressure to diversify their supplier base, while also needing to adhere to regulatory and economic mandates to operate sustainably. Solutions that engineer domestically-sourced alternatives or leverage technology to boost efficiency are well-positioned.
- Manufactories of the Future: Small to medium-sized businesses make up the majority of the manufacturing capacity in the US, and they tend to lag in adopting cutting-edge manufacturing methods, robotics, and software integrations. We think there are exciting opportunities for new business models like Robotics-as-a-Service (RaaS) to reduce the cost of technology adoption for this segment. Another approach we’re observing is building entirely new factories, designed from the get-go with today’s software-first principles and sustainability at the core.
At General Catalyst, we are incredibly motivated to support founders building in industrial resilience. This is a responsibility and privilege we take seriously. In prior careers, our team has had the opportunity to witness aspects of industrial resilience first-hand - one as a journalist interviewing the sole US swab manufacturer during peak COVID, another as a special operations officer procuring technologies for use in contested environments, and another as the lead sponsor for Amazon AWS’ entry into the defense, aerospace, and energy industries. We understand this imperative and are excited to support those building for the industrial resilience renaissance.
Not a day passes without headline news coverage of the brittleness of global supply chains, the need to invest in the US’ eroded manufacturing infrastructure, and the urgency to re-calibrate industrial value chains. After decades of relegating manufacturing overseas, the US and its allies have a compromised industrial ability to fulfill national strategic priorities amid escalating geopolitical pressure. More pressing, the long-standing division of knowledge-based work and physical labor—and the offshoring of the latter—overlooked an important consequence: expertise, data, and IP would also drift overseas.
Last year, we published our thesis on Global Resilience, arguing for the need to modernize critical infrastructure in society amidst burgeoning global power competition. Since then, the outbreak of multiple global conflicts and proxy wars, breakthroughs in artificial intelligence and machine learning, coupled with a more challenging geo-economic environment, underscores the imperative to build a more robust and resilient industrial base. Many global examples have been widely discussed: Europe faces a generational workforce crisis, with Germany’s labor supply growth rate expected to decline -1.2% p.a. between 2020-2030. Meanwhile, the US Navy cannot sustain its shipbuilding efforts, while a single Chinese shipyard is reported to have the capacity equivalent of all American shipyards combined. At General Catalyst, while we believe that urgency and scarcity are important market drivers, what excites us more is that there are fundamental changes in the opportunity to create value in the industrial economy, which we believe will lead to a renaissance of innovation.
Here is why we believe we are at the forefront of an industrial renaissance:
1. Old is not new again - the industrial automation stack has unmet needs
Industrial production environments have visibly become more advanced over the last few decades. The proliferation of sensors, the improved dexterity of robots, the increased accuracy of predictive analytics – each serve as milestone of innovation. Yet core segments of the industrial automation stack have remained relatively unchanged, reflecting the “built to last” philosophy that accompanied their design and installation in the 80s. Today, a handful of incumbents have accumulated gargantuan footprints, locking in customers with local and manually programmed hardware, proprietary protocols, and a patchwork of siloed solutions. With every innovation, a data infrastructure problem is next. As cloud and edge computing adoption grows across the sector, we believe startups are uniquely positioned to build modular and scalable offerings tailored to the needs of the next generation. We saw this in our portfolio company, Tractian, an industrial operations platform that solves deeply rooted pain points within asset health monitoring and maintenance. The founders - Igor, Gabriel, and Leonardo - grew up around manufacturing plants. While predictive maintenance has been a long-standing problem, few vendors have taken a modern, friction-free, and user-centric approach to this critical need.
2. Step-changes in technology advance the art of the possible in industrial
Advancements in communication networks, computing power, and AI/ML applications enable not just new paradigms of data processing but also further the promise of fundamental shifts, an example being the virtualization of hardware. Cognitive robotics and enhanced human-machine interaction are now closer within reach. Automakers are working on EV motors that eliminate the need for rare earths, the production of which China largely controls. It’s no longer just about faster and cheaper; industrial resilience is also about delivering advanced core competencies to the end-customer that legacy players are either missing or de-prioritizing. This past year, we announced our investment in PhysicsX, a simulation software platform that employs deep learning surrogates to explore the complete design space of an object. While we believe most simulation software today is assumptions-based and constrained by input parameters, PhysicsX and its team of scientists expand what engineering can achieve, predicting the physics of a given object or system with high fidelity and in a much faster time frame.
3. Hardware-native talent is vital—and they’re building for themselves
The public rise of companies like SpaceX has reinvigorated enthusiasm for building in the physical world. Founders in small aerospace hubs across the country are swapping offices for factories and desks for production stations, sharing in their ambition of industrial self-sufficiency. As we see it, of the many areas to capture value in the trillion-dollar global industrials sector, accelerating the velocity and scalability of production and assembly processes with technology is high on the list. One such company is Senra Systems, which reimagines the production and assembly of critical wire harnesses for the aerospace and defense sector. In doing so, the team is building new tools and capabilities for themselves to match the speed, flexibility, and collaboration afforded to software engineers. We see this software/hardware rapid iteration mentality also driving the culture at Charm Industrial where Peter Reinhardt leverages his decade-plus experience building a multi-billion dollar software business at Segment to bring about rapid innovation for hardware-engineered decarbonization.
4. Education and workforce training are critical pieces of a resilient industrial base
The US manufacturing employment base alone has experienced a longstanding decline since the 1980s, with 20 million workers back then, falling to roughly 13 million today. Critical subsectors for aerospace & defense, like casting and forging, are struggling against retiring workforces and institutional brain drain exacerbated by the pandemic. In parallel, China’s dominance in these areas grows more pronounced, with the country controlling 56% of global casting production today. The impact on national security, especially in the US, is clear. The Department of Defense, as an example, relies on a single US foundry for large titanium parts, which are essential to defense sub-sectors such as hypersonics and ship-building Globally, we see an immediate opportunity for technologists and educators to come together to attract great talent. This starts with curriculums and helping students understand what it means to work in a factory today, as well as initiating workforce development, on-the-job training, and career development.
5. Radical collaboration and public-private partnerships change the game
Decoupling long-intertwined supply chains requires radical collaboration with a consortium of stakeholders - technologists, entrepreneurs, research institutions, national labs, policymakers, and international partners. The US government is investing heavily in domestic production capacity, with billions of dollars allocated to the rebirth of industries such as semiconductors, EVs, and batteries via the CHIPS Act, the Inflation Reduction Act, and the Infrastructure Investment and Jobs Act. Some of the most innovative startups we see in Global Resilience focus early on partnering with their governments. It requires a different kind of commercial muscle. Still, the opportunity to apply for non-dilutive funding or to access frontier technology within the National Laboratories represents differentiated strategies. We see both an imperative in working with domestic stakeholders and also an opportunity for global partnership. India is already playing a role in expanding manufacturing capacity for global businesses. Our recent portfolio company, JEH Aerospace, a B2B marketplace delivering components to global aerospace companies, is helping to resolve supply chain bottlenecks and, more broadly, facilitating a robust India-US corridor.
6. A founder archetype now focused on the overlooked and underserved industries
Our mission at General Catalyst is to invest in positive and powerful change that endures. What excites us is seeing more and more founders with clarity, mission, and extraordinary depth of domain expertise choosing to bring their skills to bear on society’s toughest problems. Building in industrial resilience surfaces unique challenges distinct from typical technology sectors, whether understanding the problems, accessing customers who aren’t digital natives, building user empathy, enduring long sales cycles and pilot purgatories, or leveraging hardware and software in parallel. At GC, we’re fortunate to have Catalyst Advisors like Andy McCall, former CRO of Samsara - the leader in Connected Operations, and Teresa Carlson, former head of Amazon AWS Worldwide Public Sector and Regulated Industries who led their expansion into defense, aerospace, and energy industries. To transform these hard industries, the best companies we see combine technical excellence, deep customer and domain empathy, and commercial rigor.
In light of these factors, there are several themes we are investing behind:
- Software Purpose-Built for Hardware Workflows: Hardware engineers and industrial organizations are culturally more operational than software organizations. They favor thorough process, 100 percent coverage, and care about significant digits. They want automation coupled with consistent checks, balances, and high-priority alerts. Meanwhile, SaaS businesses have traditionally represented the opposite; they sacrifice operational coverage in favor of velocity ("move fast and break things"). Today's tools reflect this mentality and aren’t seamlessly ported over to an Industrial environment without significant wrapping. We believe there to be a meaningful opportunity to partner with companies building robust, intelligent, and collaborative capabilities specifically tailored to hardware-based workflows and individual functions.
- Supply Chain Traceability: The pandemic highlighted the vulnerability of global supply chains and simultaneously accelerated their regionalization. The widespread electronics component shortage continues to loom over the industry, while the challenge in tracing the origins of these components also remains unresolved. While demand builds, suppliers and startups alike weave through offline inventories, disparate datasets, and complex disclosure requirements to meet the design requirements of their hardware teams and certify their products. In a survey of aerospace & defense leaders, a sector buoyed by thousands of suppliers, just 16% of companies surveyed use digital tools to trace components. We’re excited by the next generation of companies bringing greater visibility and traceability to global supply chains to dissolve bottlenecks for SMBs and large enterprises (and even the DoD).
- The Agile and Secure Industrial Stack: Against the backdrop of new wireless networks and early edge computing adoption, we are excited about the possibility of more flexible, interoperable, and scalable industrial automation stacks. Select applications of AI/ML are still in their infancy, and we see myriad other problems to work on, from data infrastructure to networking to testing and measurement, and quality assurance. We also know that manufacturing saw the highest number of cyberattacks of any vertical in 2022. The attacks weren’t just on small manufacturers; major publicly traded companies lost millions in production downtime. As industrial companies continue to digitize more of their manufacturing environments, the need for sophisticated cybersecurity solutions is an imperative.
- Raw Materials and Critical Resources: Today, China dominates access to and production of raw materials, metal alloys, and other critical resources foundational to automotive, battery, aerospace & defense, and semiconductor supply chains. OEMs face greater pressure to diversify their supplier base, while also needing to adhere to regulatory and economic mandates to operate sustainably. Solutions that engineer domestically-sourced alternatives or leverage technology to boost efficiency are well-positioned.
- Manufactories of the Future: Small to medium-sized businesses make up the majority of the manufacturing capacity in the US, and they tend to lag in adopting cutting-edge manufacturing methods, robotics, and software integrations. We think there are exciting opportunities for new business models like Robotics-as-a-Service (RaaS) to reduce the cost of technology adoption for this segment. Another approach we’re observing is building entirely new factories, designed from the get-go with today’s software-first principles and sustainability at the core.
At General Catalyst, we are incredibly motivated to support founders building in industrial resilience. This is a responsibility and privilege we take seriously. In prior careers, our team has had the opportunity to witness aspects of industrial resilience first-hand - one as a journalist interviewing the sole US swab manufacturer during peak COVID, another as a special operations officer procuring technologies for use in contested environments, and another as the lead sponsor for Amazon AWS’ entry into the defense, aerospace, and energy industries. We understand this imperative and are excited to support those building for the industrial resilience renaissance.
