Shining a Light on the Hard Asset Supercycle

Ben [00:00:17]:

Hi everybody. Welcome to today's 4 by 4 virtual salon, where we will be shining a light on the hard asset supercycle. Before I introduce our four amazing speakers, and before I introduce the topic in a bit more detail, I just wanted to give a shout out to our sponsors. We now feel very proud to have a corporate sponsor, who is Stableton. If you don't know Stableton, they work with large financial institutions to help them to create systematic, low-cost and semi-liquid products, giving exposure to the world's largest privately held companies like SpaceX and OpenAI. To learn more about Stapleton and their investment platform, please visit www.stableton.com.

[00:00:50]:

Now on to today's topic, we're going to be talking about the hard asset supercycle. Just to put this in a tiny bit of perspective, I wanted to share a quote from Larry Fink, who's the chairman of BlackRock, and he said, by 2040, the global demand for new infrastructure investment will be $68 trillion. To put that price tag in perspective, it's roughly the equivalent of building the entire Interstate highway system and the Transcontinental Railroad start to finish every six weeks for the next 15 years. We are clearly at the beginning of a huge structural supercycle in hard assets. To help us unpack this topic, we have four tremendous speakers.

Starting from left or right, I'm going to introduce them quickly. We have Aishwarya Dahanukar, who's the co-founder and chief commercial officer of Tangible, which provides a platform helping hard asset startups to raise asset-based lending Latoria. Next, we have Nicolas Colin, who's a regular on the 4 by 4's. Nicolas is a former VC and now a publisher of the much-recommended Drift Signal newsletter, which covers macro and geopolitical topics. Next, we have Brett Bivens, who is Managing Partner of Production Capital, a VC firm investing in hard assets. Then last but definitely not least, we have Leon Baade, who is co-CEO of 8inks, which is a Swiss startup revolutionizing battery manufacturing.

[00:02:45]:

Those of you who have attended a 4 by 4 before will know that we cover four topics. We have four speakers, who we introduced. We cover four polls. If you see the polls, they should be live now and you can please answer those as you wish. Then the last thing is we'll take at least four questions if we have them. Please don't be shy; if you have a question just post it in the channel and I'll put it to our speakers.

[00:03:15]:

Without further ado, let's address the first of our four topics. The first one is about macro drivers and structural trends. Nicolas, I think it's fitting that we come to you first. Nicolas, how would you define the current hard asset supercycle, and what are its principal drivers?

Nicolas [00:03:38]:

Very pleased to be here and to participate in this panel. You quoted Larry Fink, so I don't have to repeat the figure. That's the supercycle, all that money that needs to be invested over the coming years. I think the drivers of that are manyfold, but I would like to highlight three of them. The first is, we all remember Mark Andresen writing in 2011 about software eating the world. The idea was that software startups would eat entire industries and triumph over exhausted incumbents that don't know how to use software. That has happened in certain industries, but in other industries it's difficult for software alone with an asset-like model to effectively disrupt the existing order. Which means that software, to quote a newsletter I wrote a few years back, needs digestive pills. It needs hard assets to make a given industry easier to digest.

[00:04:48]:

The perfect example we have before our eyes at the moment is electric vehicles. An electric vehicle is an automobile that lends itself much better to embedding software than an old combustion engine car. An electric vehicle, EV technology is a digestive pill for software to eat the automotive industry. But to manufacture EVs, you need to invest in lots of our assets. That's one example. Another driver I'd say is that we are at a point in the cycle in the ICT cycle or the age of computing and networks, where we quite let in the cycle AI. We can discuss that if you want, but AI to me is a manifestation of being late in the cycle. It's more computing, more networks, very advanced in its impact on the world. Typically at the end of a cycle like that, today we are living through the equivalent of the 1970s, but for tech, the 1970s if you remember having read about them in the history books, is when a lot of institutions collapsed. Because the cycle was so advanced, the new paradigm was so present everywhere that all the institutions had to be removed and replaced with new ones. We are at a similar point today, and I think it's very clear for everyone. Donald Trump is a symptom of that. Not the cause, but a symptom of that. A lot of things need to change like globalization, international trade, our monetary system, and many other things. That creates an opening for hard asset investors, because when institutions collapse, they don't really know how to calculate risk adjusted returns on what they want to invest in. They have to make big bets, and they have to follow people like Larry Fink who drum up support for investing more in hard assets. That's the only reference you have in the market, as opposed to an institutional setup that's stable, that's easy to document and easy to harness, to calculate risk adjusted returns. Institutional collapse means more investment in infrastructure, paradoxically.

[00:07:12]:

The last driver I would say is China. There are people who say that the most important story of this year business story of this year, maybe of our lifetime, is the fall of Tesla and the rise of BYD. Meaning that China is proving to us what it means to be serious about investing in hard assets, whether in manufacturing, energy, robotics, and many other things, space, defense, et cetera. There's been an eye-opening moment earlier this year because Trump has been so hard on China, and then everyone started to look at China, what's going on, what is he so upset about? What he's upset about is that they've invested so much in hard asset, that they've become a manufacturing, energy and robotics powerhouse; and everyone needs to catch up on them, which means we need to invest in hard assets.

Ben [00:08:03]:

Fantastic. Very clear. Brett, I'm going to ask you to pick up on some of that. I don't know if you had any other drivers, but we've heard from Nicolas what the drivers are. I suppose the question is if we listen to somebody like Mario Draghi, who understands some of the urgency to build new infrastructure, would you argue that the key stakeholders, government, investors understand what's at stake and are going to be able to act quickly enough to industrialize?

Brett [00:08:42]:

Yeah. I think if you look at what most of the stakeholders say, I would say that they intellectually understand that. I think if you look at what they're actually doing and the way that they're incentivized, I think Mario Draghi, the one-year anniversary I think it was in September of that report.

Ben [00:08:59]:

It's a year already? I thought it was much worse than that.

Brett [00:09:14]:

It may be less than a year old, but there was a bunch of press that came out about it a month ago. His view was that governments haven't grasped the gravity of the moment or the reality of the moment. Areas like energy for example, where a lot of the reforms that he pushed for, whether it was in energy, whether it was in capital markets, whatever it was, was very much structural. What we have tended to see over the last year is a lot more cosmetic things, subsidies to help with near term price concerns or things like that. I think it's a big challenge. I think that entrepreneurs, people like Leon, absolutely see the urgency and see the need for it, and also see the urgent demand that sits on the other side, the end customers, the users of this new infrastructure technology. Investors also see it and understand it, but I think are cautious and want certainty, and they want rules to be clear and well understood. That's a challenge when government isn't prepared to act in the right way. To Nicolas's point, this isn't a game that is played in a vacuum, it's very much relative. The scoreboard is not just Europe, but it's how is Europe doing relative to its peers, so to speak. I hesitate to put Europe in that category given the urgency of the way that China is moving and the way that the United States is moving.

[00:10:26]:

It's not always the worst thing in the world to be able to play two sides against each other. But I'm not sure if Europe is actually shrewd enough in doing that in the right way. I think it's manifesting more as indecisiveness on the part of most governments and most policymakers. I think that comes through very clearly in the way that US capital markets have responded, especially recently. JP Morgan with this massive announcement, I think it was last week or the week before, around a trillion and a half dollars going into this reindustrialization and renaissance and everything that China's doing. I think people understand it intellectually. I just don't think that the incentives are there for most of the parties to really push forward aggressively enough at it right now.

Ben [00:11:14]:

Okay, thank you, Brett. Aishwarya, coming to you next. If we focus on one of those stakeholders, which are lenders, what do higher interest rates mean for lenders? Because maybe there isn't the same need to lending against slightly riskier assets, hard assets. What do you see in your work at Tangible?

Aishwarya [00:11:41]:

That's a good question. I think like Nicolas and Brett talked about risk adjusted returns and relative value, you can apply the same concepts and you will, like the capital markets will apply the same concepts, to this topic as well. Essentially, I'll put it out there for people who might not know, but in 2022 right before the collapse of SVB Sova, which is now the global benchmark in the capital markets for that five basis points, which is 0.05%, and today it's at about 4.3. If you do the math, you know the multiples that it has gone up by. What this basically means is that the risk-free benchmark that a lender can earn while doing nothing, while parking into cash, has substantially increased. However, we know that LPs do not reward lenders or funds for sitting on cash and giving them risk-free or benchmark returns.

[00:12:45]:

Previously a lot of this private credit was funneled into unsecured FinTechs or non-bank lending facilities, which were giving the high yield pickup, but were also a lot riskier. I think that argument applies even more now because with inflation having gone up, affordability squeezed, a lot of the portfolios that are parked in unsecured cash lending are seeing higher stress. From a lender's or from a private credit funds' perspective, you do have to give higher than benchmark returns to your LPs, but you're not necessarily on a risk adjusted basis extracting the same value from pure unsecured cash lending. The fact that this hardware and this infrastructure is now appearing as a very natural, I would say economic need, as an asset class gives a lender a really attractive alternative that sits between both of these. You do get the yield pickup because, there is slightly more risk attached, especially for some of the less off-the-shelf technologies. But at the same time it is secured against hard assets, so you do have that relative security versus a pure cash underlying.

Ben [00:14:06]:

Thank you very much. Leon, I'm going to come to you next. Brett said that entrepreneurs were stepping up to meet the needs of this hard asset, Supercycle. You are one of those entrepreneurs. I suppose the question to you is, what signals is the market sending entrepreneurs like you to know what is needed and what to build?

Leon [00:14:31]:

Thanks for the question, Ben, and really great to be here. Thanks for having me. I would start that it's absolutely important to have these signals on the radar that the market sends to you. We cannot build category-defining companies as entrepreneurs siloed from the world. We definitely have to have these signals on the radar. But I would also put an emphasis on signals that are coming from your customers, and also staying committed to your mission as an entrepreneur while you are observing and digesting these signals.

[00:14:50]:

At 8inks, building, manufacturing technology in the battery space. Let's take this as an example. In particular in the battery space, we've had lots of signals recently. We're also well-funded battery companies, in particular in Europe who have failed and the signals from the market have intensified in a way of can the Western world even play a significant role in the battery industry at all? If so, how? That's a reality that we face as entrepreneurs building in this space. I think it's our job as entrepreneurs to find ways forward by digesting these signals and adapting and finding creative ways through these signals, really working with your customers to solve tough problems for them. I think that's the ultimate way that you can generate value and then do it in a way that whatever context that we face of finding these creative ways to adjust, but really always emphasize the customer signal over general market signals because there can also be noise, which can be distracting.

Ben [00:16:16]:

Fantastic. We've had our first question here. This is coming for you, Brett, but I think it would also be good to get your perspective on this too, Nicolas, which is, is it possible to still have success with assets light software only businesses?

Brett [00:16:35]:

Yeah, absolutely. It depends on what you consider asset light all the way back through the chain. Because a lot of the companies that we might think of as asset light software type of businesses today, a lot of the companies building at the application layer of AI are dependent on this exact supercycle that we're talking about, of trillions of dollars being pumped into data centers and all of that. I guess it depends on your framing of it. But I think certainly the numbers back up that there's a lot of momentum with those companies and a lot of demand with those companies, and more and more starting to move into traditional industries, whether that's initially in service-based industries like law or consulting or accounting or things like that, but then increasingly getting involved in industrial workflows and some of these critical industries.

[00:17:27]:

But I would say is going back to what Nicolas said, which is hardware becomes a really powerful digestive pill in a sense for getting this software into these core industries. That's why I think you see that even though, if you take defense and national security for example, a lot of companies that maybe even started with a software-driven approach and AI-driven approach, have moved aggressively into hardware. Helsing is an example of a company like that that wasn't necessarily thought of as a hardware company in the early days, but is now world-class at doing that, because of that dynamic that Nicolas talked about.

Ben [00:18:10]:

Nicolas, we've got to get you to comment on that. Also we've had another question here as well, which has come to all of us, which is, are governments doing enough to support industries that build real things? I guess there's two questions. Has software eaten as much as it can without needing some hardware? Then are governments doing enough to support industries that build real things?

Nicolas [00:18:32]:

Yeah. As to the first question, I think there's still room for asset light software models. But I would say two things. The first is what Brett pointed out, which is that behind AI powered software, there are many hard assets. The cost of that, having invested in those assets can be seen in the price of software, which is changing a lot; with a lot of startups standing there back on the per seat pricing model that was the rule in SaaS, and turning to other ways so as to be able to absorb the rising costs of operating on that hard asset infrastructure. It might be software to you, but behind software is a lot of hard assets.

[00:19:20]:

As to the other question, governments, I would say governments need to wake up. We've had so many episodes of governments realizing too late that, oh, this technology has failed or this company has gone to the Chinese. We've had several episodes, the most recent being Nexperia in the Netherlands, which had to be literally nationalized to prevent the Chinese owner from appropriating the technology. Before that there was a struggle around AUM between the UK and China, and SoftBank being involved, et cetera. There's the North Volt debacle, that we've invested so much in this company, which could have become a global champion and at some point something didn't click. Unlike in the US today where you see Donald Trump ready to use taxpayer money to bail out companies or take a golden share in Intel, for instance, we don't have governments ready to do that in Europe. Or maybe they're ready to do that only for domestic companies. But then we are confronted with another problem of Europe, which is the fragmentation. If it's only the French government trying to salvage a French company and the German government trying to salvage a German company, we will never reach the critical mass for actually building something at the scale of the continent.

Ben [00:20:45]:

Fantastic. That's a very, very nice segue into our second topic, which is about supply constraints, CapEx and resource scarcity. I come to you, Leon, first. To pick something that Nicolas was around nationalism, in this case resource nationalism, how is resource nationalism reshaping global supply chains for critical materials? How do you see that with regard to your business in general?

Leon [00:21:17]:

Certainly a trend that we clearly see, in particular in the battery space that is top of mind for all players in the community. But I will say while it's certainly a challenge to navigate through it, I think it also presents opportunity. Resource nationalism I think is pushing innovation closer to home and speeding up the shift to circular supply chains, which we generally welcome. I think these are trends that we appreciate. I think overall ultimately it demands every player along the value chain, big and small, to really assess their current partnerships, both up and downstream, where they're positioned in the global supply chains and really build and design supply chains that can flex when borders tighten. Really building that resilience and flexibility within the business for all players, large and small, I think is critical and more important in recent years.

Ben [00:22:19]:

Nicolas, what are the key bottlenecks preventing new CapEx deployment in Europe, other than governments maybe not getting it or not getting the urgency?

Nicolas [00:22:30]:

One aspect is path dependency. America's success in building large software companies over the past decade have given birth to VC firms that are now giant financial powerhouses, like more than VC firms, they have dozens of billions under management across many asset classes, et cetera. We've all read those pieces about the transformation of the A16Z, Sequoias the, the Lights Speeds, et cetera, into something different, more like a large investment bank or merchant bank that does everything. There's a path dependency, because those have been successful in pure VC investments, they've been able to turn to the LPs and say, "See, we've done so well over the past decade, give us more money to diversify across the capital stack and do more to support this new breed of companies that are building on hard assets." We haven't had that in Europe. We don't have the successful VC firms that can use their credit with their LPs to raise more money to participate in the hard asset investment party.

[00:23:45]:

We need to compensate for that lack of momentum around that. We need to rebuild from the ground up, realizing that if we don't have a successful deep sophisticated VC industry, we need to compensate that maybe with more government money, but above all with more corporate money. Because as you yourself, Ben, published on LinkedIn some time ago, there's a lot of money trapped on corporate balance sheets. The problem with the startup culture inherited from the past decade is that startup founders have been told, stay as far as possible from those exhausted dangerous incumbents who will only waste your time and your money if you try to work with them. In the hard asset world, it's different. You need to work with incumbents because not only do they have access to the resources you need, they have access to the talent you need. They have the best engineers, they have access to the global supply chains that will make it possible to sell your product when it's ready to sell. Finally they have the large corporate balance sheet that you need in part to fund your operation. We need to build that connection between the rising startups in the realm of hard assets or the new industrials, if you'd like to call it that, and the legacy industrials. Because those have not gotten news to working together, and we don't have the venture capital inherited from the past to make it happen. We need the extra push by everyone involved to create that connection.

Ben [00:25:24]:

Aishwarya, I see you nodding. I think you probably want to comment on that. How can we create those pathways between corporate balance sheets and hard asset startups and private capital funds and hard asset startups? What partnership or financing models are you seeing emerging?

Aishwarya [00:25:44]:

One of the items or pathways that hasn't been mentioned so far would actually be private credit. It's more along the lines of credit. Yeah, you have strategic partnerships with corporate partners, as Nicolas rightly pointed out, that you should reach out to. Of course, we've had this discussion about governments maybe helping through grants and other kinds of non-dilutive capital. Now there's a question mark around ability, willingness, et cetera. But what we haven't touched on yet is debt capital. A lot of the work that we do at Tangible, we come across founders who, again, actually through either their own experience with VC or their prior work experience, think of capital as coming only in certain forms. The word debt capital conjures up the image of a bank. Whereas for a lot of these creators of these new technologies, the access to non-dilutive, i.e., debt capital, that might fit these business models and these companies is not surprise, surprise going to come from a bank. Because there are certain requirements that an institution like a bank which is regulated, which handles deposits, which is the custodian. Society says you need to look after the deposits that we've put into you.

[00:27:30]:

So by the very shape of what these institutions are, they are not allowed to go beyond a certain level of risk. However, these new technologies and this hardware is now being created by companies that are housed, that have the encasing of this risk. Expanding the imagination beyond just the bank as the one that gives you the non-dilutive capital is the core of the work that we do at Tangible. It is essentially to say that this capital comes in different forms. One of the best ways to reduce the risk, one way or the other, whether you accept it or not, as a startup, as a younger company, you come attached with this risk. But there are ways to work with institutional capital and credit providers who can separate the assets that you are building from the corporate entity that you are.

[00:28:31]:

I think, Ben, you mentioned this previously, it's asset backed financing, or there are many terminologies that are applied to a traditional securitization where essentially the asset is what the lender is financing. It's not you as a corporate entity. You create what we call bankruptcy remoteness, which helps to bring some of the risk premium on your own corporate entity risk down. That's a very important tool that we work with. Data centers, they are essentially a copy paste of real estate financing, which the likes of KKR, like all the trillion plus AUM stalwarts have been doing for decades. That's where data centers have now. That's the structure that's being applied to them. All I'm trying to say is that this financing technology securitization has already come to some sections of this hardware supercycle. It's time to expand it beyond just the data centers and the large creators of these assets, to also companies like Leon's who do this day to day.

Ben [00:29:30]:

I'm going to ask you what the impediments are at the moment, but I'm going to come back to that because in our next section we're going to talk more about production capital and the ideal capital stack. We had another question from the audience, which is great. I'm going to read it out and then I'm going to ask anybody who wants to answer it. I'm not sure it's necessarily an easy one to answer, so I'm not going to pick on anybody. It's come from Dan, and the question is, how can $200 per share and nearly 5 trillion market cap for Nvidia be justified, given China's growing lead in AI? I don't know who wants to take that. That's a bit of a hot potato, I would say.

Brett [00:30:13]:

Well, I think I saw that they just crossed 5 trillion in market cap today for the first time ever. Not even nearly anymore, but across it. But I'll let Nicolas or Leon, it looked like you were both going to speak.

Nicolas [00:30:28]:

Yeah, just something very short. I was at a conference last week in London, where I heard that the first sign of the current market collapsing or the bubble bursting or whatever you want to call it, will be originated in Nvidia. Maybe they have results that are less good than expected in earning calls, or something like that. Nvidia is really the cornerstone of the entire market today.

Ben [00:31:02]:

Yeah, they're in the coal mine.

Nicolas [00:31:05]:

Yeah, exactly. As soon as something starts to go wrong, even very slightly, that might be the sign that things are going to change.

Ben [00:31:15]:

Leon, did you want to add something?

Leon [00:31:20]:

I was just going to say that sounds like a question for an investor to answer.

Ben [00:31:25]:

Yeah, Brett, you gave the floor to Nicolas. Did you want to add anything?

Brett [00:31:33]:

No, I didn't have much to add on that. No.

Ben [00:31:40]:

Do you accept the premise of the question though, that China?

Brett [00:31:45]:

I guess I would push back maybe on, I would be interested in the second half of it if I'm remembering what it's said, which is given China's growing lead in AI. I suppose that would be the question. Do they have a growing lead in AI as it relates to cutting edge chip design? It seems like Nvidia still holds the lead there. I think a lot of the large language model stuff still seems quite up in the air now. Certainly a lot of the stuff that we're talking about, hard asset deployment into critical industries in areas like robotics and in areas like manufacturing, that is very clear that that's where they have a massive edge. How that flows through to the NVIDIA valuation and the risks to the Nvidia valuation, I don't have much of a view there. But yeah, I would be interested in some of the nuance on the back end of that question, specifically around that.

Ben [00:32:45]:

Let's see if that nuance comes in.

Nicolas [00:32:50]:

Sorry, Ben, I can add something about that. I was very interested recently in a Hot Lot podcast episode where they were interviewing a senior Goldman executive, I don't remember his name, but he was effectively coming back from China, saying, "Wake up guys. What matters in AI is not latest model and the new generation of chips, it's what you do with it. The Chinese are already very busy." He didn't provide any specifics, so I can't go into the details, but he said, "What I've seen in China is that they're very hard at work applying AI to everything. They're already doing many of those things well, like manufacturing or other things. Once they start applying AI to this, they will become even better." Instead of constantly celebrating the OpenAI's and the Nvidia of the world, we should be cheering the BNVs and the Chrysler and the SpaceX's to the extent that they're applying AI to getting better at their job.

Ben [00:33:50]:

Fantastic. We're going to move to section three, which is production capital. I don't know if you've copyrighted that term, Brett, but that's certainly a term that Brett uses a lot and that's what he's called his venture capital fund. Brett, coming to you first, which seems very appropriate, what does the optimum capital stack look like for a hard asset company? Then this is a slight repetition of the question you were asked earlier, but are venture investors as important as they were given how capital intense the hard asset businesses are?

Brett [00:34:35]:

Yeah, optimal capital stack certainly depends on the specific business. I think that's a place where early venture investors can be super valuable, because companies that Aishwarya is talking about, that are maybe building more decentralized asset bases are very different than companies that are building massive first-of-a-kind facilities, fifty, hundred-million-dollar infrastructure projects. Those are very different things and those can exist inside of the same types of venture portfolios, and in many ways they need to. That's still a critical piece of the puzzle, getting those companies from maybe the lab or forming their early team, and getting them to a point where they are ready to go out on that more commercial path. I think where venture investors are very, very valuable in this cycle is with a slight evolution to the model, which is to say, can those firms add a capital markets orchestration function, capital formation function, actually becoming in the same way that a firm like Andreessen Horowitz has become, so powerful in terms of its policy engagement and their ability to garner influence on behalf of their companies?

[00:35:50]:

That piece of the puzzle, helping companies understand what great looks like as it relates to asset-backed financing, or what great looks like as it relates to early project development, or what great looks like as it relates to how you need to hire a CFO to build that part of your business, becomes a really critical piece that I think a lot of firms are going to get really good at. It's quite relevant actually, not to be a prisoner of the moment, but literally 10 minutes before we came on this call, I saw an announcement from Eight VC, which is a large multi-billion dollar venture fund in the US that does a lot of defense and manufacturing and supply chain technology, announce a massive partnership with Apollo, which is one of those multi-trillion asset managers that Aishwarya was talking about. That's a perfect example of where these firms can leverage their expertise and their access to that early talent and all of those things, to bring in those later stage capital partners and help coordinate that continuum of capital on behalf of their businesses. What that looks like structurally for the venture market starts to get really interesting, because a firm like a VC can do a partnership with Apollo. What does that mean for all of the smaller venture firms out there? TBD. But yeah, I think absolutely it remains a critical piece of the puzzle with additional expertise capabilities as that category evolves.

Ben [00:37:17]:

Aishwarya, I'm going to come to you next. I know you were already working with Brett in these funds. But when it comes to helping hard asset startups get access to debt funding, what are the biggest challenges? Brett had alluded to this, which is some of these lending products are actually quite difficult for some people to understand. Is there a lot of education that you need to do for startups? Is it almost that side of things that's more challenging than helping the lender to understand the assets that they're effectively lending against or securitizing?

Aishwarya [00:38:05]:

I can't nod enough to agree about how spot on you are. I think it's really key to explain to founders, I don't want to pick on founders, but I'll just say people who haven't worked in credit or capital markets. The language that you use for VCs and the language that you use for lenders is a Mars and Venus; it could not be more opposite. Because if you think about it, they also sit on opposite sides of the capital stack. They have very opposite requirements. They have a very different role in the upside of a company. The debt is looking to cap its downside because they have to be repaid, and a VC has unlimited participation in upside, which means encouraging risk taking because that's how you get the really big returns and the really big outcomes. There's an inherent tension in this relationship, which actually is really good for everyone involved.

[38:58]:

It's not about saying that this is a bad thing. But what it needs is someone who does the translation in between, and says that you are now switching from raising capital from equity providers, this is what it means, and now you need to tell the same story but with this different lens. The biggest challenge that we find is the mindset, is bringing about that change, that a-ha moment in someone, and we can see it in the founders that we work with. You'll see this, "Oh wow, I never thought about it that way." This light goes off and then things fall into place. It's about making sure that that light goes off early enough so that the decisions that you've made about your product, about your customer contracts, all these day-to-day pragmatic decisions that you have to make early on while you're building the business, are also made to Brett's point, with an eye on the long-term capital stack in mind. Not just, this is what I need today, so I'll fly by the seat of my pants and do what I need to today and then I can just change that tomorrow if I'm talking to someone else. For some decisions you can, and some become so entrenched in the business, you won't be able to. A lot of this education, we are very strong proponents at Tangible of doing it at early as you can, learning as early as you can, so that you walk the path that you're eventually meant to walk.

Ben [00:40:47]:

Leon, it feels right to come to you next. Sorry to put you on the spot here. I know you're a relatively early-stage business, but is this already on your radar? Are you already thinking about the capital stack? You're already thinking about taking maybe some debt. I guess the thing with hard asset companies is they have to raise so much money or they need so much money to fund these hard assets, that if they don't get this right that you as a founder are going to be too diluted over the long term. Is this already on a radar? Have you already been thinking about this?

Leon [00:41:21]:

Yeah, absolutely an important point that we have on the radar, I think. as of now, we're giving our early stage, we're thinking of two main capital categories to finance our venture for now, and then bringing a third one for future growth and development in the long term. The first one, typical equity funding venture capital. We raised our first round, we're now raising a second one. The second piece is public funding and grants. I think this is where a hardware company can really also have an advantage, while it may be more difficult with venture capitalists who may not be as bullish on hardware. I think in public funding and grants this can be an advantage. In our case, for every private equity euro that we raise, we also raise at least a euro in public funding. That's a ratio that's likely going to increase moving forward.

[00:42:20]:

These programs can be on regional level, federal level, but also European level. I think there's great offers out there that startups can capitalize on. Then the third piece is the debt financing aspect. I would also say that depending on the stages of the companies, there's interesting programs that make that financing available even before bankability. With support from also, again, government programs who may be taking some risk for that financing, that is a piece that we are taking more and more into consideration, that third pillar. Essentially these are the three pillars, how we think about it. Then I think ultimately also important to have in mind is the right capital stack for your business model. Even in the hardware space, we are looking a lot on licensing opportunities where you can also move with capital efficient structures when you're building a factory. I think then the capital stack will look a little bit different. Especially when you go into the industrialization and scale up phase, that hat component will probably take a larger piece than when you have a licensing approach.

Ben [00:43:44]:

I'm going to stick with you, Leon, because we've had another question here, which is so perfect, which is about Zurich and Switzerland as a hard asset center. Are you German or are you Swiss? But regardless, I think the question is about why you chose to set up in Switzerland, and do you see Switzerland as a deep technician?

Leon [00:44:05]:

Yeah, certainly. We've been very happy of incorporating here in Switzerland. In our case, we spun the company out of ETH Zurich, which is where the initial IP has been filed. My co-founders are postdocs from ETH and really doing their whole career and education from the PhD programs there. That has been a natural incorporation place for us, and so far it's been really great. Also from funding communities both private and public, that has really supported us, also great institutions that support startups early on with various programs. Innosuisse is one of the more well-known institutes that have a diverse set of programs to help early-stage startups. The second piece I would also emphasize on is talent. Given that we are operating in the D-tech space, we need very highly specialized engineering talent. Switzerland is also a great hiring ground for attracting folks who've been in Europe and Switzerland, but also global talents. We hired, for example, one specialist who's been building a career in Silicon Valley and who's been also interested also from a private point of view of seeing themselves also building a life and a career in Switzerland. Switzerland I would say does attract a lot of global talents, which has been a tailwind for us.

Ben [00:45:50]:

Fantastic. Okay, good. Well, we're going to move into the fourth section here, which is a bit about predicting the future. I can't remember what that quote was about, never predict the future, but we're going to try to do a bit of that now. Just before we get to it, I'd have a look at the polls. People don't seem to, the consensus is that we're not in some giant AI bubble. The consensus is it's a bit frothy. But revenues and profits will catch up with valuations. Interesting. Nicolas, let's come to you first. Staying on the subject of AI, so how are AI and automation transforming extraction logistics and energy management in traditional hard asset sectors?

Nicolas [00:46:33]:

I say we don't know yet. We've had these echoes I mentioned earlier about China applying AI both in services and manufacturing, and obviously manufacturing is the very strong point. What I'm sure of is that the whole discussion, again around models and Nvidia and Sam Altman, will Sam Altman win against Elon Musk, et cetera, is a distinction when it comes to really seeing and understanding the benefits of AI. AI is an essentially applied field where you need to be very context specific, you need to train on context specific data. The rewards will come for those who understood that as early as possible, and build the tools and build the infrastructure to apply AI in their particular industry or field or company or factory floor or whatever. In that context, I'm really on the hunt for use cases, like business cases. If people are listening to us and know about manufacturers who have applied AI with success to their operations, I'm very interested.

Ben [00:47:54]:

How do they let you know? Do they email you?

Nicolas [00:47:56]:

Yes, email, LinkedIn, everything works. At a more abstract level, been reflecting, and Brett and I have been discussing in recent weeks about this concept of scale without mass. Scale and mass are different. Mass is just a lot of it. Scale is when you turn that mass into something that generates increasing returns, hence increasing returns to scale. China has mass, obviously it's a very large country, very large population. But they've turned their mass into scale. That is, they have the most advanced manufacturing sector in the world, manufacturing industry in the world. They've harnessed the power of mass to convert it into scale. In Europe, in comparison, we don't have mass. We are a small continent, not that many people here. What I'm interested in is, is AI a way to compensate for the lack of mass? Can we reach scale without mass by doubling down on AI to iterate faster, to improve precision in manufacturing, to improve yields in general in operations, and get there, get where the Chinese are on the path to returns to scale, without having the underlying mass? That's a very interesting and important question today, and it sends a message that's very clear. Because we in Europe don't have the mass, we should double down on applying AI to the industries we want to be a leader in.

Ben [00:49:40]:

Brett, what's your view on whether we can achieve scale without mass? Through your lens as a venture capitalist, where are you seeing some of the most exciting innovation in the hard asset space?

Brett [00:49:57]:

Yeah, I'll try to bundle those two together in the same answer. Because if we go back to what you said at the very beginning or the quote that you gave around this $68 trillion investment wave that's coming, that's trillions for roads and for energy and for ports and for water infrastructure and for telecommunications infrastructure. That's all stuff that we have to build. My question then is, who's going to build that? We have these massive labor shortages, we have this demographic inversion, we have these jobs that are still dangerous and difficult and dirty. What I'm very excited about and we're seeing it show up in the quality of the companies that are coming through and the quality of revenue, are these robotic services, hardware services companies, the types of businesses that Nicolas referenced at the very beginning, which are actually software businesses. They're about getting deeply integrated into these core industrial and enterprise workflows, but they use advanced hardware in order to go and do that.

[00:00:50:45]:

Those businesses, for one, they align very well with the types of companies and the types of capital scaling that Aishwarya talked about. All of the tailwinds are coming to them around, component costs coming down, urgent demand on the buyer side, again, that 68 trillion. That's one area that I'm super excited about and spending a ton of time on, are these hardware services businesses. They are, in many ways the unlocked for that type of scale without mass would be, because they are delivering the capability to build and to construct and to manufacture in a much more decentralized way and in a way that doesn't require massive centralized build out and massive amounts of hyper-focused capital allocation that can be done in a much more diffuse way. That's where I'm spending most of my time and really excited about right now.

Ben [00:52:00]:

Leon, do you want to add to that? You're essentially building a business that is making it much easier to manufacture batteries. You are thinking in those terms, right? The second thing I would ask you is, maybe too much of a general question, but is the role of startups to disrupt the incumbents in the hard asset space, or is it probably better to think about them as working with incumbents to bring greater scale with less mass?

Leon [00:52:34]:

I really like the analogy. I want to reflect on it also after the panel. To your question, I think it depends also on stage, particularly for hardware startups. I think if you're an early stage hardware deep tech company, I think incumbents and corporate partners can really be a great validation opportunity for your business. You need to get to a certain scale and growth stage in hardware to be able to play the disruptive angle of globally leading incumbents. That's why, especially for early-stage hardware, I think that customer side with models like venture clienting and so on, that I think have been increasingly rerolled out also by the large incumbents, but also from the investment side. Think of chip hardware company. If you win a commercial project or an investment from TSMC or Nvidia, I think that is a very strong validation signal and it can actually be a more interesting signal than compared to an investment from a general SVC, who may not be as familiar with the sector and also not as capable of really diving deep into the technology and what the value can be.

[00:53:56]:

That's why I think especially for early stage can be really a strong opportunity on validating what you're building both from customer commercial projects, but also investment side. Then on the long term, I think it again goes back to what is the mission for the company and what is the appetite for the founding team and also the business model, whether they want to disrupt globally leading incumbents or find partnership models, or also want to position themselves as an acquisition target. I think that's then also up to the founding team of what is the long-term goal of success that you want to build for.

Ben [00:54:34]:

Sorry, I couldn't find the mute button quick enough. Aishwarya, we're going to come to you next. We've talked a lot. I think we've given that governments a relatively hard time for not being maybe on the ball enough or understanding the gravity and urgency of the situation. But at the same time, governments are pretty heavily indebted. It's not like they've got tons of fiscal headroom to throw money at hard asset companies. My question to you is that we keep talking about this huge 68 trillion-dollar number that we quoted at the start of the podcast of the session. Is there enough private capital to fund this hard asset supercycle?

Aishwarya [00:55:31]:

If you think about the fact that one company, Nvidia, is now worth 5 trillion, then I think the question of whether there's enough capital on this planet is easily answered, right? The answer is clearly yes. Because if you combined BlackRock, Blackstone, KKR, Apollo, JP Morgan, Goldman Sachs, you've surpassed that total already. It's not so much a question of whether governments are willing or able. The indebtedness goes towards their ability. The willingness is driven by many geopolitical factors that are currently ongoing. But the question is, are there professional asset and capital allocators? We have institutional capital and sophisticated investors who do this for a living, and that's how housing, that's how all the infrastructure that currently exists, which Brett was alluding to, we need to recycle, refresh, rejuvenate, but it exists already. All of that has pretty much overwhelmingly been financed through very long dated investment pockets. Think of all your insurance companies, your pension funds, banks, private credit. These are all specialized institutional pockets of capital, whose job it is to finance the global economy using different instruments that they become specialists in. Expecting governments to have that level of expertise, that just doesn't quite stack up.

[00:57:15]:

So yes, they have a place in it, of course to create the incentives, the frameworks that allow this to happen, and supplement with non, let's say, grant funding, which comes back to that motivation point, how do you incentivize? But I think as it should, the burden of financing does sit on private capital, because that's why we have private ownership of assets.

Ben [00:57:47]:

Fantastic. That absolutely flew by. It is with much sadness that I tell you that the hour is nearly up. Does anybody want to make a final comment on that last topic of whether there's enough private capital, and how easy it's going to be to find its way through to hard asset companies? Maybe Brett, do you want to say one final thing on that, because that's really your area?

Brett [00:58:15]:

Yeah, I would agree generally with everything that Aishwarya said. The challenge has always been how do you get these massive pools of capital down to the small projects and the smaller companies that are actually going to be building the infrastructure of the future? It's not an easy task as founders like Leon see every day as they're out there trying to wrangle the capital markets in their favor. Same thing with Aishwarya, advising these companies. Same thing for investors who are trying to look and understand. We have this question come in around like, how do I make sense of this, how do I make sense of the shifting political wins across all these areas? I think with all of that complexity, with all of those challenges, the movement is going very aggressively in the direction of, yes, there are becoming these pipelines for that capital to find its way to those innovative technologies, those innovative companies, those innovative projects that are going to rebuild our ability to build things in the physical world. I think it's a long multi-decade journey, but it's happening quickly.

Ben [00:59:25]:

That is a great note of hope that you leave us on there. Thank you very much, Brett. All that remains is to say thank you very much for everybody who attended and everybody who listens to this as a podcast. Thank you very much to our four speakers. In no way did that disappoint. That was a really fantastic discussion. Thank you for joining us. The last thing to say is that our next 4 by 4 is going to be on the topic of FinTech infrastructure for the AI economy. We're actually going to be recording that here in our office in Geneva. Look out for that; that's going to be in December. If you enjoyed this, please attend the next one too. Thank you very much indeed.

Aishwarya [01:00:00]:

Thank you.