Can you tell us about your background and path to co-founding Grid Capital?
I didn’t know it at the time, but every step in my journey led me closer to Grid. Although I’m an engineer by training, my first role after school was consulting, where I implemented ERPs for utility customers. When I wanted to get back to innovation and product, I joined Silver Spring Networks, where I built IoT solutions for utilities and cities. My first foray into venture was with Hyde Park Venture Partners, an early-stage fund based in Chicago. That’s where I first met my partner, Peter. We spent the last few years working together as Partners at Chicago Ventures, which is where Grid took formation.
Peter and I have spent the past decade leading investments in pre-seed and seed technology companies across supply chain logistics, manufacturing, and construction. We found that our domain expertise and strong networks in these sectors gave us a leg up in our investing. And given the lack of go-to funds serving this sector, we saw the opportunity to fill the gap.
What can you tell us about Grid and how it differs from other funds?
Grid leads investments in industrial technology companies at the earliest stages. We are unique in that we are specialized, concentrated, and invest with conviction.
Specialization allows us to invest early and with confidence. It takes deep knowledge and networks to understand what signals indicate success in industrials. Peter and I learned this lesson early on in logistics. Chicago-based companies backed by Hyde Park Venture Partners and Chicago Ventures like Shipbob, Project44, and FourKites were all non-consensus at the early stage. All have gone on to do amazing things. Before 2015, venture funding for logistics companies never came close to $1 billion. Compare that to the last few years where it has never dropped below $10 billion. We see this phenomenon happening over and over across the industrial sector.
Concentration means we have space to make good decisions and time to roll up our sleeves and work closely with founders after investment. Where many pre-seed investors build portfolios of 30, 40, or even 50 companies, we will only invest in 20. We believe that is both a better product for founders — they get a lead investor who has real skin in the game — and for our investors since portfolio winners have an outsized impact on the fund.
How do you think about the industrial tech market and what excites you about it?
We define industrials as markets dependent on heavy industry, predominantly supply chain logistics, manufacturing, and construction. These markets have common attributes, such as being highly networked, often multi-tiered industries. For example, in construction a developer might work with a dozen general contractors, who might work with a hundred subcontractors. Those subcontractors might work with a dozen other general contractors. The same thing happens in logistics. A shipper might work with a dozen brokers, who work with carriers, and so on. This structure creates complexity but also opportunity for relationship management, transaction visibility, payment flows, and more.
We love to think about ways to share learnings from one market to another. For example, there are lots of go-to-market tactics to share across customers that look alike such as drivers or contractors. Both operate off their mobile device, take demos out of their truck, and have similar cash flow crunches. Simple things like giving out branded equipment work for both segments.
If we invested more narrowly, these lessons might be limited. We’re excited to build a fund that helps founders short-circuit learnings across all industrials.
What do you see as the main factors driving industrial tech in 2024?
There are three tailwinds propelling industrial tech today: a broad demand for resiliency, a skilled labor shortage, and the emergence of a new cohort of software buyers.
The global supply chain is getting more complex every day. COVID supply chain shocks led to the shipping crisis in the Red Sea. Global tensions and wars have put pressure on the US to build more and faster. The Inflation Reduction Act injected billions into rebuilding our nation’s infrastructure. The demand for visibility, workflow, and automation of industrial tasks is higher than ever before.
By our analysis of Bureau of Labor Statistics data, the industrial sector employs 44 million workers and yet 36% of all job openings go unfilled. We’re already short tens of millions of workers! This problem is only set to get worse as baby boomers retire. Furthermore, productivity is flat or down over the last 15 years. We’re in a position where we are supposed to produce more, with fewer people, and we’re no more productive than we were a decade ago. We think technology has to fill this demand gap.
The good news is that we are seeing the emergence of a new cohort of buyers who are not resistant to technology or overly risk-averse, and who are seeking tech to solve problems. Private equity’s increased presence is one such cohort. The other is millennials who are taking over family businesses or controlling budget as VPs or directors at enterprises. Our job is to find and fund the founders who will build solutions to fill this recent, but sustaining, explosion in demand.
What role do you see AI playing when it comes to filling the skilled labor gap?
There was a period when the prevailing belief was that robots would replace workers in manufacturing or construction. Ironically, the new belief is AI will replace lawyers and accountants first!
In any case, I see AI as an enabler versus a replacer of our workforce. These jobs are complex and critical. We’re right to be careful implementing AI. Of course highly-repeatable, low-stakes tasks will be automated. But, we will also have AI assistants that help workers spend more time on the most complex or critical tasks. For example, AI may read blueprints and highlight key data that helps a foreman identify issues in the field faster.
The use of AI agents in workflow and visibility solutions makes many core industrial platforms possible and so much more useful when they are adopted.
Let’s talk about some of your investments. Can you tell us about the types of companies you’re backing?
We invest in capital-efficient, highly scalable industrial tech companies. Our investments are typically one of two flavors: core systems or ancillary services. Jeff Bezos said, “focus on what makes your beer taste better.” In this example, a core system would be the brewing equipment and an ancillary service could be the toast PoS.
Part3 is an example of a core system. It is a workflow collaboration platform for platform prime contractors such as architects and engineers. Construction administration comes with a big overhead burden for Part3’s customers, but it is key to completing a project.
GreenLite is an example of a service. On the one hand, they serve as a permit expeditor for real estate developers and on the other, offer private plan review for municipalities. Offloading this function to a platform like GreenLite removes a big blocker for developers: getting the real estate developed.
What about M&A activity? What has that looked like in industrial tech recently?
Industrial tech has a very diversified M&A base.
Legacy industrial tech platforms are aging and have turned to acquisition as a growth engine. For example, Houlihan Lokey tracks the most active industrial software strategic buyers. Between 2020 and 2023, Aptean made 19 acquisitions, Bentley 11, Hexagon 11, Autodesk 9, and Descartes 8. Some of these acquisitions topped $1 billion such as EQT ($1.2 billion) and Jovix ($2.8 billion) by Hexagon or Inovyze ($1 billion) by Autodesk.
Historically, hardware companies are also making a big splash. Schneider Electric acquired RIB Software for $1 billion. John Deere acquired Bear Flag Robotics for $250 million. Honeywell acquired Sparta Systems for $1.3 billion. These companies are looking for resiliency in their core business as well as more attractive revenue streams from software.
Private equity is another key player. For example, PE now owns Epicor ($4.7 billion in 2020), ECI ($2.5 billion in 2020), CDK Global ($8.3 billion in 2022), and Aptean ($3.5 billion in 2023).
We see continued interest in industrial tech at all stages. Buyers know that they are sticky platforms with very loyal customer bases.
One last question: What’s your outlook for the industrial tech market going forward over the next 5-10 years?
Industrial tech is going through a renaissance. I expect more attention from founders and funders alike.
As the B2B SaaS market continues to mature, the opportunities to solve analog problems with digital solutions lessen. I expect investors to look toward areas like industrials for the big opportunity that comes with addressing unsolved problems. And, as investors begin to focus on business models such as payments, tech-enabled services, and hardware-enabled software, the outlook for industrial startups will grow and playbooks will become easier to run.
I’m bullish for what’s to come.