Innovation Back and Forth: Product and Process

Co-authored with Shan Kutagulla

The West’s deindustrialization has come into focus with American manufacturing’s share of GDP falling from the 1950’s peak of 25% of the economy to today’s 11%. As investors, we recognize this issue and are tempted to provide opinions and policy recommendations, but will refrain from doing so in this piece. Instead, we’ll focus on what we know best- innovation and how we believe startups can and should adapt to this changing ecosystem.

Cycles of Innovation

In the grand scheme of technological advancement, we can split innovation into two extremely broad stages: product innovation (increasing potential) and process innovation (decreasing cost). Product innovation is what most people envision when they hear the word “innovation” a new battery chemistry, the next chip, or a breakthrough AI model. In this stage, the focus is on creating and iterating on new products, and competition is more "democratic": the field is open, allowing startups and new entrants to compete on relatively equal footing, since no single design or company dominates the market. This environment is most common in the early days of an industry or during periods of major disruption but can reappear whenever a new technological breakthrough resets the competitive landscape.

Over time, as a dominant product design emerges and the industry matures, the cycle shifts to process innovation. Process innovation focuses on decreasing prices and improving manufacturing efficiency. It becomes especially critical once dominant product designs are established and when there are threats to supply chains or increased manufacturing risks, such as those posed by tariffs or geopolitical tensions. In this stage, the emphasis is on driving down production costs, optimizing processes, and scaling up manufacturing, which tends to strengthen the position of established players with the resources to invest in efficiency and supply chain resilience.

Are We In A Time of Process or Product Innovation?

A useful (if admittedly oversimplified) way to frame these cycles is through the lens of two well-known “laws” of technological progress. Historically, the U.S. has been associated with Moore’s Law, which describes exponential improvements in product performance (such as doubling computing power every two years), reflecting a national focus on product innovation and breakthrough technologies. In contrast, China’s industrial rise has often been linked to Wright’s Law, which observes that costs decline predictably with cumulative manufacturing experience, highlighting a focus on process innovation and scaling production efficiently. While this generalization glosses over many exceptions (China is increasingly a leader in product innovation as well) it helps explain why the U.S. has often led in early-stage, high-margin breakthroughs, while China has excelled at driving down costs and dominating global markets as products mature and commoditize. This pattern is visible not just in semiconductors, but also in batteries, solar, and automotive industries.

In critical industries such as batteries and chips, this creates a strategic problem that the current administration is attempting to solve with tariff policy. Tariffs and protectionist policy inherently shift attention away from product innovation and towards Wright’s Law. By applying immediate pressure on supply chains, incumbents are now inclined to focus on process innovation to offset rising supply chain uncertainty and manufacturing risks. This crisis response takes away from R&D budgets that have long-term or potentially uncertain outcomes. For example, we recently read that biopharma firms reported that absorbing an additional $10–20 billion annually in tariff-related costs would force them to cut back on early-stage drug discovery and clinical trials. Automotive R&D spending is projected to decline by 38% in the first year due to dual pressures from import tariffs on components and retaliatory tariffs on exports.

It seems very difficult to know where the tariff discussions will be in a month or three. But even the uncertainty surrounding potential tariffs or policy changes can have a chilling effect, causing companies to delay or scale back long-term product innovation as they hedge against future risks. The result is a shift away from high-potential, long-term R&D toward short-term operational efficiency and supply chain resilience.

There’s Still A Silver Lining for Startups!

There is still a silver lining for startups that can take advantage of this new ecosystem in a number of ways that we see:

1. Process Innovation: Building the New Backbone

Startups that focus on process innovation are well-positioned to win right now. Why? Because dominant players—facing the urgent need to replace Chinese manufacturing and stabilize their supply chains—are actively seeking robust, localized, and efficient alternatives. Higher costs and uncertainty will incentivize domestic companies to invest in equipment manufacturing, automation, and local supply chains. Startups that can deliver solutions in these areas will find a receptive market. Notably, companies are now willing to pay more for these solutions than they would have in the past, given the premium on resilience and flexibility. In short, process-focused startups can sell directly into the pain points of today’s incumbents, helping them adapt to a rapidly changing global production landscape. Examples of this are Safi and Smatch in the Transition portfolio. Safi enables companies to stabilize their supply chains by using recycled materials while establishing trust on quality metrics. Smatch allows brands to access a wider group of buyers whilst staying anonymous and keeping control over who can see their stock, leading to higher recovery value and faster liquidation.

2. Product Innovation: Exploiting the Window for Disruption

In times of economic uncertainty, incumbent risk-aversion creates a rare window for startups. Financial pressures often force established companies to scale back on ambitious, long-cycle R&D and focus on their core products, even when they recognize the potential of emerging technologies. This retrenchment leaves gaps that nimble startups can exploit by bringing breakthrough products or entirely new value chains to market first. For example, after the 2008 recession, Nokia, then the world’s leading mobile phone maker, cut R&D spending on a new operating system to shore up its existing Symbian platform, inadvertently allowing Apple to out-innovate them with the iPhone and reshape the mobile industry.

We saw a similar window open in the EV industry during the 2000s (though with more government support and top-down commitment). As established automakers focused on near-term profits from gas and hybrid vehicles, both Tesla and a new wave of Chinese companies seized the opportunity to lead in electric vehicles. Tesla’s launch of the Roadster in 2008 proved that EVs could be both practical and exciting, while Chinese firms rapidly scaled production and innovation, capitalizing on the hesitation of global incumbents. In both cases, newcomers redefined the industry by moving decisively when others stood still.

We believe a number of examples of this type of innovation are in our portfolio, such as Flux Computing, Unigrid, and Revoy. Unigrid has developed a novel anode for safe and energy-dense sodium ion batteries. Recognized as the top sodium-ion battery cell in the country by leaders like LGES, we believe they are poised to take advantage of this moment. Revoy is developing a breakthrough solution to electrify the industry. Their product allows any diesel truck to become a hybrid in minutes. Revoy has the opportunity to become a new industry standard - and show the industry that electrification can be capex light and low friction

Winning can take many shapes and forms. There are outliers in every case. But two types of companies that we expect to have a harder time in today’s environment:

1. Products Without Clear Initial Utility:

Startups developing solutions that don’t address urgent and well-defined problems, or whose value isn’t immediately obvious to customers, will struggle to gain traction. Customers are likely to focus on cost savings or operational survival, there is little interest in products that require customers to imagine future use cases or benefits.

2. Startups That Aren’t Capital Efficient Early

Companies that require heavy upfront investment or large-scale manufacturing before proving their concept are at a disadvantage. The current climate favors startups that can operate leanly, validate their technology with limited resources, and demonstrate results without massive capital outlays.

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We hope this message is not too depressing. Remember, in every time and every condition, people always wake up and go to work and do their best effort! Even in the most challenging environments, history shows that new leaders emerge, and the seeds of the next wave of innovation are sown. History shows that periods of industrial upheaval often produce the next generation of transformative companies. Whether by building the backbone of tomorrow’s manufacturing or by daring to invent what comes next, startups that understand the cycle (and act decisively) will shape the future. Transition is still investing, and we’re optimistic: the next great wave of innovation is already being built.