Brainstorm Tech 2024: Tech in the Crosshairs
Augustus Doricko, Founder and CEO, Rainmaker Nathan Poon, Co-founder and CEO, Avol Aerospace Marcus Ryu, Partner, Battery Ventures Jenny Xiao, Partner, Leonis Capital Hosted by: Polina Pompliano, Founder, The Profile; Co-chair, Fortune Founders Forum
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TechTranscript
00:00Hi, everyone.
00:01Wow.
00:01OK, hold on.
00:03Welcome.
00:04This is going to be a very dynamic conversation today.
00:08Oh, Nate, I'm so sorry.
00:09Did not see.
00:12No, no, get coffee.
00:14I just want to say that this is very much
00:18an interactive session, so we'd like to hear from everyone.
00:23So if you want to talk, press the little man-person-speaking
00:27button until it turns red.
00:29And then when you're done speaking, press it again,
00:34because there can only be several mics on
00:37at the same time.
00:38And this session is on the record.
00:41We are recording it.
00:42That's why it's important to talk into the mic.
00:45And yeah, so I think that's it.
00:48I want to start with kind of setting the stage.
00:52Battlefield Tech is on the rise.
00:55I read that between 2021 and 2023,
00:58VCs invested $108 billion into defense tech companies.
01:04Why do we think that's the case?
01:06I want to ask you all this question,
01:08but Jenny, let's start with you.
01:13Oh, sorry.
01:14Yes, and intro yourself, please.
01:16OK, cool.
01:17I'll just do a brief intro.
01:18So my name is Jenny Hsiao.
01:20I'm a partner at Leona's Capital.
01:21We are a research-driven early-stage fund
01:23investing primarily in seed and pre-seed stage companies,
01:27in AI, data infrastructure, developer tools,
01:29enterprise SaaS, all those good stuff.
01:31And my personal background is I was a researcher by training,
01:34did a PhD at Columbia.
01:36I was a researcher at OpenAI previously
01:39before leaving to join Leona's.
01:41And just going back to Polina's question
01:44about why VCs are suddenly investing
01:47a lot in defense technology, I think
01:48geopolitics is a really big aspect because
01:51of the Russian-Ukraine war.
01:52And now seeing what's happening in Israel and Palestine,
01:56suddenly geopolitics and war and conflict
01:59become center, top of mind for a lot of VCs.
02:03VCs have been enamored.
02:05They've been in love with enterprise SaaS and software
02:08for the longest time.
02:09And right now, because of these geopolitical trends,
02:13suddenly people are paying more attention to hardware
02:18and to defense technology.
02:19And actually, I personally have a hot take,
02:22which is I think software margins and I
02:24think software is no longer going
02:25to be as good of a business in the next 20 or 30 years,
02:29mostly because of AI.
02:30Because AI makes it so easy to build software.
02:33And a lot of companies are going to decide
02:35to build instead of buy.
02:37And essentially, if the cost of generating code goes to zero,
02:40the cost of software goes to zero.
02:42But it's not the same for hardware.
02:44And I think defense technology is a great area where
02:48you almost have to have some sort of hardware
02:51and have some sort of hard technology.
02:53And I think that's where value is going
02:54to accrue in the long term.
02:56And also, because a lot of these defense technologies
02:58are dual use, that means you can sell to enterprise.
03:04You can sell to businesses.
03:05But also, you can sell to the government.
03:07That also broadens your market.
03:08Of course, a lot of them are not dual use.
03:10So for those, you're only selling to the government.
03:16Hi.
03:17Good morning.
03:17So by way of personal introduction, I'm Marcus Ru.
03:21I joined the partnership of Battery less than two years
03:24ago.
03:25So I'm here as an investor.
03:27But my profile and disposition is much more as a founder.
03:31I co-founded a company in 2001 called Guidewire Software.
03:34It was a very long entrepreneurial journey.
03:36I went public in 2012.
03:37And I transitioned to the chairman role in 2019
03:41before joining the so-called dark side here.
03:45It was a very long and arduous entrepreneurial journey.
03:49And it was a completely different era
03:51in Silicon Valley.
03:52And it's been striking to me to see the contrasts from my time,
03:57so to speak, as a founder to the present.
04:00As for defense tech specifically,
04:02I don't have any special insights other than I
04:04think there is a general awakening to the possibility
04:09that there is enterprise value creation in other areas
04:12besides SaaS software, which is a good thing.
04:17I, myself, have taken a lot of interest in climate tech,
04:21weather tech, and space tech, and earth observation.
04:26These are all areas that were considered effectively
04:29uninvestable, I think, for a long time.
04:31But I think there are a host of reasons why I think they're
04:35very interesting opportunities.
04:41Morning.
04:41My name is Augustus DiRico.
04:43I'm the founder and CEO of Rainmaker.
04:45We control the weather by way of cloud seeding
04:48to make it rain and snow more.
04:51And so with respect to the rise of defense tech or battlefield
04:55tech, I think there's a couple of contributing factors.
04:59One is the end of American unipolarity.
05:03It's not that there are some conflicts that
05:06may develop over the course of the next decade.
05:09It's that there's hotspots globally
05:11that will become full-scale regional wars.
05:14So you see that, obviously, in Eastern Europe.
05:17You see that in the Middle East.
05:19I don't think people pay as much attention
05:21as we ought to West Africa and East Africa.
05:24But East Africa, particularly as Ethiopia dams the Nile,
05:27is going to become a place where people fight over
05:29resources very aggressively.
05:32And the State Department's interest in maintaining peace
05:34and alliances there will result in defense budgets being
05:36allocated to these other regions of the world.
05:39And so there's opportunity to capitalize on that spend,
05:42especially as with the advent of drones,
05:45with the advent of all these other technologies,
05:47the primes fail to keep pace.
05:50So startups will capitalize on that.
05:52I also think there's a Gen Z component here as well,
05:56which is that software is not cool anymore.
06:01And it's extremely useful.
06:03And I grew up in the software era,
06:05so I don't really know any alternative.
06:07And perhaps that's why it doesn't seem as exciting.
06:09But my friends graduating from all
06:12of these prestigious universities,
06:14sure, plenty will go to BCG.
06:15Plenty will go to YC and start software companies.
06:19But it's not something that, decreasingly,
06:23the best and brightest want to participate in.
06:26And so the human capital that's being allocated
06:29towards hardware and defense tech
06:31is more exciting now, I think, as well.
06:37Hey, everyone.
06:37My name is Nate.
06:38I'm one of the founders of Avol.
06:40We do autonomous drone deliveries
06:42of medical supplies between medical institutions.
06:46Yeah, I guess I'm pretty well aware of dual use
06:50of drone technology.
06:51It's kind of our bread and butter.
06:52But I think there's two fundamental drivers that
06:55are driving the growth of, specifically, defense tech.
06:59The first being, like you mentioned,
07:01a lot of hotspots around the globe.
07:02But specifically, the change from previous conflicts
07:06to now is that now you have a series of conflicts
07:10that can act as a testbed for the technologies
07:12that you're developing.
07:13And you can mostly do these almost free of charge.
07:17You're not paying for pilots.
07:18You're not paying for exclusive access.
07:20You have Ukraine.
07:23Both Augustus and I both have a friend, Nel Segundo,
07:26running a drone company.
07:27And he can just send drones to Ukraine
07:30to test the latest firmware.
07:32And you're testing these drones, literally,
07:34in their final use case.
07:37And I think you haven't really had that opportunity
07:40with a lot of different products that were defense tech.
07:42I mean, prior to this, you didn't really
07:44have any major world conflicts that you could just enter.
07:47And so that's driver number one.
07:48And then driver number two being,
07:51you have this growing conflict with China.
07:54And I think this is going to be every conversation we end up
07:58having with the military is centered around, what exactly
08:01are you doing about China?
08:02How will this be able to perform in a GPS-denied area?
08:05Do you use Chinese components?
08:06And I think, to your point on geopolitics,
08:10I think, as we see the US government clamp down
08:14on a lot of the supply chain issues,
08:16or a lot of the supply chain coming out of China
08:18to supply drone developers, I think
08:21what we'll see is a lot of homegrown US-based drone
08:23companies become extremely profitable,
08:27especially if you're building some
08:28of these fundamental components, like C2 interfaces
08:32and perhaps different methods of control.
08:36Very interesting.
08:37And I want to just a show of hands, how many of you
08:40are either investing in or creating
08:43a company around hard tech, robotics, space, drones?
08:50OK.
08:51So this is really interesting, because I
08:53remember when I was at Fortune in,
08:56I want to say it was 2017 or 18, I wrote a story
08:59and I interviewed Founders Fund and Palantir
09:02and all these people, and it seemed
09:04like it was a really hot take to be
09:06working with the government on some of these things.
09:08Now it's like, oh, obviously this is the hot new trend.
09:12Macro speaking, is there just a rise
09:15in nationalism or American dynamism,
09:19as people are calling it?
09:20Is that a thing, Augustus?
09:24Yes.
09:25Very, very much so.
09:28I think, again, to speak in terms
09:31of generational dynamics, especially given certain
09:38conflicts abroad, it was never cool to like the government
09:42before.
09:43It was never cool to like your nation.
09:45I don't think.
09:45It was maybe after 9-11 for a spell,
09:49but then everybody became pretty quickly disillusioned
09:53by the Iraq War.
09:55To be pro-America is something that everybody
10:00is rallying behind now.
10:01Do you remember, it's political, I guess,
10:04but there's no way around that, the protests that
10:08were going on on campuses, like the pro-Palestinian protests
10:12that were going on, frat bros from across the country
10:16were rallying with American flags,
10:18and then they were praised by national media
10:21all over the country for doing it.
10:24Nationalism is certainly on the rise, for better or worse.
10:29And then I would add on to that, working with the government,
10:35too, we're never going to cut spending.
10:40I think people have come to terms with the fact
10:42that we're only going to see more inflation.
10:44We're only going to see government budgets grow.
10:48That makes a great customer if the budget only ever grows.
10:51And then the programs are sticky.
10:53How often do programs get cut, even within the DoD?
10:55Almost never, even when there's better technology available.
10:58So talk about lifetime value.
11:01It's a bajillion dollars when you're working with the DoD.
11:05So I think that's part of why people want
11:07to work with the state as well.
11:09Yeah, just adding on Augustus's point,
11:13I think there's two trends we're seeing right now.
11:15One is there is a trend towards political conservatism
11:20in Silicon Valley.
11:21I don't know if you guys have been paying attention
11:23to the RNC at all.
11:24But a lot of these conservative candidates
11:28are actually funded by Silicon Valley venture capitalists.
11:31And definitely, you're seeing a lot more VCs, a lot
11:33more founders coming out in support of Trump,
11:36in support of conservative ideologies.
11:39Some of them say that liberalism has gone too far.
11:41Some of them have their own tax interests or economic interests
11:46in supporting the Republican Party.
11:48But definitely, we're seeing a trend towards conservatism.
11:52And I think this is one of the reasons why
11:54investing in defense technology is no longer taboo.
11:57Because just five years ago, if you were like,
12:00oh, I work for the US government or the DoD,
12:02well, that's a big red flag.
12:04I still remember the protests at Google
12:07when Google had this contract with the DoD.
12:09And everyone was super pissed about it.
12:11But nowadays, I think, especially among founders
12:14and VCs, working with the government
12:16and working on defense is actually
12:18becoming a lot more popular.
12:20I think the second factor is the amount of defense spending
12:24we're going to see in the next 10, 20 years.
12:26Because as Augustas mentioned, and also
12:30like Nate also pointed out this as well,
12:31because of the conflict with the US and China,
12:34the US government is really going
12:35to pump up defense spending.
12:36If you look at the amount of GDP that
12:39was going into defense during World War II, World War I,
12:42and also during the Cold War, and you
12:44look at the amount of defense spending as a percentage of GDP
12:47today, I forgot the exact numbers,
12:49but it's significantly down from the peak numbers.
12:53And that just shows you that there's
12:56a lot of room for growth.
12:58And if defense becomes like 10% of GDP,
13:01I think it was like during the Cold War or something,
13:03I forgot whether it was 10% or like 20%,
13:05well, that's a large market.
13:07And then a lot of VCs are like, OK, that's
13:09like a really large TAM.
13:13Yeah, Marcus McCammon, president and chief executive
13:15of Karma Automotive.
13:17So prior to being the CEO of Karma,
13:20I ran an engineering services company
13:22that did a lot of work in the defense space.
13:25I would say that the trend in tech investment in DoD
13:29is not new.
13:30So there's a couple of fundamental things
13:32that have been happening.
13:33One, the popularity of people moving
13:36into the military as soldiers has declined precipitously
13:40over the past two decades.
13:42So the necessity to have unmanned activities
13:47on the field of battle has gone up.
13:49The other thing is the machinery on the ground is 50 years old.
13:55Like the A1 Abrams tank, the powertrain in that tank
13:59was designed in the 60s, literally.
14:03I know that because I worked on it.
14:06And I worked on the replacement technology for it.
14:09So there's a structural thing that's
14:12broken inside of the DoD that needs to be upgraded.
14:17But the other side is, and we saw this in 2010
14:19in the first wave of EV companies,
14:22there is a risk mitigation investment strategy
14:26with government funds.
14:28So when the ATVM loans came through
14:30and Tesla got the first loan, Silicon Valley
14:33did not want to invest in any EV company or EV-related company
14:36that did not have government funding.
14:39That government funding has become a staple of,
14:42and I'll speak from the perspective of people
14:44in the tech space and other entrepreneurs,
14:47that low risk, very predictable, very consistent funding.
14:52And oh, by the way, the portfolio,
14:54once I've gotten that book of business,
14:55I can hang with it in perpetuity.
14:58Those things have also become a strategy
15:00from both sides of the table.
15:03So I just wanted to add that to a sense.
15:10OK, got it.
15:11Hi, how's it going?
15:11Good morning.
15:15I'm trying to figure out how to frame this.
15:16But so, Augustas, you said very wisely,
15:19the DoD is like a bajillion dollars, and that's true.
15:22And I think about in defense spending,
15:24it goes to basically through a few big companies,
15:27like Lockheed Martin and a bunch.
15:28Here's one of the things I'm trying to, actually,
15:31I'll ask a question for the room.
15:32Who here likes paying taxes?
15:33Raise your hand.
15:35No, I mean it.
15:38That's a problem.
15:40And I want to be serious about this for a second.
15:46Fair point.
15:47Maybe I should be more US-centric.
15:50But that's the issue, is actually,
15:52I remember after World War II, I think it was Henry Ford said,
15:54Ford pays taxes to the government
15:56because it's good for the US.
15:57And what's good for the US is good for Ford.
15:59And now we have this dichotomy, where we all
16:01want to get away from taxes.
16:02Spending's going up.
16:04We need help to modernize infrastructure.
16:06But what happens is they get freaking gouged,
16:08because all of a sudden, it's this massive payday
16:10for these private companies that want
16:11to make insane margins on getting a power
16:13train for the Abrams tank.
16:15Something's got to give.
16:17And so part of what I'm hoping, and maybe it's a provocation,
16:20I'd like to hear more, maybe the question is,
16:22does this resonate, because I don't
16:23know what I'm talking about.
16:24But it feels like we need some new players, maybe
16:27out of the venture universe, that come in
16:30and are capping margins, or not trying
16:31to be this insanely wild, like, 90% margin business,
16:35because it's best for the country, which in turn
16:37is then best for business.
16:42Good morning.
16:43I'm Tom Soto.
16:44Latimer Partners is my family office.
16:48I'm a longtime impact investor.
16:50I've managed three private equity funds, $200, $300,
16:54$10 billion.
16:55And longtime observer, but also a former State Department
17:01appointee by Bill Clinton.
17:03And I ran the transition team for Obama, Biden,
17:06and had something to do with the TARP 1 program
17:12that went through and pulled the country back
17:14from the edge of the cliff.
17:17And there's a lot to be said about Silicon Valley
17:22and defense.
17:23It's not a new relationship.
17:27Silicon Valley, and we are all here
17:30because of a letter that was written by Albert Einstein
17:33to Franklin Roosevelt. And that letter
17:36led to the Manhattan Project.
17:38And that was a seed capital for much of what we're discussing.
17:43The next moonshot and the next generation of economics
17:48was when peace broke out in 1989.
17:51And the Clinton administration came in
17:54and had to justify the trillions of dollars
17:57that went into the Cold War.
17:59And when we had to access those assets
18:04and convert them for civilian use,
18:06that gave to us a lot of the things that we have now.
18:10It gave to us hybrid technology, which
18:12we had been using in tanks and in submarines
18:15since World War I, electric vehicle technology,
18:18the internet, cellular, which went to Qualcomm.
18:25And as we sit here now, we're looking
18:28at the next generation of output that
18:31will be occurring as a result of the restocking of globalization
18:37where things are, especially with China.
18:41We see the obvious in the Middle East and the Ukraine.
18:45And then the larger questions are Taiwan, South Korea, India.
18:50And all of that said, it gives rise
18:54to a high demand for innovation, which, by the way,
18:59doesn't occur in government, which
19:02is why we had the Oppenheimers of the world come in.
19:06And even to this day, the UC region
19:09still own a good piece of New Mexico.
19:12That's where Sandia is.
19:13That's where Los Alamos is.
19:15It's the Department of Energy UC region's asset.
19:18And we will continue to see that.
19:19So this is where the opportunity is going to be.
19:21The reason why I don't necessarily,
19:23you know, Jenny, buy on to the fig leaf argument
19:28that our employees didn't like working with DOD,
19:31there was a lot of Silicon Valley that was just entrenched in China
19:37and could not decouple.
19:39And it was Palantir and Palmer Luckey and others
19:43that said, hey, there is some opportunity here.
19:46But there's also a way that we could improve national security
19:50because the Microsofts and the Googles of the world
19:54were unwilling to build that relationship.
19:57So they did.
19:58And now they're knocking the leather off the ball.
20:01But they're also doing a huge service to the American people
20:05by bringing this innovation to the forefront
20:08and giving it to our allies and so forth.
20:12So this is not going to be a,
20:15we're not even near the end of this cycle.
20:18It is going to continue on.
20:20And depending on what happens in November,
20:23we'll determine the velocity of how this may occur even further.
20:27And quite frankly, I'm of the opinion
20:30that under the current administration,
20:32we would actually see an increase in velocity
20:34with that type of relationship.
20:36So, you know, there's a good amount of conversation for this.
20:40The other side of the thing and what I invest in
20:42has been climate tech and response to climate change.
20:47And, you know, there is a rather generous opportunity there.
20:53If you saw this morning's Wall Street Journal and my post
20:57that will come out later on today,
20:59there are about 25 million acres burning right now in Canada.
21:04That's about $10 billion of economic loss.
21:08At the same day, you know, Intersect is announcing
21:12a $900 million commitment of debt and equity
21:15to build battery storage of all places in Texas,
21:19which doesn't believe in climate change.
21:21Thank you. Yes.
21:23And good morning.
21:24Michael Marcotte, I'm the chairman
21:26of the Arceus Global Group
21:27and the former co-founder of the National Cyber Security Center
21:31and Interoperative Response Center.
21:33As far as technology companies in Silicon Valley
21:37working within what Eisenhower famously called
21:40the military-industrial defense complex,
21:42they don't have to be contractors
21:44directly with the government.
21:46AWS, Google and Microsoft all provide services and software
21:52to the largest defense contractors on the planet.
21:56So by nature of that, they are part of that complex.
22:00That's a statement of objective truth,
22:02not one that is politically motivated at all.
22:06As far as taxes go, and I would like to believe
22:09this is a statement of principles
22:11above personalities and politics,
22:13governments increase revenues by increasing employment.
22:18You increase employment by decreasing taxes.
22:22As an economist, this can mathematically be explained
22:25to a fourth grader.
22:30Any other comments?
22:33Marcus, I want to talk to you.
22:34You started your company very shortly after 9-11.
22:39Was there this sort of similar sentiment
22:44around being proud to be American, et cetera,
22:48in the tech space?
22:50Let's see.
22:51Well, there are many people in this room who can remember that
22:53and some who are maybe of the next generation.
22:57It was an extremely sobering time.
23:00I was early in my career and I think the sentiment
23:05that was internalized by the few people
23:07who wanted to start companies then,
23:09because that was not the conventional wisdom
23:14to start a company after the NASDAQ lost 97%
23:17of its value, et cetera,
23:18and there was a nuclear winner in venture capital.
23:21It was not the obvious time to start a company.
23:23But those that wanted to, and my co-founders
23:25and I were among them, it was a sense that we had
23:29to do things that were serious.
23:31We had just gone through an era of great frivolity,
23:35of excess, of self-interest, of short-termism,
23:40of kind of fetish of new ideas that didn't really matter,
23:44selling dog food online.
23:45You know, who thought that would ever be worthwhile?
23:48And so if we were going to do something,
23:50it had to be serious and sober.
23:52And so it's not coincidental
23:53that my company served the most unglamorous industry
23:56in the world, the property and casualty insurance industry.
23:59And it was going to be a long journey
24:00to build quality software.
24:02I don't think it was a nationalist time.
24:04I think everyone recognized that terrorism was a profound
24:07threat that any thinking person
24:09with a moral sense would recognize had to be stopped.
24:12But as entrepreneurs or as business people,
24:14as professionals, we felt like let's just try
24:16to stop the silliness and the self-interest.
24:18History repeats itself.
24:20And one of my observations as now a somewhat older person
24:24is that there are cycles where people get over-exuberant
24:28again and then it takes some level
24:31of crisis before they recognize it's time to be serious.
24:34And I think we can't help ourselves as a species
24:37from these cycles of over-excitement and then sobriety.
24:41Yeah, it does feel like we're in a more sober time right now.
24:44And for the founders, Nate and Augustus,
24:48how are you guys thinking about building
24:50and funding your companies and not being frivolous
24:54with the capital?
24:59One thing that I think about a lot
25:03that increasingly my friends, particularly in El Segundo,
25:07and I'll diverge just for a moment in saying, like,
25:10to the point about like the rise of nationalism or patriotism
25:15in El Segundo, which is this podunk neighborhood
25:18in Los Angeles that's in between LAX
25:20and the Chevron oil refinery.
25:22It's where SpaceX was founded,
25:23but it's not the especially chic part of Los Angeles
25:28by any means.
25:29All of the startups compete to see how many square feet
25:33of their walls can be covered in American flags.
25:36Like who has the biggest flag, who has the most flags,
25:39who has the most exotically woven flags,
25:42or if anybody can find old ones from previous wars.
25:45Wait, sorry, I just wanna just clarify.
25:47Are those founders mostly American or are they immigrants?
25:52They are, with, the majority are American.
25:59There are some that have immigrated from East Asia,
26:03South Asia, or Southeast Asia, some from Europe,
26:08but the vast majority are American.
26:11Then with respect to funding
26:13and not being frivolous with capital,
26:17you know, Nate and I were having a conversation
26:19in the car yesterday, and like one thing,
26:22like I've never really tried to run a venture scale company
26:25outside of the, or prior to the like 2022 crypto collapse,
26:30right, so perhaps once it was much easier
26:33to fund a company off of a slide deck and ideas,
26:37perhaps now there's like more rigorous metrics
26:40required of a company.
26:42I think that whatever the requirements of venture are
26:46at a given point in time, you just have to rise
26:49to the occasion to meet, whether that's revenue,
26:51traction, technical development, something like that,
26:55and so no matter the macroeconomic environment,
26:58I think founders generally are pretty adaptable.
27:01The other thing though is like there's so many other forms
27:05of capital available besides venture equity,
27:09and I think that perhaps because of the incentive structure
27:12in VC or just because people don't talk about it
27:15or it's not on Twitter, like nobody is aware
27:17of all the different debt instruments that exist.
27:19Nobody is aware of all of the different equity providers
27:23that exist, like different equipment financing even.
27:28You can lever up ridiculous amounts
27:31from a small amount of venture equity,
27:32and so using those tools as a means
27:34to sort of decouple from venture,
27:37perhaps especially when it's hard to raise venture capital
27:40is something that we've done at Rainmaker.
27:43It's something that a lot of other companies have done,
27:45and then like non-dilutive funding
27:47is all over the place as well,
27:50so just figuring out where alternative capital is
27:52is something that I think perhaps
27:53the current macroeconomic conditions
27:55have pushed founders towards.
27:57Nate.
27:59So this is my third company.
28:01Prior to this, I built a wearable robot company.
28:03Maybe some people heard of it.
28:04It's called SuitX.
28:05We built wearable robots for augmenting human strength.
28:08This came out during the Iron Man days.
28:10You might have seen some stuff on the news.
28:14So during that time, we could raise money
28:17and be much more speculative
28:18about what we were going to do with that money.
28:20The government was giving us money
28:21to experiment and try different things.
28:23We could put 250-caliber machine guns on each arm
28:25and make a soldier that could be a mobile gun turret,
28:30and that was an experiment,
28:31and we had a lot of room to do that.
28:33I think in today's environment,
28:35what's different from when we started SuitX
28:38and then what we started doing with Avol
28:41is we came into Avol with a laser focus
28:44on the product and the customer,
28:45a very specific use case.
28:46We weren't fooling around.
28:48We saw a lot of other drone companies in the space,
28:51and you heard Amazon trying to deliver packages
28:53to your back door.
28:54You hear drone delivery doing e-commerce.
28:56You hear people trying to deliver hot dogs with drones.
29:00None of that.
29:02None of that.
29:02I mean, I don't know about anybody here.
29:03I'm not willing to pay $7
29:05to have my hot dog delivered by drone.
29:06It just doesn't quite make sense.
29:07So what we wanted to do
29:08is we came in laser-focused on the product,
29:12and I think that that's something
29:14that when we think about,
29:16well, how do we spend money?
29:18What do you spend money on?
29:19Do you spend it on trying to figure out how to battery,
29:22how to build a dual-wielding 50-caliber machine gun guy,
29:25or do you focus on a very tight application
29:29that you know extremely well,
29:30and then you try to build a really good product
29:32around that particular application?
29:34And I think there's a much,
29:37so far, the need to be capital-efficient
29:40and really laser in on how do you build the best product
29:44for a very specific use case.
29:46I think that is more relevant now more than ever before.
29:49And if you, I mean, I'm sure a lot of,
29:53we have a lot of investors in the room,
29:55like founders, as a general rule of thumb,
29:58should be laser-focused on building
30:01to a very specific use case,
30:02especially in today's day and age,
30:04where venture capital is kind of converging
30:07on capital efficiency, demonstrated proof of use,
30:12a use case that actually makes a lot of sense.
30:14This is why testing military drones in Ukraine
30:18makes a lot of sense, right?
30:19You can prove your value right off the bat
30:21for a very specific use case,
30:22and it's not some nebulous use case.
30:24Oh, we build drones.
30:25Well, what do you build them for?
30:25Anything.
30:26And I think when we think about being really frugal
30:29with venture capital dollars, it's not my money.
30:32It's my investors' money.
30:34And so therefore, I don't,
30:35and they're not giving it to me to fool around.
30:38And that's probably for better
30:40for the sake of innovation as well, right?
30:42Like if necessity begets creativity or breeds creativity,
30:46whatever the old platitude is, right?
30:48Like perhaps not being given money
30:51just to experiment on some new thing
30:54that might be interesting,
30:55and instead just iterating towards the very best version
30:58of some very specific vertical
31:01will result in more developed technology in that vertical
31:04rather than just like a sort of
31:06Google X playground environment would.
31:10I think that's true in some cases.
31:13Not to diminish at all,
31:14but like I think that's true in some cases.
31:18I think if you're riding the wave of like, for example, AI,
31:22when Gen AI was first coming out,
31:24you see a whole bunch of companies
31:25that really don't know what they're gonna do with this LLM,
31:29but they're gonna do something.
31:29Maybe they'll do customer service,
31:31and they'll pivot to like worker training,
31:34and then they'll pivot to some other use case for LLMs.
31:36And I think being able to iterate quickly between these
31:39and find the niche where that technology makes sense,
31:43I think having the capital dollars to do that
31:46can create some really incredible products.
31:47I think a lot of the most useful products that we see today
31:51were born from a pivot that a founder did
31:53or a pivot that a company made
31:55in response to being able to test something new.
31:58I think sometimes as industries get more mature,
32:01like we could say that the AI industry
32:02is kind of starting to cool off,
32:05then it becomes a little bit more necessary
32:09to kind of dial in on a very specific product use case
32:12where you can be capital efficient
32:13to solving a very particular problem
32:15versus taking kind of like the shotgun approach.
32:17But early on when there's a new technology coming out,
32:19then I think that there is a certain amount of value
32:24to having the resources to try different things,
32:26make mistakes, find the niche that really, really matters.
32:28And then once you've figured out what that niche is,
32:31then you spend the capital dollars
32:32to double down on that particular thing.
32:36Yeah, I just wanted to echo Augustus and Nate's point
32:40about capital being scarce in today's environment.
32:42I'm an AI investor, AI is incredibly hot.
32:45A lot of people think AI companies
32:46are incredibly well financed.
32:48You always see these news of AI companies
32:50raising 100 million rounds.
32:52I think the reality is a little bit more nuanced
32:55because if you look at the total amount of money
32:57that's going into AI, it's like, I don't know,
32:5914 billion last year or something like that.
33:01The vast majority of that money
33:03is going into the hot companies
33:05like the open AIs of the world,
33:06the Anthropics of the world,
33:07or maybe a handful of really, really hot startups.
33:11The average company is still struggling to raise capital.
33:14I would say in this era of capital scarcity,
33:17you see a lot more inequality in amount of capital raised
33:21between the top players and the average players.
33:23And the so-called hot companies, the top players,
33:26may or may not be the best companies out there.
33:28Another point that I wanted to go back on Augustus's point
33:33on other instruments like debt financing
33:36or other sort of financing for startups.
33:39It's good in theory, but it's actually harder to do
33:43for a lot of companies, especially software companies.
33:45I know some companies who've tried to do that.
33:49It's very hard to raise that.
33:50It's very hard to raise private equity,
33:52private equity finance.
33:54Private equity people are just a lot more sophisticated
33:57on the financial side than venture capitalists.
34:01And in their term sheets,
34:02they'll have all these crazy terms
34:05that VC's never heard of before.
34:07And a lot of founders, if they sign them,
34:10they don't really understand
34:11what these terms are doing to them.
34:14So the advice that I've been giving to founder friends
34:17who are trying to raise alternative sources of capital
34:21is always be very careful about what you're raising
34:24and I still think venture capital
34:26is the best source of capital for startups,
34:28especially the ones, to Nate's point,
34:30that want to experiment
34:31because with other sorts of financial instruments
34:34like debt or private equity,
34:36it's very hard for you to experiment.
34:54Oh, not like crazy as in they're super out there.
34:58I'm just like terms that VC's don't really,
35:00because I'm an early stage investor
35:02as investment seed and pre-seed companies.
35:05I usually just write a safe.
35:06Like there's no, I don't do valuations.
35:09I don't have any super complex terms.
35:12It's just like a simple safe.
35:13I pull it off of YC's website.
35:16That's usually what I do.
35:17But if you're raising private equity,
35:20they have really long terms and pretty sophisticated.
35:24That was my point.
35:25Not that they're trying to screw you or anything,
35:26but just that they're much more sophisticated
35:28than early stage VC's.
35:36I think that hearing what you're describing,
35:42be mindful that you're doing this all in an era
35:45of some regret, high suspicion, and dwindling capital
35:51with runways that portfolio companies have exceeded,
35:56lots of down rounds occurring.
35:59And as someone who sits on the other side of the table,
36:02seeing the 20% reserve dwindle as a result
36:06of lack of exits, that gets concerning.
36:10And so I like the term pivot, but focus.
36:15Do what you said you were going to do and do it quickly
36:19because the private markets are frozen.
36:22We have a national trauma going on
36:26that has led to freezing of these markets.
36:29And it's not going to be as though
36:32there's an unleashing of them in November.
36:35So this is going to be the status quo
36:38at least through Q2 or Q3 of next year.
36:41And that capital is going to dwindle even further.
36:45At the same time, a lot of funds are sitting
36:48on hordes of capital, but they don't want to deploy it
36:51because it's going to be a down round.
36:53They're putting good money after bad.
36:55And their investors, the dirty little secret is,
37:00are pensions, right?
37:02And Mark Sester had a good point
37:05that now is a good time for secondaries
37:07because you could get them at a discount.
37:09They could be profitable with an uptick.
37:12And the pensions are unwilling to fund these down rounds
37:16because they have unfunded mandates already.
37:18If you look at CalPERS and CalSTRS,
37:20the reason why they're hitting some of their benchmarks
37:22is because they're having a much more conservative approach
37:27to deploying their capital than their GPs are.
37:31And so as founders, you have to be mindful
37:34of the upstream economics.
37:36Where is that capital coming from?
37:39Maybe it's coming from founders.
37:40Maybe it's coming from Sequoia.
37:43But where are they getting their capital?
37:45They're getting them from CalPERS and CalSTRS
37:48who have FTX on their mind and Bravo and Sequoia.
37:53And so there's a whole stream of effect that occurs
37:57when you're sitting at your whiteboards
37:59plotting out the next two quarters.
38:01That goes upstream through folks like me
38:04who manage this capital.
38:06And I'll sit there and either roll my eyes
38:09or say, you know what, let's give it a try.
38:11So it's nothing that's gonna end very quickly.
38:17And it's a bruise that might get bigger,
38:20but you're gonna have to live with it
38:22and get through this era.
38:23The good news is that all the dynamics that are in place
38:28forcing these new economics, forcing these new markets
38:32are only gonna get more aggressive and widen even further
38:36because of the demand for greater innovation
38:39that has to occur in order to move
38:42the size of humanity forward.
38:52Curtis Anderson, I run NERSA.
38:56Marcus, I'd be interested in your take on this
38:58given your recent experience in history
39:00on either side of the fence.
39:02It feels like a well-informed position.
39:06I'd respectfully disagree with anyone
39:08who says that capital is scarce right now,
39:10including any founder.
39:12I think it's, I say this respectfully,
39:14I think that's ludicrous.
39:16The venture industry is five to eight X somewhere,
39:19roughly in size from when I started my company.
39:21There are roughly an order of magnitude
39:24more venture capital firms.
39:25My co-founders and I, we would high five
39:27when we got a meeting with a VC on Sand Hill Road.
39:29Now I find myself in a scrum of 10 to 20 VCs
39:33approaching any company that has good metrics.
39:37So I find it, it's sometimes amusing to me
39:39as people will, I will hear founders maybe
39:41who are a little bit younger than I am,
39:44but maybe not straight out of school
39:46who will say, you know, I'm hoping
39:47that it will regress to the mean.
39:48And I said, be careful what you wish for,
39:50you know, because the mean may not be what you think.
39:54You know, when my company went public in 2012,
39:56you know, we were hopeful for something
39:59like a seven or eight X revenue multiple.
40:02And our bankers at the time said,
40:04it was a very veteran one, said,
40:06you know, you should know that the long-term
40:08historical average for what a quality
40:12software company trades at over the long-term
40:14is somewhere around three and a half to four times.
40:18I share that story sometimes to entrepreneurs.
40:19Now they can't believe it.
40:20They think I'm telling some kind of fairy tale
40:22from our horror story.
40:24They can't imagine it.
40:25I think valuations now are astronomical.
40:28The ones that I've, not just the ones that I'm behind,
40:31but the ones that are actively being negotiated
40:34relative to the longer-term historical average.
40:37So I don't want to talk like a grandfather,
40:40but sometimes I say, with the benefit
40:42of greater historical perspective,
40:44you'd realize that we're still in a time
40:46of very elevated and available capital.
40:48And if anything, it's caused a disservice,
40:51I would say, because it has allowed companies
40:53that perhaps in an earlier era would not have been funded
40:56get underway with a kind of false positive signal
41:01and would not have been considered investable
41:0415, 20 years ago, but now get underway.
41:07They bid up compensation.
41:09I'm always on the side of the founder.
41:11So I always want them to succeed.
41:13And I always believe in them pursuing a dream.
41:15But objectively speaking, mortality rates
41:17are just as high as they ever were.
41:19And so there's been a misallocation overall.
41:23So speaking of a dirty secret,
41:25I think it's been kind of whispered at this conference
41:27I've heard that venture capital as an asset class
41:30is just basic arithmetic.
41:32It's going to disappoint.
41:33There's far too much, just the basic arithmetic
41:36that Roloff both yesterday walked through.
41:39It's just addition and subtraction and multiplication.
41:41It will tell you that it is impossible
41:44to deliver on the aggregate returns
41:46that the industry would need in order to justify
41:48how much there is right now.
41:51Exactly, so unsustainable things,
41:53tautologically, don't last.
41:55And then the question is, in what way
41:56does it come to an end?
41:57Is it slow, fast?
41:59Does it happen by crisis?
42:00Does it happen through a slow dissipation?
42:03I'm not sure.
42:04Venture capital will be around forever.
42:05Software is infinite.
42:06There'll always be more opportunities.
42:08But I think it will be an era that will be,
42:10there'll be an era of disappointment.
42:12And I think ahead, even as these miraculous
42:15new technologies continue to impress.
42:17What, thank you.
42:19What do you think is most important
42:21about what comes next for success?
42:24It's a very broad question.
42:27It's just to state the obvious that,
42:30in the long term, any offering that you bring forward
42:34as a founder has to meet the market
42:36at a certain moment where it solves a problem.
42:38And when capital is too abundant,
42:41you can delay that moment of reckoning
42:43for a very long time.
42:44And you can do things that make it feel like traction,
42:47but they aren't really.
42:50And so, when you're really up against
42:52the hard edge of survival, of like,
42:54we're either gonna sell a product
42:55that someone is gonna give us cash on the barrel for,
42:57or we don't exist, it really focuses the mind.
43:00And I meet a lot of founders.
43:02They're all passionate, wonderful people.
43:03They're my tribe.
43:04But I see a lot of them whose minds
43:06have not been focused in that way, in that way.
43:09And it's possible to defer that, I think,
43:11because there's such a welcoming community.
43:13And I think that's a wonderful thing.
43:14There are all these incubators.
43:15You can, there's so many blogs.
43:17You can spend all your time listening to podcasts.
43:19And you can just feel like you're immersed
43:21in a kind of startup ecosystem
43:22that feels like you're making progress.
43:26And I think that's good, because it's a lot less lonely
43:30than it was 20 years ago.
43:32But I think it also sends, sometimes,
43:33a false positive signal.
43:36If I can weigh in on that.
43:38Raja Dodala, Churchill Asset Management.
43:41I think the reason I think it feels like capital is scarce,
43:45if you actually look at the objective numbers,
43:47it is not scarce.
43:48We're sort of back to 2018, 2019 numbers
43:51in terms of total venture capital raised.
43:54I think the, I'm probably gonna insult some people,
43:58but I think the last five years,
44:00I think our industry has gotten away
44:02from being a little more disciplined.
44:07Rounds getting raised with no new progress, no information.
44:11Risk-free rate was zero.
44:13Now, risk-free rate is 6%, 5%, 6%.
44:16So I think what we're seeing is actual criteria being met
44:21before you can raise the next round.
44:23And it's a correction back to normal, I think.
44:27Compared to 2012, 2013, if anything, capital,
44:31there's too much capital currently.
44:33And that's what Roloff was saying yesterday.
44:40I would echo your comments, yours and yours.
44:43There's actually a ton of money out there.
44:46The difference now is that people selling pictures
44:49of monkeys can get out of the room.
44:51And so the capital is chasing organizations
44:55that have leadership teams, that have breadth and depth
44:59and proven credibility.
45:01To that extent, I suppose we're blessed
45:03in the RTS portfolio, we have some of those people.
45:06So we're in a unique position of actually saying no
45:10to a lot of money and choosing the money that's not,
45:13this is a highly sophisticated investor term
45:15that is not gonna be an investor PIA.
45:18It stands for pain in the ass.
45:20And so we don't see any shortage of capital
45:23out there at all.
45:24It's a matter of picking and choosing.
45:25And if you have the right team, you can do that.
45:28I might add, I think that for one concern I have
45:33as a relative newcomer is that even when there are
45:36very quality companies, that because the industry
45:39has been so professionalized relative to the past,
45:42where you have people who come right out of school
45:43and who spend, they can spend 15, 20 years in a career
45:46doing nothing but work in venture capital.
45:48And so the degree of kind of,
45:51it's kind of the deep surveying of the landscape
45:56is so much more comprehensive, so much more exhaustive,
45:58so much more professional than it was before
46:00that any company that's starting to show traction
46:03immediately attracts attention and is courted
46:05by a horde of VCs.
46:07So if you are a struggling entrepreneur on the margins,
46:10it can feel very grim indeed.
46:12But for those that are doing well, you're a rockstar
46:15in a way that I think is unhealthy.
46:18It sounds grumpy because I'm on the side of trying
46:20to bid for those opportunities, but what I observe
46:24are valuations being bid up to levels that,
46:27where I think it's almost definitionally
46:29the winner's curse for who wins that.
46:31They're the ones who are willing to outbid all the rest.
46:33And the valuations then, what's required on the outside,
46:37on the other side of it, I think is often,
46:39it's unrealistic, certainly risk adjusted,
46:42it's very unrealistic.
46:42I've seen this over and over again.
46:44And so why is that such a problem?
46:48I think because it's a misallocation of capital,
46:51but then I've also witnessed when companies
46:54get too high a valuation too early on,
46:57it sends, it's distorting.
46:59It's distorting of strategic priorities
47:01and it causes all kinds of problems
47:04when there's a correction on the other side of it.
47:05It's much healthier to have a slower
47:07but kind of monotonic increase.
47:09I tried telling that to a founder,
47:11it always falls on deaf ears, 100% of the time.
47:14But in the end, I believe that's what will happen.
47:20Awesome, thank you all for your thoughts today.
47:23If you want to stick around and chat,
47:25we have a few minutes, but otherwise,
47:27we'll see you in the main stage tent in 15 minutes.