Hi, everyone.
Wow.
OK, hold on.
Welcome.
This is going to be a very dynamic conversation today.
Oh, Nate, I'm so sorry.
Did not see.
No, no get coffee.
I just want to say that it's this is very
much an interactive session, so we'd like to hear from
everyone.
So if you want to talk, press the little man
person speaking button until it turns red and then when
you're done speaking, press it again because there can only
be several mics on at the same time.
And this session is on the record.
We are recording it.
That's why it's important to talk into the mic.
And yeah, so I think that's it.
I want to start with kind of setting the stage.
Battlefield tech is on the rise.
I read that between 2021 and 2023, VCs invested $108
billion into defense tech companies.
Why do we think that's the case?
I want to ask you all this question, but Jenny,
let's start with you.
Sorry, yes, an intro yourself, please.
OK, cool.
I'll just do a brief intro.
So my name is Jenny Xiao.
I'm a partner at Leona's Capital.
We are a research driven early stage fund investing primarily
in seed and precede stage companies and AI data infrastructure
developer tools, enterprise as all those good stuff.
And my personal background is I was a researcher by
training, did a PhD at Columbia.
I was a researcher to open AI previously before leaving
to join the onus and just going back to Polinas
question about why VCs are suddenly investing a lot in
defense technology.
I think geopolitics is a really big aspect because of
the Russian Ukraine war and now, you know, seeing what's
happening in Israel and Palestine, suddenly geopolitics and war and
conflict become center, you know, top of mind for a
lot of VCs.
This has been VCs have been enamored.
They've been like in love with enterprise SAS and like
software for like the longest time.
And right now because of these geopolitical trends, suddenly people
are paying more attention to, to hardware until I, you
know, defense technology.
And actually, I personally have a hot take, which is
I think software margins.
And I think software is no longer going to be
as good of a business then next like 20 or
30 years, mostly because of AI, because AI makes it
so easy to build software.
And a lot of companies are going to decide to
build instead of buy.
And essentially, if the cost of generating code goes to
0, the cost of software goes to 0.
But it's not the same for hardware.
And I think defense technology is a great area where
like you have, you almost have to have some sort
of hardware and have some sort of hard technology.
And I think that's where value is going to accrue
in the long term.
And also because a lot of these defense technologies are
dual use, that means that you can sell to enterprise,
you can sell to like businesses, but also can sell
to the government.
That also broadens your market.
Of course, like a lot of them are not dual
use.
So for those you're only selling to the government.
Hi, good morning.
So by way of personal introduction, I'm Marcus Rue.
I joined the partnership of battery less than two years
ago.
So I'm I'm here as a as an investor, but
my profile and disposition is much more as a as
a founder.
I Co founded a company in 2001 called Guidewire software.
It was very long entrepreneurial journey.
I went public in 2012 and I transitioned to the
chairman role in 2019 before joining the, the so-called dark
side here.
I, it was very long and arduous entrepreneurial journey and
it's was a completely different era in Silicon Valley.
And it's, it's been striking to me to see the
contrasts from, from, from my time, so to speak, as
a founder to the present.
As for defense, defense tech specifically, I don't have any
special insights other than I think there is a general
awakening to the possibility that there is enterprise value creation
in other areas besides, you know, besides SAS software, which
is, which is a good thing.
I'm, I myself have taken a lot of interest in,
in climate tech, weather tech and in space tech and
earth observation.
You know, these are all areas that were considered effectively
uninvestable, I think for, for a long time.
But I think there are a host of reasons why
why I think they're very interesting opportunities.
Good morning.
My name is Augustus Tirico.
I'm the founder and CEO of Rainmaker.
We control the weather by way of cloud seeding to
make it rain and snow more.
And so with respect to the rise of defense tech
or battlefield tech, I think there's a couple contributing factors.
One is the end of American unipolarity.
It's not that like there are some conflicts that may
develop over the course of the next decade, it's that
there's hotspots globally that will become full scale regional wars.
So you see that obviously in Eastern Europe, you see
that in the Middle East.
I don't think people pay as much attention as we
ought to West Africa and East Africa.
But East Africa, particularly as Ethiopia dams the Nile, is
going to become a place where people fight over resources
very aggressively.
And the State Department's interest in maintaining peace and alliances
there will result in defense budgets being allocated to these
other regions of the world.
And so there's there's opportunity to capitalize on that spend,
especially as with the advent of drones, with the advent
of all these other technologies, the primes fail to keep
pace.
So so start-ups will capitalize on that.
I also think there's like a Gen.
Z component here as well, which is that software is
not cool anymore.
Like my and and and it's extremely useful.
And I grew up in the software era.
So I don't really know any alternative.
And perhaps that's why like it doesn't seem as exciting.
But my friends graduating from all of these prestigious universities,
sure, plenty will go to BCG, plenty will go to
YC and start software companies, but it's not something that
decreasingly the best and brightest want to participate in.
And so the human capital that's being allocated towards hardware
and defense tech is is more exciting now I think
as well.
Hey everyone, my name is Nate.
I'm one of the founders of EVOL.
We do autonomous drone deliveries of medical supplies between medical
institutions.
Yeah, I guess I pretty well aware of dual use
of drone technology.
It's kind of our bread and butter.
But I think there there's two fundamental drivers that are
driving the growth of like specifically a defense tech.
The first being like you mentioned, like a lot of
hotspots around the globe, but specifically what this what the
change from previous conflicts to now is that now you
have a series of conflicts that can act as a
test bed for the technologies that you were developing.
And you can mostly do these almost free of free
of charge.
You don't you're not paying for pilots, you're not paying
for exclusive access.
You have Ukraine, both Augustus and I both have a
friend, Nelson Gundo running a drone company and he can
just send drones to Ukraine to test the latest firmware.
And you're, you're testing these drones literally in their, their
in their final use case.
And I think you haven't really had that opportunity with
a lot of different products that were defense tacked.
I mean, prior to this, you didn't have really have
many major world conflicts that you could just enter.
And so that's driver number one.
And then driver #2 being you have a this growing
conflict with China.
And I think this is going to be every conversation
we end up having with the military is centered around
what exactly are you doing about China?
How will this be able to perform in GPS tonight
area?
Do you use Chinese components?
And I think Geo, to your point on geopolitics, I
think as we see the government, the US government kind
of clamped down on a lot of supply chain issues
are the lot of the supply chain coming out of
China to that supply drone developers.
I think what was used a lot of homegrown US
based drone companies become extremely profitable, especially if you're building
some of these fundamental components like C2 interfaces and, and
and perhaps different methods of control.
Very interesting.
And I want to just a, a show of hands.
How many of you are either investing in or creating
a company around like hard tech, robotics, space drones?
OK, so this is really interesting because I remember when
I was at Fortune and I want to say it
was 2017 or 18, I wrote a story and I
interviewed like Founders Fund and, and Palantir and all, all
these people.
And it seemed like it was a really hot take
to be working with the government on some of these
things.
Now it's like, oh, obviously this is the hot new
trend, macro speaking.
Is there just like a rise in nationalism or American
dynamism as people are calling it?
Is that a thing?
Augustus yes, very, very much so.
Like I, I think again to to speak in terms
of like generational dynamics, especially given well, certain conflicts abroad.
Like it, it was never cool to like the government
before, right?
It was never cool to like your nation.
I don't think.
Like it was maybe after 911 for a spell, but
then everybody became pretty quickly disillusioned by the Iraq war.
To be pro America is something that like everybody is
rallying behind now.
Like do you remember is political, I guess, but there's
no way around that.
The protests that were going on in on campuses like
the the pro Palestinian protests that were going on, frat
Bros from across the country were rallying with American flags.
And then they were praised by national media all over
the country for doing it.
Like nationalism is certainly on the rise, for better or
worse.
And then, and then I would, I would add on
to that, like, you know, working with the government too,
we're never going to cut spending.
Like we, we, I think people have come to terms
with the fact that like we're only going to see
more inflation.
We're only going to see government budgets grow.
That makes a great customer if the budget only ever
grows, right?
And then the programs are sticky.
Like how often do programs get cut even within the
DoD?
Almost never, even when there's better technology available.
So like, talk about lifetime value, it's a bajillion dollars
when you're working with the DoD.
So I think, I think that's part of why people
want to work with the state as well.
Yeah, just adding on Augustus's point, I think, I think
there's like 2-2 trends we're seeing right now.
One is there is a trend towards political conservatism in
Silicon Valley.
I don't know if you guys have been paying attention
to the RNC at all, but a lot of these
conservative candidates are actually funded by Silicon Valley venture capitalists.
And definitely you're seeing a lot more VCs, a lot
of more founders coming out in support of Trump, in
support of conservative ideologies.
Some of them say that liberalism has gone too far.
Some of them, you know, have their own tax interests
or, you know, economic interests and supporting the Republican Party.
But definitely we're seeing a trend towards conservatism.
And I think this is one of the reasons why
investing in defense technology is no longer taboo because just
like five years ago, if you're like, oh, I work
for the US government or the DoD, well, that's a
big red flag.
I still remember the protests at Google when Google had
this contract with the D and everyone was like super
pissed about it.
But nowadays, I think especially among founders and VCs, working
with the government and working on defense is actually becoming
a lot more popular.
I think the second factor is the amount of defense
spending we're going to see in the next like 1020
years because as Augustus mentioned, and also like Nate also
pointed out this as well, because of the conflict with
the US and China, the US government is really going
to pump up defense spending.
If you look at the amount of GDP that was
going into defense during World War Two, World War, World
War One, and also like during the Cold War, and
you look at like the amount of defense spending as
a percentage of GDP today.
I forgot the exact numbers, but it's significantly down from
the peak numbers.
And that just shows you that there's a lot of
room for growth.
And if defense becomes like 10% of GDP, I think
it was like during the Cold War or something, I
forgot whether it was 10% or like 20%.
Well, that's a large market.
And then, you know, a lot of VCs are like,
OK, that's like a really large Tam.
Yeah.
Marcus Mccammon, president and chief executive of Karma Automotive So
prior to being the CEO of karma I I ran
an engineering services company that did a lot of work
in the defense space.
I would say that the trend in tech event tech
investment in DoD is not new.
So there's, there's a couple of fundamental things that have
been happening.
1 the popularity of people moving into the military as
soldiers has declined precipitously over the past two decades.
So that the, the, the necessity to have unmanned activities
on the field of battle has gone up.
The other thing is the, the machinery on the ground
is 50 years old, like the eight, the A1 Abrams
tank, the powertrain in that tank was designed in the
60s literally.
I know that because I worked on it, OK, I
and I worked on the replacement technology for it.
So, so there's a couple of, there's a, a structural
thing that's broken inside of inside of the DoD that
that needs to be upgraded.
But the other side is, and we saw this in
2010 in the first wave of EV companies, there is
a risk mitigation investment strategy with government funds.
So when the ATVM loans came through and Tesla got
the first loan, Silicon Valley did not want to invest
in any EV company or EV related company that did
not have a have government funding.
That government funding has become a staple of, of, and
I'll speak from the perspective of people in the tech
space and, and, and other entrepreneurs that, that low risk,
very predictable, very consistent funding.
And oh, by the way, the, the portfolio, once I've
gotten that book of business, I can hang with it
for in perpetuity.
Those things have also become a, a strategy from both
sides of, of, of the, of the table.
So just wanted to add that $0.02.
Hi, how's good morning.
I'm thinking how to frame this.
But so I guess as you said, very wisely, the
DoD is like a bajillion dollars.
And that's true.
And I think about in, you know, in in defense
spending, it goes to basically it's like through a few
big companies like Lockheed Martin and a bunch.
Here's one of the things I'm trying to actually, I'll
ask a question for the room.
Who here likes paying taxes?
Raise your hand.
No, I mean it.
That's a problem.
And I want to, I want to be serious about
this for a second fairpoint.
Maybe I should be more yeah, the US centric.
But that that's the issue is actually I remember after
World War Two, I think was Henry Ford said Ford
pays taxes to the government.
It's good for the US and it's good for the
US is good for Ford.
And now we have this dichotomy where we all want
to get away from taxes, spending's going up, we need
help to modernize infrastructure.
But what happens is they get freaking gouged because it
all of a sudden it's massive payday for these private
companies that want to make insane margins on up getting
powertrain for the Abrams tank.
Something's got to give.
And so part of what I'm hoping and I don't,
maybe there's a provocation.
I'd like to hear more.
You know, maybe the question is, does this resonate?
Because I don't know what I'm talking about, but it
feels like we need some new players maybe out of
the venture universe that come in and are capping margins,
are not trying to be this insanely wildlife 90% margin
business because it's best for the country, which in turn
is in best for, you know, for business.
Good morning.
I'm Tom Soto, Latimer Partners is my family office.
You know, I'm a long time impact investor.
I've managed 3 private equity funds, 200, three, 110 billion
and long time observer but also a former State Department
appointee by Bill Clinton.
And I ran the transition team for Obama, Biden and
had something to do with the TARP one program that
went through and pulled the country back from the edge
of the Cliff.
And you know, there's a lot to be said about
Silicon Valley and defense.
It's not a new relationship, you know, Silicon Valley, and
we are all here because of a letter that was
written by Albert Einstein to Franklin Roosevelt.
And that letter led to the Manhattan Project.
And that was a seed capital for much of what
we're discussing.
The next moon shot in the next generation of economics
was when peace broke out in 1989 and the Clinton
administration came in and had to justify the trillions of
dollars that went into the Cold War.
And when we had to access those assets and convert
them for civilian use, that gave to us a lot
of the things that we have now.
They gave to us hybrid technology, which we had been
using in tanks and a submarine since World War One,
electric vehicle technology, the Internet, cellular, you know, which went
to Qualcomm.
Thank you.
And as we sit here now, we're looking at the
next generation of output that will be occurring as a
result of the the restocking of globalization where things are,
especially with China, we see the obvious in the Middle
East and the Ukraine.
And then the larger questions are Taiwan, South Korea, India.
And all of that said, it gives rise to a
high demand for innovation, which by the way, doesn't occur
in government, right?
Which is why we had the Oppenheimer's of the world
come in.
And even to this day, the UC regions still own
a good piece of New Mexico, right?
That's where Sandia is, that's where Los Alamos is and
it's the Department of Energy, UC regions asset and we
will continue to see that.
So this is where the opportunity is going to be.
The reason why I don't necessarily you know Jenny by
on to the the fig leaf argument that our employees
didn't like working with DoD.
There was a lot of Silicon Valley that was just
entrenched in China and could not decouple.
And it was Palantir and Palmer Luckey and others that
said, hey, there's some opportunity here.
But there's also a way that we could improve national
security because the Microsofts and the Googles of the world
were unwilling to build that relationship.
So they did, and now they're knocking the leather off
the ball.
But they're also doing a huge service to the American
people by bringing this innovation to the forefront and giving
it to our allies and so forth.
So this is not going to be a, we're not
even near the end of this cycle.
It is going to continue on and depending on what
happens in November will determine the velocity of how this
may occur even further.
And quite frankly, I'm of the of the opinion that
under the current administration, we would actually see an increase
in velocity with that type of relationship.
So, you know, there's a, there's a good amount of
conversation for this.
The other side of the thing and what I invest
in has been climate tech and response to climate change.
And you know, there is a rather generous opportunity there.
If you saw this morning's Wall Street Journal and my
post that will come out later on today, there are
about 25,000,000 acres burning right now in Canada.
That's about $10 billion of economic loss.
At the same day, you know, Intersect is announcing a
$900 million commitment of debt and equity to build battery
storage of all places in Texas, which doesn't believe in
climate change.
So thank you.
Yes, and good morning, Michael Marcotte.
I'm the chairman of the Archies Global Group and the
former Co founder of the National Cybersecurity Center and it's
Rapid Response Center.
As far as technology companies in Silicon Valley working within
what Eisenhower famously called the Military Industrial Defense Complex, they
don't have to be contractors directly with the government.
AWS, Google and Microsoft all provide services and software to
the largest defense contractors on the planet.
So by nature of that, they are part of that
complex.
That's a statement of objective truth, not one that is
politically motivated at all.
As far as taxes go, and I would like to
believe this is a statement of principles above personalities and
politics.
Governments increase revenues by increasing employment.
You increase employment by decreasing taxes.
As an economist, this can mathematically be explained to a
fourth grader.
Thank you.
Any other comments?
Marcus, I want to talk to you.
You started your company very shortly after 911.
Was there this sort of similar sentiment around, you know,
being proud to be an American, etcetera in the tech
space?
Let's see.
Well, the many people in this room who can remember
that and some who are who are maybe of the
next generation.
It was a extremely sobering time.
I was early in my career and I think the
sentiment that was internalized by the few, the few people
who wanted to start companies then because that was not
the that was not the common, that was not the
conventional wisdom.
I had to start a company after, you know, the
NASDAQ lost 97% of its value, etcetera and there was
a nuclear winner in venture capital.
It was not the obvious time to start a company,
but those that that wanted to and my Co founders
and I were among them.
It was a sense that we had to do things
that were serious, that the time to it was a
we had just gone through an era of great frivolity,
of excess, of self-interest, of short termism, of kind of
fetish of new ideas that didn't really matter.
Selling dog food online, you know, who thought that would
ever be worthwhile?
And instead of if we're going to do something, it
had to be serious and sober.
And so it's not coincidental.
My company served the most unglamorous industry in the world,
the property and casualty insurance industry.
And, you know, it was going to be a long
journey to build quality software.
I don't think it was a nationalist time.
I think everyone recognized that terrorism was a, you know,
was a profound threat that any, any thinking person with
a moral sense would recognize had to be stopped.
But as entrepreneurs or as business people, as professionals, we
felt like let's just try to stop the silliness in
the self-interest.
History repeats itself.
And, you know, one of my observations is now a
somewhat older person is that, you know, that there are
cycles where people get over exuberant again.
And then it takes some some level of, of crisis
before they recognize it's time to to be serious.
And I think we can't help ourselves as a species
from these cycles of over excitement and then sobriety.
Yeah, it does feel like we're in a more sober
time right now.
And for the founders, Nate and Augustus, how are you
guys thinking about building and funding your companies and not
being frivolous with the capital?
One, one thing that I think about a lot that
increasingly my friends, particularly in El Segundo, and I'll diverge
just for a moment and saying like to to the
point about like the rise of nationalism or patriotism in
El Segundo, which is this podunk neighborhood in Los Angeles
that's in between LAX and the Chevron oil refinery.
It's where SpaceX was founded, but it's not the especially
chic part of Los Angeles by any means.
All of the startups compete to see how many square
feet of their walls can be covered in American flags.
Like who has the biggest flag, who has the most
flags, Who has the most exotically woven flags or if
anybody can find old ones from previous Wait sorry I
just want to just clarify, are those founders are mostly
American or are they immigrants?
They are with the majority are American.
There are some that have immigrated from East Asia, South
Asia or Southeast Asia, some from Europe, but the vast
majority are American.
Then with respect to funding and not being frivolous with
capital, you know, Nate and I were having a conversation
in the car yesterday and like one, one thing like
I've, I've never really tried to run a venture scale
company outside of the OR prior to the like 2022
crypto collapse, right.
So perhaps once it was much easier to fund a,
a company off of a slide deck and ideas.
Perhaps now there's like more rigorous metrics required of the
company.
I I think that whatever the requirements of venture are
at a given point in time, you, you just have
to rise to the occasion to meet, whether that's revenue,
traction, technical development, something like that.
And, and so no matter the macroeconomic environment, I think
founders generally are, are pretty adaptable.
The other thing though, is like there's so many other
forms of capital available besides venture equity.
And I, I think that I perhaps because of the
incentive structure in VC or just because people don't talk
about it or it's not on Twitter, like nobody is
aware of all the different debt instruments that exist.
Nobody is aware of all of the different equity providers
that exist, like different equipment financing even you can lever
up ridiculous amounts from a small amount of venture equity.
And so using those tools as a means to sort
of decouple from venture, perhaps especially when it's hard to
raise venture capital is something that we've done at Rainmaker.
It's something that a lot of other companies have done.
And and then like non dilutive funding is all over
the place as well.
So just figuring out where alternative capital is is something
that I think perhaps the current macroeconomic conditions have have
pushed founders towards Nate.
So this is my third company.
Prior to this, I built a wearable robot company.
Maybe some people heard of it.
It's called Suit X.
We built wearable robots for augmenting human strength.
This came out during the Iron Man days.
You you might have seen some stuff on the news.
So during that time we could, we could raise money
and be much more speculative about what we were going
to do with that money.
The government was giving us money to experiment and try
different things.
We could put 250 caliber machine guns on each arm
and make a soldier that could be a mobile gun
to it.
That was an experiment and we had a lot of
room to do that.
I think in today's environment, what what's different from when
we started Studex and then when when we what we
started doing with a Vol is we came into a
Vol with a laser focus on the product and the
customer, very specific use case.
We weren't fooling around.
We saw a lot, a lot of other drone companies
in the space and you heard Amazon trying to deliver
packages to your back door.
You hear drone delivery doing e-commerce.
You hear people trying to deliver hot dogs with drones.
None of them, none of that.
I mean, I don't know about anybody here.
I'm not willing to pay $7.00 to have my hot
dog delivered by drone.
It just doesn't quite make sense.
So what we what we want to do is we
came in laser focused on the product.
And I think that that's something that when, when we
think about, well, how do we, how do we spend
money?
What do you spend money on?
Do you spend it on trying to figure out how
to battery, how to build a double dual wielding 50
caliber machine gun guy or or do you focus on
a very tight application that you know extremely well and
then you try to build a really good product around
that particular application.
And I think there's a much so far the need
to be capital efficient and really laser laser in on
how do you build the best product for a very
specific use case.
I think that is more relevant now more than ever
before.
And if, if you, I mean, I, I'm sure a
lot of, we have a lot of investors in the
room like founders.
As a as a general rule of thumb, meet should
be laser focused on building to a very specific use
case, especially in today's day and age where venture capital
is kind of converging on this, on capital efficiency, demonstrated
proof of of use, a use case that actually makes
a lot of sense.
This is why testing military drones in Ukraine makes a
lot of sense, right?
You can prove your value right off the bat for
very specific use case.
And you're not it's not some nebulous use case.
Oh, we build drones.
Well, what do you build them for?
Anything.
And I think when we think about being really frugal
with venture capital dollars, it's not my money, it's my
investors money.
And so therefore I don't and they're not giving it
to me to fool around.
And and that's probably for, for better for the sake
of innovation as well, right?
Like if if necessity begets creativity or breeds creativity, what
whatever the old platitude is, right?
Like perhaps not being given money just to experiments on
some new thing that might be interesting and instead just
iterating towards the very best version of some very specific
vertical will result in more developed technology in that vertical
rather than just like a sort of Google X Playground
environment would.
I think that's true in some cases, like not to
finish at all, but like, like I think that's, that's
that's true in some cases.
I think if you're riding the wave of like, for
example, AI when a when Gen.
AI was first coming out, you see a whole bunch
of companies that are really don't know what they're going
to do with this LLM, but they're going to do
something.
Maybe they'll do customer service and they'll pivot to like
worker training or the and then they'll pivot to some
other use case for LLMS.
And I think being able to iterate quickly between these
and find the niche where that technology makes sense that
I think being having the capital dollars to do that
can create some really incredible products.
I think a lot of the most useful products that
we see today were born from a pivot that a
founder did or a pivot that a company made in
response to being able to test something new.
I think sometimes as industries get more mature, like we
could say that the AI industry is kind of starting
to cool off.
Then it becomes a little bit more necessary to kind
of dial in on a very specific product use case
where you can be capital efficient to solving a very
particular problem versus taking kind of like the shotgun approach.
But early on, when there's a new technology coming out,
then I, I think that there is a certain amount
of value to having the resources to try different things,
make mistakes, find the niche that you that really, really
matters.
And then once you've figured out what that niche is,
then you spend the capital dollars to double down on
that particular thing.
Yeah, I just wanted to like echo Augustus and Nate's
point about capital being scarce in today's environment.
I'm an AI investor.
AI is incredibly hot.
A lot of people think AI companies are incredibly well
financed.
You always see these news of, you know, AI companies
raising 100 million rounds.
I think the reality is a little bit more nuanced
because if you look at the total amount of money
that's going into AI, it's like, I don't know, 14
billion last year or something like that.
The vast majority of that money is going into the
hot companies like the open a eyes of the world
topics of the world or maybe a handful of like
really, really hot startups.
The average company is still struggling to raise capital.
I would say in this era of capital scarcity, you
see a lot more inequality and amount of capital raised
between the top players and like the average players and
the so-called like hot companies.
The top players may or may not be the best
companies out there.
Another point, I wanted to go back on Augustus's point
on other instruments like debt financing or other sort of
financing for startups.
It's it's good in theory, but it's like actually harder
to do for a lot of companies, especially software companies.
I know some companies who try to do that.
It's very hard to raise that.
It's very hard to raise private equity, private equity finance
in private equity, people are just a lot more sophisticated
on the financial side than like venture capitalists and they'll
let in their term.
She's still have like all these like, you know, crazy
terms that like VC's never heard of before.
And a lot of founders, if they sign them that,
you know, they really understand what these terms are doing
to them.
So like, you know, the advice that I've been giving
to founder friends who are trying to raise alternative sources
of capital is always be very careful about what you're
raising.
And I still think venture capital is the best source
of capital for startups, especially the ones to Nate's point,
that want to experiment because, you know, with other sorts
of, you know, financial instruments like debt or like private
equity, it's very hard for you to experiment.
Oh, not like crazy as in like they're like, you
know, super out there.
I've just like terms that like VCs don't really, because
I'm I'm an early stage investor as investment seed and
precede companies.
I usually just write a safe like there's no, I
don't, I don't do value.
I don't do like valuations.
I don't have like any, you know, super complex terms.
It's just like a simple safe.
I pull it off of Y CS website.
That's usually what I do.
But like, and you know, if you're raising private equity,
they have really long terms and pretty sophisticated.
That's that was my point.
Not that like they're trying to screw you or anything,
but just that they're much more sophisticated than like early
safe VCs covenant.
You know, I think that hearing what you're describing, be
mindful that you're doing this all in an era of
of some regret, high suspicion and dwindling capital with runways
that portfolio companies have exceeded, lots of down rounds occurring.
And as someone who sits on the other side of
the table, seeing the 20% reserve dwindle as a result
of lack of exits, you know, that gets concerning.
And so I like the term pivot, but focus, do
what you said you were going to do and do
it quickly because the private markets are frozen.
We have a national trauma going on that has led
to freezing of these markets.
And it's not going to be as though there's an
unleashing of them in November.
So this is going to be the status quo at
least through Q2 or Q3 of next year.
And that capital is going to dwindle even further.
At the same time, a lot of funds are sitting
on hordes of capital, but they don't want to deploy
it because it's going to be a down round.
They're putting good money after bad.
And their investors, The Dirty little secret is our pensions,
right?
And Mark Sester had a good point that now is
a good time for secondaries because you could get them
at a discount that could be profitable with an uptick.
And the pensions are unwilling to fund these down rounds
because they have unfunded mandates already.
If you look at CalPERS and counselors, the reason why
they're hitting some of their benchmarks is because they're having
a much more conservative approach to deploying their capital than
their GPS are.
And so as founders, you have to be mindful of
the upstream economics.
Where is that capital coming from?
Maybe it's coming from founders, maybe it's coming from Sequoia,
but where are they getting their capital?
They're getting them from CalPERS and Calsters who have FTX
on their mind and Bravo and Sequoia.
And so there's a, there's a whole stream of effect
that occurs when you're sitting at your whiteboards plotting out
the next two quarters that goes upstream through folks like
me who manage this capital.
And I'll sit there and either roll my eyes or
say, you know what, let's give it a try.
So you know, it's, it's, it's nothing that's going to
end very quickly.
And it's a bruise that might get bigger, but you're
going to have to live with it and get through
this era.
The good news is that all the dynamics that are
in place forcing these new economics, forcing these new markets
are only going to get more aggressive and widen even
further because of the demand for greater innovation that has
to occur in order to move, you know, the size
of humanity forward.
Curtis Anderson, I run Nursa Marcus, I'd be interested in
your take on this given your recent experience in history
on either side of the fence.
Feels like a well informed position.
I'd respectfully disagree with anyone who says the capital is
scarce right now, including any including any founder.
I think it's I say this respectfully.
I think it's ludicrous.
The venture industry is five to 8X somewhere roughly in
size from when I started my company.
There are roughly an order of magnitude more venture capital
firms.
My Co founders and I we would high five when
we got a meeting with some with AVC on Sand
Hill Road.
Now I find myself in a scrum of 10 to
20 VCs approaching any company that has, that has good
metrics.
So I find it, it's, it's sometimes amusing to me
because people will, I will hear founders maybe who are
a little bit younger than I am, but maybe not,
not straight out of school who will say, you know,
I'm hoping that it'll regress to the mean.
And I said that be careful what you wish for,
you know, because the, the mean may not be what
you're what you think.
You know, when my company went public in 2012, you
know, we were, we were hopeful for something like A7
or 8X of revenue multiple.
And our bankers at the time said it was a
very veteran one said, you know, you should know that
the long term historical average for for what a quality
software company trades at over the long term is somewhere
around 3 1/2 to four times.
I, I share that story sometimes to entrepreneurs now, they
can't believe that they think I'm, I'm telling some kind
of fairy tale from, from our Horror Story.
They can't imagine it.
I think valuations now are astronomical.
The ones that I've not, not just the ones that
I'm behind, but the ones that I that are actively
being negotiated relative to the longer term historical average.
So I don't, I don't want to talk like a
grandfather, but sometimes I say, if you, if you with
the benefit of greater historical perspective, you'd realize that we're
still in a time very elevated and available capital.
And if anything, it's caused a disservice.
I would say, because it has allowed companies that perhaps
in an earlier era would not have been funded, get
underway with a kind of false, false positive signal and
would not have been considered investable, you know, 1520 years
ago, but now get underway.
They bid up, you know, bid up compensation.
I'm on the I'm always on this side of the
founder.
So I always want them to succeed and I always
believe in them pursuing a dream.
But objectively speaking, mortality rates are no or just as
high as they ever were.
And so it's there's been a misallocation overall.
So Speaking of a dirty secret, I think it's been
kind of whispered at this conference.
I've heard that, you know, venture capital as an asset
class is is it's just basic arithmetic.
It's going to disappoint.
There's far too much just the basic, basic arithmetic that
that roll off both yesterday walkthrough.
It's just addition and subtraction and multiplication.
It will tell you that it is impossible to deliver
on the aggregate returns that the industry would need in
order to justify how much there is right now.
Exactly.
So, you know, unsustainable things tautologically don't last.
And then the question is, in what way does it
come to an end?
Is it slow, fast, You know, does it happen by
crisis?
Does it happen through a slow dissipation?
I'm not sure venture capital will be around forever.
Software is infinite.
They'll always be more opportunities, but I think it will
be an era that will be there'll be an era
of disappointment and I think ahead, even as these miraculous
new technologies continue to impress.
What?
Thank you.
What do you think is most important about what comes
next for success?
It's a very broad question.
It's, it's just to state the obvious that in the
long term, you know, any, any offering that you bring
to that you bring forward as a founder has to
meet the market at a certain moment where it solves
the problem.
And when capital is too abundant, you can delay that
moment of reckoning for a very long time.
And you can, you can do things that, that make
it feel like traction, but there aren't really.
And so, you know, when you're really up against the
hard edge of survival of like, we're either going to
sell a product that someone is going to give us
cash on the barrel for, or we don't exist.
It really focuses the mind.
And I meet a lot of founders.
They're all passionate, wonderful people.
They're my tribe.
But I see a lot of them whose minds have
not been focused in that way, in that way.
And it's possible to defer that, I think, because there's
such a welcoming community.
And I think that's a wonderful thing.
There are all these incubators you can there's so many
blogs, you can spend all your time listening to podcasts
and you can just feel like you're immersed in a
kind of startup ecosystem that feels like you're making progress.
And I think that's good because it's a lot less
lonely than it was 20 years ago.
But I think it also sends sometimes a false positive
signal.
If I can, if I can wait, weigh in on
that.
Raja Adala Churchill Asset Management.
I think, I think the reason I think it feels
like capital is scarce.
If you like to look at the objective numbers, it
is not scarce.
We're sort of back to 2018-2019 numbers in terms of
total venture capital raised.
I think the, I'm probably going to insult some people,
but I think the last five years I think our
industry has gotten away from being, being a little more,
you know, disciplined rounds getting raised with no new progress,
no information.
Risk free rate was 0.
Now risk free rate is 6%, five, 6%.
So what I think what we're seeing is actual criteria
being met before you can raise the next round and
it's just a, it's a correction back to normal.
I think, you know, compared to 20/12/2013, if anything, capital,
there's too much capital currently and that's what, you know,
Roloff was saying yesterday.
I would echo your comments, yours and yours.
There's actually a ton of money out there.
The difference now is that people selling pictures of monkeys
can get out of the room.
And so the capital is chasing organizations that have leadership
teams that have breadth and depth and proven credibility.
To that extent, I I suppose we're blessed in, in
the RTS portfolio.
We have some of those people.
So we're in a unique position of actually saying no
to a lot of money and choosing the money.
That's not, this is a highly sophisticated investor term.
It is not going to be an investor.
PIA stands for Pain in the ass.
And so we, we don't see any shortage of capital
out there at all.
It's, it's a matter of picking and choosing.
And if you have the right team, you can do
that.
If I might add, I think that for one, one
concern I have as a relative newcomer is that even
when there are very quality companies that because the industry
has been so professionalized relative to the, to the past
where you have people who come right out of school
and who spent they can spend 1520 years in a
career doing nothing but work in venture capital.
And so the degree of kind of, it's kind of
the, the deep surveying of the, of the landscape is
so much more comprehensive, so much more exhaustive, so much
more professional than it was before that any company that's
starting to show traction immediately attracts attention and is courted
by, by a horde of VCs.
So if you are a struggling entrepreneur on the margins,
it can feel very grim indeed.
But for those that are doing well, you are, you're
a rock star in a way that I think it's
unhealthy.
I mean, it sounds grumpy because I'm on the side
of trying to bid for those opportunities.
But what I what I observe are valuations being bid
up to levels that where I think it's almost definitionally
the winner's curse for who wins, that they're the ones
who are willing to outbid all the rest and the
valuations then what required what's required on the outside, on
the on the other side of it, I think it's
often it's unrealistic, certainly risk adjusted, it's very unrealistic.
I've seen this over and over again.
And so why is that such a problem?
I think because it's a misallocation of capital.
But then I've also witnessed when companies get too high
a valuation too early on, it sends it's, it's distorting,
it's distorting a strategic priorities and it it causes all
kinds of problems when there's a correction on the other
side of it.
It's much healthier to have a slower but kind of
monotonic increase.
I tried telling that to a founder.
It's always falls on deaf ears 100% of the time.
But in the in the end, I believe that's what
will happen.
Awesome.
Thank you all for your thoughts today.
If you want to stick around and chat, we have
a few minutes, but otherwise we'll see you in the
mainstage tent in 15 minutes.
Thank you.