Deep Tech Gold Rush: Smart Boom or Future Bust?

Narrator: Foreign.

Samir Kaji: Welcome back to another episode of Venture Lock, the podcast that takes you behind the scenes of the business of venture capital. In today's episode, I'm joined by three deep tech investors and friends of the show. Nate Williams from Reunion Labs, Sunil Nagaraj from Ubiquiti BC and Geet Perilmeter from Grids Capital for a roundtable on the state of deep tech and the changing venture landscape. This podcast was inspired by a conversation the four of us had at, uh, the Allocate Beyond Summit and during that we wanted to go deeper into what does deep tech mean today? Why is it suddenly attracting so much capital? And how economics, government tailwinds and AI have pulled these once niche technologies into the mainstream. We also explored the growing concentration of capital in a handful of hyperscale winners, the tension between consensus and non consensus investing, and what all this means today for emerging managers, LPs and founders. We really hope you enjoy our episode.

Narrator: Sameer Kaji is the CEO and co founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third party investments or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests or Alicait. Allocate or its clients may maintain relationships with or investment positions in guests, third

Sunil Nagaraj: parties or securities mentioned in this podcast.

Narrator: This podcast is for informational purposes only and should not be relied upon as

Sunil Nagaraj: a basis for investment decisions.

Samir Kaji: Guys, it's great seeing you all and this episode, uh, actually was a follow on to a conversation the four of us had back at the Beyond Summit and we were talking about post the summit, all the things we were thinking about, all the conversations and a lot of threads got pulled from there. The Deep Tech Where's Deep Tech today? Which all of you are Deep Tech investors. The second was around the concept of how concentrated capital is becoming both at the fund level and then also with companies. And we were just all thinking through, is this like a moment in time? Is this a, uh, good proxy for what's going to happen in the future? And I think a good place to start because we're going to pull on each one of those threads independently. But the first thing is Deep tech is something that we've all talked about and thought about for a very long time and it seems like it's having a bit of a renaissance moment with a lot of capital. I think I mentioned this, but a third of the capital over the last year has Gone into what I would consider deep tech. Now, for all the people listening, how do you guys even define deep tech today? Because I think it's expanded in meaning.

Nate Williams: Great to be here, Great to see you guys. As always, I would say that the key definition of deep tech has to do with technical prowess, moats, deep engineering skills, and very unique set of capabilities that will create some edge into a specific field. So the way I like to exemplify what is deep tech versus what is not deep tech, if you are having a, uh, dinner conversation, right, and you overhear a pitch for a startup and you figure, yeah, I could build that, probably not deep tech, but if you overhear a pitch and you say, wow, that's very cool, and I don't have the technical chops to build that. I think I would need a doctorate or a postdoctorate. That's probably deep tech. So that's my empirical way of defining deep tech.

Narrator: Uh, I'll take a shot. Effectively, my career post grad school last 20 years has been deep tech. Used to be called Internet of Things before it was called connected hardware. It was called semiconductors. I think the classical definition that we use for hard tech, deep tech, is similar to what Guy mentioned. First, it has to contain hardcore technology. So white leather sneakers. That's not hardcore technology. A dating app, uh, not necessarily hardcore technology. So hardcore technology, second is it's hard to build. So Ceremus just went public after 10 years. Like taping out a chip is extremely hard. That's hard to do. And by the way, I was reading the SpaceX prospectus on the plane here to Philly. If you do it right, it's hard to replicate. So it's hardcore technology. Hard to build, hard to replicate. And this is a thing, Samir, you and I have talked about offline, which is it may involve hardware. For the past 10 years, many VCs have conflated deep tech with hardware. And that was some of the reticence previously to this bull rush we're in right now. In deep tech, they just didn't want to do hardware. But if you call it physical AI, let me tell you, there's a whole bunch of sandhill firms that want to do physical AI.

Samir Kaji: I was having a conversation with somebody else actually at the summit a couple weeks ago, and it was somebody at Lux. And Lux has made its name as one of the top investors at the intersection of, let's call it, science and technology, of invested in some great companies, whether it's the andurils of the world, some bio Companies, uh, and they've done really well. And in the past the difficulty they had with LPs was LPs said, okay, well deep tech is this thing where you're just investing these science projects that could take 5, 7, 10. You mentioned cerebras just now before you even know it's working. And in many cases they don't work because of the technical challenges on top of the commercial challenges. But now it seems like the narrative is starting to shift. People like Lux, dcvc, uh, folks like Playground Global, and we can name many other firms that have Eclipse that is now getting the tailwinds. But what is driving these tailwinds? Sunil, Maybe you have a sense of like, why are people now so excited about investing in these companies?

Sunil Nagaraj: Yeah, it's a really good question. Again, these companies are ones where not every average person could launch a company that requires some technical depth. I'm a little mixed on um, why, how pure the motivations are for this rush into deep tech, which I think all of us would consider, consider our, our area to invest in, but also protect, steward, nurture, to continue on a strong path. We don't want the pendulum to swing too fast and we have overhype and then a nuclear winter. We also want to make sure that we have co investors and follow on capital in the sector. So there's kind of a delicate space for this pendulum. And so I think there are two or three drivers that come to mind. One is, I'm using this noble word, pure. I'm going to keep running it with it for, until somebody slaps my wrist. But I think the pure reason is that these technologies have started to come into the fold where something that might have been 15 years it might work is now like seven years it probably will work and then three years it definitely will work. And the same thing happened with databases, right? Like as Oracle, MySQL $0 In 10 minutes you can spin up a MySQL server or Aurora on Amazon or something like that. So these technologies come in and in. And so as more of them have come in, whether it's 3D printing, whether it's having outsourced design manufacturers, a few different places, where in my focus on software being the screen, more of the real world is now programmable, better circuit boards, Raspberry PIs, prototyping tools, fem, like all sorts of things, like 30 different technologies have all sort of come in a little bit. Then it's, it's more addressable and it fits with the dogmatic venture capital model of about 20 investments per fund, one or two pay off and that pays off all the rest of the portfolio and that's not possible. And to do so in canonically a 10 year fund now usually it's 12 or 13 years, but in that window and that's relatively new, that was not true 20 years ago and it's kind of true today. So that's a good one. I think the less pure reasons I think which are still m maybe happening, they still may benefit the sector is it does feel like there's a lot of excess investor interest in deep tech funds. From folks who've watched on the sidelines as uh, SpaceX has gone from being a small company to a very valuable company, as Anduril has gone from being a very small company M to a very valuable company very quickly these were companies that weren't on the SaaS mainstream investors radar and the SaaS LPs radar. And so I think there's folks thinking, huh, I wonder if something is going on there, I should start looking into it. And I have many of the LPs in Ubiquiti three funds now I would say are deep tech curious. They want to invest, they want to have exposure off the beaten path but not off the deep end. And that's the kind of thing that I try to focus on. So, so there's sort of the nerd technologies becoming a little more mature, there's kind of latent overflowing SpaceX and other interest and then there's the current kind of administration push, golden dome, new government push, new defense tech push, new prime push that's also pushing a lot of dollars into the sector as well. And again there's lots of different definitions, but that would fall into the American resilience, America first de industrial deglobalization, there's another theme, but these all start to swirl around this notion of a little bit more physicality, a little bit less dating sites. And I had a dating site when we moved out to Silicon Valley. So I make fun of that with pride, but actually more into deeper tech stuff I think, and I would die to hear kind of what you all think is the real driver or the most prominent driver out of those three.

Narrator: Something I would bring up just with a plus one to Samir and Hannah for the Beyond Summit was The fact that $3.7 trillion of capital are going to go into privates. So Samir, you said that on your keynote with Mamoon. I think that's important. But the other thing just to be controversial is I think Many folks aren't saying it, but many do believe on the LP community that SaaS as a major banger of a thesis has kind of run its course, which is just a history of venture. If we think about social, mobile, local, if we think about comms, networking in the late 90s, early 2000s, these thesis have a time and a place where they can coalesce a group of talented founders and capital. And then they make the slacks, the box, the dropboxes, the stripe, the data bricks, right? And then it makes way for the next. And so I think some of this is healthy. The thing that I sometimes have difficulty as an emerging manager adjusting to is Samir, how much is venture capital changing and growing up? Like how much of that is venture capital becoming like today's venture capital is like 20 years ago private equity. I mean, we're going to have firms go public. How much of it is that versus how much of it is just somebody really believes now that if you have a hardcore technology product, you actually have a moat. Whereas if you just have a software product, maybe there's five engineers that can vibe code, uh, a, uh, competitor over the weekend. So I think that's where I struggle is how much of it is secular change in venture versus deep tech.

Nate Williams: I will kind of posit that the key driver for us to be seeing this moment right now is almost purely economical. And I'll tell you why I believe that. First autonomous car serious testing happened in the late 80s, right? Carnegie Mellon, first 3D printing tests, early 1970s. Okay. AI has been around, we all know, since the mid-1950s what happened over the course of the past, let's call it 10 years, maybe 15. Is that all the economics around those technologies became, um, orders of magnitude cheaper, right? Processing power, memory, database, software, programming, everything that goes into building sensors, everything that goes into the building blocks of pretty much any deep tech, uh, company that do involve hardware and software and sensors and physical, the physical world has become cheaper. So as this happened, it became easier to go from only universities or government labs developing cutting edge technology into the private sector. And what we needed in deep tech was a killer app, right? During COVID we thought, all of us thought that the killer app was biotech, right? There was this 12 to 18 month period where everybody wanted to pile onto bio companies and that fizzled. But it's obvious right now that the killer app is AI, right? So the world through AI said, okay, this is the moment where all those vectors converge. And in my view the, the basis of this tailwind that I think is going to last for a long time because there will be multiple derivatives of AI is purely economical.

Samir Kaji: This also then comes back to is this a transient thing or is this longer term? Because right now one of the things that I'm seeing is if you look at space, you look at robotics, you look at AI, especially the frontier labs, they're not talking about AI apps which are built on other sort of like large language models. Is OpenAI, SpaceX, Anduril, Anthropic. Look at those four companies together, almost what is that, three and a half trillion dollars of private market cap. Everybody knows these companies. In fact they're probably the most demanded companies to try to get into. In fact Anthropic, when the news came out they're raising this new round of capital. I can say that we were getting inbound emails from people we didn't know that said we have 500 million, 700 million ready to wire. And it just shows you like where the world is right now in investing in these high flying growth startups. But is this sustainable? Probably not for forever. There's n of 1 is anthropic, n of 1 is SpaceX, is Anduril. There's not a lot of those companies. On the other hand, we're finally getting to the point where technology adoption along with the physical world is there, where now you can create these type of companies and some of these companies can be created faster. We're looking at a large language model, right? Uh, a new one, a neolab that's really focused on material science. Right? Very interesting. And how do you take something and get it into identify a compound, test it, simulate it, put it in a lab environment to be able to deliver things like superconductors really quickly. So how do you guys think about like the next five to ten years? Forget about this point in time because I think everything is at a fever pitch.

Nate Williams: I'll take a stab at it. I think that we are living a uh, very similar moment in time to what happened in the late 19th century when the world was starting to electrify itself and people were laying down all the infrastructure to make sure that the world could become electric as opposed to whatever we had before that, right before electricity. We're not that old. So when it comes to that phase, I think all these hyperscaling data centers, all this massive multi billion, billion almost trillion dollar type of investments we're seeing, I think it's just the foundation of this new era. And my take is that the interesting part of this story will start as we try to imagine what are the consequences of us having a newly electrified world where instead of electricity, abundant and available and pretty much expanding its little pause into everything, it's AI. And I think we're going to see an explosion of applications in manufacturing, in health, in telecommunications, in infrastructure, in transportation. So this for me is chapter one where we're just laying the foundations. That's why I do believe that we're talking about a handful of companies because there are no large infrastructures in any sectors where we have multiple players. It's usually a very concentrated, high capex, very concentrated kind of platform. But after that, I think we're in this cycle where we're going to see the derivatives of us, uh, setting this infrastructure that is driven by AI.

Sunil Nagaraj: Uh, I want to agree with you as like the beautiful dream of the march of technology, but I think the capital markets are just a little schizophrenic. I think as Nate was saying, like running away from SaaS, maybe even like three, four, five years ago, a lot of my VC friends were saying there's no more alpha, there's no more extra return in SaaS, because there's not frameworks. All you gotta do is run it through the frameworks, right? It's a mature sector scale and like five other firms will put out the frameworks and you do the rule of 40 and then we get hit by SaaS apocalypse. So it was a one, two punch. The capital's running and when it runs off the beaten path, it's in rarefied air and it gets scared and it chases it gloms onto anything with traction. So for me, that's part of the consensus piece. Why anthropic and why when one company gets hot, it gets hot quickly. Why? A lot of investors who are over their skis are looking for surface level proxy signals. Hey, was it the seventh author on that paper? Did they happen to work at SpaceX? These are useful signals. All of us use them, but we don't rely on them entirely. We go do uh, our uh, homework underneath. And I'm seeing a lot of investors do no homework on top of it. So I think we are seeing the rails being put in, but we're also seeing a lot of schizophrenic capital chase the same couple deals. And it's responsible for, I think, an unhealthy concentration which will, back to my very first comment, could swing the pendulum too far. And then there ends up being a nuclear winter when a few of them collapse.

Narrator: Well, there's a circular reference here that I think is super important. So there is an implicit homogeneity of SAS. So let me unpack that. If I have a SaaS tool for fintech and then I have a SaaS Tool for health tech, accounting, HR, et cetera, the throwing motion is very similar. The financial, as you mentioned, magic rule 40, etc. Is the same. Okay, so now I'm going to go into Deep Tech and I've got space robotics, industrial, I've got health care, I've got bio. Right. The heterogeneity of Deep Tech is so difficult for one GP to actually cover that. And so that's why we're seeing if you're going to move from a world where a lot of things look alike and I'm not, there are, uh, if I could be 1/10 the investor Mamoon is, that would be a great career for me. But what I'm saying is moving from SAS over to Deep Tech and having to become an expert in semiconductors, nih, getting atoms from NIH to create a new compound, then turning around and getting a Kuka arm and going over to PRC or Vietnam, those things are really difficult. And I think it just takes some time for these teams and investors to actually grow their bench. So probably the hottest spec right now, Samir, if you ask any of the headhunters, is not people in our generation. It's actually that principal who's the hot up and comer in Deep Tech because that person can go to pretty much any fund. The number of firms that I see pinging Sunil or myself or, or ghee about co investing, These are people five years ago, I've done nothing but connected hardware IoT. Nobody thinks IoT is cool. The people now that want to talk about Deep Tech give you an invite to a dinner is unbelievable.

Sunil Nagaraj: Nate, where I thought you were going to go with that was that there's so much specialty for the different facets of Deep Tech, it may even imply a new VC organizational structure. Like I thought you were going to say, you can have five folks who kind of lightly overlap in SaaS and they can speak each other's language on Monday morning, but with Deep Tech, they're almost irrelevant to one another on Monday morning.

Narrator: I was going to hit that point, but actually I was going to say something different, which is, so what is an inherent moat in Deep Tech? You already have the hardcore technology, but the other one is the specialty path to distribution. So fill your boots. If you just graduated from undergrad and you're going to do a company that wants to Contract with the US Government. Like that is just so dang hard to understand the procurement process. The sbirs getting to a por. I mean you and I do. We have investments both in the sort of stratospheric micro balloon segment. Like that stuff is hard. And so I actually think the way that venture will look is like similar to any sort of scouting organization. Right. So if you say, I know a bunch of us are sports nuts on this call, it's like you have to have a scout in the southeast region, you got to have a scout up in the Northwest, etc. I think that's where the job. I know I'm jumping ahead, Samir, to your comments about major firm versus minor, but I 100% believe in the Josh Wolf whales versus minnows. I think there will always be place for craft artisanal managers who have amazing access to founders and actually have experience as founders to help on the zero to one. Yeah.

Samir Kaji: Uh, yeah. And we'll get to that point of this kind of stratification of the market, especially with the big funds getting much bigger. And you can make the very cogent argument that is not venture capital, it's just mainstream technology finance. When you're investing in a company, even like what's happening right now with anthropic at a $900 billion that is very different than what we have considered venture capital for the last 50, 60 years. Doesn't mean that it's wrong, doesn't mean that it's a bad thing. It's just a very different sort of product offering than what I see on the other side of the barbell, which are small kind of artisanal managers that are investing at that 0 to 1, which at 0 to 1 for deep tech is very early and soon. I see.

Sunil Nagaraj: Just to make it spicy. The only wrong part of that is I don't know if you should get 2 and 20 when you're doing $900 billion entry valuations. That's mutual, uh, fund stop at your capital.

Samir Kaji: Yeah. And we could probably talk to those folks and see if they're willing to reduce. I And by the way, I don't think it's 2 and 20 in many of those cases. I think it's something elevated above the 2 and 20 in terms of the actual economic rate that they're getting. However, coming back to the capital and I think you made the point of capital markets can be very schizophrenic. There's animal spirits that come into play and right now we're seeing a lot of Risk on type of behavior that can be very different from where we are. Guy, for example what you said is where are we in the technology adoption and how is technology going to reshape the future of the way we work, the way we live, which is almost undeniable. But capital does affect it. So if the capital markets do change that does change capital formation for these companies. But even right now there is such a concentration, it feels like there is companies that are being king made, getting a lot of capital and they all feel fairly consensus in terms of somebody leaves DeepMind, somebody leaves OpenAI, somebody leaves Anthrop, they're going to raise whatever everyone else or somebody leaves SpaceX for example, they're going to be able to raise. What are the trickle down negative effects of the current concentration of consensus world we live in within venture?

Nate Williams: In my opinion it's the fact that uh, the arc of history seems very neat and clear when you have the benefit of time, right? We can very clearly see the patterns of uh, the first industrial revolution, the second industrial revolution, the third one, because we can see that chart looking into 50 years right or 100 years right now we have our screens ticking with prices every second or less than second and we do have ample access to information and capital. So the speed and the efficiency and the nervousness with which capital moves is extreme and that will create backlash, that will inevitably create winners and losers. This is going to be as an infrastructure that is going to be the base for uh, a uh, new economy. And effectively over the next few decades there can be very few players. So I do not believe that there's space for too many LLM providers, pure LLM providers. There is no as there's not a lot of space for global telecommunications companies or global fiber optics companies and so on so forth. So at the end of the day I think the negative effects are going to be that some investors are going to be burned, some investors are going to lose a lot of money, they're going to bet on their own horse if you will. And uh, as you have seen in history time and time again, there is a risk that this will overflow to the whole asset class, right? That people are going to say okay, this asset class doesn't work. And the truth of the matter is not that the asset class doesn't work, it's that specific strategy for that specific investor didn't work. And that's my fear that you're going to see this kind of nuclear winter if you will, caused by these failures that will inevitably come and that could spill over into the broader venture market.

Samir Kaji: Sunil, one question I would ask is because you're on the ground investing at the early stages and a lot of what you invest in, the old kind of adage in venture investing is when you invest in a company you have to believe there's a potential for it to return the fund or more over a long period of time. Which means you need to make some assessment of how big exits can be, especially when you see valuations rise at the entry point that you're all you and Nate are getting into. And Guy, I know you do co investment so you're coming in many cases alongside some of these folks here. And it's very hard to debate that the exits have gotten bigger. If you look at the Internet to mobile to now they've increased 5 to 10x every single time in terms of the size of the ipo, the size of the average out outlier exit. But those are a small group of companies and we feel like right now, or I feel right now we are in this extreme power law state. So if you're an LP and you have no exposure to OpenAI, Anthropic Anduril, SpaceX, your returns are unlikely to look very good. When you look at maybe $2 trillion of capital going back to LPs just from those three or four companies, is that the world we are going to live in? This extreme power law that if you don't get it right, it is almost impossible at the entry points to be able to deliver that 3 to 4 type X type of return at the fund level?

Sunil Nagaraj: No, uh, I definitely don't think so. I think this is where we used this word transient earlier. I think there's a reason big companies, tiny startups, have a chance against big companies. Because big companies can innovate, use their capital, turn into light monopolies, get fat and lazy and dysfunctional and say silly things. So at many big companies they say that's just a $2 billion opportunity, it's not worth our time. That is a ridiculous statement. That's just $100 billion opportunity. It's not worth our time. And folks said Google and Anthropic are going to say things like that. That's not even considering. Like the Uber thing. When Uber came out with their first pitch deck, they were going after black cars, which is a tiny market. So either underestimating market sizes as they grow, which big companies are terrible at doing, look at 80 billion from Mr. Zuck pissing it away on BR as well as also following the trends and Thinking that a, uh, market isn't big enough because they use their denominator. So it's almost like the size of their market cap is actually their Achilles heel. Because that's how they measure every incremental dollar. Because they're not trying to add 2 billion of market cap, they're trying to add 10% of market cap. So like there's just massive diseconomies of scale that we don't talk about enough. And so I think we're temporarily swung into this model of Mag 7 producing 20% while the S and the rest of the S and P is 5%. That these companies are a trillion dollars. While if I had a $5 billion exit today, you could be convince yourself that doesn't matter. It turns out it does really matter. When I have a $75 million fund three and I own 15% of it. That's a huge freaking deal. And so I think we're just in this temporary window. The headlines are a little too hypey. We're all a little confused with AI sort of really impacting our lives since December with the cloud stuff coming out at that point. So we're in this kind of funny corner. But I do think the idea of a certain size fund, you make 20 bets of about 10%, one or two work even after dilution. It can return multiples on the fund. That is going to be a perennially good. And that means that I'm going to say normal, not small, normal M and a and normal IPO. This is 500 million, a billion, 2 billion. 5 billion is still going to be really exciting. And there's a way to make a lot of money for LPs and for myself in that process.

Samir Kaji: I tend to agree with that. And I've seen these cycles kind of play out in the same way where you have a lot of euphoria, you have some breakouts. Uh, the main risk is when people start to apply that logic to every company and say, well now the exit is going to be 50 to 100 billion. So I don't care what I pay. I think that is a false sort of pretense to actually operate a, uh, venture strategy around now. You may get lucky and you get one of those 50 billion, 100 billion or even more. But one of the things that we also have to look at beyond what's transit is what has actually happened over the last few years that is actually going to stay past this kind of fever pitch moment. And so venture has changed. I mean look at the number of funds that have come to market in 2021. I'll give you a stat. 1300 VC firms raised a fund in 2021. That's up from about 200 per year. The last couple years we've been averaging about 4 to 500 which is still quite a bit in terms of the not net new funds but just not net new firms but funds in 2021. It was a lot of fun ones and fun twos though. And that was when we saw the heyday of a lot of capital people starting hanging their own shingle. What do you think is actually let's assume a year and a half from now the market starts to stabilize a little bit. Some of this frost starts to come back a little bit or at least retreat because it becomes clear like there are some losers. There was expensive mistakes. Some of these companies looked great but weren't real long term durable companies. What do you think stays the same in venture capital versus the things that we are saying that are transient?

Narrator: Yeah, I mean I'll take a shot at it. Look, several of us on the call have founded companies, right? And the actual mechanics and the throwing motion of starting a company or starting a movement doesn't change. It starts with an idea, it starts with convincing a co founder. It starts with a small amount of capital and kind of get going. And so as Sunil mentioned, I don't think that changes. Something that I do think is important to double click on is if I look five, seven years ago in the timeline you talked about Samir, when there was uh, an explosion in challenger firms that coincided with majority of the tier one firms had upper limits on fund size. It was impossible to get allocation into Sequoia, uh klein or greylock A16Z in the last couple years we've seen much higher hard caps if any hard caps at all because you can sma your way to tens of billions of dollars. And so I don't think that affects the small managers. I actually think that affects the middle managers that are hundreds of millions of dollar funds. So I think that trend will play itself out on the startup side. Sunil, I thought you made a really good point which is you have to be non consensus and. Right. And one of the biggest fears I have Samir, I mentioned to you offline is we are in this part where there's uh, just a big part of venture capital is being conflated with access capital. Right? Like we've got the Hollywood vibes in venture capital and we've got celebrities investing and we've got like triple layer SPVs. And I think there are economic reasons why that happens, which is the fact that there's a ton of companies that are generating exceptional wealth similar to when Goldman Sachs went public in the 90s. There's going to be venture capital firms that go public. So I think the reasons, as Guy said, are economical. But I think the knock on effects are going to be quite terrible because what ends up happening at the end of any boom cycle when there's a bust, there's a sense of alienation. And so if a lot of us study financial markets, you can be risk on forever. When you're risk off, you don't get to risk on very fast. And so if we go risk off, we could be risk off for three, four years. So let me just play that forward. As somebody who likes to say as I built my firm I made some errors in terms of judgment, right? Building out a set of capabilities for founders that founders didn't necessarily need. They don't need okrs, they don't need book clubs, they don't need exact coaching. You know what they told me, Samir, I need you to help me with downstream capital formation and I need you to be effectively like a part time CRO for the company. And so I think over time, through trial and error, Most of us VCs kind of get it together and then the key and I'm facing this right now, so hold me accountable. I can't go in too much detail, but I have a new EIR in my team who's coming from a very large 3, 4 billion dollars company. I think that process of how you can work with somebody to create magic is so special. That's what, that's why I'm not a growth investor. I want to be there when it actually starts, when the magic starts.

Samir Kaji: Can we double click on something you just said? You said? And I think the old adage certainly in venture was on consensus and right. If you look at the quadrants you're either right or wrong. And yeah, uh, it's either consensus or non consensus. And no one wants to be in that quadrant where you were wrong and non consensus. That's obviously like the terrible place because then you bet against the crowd and you were wrong and then everybody thinks you're, you're stupid or you're not going to be able to raise more capital and actually continue to build a firm. But I want to at least posit something and see what you guys think. I think you can be consensus and right and still do well in certain cases. So I do Think if you're a bigger firm you can afford to just focus on consensus where you could put the most amount of capital behind a few sort of companies that are on this hyperscaler mode. And I also think it works in bull markets, I think in bear markets it's a little bit tougher. So I'd love to get your guys thoughts on, at least bring a little bit nuance to this consensus versus non consensus.

Nate Williams: I think there's very little doubt in all of our minds that uh, something that approaches not perfectly but approaches consensus is growth money, right? As you see growth firms piling onto a uh, relatively small cohort of names, that's their consensus, right? That's inevitably or almost inevitably companies that have been de risked at some point by folks like us that come in early that at some point were very non consensus, very non obvious because hindsight is 2020 now. The idea that SpaceX will be worth, call it a trillion dollars, give or take a couple of billion, $100 billion or exactly all that feels very natural, very obvious and uh, to your point, very consensus like. And because there are again relatively few names, not only few companies that are reaching that kind of uh, stage and size and gravitas, but also few firms, relatively few firms that can raise the billions of dollars necessary to keep that going. So it's almost like a circular argument where those few firms are going to subsidize or are going to invest on those very few names. Whereas in a very traditional barbell uh approach there will be a ton of other firms looking to think about what is the second or the third derivative after this movement that will be the thing we're going to be talking about in I don't know, four, five, six years.

Narrator: Samir, let me put a point, let me put a point on that real quickly because I think you nailed it. If everything was consensus, we wouldn't have Roblox, right? Like, like if we're so consensus and it has to be up and to the right, triple, double within three years, you raise a $50 million seed, you raise a hundred million dollar series eight. There's nothing wrong with that. What I'm saying is one of the fears that I have is if you're heuristic to underwrite the next round is that it happened within 12 or 18 months. If you look backwards, there's a variety of companies that are very successful publicly traded companies that don't fit that profile. And so to think about what we do in the craft adventure, you have to be willing to break your own Rules. I'll just get, I won't call out the VC firm. But they were very specific to me that they said if you bring me a company that's raising a series A and that company was not formed in 2024 or 2025, it's almost always an automatic pass. And so I, I, I asked the question, what happens if they took time to measure thrice, cut once, low burn, et cetera. We were focusing on clock speed and the best founders can iterate super quickly. There's nothing wrong with that. But there are plenty of anti portfolio cases where that company that was light on capital. I'm thinking of a company like Viva in the emergence portfolio. I think they went public with like $7 million of venture capital raise. I would love a company like that. So it shouldn't be. Samir, you mentioned the great food at the uh, beyond Summit. It shouldn't be just because there's a buffet and you can have unlimited food. I don't need 4,000 calories for breakfast. Like I should be smart enough to know, like I eat enough food and then I go take my meetings.

Samir Kaji: It's a really good point and it actually sparked a couple things in my head that I'd like to ask you guys about. So number one is when we think about consensus, there's, there's different definitions of what consensus could mean. It could mean traction, like companies going growing 5, 10, 15, 20x per year. And in today's world of course, like I think there's this little bit of a false positive of uh, companies going from 5 to 100. And then you kind of realize, okay, how are they actually computing ar? Is it durable, is it experimental? Put that in, putting that aside for a second, that has created a subculture though whereby now companies are raise a lot of money, grow crazy or it's not interesting. I've had investors tell us like, oh, uh, you only go 3 or 4x year over year. That's not interesting. Where's that 10 to 100, 100 to 500. Which seems a little bit silly to feel like you're having these conversations, but this is what is happening every single day. And you guys see it. So consensus right now is like super high growth, raise a lot of capital. Consensus is not just about traction. In some cases it's also where do the people spin out of? Like again, I go back to that DeepMind OpenAI. I go to, hey, this is deep tech is consensus right now. So like now you're attracting higher valuations and you're putting on These companies on this hyper growth path which may not be compatible with the actual businesses. How is that affecting you guys on the ground when you see these companies? And now a lot of things start to become consensus and then get priced as consensus impacts.

Sunil Nagaraj: In my Ubiquity portfolio, 40 companies we always invested, precede or seed. But then I helped my babies graduate to series A. It's gotten a lot harder to raise series A's. And I think part of it is the consensus capital, part of it is the turnover in the industry. The average series A person hearing one of my portfolio companies pitches has been in the industry one or two years and so they're over rotated on the blog post in the last one or two years. And so I even wrote my own post about this supernova thing being sort of bs but it sort of fixated everybody on like if you're not growing 10x a year, uh, I can't take it to my boss. Right? That's what the average associate would say. Which really puts a damper on everything. And I'm not even asking for accommodations for deep tech at this point. Even if you're a SaaS company doing this, you're just not getting the same level of attention now. I'd like to think with everything it's a cycle. I've done this pendulum motion a few times, it'll eventually come back. But for the moment I believe there's a tainted impression of sort of what that growth looks like. Either it's not real, it's just people have read about it being 10x and they fixated or it's 10x for a while but then it comes crashing back down. I just don't. I think AI has trained some structural stuff. I think you can get more done with less, you can prototype more stuff. But I don't think the new hurdles are the new sort of baseline norm. It used to be triple that sort of thing. Uh, I don't think it's 10x 10x I don't think. Even though as much as some of the big firms post would like you to believe, I think it makes for good headlines. You have a lot of folks trying to ride the buzz to get more attention, but it also does. When I wrote that post about the Supernova thing being BS, I got maybe 50 emails from friends saying thank you for saying what we've all been thinking. It's sort of the quiet thing. But nobody posted publicly about it.

Samir Kaji: Any other thoughts on that? Because I do think it's. It is impactful when you have so much capital going into these companies. It does change what you can invest in. And in many cases as a seed manager you still have to play in that non consensus like what is true and by the way like you've invested in companies Sunil, like Halter for example. I wouldn't say sensors on cows is the most sort of consensus type of thing. Or even if you look back, Uber companies like Airbnb, these were not consensus companies. Right. So going back to that Nate, how do you, when you're investing right now, and there is a huge part of the universe right now where there are consensus because of the profile of the people or the fact that it is a deep tech company and if it's like Space or AI Frontier Labs, they kind of pass you in terms of what actually makes sense for your models. So how do you adapt to that?

Narrator: Yeah, I mean I think similar to uh, I was knocking Hollywood for a second but I would actually derive a couple learnings from Hollywood which is the best people in Hollywood. Think of the George Lucases of the world and the Clive Davis. They always reinvent themselves. And so I think Samir, you have to constantly be thinking about what your value proposition either as a solo GP or as a firm is to these founders. And so what I end up thinking on this is like part of the job that uh, I do at Union is effectively reading signals from Series A and series B investors, right? That could be folks who sit at Google Ventures, it could be people at Lux like Peter or Josh Wolf, could be Lear at Eclipse. I need to understand how they're thinking about the world. And I also need to have kind of the human Rolodex which I do have of the types of opportunities I think fits their taste because this is still a taste business, right. There's not an AI that's basically selecting series A investments for these companies. And so what I've learned over the past eight years being a full time investor through my EIR Kleiner Perkins is I have a job to do to downstream capital to avail them of opportunities before they're non consensus. I'll just give you two examples. This isn't talked in my book but you and I had talked about. I have a company called TrustPoint AI which is one of the leaders in risk decisioning for construction. They manage the financial process of a draw request in construction and actually creates a score that's quite helpful to private credit. The investors that when we first talked about on Sandhill, that was not an area they were spending much time in. And so it Was easy pass. Now that company has PMF doing great. Another company, Urban sky, came out of techstar space. They have a stratospheric micro balloon. They raised their Series A from Lara Hippo. Altos did the Series B. So that's an example where we actually went out of the coverage of it's got to be Lux or Eclipse or data collective etc. And said, hey, these people are smart. There are people on Altos who have military backgrounds who understand these types of companies and they turn out. Altos is an amazing investor. So I do think what it requires is, is a lot more legwork and advocacy. What I try to do is make that personal. I hope when I reach out to an investor that they see that my outreach. I'm not sending a bunch of like Mixmax messages. Samir, uh, to GPS. 30 people for one Portco. I'm making a specific case. Shaheen, you are the GP at Lux who loves cars. You have a 911 pictured in your office. You have beautiful kids. This is a company for you. And I think at Bespoke, I learned that from John Doerr, who for all his success, that is one of the most maniacal sleeves rolled up tactical GPS I've ever seen. Calling and closing like director of engineering when he's already had Google, right? Already had big hits. And so I think that's the business and that's the part that I get really excited about is doing the little things.

Nate Williams: I think Nate, there's some very kind of symmetrical happenstance now because to your point, I think we're trending towards uh, a venture market, especially in deep tech, where the power uh, of this equation is going to flip somehow in the sense that I've been a firm believer that the best founders choose their investors right? Even at pre seed or seed, these founders say, okay, that guy from Software beyond the Screen, that's a Neil guy. That's the guy I want to talk to. That's the guy I want to pitch my startup to because he has the chops, the experience, the knowledge, yada yada. And then once Sunil or Nate, uh, or any one of those very early stage great investors take that founder under their wing, coach them, feed them, help them build their company, and when that company is ready for other stage of its history, then to Nate's point, it's up to us to cherry pick which funds are now able to do the work. Who's going to get it? Who's going to understand the founder, the company, the opportunity that may or may not be consensus at that point in time. But I think that we are heading towards a venture world where the power is going to be not on the hands of the people that have the money, but it's going to be on the hands of the people that of course they have money, they have the capital, but they also have the credentials, the intangibles, the network, the coaching, the mentorship, the skills that are not on paper but that every single founder talks about. And that's how a lot of founders find their way into our firms. Because other founders will tell them, you know what, Nate is the guy you want to talk to for that particular problem, or Sunil is the guy that you want to talk to that particular problem.

Samir Kaji: I think the other thing you probably have to think about is who are the ones with the right aligned incentives with the company. Because what we are seeing right now is companies being pushed on almost this homogeneous path to take a lot of capital, try to get that 10x growth which can actually result in a lot of value destruction. So we talk about some of the expensive mistakes that will happen and some of these companies that we'll read about in two years, three years that were high flyers, that didn't make it. And some of it is because they took on too much risk, they imbued too much operational risk by the number amount of capital. And then what ends up happening is those companies get orphaned and then they go into a point where they sell for almost nothing or they get acqui hired. And I think that's going to happen. We've, we've talked a lot around a number of different things in terms of the venture market, deep tech. I'd like to end with asking you all kind of the same thing because one of the maybe not so great effects of AI is like we see a lot of AI slop out there and this is permeated through all the social media networks. Everyone has opinion that they write about venture capital. What is the thing that you see parroted the most in whether it's LinkedIn or Twitter, whatever about venture capital that you fundamentally disagree with and wish it wasn't parroted as much as it is? And I'll start with Guy and then I'll go to Nate and Sunil.

Nate Williams: I think this idea that venture capitalists are the ones responsible for the success or failure of a company is kind of usually blown out of proportion. I think the good ones, they absolutely will have a big role in helping, building and kind of guiding their respective companies. But I think that the headlines that capture the linkedins of the world or the newsreels of the world are much more simple and very repeatable. And I will give you guys an example that we all remember. Even though it was very brief, but during a relatively short period of time, the world was fixated on virtual reality. That was going to be the next big thing, right? Then there was this even smaller period of time when blockchain was absolutely going to change the world. Right. Flip it upside down. And now it feels that, yeah, now we hit something that will actually change the world, will actually make everybody's life lives different. But at the same time, this is not because a, uh, handful of GPS had their hand on it. This again, this is a trend. These are multiple currents that were trending towards a, uh, single point, a convergence of factors. And I think it's a little naive and I think a lot of investors fall for that narrative that, oh, this is because that investor or that other investor has this touch and they were able to transform this trend into reality. They just wished that to be true and it became true. So that's something that I think, uh, again, going back to my earlier comment, I think that could have a very nasty spillover effect when. Not if, when the losers are clear and the money is effectively lost.

Narrator: I think that's a really good point. Yeah, mine's a little bit different. I really. There's two things I really don't like. Uh, I think the first one is correlated to the second. I think the first one is really that the best tech always wins, which is absolute bullshit. Right? The best tech doesn't always win. That just does not happen. And because of number two, which is distribution, is really going to be the kingmaker for the next 10 years. And so we have just been. I got here in the Valley for, from grad school in 2005. I worked at Intel. I was working on speeds and feeds of semiconductors and many core. The thing about that time is the Googleization of the only job on the field or uh, the only position that mattered. Samir was engineering. It was engineering, then it was product and then it was finance, then it was marketing, et cetera. And I think we're about to see a big role reversal. Even that trope that we see where you get a very technical founder. It's like, I think I need that sales guy. I'm going to get the sales guy at series A or the sales guy or gal. And all of a sudden they raised $20 million in a, uh, mango seed. They have no traction. And so that's something that I see. I try to attack it all the time when it's ever propagated that of course deep tech founders are always, almost always hacker hacker teams in the 1990s Boston 95128 corridor hacker hacker teams who are PhDs with a GP who is a PhD. The problem is the world is so different now and if you don't have that Rolodex to Schneider to Siemens to Bosch, Verizon, att, Best Buy, Apple, that's really hard to uncork success for a founder. So I would say it's not always the best tech its distribution and work with people who understand that distribution.

Sunil Nagaraj: Both of those I agree with them. I'll add one final one here. This notion of you're not going to get replaced by AI. Uh, you'll get replaced by someone that's using AI. I think. No, I think some people will get replaced by AI. I think a lot of VCs mark and recent among them will say yeah, other jobs will get replaced but not vc. It's special. I don't think so. I think like a lot of the stuff that I do, a lot of the stuff that people around Ubiquiti do will get replaced by AI. I uh, want to be compassionate and delicate and thoughtful about it and retrain and things like that, but I think that that quote is kind of just wrong. I think we need to take on the challenge ahead like eyes open as opposed to it. So at the moment, again I mostly think of the agent stuff as like 6 months old. Since the Sonnet upgrade Opus Upgrade in December, we are all need to rethink kind of how we're approaching things at every level of it. It's not that uh, you're going to get replaced by someone using AI. I think that's parroted way too often.

Samir Kaji: Well, there's a lot of things we could probably talk about that gets parroted out there and this is a great way to end and you Appreciate you guys coming on and recreating some of the parts of the conversation that we had over breakfast. But thanks again and really appreciate you guys coming on.

Nate Williams: Thank you.

Samir Kaji: Thanks awesome guys.

Narrator: Thank you.

Samir Kaji: Thanks for listening to another episode of Venture Locked. I hope you enjoyed the conversation with Nate, Sunil and Guy. If you'd like to get Venture Unlocked content straight to your inbox, go to ventureunlock.substack.com and sign up or head over to Apple Podcasts or Spotify and subscribe. Thanks again for listening.