The Exchanges

Q a technology that they wish to deploy, and the markets that they are entering are comprised of big incumbents who control a lot of the infrastructure and the distribution and so on, and so the obvious thing to do is try to sell them the technology, and so you do see a ton of that. Tell me if you disagree. Why is that, like, Um, a blanket pass for you?

A Well, I've learned this, like many things, the hard way. You know, I, I started Kantos, it'll be 10 years this spring. Um, and the, it seems like the easy thing to do, because it, it scopes down your startup to, oh, we just, we're gonna use this amazing technology, and we're gonna, like, you know, productize it in the simplest way, and that'll make it Easy to sell to said big customer. Um, and then it turns out that there's just so much institutional inertia, sometimes cultural, sometimes it's actual switching costs of having to rip out whatever they're using now to move to your product, such that it ends up taking a lot longer than you think. Um, and this has implications for capital intensity, too, but, you know, we can, we can address that later. It's more that It slows you down when speed is so critical to a startup.

AI assessment note: “there's just so much institutional inertia... it ends up taking a lot longer”

Q Can you give me, like, a canonical example for you of, like, a company either you are or are not involved with that is full stack in a category where they could otherwise be selling tech to incumbents?

A Yeah, so, I mean, the A great example is mining, um, and there's a few companies in that, in this space, full disclosure, one of our largest investments is Earth AI, um, but you also have Kobold, which just rates a lot of money, and for AI, and there's a couple others in this space. So, mining is an industry that is massive, and there were just not that many startups in, and I thought that was interesting, because it's such an important industry, this is definitionally a commodity industry, um, And it is increasingly important for semiconductors, for, for defense tech, for, um, for, uh, electrification of the grid, yet we're not seeing much innovation there. There had been some startups along the way that said, hey, we're going to use satellite imagery, AI, to help people mine better, and know if there's a deposit near your existing mine, or something like that. And, um, it turns out it was very hard to sell that Technology into mining companies, and, and two, uh, they weren't willing to pay much for it. And so, the company we invested in, Earth AI, um, and, and I believe Cobalt may have had a similar journey, although I won't speak out of turn, um, I said, well, hold on, like, how much is it to acquire these mineral rights? How much is a drill? Like, let's just hire some geologists and go apply for the rights. Um, Earth AI went out and Bought rights and drilled their own hypot…

AI assessment note: “Earth AI went out and Bought rights and drilled their own hypotheses”

Q Alright, so let's talk about what to do. We've mostly been talking about what not to do. So you, you have two archetypes here. I want to spend most of our time on the first one, which you described as full-stack deep tech selling an end product or even commodity, not technology. So say more. What is full-stack?

A Um, so, so when I say full-stack, I'm sub-tweeting a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, a, He, uh, described a full-stack startup and was, um, largely alluding to companies like Uber and Lyft and Airbnb, who rather than trying to sell software to the taxi and limousine industry or to the hotel industry, were, were leveraging software to influence the real world, um, while not necessarily building hardware themselves. And I thought that was really interesting, and largely apply that same thinking to more industries, and the types of technologies that we invest in, where you are building some software, but also some physical component.

AI assessment note: “leveraging software to influence the real world, um, while not necessarily building hardware”

Q end customer the thing. Whatever your technology makes better, figure out what the end, who the end customer is for the thing that that made better, and then sell that product. Um, But that is expensive. Like, let's be clear about the trade-off there, right? Like, cause I think it is, it is, it's like, definitionally more capital intensive to do that. Do you disagree with that? No, it is.

A This is clearly the, the downside of, um, of going full stack is that you, you typically need a little more money to do it. Um, and like the time is money adage, um, Uh, it is appropriate, but there's a multiplier on time, as we talked about earlier, for startups where there's such an importance around making progress quickly when layering in the intersubjective nature of capital markets that, like, if you fail, like, if, if you, if you make progress quickly, great. Makes it easier to raise your next round and therefore do all the other things you need to do. But if you don't, the lack of momentum Will kill you. Because it'll become multiplicatively harder to raise capital the less progress you make. I would rather need more money but make time, my friend, than, than treat them as pure trade-offs.

AI assessment note: “This is clearly the, the downside of, um, of going full stack”

Q like a trope. Um, I think there are a bunch of ways that you can do it, but you, you said in here, even commodities. So like, what is it that makes a commodity, a company who is going to end up, if they go full stack, they integrate downstream, they're going to sell a commodity. What is it, what does it take for that to be attractive to you?

A Yeah, I've, I love, I love commodities. Like, for a long time it was used as a pejorative in venture capital. I love when a company is selling a commodity when the technology that is embedded in their full stack business actually gives them a cost advantage. Um, that's incredibly powerful. And, and taking a step back, like, what we do as investors is, in a way, price risk. And so, if we're thinking about the types of risk that a startup takes, there's There's technical risk, there's execution risk, and there's market risk, and you, you always have execution risk, so let's focus on the other two. In hard tech, in deep tech, in the physical world, you're typically taking a bit more technical risk than some of our peers who focus on maybe software and AI applications, um, and not foundation model, there's a lot of technical risk there, of course, but, um, If we're taking more technical risk, and we are on balance, basically paying the same prices at seed, series A, series B, whatever, as companies that are not taking more technical risk, um, then unless you are offsetting that with a equivalent decrease in market risk, you're probably just going to make worse investments. Like, these are the, the physics of, of finance, right? And so, why I love commodities is because It offsets the technical risk we're taking with less market risk, because I know if I'm selling a commodity, i.e.,…

AI assessment note: “when the technology that is embedded in their full stack business actually gives them a cost advantage”

Q Right? And so, what do you, how do you think about, like, the archetype of the founder that can do the full stack deep tech thing?

A Our preference for this type of business has also increased the onus on the entrepreneurs. Um, and, you know, when we, when we thought that you just needed incredible technology and, you know, sort of Good enough business sense. I was not, um, not that we were lowering our bar for entrepreneurs, but I was sort of looking for different things. And now we flesh it out, um, actually have internally like a way of, of scoring founders along six axes and how we tease out each of those. Um, and a lot of them are around the qualitative. It's sort of, you know, it's talent gravity. It's, it's, um, narrative ability. And if you're going to raise the capital required to vertically integrate a business and go full stack, then you just have to be that much better at fundraising, and I think you have to be really honest about the fact that, you know, a lot of people don't. Like, the reason that I'm on this side of the table not operating a company is I know I don't have those qualities. I have enough of them to run a small investment firm, but not to build a Full stack business that's gonna come at a giant advantaged incumbent, um, and to do so, you probably need to raise, you know, nine figures of capital, probably ultimately billions of capital, um, across equity and other forms of capital, so the, um, the type of person you need to make a wave is like you said, like, you know, bends the a…

AI assessment note: “a lot of them are around the qualitative. It's sort of, you know, it's talent gravity.”