Investing Billions - E131: Can VC’s Make Money in Deep Tech? w/Nick Shekerdemian
Episode Date: January 21, 2025In this episode of How I Invest, I sit down with Nick Shekerdemian, entrepreneur, investor, and founding partner of The Venture Collective (TVC). A former Oxford student turned Thiel Fellow, Nick shar...es his journey of dropping out of university to pursue big ideas and how the fellowship helped shape his path in venture capital. We explore TVC's unique approach to portfolio construction, investing in deep tech and computational biology, and why thesis-driven investing is the future of venture capital. Nick also discusses challenges like founder breakups, scaling value-added strategies, and his thoughts on the next big shifts in technology and bio-defense.
Transcript
Discussion (0)
So I think that's a very interesting and quite terrifying biodefense problem that I've been thinking a little bit about with some of our companies recently,
which is if cyber was like the recent iteration of like the kind of quote unquote fashionable way of attacking adversaries,
and maybe more traditionally that was actual physical weapons, I think the next iteration of that is probably using bioweapons.
And I think that the way that plays out is using AI.
I think AI's ability to create new protein structures that can evade traditional vaccines
really powerful and a little bit scary.
There's a very, very linear correlation between reporting cadence and performance for company.
As companies tend to go downhill, reporting tends to get soppier. It isn't as extensive, it isn't as frequent. We can generally tell, we've seen
enough companies now to tell from those signals. You mentioned founder breakups.
It's arguably the number one issue for seed stage startups that fail. How does a
company go about navigating a founder breakup? You decided to drop out at the age of 20 from Oxford after getting accepted into Peter
Teel's fellowship.
Tell me about that decision.
My family didn't have like a history of going to Oxford every generation.
And so it was a pretty kind of meaningful decision for me, but at the same time, it
was a supernatural decision.
Not least because the Teel fellowship has obviously got an incredible reputation, but
I think kind of more importantly, you know, I was at the
right time for that decision and it's definitely been among the most impactful
decisions, if not top two or three most impactful decisions of my life to do.
There's only been a couple hundred Teal Fellows and already some incredible
breakouts like Ethereum, OyoRum, ScaleAI, Polkadot, to name a few.
What do you attribute to the success of the Thiel Fellowship?
Why is there such a high hit rate?
It's maybe a mindset or mentality of the kind of person who has not only taken the initiative to build a company during college,
but also to do so with some traction or some kind of early success, but two, to kind of have
the, I guess, the internal drive to drop out and pursue this full time against all of the
social pressures and all of the social norms.
I think that takes a certain kind of attribute in terms of personality.
And I think that combined with, frankly, the Teal Foundation and Teal Fellowship's ability to find those people
and bring them together. I think that combination is pretty unique. And I think the fact that
it hasn't scaled in some ways is the feature. It's by design. And I think it very much contributes
to such a high rate of success. I think that the kind of more formulaic programs that are
more scaled ultimately will have
a higher number of unicorns on a number basis or a higher number of successful outcomes
on a number basis, but the percentage hit rate likely won't be as high even though
you have more shots on goal.
I think there's a couple of factors there.
One is the Teal Fellows are figuratively burning the boats.
They're dropping out of college in order to pursue something, So they're all in, in that kind of focus.
I think the second one is obviously, you know, it's, it's picked from tens of thousands of applicants.
And, you know, these are like the elite, the most, most elite, the highest IQ
people, and then of course, I think the Teal fellowship itself has become a
sort of signal or a self-fulfilling prophecy.
Once you're in the Teal fellowship, you're able to raise a lot of capital.
And then that obviously significantly increases the chances of success.
Yeah, I definitely think there is some self-fulfilling kind of attributes to it,
the same as you have with any kind of like elite community or some sort of, you know,
high profile kind of, you know, community or in many other cases, awards and things like that.
I definitely think that contributes to it.
And I think as the fellowship evolves, um, the concept of dropping out of
university to start a company is still rare, but not as rare, but I think that
that you'll see a complete, um, kind of, um, refocus on, on big ideas, which I
think is, is critically important.
You mentioned portfolio construction.
You have strong, uh, strong views on portfolio construction for seed stage.
What are your views on how portfolios should be constructed?
I guess why we've chosen to think about things the way we have at TBC.
Um, you know, our view is that, um, with a slightly larger team than your average
sheet funded eight people, um, we have an ability to, um, you know, work with
founders in a more proactive way than maybe you
could do if you were two people.
And so that enables us to build strong relationships with our founders in an
operating capacity that really gives us a few different advantages, but hopefully
adds commensurate value back to the founders in what they're able to extract
from that in terms of the kind of two-way trade or the two-way dialogue.
And so for us, our advantage in doing that
is something that leads to our ability
to have a more concentrated portfolio construction,
which is our kind of information asymmetry.
It's how can you make a kind of comprehensive decision
in the rosiest picture of what a founder's story
is going to be, which is your first investment decision?
The first time you ever meet a founder, regardless of the context of the situation, it will ultimately
be the most packaged and best picture of the business, which is ultimately the job of a
good founder.
And so your first investment decision probably will, it may be your best, but it statistically
is likely to be your worst from like data to information perspective. And so the ability
to leverage a larger team to have an extended diligence process post-investment and then double
down on winners is something we feel very, very strongly about. And so our construction
is relatively concentrated to seed stage. We do about 30 companies every fund cycle.
The ownership at entry, which we can also talk about in a second for us
is, is eight to 10% at entry, um, which is slightly lower than your conventional
20% of your leading grounds that you'd see in most funds.
You mentioned that you have an informational advantage as an existing investor.
Tell me about that informational advantage.
Yeah, I think, um, this really comes down to your approach post investment
for portfolio success.
So I think you kind of really have three schools of thought there again,
or three strategies there.
Uh, some, uh, highly diversified seed firms, um, who have limited resources,
but they want to get a large base of companies.
Um, they probably aren't spending huge amounts of time working with their
companies day in day out, that's just a resource constraint and being able to do so.
And so I think that limits your ability to have information and thereby likely means
that you should be spending the bulk of your dollars in your initial investment and try
and optimize for the lowest possible price.
I think that's kind of got to be the strategy there.
I think the other end of that is a kind of a multi-stage firm who
is using seed stage as a kind of an option on supporting companies. Whether they take
a board seat or not is kind of bifurcating there. But let's say they do take a board
seat, the relationship tends to be relatively governance heavy. It's like I come to my board
meeting, I'd like to understand what's going on. And I'd like to help you make a couple
of key decisions. And that's like, that's quite high level and quite specific to some very, very key decisions. If they
choose not to take a board seat, they probably have that same lack of information or advantage
because they're really ultimately waiting for a large round and using their initial
investment to kind of get them in the door.
And then I think you have kind of a strategy in the middle, which is if you can come up
with a mechanism to have more resources, you can have a slightly more concentrated portfolio,
but you can spend significantly more time with those companies outside of board meetings.
And I really emphasize outside of board meetings, because I think board meetings are kind of the
default place where VCs interact with companies and founders. But I think they are probably the
worst place to get into the real kind of bones of what's
going on at a company.
So essentially, it's really a two-way street.
Your informational advantage comes from being involved with a company and helping, and the
company gets that as a value from you as an investor.
Correct.
That's exactly how I view it.
It has to be a two-way street.
It has to be organic.
The information requests
aren't something that I found at once. I've been on that side of the table. Every time I get asked
for information, it distracts from me doing my core job. But if I'm being asked for information
as a mechanism for me to be able to, let's say, receive an introduction or something that is
relevant and something that furthers my goals, that kind of two-way street means that I'm very,
very willing to play ball and give that information
because it's value added to me
to have that engaged relationship.
To play devil's advocate,
how do you scale this value added strategy?
I think that's a super valid question.
I think it ultimately doesn't scale infinitely,
e.g., if you continue to put the same amount of effort
into every company on a kind of evenly distributed basis,
that becomes very challenging.
We as a firm, twice a year get together
and we actually have all of our team blindly stack rank
our portfolio companies on a series of different metrics
that give us a sense of the time input
to progress of the
company and how they continuously are performing.
If a company is stopping reporting, is being less communicative, is ultimately growing
slower and we don't think we're going to allocate significant follow on dollars to that company,
we do make a conscious decision to reduce the cadence and volume of people on our team
that are working with that company.
That's not to say that we abandoned them or don't pick up the phone, but
ultimately we are in the business of trying to work out which companies are
going to succeed and allocating our resources accordingly, and thereby we
have to be conscious, despite having an eight-person team, as to how we do that.
The dirty secret of VC is that every VC has their favorites and their less
favorites and don less favorites and
don't always spend an equal amount with every startup. That's ultimately the business model
that venture capital firms have to be upfront about. It is a game where some companies will
ultimately return the vast majority of the capital and others will not. And I think as long as that's
kind of front and center, I think the expectation needs to be
if your if your company is struggling and you need our help, we will be there. But ultimately,
our productivity is obviously going to go towards the companies that are progressing the best and
the fastest and who are ultimately on that kind of two way journey with us who are playing,
you know, the the game that we are playing in terms of we need the communication, we need the consistency
of reporting, etc. to be able to do that. And I think there's a very, very linear correlation
between reporting cadence and performance of a company. As companies tend to go downhill,
reporting tends to get stoppier, it isn't as extensive, it isn't as frequent. We can generally
tell, we've seen enough companies now to tell from those signals.
When we were last chatting, you mentioned that you tell every founder, text me with
good news, text me with bad news.
How do you get founders to open up and text you with bad news?
It's really nuanced, right?
And you can't expect to see everything in real time.
But I do really believe that the quality of your relationship with the founder and explicitly
that not being in a board setting,
I think is really important.
Like we really do invest the time
to try and build that relationship.
We do work with founders to set those micro goals
that aren't the macro goal of the company,
but what are the specific things you're trying to achieve
in working back from your next financing round
or for your next milestone.
And I think by being integrated into that flow,
I think it's easier to see those things. Of course, we get blindsided the same way as other
people get blindsided. That's not to say that we see everything. But I think even if we see 50% more,
that's a significant difference for us in our ability to plan how to one, allocate resources
and to support those companies in advance. And I think making it clear early on that we can only
help you if we find out before it's too late. For example, if you're having a really big problem with
your co-founder and you would like to part ways with your co-founder, knowing that before you're
getting into a legal dispute or before you're trying to figure out how to transition them out
is critically important. We can only help you if we know that in advance. I think it's just
things like that,
encouraging that behavior early on and being hugely transparent as well. One thing I think VCs do quite badly in general is managing expectations and things like follow-on, things
like decision to do prorata, all of those types of decisions by being super, super candid and
transparent early on as to how we make decisions, why we generally
don't do bridges, even if they seem like a great deal, unless our information tells
us that it is a great deal, things like that.
We don't do things just for signaling, which I think a lot of people do.
And I think being really transparent around that whole process and how we think about
those things and our philosophy is really important.
You mentioned founder breakups.
It's arguably the number one issue for seed stage startups that fail.
How does a company go about navigating a founder breakup?
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It's a really challenging and nuanced situation in every case by case.
Uh, so I think it's, it's hard to generalize. But
what I would say is getting to the kind of core of the motivations on both sides and cutting through
those emotions to what is the most productive thing for the vision of the company? Is it a
vision dispersion? So is it, I think the company should go in this direction, you believe the
company should go in this direction. That's a very different situation to we just can't get on and communicate anymore.
That's a communication breakdown, or a secondary, should we be taking a secondary? There's all kinds
of nuances to that. I think it's getting to the nub of what is the problem? Is it we're in the
wrong world? That often happens. The CEO and the CTO, there's a friction or in Chief Scientific Officer and the CEO, there's some friction
around who's in that role. And there's obviously always some
egos at play, you have to have a certain amount of ego to be a
founder. And so I think it's really getting to the core of
that. And then working backwards from that, how do we solve that?
Is it a complete breakup? Is it a move in role? Is it a change in
equity or compensation that there's always some way to solve it?
I think not moving to lawyers immediately and not moving to kind of a toxic
situation immediately is really important.
And I think having a mediator who is somewhat unbiased is really important for that.
There's a lot of funds in the market.
How would you explain to the LP or allocator community, TVC source of alpha?
It's a combination of a few different things.
I think it's hard to kind of point to just one thing.
I would say the first thing,
and I think very importantly is where we choose to focus.
I think there is an under-emphasis
on thesis-driven investing in venture.
I think over the years,
venture has become relatively concentrated
into a few different categories.
So white collar enterprise and B2B software, consumer internet, we've very proactively
decided to be quite thematic and thesis oriented in how we choose to invest.
And I think that is a source of alpha in itself.
I think staying close to what the roots of venture capital actually are, i.e.
investing in ambitious people, building very innovative things.
I think that's really important. And I know that sounds quite trivial, but I do think we've kind of gotten into a cycle
of an ability to make money by using existing technological progress and applying spend on
marketing dollars or things like that to generate returns. And I don't know if that necessarily is
kind of the core of venture capital or what we'll sustain.
And so for us, that is spending a lot of time
forming points of view and working out
where the right communities of both investors and founders
are within categories that we think are interesting.
So for us, we think we're at a very, very interesting
pivotal moment in the healthcare system right now
around personalization, data
and the applications of AI and computational biology in reducing the risk of operating
in the healthcare industry, whilst increasing the return profile because you are driving
better outcomes at lower costs for people. So I think that's really important. And then
we secondarily, thematically believe on point, that the physical world around us
is gonna go through a bit more
of kind of an industrial transformation
or some sort of re-industrialized process
where everything will both become more sustainable.
And so I think there's a very important moment in time
where things need to be efficient,
cheap, low cost at the same time as being more sustainable,
which we firmly believe that there is an opportunity
in with computational biology and chemistry and AI.
You mentioned a couple of categories that could be categorized as deep tech and obviously
there's a lot of opportunity there, but a lot of it takes a lot of capital.
How do you make sure that your portfolio math makes sense in order to invest in these deep
tech startups?
The capital intensity and also the time duration are probably the two biggest
kind of risk factors or criticisms that people make in investing in deep tech.
And I certainly think that has been the case historically.
I would say we can simulate a lot of things, especially things that are
not too hardware heavy in advance.
So I think there is a huge advantage right now in the kind of intersection of computational power
or applied AI with biology and chemistry specifically
in those kinds of physical world aspects of deep tech
and also to a certain extent within the healthcare system
on the bio side as well.
So I think that there is a multi-year trial and error
R&D process in some ways that can get avoided through these abilities to
simulate things at scale. And I think that that will only get better and easier. And
I do think that's like three to five years of the journey and quite a lot of expense
and risk can be automated pretty significantly. And you see that now also in the ability to
simulate things that are capex heavy, which also take a lot of trial and error, which
I think is really important. So I think that's the first thing. I think you can compress those cycles significantly.
And the second thing is the outcomes can just be bigger. I think people always underwrote
to the unicorn valuation, like the billion dollar kind of magic number. I think you will
start to see many decades unicorns beyond using deep tech or kind of a more kind of
transformative IP rich things,
where they are kind of either winner takes all markets or oligopolies that can
be close to kind of winner takes all markets, where you will see just
transformatively big outcomes.
You've obviously already seen it in your, you know, SpaceX is opening eyes,
XAIs, et cetera, of the world.
And there'll be a long tail of a lot more of those companies over the coming years.
So I think you can make the math work by just underwriting to a bigger outcome.
But I also think that the dilution historically was heavy because less
investors invested in those categories.
I think as more and more investors start to invest in American dynamism and a lot
of these things that intertwine with deep tech generally, just by nature of what
they are, you will see that capital come in and thereby you will see less dilution.
Seen a lot of excitement around defense tech.
Do you think the time has come for defense tech to really make
venture like returns for investors?
There is an enormous amount of government funding still that maybe in the last
administration went pretty heavily to like climate tech and things like that.
I think you'll see a lot of that go into kind of the American
dynamism, on-shoring of critical things to the US.
Some of that is defense.
Some of that is more kind of independence or self-sovereignty.
But I think that you will see a huge amount more investment there,
subsidized and supported by government funding, absolutely.
But I see a lot of investors who were very anti-investing in defense a few years ago,
to a certain extent anti-investing in deep tech, generally now shifting their focus a little bit
because it's become both more acceptable, but also more subsidized and also more in the kind of
forefront of people's perspectives and minds.
And obviously, this incoming administration is all about self-sovereignty about self sovereignty of the US and bringing things back to being produced here. And so I
think that that is going to have to come with a level of subsidization. Labor is just more
expensive here. But I think the applications of AI and robotics will reduce that cost significantly.
And so will I think kind of start to equitize that a little bit.
I think you've seen a similar shift in sentiment on the LP side.
If you're an LP side, if you're an LP today and you're trying to
invest in venture and the large funds, you really can't avoid defense tax.
I think some of those policies have been changing really in real time.
When, when we last spoke, you mentioned that most VCs are momentum investors,
but TVC is not a momentum investor.
Unpack that for me.
investors, but TVC is not a momentum investor. Unpack that for me. It comes down to your ability to pick areas not based on what is hot right now, but what
could be hot in future. I think that's, it's trivial in what it sounds like, but in reality,
it takes a lot of work forming points of view and not looking at what the market is doing. Um, you know, and, and informing those points of views with a fundamental
first principles approach is really kind of counterintuitive to what we've seen
over the last 10 or 15 years in venture, where I think the real innovation
happened for the last kind of decade or so of the internet era, a lot of that
real innovation happened in the prior decade with the cloud
or the new cloud and the app store and the move to mobile. A lot of those things enabled
significant convenience improvement for your average person's life, which generated a huge
amount of momentum behind things that could capture parts of that value stack.
I think the interesting thing about that is if we look at the most fundamental industries in the US and further afield, things like the production of what we eat,
or the things that drive the manufacturing of all of the goods that we consume, a lot of these
physical world things, and to a certain extent healthcare, but more specifically, these physical world areas, a website or a mobile app may be improved
people's businesses a few percent or maybe even 10%. But they didn't improve them hundreds of
percent like you saw in the kind of more of the white collar service industries, right? So for
someone, you know, who was a farmer in a field, you know, the web era didn't really impact them,
whereas the computational biology era or the
applied AI and robotics era, where their jobs are getting much more high margin and they
are able to elevate themselves and use robots for the lower margin things or use new products
to ensure that crops are protected or other things like that. That is a huge multi hundred percent improvement on the
efficiency of running their business.
And that I think drives real innovation.
I think we're about to see that in the same ways in white collar industries.
We saw that with websites and, and mobile apps and software platforms, et cetera.
You mentioned computational biology.
What are the opportunities that you see in computational biology today?
Both computational biology and chemistry are very interesting now that AI is getting so
good at simulating things.
Let's take the kind of the healthcare system to begin with.
We give someone a vaccination or we give someone a therapeutic by putting something that is
foreign into the body and having it work its magic, quote unquote.
I think that's not the future of medicine.
I think the future of medicine is getting the body to produce things it already does every day,
but on demand with the right payload or the right dosage on demand.
So I think our ability to interface with our core critical intelligence systems,
the brain is not the only intelligent organ in the body, our immune system and our ability
to fight foreign things and read and write what's coming into the body is not equally
as intelligent, but is extremely intelligent. And our ability to interface with that and
then apply AI to personalize that, that is like an incredible move forwards and shift in our ability to do things.
And it's a lot cheaper for the healthcare system.
So that will be, I think, very transformative.
That's kind of probably one example.
And then maybe more in the physical world.
A lot of the kind of commoditized products that, you know, we consume every day right now
that aren't sustainable, take surfactants, for example. Surfactants are in every detergent,
cosmetics products, sunscreen, food color, and everything around us. It's not sustainable,
and it hasn't really been innovated on for a long time. But it's effectively, in the most simplistic
terms, kind of like the binding agent that's there. Redoing things like that with new
methodologies computationally and ensuring that it is both low cost and cheaper, but also sustainable.
That kind of stuff we're going to see kind of day in day out, not with the green premium, but at cost parity or lower than cost.
And redoing the physical world around us with that overlay, I think is really, really interesting and will be hugely important for things like
preventing wildfires and hurricanes and things that happen right now, which are deadly and
devastating for people. To borrow Peter Thiel question, what do you believe about venture
capital that very few others believe? Gosh, that's a tough question. I think
whether very few others believe this, or maybe I'm packaging it slightly differently, I think
maybe I'm packaging it slightly differently. I think very few people believe that the current state of venture capital is not really investing
in innovation, but is instead investing in ideas that have already played out.
I think the kind of contrarian perspective that I will hammer home forever is that the
rate of innovation is so rapid right now and everything that we see and do is so significant
in terms of the rate of change right now,
that the things that we thought,
things that maybe took 10 years to play out last cycle,
I think are playing out in months and maybe years right now.
And so if you don't take a very, very thesis-driven approach
to figuring out what is going
on in the world and where the opportunities are, I think you get left behind.
I think we're going to see the biggest shift in venture capital that we've seen probably
at least since I've been even thinking about the concept of venture capital and probably
even since I've been thinking about the concept of a company and building a company and entrepreneurship
in the next few years, not because of a reallocation
of capital by LPs and allocators, but based on just the relevance of the things that people
are focusing on and how rapidly that will shift. That's my big kind of bet and thesis.
What's an example of something that some people might think is going to be five,
10 years away that you think may develop in 2025?
So I think that's a very interesting and quite terrifying biodefense problem
that I've been thinking a little bit about
with some of our companies recently,
which is I think if cyber was like the recent iteration
of like the kind of quote unquote fashionable way
of attacking adversaries,
and maybe more traditionally
that was actual physical weapons.
I think the next iteration of that is probably using bioweapons. And I think that the way that
plays out is using AI. I think AI's ability to create new protein structures that can evade
traditional vaccines is really powerful and a little bit scary.
And I think that it will take a reframing of how we both build biodefense capabilities,
but just generally how we build vaccines and therapeutics to this arming the body in a personalized
way with what the body already does right now extremely effectively.
That play out, I think think will happen very fast. It's scary for the world. But I think enough
smart people are starting to think about that, that I think
that some of the smartest minds in the world, who may be
currently working on medicine may be working on bio defense
pretty soon. And I think that's a pretty exciting thing if
you're ahead of the curve. And a terrifying thing if you ignore
it, that is coming down
the pipe right now.
What would you like our audience to know about you, about TVC or anything else you'd like
to share?
Anyone who's trying to solve a very, very big problem that's challenging to solve, the
ones who thought partner in doing so absolutely should come and talk to us.
We're not scared of big ideas.
We're willing to take risks there.
The whole point of venture is taking risk. And for me,
I personally am very, very excited by things that are obvious big things that are around us that people think are so established and incumbent that no one should dare tackle them.
Tackling those problems with a new perspective as to why that, you know, why that should be changed.
And with an approach that is very first principle, that's always exciting to me. And I'm always down
to have that conversation to think about how that can be best be financed. Nick, appreciate you
jumping on. Look forward to seeing you down soon. Absolutely.