Episode #222: Dakin Sloss, Prime Movers Lab, “Power Law Is The Key To Understanding Venture Capital”
Guest: Dakin Sloss is Founder and General Partner of Prime Movers Lab. Over the course of the last decade, he has created billions of dollars of enterprise value including founding two breakthrough start-ups, a dozen personal angel investments, and coaching 10+ Prime Movers. Most recently, he served as the founding CEO of Tachyus, where he built the leading prescriptive analytics company in the oil and gas industry.
Date Recorded: 5/5/2020 | Run-Time: 1:13:28
Summary: In today’s episode, we’re talking venture capital and investing in breakthrough scientific startups. We get into the way Prime Movers Lab thinks about its place in the venture capital ecosystem and why Dakin believes the least useful thing they provide is capital. We talk about assessing entrepreneurs and companies and looking for founders who don’t give up.
Dakin even gives us insight into some of the innovative companies in the portfolio, those executing on ideas from space transit to sustainable aquaponic farming.
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Interested in sponsoring an episode? Email Justin at email@example.com
Links from the Episode:
- 0:40 – Sponsor: YCharts
- 1:24 – Dakin Intro
- 2:20 – Welcome to our guest, Dakin Sloss
- 3:56 – Dakin’s background and how he wound up in Jackson Hole
- 5:18 – OpenGov
- 5:34 – The Meb Faber Show Episode #219: Paul Collier, “What Capitalism Offers Is A Combination Of Competition And Collaboration”
- 5:41 – The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It (Collier)
- 5:43 – The Future of Capitalism: Facing the New Anxieties (Collier)
- 7:47 – Tachyus
- 8:55 – The shift to full-time VC
- 10:14 – From angel investing to creating his first fund
- 12:01 – Prime Movers Lab
- 13:54 – Investment focus
- 17:34 – The tax benefits of QSBS
- 19:46 – The power law of VC investments
- 21:53 – The Meb Faber Show Episode #165: Chris Mayer, “I Do Think The Biggest Challenge…Is Keeping It, Holding On To It”
- 21:55 – 100 Baggers: Stocks That Return 100-to-1 and How To Find Them (Mayer)
- 24:44 – The Meb Faber Show Episode #202: Joe Davis, “The Idea Multiplier…We Believe It’s One Of The First Leading Indicators Of Commercial Innovation”
- 24:46 – The Idea Multiplier: An acceleration in innovation is coming
- 25:42 – How Prime Movers Lab works with entrepreneurs
- 29:54 – Sponsor: YCharts
- 30:35 – Knowing when big winners would be the big winners
- 35:55 – Finding and investing in companies
- 38:32 – Momentus
- 43:00 – Heliogen
- 45:26 – Covaxx
- 51:18 – Seed & Roe (Formerly Edenworks)
- 1:00:30 – The Greatest Time to Be Alive (Sloss)
- 1:01:22 – Lifespan: Why We Age―and Why We Don’t Have To (Sinclair, LaPlante)
- 1:06:24 – Most memorable investment
- 1:10:26 – The optimism in VC vs public markets
- 1:12:34 – Best way to connect with him – Company Blog email – firstname.lastname@example.org
Transcript of Episode 222:
Welcome Message: Welcome to “The Meb Faber Show” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser, better investing starts here.
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Welcome podcast listeners. We have a super fun show for you today from Jackson Hole. Our guest is founder and GP of Prime Movers Lab. Over the course of the last decade, he’s created billions of dollars of enterprise value including founding two breakthrough start-ups, a dozen personal angel investments, and most recently, he served as the founding CEO of Tachyus where he built a leading prescriptive analytics company in the oil and gas industry.
In today’s episode, we’re talking angel and VC investing. We get in the way his firm Prime Movers Lab thinks about its place in the VC ecosystem, and why he believes the least useful thing they provide is capital. We talk about assessing entrepreneurs and companies and our guests even gives us insight into some of the innovative companies in the portfolio.
Those executing on ideas from space transit to sustainable aquaponics farming, and we even chat about climbing the Grand Teton too. Please enjoy this episode with Prime Movers Lab founder and general partner, Dakin Sloss. Dakin, welcome to the show.
Dakin: Glad to be here. Thanks for having me, Meb.
Meb: So, last time I saw you, we were in Jackson Hole at a great investment conference. Got in a few days skiing. And I don’t know about you but about a day after I got back from Jackson I started to feel a little under the weather. Didn’t know it at the time.
Still don’t know it because I haven’t had a test, about 70% sure I got corona from one of the trams being 70 people nose to nose and the tram is probably the best place to get it, but I still haven’t had a test yet so we’ll find out this week. You’re healthy, and sanitized, and sane?
Dakin: Well, a couple things. First off, you’re lucky it was a good day, it was only 70 people rather than 100 in the tram. And yeah, I actually invested in a company called Covaxx that has the world’s most accurate antibody test for Coronavirus and can distinguish between different strains of Coronavirus.
And my wife and I and my parents are here in Jackson. I kind of organised a community effort where a bunch of donors put together and we got tests for the entire community of Jackson through an organisation called Test Teton now that I’m not involved with for financial conflict reasons, obviously, being an owner of the company. But basically, we’re all negative. So we haven’t been exposed to it, though Teton County has about 9.5% positive test rate so far.
Meb: Well, we’ll get some more corona stuff later, but it was such a fun conference. I mean, it’s a 50% chance it was just the beer drinking and altitude, and everything else because I had such a good time. A really well done conference. But anyway, so I haven’t seen you since then.
It’s great to catch up, but the audience is listening. We’ll get into all the VC stuff later. Run me through your background. It’s pretty atypical I think to find a venture capital shop based out of Jackson Hole. Where’d you get started?
Dakin: Yes. So I mean, depending how far back you wanna go, I was born in Vienna, Austria, I lived in D.C., St. Louis, the Bay Area. I went to Stanford, and was planning to do a Ph.D. in physics, math, and philosophy kind of a combo. Around that same time as I was studying at Stanford, I became good friends with Joe Lonsdale, the co-founder of Palantir. And he became a real mentor to me.
And I think when we were at the conference, you saw Joe and I presenting together about another topic. And we ended up building a non-profit together called “California Common Sense” that helped put government data online, make it more transparent so citizens could understand and hold government accountable.
And then we started a company called OpenGov, which is now in thousands of governments across the world, providing financial planning and analysis software to help governments run their budgeting process, and then automatically share that data with citizens and it’s become a whole smart government platform. So proud of the team there that’s taking it way beyond anything I created.
And then I built a company called Tachyus, which is the leader in the oil and gas optimisation world. Its a combination of machine learning and reservoir physics to effectively much more rapidly model oil fields and substantially increase oil production or reduce operating costs depending on the environment. Today, they’re helping a lot of people reduce operating costs. So yeah, that’s kind of my short story.
Meb: So, a couple of quick questions on both those, just out of curiosity. OpenGov, it seems to me we live in, it’s 2020 now, a new decade and governments and budgets and everything surrounding it still, in so many places around the world are so opaque.
And we had on Paul Collier, maybe a week or two on the podcast, and he was talking about, he wrote some books, “The Bottom Billion” and “The Future of Capitalism.” He’s kind of talking about some of the best ways to really improve the lives of many countries around the world that are pretty far behind. Is this transparency acting as a great disinfectant? He was talking about Africa.
What was kind of the experience of this idea and concept? Because it seems like a lot of people certainly empowered don’t love transparency and some of the ideas there. We’d love to hear just a few minutes on y’all’s work and takeaways.
Dakin: Yeah. So I mean, the first piece of context, I think is useful to share is while I ran the company, I ran it for the first year and then I replaced myself with a more senior CEO to scale up the business. So during my time, we were focused on like local and city governments in the United States rather than maybe some of the international context you’re referring to.
At this point, it is starting to scale into that international context. For example, an early customer was the City of Bell, California that had gone bankrupt due to all sorts of overpaying employees. And so a new regime had come in and part of what that regime wanted to do was build trust.
And I think there’s all sorts of views about like how big government should be, what government should be involved in. Everyone can agree other than people who are trying to hide something that government should be transparently sharing what it’s doing. And so what would often happen for us as that company scaled, is you’d get into a neighbourhood take like, you’re down in Santa Barbara.
There’s, in the vicinity of Santa Barbara, 10 or 15 different little city governments, there’s the county government, so you’d get one government that really wanted to be transparent. And they would go on. And then suddenly somebody in that county or that city would say to their friend in the neighbouring city, “Hey, I went to a town hall meeting and I saw that they had this software that they were using to make transparent. Do you guys have it yet?”
They’d call their city official, and they would jump on board. So there was a bit of a natural network effect, because if it was in one municipality, it would naturally end up in like a municipality right nearby. And a lot of people ask this question like, “Did you run into resistance?”
In general, no. The reality is, it’s a lot easier for a government who has to respond to freedom of information requests that automatically share stuff, and not have to respond to that set of requests and do less work, than to kind of have to deal with the administrative process that was in place before.
Meb: Interesting. All right. Well, let’s hop next to Tachyus. You said how long was that? And give me a context on what years this would have been, because the energy patch over the past decade has seen all the way from Boom, the bust and back and then back to where we are now with negative yielding futures. What year was this and…?
Dakin: I started the company in I think 2014 and let it for about five years, four and a half years. We went through multiple ups and downs. This was a really difficult company to build because even though we had a product that could decrease operating costs by 30%, 40%, increase production by 20% it doesn’t really matter on those peak parts of the cycle, where customers who signed up for long-term multi-million-dollar contracts, just call you and let you know, “Hey, we’re not sending you money. We’re not renegotiating the contract. Good luck.”
And doesn’t really matter because big companies, you know, end up taking fairly irrational decisions in downturns even where they’re kind of hurting their medium-term future to save on sending out a check today. So, learned a lot about Boom bust, commodity cycles, layoffs. It was a real battle testing. Fortunately, the company’s come through all that and is doing quite well, but it was not an easy one.
Meb: What was the sort of path post-Tachyus into deciding to become a full-time investor?
Dakin: I’ve personally angel invested in a bunch of companies and that portfolio had done extraordinarily well. The most prominent, which is Boom, supersonic. They’re building supersonic jets and that’ll be out in the market here soon. It’s been a fun journey over the last seven years.
Basically, Prime Movers Lab invests in breakthrough scientific inventions that have the ability to transform billions of lives. And it’s really a perfect synthesis of the three things that I’ve been best at, and have the privilege to kind of give as a gift to the world, skills in investing, skills in entrepreneurship, and science. And there’s not that many science-based VCs out there.
I saw my friends who were scientists building really interesting hard tech or deep tech, I call it breakthrough science start-ups. And, you would go out and you would maybe get some money together from brands, from friends and family, could be your life work after like spending years in your Ph.D. And then you get to the market and there wouldn’t be VCs who felt comfortable assessing it at the seed stage.
A lot of people at the seed stage are focused on consumer and enterprise, and these tend to be areas that have a lot more capital in them. There’s a lot more competition, deals are moving fast and it doesn’t require that detailed scientific and engineering analysis to assess the level of risk at that stage. Does that make sense?
Meb: It does. I’m just trying to think of the time horizons. You started angel investing, say 2013-ish, somewhere around there. What was the sort of the progression and the eventual where you said “You know what? This should be a fund.”
Dakin: Yeah. I mean, one, if it performed well, it was up like 14X over seven years, my angel portfolio. And then two, I had kind of transitioned Tachyus and replaced myself with another CEO. And I took some time off. I was actually here in Jackson for the summer, climbed all the mountains and other Grand Teton, South Teton, Middle Teton, and I got to the top of like, the seventh one.
And I was like, “It’s time for me to get back to work. I know what I’m gonna do.” You know, my, my wife is very important to me. And we talked up until that point, kind of preparing that I was gonna start a venture capital fund and made a couple of calls and got a lot of the folks who backed me before to come in and started Prime Movers Lab. And that was coming up on two years ago.
Meb: You know, it’s funny. Jackson is such a magical place. I grew up partially in Colorado and lived in Tahoe for a bit, and I had stayed in Jackson. This is kind of right after college and was going to go climb the grand and went up to camp the night before at, I forget what it’s called. So there’s not the saddle but somewhere there’s…
Dakin: Yeah, yeah, yeah. I’ve been going to Canyon. You can do like Platforms or Meadows or the Saddle.
Meb: It might have been Meadows, but it was a big open field but we got caught in the biggest storm. And I don’t think we’d left the tent for something like 16 hours or something. One of the guides came down, and he knocked on our door he like, “You guys aren’t planning on climbing today?” We’re like, “Yeah,” and he’s like, “No, you’re not.” He’s like, “You’re not. You’re not. Just go down. Just go down.” So still on my to do list one of these days.
Dakin: You should come out and we’ll do it together.
Meb: Well, one of the funny things about the mountain towns growing up, particularly when I lived in Tahoe, was that being a skier was all about the winter but summers are just absolutely just magical in the mountains. I live at the beach now in LA but I still haven’t gotten it out of my system.
All right, you decided to start the firm. Tell me a little bit about the firm, it’s a little bit different. Tell me about the organisation. You know, you’re based in Jackson. I think if I recall correctly, it’s a fairly remote company too, are people kind of spread out?
Dakin: Yeah, to be candid. I live in Jackson, but I wouldn’t think of the firm is based in Jackson. We’re a remote venture capital firm. There is no office in the world that belongs to Prime Movers Lab. And I think a lot of people in the last 60 days have learned about what that’s like. That’s how I’ve been running organisations for almost a decade now.
If you’d told me a decade ago when someone first said, you know, you’re gonna run remote organisations, I would have been really skeptical, you need to be in-person, you learn. So Tachyus, you know, we had 30 people spread out across eight countries around the world because of the nature of oil and gas. And you build systems where people every quarter end up in physical proximity to each other.
Every time you hire a new employee, you have them rotate and go to kind of each person’s spot and spend a couple of days with them. So there’s ways to kind of build that familial community sense that is like typical of a workplace. And then, we’re on Zoom every single day. And I probably spend 12 hours, 14 hours a day on Zoom between with the team and with folks that I talk to, that was like pre-Coronavirus. That was just that’s how my life has worked for the last 5, 10 years.
And I have partners in the Bay Area, partners in Texas, team members up in Oregon. And it’s got so many advantages. I mean, on a business level, we’re accessing the best talent across the country, we only invest in U.S. companies. So we’ve chosen to keep our team U.S. based. But if we were International, we could do international too, no problem.
Two, we can access the best companies around the country. So, the best tech company isn’t necessarily in the Bay Area or in New York, there’s companies in our portfolio spread out across the United States. And we just jump on a plane, and it’s not that hard. In this moment it’s a little bit harder, but we feel very comfortable cutting a check getting to know somebody over Zoom because that’s how we all function together.
Meb: All right, so tell me… We’ll start broad and we’ll start talking about some case studies and ideas in general. What’s the firm look like? So you launched a pretty big initial fund, I think 100 million bucks. What’s the focus? You mentioned U.S.? Is it series A? Is it seed? Is it both? Give us all the LP information that’s kind of typical of how you characterise what you guys do.
Dakin: So, Prime Movers Lab invest in breakthrough scientific inventions that have the ability to transform billions of lives. We do that in six areas, energy, transportation, infrastructure, manufacturing, the future of computing, and human augmentation. And I know that’s a broad set of areas. But what’s core and what’s very different is we only invest if there’s some sort of unique intellectual property.
So if you think about like a typical software business at a seed stage, the stage we invest in is usually entering at seed and then we have follow-ons for series As. So think of a typical software business at a seed stage, there’s like a deck and maybe like an MVP. And fundamentally that business is gonna win or lose, based on its go-to-market strategy, and its differentiation and how it sells in markets itself rather than some underlying technical innovation for the most apart.
We’re only investing in businesses where by the time we invest, they’ve actually been de-risked in this really interesting way that most people have trouble assessing, which is they’ve already created something inherently quite valuable. So, it might be a propulsion system for in-space transportation. It might be a system for converting solar heat into industrial use cases, cheaper than natural gas. It might be an indoor vertical farming system based on aquaponics. These are, like, examples.
And in each case, there’s valuable IP such that we could sell the company for the value of the intellectual property and recoup our liquidation preference. So we have, like, this level of downside protection that generally doesn’t exist in early stage venture capital and we have huge upside. These are companies that have $10 billion plus market opportunities.
When I think of investing, there’s really four things that matter most. One is do you have some sort of asymmetric risk reward? Is there some way to have huge upside so that you can be wrong a number of times? You know, even the best investors in the world they’re gonna be wrong often 50% or more in venture capital, more, and you have to have so much upside that it makes up for all your losses.
So obviously, that’s the case in early stage venture. You know, we’re investing in things that have the potential to 100 X, 1000 X. Second, you have to have some sort of downside protection. So you’re gonna lose, but you wanna have a way where your losses hurt less. And that’s the value of having this intellectual property in place.
Third, it is diversification. When I mentioned those six areas, fund one, for example, we invest in 15 companies spread out across 15 different industries and verticals. And I don’t know if you’ve heard this, but Ray Dalio teaches folks that if you invest in 15 uncorrelated assets, you get an 80% reduction in risk without losing any of your upside.
And then fourth is tax efficiency. For those who don’t know, qualified small business stock, basically means that when you invest in a venture capital fund where they’re investing in C corps that are $50 million of assets or less after the financing, you’re not gonna end up paying really any capital gains on that because you get 10 extra cost basis or $10 million whichever is greater, tax free. And then anything beyond that you can roll over.
And it’s not like at the fund-level, it’s at the company level. So each investor in a venture capital fund has that for each company. And then anything on top of that, you can roll into another venture fund and do another qualified small business stock investment. And like a 10-31 exchange, you should never pay any taxes at the federal level on your start-up investing.
Meb: Man, you hit about four things that I wanna keep talking about.
Dakin: That is the loose, sorry.
Meb: You know, the QSBS is something that the media in the general financial planning investment community has not really caught on to and appreciated that much. You know, people will talk a lot about fees and they talk a lot about what our markets doing, which is 95% of what the media wants to talk about. But we’ve had a few people on the show to talk about the QSBS.
And it is such a profound tax hack that the people who get it like yourself understand how massive of a benefit that can be. Anyway, listeners, we’ll add some links in the show notes to learn more, but it is a monster benefit of investing in private companies. And hopefully, something that really moves the needle on building entrepreneurship in the U.S. too.
Dakin: I think that’s the key. Like, obviously we all love the tax benefit. Why is it there? It’s there to make America amazing at what America is amazing at, which is entrepreneurship. The primary beneficiaries of this are the founders of and investors in early stage technology companies, which have the potential to expand the…
If people think about tech is like disrupting jobs, I don’t think of it that way. I think of it as you’re actually creating the next industries, the next big industries, and the next huge opportunities to employ large numbers of people in better quality jobs with better lifestyles, and with better skills.
Meb: You guys got any opportunity zones in Jackson? I don’t know what the, that’s another big…?
Dakin: I do. I have a friend lives a couple of hours south of here, like at the Wyoming-Utah border and has a venture fund based out of an opportunity zone. But it doesn’t actually make sense to put a venture fund in an opportunity zone. Ultimately, he’s got a few other businesses there. Because you’ve got qualified small business stock you don’t need the opportunity zone piece.
Meb: Yeah, I got an uncle up in Cody, who I guess Kanye is now the new neighbour up there but it’s another interesting… But it seems like that’s mostly more for real estate as the main target of opportunity zones, but who knows. But the QSBS listeners take a deeper dive. It’s funny you also mentioned the Ray Dalio. He also calls that concept the holy grail of investing.
We used to have a great PowerPoint when he presented to Harvard once that kind of demonstrated this before Bridgewater came after us and asked us to take it down. But that concept, and the concept you mentioned which venture capitalists understand, a part of the investment world I feel like really appreciate it because it actually plays out in public equities.
It’s like 4% of public equities determined the returns of the entire index, the McDonald’s, the Walmart’s, Amazon’s, and Apple’s. And it also plays out in the trend following space managed futures. Talk to me a little bit about that sort of power law with your own personal experience.
You know, you said you returned 14X. How much of that was one company? Was it a couple companies? Was it the whole portfolio, just magically with?
Dakin: Power law is the key to understanding venture capital. You know, so if we invest in 15 companies, which we didn’t fund one, and we’re doing similar kinds of things, and fund two you get two companies that determine the outcome. So, the downside protection is nice. And whether the other 13s or 1X or 2Xs or 0Xs has relatively little impact if you’re a top fund. If you’re a top fund, you’re a top fund for one reason, and one reason alone.
Your top company is a 50X or 100 X 1000 X. That’s what determines the returns of a venture capital portfolio. And we’re all bad with statistics. We’re all bad with the laws of exponentials. And if you think about it though, if you have 15 companies and one is a 50X versus 100 X, that’s a 3X fund off that company versus a 6X fund off that company. And if all your other things are 1Xs or 0Xs, it’s just rounding error compared to that difference.
Meb: That’s really well said, and for a long time, the challenge with public markets as evidenced by Q1 is investors really struggle with “daily volatility” and what’s going on. And we tell investors how many people if an investment 2X is their party, and they’re looking up vacation spots depending on their age, going to the club, whatever it may be, if it goes 5X, 10X, I mean, the world is changing and everyone would sell many times along the way.
And ability to hold investments and have the time to mature, we had another guy on the podcast who wrote a book called “100 Baggers” to talk about in public markets and they take time. I mean, many of them take 10 years, but the challenge of not selling that a million years on the way. With the private the benefit is you can’t usually until there’s liquidity, but in public, you can log on to Robin Hood every day and check it out.
Dakin: I’ve done a lot better in my private investing than my public market investing because of that.
Meb: It’s become, you know, in many ways, I think of it as a feature, not a bug. And you combine that, I tweeted about this maybe a year or two ago, you combine that with some of the tax benefits. And as long as you have access to the opportunity and diversification, it’s a pretty compelling case.
Dakin: I will say, all that being said, in general, as an asset class, I think everyone knows this, venture capital tends to underperform unless you’re in a top fund. And I think that is perhaps going to get only worse with like the set of vintages that have happened recently. And the reason is, there’s been so much money in venture capital.
I forget who I think it was, like Fred Wilson’s blog talked about how the average day for like a consumer or enterprise software start-up, the average amount of time from when an investor meets the founder to giving a term sheet has shrunk from 90 days to 9 days over the last 10 years. Now this is specific to software companies like enterprise software, consumer software, e-commerce.
And that’s what we don’t invest in any of that stuff. If you really, like, conceptualise that, what used to be a 90 day meet and greet diligence process is now nine days, means that in those nine days, all you’re getting to do as a venture capital investor is sell yourself, but you can’t actually do real diligence.
And what you end up with is these party rounds that are way overvalued. People all converging, trying to buy as much of the company as they can and be the one that wins the hot deal. And that’s actually why we got out…why I don’t invest in that era. There’s also I chose not to be in the Bay Area and be in that craziness in that environment.
What we’re investing in are these kind of long-term structural shifts. You know, I talked about space, agriculture, energy. These things require you to actually dig in and do real research. And that’s not how most venture capital firms are set up. Most venture capital firms are set up to win deals and to provide, you know, marketing support effectively.
We have a team of have Ph.D.’s both in-house a couple and then dozens outside that are advisors so that we can dig in and suss out science risk and engineering risk, which is just a totally different exercise. Then we have, there’s other parts. I could talk about how we work with the founders, but it’s just a totally different exercise where you’re getting months to kind of evaluate and assess an idea, build a relationship with the company.
And it’s an area that there’s just not the same competition in so you don’t have the crazy valuations that you’ve kind of seen all over the news for other areas, which is why we chose to focus on it.
Meb: Yeah. And the science, particularly when you’re doing a lot of this deep, hard, real science is not something you can often just whiz through in an hour. We had the head economist at Vanguard, Joe Davis on maybe a month or two ago. And he’d written a pretty interesting paper that they analysed, it wasn’t patents but it was citations globally and all the academic literature, and they found that there was, and I’m gonna murder this description.
Dakin: That’s fine.
Meb: But there was a lead time between essentially booms of innovation. I think they took this back century, lead times of innovation when you started to see in the academic literature first and then fast forward five years, you know, you started to see crazy. And he said there was a couple of areas it was happening right now, which were areas that some you would expect, but some you wouldn’t.
One, he said was biotech and oncology and sort of some of the bioinformatics areas, obviously, a big one being logistics, which makes sense with all that self-driving and everything. AgTech was a big one, which surprised me a little bit, but from someone who comes from a farming background, I can’t remember one or two others.
But it’s interesting because a lot of those crossed over to some of the things you’re talking about rather than just necessarily pure enterprise, SaaS, or anything else. Let’s talk a little bit about you said, you mentioned your firm and how you work with investors. I saw somewhere on your website where you said capital is the least useful thing we deliver.
Let’s talk about kind of how you guys work with entrepreneurs. And then we can start to get into a couple of fun case studies and here are some of the companies you guys invest in and what you’re looking for in the future.
Dakin: Look, the reality is every VC advertises themselves as being helpful to entrepreneurs. As an entrepreneur who worked with a bunch of VCs I didn’t find that to be the case. That was the rarity not the norm. And particularly in the deep tech world, there’s just not, there’s not GPs out there who’ve got a scientific background like I do, who’ve built a team of scientists who get and understand the perspective and context of where entrepreneurs who are scientifically-minded are coming from. Some are really successful software entrepreneurs to look up to, like, the guys that Andreessen Horowitz is a perfect example who’ve built out this kind of agency model of really being all in everything that an entrepreneur needs to support them.
In the deep tech world, you don’t see the same thing. And so that’s what we set out to build. And the commitment we’ve made to every single founder and we’ve delivered on, you can go look at our website and see what the founders say about us or just call them is, that by far the least useful thing we provide is capital. And the way we do that is we treat founders like customers rather than investments.
So, instead of thinking about how do I maximise my returns on this over the next 12 months? Which of course ends up happening by taking this approach is we’re like, what do you need in order to be successful? What do you need in order to win? And what do you need in order to enjoy the journey? This is not a one-year journey. This is a 10-year journey like you talked about.
So in addition to myself, there’s two other general partners. Suzanne used to run the Stanford StartX community and basically mentored 500 different Stanford founders including all of the best Stanford founders. She takes all the learnings from that and brings that institutional knowledge to all of our founders.
Brandon has worked with me at each of my companies before and been really like an operator and has like legal background, finance background, all these different perspectives to help people with the nitty gritty of building companies. We have a full-time executive coach, Decker, who coaches focus on communications, leadership, development, personal growth.
One of the things I really believe is no one is ready to build like the big 10-year from now company, they’re ready to be the person that becomes the person that builds that company. And so a huge amount of what we do and another way of looking at this is, every VC knows the single greatest risk in an early stage company is the team and the people, and their skills, and their psychology.
And we go help develop that psychology actively. We help bring in the set of coaches they need. So in addition to Daiquiri, a bunch of other coaches. And then my other partner is actually Tony Robbins, who’s known as one of the world’s leading peak performance coaches. And so people who work with us have access to all of his tools, technologies. For our entrepreneurs that really breaking out, he helps them as well.
And then we have a creative director who helps with branding, marketing and design. And that’s like the tip of the iceberg of the things we do. That’s like what’s advertised. The reality is when you build a company over 10 years, particularly with the ups and downs, like what’s been going on in the last 60 days, I’ve probably coached 15 entrepreneurs through the trade-offs between layoff now, layoff later, furlough, the call of their own personal stress that’s going on, getting them tests, getting their family to a safe place, whatever it is and whatever it takes that’s what we do.
And I think it really comes back to, and it’s hard to capture verbally. It’s like an experience, but it comes back to, “I’m not running a venture capital firm like a venture capital firm. I’m running a venture capital firm like an entrepreneur, where I’m offering a product. And that product is helping an entrepreneur get from where they are today to a massive exit at the end of the tunnel.”
And capital is like the teeny little piece of what we provide to do that. Everything else is what you would want if you were an entrepreneur because I was an entrepreneur. And no, and I don’t assume that I’m right, either. I ask a lot of questions. I think I ask at the end of every call, “Hey, what was great about this? What could be better?” We do weekly calls, Brandon and Suzanne, and I with each of our founders at a minimum, and it’s whatever they need.
So it’s not about us. It’s not about the fund, it’s about the entrepreneurs’ success. And of course, that translates into the biggest successes that you can have as a fund. But putting yourself second is I think really important to being a valuable partner in this journey.
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Meb: One of the things I think a lot about looking back, I’ve done a fair amount of around, started around the same time you did on the private investing side. And I look back at some of the companies that have been successful and the ones that have become the big winners.
How throughout your journey, the question I’m trying to get to is how obvious was it, if you look back with hindsight, that the big winners ended up being the big winners or was it something where you’re like, “Look, we just have to have at least a blanket of all these companies that we think have a shot where they can make it?” And the ones that end up, to me, ends up being almost so much more execution right time. But anyway, love to hear your thoughts on kind of how that plays out.
Dakin: The way we assess entrepreneurs is based on four criteria or four general areas and then sub-criteria within that or I guess that’s how we assess companies. And those four areas are based on Suzanne’s experience and track record with 500 companies at Stanford, my experience and track record, or Brandon’s experience and track record.
So what we use is, we assess the founder and the team. And I think there’s fundamentally two things that define founders who are gonna win no matter what comes. And it has to be no matter what comes because it’s not gonna be easy. You’re gonna, in building a 10-year company, go through a cycle change, and you’re gonna have to deal with at least one cycle change, if not multiple.
So, one, we look for people that are unbelievably resilient. So, I think there’s only one thing that all successful start-ups have in common. They didn’t give up, and that’s the thing that defines them compared to all the other ones. Everybody else gave up along the way because it got too hard, they ran out of money, whatever. Those are the excuses.
If you have the winner’s mentality, you’re just gonna get there no matter what. And we test that. We test that through personality tests, we test that by in our process, doing things that are designed to be roadblocks and seeing how they deal with them. Second is growth mentality.
And, again, no founder’s ready to build the multi-billion dollar company. Even if they’ve built then, you know, I’d say half of our portfolio is built and exited multiple billion-dollar companies before. We love people who have a great track record. That’s part of what we look for. But even those guys aren’t ready for the company they’re building now. They’re building cutting edge things that’s never been done before.
So we need to see active growth during our diligence process from a founder where they get feedback, act on it, get feedback, act on it, because the best founders don’t think they have all the right answers. They’re out actively seeking and gathering perspectives and then kind of moving forward with what makes sense based on that. That’s the founder and team side.
On the business side, it has to be nice something that has a $10 billion plus market opportunity so that there’s enough asymmetric risk reward. It has to be something… We don’t like complicated business models. We’re like, they’ve built a really cool technology. There’s a customer who wants to buy it. We can go call three people who are already interested, and 10 people in our network or 20 people in our network and see is there a real market for this.
It has to be a simple like quantifiable value proposition. That’s how we assess the business in short. And then for the technology we’re looking for stuff that has IP and trade secrets that’s inherently valuable so that even if the commercialisation and go-to-market doesn’t work you can sell that for recouping your liquidation preference.
And I think there’s this big myth about deep tech, that is the core of what we’ve figured out that’s special. So, everyone thinks that deep tech is higher risk, more capital intensive and takes longer, that’s not true. Those are products of people having invested in deep tech the same way they invest in software, which generally is based on founder charisma, which is a good predictor for software companies of success.
Because if you have a great storytelling capability, you’re gonna attract a team, you’re gonna attract customers, and you’re gonna work your way through the problems. If you look at the kind of classic examples of failed deep tech, Theranos, or the Cleantech bubble. The mistake was people got caught up in the founder story and they didn’t do their homework. And the key homework question in assessing a deep tech company is, is this science risk or is this engineering risk?
So what I mean by that is science risk is still a like, scientific miracle basically has to happen. Like the IP isn’t actually there. The breakthrough isn’t there. There’s a promise of a breakthrough and like researchers working on it. If you invest at that stage, it is higher risk, it is more capital intensive, and it takes longer. It’s fundamentally unpredictable.
Once that breakthrough is already in place, though, I can sit down with a team of Ph.D.’s that we have in the dozens of experts who are world-leading thinkers in what we invest in and say, okay, is it a 6-month process to get to a product that’s ready for market, a 12-month process, an 18-month process, a 24-month process, more? And you can build like a reliable engineering timeline that is never ending exactly right but plus or minus 20%.
And we look at that, and we assess, “Okay, if it is not less than 18 months to market, if it’s more than 18 months to market, we’re not gonna invest right now. It’s not in our sweet spot.” And the beauty of this is because very few other people know how to distinguish science risk and engineering risk. We pay for science risk in companies that are actually at the stage of engineering risk, and then quickly commercialise.
If you look across the 15 companies in our fund one portfolio, most of them are now producing revenue 6 months, 12 months, 18 months after when we invested and then raising at significantly higher valuations because now somebody can go through a more traditional commercial diligence process, make a few calls, talk to actual customers, just, “Hey, I love it, I’m gonna buy more.”
And if you get it at that sweet spot, you’re kind of getting this mispriced part of the market, because there’s not that many teams that are set up to evaluate and assess that type of risk. That was a really long answer but you get the idea.
Meb: No, it’s perfect. And I think that’s a great lead-in to maybe chatting about a few case studies of companies you’ve invested in, maybe given what’s going on in the world. Covaxx, which we mentioned briefly seems like an obvious first starting point. So, maybe talk a little bit about what attracted you to that company.
Also, and real quick on the intro too, how do you screen filter find all these ideas? Now, as a firm that’s done multiple funds, it’s probably more established. But in general in the early the first 15, how’d you find all these?
Dakin: Yeah, so last year, we probably saw a couple of thousand deals. We’ve already seen a couple thousand deals this year. It keeps accelerating because our brand has gotten out there. Let’s say its 3,000 deals a year just to take a nice round number. The first thing we do is a quick 15-minute screen. Well, the first thing we do is read the deck and the materials that have come in and that knocks off two thirds of them.
There’s just a lot of stuff out there that either isn’t done thesis, or is competitive with something that we think there’s actually better. If you send me a deck that’s competing with Elon Musk or Martine Rothblatt, I’m probably not gonna evaluate that. And then we do a first screen maybe for 1,000 companies in the year.
And this is a 15-minute screen that we have custom designed to understand the track record of the founder, the growth orientation of the founder, and the resiliency of the founder, because those are the easiest things that I think I actually pick up in a few minutes. I really believe in five minutes you can get to know what are the core things motivating someone? What are the top needs that are driving them?
This is a tool that’s from Tony actually, and is that one of the types of personalities or psychologies that’s well designed for entrepreneurial success? Not everyone’s well designed for entrepreneurial success. So, then after a 15-minute screen, we do a longer like hour. And these are all, like, usually Zooms, given that we’re a remote venture capital firm. We do an hour deeper dive on the person and on the business. Do we believe in the thesis of the business?
Do we believe that’s where the world’s going? Is there a big enough market? The things we talked about. And because our most time-intensive piece is the technical deep dive, really getting into that science risk, engineering risk, we save that for after our business and founder and deal boxes have been checked. We’re not gonna cut a $20-million check.
We put in a few million dollar checks to start, and then we size up to lead a series A after we’ve already loved the seed round. If all that comes together, then we do like the much longer tech deep dive. And that’s a very bespoke process. There’s no way to templatise that. Does that make sense?
Meb: Yeah, it makes a lot of sense. So maybe walk us through Covaxx, is something you saw what attracted you to it? I assume it was pre-2020 and kind of where…
Dakin: Well, if you don’t mind actually, Covaxx because it’s so event-driven, has some unique features to it. So I’d rather start by talking about Momentus, which is the first space transportation company, and then let’s talk about Covaxx after that. But Momentus better exemplifies kind of the process. So, Momentus is founded by Mikhail Kokorich, who’s built and exited a couple of billion dollar companies.
They came to us through YC, that’s Y Combinator which is one of the top incubators in the world, along with StartX where Suzanne led the program. And, basically the concept is today if you want to get to a particular orbit in space, and all these satellites that are being launched, and even future industries that are coming and the satellite industry is already large enough to justify billions or tens of billions in the satellite movement revenue, so in-space transportation.
If you want to get there you’ve got two choices. You can kind of launch direct with one of these hundred small SAP companies that have popped up. We don’t believe that’s gonna actually pan out as a business because all those small SAP providers cost $25,000, or $50,000, or $75,000 a kilogram depending on which particular technology, and it depends which orbit we’re talking about if we wanna be precise.
Today, though, if you’re gonna launch to low Earth orbit on a SpaceX rocket, that’s $5,000 a kilogram. It’s so much cheaper than anything else because of economies of scale. So it’s actually much more attractive than direct launch is connecting flights. But nobody has been able to figure out how to do that connecting flight piece cheap, safe and efficiently. That’s where Momentus comes in.
So, Momentus when we got to know them about two years ago, basically had built this water-based propulsion system in the lab that allowed them to achieve high enough thrusts at a low enough cost to be able to move payloads from low Earth orbit to their ultimate destination or from another orbit to their ultimate destination, such that the combined cost of SpaceX plus Momentus is anywhere from a third to a seventh of all the competitors’ prices.
So, it’s by far the low cost option. And as other options get cheaper, these will get cheaper even more quickly. So, huge market. Technology proven in the lab so we could see the science worked, but it hadn’t been launched into space yet. So a lot of other investors were kind of like, “Well, talk to us once you’re in space.”
We didn’t need to do that because we could assess the science between our principal systems engineer, Dan, and one of the world’s leading experts in propulsion, who is a former NASA guy with like security clearance. They dug in and said, “Yeah, this is gonna work,” and all you have to believe is that they can do their systems engineering to get it up into space, which is not that hard for somebody who’s built and exited a couple billion-dollar companies, including launching 10 satellites into space at one of those companies.
So we invested a few million dollars. We usually when we do that buy about 10% or 15% of the company, then we worked with the founder for nine months. And in that period of time, he ended up with $400 million of ROIs, 10s of millions of dollars in signed contracts. I can’t say the exact number publicly, a partnership with SpaceX that’s out there and you can read about that basically gives them a huge competitive advantage, because SpaceX and them are working so closely together.
And we then led the next round and put in another 10 plus million dollars. We offered an SPV to our LPs, which we always do when we lead a series A to give them the ability to invest fee free, and we ended up with a big, big chunk of that company. And now they’ve continued to expand revenue. I think it’s probably doubled since when we invested, and it’s a perfect example of what we like to do. Invest early when other people don’t see it, and then help store them towards commercial success.
Meb: Well, I hope it works because that was one of my angel investments. I own probably point 0.0000001% of Momentus. I think it was the series A maybe on AngelList. I come from a family of aerospace guys. And so I’ve always been curious about that space. We actually have an aerospace focus VC on the podcast next, so stay tuned listeners.
We actually saw a few satellites last night. We stayed up in Santa Barbara and it was the warm winds, it was nice to see outside. SAW a few cruise by, I don’t know where they were going, who’s they were. But anyway, that’s a cool and space seems like obviously it’s in the infancy of commercialisation.
There’s a lot of cool ideas, and a lot of the fundamental foundation seemed have been built so it’ll be fun to watch. Okay, Momentus, that’s a cool one. We could probably spend an hour talking about that alone. Let’s walk through a few more. Pick one out next. I know ODIN Works or we could go back to Covaxx.
Dakin: The other one I would love to mention is Heliogen. Founder here, Bill Gross, has built and exited $7 billion companies. He’s the most successful unicorn founder of all time, and he runs Idealab, which some people may have heard of. This is not Bill Gross of PIMCO, other famous Bill Gross.
Basically, since Bill was, like, a young boy, he has been building designs for various energy systems that could be cheaper than alternatives that exist today and clean. And the company that he’s built that we’ve invested in, Heliogen, has basically already produced industrial solar heat cheaper than natural gas.
And the industrial heat market is about three times the electricity market. It’s a combination of hardware inventions in traditional heliostats with mirrors that are kind of redirecting the sun towards a particular point, and software innovation to automatically calibrate all of those mirrors in real-time using some artificial intelligence, and computer vision, such that you can achieve much higher temperatures than would have been possible before.
Typical heliostats only get up to 500, maybe 600 degrees Celsius, which is great for like steam production. But if you wanna use this for cement production, possibly in the future hydrogen fuel production, any of these industrial processes, you need high temperature sheet to be able to break down the thermochemical bonds, so you have to get to 1,000 degrees Celsius. We invested once they had demonstrated they reached 1,500 degrees Celsius.
And it’s again a perfect example of kind of the science risk has already been solved, moving into engineering risk. And when they launched, Bill Gates is also an investor. When they launched, they got a ton of press and they’ve got a backlog of 1,000 plus customers ready for them to deliver. So I think this is one that can be a 100-billion even trillion-dollar company given how big the energy markets are.
We have a unique partnership with Bill where we’re actually soon going to be announcing a couple of other of his companies that we’re backing as well similarly in the energy world.
Meb: Yeah, it’s gonna be fun, too. Watching the energy space. There’s likewise so much innovation going on and seismic shifts with the markets particularly this year.
Dakin: Who would have thought we’d see $0 oil for a couple of days?
Meb: Yeah, it wasn’t in my textbooks when I was going through university.
Dakin: I had to look that one up and remember how futures contracts works to make sense of that.
Meb: We were doing a Zoom call the other day, a Zoom happy hour, and I was asking my futures buddy, I said, “Had this ever happened before?” And they said it happened in another futures market, I’m blanking on what it was. But it was something else I think in the energy space where storage was somewhat of a problem. And luckily, it doesn’t last forever for obvious reasons. Okay, so take a pic. Next one.
Dakin: Yes. So let’s talk about Covaxx in Coronavirus. So, we didn’t invest in this before 2020. We invested in this in actually a shorter timeline than we usually do. But basically, when it became clear earlier this year that Coronavirus was going to be something we were all talking about, whether we should be talking about or not, it was gonna be something we should all be talking about, and that we would all be talking about.
And we dug in and looked at all of the diagnostics companies, and all of the vaccines companies that were out there and not out there yet. And, Covaxx basically has the most accurate antibody test. So, to step back, there’s three types of testing that are out there in the market.
There’s PCR nasal swabs, which 50%, maybe 60% accuracy, mainly because it’s difficult to administer, like to get it high enough up in the nose to be clear that you’re getting live virus. And it’s not obvious for a lung infection that it’s actually in the nose at the time that it swabbed.
So, everyone who’s listening should be very skeptical of any testing numbers they’re seeing because almost all of the testing is based on testing for live virus. And that live virus detection system is not that much better than a coin flip. Does that make sense?
Dakin: And that’s not to say we shouldn’t do that. That has a really important role in a testing process, but it’s not like your ultimate source of authority in the long run. The second type of test are these rapid antibody tests, IgG and IgM. So those are two different types of antibodies or antigens that kind of develop in response. And basically, the IgG is the longer-term one, the IgM is the shorter term one. And you test this through blood.
So you’ve probably seen a lot in the news about finger prick blood tests, a bunch of those have gotten FDA approval. The problem with these is most of them are like in the 80% to 90% accuracy range. So you’re not detecting live virus, you’re detecting a response if it’s IgM, like three to five days after IgG, 7 to 10 days or more after.
And it’s great because this is more accurate than 50% to 60%. But 80% to 90% is not good enough to do like widespread testing and like be able to reopen things based on that. The third type of test is a pure IgG high throughput test. And in the last week, there’s been a couple of these approved by the FDA.
I think Roche and Abbott are probably the two most prominent ones. Those are actually non-proprietary equipments so you have to have like the Roche or Abbott equipment. So it’s fundamentally limited in terms of how widespread that can be used, and the rate at which those machines process.
The other type of IgG test in this third category, that’s a long-term antibody detection test, again is blood. That’s not a finger prick for any of these this is actual blood draw is ELISA-based. This is a standard machine that used to like clean blood banks, meaning process all that blood and check for HIV or HPV or whatever it is so that you don’t end up donating blood that has like an infectious disease in it.
There’s ELISA machines all over the country all over the world, basically, unlimited processing capacity, and it doesn’t require any sort of like proprietary machine specific to the company that’s making the diagnostic. That’s the type of test that Covaxx is. And in our view as we studied the hundreds of testing companies out there, they have 100% specificity.
Meaning they’re not going to have false positives, which I think for widespread serological screening is the most important thing. And then they have like high 90s sensitivity, so they’ll have some false negatives, but that’s okay. And then basically we invested three months ago, no, maybe two months ago, the last couple of months have been so crazy.
Meb: It’s been a long decade so far.
Dakin: Yeah, exactly. We had one of our advisors who’s the former SVP of Roche who ran like neurology and Immunology online for a couple of like days not sleeping. We had one of the guys who’s built makes it a couple public and private biotech companies who was involved in one of the first synthetic peptide diagnostics.
And that’s the underlying technology is, unlike a lot of the other things they’re like artificially producing. The peptide and this becomes more important in the vaccine. They’re the diagnostic. Since we invested they’ve sold millions of these diagnostics. It’s really gone way better than, I mean, I wish this would all end now. And this investment did quite poorly.
That being said, that’s not what’s happened yet at least, and they’ve done unbelievably well commercially. So much so that that one investment is looking like up like 40X. And the second piece of the company is a vaccine. So people are reading all about the vaccines. Most vaccines involve dealing with some amount of like live virus in some form.
This is a synthetic peptide vaccine, which means you’re never dealing with that, it’s completely safe. You’re solving the problem from a chemistry perspective rather than a biology perspective. It also makes it a lot faster to iterate.
So they’ve already tested like 30 vaccines and gotten down to, which they’re going into humans with shortly, their top three. And this is the kind of vaccine instead of taking 18 months to like show safety and efficacy could happen in like six months if the FDA works with them in the right way.
We’re generally not event-driven investors, I would say, like we’re thinking about these kind of big, long-term things. In this case, we chose to do that because of how important this event is in all of our lives. And we happened to have the relationship with the right founders.
It’s actually a spin out of a 30-year-old biotech company that has already deployed billions of doses of vaccine around the world. Hundreds of millions of diagnostics. They have like an extraordinary track record in they were the first ones to market with a SARS vaccine and diagnostic 15 years ago which is very similar. You know, this is SARS COV-2.
They have clinical trials that have been successful in Parkinson’s, Alzheimer’s. So it’s a very exciting platform technology that is quite differentiated within the vaccine and diagnostic world. And so far it’s going well. We’re glad we made the exception and did an event-driven thing.
Meb: Yeah, well, I’m hopeful. That’s another easy one to cheer for. Why don’t we touch on maybe one more? I don’t wanna keep you here all day. I’m sure it’s a beautiful day in Jackson. ODIN Works maybe anything else you?
Dakin: Yeah. So in ODIN Works. And I can’t say the new name, but there’ll be a new name publicly, depending on when this comes out perhaps before then. The company basically is in the indoor vertical farming market. So, you’ve probably heard of big companies in this area like Plenty, and Bowery and arrow farms. These guys are all doing hydroponics where you’re basically doing these large vertical towers and you’re putting water in them.
In this case, they’re doing aquaponics ODIN Works is, and the big difference there is you are growing fish in like an indoor fish farm, co-located with your greens farms. You’re producing like lettuce or baby greens. The key with aquaponics is you get way higher yields.
So because you have the natural microbiome being cultivated coming from the water that’s coming from the fish, and from the soil that’s coming from the fish as fertilizer, you end up with much higher yields. And the challenge that pretty much every vertical farming company out there has run into is that it’s still really expensive. And ODIN Works has already shown at a small scale that they are cheaper than the field.
They’re not just cheaper than all the competitors they’re cheaper than the field. And if you look at the terminal cost projected for any of the competitors, it’s actually more expensive than the field. And the key thing to remember is, this is including transportation costs. So if you’re in New York City, most of the greens in New York City you’re coming from like the Salinas Valley in California.
You have huge transportation costs and your huge spoilage that happens along the way. And there’s food safety issues, which you know, is quite timely today, given what’s going on in the world. ODIN Works is cheaper than the field, safer and it’s like locally grown to whatever community. So you’ll end up at scale with farms in New York City, in LA, in San Francisco, in Chicago. They’re having interesting discussions internationally about a few places as well.
And the second really innovative IP piece is the automation system. A lot of other companies because they’re trying to solve this as like a software and hardware problem, rather than a biology problem, have these very expensive lighting setups that are custom that they’ve done, these very expensive automation systems.
Their automation system eliminates 98% of the moving parts. So between the aquaponics innovation and the automation innovation, you radically lower OpEx and CapEx, so that’s why we invested in them, and they’re building out a larger scale farm now.
Meb: What’s sort of the main high-value products? Is it the like artisanal lettuces? And when you say fish, like what kind of fish is it? Obviously it can’t be enormous tuna in a building I can imagine, what are they actually growing?
Dakin: Yeah, so the fish is just grown today for the purposes of providing the microbiome to the plants. So they’re not selling the fish commercially. At some point, that would be an even bigger market opportunity. You always like companies that have like a beachhead, that’s already a $10-billion opportunity. And then a bigger beachhead, that’s like $100-billion opportunity.
So the fish could be a business line down the road. But yeah, today, they’re in Whole Foods in Brooklyn, and they have a few different mixes. They have some microgreens, they have lettuce and a few different mixes of green vegetables. They basically sold out completely because of the local safe story that they can tell, and Whole Foods is now gonna roll them out at a much larger scale. And they’ve got a number of other commercial partners that are gonna roll them out over time.
Meb: Yeah, I mean, it’s hard to imagine a world you know, again, I mentioned, listeners know this, but we come from a farming background in Kansas and Nebraska, very traditional row crops. And even now I mean, when I was growing up, the tractors were already more technologically developed than anything else I’d seen. The calves had TVs, and AC, and radio.
But it’s hard to imagine a world in which almost the humans are involved at all. I mean, the automation is just like, why is someone even still driving the tractor? And it’s happening quickly everywhere which is great to see. But there’s Brooklyn hipsters pay anything for microgreens. That’s a great place to start.
Dakin: Yeah, it’s always nice. Again, they can actually operate cheaper than in the field for the products that they’re selling. But it’s always nice to start with kind of high-end products where you can come into a greater margin while you’re working out your systems.
The other thing I’ll say is, my personal belief is not that everything is gonna end up as indoor vertical farming. Some products are well suited for that. Some products are gonna remain field products. And the other thing on automation I mean, I think we’re a long ways off still. And when I say a long ways off, it’s maybe 20 years from eliminating people from all these places that people think people are gonna be eliminated from.
I think people’s role is gonna change. You know, one of our other companies, for example, Is Tyco, which is autonomous electric airplanes for crop dusting. It’s not like all the Ag pilots no longer are involved. The Ag pilots just insane, I mean, it’s crazy. The statistics 30% plus of Ag pilots die over the course of career.
They can now sit in the farm and remote control the object, they’re not going to die, fantastic. And it’s much safer, much more accurate. That’s like a perfect example, I think of people are still involved in the process but it’s in a safer, more, I guess, leisurely way. And what we ultimately want is not like mass unemployment. What you want is people doing jobs that are rewarding and fulfilling in partnership with technology, and in partnership with machines.
So they’re not being replaced, they’re bringing on a new ally that makes them more efficient, make their life better because they don’t have to work as much to earn the same income. That’s what I think the promise of technology is.
Meb: Yeah, augmentation rather than replacement. I think that’s…we talked a lot about this in asset management maybe a few years ago, a lot of advisors were really worried about being replaced and some of them should be, of course, but in general, the ability to incorporate a lot of the tech tends to be where it is. Let’s wind down a few more…
Dakin: Can I say one more thing about that? There’s some things that machines are really good at and some things that people are really good at. Machines are really good at repeated automated tasks. We don’t have artificial general intelligence yet but we did invest in that and maybe it’ll be there in a while. What we have are things that can automate the same thing over and over again once told once by a human.
It can even learn you know what the pattern is, and then do it with basic machine learning. And humans are really good at conceptual insights. Humans are really good at communicating. Humans are really good at reading people. Humans are good at emotions.
So, I just think we’re very far away from humans needing to worry about getting replaced. And I guess the other beautiful thing is we’ve learned during this coronavirus pandemic, regardless of people’s politics, even when people can’t work, money is gonna show up. It’s not like people are gonna starve in the streets. That’s not like what society is choosing to do or permitting to do.
Meb: When they close the beach, it was tough for me in Los Angeles. I said, “Look, I think the sensible way to go about that” and you see what’s going on Huntington, will say, “Look, you can walk on the beach, you can run on the beach, you can surf on the beach, you just can’t loiter, and sit,” and that way people have the ability to get out and about.
Dakin: If you look at the numbers on coronavirus, and if you look at the U.S. response compared to a place like Sweden that has chosen to allow herd immunity to develop, I think it is clear at this point just looking at the statistics, forget reading news headlines. The news headlines are not designed to inform us, they’re designed to shock us.
If you go look at the statistics, yes, Sweden has had some deaths. Yes, Sweden has had more deaths than its neighbours in Finland and Norway. But you’re looking at a limited time window. Everyone is going to end up getting exposed to coronavirus at some point. People who are over the age of 70, 20% of them are at risk of dying. That’s what the statistics look like.
People who are immunocompromised have a high risk of dying. But everyone’s going to get exposed. And the question is do you shut down the entire economy, cause panic, cause fear, and cause people to be out of their normal routine during this or do you let it unfold naturally? And I personally think based on the data I’ve seen I think it’s just a data question.
The Swedish approach is working. It’s working better than what we’re doing here in the U.S. And the challenge once you’ve gotten under the U.S. system now, we shut down and oh, shoot a bunch of cases pop up, we’re closed. I was looking at a number last night, and it’s just saddening for me, we were talking for California. And there’s 30 plus million people in the state, and 2,500 people have died and we have shut down the entire economy.
That doesn’t make sense to me. I get the arguments about the healthcare system being overwhelmed. That’s not what I’m seeing from talking to all my doctor friends. I get the arguments about making sure that we control the rate of spread. The reality though, is we’re either going to be shut down for years as we open, it spikes, we close, we open, it spikes, we close. Or we’re going to kind of bite the bullet and we should totally have social distancing. We should totally have people in their homes who are over 70 or are immunocompromised.
But if you look at Italy, like over 90% of the people who have died are over the age of 70. Of the people who have died in Italy, over, I forget whether it’s 80% or something like…they in a, like, high 80s is, have one pre-existing condition over 50% have three pre-existing conditions. We can be smarter about the way in which we manage this than we’re doing currently, and do it in a data-driven way.
Meb: Spoken like a scientist. All together too rational for today’s modern commentary. Dakin, let’s wind down with a few more sort of questions, which is hard for me to do. Feel free to go deep if you want. You’re very much an optimist. You had a great post recently called “The greatest time to be alive,” where you said, “Look, we have more wealth, prosperity, abundance at our fingertips than humans have dreamt up in a lifetime. Thanks to breakthrough inventions, the rate of progress, pace and conditions, enable unimaginable human joy is accelerating.”
As we start this decade, and this has been a pretty tough beginning to the 2020s, what are you thinking about on the horizon? I assume it’s positive in general. But as the next 10 years, which is the lifecycle of your sort of fund or funds, anything else we haven’t talked about that’s sort of on your brain or that you’re marinating on?
Dakin: What’s interesting right now and I read a lot of what Ray Dalio puts out. I think he’s a very smart guy. There are these two countervailing forces in the world, one…and there’s more than that, but to simplify it. One is technology and science and innovation and it is off to the races.
I mean, I just finished reading “Lifespan” by David Sinclair, who’s an expert in this area, and one of the types of folks that we rely on as we do investing in like the biotech world, and people who are being born today should expect to live to 100 plus, many will live to 120. I, personally, the way that I eat, the way that I exercise, the way I take care of myself, as long as I don’t do something stupid, I’m planning live to 150 or more.
And I think as you get to those numbers, the rate of invention continues accelerating, and it really becomes a choice of like, “Oh, cool. I’ve done enough in this body, like, I’m done now.” And I don’t mean live unhealthy. I mean, live healthy, like, 93-year-olds running marathons, 140-year-olds going up and hiking and climbing the Grand. That’s the kind of thing I’m talking about.
And some people will think this is crazy because in the same way, and I’m actually gonna write a blog about this shortly. What we should be pissed about as a civilisation right now is not coronavirus. What we should be pissed about as a civilisation is that we have accepted blindly that the number one cause of death just happens, and that’s aging.
Aging is a disease. The underlying cause of heart failure, of cancer, of all of the greatest risk factors we ever, dying is actually aging and we should be treating the disease of aging. And that’s happening. Like whether you like it or not, that’s coming and you’re gonna be able to live a very long time. So that’s one thing I’m really excited about.
While we live a really long time and extremely healthy, we’re also going to have way better quality of life. We talked about automation, making it possible for us to all work in more pleasant, more enjoyable ways. Of course, if you want to go do manual labour, you can go do manual labour. But that’s not gonna be required of us to earn our keep.
The amount of wealth that’s gonna be created in the next 10, 20, 30, 50 years because of these innovations in biology, these innovations in hardware, that just reshaped the whole fabric of what civilisation and society looks like, means that we better get used to shutdowns where we have a lot of time on our hands.
We have the ability to read, we have the ability to create, we have the ability to go exercise, the ability to raise our kids like as a full functioning family unit. As someone who spends their time imagining it all, it’s kind of unimaginable, like how fast things are changing. And I think, I talked about the positive force naturally first, it tells you about my mind-set.
The other force is the time of societal conflict. And part of its prompted by that and part of it is just where we’re at in the cycle. So, Ray talks about the cycles of civilisations. And if you look back at the fall of the British Empire, the fall of the Dutch Empire, we’re kind of like in that place in the cycle for potentially the fall of the American Empire.
And as civilisations get more prosperous, get more wealthy, you tend to have short-term economic cycles, long-term economic cycles, you could teach on this better than I can. And you end up with calcification in the financial system, where more ends up accumulating with the richest, as you have like this most recent bubble. It was a bubble of financial assets inflating, rather than broadly assets inflating.
And as a result, you end up with this big societal divide, arguing about how to divide up the pie. And I think that’s a big part of why Trump was elected. You have kind of extreme political polarisation. If you look at the periods historically, politically, and socioeconomically that are most similar to this, it’s like the 30s and like the Great Depression, regardless of what the economic situation is, and that’s a scary force.
So, in the next couple of years, I’m definitely uncertain about what’s gonna happen politically. I’m uncertain about how those questions about how to divide up the pie are gonna addressed between capitalists and socialists and everybody in between. But I don’t think in the long-term, you know, if I’m thinking about my grandchildren’s future that that’s gonna actually turn out to matter a whole lot. What’s gonna turn out to matter in the long-term is the technological force as long as it doesn’t get stifled by whatever comes out politically. Does that make sense?
Meb: It does. You know, I was smiling as you’re talking about this because my brother who’s a psychologist was talking and half-joking, he says he’s gonna write a book about how to counsel your animals, your dogs when you go back from the quarantine they’re gonna be so lonely all day long. They got spoilt. And I’m like thinking about like, hanging out with my son all day long when you have to ship him back to school.
And as you mentioned, it’s been both tough for, you know, a lot of people but also incredibly blessed to be able to have this sort of time. And I imagine a lot of people will look back with it with some sort of fondness and miss sort of this ability just to hang out a lot.
Dakin: We mentioned, you know, the rational scientific response. My heart goes out to the people that are suffering in the world right now, and who are afraid, and I’m very saddened for them. And one of the things that we work on with our entrepreneurs is, there isn’t some meaning to the events that’s happened. We give them meaning to the events that happen.
And what you just said is a perfect example of a beautiful meaning of getting to spend time with your son. And this is the hallmark of entrepreneurial success. The ability to take control of your own psychology, take control of the meanings that you make, and find the silver linings, find the lemonade in lemons. It has been a beautiful time for those of us that have chosen to make it a beautiful time.
Meb: Yeah, maybe putting a little bit of vodka in that lemonade, but we’ll see how it winds down. It’s been a lot of fun. We ask everyone a closing question which I actually, you probably don’t know this asked you already when we were in Jackson Hole, all the investors we asked at the end of our podcast, we say, what’s been your most memorable investment? I don’t know if you remember what you said. So you feel free to use that one or a different one. But what’s one?
Dakin: I don’t remember what I said. Yeah, I think I’ll give one personal angel one and one fund one. So definitely the most memorable personally angel investment is Boom, the supersonic jet company. I mean, it’s just so cool that we’re going to be able to fly shortly from like New York to LA in a couple of hours.
Meb: And then tell listeners what that is if they’re not familiar.
Dakin: Yeah, so Boom is a company now based out of the Denver area that’s building a supersonic jet. So if you think of the Concorde from before, this is a Concorde that makes financial sense. That’s the shortest way of putting it, it’s well tested, it’s well-validated, it’s gonna work, you don’t have to worry about that stuff. You’ll read that tons of airlines have already ordered them, particularly in a world where we mail off to wear masks for a while shorter flights is gonna be a beautiful blessing while wearing those masks.
You can even like make LA to Tokyo like a day business trip suddenly with this, which is just crazy and mind-blowing. So excited about that, so many great lessons from the founder and CEO of that, Blake. One simple one is just the way he updates investors is unlike any other founder out there, and it’s kind of become a template for a lot of other founders that we work with and that folks in his ecosystem work with.
Meb: What are the positive takeaways that he does? Is it just transparency, is it frequency? What’s the…?
Dakin: Yeah, so he sends a monthly detailed update where he’s kind of told every investor, small, big and little team, “Here’s the top five outcomes for the company. Here’s our wins against those. Here’s where we missed, here’s what we’re doing based on it. Here’s the next set of outcomes.”
And then there’s always videos of the plane getting put together, images, asks for help. It’s just a really good format that as an investor you feel like even though you weren’t involved for the last month, perhaps you know what’s going on like and nothing’s being held back.
Meb: Yeah, that’s great. It’s something we talk about where it’s odd to me, and I get it a lot of companies that don’t provide much in the way of particularly the ones that do crowdfunding, or sort of the AngelList style, where they have a lot of individuals because we’ve done one once and there’s so many people that not only can be an advocate and incentivised evangelists but also can be useful in many ways.
I get it. A lot of people are busy and whatnot, but it seems really odd not to be doing the kind of consistent updates end of speech.
Dakin: One thing that’s remarkable to me both in company and investor relations, and GP and LP relations is it’s like often viewed as this relationship of animosity. And I get why that’s historically happened because there have been conflicts. That’s not how we think about it with our companies. We think of ourselves as partners building the companies.
That’s how we think about it with our LPs. I mean, we send out a monthly update to all of our LPs, transparently across the companies, we have detailed financials for all the companies like in our LP portal, and we’re all in this together. Because my mind-set is like, we’re trying to build things that are gonna make human beings lives better, the LPs have an important role to play, GPs have an important role played, and founders have an important role to play. And we can’t do that unless we’re well synced.
Our annual meeting was one of my favourite things this year, it was right before that conference in Jackson, where all 15 of the founders were there. Most of our LPs were there, and there was this great exchange of ideas, opening of networks. That’s like what venture capital should be about, where you’re bringing together some of the already very successful people, normally with the budding entrepreneurs, and they’re collaborating to kind of make that vision a reality through those kind of networks they can tap.
Meb: Well, you mentioned you’re gonna do two. Do you still have another one on your brain?
Dakin: I’ve just really enjoyed being involved with Momentus, the first space transportation company. I mean, getting to see that built in the lab, and last 4th of July when it went up in space. And watching that was such a cool experience. I mean, I think all of us have somewhere inside of us that very curious childlike part, that imagines a much better future and space just captures that imagination in a special and remarkable way. It’s so vast and we’re just at the beginning of exploring it.
Meb: Tailing off that, something that I was talking to investors about on the podcast, but also writing about too, is that one of the struggles with public market investing is 95% of the news flow is consistently negative. Whether it’s just CNBC, Bloomberg or just everything like you’re worried all day. It’s just… It makes it all you want to do is go buy, put some stock market all day long, sell all your investments, it’s just constant bombardment.
But on particularly the angel, early-stage entrepreneur side, I see these emails and I tell listeners of this podcast, you don’t even have to invest, just go sign up on AngelList and other VC firm’s mailing lists because it’s the exact opposite. It’s so optimistic and positive, and exciting looking at all these companies.
I remember seeing the pitch from Momentus, I was like, “Oh, my God, this is so cool,” you know? And so it’s just such a different mind-set. So I would tell people, if you’re gonna be a public market investor, pair it at least with exposure to the start-up private side, you’ll be much happier mind-set.
Dakin: It’s so true. I mean, all of us are feeding our mind every day, and our world is a product of what we’re feeding our mind. If we spend all day reading negative news about how everyone’s gonna die and everything’s gonna crash, we’re gonna find all the evidence for why everyone’s gonna die and everything’s gonna crash.
We spend all day reading uplifting things, growing and expanding ourselves. We’re gonna live a much better, higher happier quality of life because we’re gonna find that out there, even amidst the things that are depressing, and even amidst the things that are more challenging. And so I’m very careful with my news consumption.
I spend a limited time window where I get ready. I know what’s coming for me. The news is not just being passively fed to me, there’s an agenda there. Whether you’re on the left or the right, all the agenda is to catch my attention. And the human brain the way it works is it catches your attention if it shocks you. And so you got to get ready for that.
“Okay, cool. It’s coming to shock me. What are the facts? What are the facts? What are the facts?” Then go back to life and being in, particularly with cell phones and email and everything. We all end up bombarded by this stuff. And you’ve got to take back control so that you’re actually taking control of the narrative of your own mind.
Meb: Yeah, that sounds like a perfect way to wrap a bow on this. What are the show notes, where are the best places for people to follow not only affirm, but also your writing, thoughts, etc.?
Dakin: Yes, so we have a blog and all of our team kind of publishes blog posts each week and we can give you the link to share with that to subscribe to the blog. And if you have any questions just email me, email@example.com, and my team kind of processes all that and that’ll get right to me.
Meb: Dakin. Thanks so much for joining us today.
Dakin: Awesome. Thank you for having me. It was so fun to chat and explore the future together.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcasts. If you love the show, if you hate it, shoot us firstname.lastname@example.org. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. My current favourite is Breaker. Thanks for listening friends and good investing.