Climb By VSC: Episode 31

Vijay Chattha: Welcome to another episode of the climb podcast from VSC Ventures, where we bring on company builders and folks that are helping scale businesses and climate technology. Today I am very excited to have Ian Rountree, founder of Canto's amazing and important venture firm that's investing in some of the most complicated and complex businesses and technologies out there to solve some of our biggest problems. I think Ian can say it better than I would, but I do want to introduce them. I had a chance to get to have dinner with him about a month ago, excited about what you're excited about and excited to share that with our community. So with that, thanks for joining and looking forward to getting into it. Yeah, I'm excited. Awesome. So let's start with your background. So you have an interesting background to get to cantos I've seen just from your background, and really I guess my question is how did you get from like SoFi which sort of FinTech and financing into deciding to go into cantos and again, maybe I missed something as I was looking through LinkedIn, but I'd love to also just understand that sort of your career trajectory, and maybe even if it started before.

Ian Rountree: My background is sort of nonsensical, insecure, circuitous. And if you look at my LinkedIn, you'd be like, why? It's kind of deep tech meaty, like what's going on here? I mean, honestly, it didn't all make sense to me at the time I think some things aren't. All the things aren't apparent until after the fact right and the through line for me was always trying to find my place in the world. In like that, kind of Gestalt sense like I wanted to do good in the world. I didn't necessarily know the best way for me to do that. And I studied political science, you know, started pre med then thought maybe I'd work in public health or something. Went work for a nonprofit in Central America after school, then went into healthcare consulting when I got interested in this sort of business as a way to affect change in the world. I was really interested in impact investing in social entrepreneurship. I had always been kind of a sci- fi not future forward person given my mindset. And so, in 2012, quit my consulting job moved out to San Francisco was one of the early employees at SoFi on their Capital Markets team also did some BD marketing, but I was sort of the in house like banking analyst and did some fundraising for their student loans at the time, which is when I got interested in investing in sort of brokering capital with innovation. And set my sights on business school, couldn't get in. So my consolation prize was investing my savings in 11. Startups figured I'd lose it all but learned a lot and parlayed that after a couple more startup jobs into Kansas in 2016.

VC: Amazing and so tell me about that experience with those first angel investments. How many did you do? What did you learn? What got you to the point of okay, you know, you've seen enough that you want to start a fund?

IR: Yeah, I mean, 11 investments over is kind of 2013 to the beginning of 2016. And I mostly learned what I didn't know and what you can't know, in the early days and venture investing is, I think, more than any other asset class dealing with uncertainty. And you know, I was of course, overly confident initially and I thought every company I invested in was gonna go to the moon and and I learned the power law, most of all, which is that I mean, the way that those 11 investments played out was that one of them within a few years, I was able to sell in the private markets. This company's not gone public or anything. But sold for 20 times my investment, and that was one of the larger ones and so it returned kind of four times the total invested capital and haven't seen anything from any of the rest. There's like a couple that are doing all right, but what I learned is essentially, like, you make 11 investments, only one really matters. And so thinking more probabilistically is probably the biggest hurdle that you get over at least if you're coming from other asset classes where there's more risk aversion and you sort of have to like to make sure that everything the median investment is very good. Venture is fundamentally different, probabilities are so skewed.

VC: How did you get that deal flow? I mean, if I look at if I think about your job, it's so far, I wouldn't think that you're running into these kinds of founders on a daily basis, but maybe I'm wrong. Like how did you do it, like just two different worlds you're living in during the daytime and nighttime or like, how did you have to do that? Or was it before that?

IR: Actually, I was young and single and I just moved to San Francisco and I wanted to meet everyone who might be interesting and it was going to happy hours and dinners and you know, weekend getaways. And the founders of so phi had gone to four of the five had gone to Stanford Business School. And so sometimes they'd have their friends over and their friends were, you know, starting companies and it was really happenstance. And I don't know maybe it was easier back then. Like me, I was writing tiny checks. So it wasn't like the allocations mattered. It wasn't that competitive, but we can get into this but it's certainly like from 2013 to 2017 that phase was when it felt like Angel Investing starting your own small fund really dramatically popularized Yep. And that sort of changed how I was thinking about things and then you know, kids were much broader in scope. Again, always been motivated by how we do good in the world using technology, but it was more broadly defined. I was okay with sort of adjacent like bank shot impact type pitches. And over time, one of the reasons I got more interested in deep Tech was that I felt like there was a more direct line to impact when you're building stuff in the real world but also because venture got much more competitive. And I knew that we'd benefit from some specialization.

VC: Yeah, it makes sense. And now so Cantos one, how big was the fund? How many companies did you do out of it or still doing out of it?

IR: Honestly, at the time, like, I had run out of my savings, and I was working at a startup and we were pitching VCs, but you know, I was kind of realizing that I'd rather be on the investing side and that that startup and the CEO and I had, you know, sort of differences of opinion of which which way the businesses needed to go. And I was realizing as we were pitching all these VCs, like, we literally we did 80 pitches, and I remember four of them fondly. And I was kind of like held VCs up on a pedestal I thought it was it's like magical title that if you were a VC you are automatically you know, some genius, worthy of, you know, tremendous respect and that experience really disillusion me about that. And I realized that, yeah, there was a lot of money in VC, but it was kind of hard to find people that had found her empathy and got back to you quickly and or you know, smart and kind. And I started talking to folks saying, like, I I've met a lot of VCs, and founders, I'm pretty sure I can get the founders to take our money alongside instead of, or at least alongside most of these guys out there. And that issue, I think enough people have that obvious realization that they're like, our VC kind of sucks. Like, let's go start a firm be the VC that we wish we had when we were raising capital. And I do think a lot of it has really changed. VCs are just nicer on average than they were when I got into it. But that first fund it was like hey, I've demonstrated some success, you know, returning four times my angel portfolio, but I'm, I'm out, you know, I'm out of my own money. And at the time, I had an excitement that was on paper. So it's not like I could keep investing my own funds. And I said, Wouldn't it kind of be a shame for me to stop if presumably, I'm only getting better at this and I thought maybe I'd raise like 2 million bucks and front load the fees and go drive for Lyft while I waited for markups or something or get a different job. And that first one is actually because I knew there was a reasonable chance that I wouldn't be able to raise another fund or I would have found out that I was, you know, bad at it. Then what I did is I only had management fees for three years, because I kind of wanted an excuse to like, be able to move on and do something different after three years and and still with like, a net fee load of 6% in that first fund and I even even had lower carry because I was like the only thing that matters is having money to invest and like I've only made 11 investments in one two, okay, like, I need some advantage here. And so I dropped my carry dramatically, dropped management fees, and it still took a little over a year to raise four and a half million dollars.

VC: You say my ABCs, four of them you remember.

IR: Oh, I remember a lot of them. I remember four of them fondly. I mean they were just like they're these ridiculous experiences that any founder listening is gonna be grinning or laughing or cringing as I say this because it'll be so familiar. Like, we made the trek down to Sand Hill Road, God forbid they would leave you know, they would drive up to the city to meet you and they had you know, sort of sat in their crystal thrones and made you come to them. And we go down. You know, we take half our day to drive to Menlo and I live in San Francisco and I probably go to New York more than I go down. So maybe I'm you know, subject to this criticism now but like, it was like this whole track to get down there. And then we show up and we're all prepared. And this guy is sort of like he's late to the meeting and He's flustered and he comes in, he's like, ah, you know, flipping through his phone. It's like, I'm sorry, guys. It's been a really busy day. Remind me what you do again. And like I wanted to, if we didn't need the money so badly, I would have walked out of the meeting and I say that just to say like the bar is so low.

VC: I want to come back more to the investment philosophy, but I also want to talk about opportunity, right? So when you started Cantos one, it sounds like there were two major opportunities, one, there wasn't enough. There weren't enough good VCs. That is helpful to founders at that time, and that deep tech probably was underfunded, if not funded at all. So you had this like, maybe this personality superpower visa vie the VC culture then but you also had this area of expertise you're gonna go after an area which is risky, and had a lot of hidden depending on what party look at sort of Frontier tech, like whether it's climate, climate tech at its downfall and the first version of it, or other ones have had theirs in hardware, right not maybe not enterprise but certainly consumer.

IR: At the time, the bar was literally I don't suck. And like I hadn't got I hadn't gotten to deep tech yet. I was trying to learn venture capital. And you know, and there were some deep tech investors like you know, Matt Arco coined the term deep tech or earlier than that. And DCVC hadn't rebranded from data collective yet. They were still doing mostly AI but they made a couple deep tech investments. It just wasn't like a thing yet. And I was trying to learn about investing and so I was like, you know, listening to every 20 minute VC podcast and reading all the blogs and trying to meet everyone who was a VC to learn from them, and I was jotting all these notes. And now I look back at it. I'm like, I'm laughing because I was asking like, crappy VCs for advice and like taking it and like, if you want to learn to play basketball, you don't watch high school games. You watch the best you go watch like, Jordan and Larry Bird, Steph Curry like I is so it just didn't occur to me at the time that there was like a stratification among VCs and like, I don't hate you know, apply this to me if you're listening like you know, take this with a heap of salt. I think every tweet and interview that a VC dollars should come with their IRR. So you can, you know, caveat what they're saying. And our unrealized IRR is something in the low 30s. It gives a little context but not liquid. So take that with a huge Asterix. And, like now I kind of don't pay attention to anyone that hasn't worked out or doesn't work at benchmark or Sequoia. Like if you're trying to be a VC don't listen to anyone else. Don't listen to me. Go find interviews with Don Valentine and Mike Moritz and Doug Leone and like the founders and current GPS of benchmark like they are the only people who should listen to it. And you realize when you listen to them, that they do things a hell of a lot differently than most VCs and sometimes it's super counterintuitive, but like that is what is required of building a business like as I got really interested in investing in businesses, I we can talk about this but I like obsess over moats, but not understanding that at the time, I was just trying to be nicer. And that was a differentiator, but that eroded very quickly. And you know, I started experimenting in deep Tech in 2017 because I was listening to all these VCs and they were like, well, we don't do hardware or software that has great margins. And you know, hardware is harder and more expensive and it takes longer and it's riskier, and I was like, Oh yeah, amazing advice writing this down and like one of my best investments Salia Jin is a deep tech company. And I saw it nine months before I ended up investing and I didn't invest in the previous one because I wasn't investing in hardware at the time, if that gives you some context. And then I just learned about where alpha comes from and if you are going to derive returns, you have to go where others aren't fishing, like Game Theory is real. And so if 95% of VCs were categorically saying they weren't investing in hardware and bio, and also it dawned on me I was like, wait, that might be the best place to invest. It's like cheating, if you can figure out how to do it.

VC: Let me ask you another question today right now. May 2023. You had to start a brand new fund today. What would be the alpha to that strategy?

IR: Oh, I still think it's early stage deep tech. And it's gotten more popular, but I actually don't think most people understand how to do it. And I see that because I've been doing it wrong a lot of the time and like I'm still learning by doing but there are a lot of folks that go into deep tech investing. And they think that you can just broadly apply all the lessons that you learned from software, and there are some that apply, but there's a lot that don't. And one of the reasons that we don't don't categorically invest in pure software anymore, is because it's totally different to predominantly take technical risk versus market risk. There's a lot that changes. And I became convinced at a certain point that if we tried to do both, we'd be at best okay at one of them. Like, I want to be one of the best in the world, if not the best firm in the world for an early stage. Hardware and bio founders to come to and to do that is going to require focus. And so people look at me like I'm crazy when I say we don't invest in software, like my greatest mentor has been in venture capital for 50 years and started when you were mostly investing in hardware, you know, he's getting old and kind of forgets that I focus on this now. And when I remind him, we don't do software anymore. He looks like I slapped him and it's like, well, that's stupid. But you kind of have to be doing things that most people think are stupid if you want to, like produce generational returns and in terms of deep tech, right?

VC: I know that you have some advisors to the company, sort of listed on the site. And you've got a team now that you've built over time with as you've added funds, but how can you diligence so many different areas? I mean, it's not like oh, well, I get SaaS, right. Every one of the deals you've done seems like it needs a different level of expert to have come in and help you.

IR: Yeah, there so we have 10 or 11 advisors who are technical founders that I backed in fund one and two, who are advisors to fund three so that there's no conflict there. And importantly, they are technical entrepreneurs. A trap that you can get yourselves in is if you act ask, quote unquote, experts to do technical diligence for you. There's two things that are happening. One is that experts are definitionally trained on the status quo, when the biggest companies profoundly challenged the status quo. And so there's a dissonance there where like, they're going to probably tell you that it's not going to work or dumb or whatever. The other thing is that again, going back to the probabilistic nature of this asset class, you're dealing with high variance, low probability outcomes, whereas PhDs are trained thoroughly to like nitpick every detail and find every little thing that could go wrong, and tell you why it won't work. And their job is essentially to point out the, you know, the fact that it's unlikely to work, generally speaking, I know it won't work. Don't tell me that, like, let me figure out is there a violation of physics that's going on? Like, you know, is it theoretically possible sometimes I'll stipulate, I won't ask them. What do you think about this? Or do you think it's gonna work? Or do you think this god forbid, do you think this is a good investment? Don't listen, they're scientists. They're not investors. You want to know, like, what flaw is there in the rationale like, is this theoretically possible? Because we're dealing again with like, single digit probabilities which they're not trained on? So you kind of have to reframe it. And then once we know that there's no violation of physics, I'm like, Alright, get out of here. We're gonna go talk to him about the business because the other trap in deep tech especially, and I see a lot of my peers doing this. And I was tempted to do this for a time because I had a lot of insecurity about having a bachelor's in political science and figuring out deep tech is the path to the partnership with PhDs and they can help you in their areas of domain if they like, get themselves out of that academic, risk averse training. But the fundamental thing that we are investing in is businesses. We don't invest in technology. We invest in businesses and technology can be a means to that end, but they are a means and to treat technology as though it is in itself inherently valuable and I'm speaking from an economic perspective is idiotic like I actually don't care that much about IP, you got to know is a business going to work? And that is more about the leadership, the market, the unit economics, the sustainable competitive advantage that you can build over time, which all might be predicated on the technology but it's like a thin slice that all the value sits on top.

VC: How quickly does it take you now? And maybe did it take you then to understand the founder in a way that you earned the trust or you realize that you didn't want to work with that, like, founder evaluation?

IR: Like they have to be technically competent, they have to be an incredible leader. The ability to inspire and manage others and have a like, talent gravity if success is obviously a multivariable equation, but if you force me to index only on one variable, I would say gravitas, like or talent, gravity is maybe a way to put that can they recruit and retain the best talent out there? Can they attract partners and talent and customers in a way that is itself differentiated, because startups always get hard? There has to be some pathological drive or near pathological drive behind them. And, again, going back to studying the best, Mike Moritz would sometimes say that or allegedly he would stop the founder sometimes on the pitch and say, All right, let's stop talking about business. I want to know what happened to you before you turn to 17 that formed your psyche. Like you got you got to go deep with them and really understand what drives them and what would get them out of bed in the morning. And I think I understand this better as I have come to understand my own reasons, which are like, worried in childhood and near pathological in their nature. Specifically, I lost my dad when I was really young and facing mortality at that age. imprints. A hard deadline and your psyche that you like is hard to ignore. And I think about my death regularly, probably more than is healthy. But it has a way of clarifying things like I only have so much time and I have to focus and I'm determined to be part of something that I'm proud of on my deathbed when I'm on my way out. into something like that knowing that about myself, I kind of look for whatever it is in the founder. And if I don't understand why they are doing this, at its most basic level, then like they're just another one entrepreneur that like heard raising money was easy, and they're probably going to quit and they're certainly not going to build a 10 to $100 billion company that changes the world now put on my epitaph.

VC: Let's jump in a little bit more on some advice to founders right now. So first of all, where do you see the market and funding for your companies? Many of them are probably some of them just raised actually. I saw that what's happening in the market may be May 2023 that's different from December 2022.

IR: Yeah, I mean, it's been hard for a while. I think the difference is like, if you talk to the founders, they're like VCs are investing right now. If you talk to the investors, they're like, prices are too high. And like, if that's the time that it isn't that there's not money there is that there's the bid ask spread is too wide. Then like, on one side, the founders have limited runway. And we the investors have measured with us for a decade. Guess who wins in a similar duration battle. So all that needs to happen is founders need to realize that prices have retreated. And once that clearing price is found a lot lower than it was a year ago. The liquidity will open back up and so if you're a founder listening to this and you're you're like frustrated that VCs aren't investing right now know that they will if you lower your valuation but no one wants to do that because it can't you know, their friends tell them down rounds are evil and I don't know I think just that people are gonna have the luxury of waiting. Everyone's been sort of you know, entrepreneurs are like, Well, I'm not gonna raise because you know, I just need to wait and then the syrup will come back like it's not coming back in. I would be willing to bet a lot over the next decade, and I'd be willing to bet a little bit like we won't go back to a zero rate interest environment in my lifetime. And I'm 35 like that, an unprecedented capital abundant environment that is never coming back. Get that into your head now. And adjust for it. I'm sorry, I wish it was, I wish we had some big exits. We didn't. But you know, prices have come down. build value with the clearing price that you can achieve today and don't over focus on valuation because you'll run yourself right off a cliff.

VC: Yeah, it makes sense. And then what do you see for the rat like when do you see let's just say like moving forward in terms of the market for founders in the areas that you're going after? Do you see anything? That's there any particular milestones of inflection coming up? So for example, we know about the interest rates, changing we know about Biden's inflation reduction act as sort of visiting moments. Do you see any of those coming up that you're guiding your founders towards or they're guiding you towards moments that are either going to be positive or potentially disruptive?

IR: The IRA is a big deal. I actually think that there were aspects of that bill that were impressively bipartisan, sort of like somatically Democrat but geographically Republican, which I think is a nice compromise. You see a lot of the money going to red states in rural areas. And so there are going to be certain things that are going to be hard to roll back. But should the Republicans win the White House next year, which I think is probably likely at this point. Not that I enjoy making that prediction. They're gonna come for parts of the IRA like You betcha. You're already seeing I'm making such noise about, you know, coming after ESG. They're going to come for some of the subsidies. Like I am convinced of it. And so I don't know that the IRA is infinitely reliable. There's aspects of it that are like the 45 key points. Source Capture is a good example because that credit is essentially meant for fossil fuel burning plants, and the oil and gas industry loves that they're getting incentivized to, you know, add some contraptions and capture co2. So that, you know, Republicans might make noise about it, but that sort of thing. They're not going to rollback subsidies that are really hard to take away. Look at the ethanol subsidy. But I don't know. I think there's gonna be certain incentives that they come for that I wouldn't want to underwrite. Yeah, because that might be a negative one, you know, positive one on we do some stuff in sort of dual use defense tech aerospace and you know, the Putin's war in Ukraine has reminded us that maybe we do need a military and advanced military technologies and offensive technologies are often the best way to deter conflict. As counterintuitive as that can seem. And so there's a lot of emphasis on technology in our armed forces and getting the best technology in the hands of the warfighter or the potential warfighter. And so those are major tailwinds and are relatively bipartisan now or I don't know it's kind of funny. It's flipped. The Democrats seem to be more, you know, prorate Ukraine and the Republicans do but it's still you know, investing in defense technology is relatively bipartisan, so it kind of depends on the area. And it's a reason I'm glad that we don't focus on any one of these areas. We can kind of tack and turn depending on the environment.

VC: Makes sense. Well, today's been amazing. He and we could talk for another hour, but as we wind down first of all, I want to thank you for your time today. And totally. I love this stuff.

IR: I've learned a lot the hard way so I like you know helping other people avoid some of my mistakes. Hopefully,

VC: What's bullshit right now, what's like, what's things that you should be worried about from a founder perspective, from a venture perspective? From an industry watcher perspective?

IR: I feel like there's a lot of people that are like, idealists out there and like, I know we've got a portfolio company, for instance, that's like decarbonizing, an industrial process by 85%. And this is one of the most co2 emitting industries on the planet. And there's a lot of climate tech firms out there that are like, cannabis is not 100% And I'm like, What are you smoking? Like? You hear what we just said, like 85% reduction in co2 emissions, and like, we'll get to 100. But we can't make it economically viable in the next 567 years, like we'll get there. And they're just like, No, sorry. Gotta be 100 You got to use hydrogen today, even though it's way too expensive. Like it's just, I just like, pull my hair out that they're like, so idealist that they're going to, like have us emit more co2. Because less isn't good enough.

VC: Yeah, that's great. Well, I also see that there seems to be a lot of innovation coming to making the oil and gas industry run in a more clean way. And that's completely proposed by a lot of investors and funds are just like, hey, it's either kill them or die trying. I don't know if you see that.

IR: It just seems like another odd part of the or people that are like, you know, we have an investment in using AI and some automation for metals exploration, and they're like, Oh, well, like you know, mining tailings are bad. And like it has a local environmental footprint unlike heck do you think the battery in your phone and car came from like, Get out of here? Like we can't just magically pull all the lithium and copper we need for the energy transition out of seawater tomorrow. Like, there have to be transitory technologies. And like, if you really understand the scale of the problem, you're going to realize we need to pull more metal out of the ramp faster. And yes, we need to be conscious of native populations and local environments and like ideally, you do this in a way that isn't leaving toxic tailings all over the place. There's ways to improve the status quo, but like, saying, we're going to pull it all out of the water soon enough to matter is just completely idiotic.

VC: What sort of a narrative that's happening right now that you're seeing at least in the press, or maybe on social media, that you just think is completely over indexed. In terms of like, reality versus perception?

IR: fusion energy. I've looked at a lot of fusion companies, and I've followed some of them for over a decade. And the scientific advancements are so impressive and laudable and we should be investing in I believe in investing in basic research. Absolutely. I hope cantos makes enough money someday that we can, like, you know, say we're gonna give 10% or more of it to funding basic research, I think is so important. But we're getting to the point that we need to decarbonize ASAP if we want any choice. I mean, one and a half degrees is gone. Like we need to get that out of our minds. It's a pity that we screwed the pooch on that one. Like, if we want any shot at keeping temperature rise to under two, two degrees, then we need to decarbonize as quickly as possible and a technology that's likely not going to be commercial for I think still 15 to 20 years, is dead on arrival. It's just not going to help in a timescale that matters. I'm sorry. Like, I wish that wasn't the case. But like, that's the reality. And yes, the science might get there but then you need to like make it commercially viable and we talked about commercially, you know, everyone talks about Q greater than one net energy gain is like this big thing and like, and I and I have kind of like, technically got there but it was the amount of plasma the carrying amount of energy that came out of the plasma minus the amount of energy that went into the plasma, in fine print at the bottom was like 50 times 100 times more energy went into the facility than made it into the plasma. And then you need to transfer that thermal energy into electric electricity, which is at best 50% efficient. So like, we're talking we're saying work 100 to 200 times away from commercially viable Q values. And like, it's not getting to Q greater than one theoretically, it's like, actual facility level Q values of like, greater than 10 is probably what you need. And that, not to mention then getting approval and building enough of these plants to matter. That scale is either 2025 years away, so it's not gonna matter. Like sorry, we should invest in it, but so much money has gone into it. I think it's been actually a distraction for nearer term solutions, and call me crazy, but I think you know, we should just be using uranium and there's a lot of ways to use it better to recycle it to have less waste, to get more energy out of it. To make the footprint smaller, and that technology we could bring online next year if we wanted to. We just need the political will. And I think that's changing. But if you want to decarbonize the grid fast enough to matter, you've got to invest in fission, there's no other way. That's not to say we don't need solar and wind plus storage, combining those two gets you out of the way there too. We need all that. But I think fusion is getting to the point it's a distraction.

VC: Excellent. Thank you for the time today and Cantos.VC. Check out Ian on Twitter as well. And other places and we'll be back next week with more.