207. Breaking Convention, Hitting The Fundraise Wall & Why Deep-tech Is Not More Capital Intensive Than Software (Ryan Gembala)

207. Breaking Convention, Hitting The Fundraise Wall & Why Deep-tech Is Not More Capital Intensive Than Software (Ryan Gembala)
Nick Moran Angel List

Ryan Gembala of Pathbreaker Ventures joins Nick to discuss Breaking Convention, Hitting The Fundraise Wall & Why Deep-tech Is Not More Capital Intensive Than Software. In this episode, we cover:

  • Backstory/Path to Venture
  • Talk about your time at Facebook and working in M&A.
  • What’s the thesis at Pathbreaker?
  • How do you define pre-seed?
  • Most of your dealflow inbound or outbound?
  • Quote from the website: “We don’t believe all great companies, nor all phenomenal investments, look the same early on. So we are flexible, realistic, and patient – solving for supporting the founders best-suited for tackling the most meaningful problems.” I’m curious, what are the must-haves that cut across all investments that you do?  
  • You’ve said to me that hardware isn’t more capital intensive than software.  As a hardware investor myself, that was refreshing to hear but I’m sure there are many founders and investors that would strongly disagree.  Why is not more capital intensive?
  • Do you think the time horizon to exit is longer?
  • We’ve all been in this situation where founders hit a wall — they’re running out of money, having a hard time telling your story, investors aren’t pulling the trigger to invest, there are team challenges, maybe trouble converting from pilots to licenses… Give us examples of how you dig in and help when it gets tough.
  • We’ve seen some recent failures or, at least, setbacks in the automation/robotics space.  High profile companies like Zume pizza and CafeX have had significant challenges… what’s your take on where these companies went wrong?
  • What’s your POV on robotics investing and the types of opportunities that are going to be successful?
  • Just speaking to Kane Hsieh at Root about the effect of automation, robotics on jobs… what’s your stance on the impact of these technologies on employment?
  • You’ve had a number of Series A’s just here in the past couple of weeks… seems like every time we connect you are dealing w/ a number of up-rounds at A and B.  Clearly something is working so congrats on the early success.  Talk to me a bit about how hard it is to raise a Series A?
  • Different types of companies have to achieve different milestones/benchmarks to raise and A but have you seen any common traction levels or standards to successfully close an A round?
  • For founders that are considering M&A and maybe some options are emerging for exit… what advice would you have?

Guest Links:

Key Takeaways:

  1. Two important pieces of the startup life cycle are, building funding and achieving liquidity. Ryan states that 90% of the liquidity piece happens through M&A.
  2. During his time working in M&A at Facebook, Ryan got a chance to work on the Oculus acquisition, helped lead deals and secure product design in terms of function. He also spent a lot of time thinking and learning about the future of AI, machine learning, computer vision, VR, AR, etc.
  3. We’re living in a period of human history, unlike anything that the world has seen before. We now have a collection of technologies that historically were not possible because of the lack of data, infrastructure and components at a price that made sense.
  4. At Pathbreaker, they look for highly specialized people that are experts in their field, dedicated to solving really challenging problems. People that are trying to swing really big, and create an impact across future generations.
  5. The most challenging or even narrowly defined problems that exist today, with the ability to change the way the world works, tend to attract the most talented people.
  6. At Pathbreaker, they typically invest early, in the pre-seed or seed stages, and believe that great companies can be built anywhere.
  7. It doesn’t have to be a robotics or AI company for Pathbreaker to get involved. Startups that are world-class at what they do, with a product that’s an order of magnitude differentiated and better than what exists today, are the types of companies that truly excite them.
  8. The one commonality that cuts across every company in the Pathbreaker portfolio is a depth and obsession with the relationship between the people and the problem they’re going to solve.
  9. Ryan believes that hardware isn’t necessarily more capital intensive than software. What he’s seen is non-diluted means of capital will start to emerge. Whether it’s venture debt or more traditional types of debt, because you have enterprise customer contracts and also collateral that starts to unlock non-dilutive mechanisms of funding.
  10. Ryan advises founders to not spend any time thinking about acquirers, instead focus on creating differentiated value both in your team and your products. With that, options will emerge over time, sometimes even sooner than later.
  11. Often, if a company struggles in what seems like a great market, there can be any number of things that went wrong such as, lack of enough customer discovery, execution challenges, black swans, or interpersonal dynamics.
  12. In 2019 Pathbreaker had 12 portfolio companies that raised their Series A’s and B’s. So far in 2020, they’ve had 5 companies that are either close or have signed terms sheets for Series A.
  13. When things get tough, what founders really appreciate is calm, encouragement and conviction. Just reminding founders that it’s okay for part of their story to include some incredibly hard times and every massive company that you read about in the news, went through something similar.