While the enterprise capital world is buzzing around generative AI, Dayna Grayson, a longtime enterprise capitalist who co-founded her own company five years ago, Build capital, focused on relatively boring software that might transform industrial sectors. Its mission does not exclude AI, but it is not dependent on it either.
For example, Construct recently raised a seed round Wooden eye, a startup that is developing vertical workflow software and a data layer that it says can count and measure logs more accurately and, if all goes in accordance with plan, help the startup achieve its goal of becoming a timber purchasing marketplace. Wondering how big this market may very well be? According to estimates, it hit the global forest products industry $647 billion in 2021
Another Construct deal that sounds less sexy than, say, the big language models is Earth, a startup focused on human composting, turning bodies into “nutrient-rich” soil in 45 days. Yes, ick. But also: it’s a smart market to follow. Cremation currently accounts for 60% of the market and may account for over 80% in the next 10 years. Meanwhile, the cremation process has been in comparison with its counterpart A 500-kilometer journey by automobile; As people increasingly focus on “greener” solutions, Earth believes it will probably attract more and more of those customers.
Avoiding some of the AI hype doesn’t entirely protect Grayson and her co-founder at Construct, Rachel Holt, from many of the same challenges their peers face, as Grayson told me recently on a Zoom call from Contruct’s headquarters in Washington. their challenge is timing. The two launched their first three funds in one of the most frothy markets in the enterprise capital industry. Like every other enterprise firm in the world, some of its portfolio firms are also currently struggling with indigestion after raising too much capital. That said, they are hurtling into the future and – seemingly successfully – dragging a few staid industrial firms along with them. Below are excerpts from our recent chat, edited for length.
You invested during the pandemic when firms raised rounds in very quick succession. How have these high-velocity bullets impacted your portfolio firms?
The quick news is that they didn’t impact too many of our portfolio firms because we actually placed the first fund in seed firms – fresh firms that were starting operations in 2021. Most of them were already began. But [generally] it was exhausting and I do not think these rounds were a good idea.
One of your portfolio firms is Vehoparcel delivery company that raised a monster Series A round and then a massive Series B just two months later in early 2022. It laid off 20% of its employees this yr and there have been reports rotation.
I think Veho is a great example of a company that has weathered the economic turmoil that has occurred over the last yr or two thoroughly. Yes, you could possibly say they’ve had trouble in the financial markets by attracting so much attention and growing so quickly, but their revenue has greater than doubled in the last yr, so I can not say enough good things about the team’s management and how stable the company is. They have been and will remain one of our leading brands in the portfolio.
Of course, these items never move in a straight line. What is your opinion on how involved a enterprise capital firm needs to be in the firms it invests in? This seems a bit controversial at the moment.
In enterprise capital, we are not private equity investors or controlling investors. Sometimes we’re not on board. But we are in the business of delivering value to our firms and being great partners. This means contributing to our industry knowledge and contributing to our networks. But I classify us as advisors, we are not controlling investors nor do we plan to be controlling investors. So it’s really as much as us to deliver the value our founders need.
I think there was a time, especially during the pandemic, when VCs advertised that “we won’t get too involved in your company – we’ll take the burden off you and let you run your business.” We have actually seen founders eschew this view and say, “We want support.” They want someone by their side to assist them and adjust those incentives accordingly.
VC funds promised the moon during the pandemic, the market was very frothy. Now plainly the power has returned to enterprise capital funds and away from the founders. What do you see every day?
One thing that has not modified since the rush to take a position during the pandemic is SAFE banknotes [‘simple agreement for future equity’ contracts]. I believed that when we got back to a more measured pace of investing, people would need to go back to investing only in equity rounds – capped rounds as a substitute of notes.
Both founders and investors, including us, are open to SAFE bonds. I noticed that these notes became “sophisticated”, sometimes including side letters [which provide certain rights, privileges, and obligations outside of the standard investment document’s terms]so you actually need to ask for all the details to make sure the cap table doesn’t get too complicated beforehand [the startup] has [gotten going].
It’s very tempting because SAFE could be closed, added and added so quickly. But take boards for example; you’ll be able to have a side letter [with a venture investor] This [states that]“Even though it’s not a capitalized round, we want to be on the board.” That’s not likely what SAFE notes are for, so we tell founders, “If you are going to go into this whole technique of building a company of things, just go ahead and capitalize the round.
Construct focuses on “transforming the core industries that drive half of the country’s GDP, logistics, manufacturing, mobility and critical infrastructure.” In a sense, Andreessen Horowitz seems to have appropriated the same concept and renamed it “American dynamics” Do you agree or are these different topics?
It’s a little different. There are actually ways in which we will agree with their investment thesis. We imagine that these core industries – some call them industrial spaces, others call them energy spaces, which can include transportation, mobility, supply chain and decentralized production – must develop into technology industries. We imagine that if we are successful, we are going to have a lot of firms which may be software firms, perhaps actually manufacturing firms, but can be valued the way technology firms are valued today, with the same revenue multiples and the same EBITDA margins over time. This is the vision we are investing in.
We’re beginning to see some of the older industries begin to take off. For example, a former Nextdoor executive recently raised money to upgrade his HVAC system. Are you interested in such a offers?
There are many industries that players already operate in and the industry is very fragmented, so why not bring all of them together [in order to see] economies of scale through technology? I think it’s smart, but we do not invest in older technologies or firms and then make them modern. We are more in favor of introducing technology de novo to those markets. One example is Monar in which we have recently invested. They operate in the HVAC industry, but provide a latest service for monitoring and measuring HVAC condition using technologically advanced sensors and monitoring and measurement services. One of the founders previously worked in HVAC and the other in [the home security company] SimpliSafe. We need to support individuals who understand these spaces – understand their complexity and history – and also understand tips on how to sell in them from a software and technology perspective.