Podcast Summary: How I Invest with David Weisburd – Episode E131: Can VCs Make Money in Deep Tech? with Nick Shekerdemian
Introduction
In Episode E131 of "How I Invest with David Weisburd," host David Weisburd engages in a profound discussion with venture capital expert Nick Shekerdemian. The conversation delves into the intricacies of investing in deep tech, the challenges of founder breakups, portfolio construction strategies, and the evolving landscape of venture capital. This comprehensive summary captures the essence of their dialogue, highlighting key insights, notable quotes, and critical conclusions.
Biodefense and the Emerging Threat of AI-Driven Bioweapons
Timestamp: 00:00 – 00:51
Nick Shekerdemian initiates the conversation by addressing a pressing and "terrifying biodefense problem." He draws a parallel between the evolution of cyber attacks and the potential future use of bioweapons enhanced by artificial intelligence.
Nick Shekerdemian [00:00]: "AI's ability to create new protein structures that can evade traditional vaccines is really powerful and a little bit scary."
Shekerdemian emphasizes the linear correlation between a company's reporting cadence and its performance, suggesting that declining reporting frequency often signals deteriorating company health.
Founder Breakups and the Thiel Fellowship
Timestamp: 00:51 – 05:55
The discussion shifts to the critical issue of founder breakups, identified as the primary reason for seed-stage startup failures. Weisburd probes Shekerdemian's personal experience with the Thiel Fellowship—a prestigious program that encourages entrepreneurs to drop out of academia to pursue their ventures.
Nick Shekerdemian [01:10]: "Dropping out at the age of 20 from Oxford after getting accepted into Peter Thiel's fellowship was one of the most impactful decisions I've made."
Shekerdemian attributes the success of the Thiel Fellowship to the mindset and personality traits of its Fellows—individuals who are proactive, driven, and willing to defy social norms to achieve their entrepreneurial goals. He highlights the program's selective nature and its intentional lack of scaling, which contributes to its high success rate.
Nick Shekerdemian [01:49]: "The combination of the Fellows' internal drive and the Fellowship's ability to bring them together is pretty unique."
Portfolio Construction and Information Advantage
Timestamp: 04:00 – 10:45
Shekerdemian elaborates on portfolio construction strategies for seed-stage investments. He explains that their team of eight people allows for proactive engagement with founders, fostering strong relationships and enabling a concentrated portfolio approach.
Nick Shekerdemian [04:09]: "Our ability to work with founders in a more proactive way gives us a couple of different advantages, adding commensurate value back to the founders."
He discusses the concept of information asymmetry—the advantage gained by deeply understanding a founder's vision beyond the initial investment decision. This approach contrasts with more diversified seed firms that may not invest as deeply due to resource constraints.
Nick Shekerdemian [06:02]: "If you can come up with a mechanism to have more resources, you can have a slightly more concentrated portfolio and spend significantly more time with those companies."
Weisburd and Shekerdemian also touch upon the unavoidable reality that not all startups can receive equal attention. They acknowledge that while some firms may appear to favor certain startups, this is a fundamental aspect of the venture capital model, where a few investments typically yield the majority of returns.
Transparent Communication and Managing Founder Relationships
Timestamp: 10:45 – 14:17
A pivotal part of the conversation centers on fostering open communication between VCs and founders. Shekerdemian shares his philosophy of encouraging founders to share both good and bad news, emphasizing the importance of a two-way street in these relationships.
Nick Shekerdemian [10:54]: "By being integrated into that flow, it's easier to see those things... encouraging that behavior early on and being hugely transparent is really important."
He underscores the significance of setting clear expectations and being candid about investment decisions, such as follow-on funding and pro-rata rights. This transparency helps build trust and ensures that founders are aligned with the VC's approach.
Navigating Founder Breakups
Timestamp: 14:17 – 16:28
When addressing the sensitive topic of founder breakups, Shekerdemian advocates for a nuanced, case-by-case approach. He suggests focusing on the core motivations of each party involved and striving to resolve underlying issues without immediately resorting to legal measures.
Nick Shekerdemian [12:59]: "Getting to the core of the motivations on both sides and cutting through those emotions is really important."
He emphasizes the role of unbiased mediators and the importance of maintaining the company's vision to navigate these challenging situations effectively.
Sources of Alpha in Venture Capital
Timestamp: 14:24 – 20:02
Shekerdemian discusses how his firm, TBC, differentiates itself in the crowded venture capital landscape. He attributes their "source of alpha" to a few key factors:
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Thesis-Driven Investing: Unlike many firms that follow market trends, TBC maintains a thematic and thesis-oriented investment approach.
Nick Shekerdemian [14:24]: "There is an under emphasis on thesis-driven investing in venture... staying close to the roots of venture capital by investing in ambitious people building very innovative things."
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Focus on Deep Tech: TBC concentrates on sectors like computational biology, chemistry, and AI, which are transformative and offer substantial returns.
Nick Shekerdemian [16:42]: "There is a huge advantage right now in the intersection of computational power or applied AI with biology and chemistry."
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Avoiding Momentum Investing: The firm resists investing based on current market momentum, instead prioritizing long-term, first-principles opportunities.
Nick Shekerdemian [20:24]: "TVC is not a momentum investor... It takes a lot of work forming points of view and not looking at what the market is doing."
Investing in Deep Tech: Opportunities and Challenges
Timestamp: 16:28 – 22:40
Shekerdemian elaborates on the nuances of investing in deep tech, acknowledging the high capital requirements and extended time horizons. He argues that advancements in AI and computational simulations are mitigating some traditional risks associated with deep tech investments by compressing development cycles and reducing costs.
Nick Shekerdemian [16:42]: "We can simulate a lot of things... compress those cycles significantly."
He highlights the potential for "deca unicorns"—companies valued at over $10 billion—especially in sectors where deep tech can create winner-takes-all markets. Shekerdemian believes that the increasing influx of capital into these areas will also help reduce dilution for investors.
Defense Tech and Government Funding
Timestamp: 18:47 – 20:02
The conversation shifts to defense technology, with Shekerdemian noting a significant trend of increased government funding in this sector. He observes that recent policies favoring American dynamism and self-sovereignty are making defense tech more attractive and subsidized.
Nick Shekerdemian [18:55]: "You'll see a lot more investment subsidized and supported by government funding... applying AI and robotics will reduce labor costs significantly."
This shift not only legitimizes defense tech as a viable investment but also aligns with broader national priorities, making it a fertile ground for venture investments.
Contrarian Venture Capital Approach and Future Trends
Timestamp: 20:02 – 24:54
Shekerdemian articulates a contrarian view on the current state of venture capital, asserting that many VCs are not truly investing in innovation but rather in ideas that have already matured.
Nick Shekerdemian [24:54]: "Very few people believe that the current state of venture capital is investing in ideas that have already played out... the rate of innovation is so rapid right now."
He forecasts a significant shift in venture capital, emphasizing the need for thesis-driven investing to keep pace with unprecedented innovation rates. Shekerdemian believes that firms that fail to adapt will be left behind as the venture landscape evolves rapidly.
Opportunities in Computational Biology
Timestamp: 22:40 – 26:22
Delving deeper into computational biology, Shekerdemian outlines transformative opportunities fueled by AI. He envisions a future where medicine leverages the body's innate capabilities, personalized through AI, to produce therapeutics on demand—ushering in a new era of healthcare efficiency and effectiveness.
Nick Shekerdemian [22:46]: "The future of medicine is getting the body to produce things it already does every day, but on demand, with the right payload or dosage."
Additionally, Shekerdemian points to sustainable innovations in chemistry, such as developing cost-effective and environmentally friendly surfactants, which could revolutionize industries from detergents to cosmetics.
Final Insights and Closing Remarks
Timestamp: 24:50 – 28:36
In response to Peter Thiel's question about unique beliefs in venture capital, Shekerdemian reiterates his conviction that the industry must evolve beyond chasing existing trends. He advocates for a focus on groundbreaking innovation driven by first principles.
Nick Shekerdemian [24:54]: "The things that we thought might take 10 years to play out are happening in months right now."
Concluding the episode, Shekerdemian invites ambitious entrepreneurs tackling significant challenges to engage with TBC, emphasizing the firm's commitment to supporting big ideas through risk-taking and innovative financing.
Nick Shekerdemian [27:50]: "Anyone who's trying to solve a very, very big problem... absolutely should come and talk to us."
Conclusion
Episode E131 of "How I Invest with David Weisburd" offers an in-depth exploration of venture capital strategies in the realm of deep tech. Nick Shekerdemian's insights shed light on the importance of thesis-driven investing, the potential of AI and computational biology, and the evolving dynamics of founder relationships. For investors and entrepreneurs alike, this episode underscores the necessity of adaptability, transparency, and a forward-thinking approach in navigating the complex landscape of venture capital.