My partner Steve Marcus and I co-founded the firm in 2017. And I think the insight that we had that was the impetus for starting the firm was we saw this major dislocation between where a lot of the innovation capital was being invested by the venture asset class and where, you know, the sort of core drivers of the global economy was.
And what we saw is there was not a lot of innovation capital going towards these monster sort of industrial sectors of the economy: manufacturing, construction, defense and aerospace, supply chain logistics, energy. There's a huge amount of innovation capital going into places like FinTech. Which isn't to say that we don't see a huge amount of opportunity in FinTech, but just that there was an undercapitalization of a core to the global economy that created an interesting opportunity for us to go take advantage of.
And you know, I think as we were asking ourselves why other venture firms were not taking advantage of that opportunity, we saw that, you know, the sort of broad modernization of these critical industrial sectors of the economy sat at the intersection of two things that most VCs really don't like doing.
One is investing in sectors that have no great preexisting framework for distribution. These sectors often involve regulatory hurdles. They have very entrenched, often oligopolistic stakeholder dynamics that can sometimes be perverse. And so attacking these industries, there's no established playbook for how you do it.
And then the other is, as we see it, if you're gonna go after a, you know, sector like aerospace and defense, you're probably going to need to bring to bear some very advanced, sometimes experimental technologies.
And there's a lot more inherent engineering risk. And so both of those things are really scary and unappealing to many investors, let alone to do both of them at the same time, which is basically what we do at Riot Ventures.
but
it, they're unique customers, right? So it might be the US Department
of Defense
in your case. What does that
look
like? Right now,
Um, the defense industry is going through an interesting renaissance where the us d o d is challenged, uh, for the first time in a long time with sort of peer level adversaries that are, you know, maybe nipping at our heels.
Is
this like China or something? is that a,
a, China and Russia are the, primary adversarial players in this equation. And their very rapid productization of technologies like artificial intelligence in particular, is motivating the d o D to look for new, unique and digital native suppliers of digital capabilities to enhance their position of power.
and what we have looked for and what has been very hard to find at scale, which is why I think there's only a handful of companies that you see here are a combination of teams that really, really intricately understand not only the.
The customer needs and the roadmap of customer needs over the next 10 years, which is the way that the d o d and a lot of these industries like to purchase. they're looking at not only what they need today, but who's going to be a consistent supplier of what they're gonna need tomorrow over the next 10, 20 years
And then you, you know, you ultimately need to deliver to the customer. Universe of people and teams that fits that profile as we have canvased the market here is unbelievably small. And so far between, you know, our two portfolio companies, shield AI and true anomaly, we've had again, so far a lot of success.
Hmm.
And when you say it's a renaissance, like
is
it easier to get through procurement because
of what you said,
which is the US
now has
China and Russia
sort of breathing down their
neck There's a lot of motivation on the part of the D O D to see its defense industrial base expand. For the first time in a really, really long time, we've seen basically a lifetime of consolidation in the defense industrial base since really, you know, almost the end of World War ii. And what we are seeing now is because we have an emergence of an ecosystem of new digital technologies that have massive implications for I don't know, the projection of geopolitical power and real technological peers at an adversarial level For the first time in a long time, we're seeing the d o d slowly but surely start to think about the way it, changes its procurement paradigms to encourage the.
Development of new companies that are core capabilities providers to the defense industry.
And it is, I think while there is the recognition of the opportunity to create this new cohort of defense primes, is still an unbelievably arduous, brutal journey for a company to take.
But we think right now is a moment in time where we're going to see. Call it a half a dozen to a dozen 10 billion plus scaled enterprises get built that are going to crack through that roadblock to ultimately deliver the d o d and the broader defense industry, the technologies that they're clamoring for.
And in doing so, we think also create hopefully a ability to help the d o d deter global conflict, uh, for the next lifetime.
Hmm.
you and I both have, you know, plenty of friends who
are Chinese. who are Russian, like, yeah. Do you
feel some tension there where
we're really
pitting ourselves against a country where obviously in some
sense we're friends and
not friends?
there's obviously an interesting frenemy dynamic at work. our expectation is that what we're experiencing right now in the relationship with China, because our economies have become so intertwined and because I think we are living in a world with a more global culture than we did 50 years ago, that we really do not wanna see a hot
Mm-hmm.
Mm-hmm. What we are seeing though is jockeying for the top spot in geopolitical terms, and
that is an impetus for this race from a defense perspective, particularly on the front of wielding technologies like AI and I think hypersonics as well, and a next generation of orbital defense infrastructure.
Where whoever wins that race is going to have pole position to, let's say make the
Hmm.
For a period of time. And we have been in a position where the us, which despite its many faults, has a free and democratic underpinning to the way that we see the world has been in a position to dictate the terms of global trade and development for a really long time.
I think we would love to see that continue to be the case. I think a lot of people around the world would love to see that continue to be the case and the balance of this defense technological race is going to determine who gets to make the rules for the next generation.
Fascinating. Where are we?
Do you think? Like where is, I have no great concept of where the US is vis, let's
say, China, Russia on some of these technologies.
Um, Ai I, and
also maybe you could just explain hypersonics
for a second,
uh, hypersonics, I am not a hypersonics expert. But Hypersonics is a next generation of long range ultra fast missiles that have the ability to penetrate denied environments essentially move so quickly over such a long distance that they can avert or, or go around counter missile systems that exist today.
I think The interesting dynamic that's going on right now between, let's say China and the us is the Chinese government mandates where a lot of its technology and industrial base develops technologies.
So they can point in a direction and say the government priority is X, an industry is going to follow suit to design and develop and put our intellectual and capital horsepower behind this technological campaign.
because the United States is a democracy the d o D cannot make companies design and develop technologies at its
its Mm-hmm.
it Has to compel companies to do so for capitalist interests. That. Has, I think, created a little bit of a lag, Where China was able to very, very rapidly close the gap on the US over the last 10 to 15 years because they were able to pivot in the direction of some of these new technologies very quickly cuz they could mandate it. So
The question though, where are we in this race? It's difficult to say. my perspective is that the US has a an incumbency here and that we are ahead, but that the gap between us and the, you know, call it second best player, has narrowed at a rate that is very concerning.
And that's a really interesting,
like almost just
model, which is.
is a better to be sort of more of a dictator or more
of a democracy? Like which
wins
I would say democracy is better. But certainly a dictatorship has its moments.
What about incumbents versus startups? for in the US in particular,
Yeah. I, I think what we're seeing is the incumbents, you know, Lockheed Martin, Boeing, Raytheon, Northrop, Garmin, et cetera, these are incredible businesses that have an unbelievable amount of engineering horsepower for things like designing and certifying a new airframe and a new jet.
And I think that the historical cost plus model needs to be reworked. Um, So I won't comment on the efficiency of these businesses, but just thinking about the talent at these businesses, there's a lot of incredible industrial talent. What these companies have not spent a great deal of time cultivating over the last 20, 30 years is a modern software oriented culture and sort of core talent base.
And companies like Shield and Andel and True Anomaly are really digital native businesses that are taking the best of lessons learned from businesses like Lockheed Martin and Boeing and Raytheon, and businesses like Microsoft and Google to develop and design really, really modern. Very nimble software oriented, but still full stack engineering teams that are learning how to do business with the D O D.
And I think the combination of those two things is super, super
That's really interesting. Cause I was at Google really early when I felt like product management was just being developed. like what is best practices? And then you saw it and Facebook,
kind of adopted the same
thing. And then, you know,
Airbnb innovated in a
design sense. But like, it's all become, you know, whatever the best practice. It's Very, um, everyone learns it.
And, and look, I think, sort of, what's interesting about this new cohort of digital defense primes is that they can't just say we're going to replicate Google or Microsoft or Facebook from a culture and structure perspective, because are so many nuances to doing business with the D O D.
That they've had to, I think, create very unique cultures and structures And so it's this, you know, it's a, totally new thing than I think what has existed before.
And the teams that are making it work are extraordinary but they're, kind of cutting a new path.
Totally. That's interesting. It's a different, product management, it's
a different deployment.
That's, that is
insane. The timelines are totally different. The stakeholders, the, the risks are totally different.
The implications of fucking something up are totally different. Yeah. But. You also get this, you know, these are mission oriented businesses that we believe and they believe are doing really, really important work for humanity to create, you know, put the US in a position to deter conflict on a go forward basis.
And that empowers these businesses to have, I think, really strong culture
okay, so I
don't know all of them. So, SHIELD ai, they're swarms of drones.
Yeah. You can think of SHIELD AI as, almost a cross-platform aerial autonomy system.
So what they have is a an AI system called Hive Mind. That is an artificially intelligent pilot capable of maneuvering anything from a, you know, small custom quad copter all the way up to an F 16 with human level
Hmm.
And because, the company is, empowering the d o D to move from remote piloted unmanned systems to truly autonomous unmanned systems.
It means that these systems can now go and operate in denied environments, which is a dynamic that is incredibly important when we think about projecting power into a place like the South China Sea, where Our current subset of adversaries has the ability to knock out GPS and communications in broad swaths of territory.
You cannot remote pilot a drone when you have no GPS or communications. You need to be able to give that drone a mission and have it go potentially offline for a long period of time and execute that mission. These are surveillance and reconnaissance missions. I think there is a huge amount of alignment around humans in the loop for anything that would go beyond that into a kinetic realm.
And then they are partnering with the established set of defense primes like Boeing to collaborate and partner on the future of what like large scale unmanned jets will look like.
I mean, that
probably would make some people
queasy. The
way you say. it, it Totally makes sense. But, you know, unmanned jets, it's, there are tools for war and destruction.
Yeah. I think the, the, if you look at a deterrence mission, it fundamentally lies in the capacity to overwhelm a domain with mass relative to what your adversary could
Mm-hmm.
and this is, I mean like this. Conflict has always functioned like this for humans, right? Like who had more bodies, who had more horses, who had more tanks, And what AI is, has opened the door for us to be able to do, is to overwhelm a domain with mass to show strength and capacity, that, you know, I think if you look at the historical precedent should act as an outrageously impactful deterrent to hot conflict.
Hmm.
What about Shifting a tiny bit. What about, um, manufacturing and Onshoring and Nearshoring? I mean, that's gotta be a related concept.
Totally. Yeah. I think you're seeing covid o and then, you know, conflict in Eastern Europe woke a lot of people up to the risks of a global supply chain.
Mm-hmm. And how many people I think had very large sophisticated, albeit one dimensional supply chains that had a lot of binary risk running through certain parts of the world. And that has created, I think, a lot of motivation for for manufacturers around the world to bring their manufacturing closer to home and to have more control over their manufacturing.
And I think what we're seeing is, a combination of new 3D printing technologies coming to market, new robotics and automation technologies coming to market to solve for the question of how do you domestically produce more of what falls within your supply chain while not sacrificing the economics.
Of, you know, I think the, benefit of inexpensive labor, which drove globalization in the first place.
10 years.
And
who does manufacturing really well? Like where are we? Where's the US right now?
The US does a lot of really precision, low volume, specialized manufacturing, incredibly well. Like sitting here in Los Angeles.
If you poke around the South Bay, there's a lot of aerospace suppliers and machine shops that make really intricate, really sophisticated parts and have a lot of, I think, craftsmanship.
And so I think where the US is great right now is in low volume precision parts. I think what we have a lot of work to do is to try to figure out how we cultivate a high volume manufacturing base again.
And there's lots of really interesting companies that are working on stuff like that.
interesting um, I'm gonna
change entirely. cuz now
I'm,
like, how did you
get here? Will,
like how do you know all this,
this stuff?
You were working at a family office, if I understand
I, I was, I was at a small, so, so, I grew up in Northern Virginia.
I went to school in Virginia at a, um, university called James Madison. I went straight from JMU to a small venture firm in Boston called Saturn Partners. Saturn was a incredible place to start my career. It was a really small team of folks. I think there were, four partners and myself, and they were doing everything from pre i p o investing in.
Biotech companies all the way to incubating enterprise infrastructure businesses in the office and doing small, funky private equity deals in the middle. everybody at the firm was a total generalist and believed that they had a rubric for how to take, you know, a team, a market, a business model, and make an investment decision.
And they were really good at it. And the returns over time had been really stellar at the firm. They had about a half a billion under management. But
I was developing a lot of conviction that if I was going to be successful in my venture career, I needed to specialize. And that starting with this really broad mandate was kind of a great way to look at everything, figure out where I was passionate, and then ultimately figure out where I was most interested and where I thought I had a, compelling competitive edge And so I spent, you know, four years on that journey. AndThe easiest way for me to look at where there were maybe missing opportunities was to look at the flow of capital. And it was easy to see over time that there were a few really hot sectors that were cons consuming most of the dollars for the venture asset class.
that had very similar business models and had very similar, I think core technologies and that were really crowded and where a few firms were always gonna sort of sit atop mm-hmm.
The leaderboard. that wouldn't be the highest value place for me to go pursue. Right. Enterprise SaaS. Mm-hmm. FinTech, uh, consumer internet, digital media. And that looking at the flow of capital, like if all the money was going here, where was it not going and where was it not going?
That had massive global implications and again, that sort of led me to starting to explore areas like manufacturing.
And I was starting to see this explosion of really interesting technologies like 3D printing and robotics and iot and Developing conviction that these were gonna be really powerful technologies for these industrial sectors of the economy. I brought that to Saturn partners and they're, you know, I, I owe those guys everything they wanted, nothing to
do
with this strategy, right.
And then would you also say that
the way
you invest is fairly unique? Like you're not competing head to head with the Series A firms. I said it was Seed and series
B.
Yeah. Well, we talk about it as kind of barbell oriented.
So we're investing out of our second seed fund, uh, which is a 90 million fund. We write, you know, anywhere from, uh, on average, call it a two to a $4 million check out of that fund to lead, typically a three to $5 million round of financing. Probably 17, 18 portfolio companies outta that 90 million fund. So much, much lower volume than many similar sized funds. Uh, Because our model is to be really involved with these entrepreneurs, helping them navigate kind of the formative years of development. And then we have on the other end of the barbell, we've got 500 million in managed accounts to do what we call sort of true growth investing, which sometimes is series B, but is more often series C or D, where we're writing, you know, anywhere from a.
15 to a 50 million check. And we will reengage as a lead oriented investor in those rounds where we have a lot more visibility into the unit economics, the growth trajectory, and you know, the general liquidity profile of the investment. So true growth. And then we work with companies at a and b to bring in incrementally value add lead partners for those rounds that we think have complimentary skills and infrastructure to us.
But even in your first check
tell me if I characterize this correctly, like I would
say a typical firm might.
seed fund might do a million and a half in the seed, end up with
10% ownership. Yep. 12% maybe. Yep. And then reserve 1 0 1 and do another one and a half million dollar
check. And I feel like you're putting that in your
Yeah, we, we, our style is
, and this has, I think there are a couple of reasons why we do this.
we are really targeting more like 15 to 20% ownership in that first check. And we are doing that for a couple of reasons. One, it keeps us really honest. We don't dip our toe on the water. If we're gonna do something, we are all in on doing it, and we don't make a lot of new investments.
A year, right? We we're averaging four to five new investments a year as a firm. And so if we're gonna do it, we're all in. And that check should be a little uncomfortable. It should challenge us to really do our work and to be intellectually honest with ourselves versus being kind of easy and, and small enough where it's like, eh, you know, like it's not that much money.
The other is,
the series A dynamic is such that. We think the best series A firms think similar to the way that we do, which means they're targeting 15 to 20% ownership factor in an expansion to the employee stock option pool there. And then assume that your entrepreneur doesn't wanna get diluted to shit and very quickly, the math is really hard to make work.
If you want to go work with a great series, a partner often it is almost better for us to do a partial pro rata in the A or the B
And then we will reengage in sort of a sizing up capacity in the C, d, and E.
Yeah,
it's really interesting. It made me wanna go
back and run math on my whole portfolio.
And how do you manage to get to
a point where you've got 500 million in managed accounts?
so, you know, the origin of Riot Ventures is my partner, Steve and I start the firm in 2017. We put together a beautiful pitch deck. we had spent years.
concocting our strategy and our pitch and why we were so well suited to go pursue what we saw as one of the greatest waves of value creation in human history.
And we put 25 million on the cover of that first seed fund. And we got to, we raised 10
million.
With, you know, a lot of blood, sweat, and tears.
Mm-hmm. And, you know, I think we came up short. We raised enough to get into business and we had burned the boats, so there was no going back. There was no like, oh, we came up short. Maybe we'll go evaluate something else. We're all in on this, which is, I think is Steve and I's style and why we're good partners.
But we came up short and a lot of the reason I think we felt like we came up short is we had gotten a lot of people interested, but they questioned our ability to go get into the best deals. And so we sat down in, 2018 and we made a list of what we thought were the best growth stage deals that fit within our thesis.
And we called that the beacon cohort of companies. And we went about begging those companies to let us into their growth rounds to prove to the LP community that we could go get big allocations in obvious winners and. you know, in hindsight, you know, I'm not sure they were like totally obvious, but they were, they were very competitive rounds, uhhuh.
And so alongside that 10 million fund, we ended up doing about 150 million in co-investment through SPVs into really two companies. One is toast, which went public in 2021, which we'd built a very large position in. And two is a company called Shield ai which we talked about a little bit earlier in, in the pod.
And by doing those co co-investments, that became kind of a flywheel for building our network in the LP community. And the I P O of toast was kind of a bellwether return for us that put us in a position to make people a lot of money pretty early on in our firm development. Right. You know, year four we have a huge outcome you know, nine figure outcome for the firm. With kind of our marquee position.
And that group of investors that had participated heavily in those co-investments I think started to see the power of this barbell approach. And that put us in a position where we could, you know, kind of make the ask and earn the right to be able to manage a larger pool of capital for people at the true kind of growth end side of things.
Well, it turns out I have so many things I wanna ask,
you.
But wait,
let's
just stay on this.
so, One thing
you said to me was something like, you actually like fundraising. I don't wanna put words in your mouth,
Yeah, I, um, I, so I love fundraising. Which it turns out if you're gonna start a venture capital firm, somebody on the team better love fundraising. I love fundraising. I love it for, for a couple of reasons. One, um, I love hearing myself speak, um,
as
do I
I, but two, it is like a very, I mean, it's, it's product management, right?
And, and so, I find it really interesting to go out to allocators, to build relationships with them, to understand their perspective on the way the world is moving, and to think about how we as a firm fit into that and how our product resonates with them. And we have a very unique product relative to most firms, right?
We have a, I think a, a very normal seed practice, but our growth practice, 500 million is not in a traditional blind pool account, right? That is, co-mingled. Those are kind of bespoke managed accounts with some of our large LPs that we manage in a unique way. We deploy it in a unique way, and we have.
Non-standard economics and figuring out how we could get the resources to execute our investment strategy with a capital product that entrepreneurs and limited partners loved.
and that exploration and process is really fulfilling for me.
Can you share more about you know, unique
economics and unique structures
there.
Yeah, I mean, I, I think the, big one for us is LPs have a lot of scar tissue from very large asset managers that can do ex incredibly well on management fees alone.
And they have an aversion to the idea of you being able to make a lot of money if they don't make any money. Sure. And we have a similar aversion. Mm-hmm. We think that creating really good alignment all the way from the LP through the entrepreneur is a great way of building an iconic
on. Mm-hmm.
And the other thing we identified here too is an annualized management fee is a shot clock. Right. Because you can't do nothing in a year while charging your LPs. 2%
sure.
Right. Or you can, but it's hard to mm-hmm.
Mm-hmm.
Um, and it creates a natural pressure to deploy capital Sure. At a really high velocity.
Not only because if you can churn through the capital really quickly, you can go raise another pool of capital and start stacking management fees. But also because you know, on a 500 million pool of capital, we charge our LPs, you know, if, if we were charging our LPs a 2% annualized management fee, $10 million a
I was thinking that, you're a small
firm.
did you, what the fuck did you do this year? Yeah. If you didn't deploy a lot of my money. Yeah. And so, you know, we charge a one time fee on that capital when we deploy it. And that means that we are in a position where, where there are great deals to do. That really meet our, underwriting standards and that we feel strongly about and often that we've been tracking for years by the time we, we write a check.
We can do deals, we can do big deals, we can do lots of deals, but it also means that when there's nothing great to do, nothing exceptional to do, we feel no pressure to do anything.
And in, in order to.
Continue to establish ourselves as one of the best seed stage managers. We have to stay maniacally focused on being a seed stage manager. And I think great seed stage managers have small funds and stay laser focused on seed as the tip of the spear for the firm and not doing it in a spray and prey capacity.
Not doing it as a loss leader to a broader economic flywheel, and the byproduct of being incredible seed investors is
a bunch of. Proprietary growth opportunities
And the other thing about being a really good seed investor, which I'm gonna have to hit on, is you said something like you're a student of people because as
seed seeds, you have
to be
right.
Yeah, I mean I think and I, I think this is, you will see this across a lot of the iconic seed investors of our time is that they could also have been incredible psychologists. Yeah. Because seed investing is really about underwriting the motivations and determination of a group of individuals.
And I think both my partner Steve and I, having come from very different experiences me. Having always been on the investor side of things and him leading up to riot predominantly having been on the entrepreneurial and founder side of things, I think just have a very complete set of perspectives and intuitions about people.
Except
you used different adjectives than I probably would've
Said, so I think the first thing you said was the motivation of the people and then like their determination. Yeah. I think
a lot about people's capacity too.
Yeah. I think that's a good
one,
because people can
be completely motivated, but some people just grow and
grow and
Yeah. Yeah. The, the slope of their improvement Is extraordinarily important.
But, you know,
podcast, it's about getting to know you
So, um,
again, same dinner. I'm sitting next to you and
Joe.
and Joe says, oh, you have to ask about his parents, cuz his mother is like Queen Elizabeth. I think he
said,
he said
I think I I, think it was Martha Stewart.
Okay. um, how, so like, tell me, tell me more about your parents.
Yeah, so, I grew up in Alexandria, Virginia. my dad was in the military after he got outta the Army, he went and worked uh, worked in Congress as a chief of staff to a congressman from Missouri.
And my mom had worked her way through Columbia by working in kitchens in New York and, and then ultimately running a small catering
company,And when my dad started working in Congress, she recognized that there were all of these sort of congressional events every day of the week.
There was some catered event that was going on, and noticed that the food was abysmal at all of these congressional events, and then spun up catering company to go service all of these events and use, uh, you know, I think my dad's position as a chief of staff to one of the, important congressmen at the time to get a unique leg up in acquiring that, customer.
She eventually sold that business and then my dad after his stint as chief of staff, went to law school and then I think has leveraged a lot of his background in the special forces and his time working for a congressman to build a really interesting law practice focusing on. You know, sort of international issues.
And he's a, defense attorney that, you know, if you run a foul of the State Department, is normally at the top of folks lists for who they're looking for when it comes to counsel,
And
and how do
your friends describe you? Adjectives your friends would use to describe you.
A, is this a standard question? You ask
everybody
I pretty much ask
everybody
this? Oh my God. That's, that's a ho I
I
it's friends. How your friends. I don't say like how
No, no, no, no, no, no, no. no. I, I think, I think, I think strangers, I think
acquaintances would say really nice things about me.
I think my close friends would have terrible things to say
about me. What would my friends say about me? Hopefully determined hopefully funny sarcastic. if I love you, there's a lot of sarcasm and, and I, I've been critiqued that that sarcasm can, can often be
biting. Little cutting. Yeah.
Yeah. A little cutting. And, and can linger with you for a, for a while. I'll, I'll stick with those.
Okay. I see them.
Um,
Well, I find you so. Interesting to talk to. Um, but I've kept you a little over time, so
congrats on your achievements and thanks for coming on
the pod.
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