While the venture world is buzzing about generative AI, Dana Grayson, a longtime venture capitalist who co-founded her own company, Construct Capital, five years ago, is looking at relatively boring software that has the potential to transform industrial sectors. I've been focusing on it. Her mission doesn't eliminate her AI, but it also doesn't depend on it.
Construct recently led a seed stage round for TimberEye, for example. TimberEye, a startup developing vertical workflow software and data layers, says it can more accurately count and measure logs and, if all goes according to plan, help the startup achieve its next goal. It becomes a market for purchasing wood. You may be wondering how big that market will be. According to some estimates, the global forest products industry will reach $647 billion in 2021.
Another Construct deal that doesn't sound as sexy as, say, a large-scale language model is Earth, a startup centered on human composting that turns human remains into “nutrient-rich” soil over a 45-day period. Yes, it is. But at the same time, it's also a smart market to chase. Currently, cremation accounts for 60% of the market and could account for more than 80% in the next 10 years. The cremation process, on the other hand, can be compared to a 500-mile car trip. As people increasingly focus on “greener” solutions overall, Earth believes it can attract more and more of those customers.
As Grayson recently told me during a Zoom call from Construct's headquarters in Washington, D.C., even avoiding some of the AI hype, Grayson and Construct co-founder Rachel Holt are confident that their colleagues are not completely exempt from many of the same challenges faced by Their challenge is timing. The two launched the first of his three funds in one of the venture industry's foamiest markets. Like every other venture company on the planet, some of its portfolio companies are currently suffering from the indigestion of excessive funding. That being said, they are hurtling into the future and seem to be succeeding, albeit with some solid industrial businesses in tow. Excerpts from recent chats, edited for length, are below.
You were investing during the pandemic, when companies were raising money in such rapid succession. What impact have these rapid-fire rounds had on your portfolio companies?
The quick news is that we didn't impact many of our portfolio companies due to the fact that we actually deployed our initial funding into seed companies, companies that were just founded in 2021. is. Most were out the gate.but [generally] I was very tired and didn't think that round was a good idea.
One of your portfolio companies, Veho, is a package delivery company that raised a monster Series A round, followed by a huge Series B just two months later in early 2022. The company laid off 20% of its staff this year, with reports such as: turn over.
In fact, I think Veho is a great example of a company that has operated extremely well through the economic turmoil of the last year or two. Sure, you could say they've had something of a whip in the financial markets by getting so much attention and growing so quickly, but in the past year or so, their revenue has more than doubled. I can't say enough good things about the management. Team and company stability. They have been and will continue to be one of the top branded companies in our portfolio.
Of course, these things never proceed in a straight line. What are your thoughts on the extent to which venture companies should be involved in the companies they invest in? That seems to be somewhat controversial these days.
In the case of venture capital, we are not private equity investors or control investors. Sometimes we are not on the board. However, our core business is to provide value to companies and be a great partner. It means contributing to industry expertise and networks. But I put us in the advisor category. We are not the controlling investor and do not intend to be the controlling investor. So it's really our responsibility to deliver the value that founders need.
There was a time, especially during the pandemic, when VCs were advertising, “We're not going to get too involved in your company. We're going to step back and let you run the business.” think. In fact, I've seen founders avoid that idea and say, “I want support.” They want someone in their corner to help them and align those incentives appropriately.
During the pandemic, venture capitalists were promising the moon and the market was very frothy. Now that power appears to be shifting away from founders and back into venture capital. What do you watch every day?
One thing that hasn't disappeared from the pandemic-induced rush to invest is safe notes. [‘simple agreement for future equity’ contracts]. I thought that when we returned to a more cautious investing pace, people would want to go back to investing in equity rounds only, i.e. capitalized rounds rather than bonds.
Both founders and investors, including ourselves, accept SAFE notes.What I've noticed is that those notes become “fancy” and sometimes include side letters as well. [which provide certain rights, privileges, and obligations outside of the standard investment document’s terms]Therefore, you should ask for all the details upfront to make sure your cap table is not overly complicated. [the startup] have [gotten going].
SAFEs close quickly, so it's very tempting to keep adding to them. But let's take a board as an example.Side letters can be attached [with a venture investor] that [states that]”Even if this isn't a capitalized round, we still want to be on the board.” SAFE notes aren't really designed that way, so we says this. Anyway, go ahead and make the most of your round.
Construct focuses on “transforming basic industries, logistics, manufacturing, mobility and critical infrastructure, which support half of the country’s GDP.” In some ways, it feels like Andreessen Horowitz appropriated this same concept and rebranded it as “American Dynamism.” Do you agree or are these different themes?
That's a little different. Certainly, there are ways we can align with their investment thesis. We need these fundamental industries of the economy (some call them industrial space, others energy space) to become technology industries, which can incorporate the decentralization of transportation, mobility, supply chains, and manufacturing. I believe there is. I think if we're successful, we're going to create a lot of companies, maybe manufacturing software companies, or maybe actually manufacturing companies, that are valued the same way as high-tech companies today, with the same revenue multiples and the same EBITDA. I am. You will gain margin over time. That's the vision we're investing in.
Some old industries are starting to break up. For example, a former Nextdoor executive recently raised money for HVAC Rollup. Are you interested in these types of deals?
Many industries with existing players are highly fragmented, so why not consolidate them? [in order to see] Economies of scale through technology? I think that's a smart thing to do, but we're not going to invest in old world technologies and businesses and turn them into modern times. We are in the camp of introducing new technologies into these markets. One example is Monaire, in which we recently invested. Although they belong to his HVAC field, through low-tech sensors and monitoring and measurement services he offers new services to monitor and measure HVAC conditions.
One of the founders used to work in HVAC, and the other used to work in HVAC. [the home security company] Simply safe. We want to help people understand these areas, understand their complexity and history, and also understand how to sell into them from a software and technology perspective.