Eight years ago, Brian Garrett and his partners felt a tectonic shift.
At the time, Crosscut Ventures, of which Garrett was co-founder and managing partner, had been investing in early-stage startups in Los Angeles and Southern California for nearly a decade. Although it was primarily focused on software companies, it began to shift its focus to hardware as more promising founders became attracted to it.
“At that point, SpaceX was very established,” he told TechCrunch. “In most cases, people started to become independent from SpaceX because they rang the bell and sent supplies.” [into space] And I'm back. ”
But the founders from SpaceX weren't exactly the same people who helped launch L.A.'s startup scene nearly two decades ago.
“Entrepreneurs joke, but it's true: When you think of starting a company, you don't come up with a small idea,” Garrett said. “They flew rockets up and down and landed them for 10 cents. They're not thinking about the next startup to be a DTC e-commerce apparel brand. I'm thinking about it, but they really seem to be centered around climate issues.”
Focuses of the new $100 million fund, Crosscut's sixth, include energy and power, space and underwater exploration, advanced manufacturing, advanced materials, and security and defense. Although this is broad, Garrett said the common theme is “frontier technology.”
Climate is a key issue for some of these industries. Garrett said the company's “pretty important topic” of advanced nuclear power probably applies to each technology. The same goes for transmission and grid technology, another of Crosscut's interests.
Garrett said the fund is realistic about how long it will take for its investments to mature, given its focus on hardware-centric technology. “They're not all going to be big hardware changes that cost $1 billion to build. We need to build our portfolio smartly and blend it with some software.”
Despite the cost, there are several reasons why the hardware remains attractive to investors. When hardware is involved, there can be a greater opportunity for impact, especially in situations where problems are caused by the burning of fossil fuels, such as climate change, which is not possible with software. Eliminate completely.
However, hardware startups face challenges that software startups do not experience, especially access to capital to prove the commercial viability of their core technology. This problem is most acute in the middle stages of the venture capital stack, typically around Series B or C. This is called the “valley of death,” the “missing middle,” or the “first question.” And founders and investors are starting to look for creative ways to fill that gap.
Seed-stage funds like Crosscut are not typically set up for that purpose, so the company plans to bring on new partners later this year with expertise in growth and project finance. “We're trying to build a full stack, a full platform,” Garrett said. “It will take time, but the aim is to come up with creative financing solutions.”
The growth and project finance funds should help Crosscut support the most promising hardware startups without taking shortcuts that push them into the typical 10-year venture fund lifecycle. “This allows LPs to get a product of their choice that fits their risk-reward profile and time horizon.”
While Crosscut has been interested in climate issues for some time, Garrett said the focus of the new seed funding it is currently raising is not just a product of its partners' interests. “What's really important is understanding what kinds of problems the best entrepreneurs are working on,” he said.
Garrett said Crosscut has seen a lot of talented founders come from companies like SpaceX, Anduril, Northrop and Boeing, which all have big presences in Southern California. Given the many investment opportunities found across Frontier Technologies, “it makes sense to restructure the company.”