Funding on the Frontier
Or How Flying Cars Will Make It To Your Garage
The Innovation Supply Chain: Research → Companies → Products → People
Steve Jobs wanted to put a thousand songs in my pocket. When Apple launched the iPod, he did just that. Of course, he wasn’t the only person responsible. Nor was it just all the people on the iPod team. Nor was it even all the people at Apple. Nor was it even all the people employed in the computing and music industries.
Instead, the deployment of the iPod was the result of the efforts of an uncountable number of people over a span of thousands of years. Multitudes of people from the unrecorded person who first discovered fire to Benjamin Franklin, who first discovered electricity, to the person who first conceived of an abacus to Charles Babbage, who first conceived of a computer, partially contributed to the deployment of the iPod.
If I were to summarize it succinctly, millennia of basic research followed by over a century of applied research followed by a few decades of competitive commercial activity eventually resulted in the iPod. This is pattern is largely true for all of your favorite technology, from your fork to your television. These innovations didn’t just appear on your dinner table or in your living room. They were built on the back of breakthrough after breakthrough, commercialization after commercialization, and often they were thousands of years in the making.
This article is the first in a broader series that I will be posting within the next week(s). In these articles I hope to identify the pathway through which new ideas are developed, research is applied, and products are finally deployed. Further, I want to identify ways in which this pathway to product deployment is currently broken. Beyond, I want to identify tangible ways of solving the blockages in that pathway. For if we can do that, we can accelerate technological progress tremendously. If we can do that, we can usher in tremendous economic growth and opportunity. This is an intellectual area of vital importance.
Of course, the product cycle starts with basic research. Basic research is how we develop paradigms of understanding. For example, Einstein’s paper on general relativity was basic research. That basic research eventually turns into applied research. This is when a basic insight like E = mc^2 is applied to design and engineer a theoretical nuclear reactor. These plans eventually lead to prototypes. We then enter the final stage when these prototypes are spun out into well-funded companies that can deploy products like nuclear reactors at scale.
Capablanca, one of the greatest chess players of all time, had a famous quote. He said, “In order to improve your game, you must study the endgame before everything else.” I want to apply Capablanca’s advice and start our analysis at the end of the product cycle, and not the beginning. If we work backwards in this way, we can see how things broken further down the pipeline affect things that come prior.
Therefore, this article is not about basic research but rather the stage immediately before product deployment. Namely, this is the stage where applied research is converted into a company with the funding necessary to bring a product to market. What are the issues involved in this commercialization stage? Why isn’t more applied research making its way into products that make my life better?
To find answers to these questions, I spoke with Jeff Crusey, a deep tech investor. Deep tech investors fund companies that are on the cutting edge, often right out of the applied research phase, and Jeff Crusey is someone with a deep track record of successfully funding companies on the frontiers of technology. For example, Jeff has invested in companies currently commercializing space like LeoLabs, ICEYE, Spire, and others. He previously worked at and then helped take public the Seraphim Space Investment Trust. Beyond space, Jeff was also an investor in QDVision. QDVision’s technology is the "Q" in Samsung QLED televisions. Speaking about this investment Jeff explains, “It's fun to see a technology you backed really proliferate.”
Summarizing my conversation with Jeff, there are at least five big issues preventing the commercialization of applied research.
First, there isn’t enough good basic research which then becomes good applied research. Obviously, good applied research can then turn into companies that can be funded, so if there isn’t enough good basic research, the whole supply chain breaks down.
Second, the applied research that is good is often controlled by universities and big companies that seek to grab too much equity for themselves which chills interest from outside investors.
Third, there aren’t enough good deep technology investors who can identify what applied research is ready for commercialization and what isn’t.
Fourth, a lot of deep tech commercialization is less about the technology than it is about pull with the federal government to get agencies to fund and buy the technology from new companies. This is a fundamentally corrupted process.
Fifth, there isn’t enough diversity in deep technology funds. Because so few people make decisions on what gets funded and what doesn’t, society becomes severely vulnerable to groupthink and bandwagon investing in the deep technology ecosystem. Independent thinking, and lots of it, is our need today. Essentially, there is a very strong case for more cowboys on the funding frontier.
The rest of this article reads as a dialogue between Jeff and myself. It expands on those five issues identified above.
Me: What are some of the issues preventing more successful deep technology companies from emerging?
Jeff: At the university level we sometimes find misalignment between truly exploratory research and narrowly funded research to win grant money and publish more papers. There is too much of the latter and not enough of the former. There is also still a bottleneck at tech transfer offices as well. For example, universities largely still try to take unhelpfully large share ownership in spinout companies which can deter investors.
At the corporate level there are anti-competitive practices every day. Big companies often shelve good technology so as not to enable their competition. Like university technology transfer offices, many big corporations that do try to spin out companies also take too large of an ownership stake early on. Again, this deters investors and inhibits the growth of the company. Also, at the corporate level we see more and more corporate venture arms that are often fair weather investors, budgets get cut and venture is one of the first to be pulled back. Also, those corporations often use their venture arms like shopping lists for current issues rather than allowing the venture arm to look peripherally where real innovation typically occurs. I think corporations could play a much larger role in modifying theses and structures of their venture arms accordingly.
At the government level, bureaucrats and politicians are relatively risk averse which trickles down through to programs meant to support deep tech companies. I think it will be important to help change this view of every failed company becoming a political hot point rather than seen as a necessary part of the innovation process. I think there is also an issue with awarding government contracts as they largely still go to primes as they're seen as reliable but at the expense of being far more costly and slower than their "startup" counterparts. I’ve seen estimates of nearly 75% of Aerospace and Defense revenue goes to about 5 primes. I think breaking up contract awards will go a long way to providing more companies a better chance at meaningful funding or revenue from government sources.
Me: How would you describe the bottleneck in innovative basic research? Why are corporations and universities producing so little truly paradigm shifting basic research?
Jeff: I think there are clear misalignments of interest at the basic research level both within corporations and at universities. In the case of corporations, they often don’t want to commercialize technology that will cannibalize sales of their own very successful products. In the case of universities, we regularly see proposed research for the sake of winning funding versus pursuing ground-breaking research by taking risks on exploratory projects that will often go nowhere, but might, every once in a while, produce something truly revolutionary.
But, going deeper into the product cycle, there are also issues beyond a stagnation in quality basic research. From the perspective of an investor, there are very few investors that can intelligently invest in deep technology long before there is commercial validation. Therefore, there is something of a mismatch where even if our institutions did start churning out ground-breaking research at a high rate it would struggle to reach people in the form of products. Lastly, there is plenty of great tech that never makes it to scale because it's stuck in a region that lacks the investment ecosystem we have in the US.
Me: Can you expand on how the university research system is broken?
Jeff: There might be the wrong incentive structure for more exploratory research. Sometimes researchers have to perform research that is prescribed from a number of different parties, rather than truly exploratory. Related, researchers will sometimes pursue research and publish for the sake of publishing and building of profile. The core mission rarely seems to be unbiased exploratory research of whatever topic the researcher would like to pursue.
Me: Obviously, outside universities and companies there are often labs which work on basic and applied research. Can you name some labs that you believe are successful models that the government should seek to invest in or replicate?
Jeff: I actually think there is a lot of great research coming out of many of the national labs that makes it to market commercially. As for private institutions, Santa Fe Institute, Salk Institute, and SRI are all good examples of what I view as high quality research institutions, and they’re often successful because they have partnered early on with stake holders on the commercial side.
Me: Not all research funding is equal. Why is DARPA more successful than the NIH or NSF in producing basic research that can result in economic growth?
Jeff: It might have more to do with often having an existing customer within the DoD, already a revenue motive, and more appealing for companies. The DARPA topics are often derived from the needs/requests within the various defense/intel communities.
Me: On the commercialization side, we often see some companies succeed because of their sway in Washington, even if they have worse technology than other companies. How would you characterize the relationship between successful deep tech companies, politicians, and bureaucrats?
Jeff: It seems like very successful deep tech companies are often closely aligned with politicians in various ways. Often investors who are highly politically active, can have an "unfair" political advantage when it comes to winning large awards from the US government for their portfolio companies. It is no surprise we see generals and former senior politicians joining some of the big name funds.
On a similar thread but from a different angle are the Thiel and Schmidt circles which are highly politically active and have dispersed geographically where places where they can have more latitude to pursue their political agendas whatever that might be. For example, Peter Thiel is active within the Republican party and involved with the Trump administration. With such deep political influence, it’s less of a surprise that SpaceX, Anduril, Palantir have seemingly been able to win disproportionately large contracts from the federal government to help propel those companies far ahead of their competition.
Me: Who are the big players in deep tech investing, and why do we so often see the same names again and again?
Jeff: It is clear to me that Lux Capital, Founders Fund, and A16z have closely aligned themselves investing in each other's companies and writing larger checks as compared to the rest of the Market. I haven't actually done a study to analyze the level of investment and rate of co-invest across the major players as compared to the rest of the deep tech investment community. I highlight Lux, Founders Fund, and A16z because they are publicly outspoken and have accumulated large funds. I won’t call it a cartel because I frankly don’t know the teams or inner workings and there are other deep tech investors with similar capacity that are far less public facing and don't appear to be as aligned broadly aligned.
Me: How can we bring more deep tech investors into the market?
Jeff: I think it's important to create more diversity among deep tech funds. I ruminate on the concept that a small number of funds can't have a monopoly on good ideas. Yet, LPs have been consolidating under those few funds, usually during market downturns where capital magnitude can actually drive returns, which then becomes something of a self-fulfilling prophecy. One of the ways we might be able to create more diversity is through seeding a larger number of emerging deep tech funds with new mechanisms, perhaps through government programs. There have been failed attempts in the past to do this using loan programs but those aren't a good vehicle for venture capital funds.
