The following interview is a conversation we had with Jeff Crusey, Founder of 7percent Ventures, on our podcast Category Visionaries. You can view the full episode here: Jeff Crusey, Deep Tech Venture Investor.
Jeff Crusey
It’s good to be here. Thank you for having me Brett.
Brett
Yeah, no problem. So, to kick things off for our audience, can you explain to us a bit more about who you are and your background and how you made your way into the world of venture?
Jeff Crusey
Sure. So I started up my career early on in biotech investment banking, which I honestly did not really enjoy. I think I just took the job because many of my friends were doing that at the time but wanted to use it as a stepping stone into venture. I eventually got into climate tech venture capital back in the 1.0 where I was working at a corporate venture arm of utility in Detroit, Michigan called DTE Energy. And I thought it was a much more interesting intersection of policy industry markets. The three autoems of our largest customers and they owned a lot of midstream gas assets, which is sort of the competition back then on the marginal cost of energy. So thought that was a more interesting place to go do that rather than Silicon Valley. And that was sort of my early foray into venture and then spent the next decade or so trying to get operational and technical experience across a variety of different industries before I returned to venture.
Jeff Crusey
And most recently was part of the investment team over at Seraphim Capital, a space specialist fund located in London.
Brett
Wow, very cool. So let’s talk about DTE Energy ventures a little bit. So climate tech investing in 2008, you’re an OG of the Space Center. That must have been very early on.
Jeff Crusey
Before it was cool. That was sort of the first Hype cycle for climate. I think it was really interesting mainly because I think it was still a very new category at that point in time and not a lot of investors with a lot of experience in those various fields that involve climate tech. So yeah, it was a lot of fun. And what I think is interesting is there’s a lot of parallels to space in terms of the market cycles that we’re seeing today and a lot of reemergence of the same technologies we saw more than a decade ago, finally penetrating markets. So it’s really interesting to be able to see how technology has evolved over the last twelve or so years.
Brett
Yeah, I can imagine it’s changed dramatically. Now let’s talk a little bit about deep tech. I know I used that in the intro there but it seems like everyone has a slightly different definition of what deep tech is. So what is your definition of deep tech?
Jeff Crusey
I mean it’s so amorphous and means so many different things to people. I think we think about it as just more fundamental, difficult technology beyond software. But even then nowadays AI pure software and I would consider that new tech. So I think what it really refers to is deep technical moats that companies have from their technology and that’s sort of the common denominator there. But for us it’s aerospace and defense, climate and energy, cybersecurity and advanced computing. Got it.
Brett
Let’s zoom in a bit on space tech. So what’s that like? That field must be super exciting to be part of.
Jeff Crusey
Yeah, it’s been a really New York ride the last few years, around 2019, 2020, I think. There were a lot of people that felt like they missed out on SpaceX, but they’re more interested in other areas of space and they really wanted to capitalize on the sector as it grew, especially with more and more investment and there being the first liquidity pathway with SPACs, which wasn’t a great outcome for most. But it was really interesting to see how much more involved retail investors got and sort of the response from the industry who realized that they needed to reinvest in their own industry far better than they have in the past. And then it’s hard to ignore the rate of progress that SpaceX has been making to support much of this boom. And then I think lastly, the other tailwind is there’s a lot of geopolitical turmoil right now and I think part of that is Fortifying defenses and the aerospace industry has a large hand in that.
Jeff Crusey
And we’re going to see more and more money trickle down from governments into startups through programs like civil programs or other nonvolute funding avenues. And are you seeing startups be more.
Brett
Open to working with the government and defense and aerospace? Because I feel like for a while there it wasn’t cool. I think there was stuff out of Google where they were saying we don’t want to be building this technology for missiles, we just wanted to make a better email. So are you seeing that change? Are you seeing startups in the venture world be more open to that idea of collaborating with the military in the defense sector?
Jeff Crusey
Absolutely. I think it’s important to keep in mind that not all dual use technology involves weapons or offensive capabilities, I would say more often than not, and involves a lot of other technologies that are used to create stability and resilience. And that’s really where I think a lot of people are starting to turn their attention, because that comes along with a lot of nondilutive funding and it’s broad across deep tech. So I think we’re starting to see investors warm up to the idea of programs like the Siber program, whereas before the concern was that companies would get stuck just servicing siber contracts and not growing as a company. But I think largely that tightest turn because it’s perfectly reasonable to be able to take that grant money and not get too off track while continuing development on your own products to progress the company materially.
Jeff Crusey
So I think VCs are getting much warmer with that and then I think we’re starting to see a lot of pushback on sort of ESG or some of the rigid definitions that can come along with it sometimes and so that’s sort of broadening the scope for a lot of VCs as well. So yeah, I think there’s a lot that’s going on there that’s really continuing to drive that market.
Brett
And what was the program you mentioned there? It was zipper.
Jeff Crusey
Yeah. Small Business Innovation Research Grants. There’s a variety of three letter agencies that provide those to startups in the form of nondilutive funding or grants so that they can work on some specific project that the DoD in some cases might need help with, things like battery technology that they need developed. And so they will write a grant that various startups can apply for and receive. Non dilutive funding often has to be matched with private funding, but I think that’s a really great mechanism to support innovation.
Brett
And what are they paying for exactly or what is that capital used? Does it need to be used to deliver an actual final product or can it be used just for R and D?
Jeff Crusey
So it kind of progresses over time. There’s a few different stages to sibers. Typically you often hear stage one with a small dollar amount in the tens of thousands that’s to sort of develop a concept. Phase two might be to actually develop a deliverable in terms of the technology itself. And then a lot of times phase three is around funding a larger customer with government and then hopefully progressing that to a program of record at some point, which means you get a nice big healthy contract from some agency. But those are still far few in between and hard to get on or compete with the prime sport.
Brett
Yeah, I can imagine.
Jeff Crusey
And Jeff, can you tell us a.
Brett
Bit more about your fund and some of the notable investments that you’ve made?
Jeff Crusey
Yeah, so we’re a very young fund and we are focused around four basic pillars. The first is aerospace and defense, the next is climate and energy, the third is cybersecurity and the fourth is a little bit of a catch all category we call advanced computing. And the reason for that spread is because aerospace and defense as well as climate and energy will be our main thrust. But it’s really hard to talk about either of those without talking about cybersecurity or advanced computing simultaneously. And sort of the reason why we want that subset of deep tech. We’re focused on seed stage and where I think we set ourselves apart is that we’ve got breadth and depth across the specific areas that we invest in. Meaning we’ve developed core technology. We’ve invested in it. We’ve been operators, so we have networks, talent pools and muscle memory in terms of insights into those industries as well as a lot of history that we can use as sort of our knowledge base to hopefully make more informed and more expeditious investments while not giving out any of the diligence that we typically like to perform.
Jeff Crusey
But in terms of how we think about deep tech, one of the things that we’ll often point to is the non related funding that we can use to force multiply but really then support these businesses with our extensive board of advisors that can really help them drive the outcomes. And why we’ve seen some success in rapidly raising rounds and going to market a lot faster than we’ve typically seen with other funds. So some of the investments we’ve made are kind of fun, actually. So one of the first investments we’ve done that was in a company called Epsilon Three that’s building out a platform for procedural management of spacecraft. Fun fact CEO Laura Crabtree was actually a classmate of mine. My founding partners at PowerPoint went to high school together. And that’s something we see is just simply modernizing the aerospace industry where there’s a lot of different parts that are just stuck in the Stone Age.
Jeff Crusey
And it looks a lot like digital transformation, believe it or not. And then into other areas more specifically like defense for example, were early on in a company called True Anomaly that’s just emerged out of Sculpt that’s building autonomous drones to provide on orbit defense and sort of like anderill of space and then a host of other companies because they’re the ones that are front of mind. Right, but what’s most important to us is that we have understanding and ability to help drive the outcomes for every single company that we work with. We don’t want to be on a board and just take up room unless we’re delivering real value. Then it’s hard for us to justify investment.
Brett
Yeah, that makes sense. And is it tough to give valuations to these companies because it’s deep tech, because it’s early stage? I’m guessing it’s very hard to really have clear insights onto what that Tam could look like. Am I wrong there or how do you approach these valuations?
Jeff Crusey
Yeah, you’re right. It is very difficult for any early stage company, let alone an early stage deep tech company, which I think maybe sometimes people might say take longer time to exit or require a little bit more funding, taking on more dilution than other areas. That gap is closing. I think we’re seeing much faster development cycles. But in terms of valuing those companies, a lot of times we don’t value those companies. Early on we’ll use things like convertible loan nuts to sort of punt in the value and give it a pseudo valuation with a market cap. But if it’s priced around at seed stage, how do we think about it? There’s no specific formula to it. You can’t be like a discounted cash flow or anything like that on a company that early. So you kind of look to market benchmarks as well as industry benchmarks to see where valuations are for similar companies and then use that as one of the points to triangulate where that valuation might be.
Jeff Crusey
Because then you’ll look at how much you are asking for what their plan is, what their dilution looks like for the round, if they’ve got an employee share option pool or whatnot. There’s a bunch of variables that sort of help you narrow in on evaluations that are important to consider.
Brett
And Jeff, how far out do you think you are from going to space? Is that something you aspire to do someday? And if so, what’s your realistic timeline for when you think you’ll go, I.
Jeff Crusey
Genuinely want to go to space? I’m not one of these people that’s like, oh, I’ve always wanted to be an astronaut. That’s not the case. Actually, when I was I think I was in high school, I had this insanely vivid dream that it took place on the surface of the moon at a colony of some sort. But it was just so vivid. Like, I feel the lack of gravity. I could taste the air, and it just sort of stuck with me over the years and just really made me want to go to space. So when will I go? Oh, man, who knows? I think I need to make a little bit more money before I can determine when that is.
Brett
Fair enough. Now, let’s zoom out a bit. And can you just talk to us how you would describe or summarize the state of the venture world today?
Jeff Crusey
It feels like there are a lot of investors that see uncertainty in the market, want to see better valuations as a result, and it’s taking some time to draw that out, but I think we’re starting to see more of that. CB insights, I think, put out a report the other day that showed that valuations have come down to roughly early 2021, late 2020 levels, and we’ll probably continue to come down to more or less exuberant levels for the remainder of the year. The big difference in this market cycle is that there’s a lot of dry powder waiting for investment. And so I think we’ll see a big push investment maybe towards the later end of this year, because people just they need to get that capital out. They’re on a ticking timeline.
Brett
Makes sense. And is there a chance with that dry powder that it just gets returned to the LPs? That’s one of the conversations I was listening to in a podcast a few months ago where there’s some optimism of it. Don’t worry, everyone. We have all this dry powder, it’s going to be fine. And then someone else is saying that, well, they’re probably just going to return it to their LPs because everyone’s a little bit rocked by the market or what do you think is going to happen there with all that dry powder? Do you think it’ll be deployed?
Jeff Crusey
Yeah, I suspect some of it will be returned just because there’s LP skittishness. I’ve heard of LPs withdrawing commitments left and right. Yeah, I could see that happening, but I think it’s all healthy for the ecosystem. It’s important to remember that we’ve just been in this insanely long bull run with low interest rates that’s driven a lot of this exuberant behavior and that’s not the case anymore. So I think that’ll be healthy for the ecosystem.
Brett
Yeah, makes a lot of sense. And what would you say excites you most about this world of venture and what frustrates you the most?
Jeff Crusey
What excites me the most? Genuinely, just I love being in the same room with founders that are smarter than me and that’s always the case. But it’s just I really enjoy supporting amazing founders because it gives me energy to see somebody else flourish and that’s really ultimately what I like to do. And it just so happened to take the form of venture capital. What annoys me, I think it’s probably other VCs sometimes that annoy me because I see such over the top language sometimes on Twitter podcasts where people are referring themselves as visionaries or experts in these fields and they maybe made one investment and never actually worked in that field before. And it’s like, man, that feels like a little bit of false advertising to startups and founders.
Brett
Yeah, I can see that and I do see that a lot on Twitter with some questionable posts. Now another question for you is what are you doing to really stand out and attract the right types of founders that you want to invest in? Because as you mentioned, there are a lot of ECS out there and it seems like there’s just a lot of noise in the venture world. And venture capital firms seem to really be ramping up their marketing efforts, it seems, in the last couple of years. So what are you doing to stand out and what do you have planned to stand out and attract the right types of founders?
Jeff Crusey
Yeah, I mean, it’s deep domain expertise and experience. I think one of the largest complaints we’ve heard from founders over the years is investors lacking any kind of experience or insights into their business or technology or markets that can really help them and end up just with a check, nothing more. And we hear that pretty consistently. And that’s where we believe we are different or stand out is that we’ve worked and developed technology or invested in all the areas that we are going to invest in that I think earns a lot of credibility with. founders and why we can rapidly incubate and fund companies not have to wait for them to come to us. Because we understand technology and markets very deeply. It’s not that we read some report, we’ll take a battery and we’ll see right, test it on a lab bench, because we know a lot of battery manufacturers claims maybe aren’t so truthful, but people that aren’t experts in the battery industry probably wouldn’t know that and they’d hire somebody to do that for them.
Jeff Crusey
But were able to do that as two guys.
Brett
Makes a lot of sense. And given the current landscape right now, what are your conversations like with founders that you work with? And what are some of those tactical insights and piece of advice that you’re sharing with them to just navigate the craziness of the world right now?
Jeff Crusey
Yeah, I think one of them is if you’ve got less than six months of runway, figure out a way to extend that as much as possible. I think it’s going to be a bit tough for the remainder of the year to raise funding. Even though seeing some oddly quick rounds raised recently, I wouldn’t leave it off the chance. So that’s one of the biggest things, and I don’t think it’s unreasonable to oftentimes reopen the last round if it were at a fairly high valuation relative today. Another one is really teams can be broken if you cut too many people in the wrong way. And to be very mindful, that when founders are trying to extend runway, because it’s important not to break the culture of a team if you’ve got a good one going and that can really stymie efforts. Even if you are able to raise subsequent funding, founders could be making up a lot of ground be diligent at going after non dilutive funding.
Jeff Crusey
I think at least within aerospace, I’ve seen a correlation, positive correlation, it seems like, between companies very early on that are adept at going after nonvolutive funding and being able to raise subsequent rounds. So that’s another one that take advantage of it, so long as it doesn’t take you too far off track in terms of your development roadmap. Yeah, I think those are some of the main ones right now, given where the markets have and what are your.
Brett
Views when it comes to category creation? And have you had any of the founders that you’ve invested in come to you and say, hey, we think this is a category creation play, or what are your general views there on the topic?
Jeff Crusey
I’m all for it. I think some of the largest markets are undiscovered and we should always be looking at. So there’s instances where we’ll actually incubate companies and have in fact, to go after markets that are just nonexistent today. And oftentimes those are your black swans or your moonshots. And I think it’s important to have some of those in your portfolio to sort of risk adjusted. If some of your other investments are too conservative.
Brett
And the last couple of questions, since I know we’re up on time here, so what types of opportunities generally are you looking for? And we have a lot of founders who listen in, so when should they reach out to you?
Jeff Crusey
Yeah, you can always get me on Twitter. My email is jeff at farpoint PC and always try and make myself available. What are we looking at right now? I mean, there’s a lot to be done, I think, on downstream geospatial, meaning we’ve got lots of satellites up there collecting lots of great data. Starshield is going to be up soon, hosting tons of platforms, taking even more pictures all over the place. And I think there’s a huge bottleneck in terms of DevOps within geospatial that’s really not allowing anyone to unlock the greater value. And so I think there’s a few major tech issues to solve before there can sort of be like the unity three D of geospatial. But that’s really a direction I think is important and interesting to create that sort of unified geospatial DevOps platform. In terms of climate, we’re always looking at energy storage, not just electrochemical.
Jeff Crusey
We’re developing some thinking around the reemergence of compressor energy storage, maybe more subterranean than on the surface. And that’s because there’s lots of great natural reservoirs that can be used to contain things like compressed air energy at grid scale and really shave off those big peaks. I think states like Texas would love something like that when they’re having severe weather. Other areas we’re looking at in terms of cybersecurity, we’re always curious about zero trust environments to alleviate the processing bottleneck of data, especially within the US government. There’s tons and tons of data being collected on sensors all over the place, but a tiny fraction of it’s actually being processed. And that’s just because as decentralized and securely processed rather than distributed in zero trust environments. So something that can alleviate that bottleneck is always interesting. Things like polymorphic encryption have been on the horizon for a long time.
Jeff Crusey
Who knows if we’ll ever get there? But that’s one example if there’s a breakthrough there that we’d be interested in. And then in terms of advanced computing, it’s the wild rest right now. I’ve been trying to rewrite our thesis on it for the last month, and it feels like at the end of every day I have to go back and rewrite it. There’s amazing new information I can incorporate. So I think there’s obviously the generative neonite movement that’s piquing a lot of people’s interest with GPT and stable diffusion and other foundation models like that. It’ll be interesting to see how it shakes out. I mean, it’s not like GPT-3 is perfectly baked in product ready, so people can build on top of it just yet, but I would expect that it’ll get there in other models in other areas as well. So we’re seeing interesting things like synthetic data generation for privacy.
Jeff Crusey
We’re seeing new approaches to generating or doing identity management. We’re seeing new approaches to even things like game development. It’s pretty pervasive and across so many different industries and science that it’s hard to sort of keep track of, but we try and sort of contain ourselves in focusing on where that’s deployed in the areas that we understand best. For example, there’s a geosynthetic geospatial data company that’s using generative AI that just emerged that we’re working with, and so that you can finally have these big models that can do incredible things with geospatial data, like find a Russian tank under some canopy of trees in eastern Ukraine somewhere. Whereas that was more manually done in recent history. So I think, yeah, it will be pretty transformative over the next few years. And then we also look at the hardware side because it’s not just the software, there’s a whole hardware exploration component to it, especially as it moves out to the edge.
Jeff Crusey
So definitely keeping track of things like neuromorphic computing or edge AI. Nice.
Brett
That’s awesome. All right, Jeff, unfortunately, we are going to have to wrap here, so we hope to have you on again soon. Thanks so much for coming on and talking about how you view the venture world and what you guys are backing. This has been super fun and exciting and hope to chat with you again soon.
Jeff Crusey
Thank you, Brett. I really appreciate you having me.
Brett
All right, keep in touch.
Jeff Crusey
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