For “deep tech” or industrial tech investors, a captivating idea on paper doesn’t always translate into a sustainable or viable business. Even a remarkable technological breakthrough isn’t guaranteed to survive the long sales cycles of the industrial world.
So which companies are worth the investment?
Ian Rountree, founder and partner at the venture firm Cantos, wrote a bare-bones thesis on X that offers guidance on this question. In it, he lays out a stark list of the companies he invests in — and the ones he passes on.
In this episode, Shayle and Ian unpack his post and explore how it applies to the current landscape of hardware and industrial startups. They cover topics like:
- Why selling technology to large incumbents like automakers or utilities can be a death sentence for startups
- The pitfalls of “commercializing science”
- Why capital risk to sell an end-product can be better business than licensing technology
- Why “weird” companies—”N of 1″ startups—can generate huge amounts of talent and capital
- Why selling commodities (like electrons or minerals) can actually be a safer bet than entering a new market
- Real-world examples of full-stack success in the mining industry, including Earth AI and KoBold Metals
Resources
- Latitude: Earth AI’s play in the hunt for critical minerals
- Catalyst: Calibrating hype with Akshat Rathi
- Catalyst: Climate tech startups need strong techno-economic analysis
- Open Circuit: Pain, resilience, and bargain hunting for climate tech investors
Credits: Hosted by Shayle Kann. Produced and edited by Max Savage Levenson. Original music and engineering by Sean Marquand. Stephen Lacey is our executive editor.
Catalyst is brought to you by Uplight. Uplight activates energy customers and their connected devices to generate, shift, and save energy—improving grid resilience and energy affordability while accelerating decarbonization. Learn how Uplight is helping utilities unlock flexible load at scale at uplight.com.
Catalyst is brought to you by Antenna Group, the public relations and strategic marketing agency of choice for climate, energy, and infrastructure leaders. If you’re a startup, investor, or global corporation that’s looking to tell your climate story, demonstrate your impact, or accelerate your growth, Antenna Group’s team of industry insiders is ready to help. Learn more at antennagroup.com.
Transcript
Shayle Kann: I’m Shayle Kann. I lead the early stage venture strategy at Energy Impact Partners. Welcome. All right, so this one is a little out of the ordinary for me for two reasons. First, despite the fact that I am a venture capital investor, I generally don’t have other VCs as guests on this podcast. At least not very often. I usually prefer to talk to operators and researchers who have a much deeper knowledge than anybody in my shoes. Second, I’m not generally in the habit of having a whole conversation based on a tweet or an ex-post, but I’m in the business of exceptions.
So here’s one. My friend Ian Rountree is also an early stage investor. He leads Cantos, which is a pre-seed and seed fund that’s been doing deep tech since long before it was cool. I think he may have been part of coining the term deep tech and is now part of coining whatever the next term is going to be. Anyway, Ian posted something about his investment thesis just a few months ago that has been basically stuck in my brain ever since then.
He said, and I quote, “We invest in two archetypes at Cantos. One: full stack Deep tech selling an end product, or even commodity, not selling technology. Or two: weird N of one. Never seen anything like it before. Selling technology to incumbents? Pass. Commercializing Science? Pass. Nth company doing the current thing? Pass.” I’ve been hung up on it because it resonates so strongly with my experience over the past 19 years, working with startups in the energy and industrial world. First as an analyst and now for the past eight years or so as an investor. I think it’s correct. But it also describes a world that honestly excludes the vast majority of startups in this space, so it’s worth unpacking. Ian, welcome.
Ian Rountree: Thanks, Shayle.
Shayle Kann: I’m excited to finally have you on after many times of having podcast-worthy conversations with you not in front of a microphone. I rarely do this, but I want to talk about a tweet that you posted a few months ago and have pinned since then. So presumably you like it as well, but it has stuck in my head. I could not agree more strongly with it, and I want to unpack it because I think it contains some insights into the types of startups that really seem to succeed within this world of deep tech or hard tech.
Shayle Kann: You list out the two types of companies that you do look forward to invest in, and we’re going to talk about those in a minute. But after doing that, you list out three types of companies that you pass on. I want to talk about that first. The first one is companies selling technology to incumbents, which I want to harp on because in these deep and hard tech categories—industrial categories—I feel like that’s the majority of startups. The markets that they’re entering are comprised of big incumbents who control a lot of the infrastructure and the distribution. The obvious thing to do is try to sell them the technology, so you see a ton of that. Why is that a blanket pass for you?
Ian Rountree: I’ve learned this, like many things, the hard way. I started Cantos nearly 10 years ago. It seems like the easy thing to do because it scopes down your startup to just using this amazing technology and productizing it in the simplest way to sell to a big customer. It turns out that there’s just so much institutional inertia—sometimes cultural, sometimes actual switching costs of having to rip out whatever they’re using now to move to your product—such that it ends up taking a lot longer than you think. This has implications for capital intensity too, but it’s more that it slows you down when speed is so critical to a startup.
Shayle Kann: I think speed is actually the key point. People talk about how your thing, especially if it’s going to displace some current thing, has to be 10x better. Let’s say you do have a thing that is 10x better. You would think, great, I’m going to go sell it to whoever uses the current thing and I should win. In the long arc of history, if you had infinite time and infinite cash to burn to get there, you could win that way by selling to incumbents. But you can’t if you are time-limited on startup speed.
Ian Rountree: Exactly. The main reason that startups are time-limited is because you raise serially, getting maybe 18 to 24 months of runway. Let’s say you raise 24 months of runway; you need to start fundraising six months before you run out of money. So you have 18 months to do whatever you need to do to unlock the next series of fundraising. If your customer’s sales cycle is longer than 18 months, you are de facto dead. You have to make progress faster.
The game on the field is you need to make discernible progress within 18 months, or you don’t raise your next round. A lot of times sales cycles do take longer. The stakes are very high, and in some industries, lives could be on the line. The customer wants to do their diligence and they’re using something “good enough” today. You have to overcome all this to get your product in there and start to scale enough to raise the next round and live to fight another day. One of my very first investments at Cantos in 2016 was a startup that had incredible machine learning and interoperability software selling into the automotive industry. We would hear this time and time again from their reps at big automakers, and the company died despite having flashy investors and incredible talent because Ford and Toyota sales cycles were too long to raise the next round.
Shayle Kann: The auto OEMs are notorious for having the longest sales cycles. The other dynamic is pilot purgatory. Big companies love to pilot something, and the timeline between pilot and full commercial rollout is never certain.
Ian Rountree: Sometimes they’re literally different teams. I always encourage entrepreneurs to understand the counterpart’s incentives. Whenever someone’s behavior in a business context doesn’t make sense to me, I try to learn how they’re paid, and usually, the answer comes to the fore that way. If you can understand people’s incentives, you can navigate around that and sometimes quicken the sales cycle or assess whether you are pursuing a sales cycle that is compatible with your startup in the first place.
Shayle Kann: I’ve learned this lesson the hard way in big industrial categories like the chemical and mining industries. It’s easier said than done to not do this. We’re going to get to the flip side of this, which is if you’re not selling your technology to incumbents, then you have to be full stack. That has its own challenges, but I think you and I are aligned that despite those challenges, it may be the only way to succeed at a venture pace and venture scale.
Ian Rountree: Speed is the most important thing, but there’s also ultimate value capture. There have been a bunch of cases—selling amazing chemistry into the battery supply chain or really advanced software into a larger plant—where you have objectively superior technology. Let’s say it’s 10x better than whatever there is today. They acknowledge that this is great and they want it, but they give you an offer to pay something that is way lower than you think it’s worth. When you push back, they say, sorry. If you’re not in the pole position, you’re not often going to get remunerated for the value you’re creating.
Shayle Kann: Let’s move on. Selling technology to incumbents is hard for all the reasons we described. The second category that you said is a pass is “commercializing science.” I want to hear what you mean specifically by that.
Ian Rountree: Without getting into the semantics of hard tech or deep tech, there is a category of company where you have incredible technology and you think therefore it is incredibly valuable. That’s not actually how business works. The only point of a startup or a business is to create profit margins above and beyond its cost of capital. Technology can be a very interesting means to that end, but it is only a means. Just because your technology is mind-blowing and cited in a bunch of papers does not necessarily mean it is valuable in an economic sense.
If you are commercializing your PhD, for instance, you can often look like you have a hammer and you’re just looking for nails. In a business context, you have to reverse it; you have to be obsessed with a problem and completely agnostic as to the solution. I find that there are a lot of deep tech founders, especially PhD entrepreneurs commercializing their own thesis, who have it backwards. They’re waiting for people to tell them how awesome their technology is, when really you have to do a little more work to go show them. The other part is the timelines. I would much rather have a novel application of an existing or relatively new technology rather than wait for something to become market-ready in the first place. I’ve lost a lot of money just waiting for a startup to advance through technology readiness levels.
Shayle Kann: How do you think about things like nuclear fusion? Anybody investing early in nuclear fusion is investing in inherently breakthrough science that hasn’t been proven.
Ian Rountree: The short answer is I don’t. That’s just not the kind I would do. I used to spend a lot of time thinking about fusion, but in my business context, I don’t have the time to wait for that to become commercializable. It is expressly the type of science that we at Cantos do not invest in, although I really hope for humanity’s sake we pull it off.
Shayle Kann: On that first point regarding the “hammer in search of a nail,” I see that a lot. We incubated a company called Voya Energy, which is using metals as fuel in a particular way. We were doing an electrochemical approach, and we kept finding other companies using combustion, which seemed clearly worse to me. It turns out there is a particular professor of combustion who created the diaspora around this area. It’s exactly that thing: this is a combustion person, so that is what they’re going to spin out of their lab. Do you see this a lot in the bio world—the technology and solution in search of a problem?
Ian Rountree: Oh man. We’re doing a lot less of it now, having learned the hard way that it’s difficult. We do believe that in our lifetimes, the intersection of computation and biology will probably be one of the more prolific areas of innovation. There is a lot of this commercializing science now, but that is an area where the capital markets have really figured out how to underwrite to technology readiness levels.
Shayle Kann: I find this frustrating not being in the pharma world. The process of taking a drug from very early stage through to the market is really well understood, and the financing seems straightforward. Why can’t we just replicate that across a variety of different markets?
Ian Rountree: It’s just not standard enough. In that industry, you can look at a Phase 1 trial and know the indication, the number of patients, and what you usually pay for it. Big pharma acquires something after running a discounted cash flow analysis, not based on technical milestones. We don’t have a process that is as scientifically and regulatorily defined and widespread enough that an entire capital market can develop around it.
Shayle Kann: The third category you pass on is “Nth company doing the current thing.” It’s much more difficult for a variety of reasons to get a venture-grade outcome if you are in a really crowded market. It’s harder to raise, harder to attract talent, and harder to separate yourself from the pack.
Ian Rountree: This gets back into the commercializing science thing a little. Sometimes you do legitimately have something that is better than the incumbents. We invested in a company doing amazing processing of radar technology—mind-blowing, cheaper than a camera, can see through fog. However, there’s a much better-funded company called Chaos Industries, which I personally think has worse technology, but they’re doing a lot better because they’ve productized this, they’re very good at selling and marketing it, and they have a lot more capital. My hope is because we’ve invested in a much better technology we can catch up, but I’ve seen this movie before. Sometimes having the best technology doesn’t win you the race.
Shayle Kann: It gets back to the old trope in venture of team, TAM, tech, and timing. You can have the best tech and not have the other things going for you. It isn’t sufficient.
Ian Rountree: When it gets into the intersubjective nature of capital markets, you can be objectively right, but if everybody else is wrong for long enough, you are de facto wrong. The market can afford to be wrong longer than you can afford to be right in many cases.
Shayle Kann: Let’s talk about what to do. The first archetype you mentioned is “Full Stack Deep Tech selling an end product, or even commodity, not technology.” What is full stack?
Ian Rountree: When I say full stack, I’m sub-tweeting a 2015 post from Chris Dixon at Andreessen Horowitz. He described a full stack startup, alluding to companies like Uber, Lyft, and Airbnb, who rather than trying to sell software to the taxi or hotel industry, were leveraging software to influence the real world while not necessarily building hardware themselves. I largely apply that same thinking to more industries and the types of technologies we invest in, where you are building some software but also some physical component.
Shayle Kann: I think the key thing for me is selling an end product or even a commodity, not selling technology. Whatever the thing is that your technology makes better, figure out who the end customer is for that thing and then sell that product. But let’s be clear about the trade-off: it is definitionally more capital intensive to do that.
Ian Rountree: Yes, you typically need a little more money to do it. But there’s a multiplier on time for startups. If you make progress quickly, great. It makes it easier to raise your next round and do all the other things you need to do. But if you don’t, the lack of momentum will kill you. I would rather need more money but make time my friend than treat them as pure trade-offs.
Shayle Kann: Can you give a canonical example of a company that is full stack in a category where they could otherwise be selling tech to incumbents?
Ian Rountree: A great example is mining. One of our largest investments is Earth AI. Mining is a massive industry, definitionally a commodity industry, and increasingly important. Yet we weren’t seeing much innovation there. There had been startups saying, “Hey, we’re going to use satellite imagery and AI to help people mine better,” but it turns out it was very hard to sell that technology to mining companies, and they weren’t willing to pay much for it.
Earth AI said, “Well, hold on. How much is it to acquire these mineral rights? How much is a drill? Let’s just hire some geologists and apply for the rights.” Earth AI went out, bought rights, and drilled their own hypotheses. We now own deposits that we think are very valuable. If you had taken the typical startup path of just selling software, maybe you make a software license. But if you are willing to go out and take more operational risk and raise a little more capital, you can end up owning literal gold in the ground. That’s a lot more interesting to me than a mining SaaS company.
Shayle Kann: You mentioned “even commodity.” A lot of the world I trade in—energy and industrials—is mostly commodities. Notoriously, commodities are difficult markets to build startups in. What does it take for that to be attractive to you?
Ian Rountree: I love commodities. For a long time, it was used as a pejorative in venture capital. I love when a company is selling a commodity when the technology embedded in their full stack business actually gives them a cost advantage. If we’re thinking about the types of risks a startup takes, there’s technical risk, execution risk, and market risk. In hard tech, you’re typically taking more technical risk than peers focusing on software. If we’re taking more technical risk, unless you are offsetting that with a decrease in market risk, you’re probably just going to make worse investments.
Why I love commodities is because it offsets the technical risk we’re taking with less market risk. Because I know if I’m selling a commodity—meaning my product is molecularly identical to the competitors but I have a cost advantage—I know you can sell that. I can just look at the spot price on a liquid market and know that’s the mark we’re shooting for.
Shayle Kann: I’ve heard Vinod Khosla say something very similar: he’ll take technical risk, but he won’t take market risk. But commodities are not commodities in the way you think they are. Electrons are fungible, but where and when it is delivered is very important. There are interesting examples of companies in a commodity space with a differentiated input or execution that allows them to enter a new market. Crusoe Energy is an example. They started with flare gas to Bitcoin—using wasted energy to mine a commodity. That experience allowed them to build up expertise in data centers, and now they are building massive campuses for OpenAI and Oracle. They were in a commodity business but had a structural advantage with a differentiated input (flare gas).
Ian Rountree: That’s what I mean. If you have a structural advantage in producing a commodity, that’s the holy grail. If I can make dollar bills for 70 cents, I’m a trillionaire.
Shayle Kann: I have a frame I use called “wave makers” and “wave riders.” Wave makers do a thing that wouldn’t have happened but for them, like Tesla. Wave riders correctly predict a trend and ride it. The onus on the founder is different. How do you think about the archetype of the founder that can do the full stack deep tech thing?
Ian Rountree: Our preference for this type of business has increased the onus on the entrepreneurs. If you’re going to raise the capital required to vertically integrate and go full stack, you just have to be that much better at fundraising. The type of person you need to make a wave has to have such a powerful gravity well that we feel ourselves being physically pulled toward them in a meeting. We look for people that are both incredible technologists and also have this ability to communicate things in a hyper-fluent way, getting people so fired up that they bend the fabric of space-time to their will.
Shayle Kann: To close out the other category you look for: “Weird N of one, never seen anything like it before.” Why are these good venture investments on balance?
Ian Rountree: To continue the astrophysics parallel, if you’re in an area with other astronomical bodies, you’re competing with their gravity to pull in talent and capital. That’s harder than if you are the only body to reach some critical mass. We saw a company recently where a woman left Wall Street to build “De Beers for dinosaurs,” using satellite imagery and AI to find fossils. I’d never seen anything like it. If it’s an area that is big enough, she’s going to build the company. Weird sometimes means controversial. To lean into these areas, you necessarily are going to have to disagree with people.
Shayle Kann: It’s not just being first; it is also about that part of the universe being exciting. I think of a company like Colossal Biosciences trying to bring back the wooly mammoth. That’s weird and cool. Ian, this was unsurprisingly a lot of fun for me. Thank you again for joining.Ian Rountree: Of course. This is just one of our normal conversations that we hit record on this time.
