What are the cap table red flags for VCs?

Summary

Confused about "cap tables" and fundraising? This episode is your guide! We explain what a cap table is and why it's important for startups. Plus, VC expert Jeff Crusey reveals the warning signs investors look for in a cap table.  Learn how to avoid these red flags and build a cap table that sets your startup up for success!  This episode is perfect for first-time founders and anyone interested in venture capital.

Takeaways

1. Background in the industry is important for VC investors in deep tech
2. Deep tech startups often remain in stealth mode to retire engineering risk
3. Traction in deep tech varies depending on the business model and industry
4. Valuation of deep tech companies is influenced by fund size and risk profile
5. Being the first money in can provide an edge for VC investors
6. Founder chemistry is crucial for the success of a startup
7. Post-money SAFEs have drawbacks, including dilution and lack of due diligence
8. Venture studios and accelerators can vary in their effectiveness and support
9. YC has been popularized but may have some hype surrounding it
10. The best and worst pitches can vary in terms of insight and execution

Cahpters

00:00 Trailer‍
01:40 Introduction‍
06:02 Question Unclear‍
07:24 What Is Investment Thesis of 7%
09:41 Why deep tech startup stay in stealth mode / How VC's evaluate of deep tech ideas‍
14:10 How VC's track good pitch deck. (First time founder need to listen)‍
15:32 Understand the though process of VC's (Must listen if you want funding)‍
28:10 Failure rate in deep tech catagoery according to VC
29:37 Difficulties in building humanite and biotech products
31:37 How much management team and founders expertise are required
33:23 Jeff favourate pitch deck slides
36:07 Cons of Post-Money SAFE
37:25 Opinion on Venture Studios and Accelerators
42:10 Best and Worst Pitches
47:00 Raising money is success metrics
49:28 Cap Table Red Flag
52:08 Did VC's providing clear feedback to founders‍
53:25 Ritual Time‍
54:39 Conclusion

Connect with Mudassir

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Transcript

Mudassir (00:01.441)
Okay, no notifications. Slack is off. Phone is off because this thing is in the middle of nowhere. All right. Please do a clap for me. Awesome. All right, so we're rolling now. Hey Jeff, welcome to the show, sir. How are doing today?

Jeff Crusey (00:19.278)
I'm doing great. Thank you for having me.

Mudassir (00:21.345)
My pleasure to have you here. It's a privilege and it's an honor to host you today. Every single time, and we've been doing this for quite some time, every single time we host anybody on the podcast, I start us off with one particular question. And the question that I wanna ask you today is exactly the same question. What's the earliest context you have of your life? And how did you end up becoming a VC of all things? So let's start there.

Jeff Crusey (00:43.982)
Okay. So you know, it's funny is, um, when I, I went to warden undergrad and when I was at warden, I think a lot of people were really interested in consulting or banking or trading. Those are sort of the three paths a lot of students took at that time. And I thought that was going to be my path too. I thought it was going to be some highfalutin Wall Street trader or something. I don't, I don't really remember. Um, and I had this project.

uh, my senior year. And it was one of these classes that was, I'm an elective that I left to the last minute. I shouldn't have, it's not smart. Uh, but it was called venture initiation where we had to, um, make up a company, write a business plan, put together a pitch deck. And then the final project was to present that in front of the class and a panel of actual VCs. And that was going to be our grade. And so I got.

put onto a project with a bunch of football players that didn't really want to do the project. And so we didn't do that well, but the professor took pity on me and said, I'll let you redo the project by yourself, but you have to re -present it to me in two weeks. And this was during the time when everyone's enjoying graduation celebrations and going out and meeting with their families and friends. And I was stuck in the library working on this project.

Cursing, you know, the high heavens that I'll never have anything to do with writing business plans or early stage companies or Technology none of this. I'm gonna go be a trader and and here we are I I fell into it by mistake. I I went into banking I didn't enjoy it. I didn't care about leveraged buyouts. It turns out I was more interested in earlier stage technology and sort of what what could be a

and those exciting founders at that stage. So while I was at this investment bank, I very naturally gravitated towards all the earlier stage work. And then it was after that, that I decided I was going to go try VC for the first time. And I ended up actually deciding that biomedical investment wasn't really my forte or wasn't exactly my interest at that point in time. And climate and energy were more interesting to me. And this was in 2008.

Jeff Crusey (03:10.638)
I went and interviewed at a bunch of Silicon Valley firms. Didn't really think a lot of people had a clue of what they were talking about. Mainly software investors that wanted to go invest in these technologies that were more rooted in chemistry and electrical engineering and other fields. So ended up joining a team that was a corporate venture arm of a utility in Detroit, Michigan called DTE Energy Ventures, where myself and another guy.

led that practice. And we, I thought it was a much more interesting place to do that from, because I was surrounded by the industry in a lot of ways. The, the, the parent company, the utility, their three largest customers were the auto manufacturers in Detroit. So I got to work closely with them. They owned a lot of gap, midstream gas assets. So we got a better look at what competition really was for solar and wind and a lot of those technologies back then.

There is a lot of political intersection at a utility as well. So we got to understand the direction of policy a bit better, could take advantage of some of those policies in terms of funding our startups and whatnot. So I just thought it was a better seat in place to do that from. And I learned I really, really loved venture capital and I enjoyed it, but I needed to go do a lot more learning before I could come back to it eventually.

because I wasn't really technical at that point in my career and I hadn't really worked at a startup and understood operationally how these things evolve. And so I decided, all right, market just bottomed out. I've got 10 years before it picks up. Let's go spend that time working at startups, getting technical background and understanding how to build these businesses.

Mudassir (05:08.225)
Awesome. So the question I want to ask you is, how important is it for a VC operator slash GP to come from the same background that he's investing in? So anybody who is investing in, suppose, space tech, how important is it for that fund manager to actually come from that background, to have that operator sort of a badge to him? Is that important? Is that not important? How important is that? So yeah.

Jeff Crusey (05:34.606)
Um, I think it's, I think it's personally, personally, I think it's pretty important. Um, we'll just use space as an example. Um, I think absent any background in, in the plethora of different technologies that are involved in space, it's really hard to diligence it, whether or not a company's strategies or technology development roadmap, um, or anything they're doing is makes any sense. Um, and.

It's really hard to help a company also if you can't think from first principles about what they're building and in terms of both the technology and business. And so, you know, that's when it just looks like the money at that point, just a check. Um, and I've been a founder. I know how hard it is and you know what, I would take any good help I could get. Um, and if that meant, um, somebody that's got a network and can challenge.

my ideas, that's who I'd rather take a check from than just somebody that's got a brand.

Mudassir (06:42.369)
Somebody, yeah, yeah, yeah. Okay, so let's just kick us off with the 7 % and you're working with them, by the way.

Mudassir (06:59.425)
Oh, sorry, by the way, off the record, we're not going to tell in the podcast that you just joined them two months ago or something like that. So we're not going to cover that. Cool. Rolling again. I want to start us off with this one particular question, which is around the company that you're running now, which is 7%. So what's the investment thesis that you have? What sort of sector do you invest in? So let's start us there.

And then I'm going to ask you a lot of the question when it comes to the technicalities of all these startups, because these are definitely not even close to traditional SaaS. So yeah, let's start with what is 7 %? What you guys are working on? What sort of company you invest in? What are the investment pieces that you guys have there?

Jeff Crusey (07:44.43)
Absolutely. So the way we like to talk about 7 % is in sort of two tracks. We have Frontier, which is traditional deep tech, space, defense, semiconductors, photonics, advanced computing, human tech, climate tech, a lot of different areas that I think notionally we all kind of have an idea for what they are. And then the other one we call Transformational. And...

That is laggard markets where we can deploy a known solution that scales and disrupts quickly. And a good example of that would be like our investment in Flexport and modernizing the freight forwarding industry. So those are sort of the two tracks. And then what are we excited about right now? There's a few big themes that we're excited about right now. One of them.

Mudassir (08:28.481)
Yeah.

Jeff Crusey (08:42.878)
is answering this question about the AI compute demand that everyone's projecting in the future. A lot of people like Sam Altman are talking about raising $7 trillion because we need to develop all this compute for AI that we'll need in the future. I don't know if we should give them $7 trillion, but I agree notionally that yes, we need to make more efficient our computing because...

Mudassir (08:50.303)
Mm -hmm.

Jeff Crusey (09:11.95)
I think there is going to be a lot more demand in the future. And so 7%, we've made an early investment in a company called VARIComputing that's just recently on stealth that's doing reversible computing. Just to try and answer that question and what that means is just ultra low power compute by virtue of the new architecture.

Mudassir (09:33.217)
Okay, so the Sam News is pretty interesting to see, like, $7 trillion, that's a lot of money. That's a lot of money, I don't know. 99 % of the company, or at least 95 % of the countries in the world does not have bigger economy than what he's asking for for this thing. Worth it, not worth it, I don't know. And I'll come back to the AI related question later on. But two things that you mentioned, which is a stealth startup.

And all these are the different sort of a tech. I would call them traditional deep tech slash non -SAS tech. Let's put it that way. So let's start with that. And the reason why I'm going to ask you a lot of the questions from SAS and CPG world is just because most of the time, the VCs that I happen to invite on the podcast, they come from that traditional background. They're investing in traditional SAS, in food and beverage, in CPG or something.

Jeff Crusey (10:12.686)
Mm -hmm.

Jeff Crusey (10:26.126)
Mm -hmm.

Mudassir (10:31.809)
So the question that I want to ask you is, when it comes to building any of these platform, personal branding is very, very important. These startups are kind of built in public. Everybody just going on Twitter, ranting about that, and then on LinkedIn talking about that and stuff, and whatnot. But usually what I've seen that is all deep tech companies stay in the stealth mode for quite some time before they come out of that and then makes a huge media announcement, which is totally fine.

Why these startups need to stay in the stealth mode and not be real in public? So that is the first question. Yeah, and the second one I'm going to ask you is in terms of SaaS and in terms of all these things, the comparison that I want to draw is how these deep tech companies and deep tech ideas, how do you guys evaluate those ideas? Because SaaS looks pretty important, pretty simple.

Jeff Crusey (11:08.302)
Yeah.

Mudassir (11:29.365)
You look at the time, you look at the market, you look at this and you look at that, and you look at the traction. So yeah, how do you differentiate which ADA is a good one, which ADA is not a good one in Deep Tech? So yeah, two part question because I want you to go in depth. Yeah, go ahead please.

Jeff Crusey (11:41.998)
Okay. Yeah, absolutely. To answer your first question about why, why do you, a lot of deep tech companies remain in stealth earlier on? I would say SAS companies typically aren't facing a lot of engineering risk. It's more execution and market risk, finding product market fit. And, and I would say differently for a lot of deep tech companies,

There's still oftentimes engineering risk that needs to be retired and it's not really worth advertising until, you know, whatever widget it is they're building really can perform the way they need it to, um, to, you know, raise subsequent rounds of funding and scale the business and find part of market fit and all that. Um, so I think that's a lot of times why you'll see a lot of these companies remain stealth early on.

And there's just, there's just no point in spending a lot of time on marketing themselves because they're just not at that stage yet.

And then to answer your question about how do we diligence these deep tech companies, that is a big question because there is no one size fits all approach to evaluating deep tech companies because it's oftentimes very different categories of technology we're looking at and different strategies that need to be employed, different business models and whatnot. So I think the way we like to diligence it,

Mudassir (12:56.191)
Yep.

Jeff Crusey (13:11.15)
Um, is first we know what we don't know and what we, oh, actually I'll back up first. Like we, we know that we don't have all the answers, you know, like Jeff does not have a monopoly on good ideas, right? There's that's just never going to happen. I know that already. So, uh, we always want to make sure that we are supplementing our understanding, um, with that, uh, deep domain expert. And so what we've done is developed, um, a very large network of advisors and venture partners.

that can drop in and help us with that to give us, if we aren't up to speed in that area of technology, they can hopefully get us up to speed, can give us sort of a landscape view of competition, understand what those pathways look like, potential customers and whatnot. So I would say we look at a lot of the same kind of categories of information. We would need to understand how a company could be successful as you would in a lot of other areas of VC.

Mudassir (14:04.863)
Mm hmm.

Jeff Crusey (14:10.638)
it's just having sort of that domain expertise in those different areas and understanding from first principles how those companies could be successful is where sort of we like to specialize in.

Mudassir (14:23.809)
OK, awesome. So usually, I think maybe it's because of the AI, maybe it's because I don't know if it's not because of the AI, but the barrier to entry when it comes to build any task business is pretty low. All you need to do is there's a few steps, pretty well described. A lot of people have done that successfully, repaired that. So when it comes to the

SaaS companies, and I would just, you know, happen to host a lot of VCs on the podcast and they get like thousands and thousands of pitch decks every year. So very funny question, like how many applications do you guys actually get in terms of, you know, pitch decks and investments and stuff like that? Like, is it like, oh, we get like 10 ,000, which is amazing because 10 ,000 people are thinking about innovating the future. Or is it like, oh, maybe only 10 or 20 or something. So what's the right number here?

Jeff Crusey (15:12.558)
Yeah, so, I mean, we try to do our best to track it all and be diligent about that because we want to make sure we're giving everything a fair look in response to founders of the inbound from whatever source it comes from. I mean, we're seeing well over 2000 companies a year. Yeah, and I'm sure it's like the real numbers actually higher than that, you know, because I'm terrible at LinkedIn.

It's like hard for me to field all that. But we also have a massive network of folks that can give us sort of a pre -validated look at some startups.

Mudassir (15:52.417)
Awesome. So just want to dive deeper into a little bit more of a comparison between the SaaS companies and between all of that. So when I think about deep tech, consumer tech, space tech, biotech, like the hard tech, I would call that, when I look at that, one thing that comes to my mind is the...

the capital costs are going to be exceptionally high compared to a SaaS business, right? Because there's a lot of investment to build a next NVIDIA, whatever, graphic card or whatever. And if that fails, NVIDIA is pretty big. They can afford that. But anybody just starting out, so obviously, the capital cost is pretty big. So what exactly is the thought process that you guys have behind any investment decision? Because I'm not sure if that's the unit economics. I'm not sure what exactly. How do you?

look at one particular page deck and you're like, so if we were to invest in this thing, these are the risks. This is how we evaluate the idea. So what exactly is the thought process behind investment decision and these potential risks?

Jeff Crusey (16:57.23)
Yeah, I would say starting points, usually the pedigree of the founding team. Do they have the right background for this kind of a business? And so a lot of times we're looking for deep domain expertise, a lot of experience in the industry. Prior to that, maybe having already been a founder before and through that process, we look for...

not just technical backgrounds, but also a blend of commercial mindedness as well. Because I mean, after all, they need to make money, right? So like, if you can't have a team full of CTOs, it's not gonna be a wise decision. Yeah, exactly. So yeah, so we spend a lot of time with teams, talking to them, getting to understand, getting to know them as an individual, understand the dynamics between them, whether or not they have the staying power because...

Mudassir (17:35.785)
Yeah.

Yeah, you got to sell it. Yeah.

Jeff Crusey (17:55.95)
very often, and I can't remember if this is still the number one reason, but very often the reason for failure of an early stage startup is founder breakup. And so if we already know that we, yeah, yeah, it's a.

Mudassir (18:07.105)
Oh, interesting. In the deep tech world or in just like, you know, all the startups as well?

Jeff Crusey (18:15.854)
Yeah, generally speaking for startups.

Mudassir (18:18.753)
Wow, okay. I thought it was like lack of capital, you know, people just ran out of capital or something. That's what I thought.

Jeff Crusey (18:24.046)
And I mean, I think that's an easy out. Because I mean, the lack of capital could be because we don't have the right team.

Mudassir (18:27.841)
Okay. Okay. Yep.

Mudassir (18:33.665)
Interesting, very interesting on that. Okay, awesome. So another question, which is probably the last question that I want to ask you on the same comparison thing, which is more like, how do you guys define traction in your industry? And again, going back to what 7 % is doing, which is around climate tech, deep tech, hard tech, like all of these things that you guys are investing in, these are all different verticals, albeit overall,

Jeff Crusey (19:01.71)
Mm.

Mudassir (19:02.689)
the same umbrella, but these are all different verticals. How do you define traction in this industry and that industry and that industry? How do you do that?

Jeff Crusey (19:10.702)
Yeah, I mean, it's like you said, it's different depending on the business model. Some startups will have metrics that do look a lot like a typical SaaS companies where you're looking at different metrics around the rate of the revenue over different periods of time and attrition and churn and all that. And then on the other end, there are companies that just, there's no such thing as ARR really.

and trying to put it in context of ARR is just not really helpful to anyone. And it's funny, I actually see a lot of VCs that when they see revenue that's not ARR, they freak out. And I'm like, well, I mean, not every company can do that. It's just not possible. Not everything needs to be a subscription. But anyways, it really depends on who and what portion of the market or share they've taken.

And, you know, depending on that traction can look wildly different for a lot of different companies. So, you know, let's say, let's talk about a battery company, for example, if, you know, they sold a megawatt worth of batteries to a big energy utility conglomerate, that's more interesting than if they sold a megawatt to...

you know, a small utility in some country far, far away. Um, and, and so, yeah, both the same amount, but very different profile in terms of what that quality of what that revenue looks like and what it could turn into down the road. Um, so sometimes there's more overhead in that revenue than, um, depending on who, who's being contracted. Um, so, you know, it's just, it's different for each industry. It's, and it's, it's not a one size fits all approach.

Mudassir (21:03.937)
Okay, but and also a question on valuation, like you guys invest pre -seed and seed. Are the valuation exactly the same or somewhat same as we see in the other side of the world, like in SaaS and CPGs, like okay, pre -seed you're valued at, I don't know, somewhere between two and a half to five million and then to 10 and something. Or overall in general, how do you value these companies? Because what I think is,

What I think is in SaaS or something like that, it's just primarily it's more like you have the MVP and then you can measure the customer ARR and you can just say, OK, 10K a month revenue and then 100K or a million a month revenue or something like that, recurring revenue. But in here, you don't see something like that. It's probably like contracts. OK, so you're going to secure a contract. There's something in the pipeline. And the things are very much prototype by the time you guys invest in that. So the reason why I want to ask you is that.

Jeff Crusey (21:44.686)
Mm -hmm.

Mudassir (21:59.809)
How do you evaluate a prototype in terms of money? That one thing, like the Oculus, I know you guys invested in the Oculus early on. How do you guys did that? Like, okay, so it's gonna be that much later on.

Jeff Crusey (22:13.934)
It's, it's, it's not an exact science and I would, no, no, I wish there was that would be nice if it would make my life easier. But, um, I mean, but I would say there kind of is actually to some degree. And what I mean by that is, um, in VC, I subscribe to the notion that your fund size is your strategy because, you know, depending on how big your fund is, that's in what portfolio size you want to get determined.

Mudassir (22:17.377)
Okay, there's no formula for that.

Mudassir (22:28.609)
Okay.

Jeff Crusey (22:41.23)
what size checks you write and what valuations you have to enter in to justify the risk profile of the business. And so to some degree, it is a little bit structural or formulaic because if somebody raises a $25 million pre -seed fund, it's not as if they're gonna go write a $10 million check into a series A company because that's gonna overweight their portfolio and yeah, it creates a lot of risk. So to some degree, your strategy is the size of your fund.

And so we're kind of bound in terms of valuations by that. And so the way we think about it is we like to be first or second track if we can, like really, really early on at the point where it's really difficult, honestly, to evaluate or value a lot of companies. And so that's when you see instruments like convertible notes or safes used. So you can punt on the valuation, tell the company's developed a little bit more.

Mudassir (23:33.633)
Safe, yeah.

Jeff Crusey (23:38.222)
and then you can price around. But how do we think about it? Well, we definitely have an upper limit that we, and we want to be disciplined as investors in terms of valuation as well. So the upper limit for us is around $20 million. Much beyond that, then it becomes difficult for us to generate a return given the risk profile and distribution of successes to failures within early stages.

precedency stage investing. In what exactly is that figure? I mean, it's really depends again on the profile of the company. Some companies have a billion dollars of development behind them in the lab at some university. Some are just a concept on some paper somewhere. But generally, we're sub $20 million and

Mudassir (24:29.641)
Yeah.

Jeff Crusey (24:36.692)
We're flexible on what that valuation looks like. It just depends on the nature of the company.

Mudassir (24:44.641)
But yeah, the reason why I have to ask you is because these are pretty hard to evaluate. Because this is a very, very risky business by the time you guys put any money. It's a very, very risky business. So yeah, that totally makes sense. A follow -up question on that. Do you guys think, because you said most of the time it's the first money in. You guys are like the first money in. Do you think being the first money in is kind of a moat that you guys have? Like that is some sort of a speciality?

Jeff Crusey (25:11.438)
I do actually. And that's a good question because I always worry about selection bias or group think in VC and being swayed by others opinions, which to some degree we should be, right? We should take in information, but we don't want to get caught up in any hype or hysteria in any way, honestly. We want to be able to make good investments independent of what the rest of the market's doing or thinking.

And so that's why we like to actually be first or second check in because you have to build conviction of your own to do something like that. And we think we're half decent at it. I mean, we've had a lot of top tier funds follow a lot of those checks. And I think that's because they kind of see what we see maybe a little bit later, but that's our edge.

Mudassir (26:05.729)
Okay, so tell me a little bit about and this is something that I want to learn for my personal benefit as well Where advantages do any company any VC fun has when they when they do? When they lead around like what exactly do you get do you guys get out of that? When you when you say, I'm just leading around so yeah

Jeff Crusey (26:23.438)
Um.

Yeah, so what do you get? So a lot of times, we'll write a first check absent any other investors. We'll write a check to a founder as the first check and we'll help them develop the business into what would be subsequent round of funding. And so a lot of times at that precede stage, it's not really leading per se. It's...

It's sort of a preemptive check before a price round. And so, yeah, I wouldn't say those kinds of investments were really leading. But then when a company needs a more substantial amount of capital subsequent to that, we might not be able to fulfill all of that. So we'll need to bring in other investors and hopefully they've knocked down some milestones by that point. So there's other investors.

see that progress and we'll come in and co -invest alongside us. In those instances, we might lead because we've been working with the company. We have developed a relationship with the founders. We know what's going on from the inside out and being able to sort of be the representative for the rest of those investors in that business is kind of what we're doing. We're representing that round of shareholders.

Mudassir (27:48.385)
Okay. So leading, just to circle back on that, so leading around means representing the same thing to other investors or leading around means putting the most money in for that round, or both?

Jeff Crusey (28:01.198)
I mean, I mean, it's funny because like the market's been kind of weird. I've seen people lead really big rounds. It's really tiny checks, which doesn't make a lot of sense to me. So typically you're right. It is, you are the largest investor of that round of equity or investment. That's typically the lead. And, and the responsibility on them is to basically get the round to close. So, you know, they'll write a term sheet, they'll do all their due diligence. That checks out.

Mudassir (28:08.481)
Yeah, yeah, exactly.

Jeff Crusey (28:30.446)
They'll, they'll drop the docs, they'll negotiate on the valuation. And then once that's signed, everybody follows in on those terms typically. And, and so the lead might or might not get a board seat. Sometimes companies don't need a board at that point in time and it's, you know, obstructive and it will slow them down. So they might not need it. Some do though. And.

So that's usually around the time when you would put together a board and the lead investor would take the board seat. And sometimes some other investors might get an observer seat as well.

Mudassir (29:09.537)
All right, awesome. Awesome. Thank you for sharing that. All right, so what I have learned in, I don't know, five, six years, because I consider myself a student of venture capital as well. So in the last six years or whatever, I've learned this thing that VCs is this power law, the outlier, the home run sort of a business, one out of the hundred, that kind of a thing. So what percent of these companies, especially space tech and deep tech companies, do actually survive the whole thing?

And what's the failure rate in this one particular category in this industry?

Jeff Crusey (29:45.39)
Um, what's the failure rate? So that there's, there's usually some pretty decent reports that are put out like quarterly that that outline that I don't off the top of my head and remember exactly what the distribution looks like. But if we're talking about like. Percentage of companies that go to zero. Um, I think it's like between 20 and 30%, if I remember correctly, it's last I looked. Um, yeah. And.

Mudassir (29:53.537)
Okay.

Jeff Crusey (30:12.494)
But I mean, that distribution looks different for every fund, right? But generally speaking, I think those are like the headline figures. And it's like only like 5 % of your businesses will generate beyond like a 2 or 3X return. But those are the ones you need to make sure occur for the survival of the fund because, like you said, it's a power law distribution.

Mudassir (30:17.217)
Yeah.

Mudassir (30:35.969)
Hmm. Yeah.

Okay, all right, cool. So how different is it to, comparatively, how different is it to launch a humanoid robot or a piece of the biotech that helps blind people in the vision? Because the margin is so stupidly low, because when you're dealing with these kind of things, you have to be very, very careful. So how difficult is it to launch a product like this?

Jeff Crusey (31:06.414)
Well, I mean, a humanoid robot, I don't know that there's really a market for it today, honestly. I mean, there's like...

Mudassir (31:12.193)
They're building it. They're building it.

Jeff Crusey (31:15.84)
Yeah, I mean that's not typically how I like to do things. I like to solve a problem not just build it and they'll come Which I think is often an error founders make within deep tech But to sort of answer your question a little bit better

Mudassir (31:24.053)
Okay.

Mudassir (31:28.607)
Hmm.

Jeff Crusey (31:36.974)
You know, there's, it's just, it's, it's hard, it's hard to describe in any general terms because it's different pathway for every kind of company. Um, you know, in terms of length of time to exit, for example, um, BCG actually put out a report, uh, I think it was last year that tried to, to investigate this a little bit closer with some data. And I think what they found was that there actually isn't a huge disparity in terms of time to exit between.

traditional sectors within VC and deep tech sectors. They actually have a very similar profile in terms of time to exit. It's not always been that way. That gap has closed over time and it's taken a while to do that. But I think that's one of the many reasons why I'm even more excited about all these areas that I've been involved in for so long. It's because now that a lot of these technologies are coming to maturity, now's the time.

Mudassir (32:36.705)
Awesome, awesome, great. So Jeff, appreciate it. So what we do is we have a decent big -ass audience. So every single time any guest coming out of the podcast, we just send out this thing, hey, Jeff is coming tomorrow. So send us all the questions that you think we should ask him. So we get all kinds of things, like crappiest one and the best one. So I'm not gonna ask you the crappiest one because they're like horrible. So there are a few that we put together, so I'm just gonna ask you, I see something.

Jeff Crusey (32:59.118)
Go for it, ask me whatever you want.

Mudassir (33:06.305)
So yeah, the first one is, how much does the management team and the founders expertise in aerospace, defense, deep tech, whatever that thing matters versus bringing in outside industry experts?

Jeff Crusey (33:19.31)
Um, I think at initiation, it's really important because part of what, um, well, I mean, I think having that domain expertise on the founding team is really important because it's kind of going back to this idea of, uh, about being able to think from first principles and think strategically and also attract top talent, um, and, and do that credibly. Um, it, in, in part of the reason you want that deep domain expertise on the team that can do that is because.

Mudassir (33:25.377)
Okay, do you have an industry expert?

Jeff Crusey (33:48.558)
Not a lot of times can you just write a paycheck for million dollars to the top expert in the field. You need to get them on board in terms of taking the risk of joining an early stage company where they might not make as much in that they're credible in this potentially being a successful outcome at some point. So I always worry when I see a startup that raises a ton of money that has very little experience and a very young entrepreneur in a lot of the deep tech areas.

Because it just looks to me like all of a sudden investors are paying somebody a lot of money to learn, which is like, wow, it's already risky. Why would we take on more of that risk? And all they're doing is like basically giving them money to go write some big paychecks to people that are actually going to do the hard work. So I want to get rid of the middleman.

Mudassir (34:39.355)
Yeah, sure. Okay, so the second one is your favorite slide on the pitch deck, or maybe there's two or three of your favorite slides on the pitch deck.

Jeff Crusey (34:50.062)
favorite slide on the pitch deck.

Jeff Crusey (34:55.854)
So I think with most good pitch decks, there's always a slide on like what the key insight is that nobody else has picked up on that they have. And for me, that's always, that's like, that's like the secret you get, you get to get in on with, you know, with the founders. So that's always the fun one that gets me excited. But in terms of like, what do I think is important or what's the most important slide? I mean, I, I, I, if you don't have a slide that.

talks about why this is the right team at this point in time, none of the rest of the deck matters.

Mudassir (35:32.737)
Oh really, okay. So is this all about the founding team, all about the people, and it's all about the execution?

Jeff Crusey (35:38.222)
I wouldn't say it's the only important thing, but absent the right founding team, I don't care what the rest of the deck says because it's never going to be executed on properly.

Mudassir (35:49.665)
And how do you figure out like this is the right team for this particular problem and this particular solution and this particular time? So how do you do that?

Jeff Crusey (35:57.102)
Um, how do I do that? Um, I, I talked to the founders a lot. Um, I really try and understand what they're seeing, how they arrived there, um, what the mistakes they've made, what mistakes they've made along the way, what their thought process is like, um, how they interact with others. Um, it, it, it probably, I, I hope people don't feel like I interrogate them, but I mean, there's, there's just a lot of conversation, um, to, to really get inside the head of those founders.

Mudassir (36:26.625)
Is there such a thing which is called founder chemistry? Is there such a thing exist?

Jeff Crusey (36:30.99)
Oh yeah, definitely is. I mean, I mean, I've been through it myself where there was poor chemistry on it, on one of, you know, past teams I've been on. Um, and it, it, it will inhibit the progress of a company. It'll slow down the development, whether it's business or technological, whatever research, um, it'll slow everything down. Um, and because, you know, if you're distracted with some other issue, you know, your eye is not on the ball.

So we definitely look for good founder chemistry. And it's sort of a, there's not a lot of things, it's hard to describe. It's sort of something you just kind of know when you see it.

Mudassir (37:15.009)
Okay. Yeah, yeah, yeah, okay. And if there's not a good chemistry, you can see that pretty quickly as well. Yeah, you can see that. I agree.

Jeff Crusey (37:21.23)
Yeah, you can definitely pick up on it very quickly. And if, in the second I do pick up on bad chemistry is, you know, when I kind of bring it up and say, hey, you know, you guys might, you folks might want to take a look at this.

Mudassir (37:35.041)
All right, okay. So the next one is, what are the, you know, so a lot of companies are raising post -money saves these days. I think that's very familiarized, popularized by YC. In your opinion, as a VC, what do you think are the pros and cons of, like pros, I think everybody's aware of that, like you get some money pretty fast, don't have to do a lot of due diligence, something like that, and then you just spend the time building. So the question that I wanna ask you is, I wanna take the pros out. So I wanna ask you about the cons of saves.

in terms of like why that's not a good thing for the founders.

Jeff Crusey (38:07.182)
Um.

Jeff Crusey (38:12.27)
Yeah, I think sometimes what can happen is it can enable founders to get a little bit lazy in who they select money from. And I've seen, you know, some startups, they'll do their first sort of round, but it's not really a round. It's just a collection of can save certain verbal notes from a bunch of different investors that don't really help them. It's just a check.

Mudassir (38:37.057)
there.

Jeff Crusey (38:40.686)
They kind of disappear after that, you know, because they have a portfolio of a hundred other YC companies. Um, and, and so I think, you know, I've seen it cause some founders to get lazy, not all of them. It's a rare case, but they've seen that the other, the other big mistake with regards to like station rule notes I've seen is, um, raising too much on, on those structures, um, because it effectively is going to go into the.

whatever is the next price round at some point. And if that raise is significantly larger than whatever that next round is, I mean, those investors are, I mean, everyone's gonna be looking at a lot more dilution than they probably expect or want. And then the round dynamics get a little bit warped and it can actually, I've seen in many cases, it lead to the collapse of a round because there was just too many convertible notes ahead of a price round.

Mudassir (39:10.657)
Yeah.

Mudassir (39:37.313)
Yeah, and one thing that I have observed is like people who raise these safe after safe after safe on top of each other, at the end of the day, they feel like, oh, there's like not enough of the company left without even knowing like how much they've given out. The dilution is like pretty steep, so pretty steep in that way, so okay, cool. All right, so the next one that I wanna ask you is your opinion on venture studios and accelerators.

Jeff Crusey (40:04.686)
Yeah, I mean, I've kind of got mixed emotions because I've worked with a lot of both over the years and to varying degrees. Some of them are designed just to turn out startups. I've seen these, some of these, I call them like startup mills where, you know, it's like 10 startups coming out of these accelerators a week. And it's just like, I can, you can kind of see how formulaic it becomes. And they're just kind of like throwing.

crap at a wall and there's not a lot of high quality startups coming out of them. I tend to avoid those kinds of organizations because they're more concerned with just making sure they get enough companies out the door that at least a few of them have some outsized return and they can call themselves geniuses. But there's a lot of damage left in the wake and I don't think that's a great approach. Then there are...

You know, in a lot of them don't even write a check, which is like bizarre to me because they're taking equity and it's like, why would you give up equity for a program? That's just going to like coach you on your pitch. Um, that's, that's, that's a lot of money to give up for that. And a lot of accelerators are only that they, they pretend to be sort of like domain experts, but then you look under the hood and it's really just like the coach on your pitch and they have a demo day and that's it. I'm like, okay, that's not ultimately that helpful.

Mudassir (41:17.845)
Yeah.

Jeff Crusey (41:30.606)
Um, and, you know, if I look at like, where a lot of like the big impressive companies over the last decade have come out of, it's not a lot of times from accelerators. Some of them have, but not a lot of them. Um, and, and so, um, you know, I also am wary of, of sort of group think within a lot of those organizations as well. Um, you know, I think I see a lot of that happen around YC where it's just like, everyone's trying to invest in these companies before they do demo day and.

all of sudden, somebody's startups are raised $20 million before anybody's even really seen them present. It's a bit too much of herd mentality. But there are some accelerators that are great. I love working with the Creative Destructive Lab. They have a great program that I love participating in because they don't take anything. They give a lot of real domain expertise and support to these startups.

and it's really organized and it's just a pleasure to participate in that. And I think that's a great example. And then for like venture studios, I love a lot of these venture studios because as a VC early on in my career, I became very frustrated when I would do my thesis work and I would develop a thesis and then go out to go find the company and then there's nothing like those companies don't exist yet or something.

And in the past, I would just kind of have to take it on the chin and like move on to another thesis because it's not like I was going to go start those companies. That's changed in my career over that time where I've started to help incubate early stage companies because I don't really want to wait around for those companies to show up. I want to use my edge and I want to get those companies started and get them to market. And so I love, you know, Venture Studios, like we're actually...

Mudassir (43:07.137)
Yeah.

Jeff Crusey (43:27.694)
We work pretty closely with Entrepreneur First out of the UK and have made quite a few investments in companies that have come out of that program.

Mudassir (43:30.497)
Hmm. Yeah.

Mudassir (43:39.265)
Do you think YC is overhyped?

Jeff Crusey (43:44.558)
I think it has been at times, yeah.

Mudassir (43:45.217)
OK, hyped or overhyped?

Jeff Crusey (43:51.982)
I mean, it's just part of their job to create hype, right? Like they want to wait, they want these companies to go out and raise as much money as they possibly can because they have an invested interest in all those companies now. So overhyped. I wouldn't, I wouldn't blame Y Combinator for that. I just think they had a lot of interesting companies come out of those programs and a lot of people have taken notice and very naturally a lot of people have wanted to go invest in those companies.

So I wouldn't blame Y Combinator. I think they just became very, very popular source of really good deal flow for a lot of people.

Mudassir (44:27.233)
That's a good save, okay. The next one I wanna ask you is about, is particularly about best and the worst pitch that you have seen. And the reason why I ask you this question is there's this notion in the market that if you are building a deep tech product, so your prototype matters the most, your team matters the most, as you've already said that, the execution and all of that stuff that matters the most, and most of the time these founders, they create the crappiest,

Jeff Crusey (44:29.774)
Ha ha.

Mudassir (44:57.089)
pitch decks the whole time. And you've seen that as well. So the question I'm going to ask you is, what's the best and the worst pitch deck you've seen in the years? So you can give us some examples. And then going back to the earlier question, what's the attention span that you have when you look at any pitch deck? Is it like two minutes? You're probably going to spend like two, four minutes. So you look at the team. What else do you look for? And how can people make a better pitch deck for you guys?

Jeff Crusey (44:58.67)
Yeah.

Jeff Crusey (45:23.598)
Yeah, so I'd say like, first I'll say a great framework to begin with is Sequoia has a pitch deck framework that they put out there that I think is a really good one actually. So I'll point a lot of people to that. But you're right, we don't have a lot of time to spend on 2 ,000 decks every year. We have to be able to make.

Mudassir (45:31.297)
Mm -hmm.

Mudassir (45:35.169)
template. Yeah. Yeah. Okay.

Jeff Crusey (45:51.63)
quick judgment calls. And so what are we looking for? Probably a lot of the same things a lot of VCs are looking for. We're looking at the team, we're looking at development, IP, traction, competitive landscape, funding risk, you know, what's their go -to -market strategy, all those things, all the above. We're generally looking for some, you know, some amount of clarity in each of those areas.

because we don't have the full complexion of what that business could look like to warrant maybe another call. But in terms of time, sometimes you'll get one or two slides in a deck and you'll know very quickly this is not the team or the company. But generally, I try and spend at least five minutes on the decks that I look at to really try and absorb it. But the worst decks, I think, are...

excessively long ones that don't get to the point. I think that's the biggest mistake I see a lot of founders make where they think they need this elaborate explanation because it's so complex. It might be, but it needs to be boiled down into simpler terms for most VCs to even really be able to grasp what the company's doing and limited by time.

Um, the, the best ones, like I said, I think they generally follow that Sequoia framework. I will say one thing I've noticed more recently that I think is sort of interesting is like, there's like this new class of like, sort of like marketing VC now where like startups will take a small check from these like very small VCs, but then these VCs spend a lot of time writing like really lengthy blog posts and, and sometimes even like doing like short documentary videos on these companies.

which is like kind of kind of a new trend I've noticed more recently that I thought was sort of interesting. But I mean, at the end of the day to you know it. You've got to convey a lot of the same information that just might be more exciting medium for people to see. But. Yeah, it's just working.

Mudassir (47:50.209)
Oh really?

Mudassir (48:10.113)
Okay, is that a good thing or a bad thing?

Jeff Crusey (48:13.774)
Um, it can be a good thing because it'll, it'll get awareness of a company very quickly. And a lot of times, um, you know, things like short documentary videos are pretty shareable on social media. I think people are kind of used to that nowadays with, you know, platforms like they talk and whatnot. So, um, I think, I think it's a very creative approach, um, where I think it can go wrong is, I mean, they can be too over the top sometimes in my view.

where it's there, you know, they're, you know, they're talking about some small piece of software, but in context of like going to Mars and I'm like, that doesn't really have anything to do with one another. I get, you know, the, the scale of ambition here, but you know, let's, let's, let's be realistic about it because at the end of the day, like as VCs and founders, you have to be very realistic about how your company is working. You can't be, you know,

wishing and hoping for success. And you just need to sort of face the realities and getting carried away with over the top, you know, language and videos and marketing doesn't necessarily accomplish that.

Mudassir (49:26.337)
Is raising money a success metric? Is that a validation? What exactly is it?

Jeff Crusey (49:33.262)
Um, raising money. So I mean, for a lot of companies, it is a success metric because, you um, you know, it's kind of in the vein of like the, the Peter Thiel is like zero to one where like, if you can capture a corner, a large portion of the capital that would be invested into that segment, then you're, you're guaranteeing some success, at least on the fundraising side for that business, because.

Mudassir (49:39.777)
Interesting.

Jeff Crusey (50:01.038)
If everybody's invested in you, they can't invest in their competition. And, and so people have to sort of naturally go invest in you. And, you know, we see, we see that strategy played out in companies like SpaceX, Anderil, um, where, you know, I, I, Anderil is sort of the, the big dog in the defense industry now. Um, and they, I mean, it's hard to throw a rock and not hit somebody that's invested in that company.

because they've done such a good job at fundraising. And it also is to say that there's not a huge number of defense investors. So they're having to look more at generalists or people that don't come from that world and putting it in terms they can understand and get excited about will corner even more of that capital and guarantee even more of their fundraising success. And so I think that there is...

Mudassir (50:32.033)
Yeah.

Mudassir (50:45.121)
Yeah.

Jeff Crusey (50:58.926)
there is a competitive advantage to fundraising. You know, SpaceX probably wouldn't be SpaceX if Elon could raise the kind of money Elon can the way he does.

Mudassir (51:10.625)
How much they have raised in total? Because I remember you worked at, I think you worked at SpaceVC and then those were like one of the earliest investors in SpaceX, right?

Jeff Crusey (51:13.806)
I've lost it.

Jeff Crusey (51:24.878)
Um, I don't think there were an early investor in space sex. I didn't work there. I just, I just advise the fund because, um, I think, you know, it's a great, um, great investor that I really enjoy at Jonathan cost over there. But, um, yeah, how much has been invested? I don't know. Um, I don't remember off the top of my head. It's not too important, honestly, because, you know, it's not like I'm going to go invest in like a new launch company right now. It would be silly to like go and try and compete with like.

Mudassir (51:38.593)
Mm -hmm.

Mudassir (51:49.313)
Yeah, yeah, totally.

Yeah.

Jeff Crusey (51:54.606)
one of the most dominant private companies in the history of private companies.

Mudassir (51:57.971)
Totally agree to that. Totally. Okay. So the next one is, what are the cap table red flags for you?

Jeff Crusey (52:07.022)
Cap table red flags, yeah. Well, so I like to look at the history of the cap table a lot of times to see who's coming in and out. In that audit, a lot of times you might find that there was a founder that left that they didn't tell you about. So that's always a red flag. One of the things I started to notice, at least in the space and defense industry, were startups giving up a lot of equity to advisors that really didn't do much for them.

Mudassir (52:36.031)
add value.

Jeff Crusey (52:36.91)
Yeah, exactly. You know, they might've come from the industry, but then like, they might not have worked with the startup, didn't really know how to help with startup. And so yeah, that's always another red flag where there's like a bunch of advisors that I've never seen or have helped the business. But I mean, the biggest one to look out for though, in my mind is you want to make sure that the founding team is incentivized long -term to stay with the company.

build. And if they've been too diluted early on, you know, subsequent rounds of funding, their share ownership might be so small that they might not care if they stay or go anymore. And so they might be disincentivized from staying with the company and that then that can that can be a big problem later on. So I always want to make sure that the founding team, the critical and the critical team members,

Mudassir (53:21.089)
Yeah.

Jeff Crusey (53:36.416)
for that business are incentivized long -term and have enough share ownership.

Mudassir (53:41.857)
Okay, all right, cool. Off the record, you know, after the recording, I'll tell you a story about one of the most like crappiest cap tables you could ever heard of. You cannot even imagine, you know, the story that I have for you, but I'll tell you after the recording, okay? All right. Go ahead, go ahead. Yeah, yeah, go ahead, please, no problem.

Jeff Crusey (53:52.172)
Okay.

Jeff Crusey (53:58.35)
Oh, actually have one more. I have one more point on that, if that's okay. Okay. Yeah. One of the things, one of the other things I also noticed I look out for are, so a lot of deep tech is coming out of research institutions, right? Whether it's a university or a laboratory somewhere, they're spitting out from another organization. And I've seen very, very often too many of these startups being required to give a huge percentage of equity to those organizations.

Mudassir (54:28.415)
Yeah.

Jeff Crusey (54:28.43)
so much so that it kind of runs into some of the issues we just talked about. So when I see a university trying to take like 20, 30 % of a startup before it's even raised a dollar, that's a definite red flag. And I unfortunately see that happening every day of the week in Europe, where I don't think most research universities or companies understand how to spin out technology. And they think, oh, I'm going to make a ton of money because I own 30 % of a business that unfortunately nobody's going to invest in.

Mudassir (54:32.481)
Hmm.

Mudassir (54:52.897)
Exactly.

Mudassir (54:58.241)
Yeah, totally agree to that. This is the most funniest one that we've picked on the list. Do you guys give clear feedback to the founders?

Jeff Crusey (55:08.558)
Oh yeah. I mean, some we train, we try to be kind about it.

Mudassir (55:11.713)
So let's put it this way. Yeah, let's put it this way. The one that you reject. So the ones that you reject, do you guys give a clear feedback to them?

Jeff Crusey (55:20.974)
We very much tried to do our best to give them very clear and honest feedback. Cause like a lot of times like VCs kind of don't have the courage to actually be honest about why they might not like a company. Cause they're worried about hurting somebody's feelings, but I don't, I don't think that's ultimately very helpful. And I think there's a way to do it without hurting somebody's feelings and, and, and, you know,

Mudassir (55:37.065)
Yep.

So you don't say you're too early. You don't say you're too early.

Jeff Crusey (55:44.142)
I mean, almost never because we love to be first check. That's almost like, like if I would kick myself if I ever said that to somebody. Yeah. Cause that's, that's just almost never the case for us.

Mudassir (55:52.641)
You

Mudassir (55:58.241)
All right, awesome, awesome. It's always good to hear that because one thing that I've learned is it's hard to share one difficult feedback to any of the founder because nobody wants to bear the burden and all that, but it's very, very helpful. If the right feedback goes to the founder, a lot of the time, it's very helpful to them in their, okay. So I really appreciate all the wisdom, all the things that you talked about. So we do have this one small ritual on the podcast.

And what we do is we ask all our guests a question for our next guest without telling who the next guest is going to be. So I'm going to take the question from you, but we also got a question from you. And you'll be very, very happy to hear that question because he was a deep tech VC as well. So do you think the question that he left for you is, do you think we're going to have a full tolerant quantum computer within the next 10 years?

Jeff Crusey (56:41.39)
Okay.

Jeff Crusey (56:51.662)
fault tolerant quantum computer in the next 10 years.

Mudassir (56:53.249)
A full tolerant quantum computer in the next 10 years.

Jeff Crusey (56:59.79)
Ooh, that's a difficult question. Yes, because one of our startups is working on exactly that. So, yes. And my question, actually, this is great because I remember at one point when I was a founder, invariably at the end of every pitch meeting I had, the VCs would be like,

Mudassir (57:02.623)
Okay.

Mudassir (57:12.321)
Okay, good to hear that.

Jeff Crusey (57:28.686)
great, well, we're near the end of our meeting. Do you have any questions for us? And like, you know, I would ask the typically canned answer or the canned questions like, um, you know, how much do you have left in your fund? Do you follow on? How much do you follow on? What's your process? All the, all the typical questions you'd expect somebody to ask. But by this point in fundraising, I'd become so frustrated with other VCs that I became a little flippant. And so I just started asking them when they would ask me if that, if I had any questions, whether it, whether or not.

aliens exist today and why they believe them.

Jeff Crusey (58:04.046)
And it was an absolutely fascinating question because there was a huge range of answers that I did not expect. So it was really fun to sort of understand people's thinking.

Mudassir (58:21.825)
Yeah, yeah, thank you for that. Let me stop the recording, say the bias and stuff like that, but please stay after I stop, okay? All right, so thank you so much, sir. Thank you so much for all the wisdom and sharing the insights into the deep tech world, because I always find this one sector very, very interesting, because there's not a lot of content out there on this particular sector. And one other thing that I have in mind is invite people from, VCs from different sectors and...

founders from different sectors so we can actually get to learn more about, you don't have to build the next SaaS company, you can build the next Deep Tech, next Nvidia, you can build the next SpaceX or something like that. So I appreciate the wisdom. Thank you so much for the time again.

Jeff Crusey (59:03.118)
Thank you.

Mudassir (59:04.737)
Okay. Let me pause.