“To me, the three questions that matter when evaluating a management team are, can you ship? Can you sell? And can you hire?” – Alex Rubalcava
Alex Rubalcava (@AlexRubalcava) is Partner of Stage Venture Partners, a pre-Seed and Seed stage venture capital firm that invests in emerging software technology for business-to-business markets. He began his VC career as an analyst at Anthem Venture Partners in 2002, and he as served on the boards of numerous Stage VP companies, including Balto, NotiSphere, SoundCommerce, WhiteFox, SPIDR Tech, Abett, Gray Matter Robotics, and Dyania Health.
Topics discussed with Alex Rubalcava
- 00:02:04 – Alex’s career in investing
- 00:06:41 – Investing in technology
- 00:13:32 – Stage Venture Partners’ investment thesis
- 00:23:30 – Investing in manufacturing and industrial applications
- 00:34:41 – Finding emerging technologies and applications to invest in
- 00:39:04 – Investment opportunities in space
- 00:49:48 – On founder mafias
- 00:52:42 – Attending annual Berkshire Hathaway meetings
- 00:56:51 – Patience and long-term ownership in investing
Alex Rubalcava Resources
- Connect with Alex Rubalcava: Twitter | LinkedIn | Stage Venture Partners
- Anthem Venture Partners
- Gray Matter Robotics
- Thomas Perkins
- Six Sigma
- VeriSIM Life
- Dyania Health
- Vocalytics AI
- Laura Crabtree
- Falcon 9
- Max Mednik
- Rocket Lab
- James Webb Space Telescope
- Kessler syndrome
- First Resonance
- Prewitt Ridge
- Berkshire Hathaway
- Warren Buffett
- Charlie Munger
- Marcelo P. Lima
- Heller House
- Fitness landscape
Books Mentioned in This Episode
- The Power Law: Venture Capital and the Making of the New Future by Sebastian Mallaby
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Daniel Scrivner (00:00:06):
Hello, and welcome to another episode of our investor spotlight series, where we dig into the ideas, frameworks, and strategies of the world's best investors. I'm Daniel Scrivner, and on the show today, I sit down with Alex Rubalcava, founder and managing partner of Stage Venture Partners. Stage VP invests hyper early, typically precede and seed into deep technology companies across four core verticals, which includes space technology, industrial applications, healthcare and life sciences and e-commerce tools. What fascinated me about Alex and Stage VP is the incredibly unique approach of investing super early into hyper difficult technological problems with the ability to help shepherd these companies from seed to series A and beyond. So I wanted to sit down with Alex to dive into each of his focus verticals, talk through his early investments in GrayMatter, VeriSIM Life and Epsilon3, and understand his approach to investing in deeply technical companies.
Daniel Scrivner (00:01:02):
In this episode we cover how Alex's early experiences at renowned LA venture capital firm, Anthem Venture Partners shaped his approach to investing in deep tech. Why and how he picked each of Stage VP's focus verticals, including space, e-commerce, life sciences, and industrial applications. Why he's attended 20 of Berkshire Hathaway's annual meetings and how what he learned there led to his investment in robotic deburring and sanding company GrayMatter, and what he's learned building Stage VP over the last seven years.
Daniel Scrivner (00:01:33):
You can find the notes and transcript for this episode at outlieracademy.com/98. You can also find Alex Rubalcava on Twitter, @alexrubalcava. That's Alex R-U-B-A-L-C-A-V-A, and you can find Stage Venture Partners online at stagevp.com. With that, let's dive into Alex's approach to investing in deep technology companies at the earliest stages. Alex Rubalcava, I am thrilled to have you on Outlier Academy. Thank you so much for joining me.
Alex Rubalcava (00:02:03):
Yeah. Glad to be here.
Daniel Scrivner (00:02:04):
So I wanted to start, we're going to spend the majority of the time today talking about investing where others aren't looking, because I think that's a common theme that shows up in all of the verticals and companies where you're a major investor. But I wanted to start first, and we're obviously going to get into Stage Venture Partners and what you're building there. Would you mind just starting with a quick sketch of your background just to kind of give people a high level overview?
Alex Rubalcava (00:02:27):
Absolutely. So I have been an investor for my entire career. I started as an analyst over 20 years ago at a venture firm in Los Angeles called Anthem Venture Partners, which is one of the oldest firms in Los Angeles that is still an active firm today. I spent a number of years there as the only analyst supporting four partners in a fund that had a very deep tech focus. We were doing things like analog and mixed signal, semiconductors communications and networking equipment, biologics and stem cells, some very cutting edge stuff. And that I think has given me a taste as an investor ever since for companies that have a high degree of technology risk, that have a high degree of product risk, and that don't usually have to worry about competition risk. I try to do a very similar of approach to the investments that I make in enterprise software, which I think is somewhat unusual.
Alex Rubalcava (00:03:24):
And after my time at Anthem, I then launched a fund when I was 25 years old, doing long short public equity investing. I did that for a number of years. Along the way I made an angel investment or two every year or so, maybe every two years, not frequently, not in a structured, processed way, but purely opportunistically. And as that portfolio started to mature, my results from that left my day job of public equities in the dust. And it was very clear that I'm pretty good at the public equity stuff, but I'm just a lot better with startups. And I decided to listen to the universe when it tries to tell me things and return to my roots, and I started Stage in 2015. My focus is on highly technical enterprise software startups. I invest at them at seed and I've been doing that now for about seven years.
Daniel Scrivner (00:04:21):
Yeah, which is an incredible background. I want to talk for a little bit about those early years at Anthem Venture Partners. I mean, one, you talked about just how deep tech focused they were, and obviously that's translated and you've kind of carried that forward. One of the questions I want to ask is, I think for people, for most people who become a venture investor, it takes rewiring your brain because some of the mechanics, some of how it works, some of what you're looking at and what you're trying to underwrite, it's just very different than public markets, for instance. What surprised you about venture early on?
Alex Rubalcava (00:04:54):
I would say that the amount of fear that people have for things that are technically complex or hard to build was surprising to me because I kind of thought that was the point. And in venture, what's exciting about those kind of investments is that they front load all the risk. If something is so good from a technological perspective that your primary question is, can this team actually build it, or more fundamentally, can anyone actually build it? When that question is asked and answered in the affirmative, you are often left with a company that has a really remarkable product and a really remarkable lock on a market as a result. I think the strongest example of that today, what I would call the biggest technological moat in the world, is probably SpaceX. Because here we are eight years or so after SpaceX first demonstrated the ability to land a rocket first stage after delivering a payload to orbit.
Alex Rubalcava (00:06:01):
And no one else has pulled that off. A few other companies are doing wet splash into the ocean and controlled descents, or trying to catch first stages with helicopters, with nets or hooks, but no one else is doing a controlled vertical descent. And one of their technological innovation from eight years ago remains uncopied. And I think that's a pretty interesting question to think about when evaluating technological differentiation. And I look for things like that. I may never find something as profound or as large as SpaceX is current lead in the world, but you don't need to have something that crazy.
Daniel Scrivner (00:06:41):
Yeah. I want to go one level deeper on that and talk a little bit more about investing in technology risk versus competition, because it's a very different approach. On the one hand, it reminds me a little bit of a book I read recently, The Power Law, which is kind of a wonderful, I don't know, overview of venture over the years. But one of the stories in there is around Tom Perkins and this notion of Perkins law of investing in areas where there's technological risk. And the way that he described it was if a company can overcome the technological risk and the project is basically so ambitious that if they were to which achieve it would have a massive impact. There's almost no way they won't have customers to be able to sell to, which is kind of a wonderful little, I don't know, flip on its head of the idea. Talk a little bit more about how you think about investing in technology risk and why that's safe.
Alex Rubalcava (00:07:33):
Mallaby's book was excellent by the way. And the story about how Perkins worked with the founders of Genentech to define what he called the white hot center and to de-risk that part of the business as quickly and in a way that's capital efficiently as possible, was I think a really interesting framework for venture investing. I think a good example of this from my portfolio is my company GrayMatter Robotics. GrayMatter makes software for industrial surface treatment applications to enable robots to do that kind of work. So what is industrial surface treatment? Industrial surface treatment means things like grinding, sanding, deburring and painting large pieces that are often structural components of major systems like aircraft or vehicles or wind turbines. Often they're made of composite materials or large expensive metallic alloys and their surface treatment needs and parameters are very high.
Alex Rubalcava (00:08:42):
If you are putting a ceramic or metal part on a military helicopter, that thing better work. If you're doing the same thing for a wind turbine, servicing a wind turbine hundreds of feet in the air is not easy. So you want that performance to be strong and good. And today all of that work is done by humans. It's the classic dull, dirty and dangerous kind of work. There's no robotics company on earth that has been able to train robots effectively to take over this work from humans until GrayMatter. When I invested in the company a year ago, I scoured robotics companies all over the planet and I found one or two companies doing stuff on small parts that are like tabletop kind of things. There's no one who can do this on a 40 foot part in the way that GrayMatter had already demonstrated.
Alex Rubalcava (00:09:34):
They do that because the founding team spent eight years together in academia conducting the fundamental research that enabled that. Their data room that they shared with me around their seed round had 65 technical papers published in [inaudible 00:09:52] journals. I read many of them, I won't admit to reading all 65, but it was pretty clear that this was a pretty unique team. And so subsequent to my investment, GrayMatter has proven the ability to ship the product that works to customers with high levels of demand. They now have one of the most fun problems a startup can have, which is that they're getting cold inbound every week from large customers that had no contact with them before saying, here's my specifications and parameters, here's what we need. We've been looking all over the planet for somebody to do this for us, can you help? We're desperate. And that's a great example. Like after years of work, both in academia and then in the spinout company, they now are in the position where customers are crawling out from under rocks to try to buy the robots from them.
Daniel Scrivner (00:10:47):
That's a great way to describe it.
Alex Rubalcava (00:10:48):
Daniel Scrivner (00:10:50):
Yeah. It's an amazing position to be in. One question that that makes me think about is, from your position, so you find this team, definitely top decile, probably much, much higher percentage of kind of people in the world qualified to work on this problem. And to be able to solve it, well, you have this highly technical team that's achieved this technical feat, but ultimately to have a business that works, you have to have both, I think, amazing technology and amazing sales and kind of operations. And so the one question I would ask there is, how do you then think about, okay, you have this team that's off the charts technically, how do you help them figure out the operational sales components of kind of getting that business off the ground and getting it scaling?
Alex Rubalcava (00:11:27):
Yeah, I mean, that goes to one of the fundamental questions that I always ask about teams. If you've read books like Mallaby's or listened to VC's talk before, they always say, we want to find world class team and people who are the best. And sure, we all do, but what does that actually mean? And to me, the three questions that matter when evaluating a management team are, can you ship? Can you sell? And can you hire? To your question about sales ability, not everybody is born with the ability to sell expensive mission critical software to large corporations. They do not teach that to the kids who are 12 or post secondary education system in America. It's amazing how different the skillsets are. I look for evidence that somebody on the founding team has been able to do this before. Either at a prior company or in the early life of the company that I'm getting involved with.
Alex Rubalcava (00:12:23):
And if I don't see a founder's ability to tell that story in a way that leads to orders, it's probably not a company that I'll get interested in. Now once I invest in a company, helping them to figure that out and to scale, that is a big part of the work that I do. Every company has different challenges, but they often boil down to what does the source of leads look like? Where are they originating demand? Who's doing that? Whether that's direct founder outreach or whether they figure out marketing of some kind early on, or have some other access to a channel. And then what do sales cycles look like and how do you price it? And I mean, every one of these has to slot in before a company really gets into true product market fit and companies spend different amounts of time and different amounts of dollars to figure this out and their trade offs against each other. The less money you spend, the more time you've got to figure this out. The more money you spend, the more it better work the first time.
Daniel Scrivner (00:13:32):
Yeah. That's a great way of describing it. I want to kind of zoom out for a second and just talk about the model in your focus at Stage Venture Partners, and then I want to come back to robotics and industrial applications and GrayMatter Robotics. But just to go a little bit higher level for a second, so what I kind of understand about your model is you're a deep tech investor across a number of verticals. I want to talk about those verticals in a second. You're also very early in that you focus on pre-seed and seed, and I think kind of the valuation you target is somewhere less than $10 million. Do I have that right? And can you flesh that out a little bit more and maybe describe at a high level, how you think about your thesis, your perspective, and kind of your approach?
Alex Rubalcava (00:14:10):
Yeah. So I'm investing in companies that are raising usually between $1 million and $3 million, that have raised less than $1 million in all rounds prior to the time that I'm considering getting involved. Usually the companies are very young, that ranges from 18 months or so on the high end to companies that were incorporated two weeks before I wrote them a check, which is somewhat common for me. And the teams are often three or four people and a dog at the time that I invest, and sometimes they're pre-product and pre-revenue and sometimes they've got an early product live in the hands of customers. That's the financial and organizational characteristics of the companies I invest in. In terms of what industries they're working on and what kind of problems they're working on, from a vertical perspective, about 80% of my investments fall in one of four or five verticals.
Alex Rubalcava (00:15:10):
E-commerce infrastructure is a core part of what I do. Healthcare and life sciences software is another core vertical. Industrial applications, including robotics is a third. A fourth is space tech generally, and a fifth is what I would call sort of like post sales support software for all sorts of companies. Yeah, about 80% of what I do is in those verticals. In terms of like what's powering them, a lot of the technology that I invest in are applied artificial intelligence. I've got a handful of computer vision companies, a handful of natural language processing companies. I've got a handful of specialized data warehouses, and I have a handful of core systems of record or systems of engagement as well.
Daniel Scrivner (00:16:00):
I want to ask two follow up questions. One is around, so you focus on pre-seed and seed, which really in the scheme of things, there are very few, percentage wise, venture capital firms that focus exclusively on seed and pre-seed. And I'm always really impressed by those teams. And there's clearly, if you're familiar with venture capital, there's plenty of, I don't know, fund return arguments you can make around why that's the space you should be investing in and you're investing earliest, you're investing at the lowest valuation. But it's also very different than if you're a later stage investor, you have a lot of data that you can use to help underwrite the investment and do due diligence. If you're early stage, it's much more around team. Why is that the right fit for you? And what do you think kind of like helps you have a tight, I don't know, venture fund market fit with pre-seed and seed investing?
Alex Rubalcava (00:16:49):
I guess I like chaos. The earliest stages are very creative. They're very fast moving. No two companies will ever find a product market fit in the same way, using the same tools and in the same timeframe. Every one of these processes is an art, but there's also a lot of commonality to them. As I've now invested in nearly 40 companies since I started Stage and I get the outside view on helping 40 companies through that journey, I have developed a pretty fundamental level of knowledge and expertise about what this takes. As I always tell founders, my job is to sort of get you to 20 people and $2 million of ARR and your series A, and I am often then handing the board seat off to the later stage investors who are the experts at getting it from $2 million of ARR to $20 million to $200 million. And all of my attention is directed in that very early, very unstructured part of the life of a company.
Alex Rubalcava (00:17:51):
You're right, there is very little data. Sometimes I see companies put LTV to CAC ratios on their slides that they send me where they turned on their first customers two months ago. How do you know you're LTV? You don't know that. No one knows that. You could tell me about your customer acquisition cost payback period, that's a reasonable metric at seed, but no one knows LTV. So yeah, there's no data. The financial statements of the companies that I'm evaluating are trivially simple. They've spent a little bit of money on salaries and cogs on Amazon Web Services. They have no revenue or barely any, there's no financial ratios to evaluate. You do want to evaluate effectiveness and speed.
Alex Rubalcava (00:18:41):
And for example, it's somewhat common for me to meet a team or two doing somewhat similar things in a short period of time, where one to team has spent $3 million or $4 million and the product isn't quite ready. They need that last $500,000, ideally from me, ideally tomorrow, and then everything is going to be amazing. And then five weeks later I meet another team who has a similar idea and they spent $40,000, they got the product live in the hands of customers and they've been growing month over month and they've already shipped three major updates and revisions to the product. And $40,000 versus $4 million is a 100 to one difference. And you would not think that there would be as many 100 to one differences if you had not seen so many of them.
Alex Rubalcava (00:19:31):
I'm in diligence right now with an enterprise software company that was founded late last year, they are about to deploy to their first beta customer slash design partner who is also willing to speak with me and I have a customer call with them on Monday. And I can't remember the exact number, but I think they have spent $4,000 or $5,000 in the history of the company to get the product almost ready to be deployed to their first beta customer, like $5,000.
Daniel Scrivner (00:20:05):
That's next level efficiency.
Alex Rubalcava (00:20:07):
[crosstalk 00:20:07] my attention.
Daniel Scrivner (00:20:08):
Yeah, definitely looking at execution speed, scrappiness, the ability to move really quickly is one access. Are you looking at all that kind of founder market fit? What other, and maybe to kind of ask that question in a little bit higher level way, if you were to open up your brain and share your algorithm for trying to make these early stage bets, what are you looking at and what are you weighing maybe in addition to traction speed, scrappiness, efficiency.
Alex Rubalcava (00:20:34):
The three core questions that I always ask are, can you ship? Can you sell? And can you hire? The ability to ship software is sort of what we covered a moment ago. Some people are just better and faster and more efficient at that than others. A big part of that for me is that has to be core to the founding team, essentially from day one. And every once in a while someone will pitch me and will mention that they are relying on dev shops or outside resources for their engineering and product development. I understand why people do that, but that's kind of an immediate pass for me. I have an opinion about dev shops, that they are a perfectly acceptable solution for a large company that has a well defined need. If you are an insurance company and you need a mobile claims app, by all means go hire a dev shop to build that. You'll get what you want.
Alex Rubalcava (00:21:20):
If you are a pre-product market fit startup, let's not even talk about the worst case, let's talk about the best case. The best case with a dev shop will still kill you. And what I mean by that is that the best case is that they deliver what you asked for on spec, on time and on budget. And that will still kill you because no founder ever got their product right on a whiteboard or in their head from day one. They always have to iterate it. The customers always use the product in ways that are weird and surprising, often maddening to the founders at first. And it's only when they learn to accept that this is what the customers actually want, that you can reorient the product around that. You have to do that first. You have to do that without mercy to your own preconceived ideas.
Alex Rubalcava (00:22:10):
And that's not how dev shops work. Only an internal team that is really motivated, that's in the trenches, can do that. And so for me, that's kind of a real killer to issue. The other ones that are so important are sales, as we talked about, and then of course the ability to hire. This has always been important to me even before our labor market got to where it is today in 2022, where it's just utterly insane and where we are fundamentally short skilled labor in all aspects of the economy and we're likely to be so for the foreseeable future. If you have a choice as a highly skilled person, you want to work on something that matters. You want to work with people you like. You want to work on something that has a potential for real scale and impact.
Alex Rubalcava (00:22:59):
A founder has to be able to communicate all of those things in order to convince somebody to quit their job at Salesforce or Stripe or wherever and come join four people at a company that nobody has ever heard of, where they're going to disappoint their mother-in-law, everybody is going to be disappointed. You left Stripe for what? And you've got to do that. You've got to overcome that resistance as a founder to hire folks and not everybody is equally skilled at that.
Daniel Scrivner (00:23:30):
Yeah. Really well said. I mean, I love the way you articulated both of those points. I want to kind of go back and talk about industrial applications and robotics. And what I wanted to start with there is, just talking about what do you love about that space and what do you see that's happening there now that excites you, that interests you, just broadly?
Alex Rubalcava (00:23:49):
Well, I think there's a bunch of things happening in manufacturing and industrial applications. Number one is that I think we were sent the wrong signal by the last 40 or 50 years of the industrialization in the United States. Labor went from, we went from in the 1950s, somewhere around 27% or 28% of Americans worked directly in manufacturing and in industrial applications. Today, it's 7%. One fifth of the labor force has been shed from that industry, and yet we still make more stuff than did then. And that has been through automation, through investments in capital rather than labor, but it has also made people feel like that's sort of the wrong thing to be investing in when I think it's actually not. The second thing that I think people miss about that is that a lot of the supply chains that were mobilized, and in particular globalized into countries that have a hostile security posture against the United States, are pretty vulnerable.
Alex Rubalcava (00:24:54):
And for the last two years, first with COVID and now with war, we are seeing the downsides of that degree of dependency on people who don't like us and who we may or may not want to like in return. And that has to come back. We should be manufacturing the stuff we need close to home, whether it's in the United States or in other places like that, we should be manufacturing it in democratic countries that do not invade their neighbors and we should be doing so with a diversity of suppliers so that we are not left in positions like we are today where 3 million fewer cars are going to be sold this year than would otherwise have been for a lack of microchips. So all of these things are happening. A huge amount of risk was taken on over the last 40 years an we are now paying the price for that risk.
Alex Rubalcava (00:25:50):
Now we're not going to get manufacturing employment in the United States back to 25%. At the time that that was the case, only 7% or 8% of Americans were college educated. Today about 40% or 50% of people under the age of 30 will complete a bachelor's degree by the time they're 40. I don't think anyone with a bachelor's degree is going to want to work doing industrial sanding and grinding of fiberglass. That's not what I think people do that for. As a result, if we're going to continue to make stuff out of fiberglass, then we are going to have to automate that entire process, and that's where I think a lot of the opportunities are coming in robotics.
Alex Rubalcava (00:26:37):
And then we're having similar issues in IOT for production efficiency. We're having similar issues in supply chain management. We're having similar issues in traceability to make sure that product quality and production scheduling is all handled in the way it should be. And what I love about all this stuff is that there's essentially a never ending frontier of work to be done. The moment you optimize or debottleneck one step of a process, the bottleneck moves upstream or downstream and you have something to do anew. And the culture of manufacturing innovation in our country influenced by Lean and Six Sigma and Kaizen is very attuned to that idea of continuous improvement. And that means that there is always a tailwind for adoption of technology.
Daniel Scrivner (00:27:31):
Yeah, it's a fascinating articulation. I know that also, one of the things that we talked about before, I guess I'll ask as a question instead of kind of stating it was, in part with these verticals, and it sounds like this is in line with what you just described, which I think you said really eloquently of, if you're investing in a space and you solve one problem, you remove a bottleneck, that bottleneck is immediately going to move somewhere else. And so it's this successive wave of innovation and that's why venture works again and again and again is because the technologies that we ship and reach scale today, lay the foundation for the next wave of innovations to come and basically overlay on top of them. But when we were talking before, you talked also about this idea of within a vertical, being able to find one winner after another by basically just following the kind of stream of execution and evolution. Can you maybe flesh that out a little bit more and how that works?
Alex Rubalcava (00:28:20):
Let's talk about drug development. So a number of years ago I co-led the pre-seed and seed rounds of a company called VeriSIM Life. VeriSIM Life makes bio-simulation software to model the absorption, distribution, metabolism and excretion of any new drug compound in the bodies of over 20 mammalian species. Now, what do you use that for? You use that to help decide which of the tens of thousands, hundreds of thousands of potential drug compounds that pharmaceutical companies are evaluating, could or should go into animal testing. Animal testing is a time consuming, expensive process that also yield results that are less useful and applicable than a lot of us would think. But we have no alternative because we do have to test in animals before a pharmaceutical company files an [inaudible 00:29:27] to go into human trials because otherwise we wouldn't have any information about toxicity.
Alex Rubalcava (00:29:33):
That is what we test in animals for is for toxicity. You're not actually testing to see if the drug works or not. You're just testing to see if the poor animal goes [inaudible 00:29:41]. VeriSIM software can make very specific recommendations about which drugs are likely to have good outcomes in toxicity studies and which ones are not in the short run. In the long run, we might end up building technology that will allow us to skip animal testing entirely. How long that long run is, I guess that could take a while. But that's, I think, a really big opportunity. And for pharmaceutical companies, everything comes down to the ticking clock on patent expiration. And so if you can get a drug through animal testing faster and into a new drug application and into human trials, you create a lot of value for customers and that is tremendously valuable.
Alex Rubalcava (00:30:31):
So I invested in that company in 2018, from there I started paying attention to more about what was happening in clinical trials. I saw a lot of companies trying to do AI to pick out the drugs and design the drugs. I saw VeriSIM and very few other companies working on that animal testing stage. And then I saw a few companies doing things in clinical trials like enabling remote clinical trials and stuff like that. What I didn't see a lot, it was enrollment. Enrolling patients into clinical trials is the primary cause of risk for a trial. Of all the trials that fail, about half of them fail. Not because the drug failed to work, but because they couldn't get enough patients before the company ran out of money to keep conducting the test.
Alex Rubalcava (00:31:17):
That means a really specific thing that is in many ways very troubling and sad, which is that on the shelves of pharmaceutical companies all over the world are thousands of drugs that work that have never gotten through FDA and comparable nation clearance for failure to enroll patients to prove statistically that they do in fact work. We could have miracle cures out there that we don't know about.
Alex Rubalcava (00:31:48):
So my next company in that space, Dyania Health, has built a really innovative physician trained natural language processing technology to look at specific biomarkers, including time and progression of disease biomarkers. So you've had heart disease for a certain period of time, you qualify for the inclusion criteria of a clinical trial as a result. Dyania has also focused very intently on the hardest clinical trials to enroll patients for which are oncology and immunotherapies. Finding a patient who matches a clinical trial inclusion, exclusion criteria set for one of those markets, can often be worth $10,000, just to find one patient. That's how hard it is. And so Dyania has taught its NLP models using tens of thousands of hours of annotation by trained physicians, and they found an incredible physician labor pool that they were able to bring to bear to do this, and they now have a really, really fascinating model that no one else in the world has.
Alex Rubalcava (00:32:58):
Once you get through clinical trials, you then have the process of evaluating the data and reading all of the tens of thousands of pages of information that comes out of that, and Dyania works equally well on that part of the process to speed it up and, again, get those drug applications to the FDA faster while the clock is ticking. And so Dyania is doing fascinating stuff. And I think that's a pretty good example of starting with one place in the life cycle of a drug and one place in the value chain and expanding into adjacent areas over time.
Daniel Scrivner (00:33:30):
Yeah. I also love, I mean, the theme that is shining through really clearly is I think in a world where a lot of venture investors invest in scalable, interesting things, but things that it's hard to argue that they have a real world tangible human life improving impact. And I think across your portfolio, even just in VeriSIM and Dyania, I mean, these are massive problems that to solve them obviously would move the needle significantly on just improving the world and improving our ability to develop medicines.
Alex Rubalcava (00:33:58):
Yeah. I only want to invest in things that are very motivating to me and I have never gone through the trouble of filling out an ESG checklist or doing anything like that, but there are things that I'm not going to do. I'm not going to invest in companies that help casinos to attract more customers. That doesn't excite me. I'm not sure I would feel great about that. I'm not going to do stuff in any area that has an obvious externality of some kind. I only want to do stuff that is really ambitious and really exciting. That orientation has probably guided the verticals that I have ended up investing in.
Daniel Scrivner (00:34:41):
Yeah, I think it clearly has. I want to talk for a second, I want to kind of switch pace and talk for a second about, so you can kind of look at where you invest in two different ways. I think one is at the kind of vertical level. So you talked about industrial applications, healthcare, life sciences, space technology, to name a couple, but the other is then there are these themes of core technologies that are threaded through these. So computer vision, natural language processing. So I'm curious from your perspective, because I think this is somewhat unique to being kind of a deep tech investor, one, I guess, which comes first? Are you learning about these emerging technologies and then looking for interesting applications or is it by looking in these spaces you're kind of finding these technologies? Talk a little bit about that because it seems to me that you need to both be deeply knowledgeable at kind of both levels.
Alex Rubalcava (00:35:31):
Yeah. A lot of it is kind of bottoms up. I'll give you an example with what I do in voice technology, a natural language processing. A number of years ago I invested in a company called Balto Software that does realtime coaching for call center agents. So it is listening to a call center conversation, it does it by plugging into the softphone systems that they have from the likes of RingCentral and Five9 and a bunch of long tail vendors that are nowhere near as good as those two. And it hears what customers are saying and then helps an agent to know what to say to ideally close a sale while they're having that conversation. Call centers are high churn labor environments. They're often thought of as cost centers for their employers. There isn't a huge amount of innovation that has happened there, but they're also where a huge amount of customer service is delivered for better or worse.
Alex Rubalcava (00:36:30):
And Balto developed its product that had no latency, that had integration with a lot of these long tail horrible core systems, and has delivered a huge amount of value to their customers. There are customers who use Balto who had conversion rates on conversations of 3% before Balto, who now have 6% conversion rates. And that changes a customer's business profoundly, to double a conversion rate. You can't help but pay attention to that. And I started to see that there were a lot of applications for voice technology and natural language processing. So subsequently I invested in a company called Vocalytics that is working on that for remote patient monitoring and customer service standards in healthcare applications like hospitals. And then I've invested in a company called Datch, which makes a serial like interface for field service workers in manufacturing, utilities, natural resource exploration and other areas where they're working with their hands and they don't have time to log data or retrieve data using either a smartphone or a pen and paper type of system.
Alex Rubalcava (00:37:47):
And everywhere I go, I end up finding these kinds of additional applications of voice technology. And then of course, voice is only part of what Balto does. That's the speech text aspect, but for Balto to work, you then have to understand the text, that's natural language processing. And from the natural language processing applications that I've seen at Balto, I then invested into a company called Thankful, which does automated customer support for e-commerce merchants. It allows somebody who open up a chat or an email service ticket to resolve complex service requests that often involve real money without a human ever being involved.
Alex Rubalcava (00:38:32):
Thankful's AI can process returns, replacements, crediting accounts, questions about where is my order and things like that, in over half the tickets they get without ever having to escalate to a human and where the customer often never realizes that the person that they are corresponding with is not actually a person, but an AI. And that fundamentally changes and improves the quality of customer support that a growing e-commerce brand can provide.
Daniel Scrivner (00:39:04):
Yeah, it's an incredible service, and I mean, the fact that it can resolve 50% of tickets and do so with things that are complex, but also involve things that you would typically maybe as a business want a gate and only allow humans to do. So it's obviously I think a profound, it's a profound technological application. I want to talk for a second kind of switching paces to talk a little bit about space technology. I'll ask in a second around what's exciting about that space and what feels special now, but I want to talk by just kind of diving into one of your portfolio companies. Can you share the story of Epsilon3, how you ended up finding it, what they do and why it's so fascinating?
Alex Rubalcava (00:39:42):
Absolutely. Epsilon3 is based here in Los Angeles. They are a company developing automated mission management software for space missions. The founder, Laura Crabtree spent four years at Northrop Grumman and then 10 years at SpaceX. At SpaceX she was part of the team that worked on Falcon 9 reusability and Dragon reusability. And then for the last four years while she was there, she was essentially the head astronaut trainer at SpaceX as that company was gearing up for its first crude launch, which was a couple of years ago. And in fact, during crew demo one when the United States returned to man space like capability after a decade without that after the retirement of the space shuttle, Laura was on con. When the astronauts were calling down to mission control, the voice that they were talking to on the other end was Laura. And there's some great videos of on YouTube of her work there.
Alex Rubalcava (00:40:40):
While she was there, she realized a few things. Number one, that with, first, Falcon 9 and then Starship, which is almost ready for testing at SpaceX, and then all of the other rocket companies that are now either in service or will have their first commercial launch in the next year or two, there is about to be an explosion of access to space, but the tools have not kept up. And what I mean by the tools have not kept up is imagine mission control. It's launch day and you see a team of rocket scientists sitting in rows of consoles and then they got the big screen up front with all the cool orbital diagrams and stuff like that. I thought that what was on screen for those guys was really sophisticated purpose built software. I learned from talking to Laura that it was PDFs. Like when we launch stuff into space, we manage orbital parameters, we manage procedures in space using spreadsheets and PDFs. And obviously that's not the best way of doing it.
Alex Rubalcava (00:41:50):
And Laura realized that there needed to be an equivalent of engineering productivity tools. Asana or Jira or GitLab, if you will, for hardware engineers building space missions and then other types of software as well, or other types of applications like all the new aerospace stuff that's happening. So she launched Epsilon3 with her co-founder Max Mednik, who is a multi-time founder whose previous company is one of the leading drone defense companies in the country.
Alex Rubalcava (00:42:21):
And Max connected with me through a buddy of his who's an LP in my fund and my LP made the intro without mentioning the context, so I wasn't sure. I was like, yeah, I'll be happy to meet this guy, Max, but I didn't know it was a pitch or anything. And he then told me what he was doing, walked me through the deck and I saw what he was doing and I was so impressed that I scheduled a follow up meeting two days later and then worked as fast as I could to be an investor in their pre-seed round and I ended up being the largest investor in that round. And that company has just done tremendously well ever since.
Daniel Scrivner (00:42:56):
It's amazing. Yeah, it's amazing what they're working on. I want to talk for a second around what is, so when I zoom out kind of from that application and I spent a lot of time over the last year, reading, researching, learning more about the ecosystem of companies that are building something to do with space. It's a fascinating area, because obviously in that example you talked about, it's software specific. A lot of stuff in space that you would invest in is obviously software and hardware. It may be even much more hardware forward, so it's fascinating too to find plays that are kind of application software layer of space. But the sense that I've got and that I still have is that we're in the middle of a profound transformation in space. And I think you see that both in terms of what you talked about the number of launch providers.
Daniel Scrivner (00:43:39):
For anyone paying attention, I think whether you're looking at Rocket Lab or Astra, it's just fascinating to see these multiple companies outside of just SpaceX, which gets a lot of attention and should get a lot of attention because what they've done incredible, but there is starting to become, I think, a really fascinating ecosystem of players in space. What are you seeing and what do you think feels special and unique and interesting about this moment in time?
Alex Rubalcava (00:44:02):
What's happening in space is a fundamental reorientation of the cost of getting into space, and as a result, the things that you can do with it. If you require demand mission like the space shuttle to get a payload into lower orbit, it would cost you about $65,000 a kilogram back in those days. If you didn't require that, if you wanted a Delta rocket or an Antares or an Ariane, it was about $10,000. SpaceX can do it for you today on Falcon 9 for $2,600 a kilogram. So I mean we've already had a huge cost production as a result of the reusability and the vertical integration that SpaceX has enabled.
Alex Rubalcava (00:44:42):
A year or two from now when SpaceX has Starship operational, the [inaudible 00:44:49] are going to be profoundly better than that. Starship is fully reusable, first stage and second stage, it is made out of essentially commodity materials. This is not aerospace grade composite materials that you're seeing here. They're making the stuff out of stainless steel. I mean, it's basically a giant refrigerator that will be capable of being launched in the space. Fully reusable with the ability to use more commodity fuel and with a just much, much, much bigger rocket. And I mean, Starship is so much larger than Falcon 9, it's kind of amazing. The result of that is that depending on whose estimates you believe, it might cost less than $100 a kilogram to put anything into low earth orbit. And the amount of stuff we can put into low earth orbit might go up by a hundred times relative to the amount of payload to orbit or even payload to deep space that we are able to deliver today. Literally a hundred times larger.
Alex Rubalcava (00:45:53):
I think every company is going to end up needing a space strategy. I think the number of organizations that get stuff into space is going to go up tremendously. Every company will have a satellite of some kind. Every research university, every country. I think that 20 years from now a lot of the high schools will have space programs. In that college applications for engineering schools are going to have a section on it that says, tell us about what your satellite does. And if you don't have a satellite, please explain why. And that parents are going to fund their kids' satellite science projects with car washes and bake sales. That's how much is about to happen in space. And that's going to fundamentally change everything we do in space. Everything we do in space is based on ultra precision on things, never going wrong on the most expensive materials possible because launches are rare, expensive, and infrequent. And so you damn well better get everything right the first time.
Alex Rubalcava (00:46:54):
Space Telescope is a great example of that. It took more than 20 years to launch that thing. I'm 42 years old and I've been looking forward to when they launched James Webb for over half my life. They had to fold the thing into this incredible set of torsions to fit into the nose cone of the Ariane rocket that they used to launch it. And they then had this [inaudible 00:47:16] machine of opening it, with all the risk that's entailed to doing that when it is beyond the range at which it can be serviced. And so you one shot to do that right. That's why the thing has cost, what? $12, $13, $14 billion, whatever it is. With Starship, you don't need to do any of that. You don't need to fold it up because the nose code is so much larger and you don't need to do $14 billion worth of quality assurance, you can just build like 10 of them for that cost. And let's say the first three launches blow up, who cares? The fourth will work. And so it fundamentally changed [crosstalk 00:47:50]-
Daniel Scrivner (00:47:50):
But it was an incredible feat.
Alex Rubalcava (00:47:53):
James Webb is an incredible feat. It is the last of its kind. We will never build a monolithic scientific instrument at cost like that and with risk like that ever again. That era in space is over and the stuff we're going to be doing now is really different and we're going to have to really reorient our assumptions about what is scarce and what is abundant in space. If mass is no longer scarce in space, if it is cheap and easy and fungible to put kilograms into space, we're going to do different things and we're going to send different types of kilograms into space than we send today. And a lot of my investments in space tech are based on that transition that is underway. And in particular I believe that a whole layer of software instrumentation needs to come to bear in order to make that happen.
Alex Rubalcava (00:48:50):
So I've got companies like Slingshot Aerospace whose beacon product is emerging as one of the leading collision detection and avoidance software products for satellites so that we don't have runaway chain reactions of collisions that create a lot of space junk. Anyone who's seen that Sandra Bullock movie Gravity, kind of knows a what I'm talking about. It's called Kessler syndrome, where you just end up with a lot of space junk from ongoing collisions. I've got a company called First Resonance that has software to manage traceability, production scheduling and supply chains in complex manufacturing [inaudible 00:49:28] space tech. I've got Epsilon3, which does automated mission management. And I've got a company called Prewitt Ridge, which is making engineering collaboration software for requirements management in space and other complex applications. Those last three companies, all three of those, the founders spent substantial times in their career at SpaceX.
Daniel Scrivner (00:49:48):
Which also leads to another fascinating point about where we're at, which is you see this happen all the time. People refer to the PayPal mafia, all of the founders that came out of PayPal or had some sort of genesis or spent their early years at PayPal like Peter Thiel who have since gone on to do things. And I think it also goes to prove that just having a company like SpaceX succeed and get to scale and do so in an ambitious way is an enormous good, if not just only for all of the entrepreneurs that are now spinning out and are going to be building other parallel tangential things around space, which is amazing.
Alex Rubalcava (00:50:22):
And you know, mafias tend to come out of hard environments. And payments on the internet 22 years ago was the wild west, any kind of payment product on the internet in 2000 or 2001 was essentially an open bank vault with an invitation to fraudsters and thieves. And PayPal's culture and their engineering capabilities were forged by the intense operating environment that they were in, and the difficulty of all the bad guys seeing an unguarded piggy bank in that company and everything they had to do to hold them at bay. SpaceX is hard operating environment, I think it is somewhat self-explanatory.
Daniel Scrivner (00:51:13):
Yeah. I love that insight. I haven't heard it articulated that way, but I think that's absolutely true when you look back to the examples of those mafias. It doesn't get enough discussion, but I think obviously overall building a startup, working in a startup is very difficult, but there are definitely, I think, you raise that bar significantly at a company like SpaceX or PayPal or Square or Stripe or others, where then just the bar for execution. Not only is what you're working on very hard, but the bar for execution for what you want to ship and for what you want to build is very, very, very, [crosstalk 00:51:44]-
Alex Rubalcava (00:51:43):
And there are no mafias for companies that don't have those challenges. Like the idea of an IBM mafia is laughable on its face. It's like, you're really going to develop that culture of scrappiness and experimentation and resilience from selling mainframes? Call me skeptical on that. There's no Oracle mafia, there are not, at least today, in the eighties and nineties there were a number of companies that did come out of Oracle, but there's no mafia coming out of today's Oracle. And so there are different conditions that lead to different results. And SpaceX is certainly, I think the best company today where those kind of people are being forged and where they're seeing the opportunities all around them. And I am fortunate to be based just a few miles from Hawthorne, and I'm fortunate to have been introduced very early on to a number of great people out of SpaceX.
Daniel Scrivner (00:52:42):
That's so cool. I want to ask two closing questions. One is, for anyone watching the video version of this interview, if you're listening to the audio, you're not going to see this. But behind Alex is this kind of Andy Warhol piece of artwork with Warren Buffett. And one of the things that was fascinating when we were first talking about doing this interview was learning that, I think you've been to what? 18 Berkshire Hathaway annual meetings?
Alex Rubalcava (00:53:05):
Something like that, yeah.
Daniel Scrivner (00:53:07):
And there's obviously I think for any investor, Warren Buffett, Charlie Munger, and Berkshire Hathaway are an influence in some way, shape or form. How have they influenced your approach and how, because I think people might think, wow, these are super far afield. You're doing deep tech venture work and you also are inspired and drawn to Warren Buffett and Charlie Munger. What have you gotten from going to that many annual meetings from the Ethos and from just Warren and Charlie's kind of worldview?
Alex Rubalcava (00:53:38):
Yeah. I mean, I've always been both a public equity and a private equity investor. I've always had one foot in both worlds and VCs and long term equity investors are sort of the same thing. We're focused on unity economics. We're focused on fundamentals, we're focused on long term compounding, and they're not as contradictory as you would think they would be. Certainly old school value investing, he is much more focused on things that don't change, whereas venture capital is expressly focused on things that do change. I think that there's been a lot of innovation among my friends in public market investing to update their thinking of around what they've learned from Buffett and bring that into the world of software and industries more prone to change. Some of my friends like Marcelo Lima of Heller House in particular have made pretty substantial changes in the way that they invest with very strong results, thanks to that. But there's still a tremendous amount to be learned from Buffett.
Alex Rubalcava (00:54:43):
And the value of the Berkshire Hathaway meeting is less about what Warren and Charlie say and more about the fact that 40,000 people go to it. And so it's got some of the best investors from all around the world, in all asset classes, who come there for a weekend. It's funny I've been to Omaha 18 times, I've never been to Omaha anytime except for the first weekend of May. And I don't think I know all that many people in Omaha, but I see a lot of the same people and that's why I go. I mean, it's really valuable to meet with all of those people. I mean, the questions that are asked at the annual meeting sometimes make me want to rip my hair out because they're not all that great. It's gotten better since they have journalists doing that. Because otherwise you get a bunch of well meaning 10 year old kids asking what they should do with their life. And again, it's nice for the kids, but that's not what I'm flying to Omaha for.
Alex Rubalcava (00:55:34):
But yeah, so the questions are not, and what Warren and Charlie say is not going to surprise anyone. I mean, I could practically lip sync their answers to most questions because I read enough of how Warren and Charlie think that it's not going to have a lot of surprise there, but having that many great investors in town for 72 hours is a really wonderful community. And I would encourage anyone who has not been to go because Warren and Charlie are not getting any younger and I suspect that one day that event will not be what it is today. And I don't know much else that's going to ever be a like that again.
Daniel Scrivner (00:56:09):
Yeah. And it's so much fun just to be at the event walking around the convention center, visiting the different booths, looking at all the businesses that Berkshire Hathaway have. But yeah, I think that the most fun part of it is the community. I've only been once and I would love to go again, but the people I met there were some of the best and smartest investors I've ever met. It's absolutely incredible. And I love that you made that point that I think their approach long term business ownership is very, very, very similar to venture capital, I just think most people don't see it that way. I want to ask one closing, which is, we talked about at the beginning that just from your approach, you're investing in solving very difficult technological problems.
Daniel Scrivner (00:56:51):
You've been doing this for seven years, which is a long time in and of itself just to be investing in kind of allocating capital. But the companies that you're investing in, these are things that will play out for likely decades to come. And you have a very interesting, I think, perspective of patience and long-term capital applied at the earliest stages. Maybe just close out by talking about how you think about patience, long-term ownership and how that plays into your views around investing.
Alex Rubalcava (00:57:17):
Well, in venture capital, especially seed venture capital is by definition a long-term asset class. It takes time to grow from three founders and a dog in a [inaudible 00:57:31] to ringing the bell on the Nasdaq to go public. And that's unavoidable and that's just the nature of the asset class. I think what I kind of invest in probably even adds a little bit of time to that because product development is a little bit more intense and convincing the first handful of customers that you actually have something that solves a problem that they have always had is a little bit more intense as a result of that. I'll say in my public market investing, I would have made far more money if I've never sold a share of my life.
Alex Rubalcava (00:58:02):
It's amazing how many things I have gotten right that took a lot longer than I expected them to, but that ended up being far larger than I expected them to. Seeing a stock today that's at $250 a share that I bought for $5 a share at the bottom of the financial crisis in 2008, really drives that home. You're thinking, man, why don't I own every one of those shares I bought in 2008 still? I thought it was such a genius selling those shares for $40 a share, and man was I not? And I think venture capital by the structural illiquidity of what we do, allows you to capture the full value of the things that you are right about. And it allows you to build a portfolio of diverse and asymmetrical investments that have the chance to surprise you to the upside in a really attractive way. And I think it also shows you that what causes the death of companies is often not what you think. Most founders seem to believe that it's competition, like the other guy's going to beat them.
Alex Rubalcava (00:59:10):
And I just don't see that. I mean, I've always said that startups die from suicide and cancer more than they die from murder. And I see that. I mean, I've never had a company beaten by competition. I have had companies that have completely failed, but never because of competition. They have failed because they have not found a product market fit. They have failed because they couldn't raise money. They have failed because their unity economics started to break down. They have failed for all sorts of reasons. That's going to continue to happen, but competition isn't really one of them. That's one of the surprising and fun things about the world of software today. There is so much opportunity in software that you can always carve out a niche that you can dominate if you're creative and energetic enough.
Alex Rubalcava (01:00:01):
And there's a concept in evolutionary biology called fitness landscape. It's like a three dimensional expression of how a species can survive in an ecosystem. And if the fitness landscape is flat, it means that the species are in perfect competition with each other. And there's really very few markets in tech like that. I would say rideshare is probably it. Uber and Lyft have the same product, they have the same drivers, they're in a tough business against each other. But in enterprise software, the fitness landscape is often very jagged and you could end up dominating a peak that has no one else on it. And maybe the peak you dominate is one that generates $5 billion of enterprise value and you're not going to be Salesforce with $250 billion of enterprise value, but $5 billion is a nice number.
Daniel Scrivner (01:00:52):
Yeah. It's a great number. It's a great number. Well, so well said, this has been a fascinating conversation. I love your approach. I love the specific companies we dove into. I just love the way that you think about this, because I think it's very deep. It's very nuanced and it's very different to be frank than I think a lot of investors in the space. So thank you so much for the time, Alex. For anyone listening, you can follow Alex on Twitter, @alexrubalcava, R-U-B-A-L-C-A-V-A. And you can learn more about Stage Ventures at stagevp.com and also at Twitter at, @stagevp. Thank you so much for the time Alex. This has been amazing.
Alex Rubalcava (01:01:28):
Daniel Scrivner (01:01:31):
Thank you so much for listening. For links to everything we discussed, as well as the notes and transcript for this episode, visit outlieracademy.com/98. That's 98. At outlieracademy.com you can also find more incredible interviews with investors like Joey Krug of Pantera Capital and Dan Roller of Maran Capital Management, as well as the founders of [inaudible 01:01:52] and bestselling authors. You can now also find us on YouTube at youtube.com/outlieracademy. On our channel, you'll find all of our full length interviews as well as our favorite short clips from every episode, including this one. You can also follow us on Twitter, Instagram and LinkedIn under the handle Outlier Academy. Thank you so much for listening. We'll see you right here next week on Outlier Academy.
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