While the venture world is abuzz about generative AI, Dayna Grayson, a veteran venture capitalist who co-founded her own company five years ago, Build capital, has focused on comparatively boring software that can transform industrial sectors. Its mission does not exclude AI, but neither does it depend on it.
Construct recently led an early-stage round, for example, for wooden eye, a startup that develops vertical workflow software and a data layer that it claims can count and measure logs more accurately and, if all goes as planned, help the startup achieve its goal of becoming the market for the purchase of wood. How big could that market be, you might ask? According to one estimate, the global forest products industry was affected $647 billion in 2021.
Another constructive agreement that sounds less attractive than, say, the large linguistic models, is Land, a startup that focuses on human composting, turning bodies into “nutrient-rich” soil over a 45-day period. Yes, damn. But also: it’s a smart market to pursue. Cremation today represents 60% of the market and could represent more than 80% of the market in another 10 years. Meanwhile, the cremation process has been compared to the equivalent of a 500 mile car trip; As people increasingly focus on “greener” solutions across the board, Earth believes it can attract an increasing number of those customers.
Dodging some of the hype around AI doesn’t fully inoculate Grayson and her Construct co-founder, Rachel Holt, from many of the same challenges their peers face, as Grayson recently told me during a Zoom call from Contruct’s headquarters in Washington, D.C. His challenge is time. The pair thrown out Her first three funds in the middle of one of the most frothy markets in the venture industry. Like every other venture firm on the planet, some of its portfolio companies are also now battling indigestion after raising too much capital. All that said, they are moving into the future and, apparently successfully, dragging some serious industrial business with them. Below are excerpts from our recent conversation, edited for length.
You were investing during the pandemic, when companies were raising rounds in very quick succession. How did those rapid rounds impact your portfolio companies?
The short news is that they didn’t impact many of our portfolio companies by virtue of the fact that we actually deployed the first fund into seed companies – startups that started in 2021. Most of them were heading out the door. But [generally] It was exhausting and I don’t think those rounds were a good idea.
One of the companies in its portfolio is Vehoa package delivery company that raised a monster Serie A round, then a huge Series B just two months later in early 2022. This year, he laid off 20% of his staff and there have been reports of Rotation.
In fact, I think Veho is a great example of a company that has handled itself very well during the economic turbulence of the last two years. Yes, you could say they had some trouble in the financial markets attracting so much attention and growing so quickly, but their revenue has more than doubled over the last year, and I can’t say enough good things about management. team and how stable the company is. It has been and will continue to be one of our main brands in the portfolio.
Of course, these things never move in a straight line. What is your opinion on how involved or not a venture firm should be in the companies it invests in? This seems somewhat controversial these days.
With venture capital, we are not private equity investors, we are not control investors. Sometimes we are not on the board. But we are in the business of adding value to our companies and being great partners. That means contributing our industry experience and our networks. But I put ourselves in the category of advisors, we are not control investors, nor do we plan to be control investors. So it’s really up to us to provide the value our founders need.
I think there was a time, especially during the pandemic, where venture capitalists announced that “we won’t be too involved in your company; we’ll be hands-off and let you run your business.” In fact, we’ve seen founders eschew that notion and say, “We want support.” They want someone on their side, to help them and align those incentives properly.
Venture capitalists promised a lot during the pandemic, so sparkling was the market. Now it seems that the power has returned to the venture capitalists and away from the founders. What are you seeing day to day?
One of the things that hasn’t gone away from the pandemic days of rushing to invest are SAFE notes. [‘simple agreement for future equity’ contracts]. I thought that when we got back to a more measured pace of investing, people would want to go back to investing solely in equity rounds – capitalized rounds vs. notes.
Both founders and investors, including ourselves, are open to SAFE notes. What I’ve noticed is that those notes have become more “elegant”, sometimes including secondary lyrics. [which provide certain rights, privileges, and obligations outside of the standard investment document’s terms]so you really need to ask all the details to make sure the cap table doesn’t get too complicated before [the startup] has [gotten going].
It’s very tempting, because SAFEs can be closed very quickly, to add and add. But let’s take the tables, for example; you can have a parallel letter [with a venture investor] that [states that]’Although this is not a capitalized round, we want to be on the board.’ SAFE notes aren’t really designed for that, so we tell founders, ‘If you’re going to be involved in all that company formation, stuff, just go ahead and capitalize the round.
Construct is focused on “transforming the critical industries that drive half of the country’s GDP, logistics, manufacturing, mobility and critical infrastructure.” In a way, it seems that Andreessen Horowitz has since appropriated this same concept and renamed it “American dynamism.” Do you agree or are they different topics?
It’s a little different. There are certainly ways we align with your investment thesis. We believe that these fundamental industries of the economy (some call them industrial spaces, others call them energy spaces that can incorporate transportation, mobility, supply chain and decentralization of manufacturing) must become technology industries. We believe that if we are successful, we will have a number of companies that maybe are software manufacturing companies, maybe actually manufacturing companies, but they will be valued like technology companies are valued today, with the same revenue multiples and the same EBITDA. margins over time. That is the vision we are investing behind.
We are starting to see some older industries recovering. A former Nextdoor executive recently raised money for a HVAC winding, For example. Are you interested in these types of offers?
There are a number of industries where there are players and they are very fragmented, so why not bring them all together? [in order to see] Economies of scale through technology? I think that’s smart, but we’re not investing in old-world technology or businesses and then modernizing them. We are more in the realm of introducing de novo technology into these markets. An example is monaire in which we recently invested. They are in the HVAC space but offer a new service to monitor and measure the health of your HVAC through their low-tech sensors and monitoring and measurement service.
One of the founders had previously worked in HVAC and the other previously worked in [the home security company] SimpliSafe. We want to support people who understand these spaces, who understand the complexities and history that exist there, and who also understand how to sell in them from a software and technology perspective.