Founders Fund, founded 10 years ago, wasted little time in establishing itself as a venture firm that’s willing to make unusual and often outsize bets.
Recently, at the their San Francisco offices, we sat down with the firm’s chief scientist, Aaron VanDevender, and partner Scott Nolan, to talk about some of those investments, how the highly iterative firm operates today, and which of its portfolio companies best highlight what it’s shopping for right now.
By way of background, Nolan studied mechanical and aerospace engineering and wound up working on propulsion systems and the Dragon space capsule at SpaceX out of Cornell. A stint at Bain & Co. followed, then business school at Stanford, where a meeting with Founders Fund cofounder Peter Thiel turned into a job.
VanDevender, a Ph.D., meanwhile spent time building quantum computers and working on atomic physics experiments for the government, then Halcyon Molecular, a genetics startup that was funded by Founders Fund and shut down in 2012. VanDevender was invited to join Founders Fund afterward.
TC: You both have somewhat atypical backgrounds. Did either of you imagine you’d become venture capitalists?
SN: No. I think most of our team never set as a goal to be an investor. [Laughs.]
TC: I know you work closely together. How much of what you see comes to you versus discovered outbound?
SN: I’d say it’s 90 percent inbound and 10 percent outbound. Over the years, having worked with a bunch of great companies, our networks have become pretty robust and we meet a lot through that engineering and science-driven network. Also, with a lot of these breakthrough companies, we’re getting in very early – often when they’re in stealth mode. So you’d never even know about them unless they came in through the network.
TC: How much of fund is invested in “traditional” venture-type investments as opposed to moonshot ideas?
SN: We more think in terms of force-ranking the best opportunities and only doing the best ones. If that means we do nothing in a given sector in one fund, that’s fine.
We still do a good amount of consumer internet and enterprise software; that’s probably half of what we do. The rest is probably SpaceX and aerospace and biotech and materials and energy generation and storage – it’s a wide range of things that other VCs don’t tend to do.
TC: You’re investing a $1.1 billion fund right now. What’s the range in terms of the size checks you are writing?
SN: Our checks range from $500,000 to $150 million checks. It just depends on what the company needs and what we think it’s worth and what stage it’s at.
TC: Which companies have drawn the biggest checks?
SN: We invested $150 million in Airbnb in 2012 [when the company raised its Series C round] and I think we had a small investment prior to that. We have around that much in a number of companies but not [via] a single check. We’ve invested a significant amount in one therapeutics company that hasn’t talked much about its work publicly. Others [in which] we’ve invested around $100 million would include Stripe and SpaceX over the years.
TC: It must be hard to know how some of these companies will need, given there aren’t necessarily predecessor companies with which to compare them.
AV: Estimating how much they’ll need is pretty straightforward. Estimating what the risk-adjusted valuation should be is a lot harder. A lot of these tech companies don’t have that kind of smooth continuous scaling. It’s zero, zero, zero, then there’s a breakthrough and something changes and it’s worth a lot. An extreme example would be drug companies, where they’re worth essentially nothing until you get FDA approval, then they’re worth an enormous amount.
TC: How many people at Founders Fund are involved in these decisions? Are there Monday morning partner meetings where some of this stuff gets hashed out?
AV: No, we don’t have Monday morning partner meetings. Everything is ad hoc and how many people need to be involved depends on the check size. If it’s fairly small, [seed-stage] science-type investment, then myself and Scott and people who are interested in those kinds of things will look at it. If it’s something that’s tens of millions of dollars or more than one hundred million dollars, we’ll get consensus from the whole team.
TC: It seems like more firms are looking at and funding experimental stuff. Is that something you’re observing? Are there particular firms that are showing up in more of these deals than in recent years?
SN: Not as much for the stuff we’re seeing where there aren’t necessarily trends. Often, we’re the first money in or very early after angel rounds, and sometimes we’re doing those financings on our own or doing the bulk of them. I’d say it’s case by case and sector specific, regarding which investors are seen are valuable [to bring aboard later].
TC: Like other investors, you say you make early bets, then move on. Does that mean you’re done with certain, still seemingly nascent technologies like virtual reality?
AV: With artificial intelligence and drones and VR, for example, I wouldn’t say we’re avoiding them, but we’re only interested in things that offer some very unique, differentiated angle. We did Oculus years ago when it was a one-off thing. More recently, we invested in a company called 8i that has really unique capture technology that creates people inside of virtual environments that look really lifelike. That was a different piece of the stack that wasn’t being addressed.
TC: I know you made an early bet on a satellite company, Planet Labs. Have you funded any drone companies?
SN: SpaceX? It has drone barge, that’s the closest thing. The Dragon is kind of a drone. [Laughs.]
TC: What about synthetic biology?
AV: We invested in Bolt Threads. It makes spider silk, which is six times the strength of steel but very soft and light and made in an environmentally friendly, sustainable way.
TC: Is the sustainability angle important or even necessary to Founders Fund?
AV: It’s important to me as a person. If I ever have kids, I want them to inherit a nice place to live. It’s also compatible with our philosophy as fund, to help companies that are building a future that we want to live in. At the same time, for something like Bolt where you’re trying to have a conversation with the public, because it’ll be selling goods to the public, [the sustainability component] makes the company more valuable [to consumers, too].
TC: You also invested in Transatomic, which is making advanced molten salt reactors. Why is that interesting?
AV: The reactor has a lot of great advantages over the kinds of light water reactors that we have now in our energy fleet. For example, rather than use water to cool and mediate the reactor high pressure water, it uses a liquid uranium fuel. That means it can be made a lot more compact and inexpensive because you don’t need the same containment facilities to capture the high pressure radioactive water, which is very dangerous, as we found out in Fukushima.
It’s also 75 times more fuel efficient than the regular reactors that we have, so instead of just burning a small fraction of the uranium that you put into it and having to store the spent rods for a hundred thousand years afterward, you can effectively burn the fuel to completion.
TC: That fascinating. It also sounds like a very long-range bet.
AV: There’s the lifetime of the mission and the company, and the lifetime of the investment. They’re thinking in terms of a 20- to 30-year time scale. If you want to have a major impact on our utility grid, that’s how you have to think.
TC: How do your LPs get paid in these longer-term scenarios?
AV: Our fund [has a] 10-year [lifespan] that’s extendible to 12 years, then there are provisions where, if something really goes longer, we have a conversation with our [institutional investors] about whether they want to go longer or for us to return them their shares or to create a side vehicle. But they’re well aware that we have a longer time horizon.
TC: Have you ever sold shares to a secondary buyer?
SN: Secondaries can let a company preserve control much longer, so it becomes an option at some point. But no, we haven’t.