What sets apart the founders who persevere through immense challenges and come out stronger on the other side? In this episode, David sits down with Shaun Abrahamson, Co-Founder & Managing Partner at Third Sphere. Shaun shares his unique insights into the high-stakes world of venture investing, particularly in climate tech and hardware, reflecting on the kinds of founders he backs and the unforeseen hurdles they’ve had to overcome.
Shaun delves into his philosophy on investing in early-stage companies, emphasizing the importance of resilience and adaptability in founders. He also discusses the intricacies of climate tech investment and the lessons he’s learned from over two decades in the field.
Takeaways:
The Importance of “Burned Bridges”: Shaun explains that he looks for founders who feel they have no option but to succeed, drawing a comparison to immigrants or those without a fallback, which can drive relentless focus and fortitude.
Signals of Early-Stage Investment: Investing at the pre-seed stage involves identifying teams with potential through their work product rather than initial conversations.
Challenges of Climate Tech Investing: The difficulty in obtaining clear customer signals within climate tech is highlighted. Shaun notes that genuine customer commitment is hard to gauge and is essential for moving beyond pilot projects.
Weathering the Storms: Shaun emphasizes that founders who persist through geopolitical challenges, like supply chain disruptions and tariffs, emerge uniquely stronger.
The Vital Role of Communication: Regular, transparent, and honest updates from founders are crucial. Shaun believes in using structured updates to inform strategy and investment decisions, shedding light on what is and isn’t working.
Navigating the Path to Profitability: Shaun shares Third Sphere’s model of aiming for break-even by Series A, emphasizing the value of financial independence and sustainable growth over solely seeking further rounds of venture capital.
The Future of Hardware and Climate Tech: With advancements in robotics and climate resilience, the potential for transformative business opportunities in these sectors excites Shaun.
Quote of the Show:
“Portfolio math is brutal because it basically says that most companies don’t matter… it’s very easy to say, it’s very hard for founders to accept they may not be that one or two companies.” - Shaun Abrahamson
Links:
LinkedIn: https://www.linkedin.com/in/shaunabe/
Website: https://thirdsphere.com/
Ways to Tune In:
Substack:
Spotify:
Apple Podcasts:
Transistor: https://podcast.notanotherceo.com/
#NotAnotherCEO #BusinessSuccess #ThirdSphere
Chapters:
00:00 Intro
01:30 Burned Bridges Mindset
03:47 Early Bets And Bad Logos
06:20 YC Founder Signal Noise
08:48 Work Product Over Pitch
11:32 Climate Hardware Realities
15:39 Lego Building To Revenue
17:29 Tariffs And Supply Chain Chaos
20:02 Founders Forged By Turmoil
23:54 Why Third Sphere Went Climate
26:29 Mission Driven Founder Support
27:26 Belief And Reality Checks
30:41 Direct Feedback As A VC
35:35 Private Credit Replaces Banks
39:15 Founder Updates And Trust
44:29 Portfolio Math Harsh Truths
49:09 Biggest Missed Deal
50:46 Next Decade Climate Bets
53:16 Outro
Transcript:
Shaun: [00:00:00] Good luck. Go and raise $250 million and try and beat this founder. Not gonna happen. Like you can back up trucks of
capital that’s not going to, you’ll not overcome. These people they’re different.
David: Welcome to not another CEO podcast. I’m your host, David Palus. Every week we talk to inspiring leaders and get the true stories, the ups and downs, the lessons learned, and come away with actionable advice for our own journeys.
Today’s guest is Shaun Abramson. Sean is the co-founder and managing partner at Third Sphere. Their portfolio spans companies in deep tech, climate, tech, hardware and urban infrastructure. They’re considered one of the best climate tech venture funds in the world. He has nearly 20 years of experience as an investor and has invested in over 150 companies over [00:01:00] that period of time.
As an angel investor, he backed companies like Zocdoc and Refinery 29. And through Third Sphere, he’s invested in companies like Future Motion, near Space, and reviving. When I asked some of the founders he’s invested to describe him, they said he is exceptionally supportive, calm, and helpful, yet fearless.
He backs founders, he believes in, even if they’re non-obvious markets. Please welcome Sean Abrams.
Shaun: Thanks for having me that, uh, dunno if I can live up to that intro.
David: I’m excited to be doing this. Sean, first question I ask all the investors, what is the one thing that you look for in the founders and companies that you invest in?
Shaun: Yeah, I think there’s, we use burned bridges to mean something negative. I think most people do. But I think we try and identify folks who feel like they have no other option except to build. I think as soon as there’s optionality, there’s loss of focus and, those are [00:02:00] generally the folks that give up when things get hard.
So, burned Bridges is the shorthand, but basically low optionality or no optionality. And often that manifests, I think in immigrant founders, there’s a reason why immigrants sort of, if you look at the data over index, and I, think it’s not that they’re better or smarter, it’s that they just, they don’t have a fallback. Like there
literally Isn’t another option. so we, try and look, it’s not, immigration is one way to not have a way back, but, we, try and figure that out when we meet people.
David: Yeah, it’s interesting when I, when I’ve asked, um, I had someone named Adam Bryant on the podcast. He used to write the corner office for the New York Times, and I asked him, you know, what makes the best CEOs, you know, not necessarily founders. And one of the things he mentioned was immigrants. You know, one of the things he mentioned was people who’ve just had some really bad stuff happen in their lives and they [00:03:00] just.
It’s so deeply kind of embedded in them that they’re going to not have that happen, you know, kind of for the next generation and for the next, and, but either way, I think that burn, I, I haven’t actually heard that as a way of describing it, but it is, there is some element of that. In both of those kind of examples, they have almost no choice.
Shaun: yeah, I mean, there’s a bunch of military references for burning bridges as a way to either, you know, in some cases it was meant to deter enemies, but in some cases it was meant to signal to. The army. That army, there was only one path, and
David: Hmm.
Shaun: Was retreat wasn’t an option. I think now it means more negative things like
David: Yeah.
Shaun: Know, relationships, um, but it goes nicely with moats.
So we like bridges.
David: Um, when you meet with a founder and you’re meeting them first time, how quickly are you kind of making a decision that you want to invest? And [00:04:00] I guess also that they’ve burned the bridges. Like how, how fast can you assess that in someone?
Shaun: It really varies. Um, and we get it wrong more than we should. It’s probably the hardest thing I think for us. we essentially view our so we, invest super early. So the way that I would describe our investment stage, a pre-seed’s probably not the right description.
great team, not a surprise. Everyone says that. Somewhat working demo, no customers and generally a bad logo. Because we’ve found bad logos to be correlated with really good technical talent, at
least in hardware anyway. but because we’re investing at that stage, the first check for us very often is buying the right to get to know people. So I just don’t think, you know, yes, there’s love at first sight, you know, that can happen. but it’s not, we haven’t found it to be repeatable, so we assume a lot of the time we meet people that are different to us. We’ll [00:05:00] try and cycle through the team and get different perspectives. but often we get to the point where we have a sense that. The person is interesting and may have the characteristics that we want, but we often need months and multiple, you know, sort of working meetings and in some cases the best thing that could happen is something bad could happen
for some reason That is like in an ideal world, if we could choose to orchestrate something bad happening, that would be the best way to get to know someone.
I think.
David: Hmm. And you see how they adapt to that. And I really, I, I’ve noticed that actually when I meet founders really early and then something. Derails them or something happens and then you see how they adjust.
Shaun: Yeah.
David: And it is, it is, it’s interesting to see that because some people get so frustrated and they just start to, you know, spiral and then other people like, no, okay, I’m gonna get I that, that was a problem.
Now I’m gonna go figure it out.
Shaun: and it’s, it’s also interesting to hear people speak through what happened. Because there’s some people that things [00:06:00] happen to.
David: Hmm.
Shaun: And I, and I think that’s a sort of tough place to be a founder. Um, and there are other people who sort of are much more in control or, or, or much more self-aware about what they can control.
David: Hmm.
Shaun: And that when, when you get sort of a unique, difficult event that that stuff comes through pretty quickly. Um, it’s also like, I think people get, are just coached much better. Like, I, like I find. Let’s say YC coach founders to be completely impenetrable. You kind of have to, you, you just have to make, you just really have to make a judgment that you can’t possibly know them.
You have to make some broader, I, I, it’s not a reason not to invest. We, we still invest in YC back companies, but I mean, so well trained to like say nothing.
David: I’ve, I’ve actually just had my exposure to YC companies for the first time. I, I, I never just played in that realm and I’ve had some meetings recently and that I’d say coach and also just, they are trained at, they’re like the best companies. [00:07:00] To happen to the world, you know? And, uh, it is, it’s interesting because a lot of times there’s actually a lot of good behind that.
But I think there is a, the way they’re trained, the way they speak you, I, I now start, I, because I have never had this exposure. Now I see it and I’m like, they’re all saying the same, like basically the same thing, you know? And it’s hard, like you said, I, I, I, one time I said, listen, I don’t need you to tell me you’re the best.
I don’t really care. I’m not even investing. I’m, I’m just trying to understand if I can help. And then finally, like after. A long time I was able to kind of break through, but, but it’s, um,
Shaun: I watched my oldest son, I would describe as like, he’s just an infinite optimizer. So like watching him in situations is like watching someone trying to pick a lock. And that’s, that’s what some of the discussions feel like, where you’re like, I’m not having a conversation. I’m just, I literally can see the algorithm running and I’m like, no, but, and, and again, like I have no, I totally get it.
It just, it makes, it actually makes it harder for us because then we’re like not making any assessment of the founder. We’re trying to use some other signals [00:08:00] to say, this is interesting. we buy the right? And then, as you know, from a valuation perspective for our model, it’s really tough.
David: Right, right. When you, when you, so you’re so early with the, like you, I think you’re the earliest stage investor so far that I’ve had on the show. And at that stage, are you like. Is it literally just talking it through with them? Is there something in there, you know, do they come with a deck still and they’re telling you some story that you’re keying in on?
You know, a lot of people have told me, Hey, this is, it’s the power law. We’re looking for the things that are literally gonna change the world. And you know, we’re looking to see in the deck that they can tell that story. Like, are you doing that? Or literally just. It’s a conversation and you’re kind of flowing with them, and that’s kind of how you’re doing your assessment.
Like, I’m, I’m just curious. At this stage, it’s, it’s basically inception, I mean, BA basically.
Shaun: So it’s a little counterintuitive, but I think we, we actually don’t want the first step to be a conversation. We wanna see some work product. [00:09:00] Um, and so just how do people
David: Mm-hmm.
Shaun: Other than this, like, especially given how much of communication is asynchronous today? a, that’s usually where we start.
So we’ll look at materials, we’ll look at, I mean, and everything is a signal, right? I mean, I joke about bad logos, but you can still have really well thought out, you know, sort of storytelling and communication. do a lot of hardware, so we are looking for things like. Did someone do the techno economic model?
David: Hmm.
Shaun: Right? So like the SpaceX sort of inception story, you know, leaving Russia and being told they couldn’t buy, uh, uh, rocket engines. Um, was Elon doing techno economic Excel, right? It’s like,
David: Hmm.
Shaun: Assumptions, this is how this is gonna work. So we look for things like that. It’s just how, how do you think, how, how did you arrive at this?
Why do you think it’s a huge opportunity? The questions of, are you right? [00:10:00] Do you have the right background we’ll get to, but just in a lot of cases, the insights are pretty deep. Uh, especially, again, I, I think in a lot of the, in, in hardware, there’s a lot of things going on. There’s the customer, but then there’s a whole tech stack often that we don’t know that much about. Right. Will will show up and say, Hey, did you know that, uh, recycled nylon, uh, can actually be cheaper than virgin nylon? Uh, no. Didn’t, how do we, how do we,
David: Hmm.
Shaun: I didn’t know that. Why? Why should we believe that? Well, here’s why. Here’s, here’s the breakdown of how we got to that insight, and actually this is why it’s gonna get better. stories sometimes come out in conversation, but we usually get them first through some sort of asynchronous like work product.
David: Got it. And so you, not only are you the earliest stage, you’re also the most focused because most of the funds that I’ve talked to are just kind of, they go across any industry, any space, and you’re, [00:11:00] really focused. You mentioned you do a lot of hardware, first hardware investor that I’ve had on, like, how does that impact how you think about.
The space, how you think about investing. Like, I, don’t know, for me, especially climate tech, when I hear that, I, wonder, you know, that, the space has kind of changed and evolved quite a bit. what are you having to look out for in this when, you’re doing this kind of, this kind of investing, which is definitely very different than the other investors I’ve had so far.
Shaun: Yeah, so I think there’s probably a couple of main things. One. the customer signal. Let’s compare to like, your experience in enterprise SaaS right? When you go and have a customer conversation, if you get to a certain level in relationship, you can feel pretty good that folks are describing the problem you. And that their [00:12:00] intention to buy is
real Right? Or at least you can figure out how they’re gonna get to a decision. Who needs to make the decision? One of the challenges in climate is that there’s really good intentionality. So folks will tell you things that you want to hear. customers will tell you things you want to hear, But when it comes time to get beyond, let’s say, a pilot or a trial, and the math doesn’t work, the CFO has a veto.
And so getting clear customer signal is super hard, super, super hard. and there’s unfortunately so many smart people who built things that are super impressive in response to being misled by customers. Not, intentionally, like I think this you know, there were stakeholders at the customer that sincerely wanted the thing. but, ultimately it didn’t make operational sense, so, then you’re in a tiny universe of companies that do charity, which you can imagine is not [00:13:00] large.
So, customer signal I think is the hardest thing. And then I think there’s some structural things
And physical world has things like supply chain, it has other constraints. And so we like the sort of Warren Buffett perspective that, you know. If you have a, sort of a business with a reputation for bad economics or challenging structure, and you have a, founding team with a phenomenal reputation, the thing that will endure is the bad reputation of the business. It’s just there’s limits to even what the greatest teams can do.
And so we do pay attention to the operating structure. Where, are you buying things from? So who’s your supply chain? what does distribution look like? Are you operating in an oligopoly? Some of the older businesses, like hundred year old industries are, super tightly held, right?
And so the incentive to do nothing or to resist change is even higher. so [00:14:00] I’d say those are the two biggest challenges. It’s not like. I think people the capital intensive discussion, I think we’re past, like, I think yes, I would say the better way to think about it is margin for error. So
the way we Call and we think about margins is it’s sort of 90% versus 60% And that 30% difference. it’s just, that’s, the difference in margin. If you make a mistake, you have to correct faster.
for a Hardware company like, so all things being equal, that’s the hardest thing. And so I think there’s some operational differences. And so again, upfront, the more folks have modeled out their business so that you know they have an operating framework, that the easier it is to get excited about it.
David: The climate tech part about the customer’s good intentions is one that when you say it like that and you start thinking like. I imagine some amazing technology. Amazing. You know, you start going out to these customers and to your [00:15:00] point, they’re all like, yeah, of course I want, it it’s gonna make the world a better place.
It’s gonna make my company a better place. Like, of course. But actually becoming a customer and paying for that thing on a multi-year contract and growing NRR and doing like I, can and I never, yeah. Versus just a pure B2B SaaS thing. You have a problem. We solve the problem. It adds value. Awesome.
Cool. And so do you find that those that the climate tech companies you invest in, does it take them longer to get traction or the ones that have traction have it as quick. And there’s just a lot that have no traction. I’m not sure if that question made sense, but like.
Shaun: I think we had to, I think we had to learn. I think where we’ve landed up is, a pretty high focus on sort of time to revenue with good margins. They don’t have to be totally optimized, and so the, sort of rough model we have is about two years from the time we invest to revenue, [00:16:00] which is relatively quite short for, physical things. But I think we realized at some point, this is what Nvidia did. It’s what Apple did, it’s what Tesla did.
Right. but it requires that the founder make certain decisions to basically be in the business of Lego building initially. Right. So you find existing pieces and plug them together. And so the simplest way to sort of sort the founders for us has become. Are you describing a world in which you have to build a Lego so you can then put it together with some other things? Or did you just find the pieces and put them together? Because if you’re doing the first thing, like we’re talking four or five years to revenue, right? And if you’re doing the Lego assembly, and, again, I don’t wanna minimize the complexity of some of this stuff, but it’s much easier if you start with a [00:17:00] multinational as your core supplier. Who’s been building the thing for 20 years, and that’s your sort of most expensive thing on your list of parts Versus you saying, oh, that’s the thing I wanna make,
just give me five Years. so, in some ways it became really simple, but I think we also just looked at what’s worked and there definitely is a pattern. People don’t hang around for years building stuff and not worry about revenue. At least not some of the most successful companies in hardware.
David: Yeah, and on the hardware front, the first thing that comes to my mind is all the tariffs. And you know, I, I’m curious. How that has impacted your companies? I mean, I can only, I can only imagine probably a sort of subject, but that’s the first thing I think about. You know, and I, again, I, I’ve had so much exposure in the last couple years that I never had before.
I, I never literally talked to a hardware founder. I think literally in my life, and I’ve talked to a couple recently, and it, it’s a, it’s the things they have to deal [00:18:00] with
Shaun: Yep.
David: Are I, I mean. I don’t like to say insurmountable ‘cause things are insurmountable, but sometimes you just like, how do you deal with this?
Shaun: there’s, there’s days, um, where I’m just like, man, I like, this is just too hard. You take all the things you know about company building
David: yeah.
Shaun: Sprinkle geopolitics just for fun. You know, it’s like, it’s, it’s brutal. Um, but, but I think that, uh, there are, there are a lot of strategies. I think there are a lot of founders helping each other out.
It’s a pretty collaborative. Universe. Like if, if, if folks are like, Hey, you know, we had a supplier in China and we’re trying to figure out sort of China plus one, like what’s the next place we should be looking? Um, folks will take the call, they’ll share what they
David: Hmm.
Shaun: It, it, so it’s pretty but it is, you know, [00:19:00] again, if you think of sort of margin for error problem of, you know, 60% versus 90% margins, then this is one of those things in, in time where you’ve got this additional time suck. For things that are, I mean, worrying about tariffs is not productive. It’s just not great use of time,
David: Mm-hmm.
Shaun: You know, revisiting your supply chain, going out and, and retraining people, reevaluating products. Um. it, I mean, the effect has been, um, rough In some cases. Companies are just, are not gonna make it like they’re companies
David: Mm-hmm.
Shaun: That will, know, either go out of business or be restructured.
So from a sort of, as an investor and in some cases for the founders, it’s meaningful, it’s meaningful dilution, and know, they may still choose to walk away.
David: And has nothing to do with what they did. That’s the most fucked, like that’s the most part. That’s the worst. Like made all the right decisions, did all the right things,
Shaun: [00:20:00] the look, the
David: right? I mean.
Shaun: Side. The flip side of this is I think if you can manage the mentals of being in a world that sort of periodically flips and living in that kind of uncertainty, man, I do not wanna compete with the people who make it through that.
David: Yeah, that’s a good, that’s true.
Shaun: Right. So because, because I’ve, I, I now know a
David: That’s good.
Shaun: Have been through that like,
good luck. go and raise $250 million and try and beat this founder. Not gonna happen. Like you
can Back up trucks of capital that’s not going to, you’ll not overcome. These people they’re different
David: Mm-hmm.
Shaun: It’s like, it’s different in the way that, I dunno if you’ve met people who have. You know, being in the military or being to prison, they, they, they’re different
David: Yeah.
Shaun: In some things. You do not wanna mess with them. And I think the same thing happens to founders.
David: I think there’s actually an entire population [00:21:00] of founders and CEOs who’ve been running companies for the last five years that on like a whole, I, I mean, you have more experience than I do, you know, with across more companies. But at least in my opinion in the last five years, what we’ve gone through
Shaun: Yeah.
David: Is more.
Turn, turmoil, changeover, crazy shit than probably any five year window between the beginning of COVI to,
Shaun: I’ll I’ll
David: right?
Shaun: The reviving guys. It’s on your,
David: Yeah,
Shaun: it’s um.
David: yeah,
Shaun: Good.
David: Yeah, no, it’s, it’s, um, when you see that and you see it, I, I’ve, I’ve met a couple of CEOs who I didn’t know before and have talked through this, the journey of what they went through for various reasons over these five years. And to your point, they’ve just figured out how to do a lot more with a lot less, and I don’t know that another thing’s [00:22:00] gonna occur.
Shaun: Yeah.
David: That’s gonna derail them because nothing else is gonna come up. That’s, it’s like, you know, I had one founder who went from 200 million of revenue to zero, literally zero overnight, like, like overnight. And now business is back to hundreds of millions of revenue. And you’re like, is anyone gonna compete?
Like he went through that had a thousand person team that had to get cut down to zero and then built back up in a three year period. Like that. Like that. I mean, those people, you just, you start to have a different muscle.
Shaun: Yep.
David: Like,
Shaun: a, there’s an interesting. Interview. I think it’s like a q and a session with Janssen. Maybe it’s with an MBA class. And he is like, the challenge for you is you haven’t had enough difficulty something I’m, I’m not using, I’m para,
David: no, that’s a, yeah.
Shaun: but that, but that’s, I think that’s what we’ve come to believe is that in the same way as we look at the beginning for this sort of no way back. Um, [00:23:00] there’s a part somewhere in the middle of the journey, which is you need to have overcome a certain amount of stuff and decide you really wanna do this.
It’s not
David: Hmm.
Shaun: The, where you start. Um, and at the same time, I think it’s fair to say, man, I don’t, I, this is definitely not for most people,
David: Hmm.
Shaun: It feels kind of irrational to sign up for this.
David: Yeah. Someone else described to me as like, you know, I think I forgot who said this, but someone, um, I was listening to some panel and this guy was like, it’s, you know, it’s chewing glass all day long and smiling while you’re doing it, and you know, and. I think that he’s, I think he called it a chewing a, a, a chewing glass contest or something and, and having to smile at your team, at your investors, at your, at your customers.
And yeah. Who would choose to, who would choose to do that? You have to be a little bit crazy. Um, and to do it is one thing, then to stay in it. That’s, you know, a whole, a whole nother thing. Um.
Shaun: in the climate world, it was interesting, I think the end of the sort of Biden [00:24:00] administration and the reversion of the IRA just broke a lot of people mentally in the
David: Hmm. I’m curious, originally when you started Dirt Sphere, because you’re Angel investing, from the research I’ve done, it wasn’t climate tech. It wasn’t like, that wasn’t the the primary thing. How did you come to third?
Shaun: Yeah. Calling, calling my angel. Career investing is generous. Um, know, I, I think at that point it’s like, you just dunno what, you know.
David: That That’s fair. That’s fair.
Shaun: in New York. you know, our team had an exit at a time where that was an unusual thing. relatively easy to meet people.
Um, surprise, surprise. You know, you, you’re in a tiny universe of people who’s actually allocating money. Um, but yeah, I mean, in the beginning it was just sort of a curiosity with. Um, investing, uh, and building companies. So, so I, so like I came to the US to go to grad school. I went to [00:25:00] MIT and I wrote a paper on lifecycle analysis, which is like the core, essentially organizing principle for carbon accounting. Right? Um, and so I, that’s how I viewed climate. Climate was like this accounting problem, that we would just figure out, right? We would agree on some accounting standards that would become part of. world alongside your financials, and you would, you would have some rules and some taxes.
Like it really in the, in the sort of going into 2000, 2001. That’s what I thought.
David: Mm-hmm.
Shaun: Right. So I didn’t, I didn’t pay. It was interesting to me when I was like, this is such, this is a solved problem. That was my view. And also the internet was happening. So there was a, a new shinier thing to do for a few years, but, but by the time, like, you know, 20 10, 20 11 rolled around, had a few friends, you know, doing different things around climate.
I was like, wow, this is actually pretty insane. Like
David: Hmm.
Shaun: [00:26:00] Repercussions of getting this wrong. Um, and um, and when we started, of there. Two groups of people. There was one, one group who knew people who had lost money in clean tech, and there was another group of people who actually directly lost money. So, you know, can you imagine going, you’re like, oh, we wanna work on this. And everyone was afraid, like, yeah, some people tried, or I know someone who tried and lost money. So, yeah, again, like the benefit I think of, climate has been the folks that we meet who wanna work on stuff. I don’t wanna say it’s a higher purpose ‘cause it’s not fair. There are plenty of people who build companies for lots of reasons, but I, but I think like the, the most resilient founders in our portfolio are really locked in on like, the money is gonna be a byproduct
David: Yep.
Shaun: This other thing. So, so you can sort of see that of the peripheral vision, [00:27:00] they can see the math and they can see that it’ll be transformative financially, but they’re looking at something else.
David: Mm-hmm.
Shaun: Um, and that’s, yeah. And that, and that, that’s, I mean, that’s what I find my job is easy. It’s really easy to work for those types of folks,
David: When you say work for them, like what, what is the value that you add to them? I think this, this is
Shaun: I
David: a topic, uh, you know, with, with investors. I, I have a lot of opinions on this. I’m curious, like, where, where do you, at this stage when you’re investing, where are you adding value for the inve, for the, for the founders?
Shaun: I think very often. Um, so my kids are now, uh, my youngest is about to finish high school and it feels, it feels a lot like parenting. Um, and I’m not, I’m not, I’m not the person you want to ask about parenting, but I do think there’s an important part of parenting, which is sometimes you, you’re just supposed to be the person that says, I believe, right?
Like, you [00:28:00] just, and because there are moments there, aren’t other folks for founders to talk to. Not their parents, not their good friends, sometimes not other found. There’s just, there’s a very short list.
David: Hmm.
Shaun: And so. think we land up being on the short list of like, you know, we believe, and incidentally, the, the hard part is you can get 12 months in where you’re like, oh shit, this is probably not the right investment. Right. This gets back to the, do you know if it’s the right person? It’s like, sometimes it’s like, yeah, we wanna believe, but I’m not gonna be the person you
David: Yeah.
Shaun: Weekend and say you can do it. And that, that’s tough.
David: Hmm.
Shaun: We have a good way to manage that, but, um. But I think that’s probably the main, for me, that’s the main thing.
And then, um, and then just try and shortcut to reality, right? Like there’s a lot of reasons for folks, you know, it’s kind of like, is this really a customer?
David: Mm-hmm.
Shaun: Like sometimes, you know, it’s like, [00:29:00] oh, I just had this great, this great meeting with the Fortune 50 logo. And I’m like, really? How great was it? Are you sure?
It was great everyone else is like, wants to do and I’m like, yeah, I’m sorry to be the person, but I, but I think folks mostly come to appreciate that they’re, we’re a little bit obsessed with, there isn’t a lot of time to course correct.
David: Hmm.
Shaun: So gotta, we gotta double and triple check that we, you understand reality.
If this is not gonna be a customer, if this is not a, a fit, let’s move on. Same thing for talent. Um, and so I don’t know if we have like. Special skills. I think like we definitely have spent a lot of time in hardware and so there’s some parts of the hardware ecosystem where I think we just, not we, it’s not that we know anything, it’s that we know people who know probably.
David: Hmm.
Shaun: Do have a, I think we have a distinct advantage. Um, and then we spend some time, you know, I would say we are [00:30:00] accidental VCs in the sense that. We didn’t show up and say, Hey, VC is the thing that we want to be like, Hey, VC is in, is a really good way at the early stage to support climate founders increase their probability of success,
David: Hmm.
Shaun: But actually as you get to growth stage, I’m not sure that’s the answer anymore.
Maybe private credit is the answer. So we’ve spent a lot more time on other parts of the ecosystem. Again, not to discount the value of vc, there are, there are additional things. That sometimes are more transformative
David: Hmm.
Shaun: And private credit is one of those things.
David: You’ve said a lot of things here. One, one of the things that you said though, that I know that I really want to key in on because I’ve been having this conversation with some VCs recently, is I have worked with some companies where I’ll meet the founder, I’ll talk to the team, I’ll come back to the VC and I’ll say, Hey, these are the things that I noticed.
I’m just curious. Am I missing something? You know, and [00:31:00] they’ll say, oh, yeah, yeah, yeah, we, we feel the exact same way. And I’ll tell them, but the founder said, you never said any of these things to them. It’s this interesting dynamic. I asked an investor, I was at some event, and I had this conversation. I said, do you feel uncomfortable?
Like giving the real feedback about the team, about the product, about the company, about, you know, and he said, yeah, because what happens in the next round? Like if I’m not the founder friendly investor, are they? And so when you just said that, you’re, I think like, um. Where does that come from, that you feel comfortable?
Like, has that been you, your whole career? Where you, you, you feel comfortable sharing this with the founders? ‘cause I, I actually think it’s really important. I wish VCs did it more. My, my experience has actually been that some do, but usually later in their career who kind of don’t get, they’re like, yeah, I’m gonna tell you the truth.
But a lot of early, early people, especially people who’ve never operated before, they don’t feel kind of. Confident [00:32:00] enough to deliver
Shaun: Yeah.
David: You know, message. And I think it’s really important actually. I, I think that’s actually what the VC should be doing, but it feels like that governance is kind of, we’re losing a little bit of that feedback, you know, to be founder friendly.
Shaun: my, um, my sort of personal, I would say on the sort of operating side, my experience. The last company that we exited from, I think was a group of people that were very direct, very, we were all good friends, but very, you know, feedback was fast and, and, and was direct. And I, and I think part of it was everyone through, went through the.com bubble.
David: Hmm.
Shaun: So everyone had a story in some cases about getting through being on a public company being worth a billion dollars. And it, and the, and the thread in retrospect was that. They wish folks sort of guided them back to reality instead of everyone hyping each other up. I didn’t understand that at the [00:33:00] time, but like that, that was the culture when everyone was recovering from that.
That’s the culture that in the company that we built in like early two thousands. And so my mistake was that I went into angel investing. I’m like, I’m just gonna be the direct person. the first few times it was terrible. It was terrible. Like I had, I had one founder who was like, didn’t talk to me for 12 months. I was like, I, I thought I was just being helpful by being direct. They were like, yeah, you’re, yeah. Fuck you. Basically,
David: I believe that. I believe that’s why I’m asking like that.
Shaun: but it, but I think that, that as time went on, uh, in, in general, I, I think like you, you’re not, you’re not gonna get a hundred percent, but it was more than 50% of folks who are like, actually that you, the person like this made a difference.
‘cause you were direct about this. I know, I, I think once you understand that you’re just going to, you, you, there’s no way you, there are gonna be a bunch of people who just will write you off. You’ll miss the next round. But, but I, but I think. [00:34:00] It’s the net best thing,
David: Hmm.
Shaun: the the given time. Most folks appreciate it.
David: I think literally right now, like in the market at this moment, this is exactly what needs to be happening more because there are founders I’ve talked to who are doing a half a million of revenue, a million, whatever, and they’re raising a $200 million valuations. And they’re walk, I’ve, I’ve talked to ‘em.
They’re like, yeah, I’m crushing, I’m crushing. I’m like, you have half a million of revenue. Like, let’s be, you know.
Shaun: the fortunate thing about climate is. Before you can say to a founder, let’s talk about you, you get to talk about whether their customers are bad, because they’re not being totally honest with them. And, and it doesn’t, it, it, it literally, like, I feel there’s no animosity. like, here’s the structure that you’re in that causes this person at your customer to behave this way. You can’t be, you can’t be mad about it. And I think for
David: Hmm.
Shaun: Of founders, that’s the same type of feedback is like, I understand why you’re making [00:35:00] this decision. Right? Like I have a group of founders that I talked with yesterday, two founders, and they do this thing where they survey their investors and they try to get people to vote on what to do.
And I’m like, no, this is, you need to, you need to wait the votes, right? You can’t, not every vote can count the same.
David: Yeah.
Shaun: And here’s how I would think about waiting. And so in some cases, in like in that case, I don’t have to, the feedback is not directed at the founder. The feedback’s directed at, Hey, would you consider a different process because you’re probably with a weighted voting system, get to a conclusion.
David: you, you mentioned another thing, the private credit thing. Um. There’s another area where there’s a boom right now. I mean, the amount of private credit that’s available is crazy. Was that I, since, I don’t know the hardware business, was that not always the case? Is that a newer, I mean, I know it’s been around, but is the availability a newer phenomenon?
Shaun: Yeah. So, [00:36:00] so, so what happened, you know, sort of. I think the startup world, pre great financial crisis more active bank participation. So we would know about SVB and venture debt, but there was a much larger universe of sort of banking relationships where it really was a relationship where someone would be like, Hey, I noticed that you, you know, we watching your bank accounts and interesting things are happening we can get you a line of credit. And that a lot of that just sort of went away. Regulatory risk, a bunch of things. And the way that it came back was effectively a whole bunch of everything, family offices, hedge funds, um, in the PE world. I think the big PE folks are managing more private credit now than there are private equity. Um, but so everyone was like, Hey, we can be banks. We don’t have the same regulations, and actually banking can be good. Um, there are some real challenges with, with like. Shopping around to build like a, a capital stack where you’ve got sort of VCs [00:37:00] playing over here and then a feeder fund for Blackstone and then a bank, right? Like now you, there’s actually a lot of overhead in trying to manage all those things. but it’s a different type of capital and in a lot of cases in the physical world, it’s better capital from an underwriting discipline perspective. And what I mean by underwriting discipline is. have a pretty good sense of what those folks want at a moment in venture where I couldn’t tell you what growth metrics are for Series A. I don’t, I don’t know. I used to know, but I, I’m not sure anymore, but I, but I can tell you roughly what it would take to get an asset finance deal done, or project finance or line of credit. That stuff actually is easy to understand right now,
David: Hmm. And there’s a lot of that money in the, I mean, like you said, there is a lot, I mean a lot looking for homes,
Shaun: so we changed like our investment, like we changed how we early stage investing. Like [00:38:00] we, we want plan A to be break even by series A.
David: Hmm.
Shaun: Know if you can hit that, if you can do, if you can sort of get to revenue, decent margins, that’s enough. Like you could, if you could then just like, literally plug yourself into Shopify, right.
Direct most of your sales activity through Shopify, and they’ll give you, they start to calculate, uh, uh, loans based on your sales activity. Yeah. You just like hit a button,
working capital. Yeah. So, there’s, there’s a bunch of interesting hacks, but that’s what I mean by underwriting. Like I understand that like if a certain amount of cash is coming through the door, um, I can get a certain amount of working capital.
David: Right.
Shaun: I think the other thing that’s happening is more of that underwriting AI is gonna automate more of that underwriting. So the time to make decisions and the transparency about decisions. And I don’t know that VCs are getting faster, we certainly are doing a lot of AI things, but I don’t know that it’s actually sped up our decision making. [00:39:00] Made it more transparent to founders.
David: Definitely not the latter. Definitely not the, yeah.
Shaun: is, I, I used to feel more confident about what a series a milestone is, but now I’m actually
David: Hmm. Um. When you think about working with founders and you have a bunch of companies that you work with and founders at different stages, and how do you like to be communicated with? Is it it’s because you’re early, is it, is it board meetings? Is it just informal? Is it on text? Is it on Slack? Is it once a week to talk to them?
Like how do you like to understand where the businesses are and, and what’s the best way to communicate with you?
Shaun: I really like structured updates that I can get and review before we chat live. Um, I’d like to just be able to show up and be like, here’s a bunch of stuff I’m not worried about. This seems like the main, the [00:40:00] main sort of linking red lights. Um, you know, we can do the high fives all around for the green lights, but like, let’s use the time to just do this, you know, this one thing that takes a bit of coaching to get folks and it’s, it’s not that folks can’t do updates, it’s that you have to have. certain amount of trust to be like, Hey, here’s the actual thing that I’m worried about.
David: Mm-hmm.
Shaun: So, and then to write that down and describe it is like another whole level. Um, but that’s, when we get to that point, it’s, it’s, um, that’s sort of the preferred place. And in fact if we, if we cannot get to that point, it’s one reason why, we’ll, we’ll probably not continue investing
David: Hmm,
Shaun: becomes really hard then to figure out how to help.
David: I, I actually had this advice from one of our investors and he said, it’s great that we talk every two weeks, but I, I’m going in blind basically into the conversation, and I don’t. Like, gimme some context of what we’re gonna talk about. And then I started doing that. Yeah. I’m sure [00:41:00] you know exactly who, who that was.
But I get, you know, I get, and actually he all, I mean, even the board decks, he’s like more information, more, I, I, I, I want more, because then I have the context of where I can help you, where we can go, you know, if you’re giving me nothing or one line thing. And, and actually now as I work with companies, it’s the same thing.
Like, if you gimme enough information, I can process it, I can think about it. I can go try to get help. I can go, you know? And um,
Shaun: Yeah,
David: and then I had a, yeah.
Shaun: I say to a lot of founders is I like, I don’t, I, I’ve my, I don’t remember what I had for breakfast. I mean, if you forced me, if you made that a priority, I would try. But what, what I kind of want to frame the conversation is what did we say we were gonna do and how are we doing versus those things.
Just remind me what we agree to
David: Hmm.
Shaun: And then how are we doing?
David: Mm
Shaun: And
David: hmm.
Shaun: Unpack like, why are we missing? ‘cause we’re gonna be missing something.
David: Hmm.
Shaun: Um, and, and so it’s, it’s, I don’t even know if it’s so [00:42:00] much about the writing, it’s just like, you can be. Prepared when you get into a meeting, if you just have that and it, and it will, it will make sure that miss is the thing that’s top of the agenda, which is what it should be.
David: I had, I had a
founder tell me actually that they did this and they were really good at it and he was explaining to me how he did it. And he said that in a period where they were running out of cash, all of his investors bridged him. He said almost with no questions asked, like in a very bad time. And he said he believes in his, the feedback from the investors was because he was doing this for ye
couple of years.
Shaun: totally,
David: He said literally they put the money in. He said almost no questions asked. Because they trusted me. They trusted me that everything I was, I was telling them the good, the bad. I was giving them a, a real picture. And it’s kind of what you actually, you just said, like if someone’s not doing that at some point it becomes hard to continue to
put [00:43:00] money behind that.
Shaun: so we eventually, we built a tool, actually we’ve automated a lot of it now, but, ‘cause it, it was quite hard to do. So we took, we basically take in all of the updates for how we get them transcripts, et cetera, et cetera. And we, we basically just build an assessment of like, know, how close are we to doing the things that we said we’re gonna do for every company in the portfolio. And then we try and parse out like, is this a execution driven thing or is this a headwind tailwind problem? Like is it an external, like tariffs,
David: Yeah. Yeah.
Shaun: Um, ‘cause ‘cause sometimes you can get lucky and so there’s still work to do. you just may be in the right place at the right time.
David: Right.
Shaun: The opposite is true.
You may be temporarily just in a really hard place. So like, I don’t wanna ding founders who had like a shitty year of tariffs. Like, there’s plenty of great businesses that people are gonna give up on because they don’t have the patience to wait out tariffs. Like tariffs will settle down, right? It may take [00:44:00] six months,
David: Right, right.
Shaun: Like trying to parse that out, again, I think for founders is like, is a huge lesson.
If you, if you can, if you can just communicate regularly, like here’s what we said we were gonna do, here’s how we doing versus those things. Here’s roughly why. We think we are ahead or behind.
David: Hmm.
Shaun: I like, I would just wire money if you need.
David: Yeah. Yeah. Um, what, what do you think? That founders don’t understand about what’s happening on your side of the table. Misunderstand or just don’t understand about the job of being an investor.
Shaun: I think it, I think it’s, I think it’s what we just discussed maybe more than anything is that, um, we have a portfolio. [00:45:00] The, the math is brutal. Portfolio math is brutal. Because it basically says that most of the companies don’t matter except for one, two. Uh, and I think that’s a very, like, it’s very easy to say, it’s very hard for founders to accept that they may not be that one or two company. But you know, one way to take yourself out of contention is don’t send updates or send shitty updates. Like, because I’m, because like the correlation with success is not high, right? Like if you, if you can’t actually communicate, which is, I think again, the, the, the, the desire to just know more and have transparency so that you can help. okay, so have two teams in a head to head. Here’s one team that’s getting lots of help. Low friction raise when they need it. Low friction bridge when they need it. Here’s the other team that didn’t, that’s now stopped doing everything to run around and try and motivate the investors, like, [00:46:00] no, the second team’s losing. I would, I
David: Hmm.
Shaun: That bet every day over and over again.
David: You know when you,
that that whole commentary hits hard. ‘cause actually, I think about my investors and I had some investors where I think I, well, I not, I think I know I was one that one or one or two of, in their portfolio that was the, the returner of the fund. And then I have somewhere other investors where we were not in the top.
You know, a hundred companies, you know, d different port, different kinds of investors, whatever. And the difference is so clear
Shaun: Yeah.
David: When you’re one of those one or two, and when you’re not even in the top whatever. And the difference in attention, the difference in in help and the difference in everything. But it is hard to admit.
You know, this investor didn’t even put me on his LinkedIn because I’m not even like in the, in the vicinity. And then this one is like, put it at the top of my LinkedIn, you know,
like,
Shaun: I
to laugh at one [00:47:00] point on Twitter, there was an account that did like change tracking on bios. To
figure out which companies were in and outta. Like it was
David: oh.
Shaun: Very funny. Um, but, but exactly, exactly right. Like you are, you’re either gonna be in the storytelling. It’s like, you know, you said to me at the beginning of the call, who, who do folks
David: Yeah.
Shaun: will they recognize? I mean, it’s all the same calculus in 150 companies we mentioned so far. How many? Five or six.
David: Yeah. Yeah.
Shaun: mean, it’s, it’s rough. Um. So, so, yeah. I mean, I think that’s probably the hardest thing to understand. And then I think thinking about it from a founder perspective is do you want investors to have a referendum whether you get to continue building? Because the other reality is that yes, you, you can cycle through the bio, right? It’s easy to get in. It’s also easy to get off. There are plenty of folks that get in and then go [00:48:00] off and then still make it right. So like remembering that it’s like a very lumpy thing. And so like, don’t, don’t over, you know, figure out VCs have a role, um, and figure out what we can do to, to help. Don’t over index on how important we are. We, we, not especially, I mean just in simple math of like who has money right now, like private credit’s, like a hundred x, but
David: Yeah. Yeah.
Shaun: Like we are very, very small players in the capital markets. Um, but, but also in terms of like building a business there, I think we, the hardest conversations at the moment, you know, like the series A, what are the metrics question is a hard one because you can go for it. And it’s like you grab onto rope and you start to swing and you hope you can let go and grab the next rope. Is that, is, do you really want to do that
David: Hmm.
Shaun: Or do you, or do you want to build in a way that is, is [00:49:00] maybe not that dependent on getting the timing perfect? Um, I’m not, I don’t know what the answer is, but we
David: Yeah.
Shaun: Lot at the moment.
David: Um, what is, what is, to switch gears just for a second, what is the deal that you missed, that you regret the most?
Shaun: I mean, I have a list.
David: You actually keep a list.
Shaun: Yeah, yeah. No, I mean, I have a, I in my head, I have a list. Um, I think like the, the, the, the one which is just is, is probably the most errors, is a company called Glo. In, in, based in Barcelona. They were acquired for like two and a half billion. It was, it was co-founded by someone that I knew, uh, who, who had already had multiple exits. So it should have been like a no brainer.
David: Yeah. Yeah. Right.
Shaun: Um, but we sort of [00:50:00] looked at the market and we were like, man, there’s like three or four delivery companies, you know, um, a lot of them are mo are already expanding. They’ve raised a lot of money. They’re expanding into the eu. How’s this team gonna figure it out?
And what the team wound up doing is they went to like the smaller EU markets and then went to Latin America and Africa.
David: Hmm. Hmm.
Shaun: So, you know, at some point it’s like, yeah, you can be too clever. Second guessing founders. You know, that’s the, that’s where I think like the, the caveat on there are some bad businesses can get you in trouble.
David: Yeah. Yeah, yeah.
Shaun: Business being bad versus some other thing like being outraged.
David: Hmm. Um, last question, what, what excites you about the next five years or 10 years as an investor?
Shaun: I mean, I, I, [00:51:00] because we do so much in the physical world, robotics is just sort of mind blowing. Like what, what the options, what the possibilities are. Coupled with capital,
David: Hmm.
Shaun: Like they were made for each other, it’s just, it’s a bunch of new assets, um, coming online that are quickly getting de-risked from a. Underwriting the capital markets perspective. And there are a lot of folks in the capital markets who miss things like batteries and solar who are like on the lookout for what’s the next thing that I could deploy a lot of money into. So that’s, um, that intersection is sort of super interesting. And then within climate, it’s sort of a relief to not worry about. You know, people who wanna save the world.
David: Hmm.
Shaun: Um, because, because climate now is basically just, [00:52:00] it’s just tech. It’s just better, faster, cheaper. So
David: Hmm.
Shaun: Like
David: Hmm.
Shaun: Um, a full stack, trucking company that only uses EVs. You know, good luck. The math is not in your favor if you run a traditional tracking company.
David: Hmm.
Shaun: If these guys make it, I mean, they, they, they can barely keep up with demand currently. But the only, the only thing between them and being the largest trucking company in the US is asset finance piece, which is pretty much in place. Um, and, and probably the main constraint is can you buy enough trucks? Like literally can you get enough electric semis? But it works phenomenally well. And there’s, there’s a lot of other businesses that look like that, where the, the, the tech stack for. emissions or no emissions tech is phenomenal. So that, so that’s interesting. Then the last thing I’ll say is like climate resilience part of the world, [00:53:00] the lines with defense and public safety are pretty blurred. So the way into those deals, there’s just a lot more people, a lot more interesting customers. So, know, in many ways, far as climate got more interesting despite the sort of rollback on.
David: Hmm, Sean, I was really looking forward to this and you did not disappoint. You’re always, uh, you’re transparent, you’re, you’re always real talk all the time, which I appreciate and very thoughtful and, um, definitely in a space I don’t have a lot of experience in. So I appreciate you sharing all this and, and just for you doing this with me.
So thank you very much.
Shaun: Cool. And thanks for I, I think at this point, yeah, you becoming the go-to resource. Hopefully this adds a little, but, uh, even if it doesn’t, thank you for what you do.
David: Awesome. Thank you Sean, and for those listening, I hope you enjoyed. I’m sure you learned a lot if you did. Share this out with your networks, and we’ll see you for the next episode of not another CEO podcast. I.
[00:54:00]
