While generative AI is all the rage in the venture world, Dayna Grayson, a longtime venture capitalist who co-founded her own firm, Construct Capital, five years ago, is focused on relatively boring software that can transform industrial sectors. Your mission doesn’t exclude AI, but it doesn’t rely on it either.
For example, Construct recently led a seed stage round for TimberEye, a startup that is developing vertical workflow software and a data layer that can count and measure logs more accurately and, if all goes as planned, can help the startup achieve its goal reach has developed into a marketplace for purchasing wood. How big could this market be, you may ask? According to one estimate, the global forest products industry reached $647 billion in 2021.
Another Construct deal that sounds less sexy than, say, large language models is Earth, a startup focused on composting people, turning bodies into “nutrient-rich” soil over a 45-day period. Yes, gross. But also: It’s a smart market to chase. Cremation accounts for 60% of the market today and could account for over 80% of the market in another 10 years. The cremation process is now compared to driving 500 miles by car; As people increasingly focus on “greener” solutions in all areas, Earth expects to attract a growing number of these customers.
Steering clear of some of the AI hype doesn’t fully insulate Grayson and her Construct co-founder, Rachel Holt, from many of the same challenges their colleagues face, as Grayson recently told me during a Zoom call from Contruct’s headquarters in Washington, DC told her challenge is timing. The pair launched their first three funds in one of the venture capital industry’s most dynamic markets. Like every other venture capital firm in the world, some of their portfolio companies are currently struggling with indigestion after raising too much capital. Nevertheless, they are racing into the future and – apparently successfully – dragging some staid industrial companies with them. Following are excerpts from our last chat, edited for length.
They invested during the pandemic when companies were raising rounds in very rapid succession. What impact did these quick fixes have on your portfolio companies?
The short news is that they haven’t impacted too many of our portfolio companies because we really invested the first fund in seed companies – young companies founded in 2021. Most of them were just about to give the starting signal. But [generally] It was tiring and I don’t think these laps were a good idea.
One of your portfolio companies is Veho, a package delivery company that raised a huge Series A round and then a huge Series B round just two months later in early 2022. This year the company has laid off 20% of its employees and there are reports of turnover.
I actually think Veho is a great example of a company that has weathered the economic turmoil of the last year or two very well. Yes, you could say they had a lot going for them in the financial markets because they attracted so much attention and grew so quickly, but they have more than doubled their revenue in the last year or so and I can’t say enough good things about management say team and how stable the company is. They were and remain one of our top brand companies in our portfolio.
Of course, these things never move in a straight line. In your opinion, how involved a venture capital firm should be in the companies it invests in? This seems to be a bit controversial these days.
At venture capital, we are not private equity investors, we are not control investors. Sometimes we are not on the board. But our business is to add value to our companies and be great partners. This means bringing in our industry expertise and our networks. But I put us in the category of advisors, we are not control investors and do not intend to be control investors. So it’s really up to us to provide the value that our founders need.
I think there was a time, particularly during the pandemic, when VCs advertised, “We’re not going to get overly involved in your business – we’ll walk away and let you run your business.” We’ve actually seen that founders have rejected that idea and said, “We want support.” They want someone on their side to help them and align those incentives properly.
VCs promised a lot during the pandemic, the market was so exuberant. Now it seems as if the power has shifted back to the VCs and away from the founders. What do you see day after day?
One of the things that hasn’t gone away from the pandemic rush investing times is SAFE notes [‘simple agreement for future equity’ contracts]. I thought that as we returned to a more moderate pace of investing, people would go back to only wanting to invest in equity rounds – capitalized rounds versus bonds.
Both founders and investors, including us, are open to SAFE bonds. What I’ve noticed is that these notes have become more “edgy” and sometimes include secondary letters [which provide certain rights, privileges, and obligations outside of the standard investment document’s terms]So you really need to ask for all the details to make sure the cap table doesn’t get too complicated [the startup] has [gotten going].
It’s very tempting because SAFEs can be closed so quickly to keep growing them. But take boards for example; You can have a side letter [with a venture investor] The [states that]”Even if this isn’t a capitalization round, we want to be on the board.” That’s not really what SAFE notes are for, so we say to the founders, “If you want to participate in the entire company formation.” Stuff, just go ahead and capitalize those Round.’
Construct focuses on “transforming essential industries that account for half of the country’s GDP, logistics, manufacturing, mobility and critical infrastructure.” In a way, it seems like Andreessen Horowitz has since appropriated the same concept and renamed it “American Dynamism.” Do you agree or are these different topics?
It’s a little different. There are certainly ways we can buy into their investment thesis. We believe that these core industries of the economy – some call them industrial spaces, others call them energy spaces, which can include transportation, mobility, supply chain and distributed manufacturing – must become technology industries. We believe that if we are successful, we will have a number of companies that are perhaps producing software companies, perhaps actually manufacturing companies, but they will be valued the way technology companies are valued today, with the same revenue multiples and the same EBITDA margins over the course of time currently. That is the vision behind which we invest.
We are starting to see some older industries being upgraded. For example, a former Nextdoor manager recently raised money for an HVAC roll-up. Are such offers interesting for you?
There are a number of industries where there are existing players and they are very fragmented. So why not put them all together? [in order to see] Economies of scale through technology? I think that’s smart, but we don’t invest in older world technologies or companies and then make them modern. We are more in the camp of introducing de novo technology in 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 with their low-tech sensors and monitoring and measurement services.
One of the founders previously worked in heating, ventilation and air conditioning technology, the other previously at [the home security company] SimpliSafe. We want to support people who understand these areas – understand the complexities and history there – and also understand how to sell them from a software and technology perspective.