Human Composting and Wood Markets: Discussion on “Industrial” Venture Capital with Investor Dayna Grayson

As the venture capital world is abuzz about generative AI, Dayna Grayson, a longtime venture capitalist who co-founded her own company, Construct Capital, five years ago, has focused about relatively boring software that can transform industrial sectors. Its mission does not exclude AI, but it does not depend on it either.

Construct recently ran a seed round, for example for TimberEye, a startup developing a vertical workflow software and data layer that it says can more accurately count and measure logs and, if all goes according to plan , helping the startup achieve its goal of becoming the marketplace for purchasing wood. How big could this market be, you might ask? According to one estimate, the global forest products industry reached $647 billion in 2021.

Another Construct deal that seems less sexy than, say, the big language models, is Earth, a startup focused on human composting, turning bodies into “nutrient-rich” soil over a 45-day period. Yes, ick. But also: it’s a smart market to exploit. Cremation represents 60% of the market today and could represent more than 80% of the market within 10 years. During this time, 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 a growing number of these customers.

Avoiding some of the AI ​​hype doesn’t completely protect Grayson and his Construct co-founder, Rachel Holt, from the same challenges facing their peers, as Grayson told me recently on a Zoom call from Contruct headquarters in Washington, DC. their challenge is timing. The pair launched their first three funds in one of the venture capital industry’s frothiest markets. Like every other venture capital firm on the planet, some of their portfolio companies are also struggling with indigestion after raising too much capital. That said, they are looking to the future and – apparently successfully – taking some more serious industrial industries with them. Excerpts from our recent discussion, edited for length, follow.

You were investing during the pandemic, when companies were launching funding rounds very quickly. How has this rapid fire impact impacted your portfolio companies?

The quick news is that they haven’t impacted a lot of our portfolio companies due to the fact that we actually deployed the first fund into seed companies – new companies that started in 2021. Most have been launched. But (in general) it was exhausting and I don’t think these tours were a good idea.

One of your portfolio companies is Veho, a package delivery company that raised a monster Series A round, then a huge Series B just two months later in early 2022. This year it has laid off 20%. of its staff and there were reports of turnover.

In fact, I think Veho is a great example of a company that has handled the economic turmoil of the last couple of years very well. Yes, you could say they’ve had a few hits in the financial markets by attracting so much attention and growing so quickly, but they’ve more than doubled their revenue in the last year, and I can’t Can’t say enough good things about the management. the team and the stability of the company. They have been and will remain one of our core brands in our portfolio.

Of course, these things never move in a straight line. What are your thoughts on whether or not a venture capital firm should be involved 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 our mission is to bring value to our businesses and be great partners. This means bringing our industrial expertise and networks. But I classify us as advisors, we are not controlling investors and we do not plan to become one. So it’s really up to us to provide the value that our founders need.

I think there was a time, especially during the pandemic, where venture capitalists were announcing that “we’re not going to be too involved in your business – we’re not going to get involved and we’re going to let you run your business.” We’ve actually seen founders avoid this notion and say, “We want support.” They want someone on their side, who helps them and aligns those incentives correctly.

Venture capital companies were promising the moon during the pandemic, the market was so frothy. It now appears that the power has shifted to the venture capital firms and not the founders. What do you see, day by day?

One of the things that hasn’t gone away since the pandemic days, when there was a rush to invest, are SAFE notes (‘mere agreement for future actions’ contracts). I thought that when we returned to a more measured pace of investing, people would want to go back to investing only in equity rounds – capitalized rounds rather than notes.

Founders and investors, including us, are open to SAFE Notes. What I have noticed is that as these notes have become “more sophisticated”, sometimes including side letters (which confer certain rights, privileges and obligations outside of the terms of the standard investment document), it is necessary so really ask for all the details to guarantee the ceiling. the table doesn’t get too complicated before (boot) (starts).

It’s very tempting, because SAFEs can be closed so quickly, to add more and more. But let’s take the boards, for example; you can have a cover letter (with a venture capitalist) that (states that): “Even though this is not a capitalized round, we want to be on the board . That’s not really what SAFE scores are designed for, so we say to founders, “If you’re thinking about going through all this business building stuff, go ahead and capitalize on the cycle.” »

Construct is focused on “transforming the foundational industries that power half of the country’s GDP, logistics, manufacturing, mobility and critical infrastructure.” In a way, it feels like Andreessen Horowitz has since appropriated this same concept and renamed it “American dynamism.” Do you agree or are these different themes?

It’s a little different. There are certainly ways we can align ourselves with their investment thesis. We believe that these fundamental industries of the economy – some call them industrial spaces, others energy spaces that can integrate transportation, mobility, supply chain and decentralization of manufacturing – must become technology industries. We think if we’re successful, we’ll have a number of companies that are maybe software companies, or maybe actually manufacturing companies, but they’ll be valued like technology companies are today, with the same revenue multiples and same EBITDA. margins over time. This is the vision behind which we invest.

We’re starting to see some older industries consolidate. A former Nextdoor executive recently raised money for an HVAC roll-up, for example. Are you interested in this type of offer?

There are a number of industries where there are existing players and it’s very fragmented, so why not bring them all together (in order to achieve) economies of scale through technology? I think it’s smart, but we don’t invest in old technologies or companies and then modernize them. We are more on the side of introducing de novo technology into these markets. An example is Monaire which we recently invested in. They are in the HVAC business but provide a new service of monitoring and measuring the health of your HVAC with their low-tech sensors and monitoring and measurement service.

One of the founders had previously worked in HVAC and the other had previously worked at (home security company) SimpliSafe. We want to support people who understand these spaces – who understand the complexities and the history – and who also understand how to sell in them from a software and technology perspective.