Space VC closes $20 million Fund II to support deep tech founders from day zero

Gone are the days when space and defense were considered fundamentally antithetical to venture capital investing. Today, the country’s largest venture capital firms are investing more of their money in so-called hard-tech startups early on. The about-face has led some in the industry to question whether smaller investment houses will be able to keep pace with companies armed with more dry powder.

Not so for Jonathan Lacoste, solo managing director of Space VC, an Austin-based microfund that invests in cutting-edge technology. It just closed a $20 million Fund II on the premise that there are still big opportunities for specialized early-stage companies – despite the increasing consolidation of multi-stage funds and their increased participation in industrial startups during pre-priming and priming cycles.

“We invest from day one, often when founders are just starting their business,” he said. “There is much more opportunity for a new fund that is specialized in nature to make a pre-seed impact than raising a Series A fund and competing with all the well-known funds that can invest in those categories.”

Arriving very early, at “day zero”, as Lacoste puts it, is the cornerstone of Space VC’s strategy. Doing otherwise — waiting until companies are founded, then evaluating their startup cycles like a lead-free check, for example — is likely a recipe for failure, he said.

Space VC’s other stronghold is ultra-high conviction: $20 million will go to just 15 to 16 companies, with checks ranging between $500,000 and $1 million. In some ways, this part of the strategy is more contrarian than anything else, given that venture capital is generally considered to be governed by the power law principle. But smaller funds simply don’t have the financial flexibility to play the numbers game, especially when larger funds can afford to bid up valuations.

Lacoste acknowledged that the fund price is sometimes discounted by a large multi-stage company, for which a 50% price difference is inconsequential. Often, it’s up to the entrepreneur to decide how big their first round of funding should be, he said.

“There are definitely times where I think a founder can take two paths: raise a $2 million pre-seed, close government funding, get initial customer buy-in, build an MVP in a really disjointed way , then raise a much larger round of funding. – and in doing so, avoiding earlier dilution – or driving the biggest trick out of the door,” he said. “It’s difficult for me as a VC to say one is the right path over the other. But I truly believe that being capital-limited, scrappy, and focused (…) generally leads to healthier habits, more business, and better results.

He highlighted that portfolio companies True Anomaly and Castelion both raised relatively small initial rounds, and both subsequently closed larger rounds with participation from large, multi-stage companies. (Space VC wrote Castelion’s first check, as well as the first check to Array Labs and UK-based Space Forge.)

Not everyone thinks this strategy will be a winner. Jai Malik, the former solo GP of small industry fund Countdown Capital, made waves earlier this year when he announced in a letter his intention to return the remainder of his second fund to LPs. In his letter, he explains that he made the decision to cease operations because the chances of small businesses generating the returns they need are very low.

Lacoste clearly thinks this is not the case. While he didn’t talk about Countdown specifically, he said his company seeks to provide value beyond just a check: customer introductions, capital introductions to potential partners who might leading a Series A or beyond, and a network of founders who are building a similar project. business. In the early stages, the company can also serve as a “sounding board” for entrepreneurs, or even military veterans or people outside the industry looking to transition into space and defense, he said .

“I see the opportunity for pre-seed funds to be at the ideation and launch phase, to serve as a sounding board, to offer industry connections to entrepreneurs to help solidify these ideas. This is where we spend a lot of time and I think there are many opportunities for specialist companies like ours to compete in these areas.

Bigger bets three years later

Lacoste has taken an unconventional route when it comes to investing in space and defense. He spent much of his teenage years playing for elite hockey teams, then founded a venture-backed enterprise software company called Jebbit with a few classmates from Boston College. (He dropped out after three semesters to develop the startup full time.) They left the company after being acquired by billionaire Robert F. Smith’s Vista Equity Partners in early 2022.

The question “what next?” » occupied an important place.

“I think my honest assessment is that I lacked impact and I started to wonder, when I was in my 20s, how I wanted to spend the next few decades,” he said. “Intellectually, for me, even though I worked in the data infrastructure (and) software world for almost a decade, that’s not where I would have charted my career path. I was much more interested in government and foreign policy, defense, space and frontier technologies.

“When I had the time and resources, I knew I was going to get into the industry. The question was how.

He saw a gap in the market: a role for a former founder turned investor, who could invest early in deeply technical areas that venture capital was just beginning to show interest in. It raised its first fund in early 2021 and immediately began deploying capital.

Although Fund II is significantly larger than Fund I’s $3 million position and the capital markets are much tougher, he said it was overall easier to raise money this time around. To raise his first fund, he had to ask sponsors to bet on his vision and on his person – he had no track record to speak of at the time.

“Some questions have been raised: Why does this software founder think he can come and dominate early space and defense companies? It was a legitimate question at the time. So Fund I was difficult, even with looser capital markets, it was difficult to be able to answer that question without saying, trust me and let my actions speak more than my pitch.

Fund II’s flagship LP is a fund of funds called Nomads, part of Hummingbird Ventures, which focuses on exceptional emerging managers. At this stage, after three years of journey and public investments in fifteen companies, Lacoste believes that it has earned its place in what is called the hard tech ecosystem.

“I’ve spent four years in space and defense now and I really don’t feel like an outsider anymore. I rolled up my sleeves. I work hand-in-hand with many companies… and I feel like an extension of these founding teams. I no longer feel like a software entrepreneur who is a fish out of water.