Early-stage arduous tech agency Countdown Capital shutting down

Countdown Capital, an early-stage enterprise capital agency centered on arduous tech industrial startups, will shut down by the top of March and return uninvested capital, agency founder and solo normal companion Jai Malik stated in an annual letter.

Within the letter, which was considered by TechCrunch, Malik says he determined to shut the fund after coming to 2 essential conclusions on the economics of early-stage arduous tech investing: that “funding industrial startups is not inefficient enough to justify our existence” and that “larger, multi-stage venture firms are best positioned to generate strong returns on the most valuable industrial startups.”

In different phrases, that the agency could be unlikely to understand extra returns constantly primarily based on capital limitations and swelling competitors from massive incumbents.

The three-year-old agency’s sudden closure means that there are stronger headwinds for early-stage arduous tech funds than the overtly optimistic narratives about “building for America” may counsel. The incisively-written letter reads like a chilly glass of water to the face.

“Despite our performance to date, I’ve concluded that new investments are unlikely to yield strong returns,” Malik says. “As a result, I no longer believe that Countdown’s existence is justified, for both our LPs and Countdown management.” Malik declined to touch upon this story.

The agency has backed among the better-known names within the aerospace and protection sector, together with massive satellite tv for pc bus developer K2 House, machining startup Hadrian, and cybersecurity firm Galvanick. A complete of 12 investments are listed on the agency’s web site. Amongst Countdown’s LPs included Craft Ventures’ David Sacks, Banana Capital’s Turner Novak and Homebrew VC’s Hunter Stroll.

Notably, Countdown was comparatively early to the American arduous tech Renaissance; the agency closed its first fund effectively earlier than Andreessen Horowitz launched its American Dynamism apply, possible the biggest and best-known U.S. fund centered on shoring up “the national interest” throughout sectors like manufacturing, aviation and others.

TechCrunch covered Countdown’s second $15 million fund in September 2022; on the time, Malik stated that the agency was filling a void on the very early levels for capital-intensive companies. A yr and a bit on, nonetheless, it’s clear that the early-stage alternatives Malik was focusing on haven’t shaken out as anticipated. Countdown’s first fund was $3 million.

The letter posits bigger narratives about early-stage arduous tech industrials investing that throw into doubt the power of small, specialist funds to compete towards multi-stage incumbents.

Malik explicitly touches on this reality towards the top of the letter, when he writes: “To be clear, we’re not bearish on venture capital or the future success of venture-scale hard tech companies at large. We’re bearish on the ability of small, early-stage funds — particularly sectionally focused ones — to continue exploiting these opportunities profitably.”

Within the letter, Malik connects massive multi-stage corporations investing in arduous tech industrial startups to the slowdown in development in software-as-a-service (SaaS) companies. However he says that the speed of general worth development for industrial startups is not going to outpace the speed of funding from massive corporations. “Consequently, we think early access to the best companies for a specialized, early-stage venture firm like Countdown will become more limited,” he says. “The most successful early-stage, specialist firms may simply resemble less-profitable ‘derivatives’ of top-performing multi-stage firms, like Founders Fund.”

Malik goes on to say that he thought Countdown had or might develop aggressive benefits to outcompete towards different corporations, multi-stage or early-stage, however that these “are unlikely to prevail.” These benefits might be issues like incubation or different approaches that require extra money and time than the small-AUM agency might afford.

He stated that this lack of aggressive benefit was already noticeable: In three instances, Countdown got here near investing in an organization’s first spherical, just for the agency to be priced out by a bigger multi-stage agency: “A 50-100% price difference at the pre-seed and seed stage is immaterial to a multi-stage firm managing billions of dollars, but can and should be the difference between a yes and no for a firm of our size.”

One other concern, Malik says, is that the top-performing industrial startups are inaccessible to early-stage corporations as a result of they’re priced effectively early on. For instance, Malik estimates that Anduril, The Boring Firm and Redwood Supplies had been priced at roughly $60 million, $1 billion and $200 million, respectively, of their first outdoors rounds; Countdown would’ve needed to make investments an unlimited portion of its fund to amass even simply 3% of every firm.

By the top of March, the agency will full all pending investments, return capital, cancel all uncalled commitments and completely stop operation aside from present asset administration, Malik stated.