From its glass-lined offices in San Francisco’s leafy Presidio national park, six-year-old Mithril Capital Management has happily flown under the radar. Now it’s leaving altogether and relocating its team to Austin, a spot that, among others the firm had considered, has “enough critical mass of a technical culture, an artisanal culture, an artistic culture, and [is] not necessarily looking to Silicon Valley for validation,” says firm cofounder Ajay Royan.
The move isn’t a complete surprise. Royan, who cofounded the growth-stage investment firm in 2012 with renowned investor Peter Thiel, hasn’t done much in the way of public relations outside of announcing MIthril’s existence. Thiel and Royan — who’d previously been a managing director at Clarium Capital Management, Thiel’s hedge fund — largely travel in social circles outside of Silicon Valley.
The firm has always prided itself on finding startups that don’t fit the typical ideal of a Silicon Valley startup, too. One of its newer bets, for example, is a nine-year-old dental robotics company in Miami, Fla. that says it performs implant surgery faster and more effectively, which is a surprisingly big market. More than 500,000 people now receive implants each year. “It was a hidden team, because it’s in Miami, and it was a field that was under invested in,” says Royan, noting that one of the few breakthrough companies in the dental world in recent years, Invisalign, which makes an alternative to braces, caters to a much younger demographic.
Even still, Mithril’s departure is interesting taken as a data point in a series of them that suggest that Silicon Valley may be losing some of its appeal for a variety of reasons. One of these is so-called groupthink, which had already driven Thiel to make Los Angeles his primary home. An even bigger factor: the unprecedentedly high cost of living. As The Economist recently reported about the Bay Area’s narrowing lead over other tech hubs, a median-priced home in the region costs $940,000, which is four-and-a-half times the American average. “It’s hard to imagine doing another startup in Silicon Valley; I don’t think I would,” said Jeremy Stoppelman, who cofounded the search and reviews site Yelp, took it public in 2012, and continues to lead the San Francisco-based company, to The Economist.
Late last week, to learn more about Mithril’s move out of California and to get a general sense of how the firm is faring, we sat down with Royan at the space the firm will formally vacate next year, when its lease expires. We talked for several hours; some outtakes from that conversation, lightly edited for length, follow.
TC: You and I haven’t sat down together in years. When did you start thinking about re-locating the firm?
AR: In 2016. I started seeing a lot more correlation in the companies that we were seeing; they were looking more similar to each other than before, and the volume was going up as well. So to put that in context, 2017 was our largest volume in the pipeline, meaning the number of companies coming through the system. And it was also the year that we did the least number of investments. We made one investment, in Neocis [the aforementioned dental robotics company].
TC: You don’t think this owes to a lack of imagination by founders but rather serious flaws in the overarching way that startups get funded.
AR: The problem is what I call time horizon compression. So a pension fund is supposed to invest on a 30-year time horizon, but if you look at the internal incentives, the bonuses are paid on an annual basis [and the investors making investing decisions on behalf of that pension] are evaluated every six months or every quarter. So you shouldn’t be surprised when people do really short-term things.
There are very short-term versions of investing in the private markets, as well. It’s the 15th AI company, or the 23rd big data company, or the 256th online-to-offline services company. A lot of the people making these investments are very smart. The question is: why are they funding these companies? And why are people starting them? I would suggest it’s because both are under tremendous time pressure, and pressure not to take real risk. If you’re really smart, and you’re told that you’ve got to make returns tomorrow and you can’t take a lot of risk, then you do a me-too company and you look for momentum funding and you try to get out as quickly as possible. It’s a perfectly rational response to bad incentives, and that’s part of what we started to see a lot of in Silicon Valley. I think you have a lot of it going on right now.
TC: It feels like the “getting out” part has become a problem. The IPO market has picked up, but it’s not exactly vibrant. Do you buy the argument that going public limits what a team can do because of public shareholder expectations?
AR: I think that’s fake. Private investors are maybe even more demanding than public investors, because we have material amounts invested generally. Certainly, we do at Mithril. When it comes to governance at our companies, it’s pretty tough, and we get a lot of insight into their activities. It’s not like a public board, where you get a quarterly meeting and a pretty presentation and then people go home.
I do think it’s risk budget and time horizon, bottom line. So the ability to take risks in ways that are not supported by historical models would be: if it goes well, people are happy; if it goes south, the public markets I don’t think will forgive you.
TC: What about Amazon, which went out early, lost money for years, was hammered by analysts, yet is now flirting with a $1 trillion market cap?
AR: Amazon is like the sovereign exception that proves the rule. It’s like [Jeff Bezos] was structured to basically not care both in terms of governance, or he cared in the way that was actually constructive to building Amazon, which is, ‘I’m just going to keep reinvesting all my profits into things that I think are important, and you all can just wait,’ right? And not a lot of people have the intestinal fortitude to do that or the governance structure to sustain it.
TC: You’ve made some big bets on companies that have been around a while, including the surveillance technology company Palantir, which I recall is one of your biggest bets. How patient are your own investors?
AR: Palantir is still doing extremely well as a company. What’s interesting is 80 percent of our capital in [our first of three funds] is concentrated in, like, 10 companies. Our two biggest investments were Palantir and [the antibody discovery platform] Adimab [in New Hampshire], and I’d argue that Adamab is even bigger than Palantir. We actually helped them not go public in 2014 when they were thinking about it.
TC: How, and why was it better for the company to stay private?
AR: Adimab was founded in 2007, so it was already seven years old when we encountered them. And I was looking for a company that would be not a drug company but instead [akin to] a technology company in biotech, and Adimab is that. The’ve built a custom-designed yeast whose DNA was redesigned based on the inputs from a multi-year study of about 120 human beings, I think at Harvard, where they assessed the immune responses of the humans to various diseases, then encoded what they understood about the human immune system into the yeast. So the yeast essentially are humanized proxies for the immune system.
TC: Which means . . . .
AR: You can attack the yeast with disease, and the antibodies the yeast produces are essentially human antibodies. Think of it as a biological computer that responds to disease vectors. We now have a database of 10 billion antibodies that we can use to figure out how best to interrogate the yeast for the next generation of diseases that needed an immunotherapy solution.
TC: Is the company profitable?
AR: It is. They don’t need any new money. We’ve just begun a program to help them restructure their cap table so they can take out early investors.
TC: An 11-year-old company. What about employees who are waiting to cash out?
AR: They want more stock, so we’ve created the equivalent of stock options that are tied to value creation.
A lot of biotech companies go public very early on. If Adimab had, they would have been under tremendous pressure to actually build a drug company. People would have said, ‘Hey, if you’re discovering all these antibodies and they’re empowering other people’s drugs, why don’t you just make your own drug?” But the founder, Tillman Gerngross, who’s also the head of bioengineering at Dartmouth, he doesn’t want to be in the position of having to sell or be under tremendous pressure [to create a drug company] when he thinks the full impact of what Adimab is building won’t be realized for another decade.
TC: In Austin, you’ll be closer to this company and some of your other portfolio companies. But are you really certain you want to leave sunny California?
AR: The cost of trying is what I’m worried about [here]. It’s that simple. That applies to people who are starting jobs in someone’s company, or trying to start a company themselves. If it’s expensive for the company to take risk, it’s going be expensive for you to take risk inside the company, which means your career will take a different path than than otherwise
After [I was an] undergrad at Yale, New York was a natural place to go, but I never worked there. It just felt like a place that was externally very pressurized. You had to conform to the external pressures that dictated your daily life. Your rent was $4,000 to $6,000 a month for craziness for like a walk-up in Hell’s Kitchen. Social structures were fairly set, like, you had to go to the Hamptons in the summer or something. There were these weird things that felt very dictated and you had to fit and you had to climb the pyramid schemes that people had established for you. Otherwise, you were out.
What made [Silicon Valley] really attractive was it was a one giant incubator as a society, with a lot of pay-it-forward forward culture and a low cost of trying. Now I’m worried about all three of those.
I’m not saying that just by moving, that gets fixed. That’s facile. But if you conclude that this is an issue that you need to think through, and try to find thoughtful ways to get around, you have to enlist every ally you can. And one of those allies might be reducing unidirectional environmental noise, and having more voices that you can listen to and being exposed to more lived experiences that are varied. . . It builds your capacity for empathy, and I think that’s important for good investing and being a good founder.
TC: What are your early impressions of Austin?
AJ: It’s a great town. Everyone’s been super friendly. I get to wear my cowboy boots. You can actually do a four-hour tour of food trucks without running out of food trucks. Also, most of the people I’ve met are registered Democrats and like, half of them own really nice guns. And these are not considered contradictory at all.
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