4.10 | 05.18.21
Venture capital is the fuel powering most technology startups. Behind every Google or Uber or Snapchat is a syndicate of venture firms hoping for outsize financial returns. But the vast majority of venture capital goes into Internet, mobile, and software companies where consumer demand and the path to market are plain.
So what happens to entrepreneurs who have risky but potentially world-changing ideas in areas like zero-carbon energy or growing replacement human organs? If it weren't for an MIT-born venture firm called The Engine and a tiny handful of other venture firms tackling "Tough Tech," they'd probably never get their ideas to market.
VCs love to cultivate an image of themselves as risk-taking cowboys with a nose for great ideas and the ability to help book-smart inventors and programmers grow into savvy entrepreneurs. But in reality, the industry has spent a quarter century chasing Google-sized returns in relatively safe, efficient, and low-cost businesses such as consumer and enterprise software, mobile apps, and, to a lesser extent, healthcare and drug development. And sure, smartphones and apps are fun. But how much is the next new video-sharing app or gaming platform going to contribute to human welfare?
The Engine, created by MIT in 2016, is one of the visionary counterexamples. Among the startups it backs is Commonwealth Fusion Systems, which is building a new kind of "tokamak" reactor and believes it can demonstrate the feasibility of net-positive-energy fusion to power the grid within the next few years. Other portfolio companies at The Engine are tackling thorny problems like reducing food waste, replacing silicon chips with faster photonic ones, and building better batteries for grid storage of power from wind and solar installations.
Such ideas have come to be known as Tough Tech because they often need more capital, more time, and more expert input to get to market. In this week's episode you'll meet Katie Rae, CEO and managing partner at The Engine, who leads us on a wide-ranging discussion of topics such as
the ways Tough Tech companies could change the world
the causes of government and private underinvestment in these areas
the challenges of evaluating and managing Tough Tech startups
the prospect of expanding government support for high-risk innovation
the reasons why institutional investors who could just as easily put their millions into software-focused venture funds might want to consider Tough Tech instead.
Rae thinks The Engine can outperform traditional software-focused VC firms—even though its companies face higher hurdles—because their chosen markets are more wide-open and the payoffs could be so enormous. "I don't think there's any reason that I should say to my investors, 'You should expect less of me.' In fact, maybe they should expect more of me," Rae says. "And they should also expect that what we invest into, they feel incredibly proud of as well—that they backed a company like that, that had impact on the world."
Mentioned In This Episode
Marc Andreessen, It’s Time to Build, Andreessen Horowitz, April 18, 2020
A Foundational Technology Development and Deployment Office to Create Jobs
Ólafur Elíasson's Untitled (Spiral) (2017) at The Lonely Palette
Further Reading
Wade Roush, Who’s Brave Enough to Invest in Saving the Planet?, Scientific American, April 2020
Chapter Guide
00:09 Soonish opening
00:27 Imagine a Future Where...
01:50 How Venture Capital Lost its Way
03:56 Marc Andreessen's Change of Heart
04:50 The Engine's Unofficial Origin Story
06:07 Introducing Tough Tech
06:51 Katie Rae Tells he Engine's Official Origin Story
08:37 How The Engine Runs
11:18 What Tough Tech Means to Katie Rae
14:17 How The Engine Is Different
16:26 Midroll Message: Support Soonish on Patreon
17:31 The Tough Tech Poster Child: Commonwealth Fusion Systems
24:13 The Case for Public and Private Investment in Tough Tech
27:03 Life Sciences at The Engine
29:46 Overinvesting in Bits, Underinvesting in Atoms
31:33 Shifting the Policy Conversation in Washington
34:20 The Return on Investment from Tough Tech
36:42 End Credits
37:09 The Lonely Palette Goes to Iceland
Notes
The Soonish opening theme is by Graham Gordon Ramsay. All additional music by Titlecard Music and Sound.
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Full Transcript
Audio Montage: We can have the future we want, but we have to work for it.
Wade Roush: You’re listening to Soonish. I’m Wade Roush.
Try to imagine a future where thermonuclear power provides all the electricity we need energy while emitting zero carbon.
Where robot cars understand the intentions of human drivers so deeply that they can drive safely alongside us on the same highways.
Where we can use electromagnetic waves to blast through rock and drill deep enough to tap the unlimited geothermal energy of the earth’s mantle.
Where we can use ultrasound waves to push drug molecules into the specific cells in our bodies where they’re needed.
Where we can replace the silicon semiconductors in our devices with photonic chips that are thousands of times faster and more efficient.
Where we can engineer human cells to build replacement organs.
Those futures sound like pure science fiction. Like the kind of thing you’d see in Tony Stark’s lab in a Marvel movie. But every single one of them is a real project funded by a venture capital firm called The Engine based here in Cambridge, Massachusetts.
Now, if you know anything about venture capital, you may be wondering if you heard me right. Because the truth is that when you hear the term venture capital these days, you think, oh, those are the guys who invest in fizzy new ideas like electric scooters and video sharing apps. You don’t really think of VCs backing ideas that are so grand and so ambitious that they could actually change the world.
But here’s the thing. When financiers started the first venture capital firms back in the 1960s, they really did put their money into risky new concepts like factories to build integrated circuits. That’s how it got the name “venture.”
Alas, I’ve been covering venture capital for a long time, and I got to watch up close as a strange new obsession spread through the VC business. Starting in the late 1990s and early 2000s, the partners who run most venture firms realized that software was eating the world, to paraphrase a later remark by Netscape co-founder Marc Andreessen. So they began to invest in software and Internet startups above all else.
And to be clear, they did it because it made financial sense. Just look at Google. Today the company’s worth one point six trillion dollars and has more than 100,000 employees around the world. It dominates the market not just for online search but for advertising and email and translation and mapping and video and mobile phone software.
But all that sprung out of the work of just two Stanford computer science grad students, Larry Page and Sergey Brin. They got started with $100,000 in capital from a German hardware engineer named Andy Bechtolsheim, followed within a year by larger sums from famous venture firms like Kleiner Perkins and Sequoia Capital.
As Google and other early Internet companies grew and went public, they transformed those relatively small early investments into payoffs that were so gigantic that they changed the whole way venture investors think about risk and reward. Essentially, the Internet and mobile revolutions made venture investing seem easy. When you can place a bunch of small bets on tiny teams of programmers, and at least some of those programmers end up reaching millions or billions of customers, why would you put your money anywhere else?
And that, my friends, is how we ended up a world where we can all play Clash of Clans on our phones while we wait for DoorDash to deliver dinner, but we don’t still have fusion power or flying cars.
But today, even Marc Andreessen, who now runs the huge VC firm Andreessen Horowitz, has had a bit of a change of heart about the primacy of software.
He said in an essay and a podcast in April of 2020 that Western institutions failed to anticipate or prepare for the coronavirus pandemic because we’ve forgotten how to build actual stuff, like ventilators and protective equipment.
Marc Andreessen, from the A16Z Podcast episode Time to Build: I think building is how we reboot the American dream. The things we build in huge quantities, like computers and TVs, drop rapidly in price. The things we don’t, like housing, schools, and hospitals, skyrocket in price….Building isn’t easy, or we’d already be doing all this. We need to demand more of our political leaders, of our CEOs, our entrepreneurs, our investors.
Wade Roush: I think he’s right. We do need to demand more of our investors. And that’s why I’m so fascinated by The Engine.
Here’s how I would explain the unofficial history of The Engine. I’m speaking here as an outside observer, though for full disclosure, I should say that I used to work at MIT and I still do some consulting work there.
Back in the early 2010s, the leaders of the Massachusetts Institute of Technology looked at how many young people who wanted to be entrepreneurs were choosing to attend Stanford instead of MIT. And they were also looking at how many of MIT’s own graduates were immediately leaving the Boston area for Silicon Valley, to work for venture-backed startups and tech giants like Google.
Stanford has the advantage of being located right next to Palo Alto’s Sand Hill Road, which is basically the world headquarters of venture capital. And so MIT realized that it would probably be smart to do something to boost the tech investing ecosystem in its own back yard here in Massachusetts. They decided to spin off a new venture capital firm that would be right down the street from MIT and that would fund ideas and teams coming out of MIT and other local universities.
But they didn’t want it to be just another Silicon-Valley-style VC firm obsessed with software and drug development. They wanted to focus on the kinds of technologies that weren’t winning investment and weren’t being spun out, or translated, from the lab to the marketplace.
Katie Rae: If you were looking at what was actually translating, what you'd see are these two very interesting trends.
Wade Roush: This is Katie Rae. She’s the CEO and managing partner at The Engine.
Katie Rae: You'd see pharmaceutical and software getting plenty of capital, lots of translation there, and then you would see everything else really on a downward trajectory, much like U.S. R&D spend has been on a downward trajectory over the last three decades. So you'd see a lot of correlation there.
Wade Roush: And that everything else, just to be clear, could include everything from material science to chemistry to aerospace.
Katie Rae: Aerospace. What we call Tough Tech.
Wade Roush: I caught up Katie on Zoom a couple of weeks ago, and I asked her to give me the official version of The Engine’s origin story, which revolves around this whole idea of Tough Tech. It’s not just a fun alliteration. To the folks at The Engine, it really means tough, as in: not easy.
Katie Rae: So these are things often with a physical instantiation. They require a true technology breakthrough to be an important company, and they often take slightly longer time periods and more capital to get to market. So they're in what we call Tough Tech. You would see that there was less and less funding over time, which means that these things that could have an impact on our world's biggest problems aren't getting to market…MIT, its mission is impact. So they care about having a positive impact on these really big problems that we're facing, like climate change or many areas of human health or how we're going to feed the world or how we're going to have clean water for the world, et cetera… So that is the reason The Engine was formed, was really to have a material positive impact on the world in these areas of breakthrough science that that could create foundational technology companies of the future. So it's both an economic impact in this region, an impact to the world on solving big problems and and creation of true long term foundational tech companies. That's what we're doing here.
Wade Roush: In some ways the Engine works just like every other venture capital firm. it’s got a managing partner, that’s Katie Rae, and two general partners, Reed Sturtevant and Ann Dewitt.
And the partners have three main jobs. The first is to go out and raise the money they’ll need to invest in startups. They do that in batches called funds, and the people and institutions who invest in each fund are called limited partners or LPs. The Engine raised $205 million for its first fund back in 2017 and another $230 million for its second fund in 2020. Its LPs include both MIT and Harvard.
The partners’ second job is to choose which companies to invest in. The Engine used its first fund to invest in 27 early stage companies and it’s brought in five more companies so far through its second fund.
The partners’ third job is to make sure the companies in their portfolio grow and succeed. The Engine puts more work into that part than just about any other venture firm I’ve seen. They kind of have to, because by definition these Tough Tech startups are tackling hard problems.
Wade Roush: And just to give listeners a picture of basically where you are and what kind of home you have, you've taken a couple of buildings in Central Square and renovated them. And you've created this beautiful and highly functional lab and office space. And can you just tell me a little bit about that?
Katie Rae: This is so important. You know, the companies that we work with, there are very few places that they can found because they are really almost always at the convergence of different technologies. And that means they need very different types of lab space. Often, like in our parking lot, we have a truck that's a self-driving truck. So they go they run down to the machine shop, make parts, run back to the parking lot, and then they're quickly on the highway to test it. Right. Or our fusion company, Commonwealth Fusion, like they had a place to assemble the magnet. And and so you have to have space that is super flexible and can allow you to do those things. So that's the kind of stuff we do here. Super fun, super differentiated, and lots of people with deep expertise in other areas. So many of our companies end up helping each other in areas that they don't know as well. I love being here. It's so much fun to walk, watch the teams, get to know each other and work together.
Wade Roush: I love the offhand casual way you just mentioned, "Oh, our fusion company needs a place to put together their magnets." We're going to come back to all of this stuff, especially Commonwealth Fusion…So but to start, …[00:13:40] what does Tough Tech mean in your mind?
Katie Rae: Yeah, so it is breakthrough technology. So it is a true step function, at least a step function better than anything that's existed before. It is born out of research almost exclusively. Right. So you actually have to be exploring the edges of what is possible. But it is that combined with the leadership that you need to actually grow a Tough Tech company. Right. So just invention is not enough. Tough Tech means you're going to grow a big company and it's going to be defensible. That's what that's our double use of tough, like, it's hard, but it's also sustainable. Like it's real. It's a deep breakthrough. And so that's how we think of it. And it's going after a tough problem. Right. So it's all three uses of that word.
Wade Roush: Was that there from the beginning or how did you how did you settle on that idea and really crystallize that idea?
Katie Rae: Yeah, I mean, I think certainly that has been part of the mission from literally day one. I would say we refined that over time. And, you know, I mean, if you're if you're MIT, you know, the endowment backs lots of venture capital funds, so we're not really trying to directly compete with that and we're looking for an area that we really can serve that very few other people can, right? I mean, that's otherwise MIT wouldn't do this, right? They didn't need to form just a regular venture capital fund. So the point here is that it is something different. It is something that is unserved in the market and therefore an opportunity. And that that is that is why we settled in this Tough Tech area, because it requires many of the resources that you could only get through deep partnership with either a university or a national lab. And by the way, MIT has both….And so if you look at kind of our own mission statement, it is to be the home for Tough Tech founders. And that means a place that people are willing to take risk, a place that they will be a mission aligned to the impact to the world and a place that they can get funded and truly build their companies. Like that's what we're up to.
Wade Roush: It does feel to me like one of your founding propositions there is that Tough Tech startups need well, they need a longer runway, for one thing. Right. Because it's going to take longer to prove the idea out sometimes. And they're taking bigger technical risks, so. By definition, a lot of investors are going to be scared off, and I just wondered if you could explain…how you see The Engine as different from a traditional venture capital firm. I mean, if I were to sum it up, I would probably say something like traditional VC has a much smaller risk appetite and much shorter timelines, and they can see how much money you can make in software. And obviously th at's the direction you're going to go if you have some money to put to work and you need to earn some money for your LPs, that's sort of what you have to do.
Katie Rae: Well, it's interesting because I think if you look at the true Tough Tech firms, they've done very well over time. You look at Lux Capital, you look at, you know, Founders Fund, Arch Ventures, you see a lot of really excellent returns. But there are very few firms like this because it's hard to put them together. Think about all the venture capital funds investing in software. They're all competing with each other. There's a thousand of them right there, like five of us and a thousand of them. So if you think about risk adjustment, you might not want another software venture capital fund. Right. And so our timelines might be slightly longer, but there's also huge upside, like we're talking about companies that have the potential to be trillion dollar companies. This is not small markets. Right. You're talking a dominant fusion company could easily be a trillion dollar company. So there's massive returns. Right. So, you know, everyone tries to simplify it and say software is easier. It's not necessarily true. It's also highly competitive. This has other things that are more difficult. But we have a big, wide open space with gigantic markets to go after if the technology works, right? So it's just a difference in risk. And that difference sometimes makes it hard for limited partners to evaluate. But once they do, they often see, oh, this is highly differentiated from everything else in my portfolio, I want a piece of that. And so those are the types of people that we partner with.
[Musical break]
Wade Roush: If you’ve made it this far into the show, I know you’re a committed listener. So this is the part where I ask you for some help. Soonish is an independent podcast, meaning it’s funded by me, not by a public media station or a giant streaming audio network. I love that independence, and I do have a few ways to cover my costs as a freelancer, including my writing gigs and the audio production work I do for other shows. But your donations also make a real difference.
So if you like this show and you care about independent podcasting, please go to patreon.com/soonish and sign up to give $5 per episode. At that level you’ll get early access to every new episode of the show. At the $10 per episode I’ll send you the Soonish coffee mug with our Season 4 motto and logo. And at higher levels we have even cooler benefits. Find out more about all of our rewards at patreon.com/soonish.
[Musical break]
Wade Roush: It seems to me that when we're talking about Tough Tech, if you looked through your portfolio of, I guess, 27 or so companies that you've invested in so far, there is, in my mind, a poster child for this whole concept of what makes an investment risky and what makes it tough to get to market. And in my mind, just because I'm kind of an energy geek, it's Commonwealth Fusion Systems. And so they probably come up all the time as the the sort of like, the best example of the kinds of firms you're trying to get off the ground, but they are a good example. So can you tell me a little bit about Commonwealth Fusion and what made them investable from your perspective, and what you can do to help a company like that?
Katie Rae: Yes. So listen, for those that don't know, Commonwealth Fusion is, they are a company that spun out of MIT and they were basically the plasma fusion science center, 50 years of Tokamak research, which is the structure of the actual power plant that they're going to build. So it's a series of magnets that basically form a circle that create the plasma or the energy that can power the grid.
Wade Roush: I’m going to jump in here with some nerdy details about fusion, because… I know you love it!
Tokamak is a Russian word and it describes the dominant style of fusion reactor that engineers have been studying for decades. To make atoms fuse together you have to heat fuel to such incredible temperatures that it becomes a plasma.
A tokamak reactor uses powerful magnets to contain the plasma in a torus or donut shape. But it takes a lot of energy to create and confine the plasma. And the hardest thing about building a practical tokamak reactor has been finding a way to get more energy out than the energy you put in.
Commonwealth Fusion used a new high-temperature superconducting material that lets them build magnets that are smaller and more efficient than those in previous generations of tokamaks.
They’re using those magnets to build a compact demonstration reactor called SPARC. The engineers at Commonwealth think it’ll be able to generate twice as much energy as it consumes.
Katie Rae: OK, so this was an unbelievable set of PhDs, postdocs and professors who were all mission aligned to create what we call net positive energy. So it's more energy produced from the power plant than it takes to cool it. So that's been the problem with fusion. So when they came up with a new material and in a slightly tweaked design, you know, the issue was could they actually build it? Would the material work? Could they build it and could they get to net positive energy in the next 15 years? Those were all kind of the technical questions that had to be answered, because actually the business case for it is quite good and quite robust. But in order to evaluate that set of risks, that is an enormous, I mean, that's an enormous amount of data to collect, really to understand from the team. And I think that's our problem in getting to investability for a company like that in the first round.
Katie Rae: So think about it this way. What's the joke of fusion?
Wade Roush: It's always 30 years away.
Katie Rae: Fine. Great. You know the joke. There's the punch line. It's always 30 years away. So then it's basically like, all right, well, how do you prove you're not? And so Bob Mumgaard, who's the CEO, absolutely fabulous human being wicked smart. He knows this like he's been living as a grad student, a Ph.D. in postdoc in that joke for, you know, eight years or whatever. And so he knew right away I have to get people to see that proving this is not eight years away. It's probably three to five. Most people can handle that level of risk. And so the whole first round was all about building the first magnet to prove you could get to net positive energy. So that was, you know, the first couple hundred million bucks we raised, he raised was all about that. And so when we were evaluating what we were basically evaluating was could he get to the first magnet? How much money would that take? Could he get the team there? And then once he could get to the first magnet, was the Tokamak buildable in eight to 10 years? So if you had a ten year time horizon to basically, in our mind, become a public company, you could probably back a company like this. And so that's what we had to figure out in diligence.
Katie Rae: And the answer ended up being, yes, for us. And so we invested into the first round and I sit on the board of Commonwealth Fusion. It's an unbelievable company that will be, uh, MIT should already be proud of and is. But this region should also be proud of because, you know, if we can really develop and be the place that fusion power gets developed, that will have ramifications for the world, but also this region. And so that diligence process, while difficult, if you hold out what impact you could have if you can get this company off the ground. It's worth doing it right, it could be a 1000x return for us. Awesome. You should be able to put in that diligence all day long if you think those are your odds. And so that means that you hire PhDs. You you work with world experts who are all going to disagree about it. And then at the end of the day, they fight it out. And you make your judgment on, you know, are they breaking any fundamental laws of physics? Will they be able to assemble the team that could build the first fusion power plant? And then if they can do that, the last piece is how do you make the money off of it? You know, how do you get your slice of the proceeds? Essentially, that was the easiest part to prove. And when we got to yes, on both of all three of those, we wrote a check. I sit on the board. What we do with that company and work with that company is on anything they need. It might be facilities. It might be strategy, it might be biz dev, might be hiring and firing. It might be creating a comp committee. I mean, all the things that a founder CEO needs and we just try to prioritize, Bob, how can we help you?
Wade Roush: You know, if you rewound the clock a few decades in the U.S. to, say, the 60s or the 1950s even, and you started talking about something like fusion, hey, let's figure out nuclear fusion. I think the answer, if you're trying to put resources behind a big project like that, a big, gigantic social investment that could change the world, the answer would be the government should fund it, obviously. And that's the way most things did work in the U.S. until maybe the 70s or 80s. So what is the case for funding these things through the private investment market? …Do you feel like you're having to make up for a failure of vision at the government level, or is there a positive case for why these things should be coming out of the private sector?
Katie Rae: Yeah, I mean, I think it's all timing. First of all, you could not have invested in Commonwealth Fusion 10 years ago. The research wasn't there yet. They had not gotten far enough for this to be a company. …It still needed to cross a certain threshold to be investable. So the U.S. government did all that work. I mean, all of that was funded by the U.S. government. So I don't think it's as simple as an either-or situation. I mean, we can't invest into things until they are ready to truly translate. Certainly, the science needs to be proven. We can take engineering risk, but the science needs to be proven. That is almost exclusively done by U.S. government and philanthropy. And I think philanthropy has been making up for some U.S. government non-investment areas. But I would not say venture capital is . We are at the next phase, which often the U.S. government used to invest into this kind of engineering, you know, risk. And they still do. It's just not enough. And you could look at the semiconductor industry and say the U.S. has completely missed the mark here. Private investment was not enough, that we have been losing market share rapidly for decades and losing it and may certainly have lost, you know, this round to Asia and China. And so the U.S. government has to intervene. So but it's a complicated set of, I think, calculus about when should the U.S. government intervene and when should private industry do this. So I think it's all about once the science is proven, then the U.S. government can be a partner to venture capital and different forms of capital. I think that's really where we are.
Wade Roush: With all this talk about tokamaks and self-driving trucks, you might get the impression that tough tech is only about hardware.
But it’s not. The Engine also invests in companies working on problems in chemistry and materials, like how to build batteries that could store energy from renewable power, or how to extract lithium from brine more efficiently.
And at least nine of the companies funded by The Engine are in biotechnology and the life sciences. That definitely makes The Engine an outlier in the venture capital world, because most VCs invest only in technology or only in life sciences, rarely both.
Katie Rae: I'll give you an example. A woman Nabiha [Sakleya] runs a company called Cellino Bio. And they she's a physicist by training. She's partnered with a guy who came out of the semiconductor industry and a biologist. And essentially what they said is there is no reason at this point with how accurately we know how to use lasers, that we can't control cell development and create sheets of cells that could be used to replace different body parts. Like there are so many diseases that we cannot fix or cure with the drugs that we have. So think of macular degeneration. Almost everybody over the age of 70 starts to get some kind of mac-D. We have no cure for. We can kind of slow it down, but there's no cure for it. If you could literally print the rods and cones and create the cells that would replace the back of the eye, you could restore vision for people or think about all the other areas that if you had. True. High throughput manufacturing of cells, what you could do, but it takes that convergence of a biologist, physicist in a semiconductor person to get it right repeatedly, to really understand with lasers how to control these cells. And then a biologist to help you think about what are the different kinds of cells that have to go together to create the back of the eye is one example. They can do lots of different things. But that's an example that probably most people could understand. That's where we are today. And that is a form of biology and company platform company that could attack many different disease forms that we are so excited about. But it does take longer than a year to get to market.
Wade Roush: It's safe to say that almost any idea that can really change the world is going to take longer than a year to get to market.
Now, in this episode I haven’t been trying to hide my own point of view.
Venture capital is the one sector of our financial system that’s supposed to be about taking big risks and supporting bold, world-changing ideas.
But sometime around the dot-com boom, it got sidetracked. And it’s spent the last twenty years chasing Google-sized returns in the world of bits instead of the world of atoms.
Don’t get me wrong. There’s nothing wrong with bits!
For one thing, I couldn’t be making this podcast right now or sending it out to your gadgets without all the work Silicon Valley companies have done to put smartphones in our pockets and keep them filled with fresh audio content.
But we can’t invest just in bits, or we’ll wind up with a hollowed-out economy that can’t make progress meeting people’s basic needs.
That’s why I think the venture capital business should be putting more of its cash into areas like healthcare, energy, transportation, and climate.
And so should the U.S. government. Under the Trump administration federal investment in R&D as a share of the overall economy had dropped to its lowest level in 60 years.
That’s a huge mistake, because almost every time the government has backed big ambitious technology programs, whether it’s developing new vaccines or building a space station or organizing robot car races in the desert, the payoff has been enormous.
Private investment can’t make up for all the missing federal R&D dollars, but it can help.
I’m excited about The Engine because it’s one of a handful of venture firms that are pushing in the right direction, toward solving problems that really matter to our future.
And under President Biden it looks like we might finally start to see growing investment in R&D and infrastructure technologies for the first time in a generation.
In the last part of my conversation with Katie Rae, I asked about the work The Engine is doing to shift the policy conversation about federal support for innovation. And I also asked her whether she thinks that in the end, investing in Tough Tech companies can be just as profitable as investing in the Googles of the world.
Wade Roush: I know that The Engine worked with some scholars at the Kennedy School at Harvard on a white paper recently called Building a 21st Century American Economy. And also you came out with another white paper that suggested that the Commerce Department set up something called the Office of Foundational Technology Development and Deployment. And I love that idea. So I just wondered if you could summarize what was the gist of those white papers? And do you feel like there is a growing audience for this argument in Washington right now?
Katie Rae: Yeah, I think I think there are a lot of people interested in that. So it's basically, hey, how can the government be a partner for rapid growth of important technologies and important companies. T hat is a bipartisan issue. It's motherhood and apple pie to both sides. Like who would say no to that? It's like, yeah, do we want to grow the next generation economies here? Of course we do. So everybody wants that. The question I think was, was there the appetite on the government side to be creative about how to partner and to put capital at risk to scale these companies? I mean, that's what both were about. And one was a very specific proposal about how the Commerce Department could help to fund scale-up of these companies and partner deeply, you know, with the venture capital world. And we're just saying, hey, guys, we should take more risk here so that you actually have more success. You might have a few more failures, but you could have wild success in helping many, many Tough Tech companies scale. And so that those were are basically proposals.
Wade Roush: Do you know of anything happening, anything concrete, anything moving through Congress that would directly help Tough Tech?
Katie Rae: I think there are many things that will be that will look like scale-up funds, that will look like loan programs, that will look like more dollars into kind of translation stage. All of that is happening and in a very, very exciting way. I mean, there are lots of proposals out there about how to have innovation centers all over the country and with our national labs. So, like there are many, many proposals out there. I don't know specifically what we'll get through, but people are thinking extremely ambitiously at this point.
Wade Roush: Let’s come back around to the beginning.I think when you strip venture capital down to its sort of core, it's always been about providing a way for investors to put some of their money into somewhat riskier investments. Right. If you're trying to diversify your portfolio, you want some of your money to be in really safe places and you want some of it to be in a riskier place where there's a higher potential return. So that's why VCs exist. … Which means you are on the hook to your investors, your LPs, your limited partners. And if you invest in too many risky startups that all wind up blowing up, you failed, your LPs lose their money. And, you know, you go out of business, in the worst-case scenario. Right. So I'm just curious, like, whether you feel that your investors have the same expectations, or would they be okay if The Engine didn't return at the same rate as other venture firms? Do you really feel like you're playing by the same rules or are you trying to create a different set of rules and expectations?
Katie Rae: No, I am shooting for top quartile returns, no doubt, and I think very possible. So this is this is where we get the simplification of risk wrong. So if you think about what I'm doing versus maybe what other venture capital funds are doing, I might have a longer time frame to market, but I am going after a bigger market….And so I don't think there's any reason that I should say to my investors, you should expect less of me. In fact, maybe they should expect more of me. And they should also expect that what we invest into, they feel incredibly proud of as well, that they backed a company like that that had the impact on the world, plus the returns. And so that's what we're shooting for. And and I think our investors are very aligned to that. And listen, look at where, look at where I'm fishing, I'm fishing at MIT and in the Boston region, I mean, these are some of the smartest people in the world. Why should I expect lower returns? And that that's how I think of this.
Wade Roush: That's a great way to think of it. Thank you, Katie. This has been really fun and I really appreciate your time.
Katie Rae: So nice to see you.
Wade Roush: Soonish is written and produced by me, Wade Roush.
Our intro theme is by Graham Gordon Ramsay.
Out outro theme and all the other music in this episode is from Titlecard Music and Sound.
You can check out a transcript of this episode and links to more resources on our website at soonishpodcast.org, and you can follow the show on Twitter at soonishpodcast. And you can learn more about The Engine at engine.xyz.
Soonish is a proud founding member of Hub & Spoke, a nonprofit collective of indie producers making some of the smartest audio stories out there.
And this week I want to tell you about a mesmerizing episode of The Lonely Palette, the show from art historian Tamar Avishai that makes art accessible to non-experts.
Before the pandemic, Tamar went on a family trip to Iceland and visited the studio of sculptor and mixed-media artist Olafur Eliasson in Reykjavik. She made an episode focusing on specific Eliasson sculpture called Untitled (Spiral).
[Lonely Palette episode excerpt plays]
To see the mysterious object these folks are talking about, go to thelonelypalette.com. And find out what the rest of the collective is up to these days at hubspokeaudio.org. That’s it for this episode. Thanks for listening and I’ll be back with a new episode….soonish.
