EP4: Arkady Kulik - Deep Tech investing frameworks

Martin Tobias (00:00.253) Hour. Hello, everybody. how are you? I'm Martin Tobias, the managing director of incisive ventures, and this is another episode of The First Bet where we talk to people about making capital allocation decisions in low information environments with lots of uncertainty. I've done that as a pre-seed investor, as a poker player, as a CEO, and we try to find the smartest people we can to talk about that. And today I have my friend.

Arcady, who's a deep tech VC, and I'm really interested to talk to him because he making decisions in deep tech are is I think very different from making decisions that I do in in in software companies. So I wanted to welcome you, Arcady, to the first bet.

Arkady (00:48.834) Martin, thank you very much for the invitation. I love the chance of being here and I'm happy to talk to you about any complicated life decisions that I made or will have to make in the future.

Martin Tobias (01:01.823) Yeah, so what what I'd like to do is ask you the question, you tell me about one investment you made in a company, how you met the founder, what information you had. Let's start there. you know, what size check you wrote or whatever. but let's get into the information that you had at the beginning and some of the frameworks that you use to decide to write the check, because there's a lot of uncertainty early. Maybe just

and we'll talk the the whole conversation kind of around that that one decision that you made.

Arkady (01:40.941) Would you like an example from in the earliest days of my VC career, or would you like an example from the freshest, from the the the most up to date?

Martin Tobias (01:49.275) Which whichever one you want. Maybe maybe the maybe a little bit older one, if if the d if the way you made decisions is is similar now, or maybe an old one and a new one and tell me the differences if you've learned anything and are making decisions differently now than you were maybe five or ten years ago. That could be interesting.

Arkady (02:09.862) That that is exactly the the idea here. So let

Martin Tobias (02:12.339) So let's talk about two of them then. Let's talk about the old one and then let's talk about a new one. And yeah.

Arkady (02:15.531) Sure, sure. and I will use those I will give two examples. One of them will be more on the kind of n that didn't play out as I expected it it to play out, and what kind of risks I saw and what kind of risks I have omitted and I didn't realize they're they were important. And I will talk about something that we have made recently, the the more recent investments and how that played out a little bit better.

Martin Tobias (02:45.232) Okay.

Arkady (02:48.309) I'm not gonna name the company that I don't think is doing really well, really not so well. So I'm just gonna tell you the story.

Martin Tobias (02:48.882) It's fine.

Martin Tobias (02:54.041) I think no one is

Arkady (02:59.561) I get the company as I usually get it into my pipeline. I start looking at the deck, it sounds very interesting. They're doing th they're trying to solve one of the critical problems around energy, energy space in the world, energy storage specifically. And we are working together, we're doing the deep diligence on them, scientific diligence, technological diligence. We actually fly to their site with my p partner.

Martin Tobias (03:09.068) They find this one for critical problems around energy.

specifically and we're making logicians with scientific developments, technological dealers, we actually fly to the site, we might partner, we meet together with one of all those things. We spend a day in the farm that is, you know, we check everything well, it's a real device, we will probably customers.

Arkady (03:27.902) We meet together, we talk about all of those things. We spend a day with the founder and and his team. We check everything out. It's a real device, real problem, real customers.

We talk about everything, they make sense, and we do the investment. We underwrite the the size of the problem, classics, right? The the size of the market. We underwrite the groundbreaking technology. Is it there? Yes, it is there, and it is it is still there. And we underwrite the founders, their capabilities, their resilience, their greed. Can they deliver?

Martin Tobias (03:41.902) No problem is that we do the best. When you write the company technology, what's it there is still there? And we are inviting the farmers their capabilities, their groups can be different. But everything is property.

Arkady (04:03.731) Seems like everything discovered. The one thing that we have completely missed is the size of a venture scale ambition that the team had, or in that particular case, did not have. So I'm coming there with my entrepreneurial background, right? I'm an entrepreneur since I was 18, for 20 plus years at that point. And I'm like, is it a good entrepreneur? I'm like, yeah, for sure. Is it a solid team? 100%.

Martin Tobias (04:10.288) Ventures if you want to addition. Mm-hmm.

Martin Tobias (04:23.236) Yes.

Arkady (04:31.014) The thing that I did not ask myself back then was

Martin Tobias (04:33.279) I depend on who was

Arkady (04:36.89) Is it a good entrepreneur to run a venture scale business? Because and this is a very fine distinction between being a really good and strong entrepreneur who can build a lifestyle business, like a restaurant or hotel or something that you you manage on a daily basis. And I'm one hundred percent sure that this company isn't gonna do really well for the founders. They they're already in in good revenue, they will probably hit several tens of millions of revenue soon. I just don't think it's gonna be a unicorn.

Martin Tobias (04:37.644) It's

Martin Tobias (04:44.546) Between being a green business, but not going to build a lifestyle business.

Arkady (05:06.191) I don't think they will be the people who will return my whole fund. So are they gonna do well? Sure. Is it gonna be a good investment for me? Maybe not so sure.

Martin Tobias (05:07.259) Right.

Fine.

Right stuff for you.

So did you do that in a prior fund or was that an angel investment? It was in a prior fund. So it was in a venture fund, but so something you might have learned as a venture investor is that you need to back founders that are not just good in big markets, but that have the ambition that's big enough to get in there. I've I've seen plenty of them where they they they end up I think it's going to be a lifestyle business. and

Arkady (05:22.439) Yeah, it was in a prior font, in my previous font. Mm-hmm.

Martin Tobias (05:47.413) I it it that's a hard thing. So so you would have on that one wished you had spent more time on on diligencing the the size of their ambition. Was was do you think it was related to the the founders' ambition or the market's exit? Because the other side of that is it's some of these things that get built, that could be good businesses.

may not be valued well at the exit. Like, you know, a a lot of these software companies I'm looking to they're turning into software as a services business are end up being services businesses. And services businesses are, you know, trading at two or three X EBITDA versus 15 X EBITDA on a software business. So even if they build a successful business that's profitable, the exit multiple is not there. So in this company, was it more the founder's motivation or more the market's

ability to pay for that innovation that was the issue.

Arkady (06:46.47) think it was more more more on the founder side of things. I think this is one of the one of those situations when the founder who

Arkady (07:03.493) I think the founder would be content and happy with the with the outcome, even if it's not a venture scale size outcome. And I I think it's it's an important thing, yeah.

Martin Tobias (07:13.199) Yeah, yeah. Cause they they they probably ended up owning most of the company anyway, like versus the venture people, right? So that that's one thing that as venture capitalists we need to look at. The I mean I've funded six companies that became unicorns and all six of the founders are billionaires and I'm not. I made less money than they did in in those deals, as it should be.

Arkady (07:21.966) Mm-hmm. Mm-hmm. Mm-hmm.

Arkady (07:37.156) I think it's fair. I think it's that that's how it should be.

Martin Tobias (07:42.739) It it it it is fair, but you you need to have someone that that that that that wants the to to work as hard as it's gonna be to make themselves so much money because you're gonna make a fraction of their money. And if they have lower ambitions, yeah. So that's one thing. So tell me about the second one that you made.

Arkady (07:57.783) Yeah.

Your fund your your your fund is gonna make a fraction of their of of their money. And then you as a manager is gonna make a fraction of what your fund is gonna make.

Martin Tobias (08:04.67) Yes. Your fund is gonna make a fraction. Even smaller fraction of that. That's true.

Arkady (08:11.779) You're gonna get a fraction of a fraction at the end of a day. So yes, the the ambition really is important.

Martin Tobias (08:14.418) Okay. So the the the the way you're underwriting it was founder, team and market and the product did it work? And all those things were yeses, but there was something that you missed. So tell me about your second example that was more recent and how you underwrote that one, either the same categories or different or

Arkady (08:39.927) I will I actually while we while we were talking about that, I decided to give you an example around the same timeline, which which I did in investment roughly around the same time. and where I would argue people in general see that industry is more risky one. This is a medical device. This is a neuromodulation halo that goes around your head. And when people hear medical device, they're like immediately FDA, regulation, like no no no no.

Martin Tobias (08:47.121) Okay.

Martin Tobias (08:55.015) No.

Arkady (09:08.096) Not gonna touch it, so thank you. Thank you, no thank you. The

Martin Tobias (09:11.08) Thank you, Although.

Arkady (09:16.842) company itself is called Farion. It's led by Blake Gurfin. And we have been talking for a while before he even launched the company. I was the very first VC check in his firm. The interesting part about that is that when we've been evaluating that, he was coming with a proposal to use

Martin Tobias (09:17.56) Please.

Martin Tobias (09:24.178) We have been okay for a while before even launched the company. I was the very first to check with this program. Here's the important

Martin Tobias (09:42.504) Just the most.

Arkady (09:42.655) A very specific type of magnetic wave to heal inflammation and human tissue. And they start with the brain because it's the hardest one to treat with traditional pharma and other means to treat inflammation. So I think it's a good way to start. We've done a very deep due diligence again on the scientific side of things, physics of it, neuroscience of it. Special shout out to Richard Silberstein, who led it in my firm, my scientific partner. We have spent

Martin Tobias (09:48.294) But the very thing on this hardest one to treat both our and distributed connection. Maybe the list started. We've done a very deep detail again. special shot, which is interesting with that for sensitive part.

Arkady (10:12.053) I would say maybe more than ten hours in person or via Zoom net time before we made an investment with a founder. This is very rare. We usually spend three, maybe four hours with a with a founder before we make an investment. Y you know how it goes. Yeah. And

Martin Tobias (10:16.711) More screen and that's probably like

Martin Tobias (10:25.968) So you spend about three times more time. Yeah.

And why did you do that? What was it it was it the technical challenges around validating the invention? Was it the team? What were the things that were causing you to spend more time?

Arkady (10:38.95) It was it was the interpersonal connection with the founder. It was the specifics of a Russian dude trying to decipher the social code of an Italian American. And I I actually had a conversation with Blake at some point. We had lunch in Palo Alto, I believe, and I was like, man, I sometimes feel like there is a like a wall of ice between us, what's going on?

Martin Tobias (10:49.59) Yeah, because it's a better.

Martin Tobias (10:56.292) It actually happened to speak.

Arkady (11:08.263) I'm I'm I can connect to many, many different people with different cultures, Indians, New Yorkers, Los Angelitos, Angelitos was the right name for those. like different different kinds of people, even somebody from Spokane, even, right? And the

Martin Tobias (11:12.07) Yeah.

I have to look at something like that.

Arkady (11:28.147) This was an awkward conversation, Martin. Like, dude, I I don't get you. You don't get me, I don't get you. How can we do business together if we cannot communicate help in a healthy way? And this was something that was giving me the biggest pause. The the funny thing is that this investment was done even before my previous example. So this guy has a lot of ambition. Like this was never even a question. Like it's very clear that he wants to build build a multi-billion dollar company and

Martin Tobias (11:29.731) It's awkward.

Martin Tobias (11:39.053) This one's something that's okay.

Funny thing is that what's happening in this work are previous examples. So this guy has a lot from this company. This was never even a question of it. Very clear that you possibly look on building that ID and our company and ideally on the way by the world is simple people in a national

Arkady (11:57.914) ideally along the way find a way to heal people in a much more sane format. So in that particular case I've I've looked into that into in details and we have worked very hard to make sure that this is the technology is here, the market is here.

Martin Tobias (12:09.8) And then artificial that's

Martin Tobias (12:20.836) What you know the practical temptation has. And I said no, I think it was funny how to shoot the button. So is that particular one?

Arkady (12:22.651) That it's a real problem, and inflammation in the brain is a real problem that is persistent in many conditions, from concussion to Alzheimer's. And in that particular case, everything keeps playing out as it should be. They just clean finish their clinical trial. Number one, complete success. 80% patients report that everything is great. Then they're now doing the bigger clinical trial with Mount Sinai with open indication. So in that particular one,

I wanna say it was a much less obvious yes to me than the energy storage startup that I mentioned. Because so much regulatory risk, so much technological risk, because they're doing something never done before, the specific type of magnetic therapy. And yet

Martin Tobias (12:51.188) I wanna say much more than this yes about it. Because my budget was much like everybody's like, And you had the FDA, which is hard to underwrite. How how did you get comfortable with the FDA risk?

Arkady (13:14.18) Well, to mi.

Because we do a lot of in neur a lot of stuff in neuroscience, to me FDA is a given for many of my startups. So instead of treating it as a kind of a gate function, yes or no, I try to understand what does the founder think about it? How do they think about it? And kudos to Blake. He had his stuff together from day one. He was very clear on the FDA, he was very clear on the reimbursement codes, which is actually a much bigger problem than people realize.

Everybody's talking about FDA, but getting an FDA approval doesn't mean that you're automatically in money. You need reimbursement codes, you need to work yeah, exactly. Like 'cause if you lock yourself in the out of pocket situation, your your revenue is abysmally smaller than what you can get from from from insurance companies. So to me this was a more risky investment by every standard, like just the number of risks and the magnitude of those risks was much higher.

Martin Tobias (13:49.667) Reimbursed, yeah. Yeah, yeah.

Martin Tobias (14:04.192) Yeah.

Martin Tobias (14:09.417) It's a good

Martin Tobias (14:15.841) So how did you get over your personal the the the we're not meshing objection you had? Did did when you had that conversation it just worked out or the conversation you had? Yeah.

Arkady (14:17.038) And at the same time, the ambition of the founder, his passion, his resilience and ability to find new ways to figure out those problems, so far is working out even better than the energy startup I've mentioned.

Arkady (14:37.466) Just a conversation. Just a conversation. Yeah, Martin. I I I'm a big believer. Yeah. I'm a big believer in communication. Just talk to people.

Martin Tobias (14:44.821) So so so sometimes you could have an objection. So let's talk sorry, go ahead.

Arkady (14:50.69) I believe in communication. Just just talk to people openly about everything. We have the same rule with with my wife. If somebody is not happy with something, we just talk about that stuff. We don't hold any kind of negative stuff until it bursts in our faces. We we we try to make sure we talk about things openly.

Martin Tobias (15:02.891) Yeah.

Martin Tobias (15:06.42) Yeah, yeah.

Martin Tobias (15:10.922) So so that's something I'm glad you brought that up because that's something that a lot of capital allocators don't talk about. They say, you know, when you talk about so let's move on to the the case against making these investments. Cause every time you're presented with an opportunity to invest in something, there's a whole bunch of reasons to not do it. There's more reasons to not do it. and most people kind of pin their hats on

the reasons outside them, like I'm worried about the FDA or I'm worried about insurance co-pays or I'm worried about those things. And you talked a little bit about those, but you mentioned that there are sometimes internal or, you know, relationship things, communication styles that are also reasons to not do a deal that are th that that that come up. and and you and the way you deal with those is you just keep talking to the people. And sometimes you can

Talk yourself, you you know, get get a better understanding from the person. But sometimes, you know, you can try to have that conversation and the person's not open to it, and that's a reason to say no. You know, like if if if the person one of the things I do, for example, is I I don't expect the CEO to do everything I say, but I expect them to be curious about the comments I make about their business and to be thoughtful in their responses.

If they dismiss comments that I have out of hand without even considering them, that means that we're probably not going to have very good conversations in the future. You know?

Arkady (16:43.468) That that was exactly the point I was trying to make. Yes, the

Arkady (16:51.074) This is a very long game. You invest in the companies at the early stages of their formation, pre-seed seed. You're going to spend seven, maybe ten years with this founder in the future. If you already start with a broken communication, this is gonna end in disaster. Maybe not a disaster, but the the absolute best outcome that can happen is that say.

Martin Tobias (17:08.829) Mm-hmm.

Arkady (17:16.639) Somebody buys out that company and you get your distributions at some point after ten follow-ups with the founder. If if you already have a broken relationship and broken communication. You will never know what's going on. You will never know how to help these people in the moment when they really need your help. Because you know it and I know it. When founders openly ask you about something, that's that's nice to have. Usually when founders really need your help, they're ashamed to even mention that on a call with you.

Martin Tobias (17:18.449) Yeah, I can think that your distribution is not what happens after they have fall off. Mm-hmm. Yeah.

Martin Tobias (17:33.916) Because that's even I know it. Once it's opening up to the bust and then that's nice to death. Yeah. Yeah.

Arkady (17:47.744) So you need you need to have trust. You need to have a relationship that is based on open communication and transparency. And if you have it, in that particular case, then you will have a successful relationship with the founder. And successful relationship with the founder is the foundation of getting access to secondaries if they sell at some point. Is the foundation of getting preferred preferred liquidity through MA or IPO. Like there is a lot of stuff that will translate, let me finish, that would translate into

Martin Tobias (17:56.091) That was equivalent and the use has a successful relationship with the flower. Yeah.

I agree, and I'm glad you mentioned that because a lot of early stage VCs or a lot of outside people looking at early stage VC might say, he just got lucky, he picked a thing and it went up a lot of and he and he made some money. but you you have to

Arkady (18:16.991) clear monetary wins purely from having a healthy relationship with a person.

Martin Tobias (18:41.942) So let's move on to the other the next thing, which is where did the confidence to to write the check come from? And you just mentioned a lot of personal things that I don't think a lot of people making decisions think about, which is my relationship and my communication style with that person. I have to get confidence that they are going to listen to me, that we're gonna have a good ability to communicate. So, like you said, it's eight or ten years. and you know, the spreadsheets aren't aren't gonna be what matters.

Arkady (18:44.095) Mm-hmm. Sure.

Martin Tobias (19:11.279) a a lot of times it is that ability to just think, you know, I think he's gonna be honest with me about the status of the company and I think he's gonna be open to any, you know, suggestions you know, that I have. When you mentioned you know, how you made decision you did diligence on the technical and you did diligence on the team. And so if you had to sort of stack rank or as a percentage, I know it's not a formula every time.

But what percentage of your decision to write the check is those relationship and how well you think the relationship with the s with the founders are are gonna go versus the other things like can the product be built? do they have the right team? Is the market big enough? Is it fifty-fifty? Is it seventy-thirty? Have you thought at all about the percentages of weights of those different things?

Arkady (20:05.171) You you know how OCD-ish I am. So yes, I have thought about this. my investment process is broken into two different things. there is the the first IC which is focused on blockers, and that first I see there are six questions that can go wrong with the team, three questions that can go wrong with the market, five questions that can go wrong with the product or technology.

Martin Tobias (20:10.699) I thought so. So tell us, please.

Arkady (20:34.946) two questions on strategy, two questions on round parameters. So mis it's like I would say team is the most important thing in terms of blockers. the technology and product is the secondary and then strategy, planning, strategy, round parameters, and the market size is the third layer. I I would I would categorize it like such. If if we don't find any blockers, then I can give you specific percentage points among

Martin Tobias (20:50.935) Strategy wrote us and market size in the third player. Okay. So once we get to IC2, once we can have it all the information and our part installed to the hardware, the other things that we want to do, we attribute 93% of our weight by the people. Okay.

Arkady (21:03.737) Eight different parameters. So once we get to IC2, once we have collected all the information, our partners talked to the founder, we've done all the things that we wanted to do, we attribute 23% of our weight to team and people, around eight percent to market and need. So how big is the problem, how large is the market? Twenty percent of the product and technology, twenty-eight percent to the mix of science, technology and product.

Martin Tobias (21:20.632) Okay. If we have to have a relation.

Arkady (21:33.658) 15% to competition, eleven percent to traction, and if if c if the case is like regulatory, then regulatory as well. And then fifteen percent to the mix of strategy and round parameters, because we need to understand how we're gonna make money as investors in that specific deal. So yes, I I do have it down to a specific percentage point.

Martin Tobias (21:38.293) that this is on the production where it's if you think of like Ramble that the Bible does well and just strategy.

Martin Tobias (21:57.705) Okay. Well, thank you for sharing that because I think that is very different from what you would get from investors in in software, for example. For example, like the the product for me, you said yours is twenty-eight percent. Mine for the product that's more like ten percent. Because my assumption in software is that if you understand the customer really well,

Arkady (22:16.015) Mm-hmm.

Martin Tobias (22:22.598) And you understand the problem really well, you can build just about anything that you want with software. but in in in in your case, you know, can you get a patent on it? Can you even build it? Does it how does this scientific approach compare to the three other scientific approaches people are taking to the same problem? And I have to make a bet on a particular, you know, approach to the problem, which cause because I'm sure.

Arkady (22:27.994) Mm-hmm.

Martin Tobias (22:50.579) Like the one you talked about, the guy doing the the headset for brain inflammation. There's probably pharmaceutical companies that wanna sell you a drug for brain inflammation, which is a different way to solve the same problem. There are different ways to solve that problem. And you as a VC have to decide, do I think this approach, you know, is gonna get enough traction or work well enough relative to the other potential approaches, right? So that's that's why you have a twenty eight percent. Yeah. That

Arkady (23:03.416) Mm-hmm.

Arkady (23:17.75) Exactly. the the we can go deeper into the split between technology, science and product, but I don't I don't think your your listeners would be interested in that specifically. And it's very idiosyncratic. Let's be very clear. Every single VC will build a process that is tailored to their own perception of the world and their own perception of the risk. So if I have it at twenty eight percent and somebody else investing in early stage deep tech has it at fourteen percent

Martin Tobias (23:41.64) I kind of just put it in the bottom.

Arkady (23:47.031) They might be right for themselves. And I mean might be right. Exactly. So

Martin Tobias (23:48.529) They might be right, yeah. And and that's fine, and that's why I'm talking to like thirty or forty different people because somebody has different things and then people can hear, you know, this resonates more with me or that. But I I just want to get it from you and what you you do and how you underwrite deep tech. It was interesting when I was at liquidity, you know, I was talking to a couple of people and one guy's venture's easy, you know, you just apply the Harvard

rule of how to underwrite and there's only four categories. In fact technology is not even one of them. And I'm like, that might work for Harvard in you know certain categories, but it's not gonna work in deep tech, it's not gonna work in biotech. I I think you gotta come a little closer. So w yeah.

Arkady (24:36.16) I have something to say on that point actually. I th I think it's an important distinction between software and deep tech and I I think it's it's a pretty straightforward a thing that a lot of people oversee. They they they they kinda shrug at it and they d they don't think it's serious. For any software company you need a huge market and an outstanding founder. The way you you define your outstanding founder is up to you. You can talk about resilience, greed, obsession, passion. Doesn't matter. Market and founder should be phenomenal.

Martin Tobias (24:55.325) Yes. Yes.

Arkady (25:05.324) For you to invest in them.

Martin Tobias (25:05.543) It's like eighty percent of the decision criteria for me. Yeah.

Arkady (25:08.883) if if if not if not ninety-nine percent, right? It's like it's very important. The the the deep tech angle brings a separate aspect to that. It brings the the aspect of technology technology, I wouldn't go all the way and say science, into the mix. Because if you as a founder, not as a VC, if you as a founder launch a software company and you want to play you want to develop a video game

Martin Tobias (25:31.564) And he won't be he won't build it again.

Arkady (25:35.487) But then the video game fails and you pivot into a messaging system, you can still become Slack and IPO and become one of the biggest runaway hits o of that period of time, right? Of the decade. Fantastic case of pivoting. If you're building a solar panel company and then it fails and you decide to build a nuclear engine, it's not gonna work. There is there is nothing you could

Martin Tobias (25:38.374) The messaging system.

Yeah. Yeah.

If you are building the small company.

I think with a nuclear team. That's not gonna work. You need completely different team, completely different everything. Yeah.

Arkady (26:01.928) You you basically bankrupt one company and launch another one. So th the ability to pivot is actually this very important point that a lot of people are not paying attention to. The ability to pivot in software is close to unlimited. The ability to pivot in in hardware and deep tech is very, very, very narrow.

Martin Tobias (26:20.986) Right. And I think that's a lens that's important that you've identified that I haven't heard from anybody else. That is if the capital allocation decision you're making is in something which has a lot of technological risk of can you even build the product and you know, is there a pivot out of this product? you might want to think differently or spend a little more time on the technology risk there.

Than if you're talking to somebody that that could have an ease an easy pivot. you know, I'm a software investor. I would say at least 50% of the companies that I've invested in after I wrote the check have pivoted to some extent. Sometimes a heart, sometimes a soft pivot into like a different vertical market for their product, sometimes a super fucking hard pivot. For example, one company I did, it started as a general generative AI search.

company basically helping you show up better in ChatGPT and Claude. And now they're a data company selling proprietary data sets to LLMs. Completely different.

Arkady (27:17.769) Mm-hmm.

Arkady (27:25.308) That's that's a lot of a pivot though.

Martin Tobias (27:28.089) That's a that that was what I call a hard pivot. But luckily for them, they it still fit the the CEO's network, their superpowers, and the customers pretty well. They're actually doing more revenue as a data company than they were as a generative search company. And what happened in generative search is that it was a good idea, but it got overfunded and too much competitive. That's the other thing in software. You can have a hundred companies funded in like three months.

Arkady (27:31.048) Yeah, I agree.

Martin Tobias (27:58.264) Doing exactly the same thing. And in deep tech, you're unlikely to have a hundred companies doing exactly the same thing because the researchers that have been working on this for 10 years, there's only like three labs that are even anywhere near it. And so in in in some ways it's a a a little bit easier to understand the competition in deep tech. Would you say that?

Arkady (28:00.498) Mm-hmm.

Arkady (28:22.528) I think so, especially especially if you're willing to spend time and effort in understanding the scientific landscape. If you're willing to if not read the whole corpus of the scientific papers on that, then maybe at least have an expert. If you don't have any of those, then maybe at least read a summary of what's going on in this area. The the problem with that approach is it's a little bit like boiling the ocean because you can surely surely you can look at the direct things, but

you yourself mentioned that this company that does the inflammation device for your head, the competition is not just another neuromodulation device. It's pharma, is this, is that, it's surgery, it's it's healthy food. Like a lot of people are damaging themselves just through eating habits. So

Martin Tobias (28:51.829) No.

Yeah.

Martin Tobias (29:05.237) What people are damaging the cells.

Arkady (29:12.654) you can get a very good understanding of what is the landscape of science around that particular problem if you are willing to put in the time. And the landscape of science does not change it with the same velocity as landscape of software changes. So if something was true about specific things in energy storage ten years ago, it will still stay true right now. If there were specific challenges around

Martin Tobias (29:15.437) understand of what is the landscape of science around that particular

within the time. Yeah. But then something was

energy storage we will still take through like that because my challenges

Arkady (29:42.307) Around ways to generate energy. I'm not gonna name any names again, but like there were there is a bunch of companies that are trying to utilize a very well-known microscopic effect in physics that on surface gives you unlimited energy. In reality, it does not. But they think that they figured it out. Like generations after generations of physicists were trying to make this thing generate energy and they failed. And then now somebody who never had a physics degree has figured it all out.

Martin Tobias (29:44.222) In reality, it has nothing if you put it out.

Martin Tobias (30:04.608) Perpetual energy machine, yeah. Mm-hmm.

Martin Tobias (30:11.359) Yeah. Yeah. Okay. W well, I think I understand a lot of the frameworks that you use. If you had to summarize, you know, two or three repeatable lenses or portable rules that people could use to you know, make capital allocation decisions in deep tech, what would what would those be?

Arkady (30:11.993) Clearly. So you need to have a very good footing there.

Arkady (30:41.803) I will start with the fact that Deep Tech is such a broad moniker for so many different things that I don't have a good advice on a broad deep tech. I would also mention that VC of early stages, and I mean friends and family pre-C those three ro three stages of funding, versus A or B are very different, versus C and later are also very different. VC is way less

Martin Tobias (30:47.112) Yeah.

Martin Tobias (31:05.226) Yeah.

Arkady (31:08.769) of a uniform homogeneous industry as people than people think it is. In reality, it's it's a very, very, very dispersed industry. And like things that work for Series B fintech startup don't work for pre-seed pharma or series A deep tech. So the the very first advice I'm gonna give to everybody, although it is a generic advice, don't take it face value. All the advice that you see online

Martin Tobias (31:11.055) That's true.

Martin Tobias (31:22.566) Is that what we see we three text up? No. Yeah.

Martin Tobias (31:37.857) Right. Well because we have in general, by general very understand the technological competition and then the foundation of a lot of people look a lot of people concept on biology course, but I've never invested in house. Yes. And in fact, nobody did.

Arkady (31:38.122) And try to understand how it applies to your specific industry and your specific stage. When it comes to deep tech in general, my general, very broad advice would be understand the technological competition and understand the scientific foundation of what's going on. Because a lot of people look a lot of people who understand how biology works would have never invested in Theranos. And this is a great example of when a lot of

Martin Tobias (32:06.788) Nobody who understood biology did. It was all sort of name brand Hollywood people and whatever. And that that was one of the problems with the company is that the people who understood it, and I think even you know, who who's that doctor in Austin that that was asked to be chief medical officer and he looked at technology said this doesn't work. plenty of people who who who looked at who did understand it said this is snake oil. They knew it was snake oil way before the market did.

Yeah. So so understand what your your

Arkady (32:39.201) Cause i I I don't I don't know I don't know if if she was like like deliberately fraudulent. I I wouldn't go like that way from the get-go. Maybe she was really, really optimistic. But at some point she knew it doesn't work and she continued selling that. That's a problem.

Martin Tobias (32:55.787) So so let me ask you that as as as the final question. how do you I I always have what I call a discount rate I apply to CEO's claims and and and all this stuff. And you know, sometimes you you you hear people like Elon Musk saying, we're going to Mars. And my discount rate on his going to Mars is quite significant. But the reality is that he's actually pushed the limits and

and and gotten things done with a really high bar like that that many other people haven't. Many people's bar isn't high enough, right? but how how do you risk adjust that at some point if I think the person's lying to me, I'll pass. If I think they're being optimistic, but but have a reasonable path for the next three or six months to make progress on their

Big goal, I'm I might be a yes. But the minute I think that their optimism is in the realm of charlatanism or lying, and that's happened to me. I had one of my CEOs, you know, create a bot farm to drive his traffic up and lie about his traffic. that's gonna happen to you as an investor sometimes, where the CEO in fact goes into the fraudulent category. But how do you think about

getting comfortable with this, you know, optimism versus pragmatism thing at an early stage VC. You want a lot of optimism, but you also want pragmatism. How do you think about that?

Arkady (34:35.518) I think that people who are not optimist by nature will never be a good founder because y y you need to be a little bit insane, thinking that you understand this world better than anyone else, thinking that you found a solution to the to the thing that a lot of people were trying to figure out for a while. And look, it does work every single time. Not not every single time, it does work sometime from time to time. And you get companies like Uber or Facebook. By the way, have you heard about this new round announced for Travis?

Martin Tobias (34:39.641) Yes.

Martin Tobias (35:03.238) yeah, the atoms. Yeah.

Arkady (35:04.944) Atoms, yeah. that's a grand vision by the way. Yeah, yeah, that from Goldman Sachs and JP Morgan led by A6 and Z, kudos. Then the I would say that if a person is lying about anything knowingly, and it's a very, very, very, very strong signal not to do business with that person. If the person is delusional about something.

Martin Tobias (35:07.845) Yeah, he raised one point eight billion or something like that. Good for him.

Martin Tobias (35:28.834) Yes.

Arkady (35:34.503) To the degree that that person doesn't hear any feedback, that's also probably a pass. You have to be a little bit delusional to be a good founder. You have to believe that you and your team will persevere, overcome, will achieve. There is no way you can be absolutely sane and rational and be a successful founder at the same time. So so the big question is.

Martin Tobias (35:59.331) Right. That's as far as our first.

Arkady (36:00.96) Where do they lie to themselves? In what specific area? Do they lie to themselves or or where do we lie to ourselves, Margin, as as founders of our own firms? Is it is it in the area of I can do the blood test from a single drop of blood of any kind of disease? Or like I can build a fusion engine the size of the tabletop? We've talked about this example in personal previously. when people are

Martin Tobias (36:16.725) On the single problems.

Martin Tobias (36:29.93) Yes.

Arkady (36:30.426) Delusional about reality of things, like scientific, hard reality of things, then maybe it's also a past because you don't want to deal with people who are not ready to accept the world, the physics of the world. However, where when people are delusional about the

About how big they can become and how great they can become, those are specifically the fathers that you want to to invest in. When people already are very when people believe in themselves to an extent that they think they can overcome anything, and yet at the same time they have this beginner's mind or this mentality of a person who's open to any advice and any questions, this is the perfect combination.

Martin Tobias (36:56.245) But we take

Martin Tobias (37:06.593) And yet this is my personal those bulk and is going to get advised and they watch it. I I agree, and that's that's what what you want to find in in in ventured, you know, like when when you meet it at our stage, pre seed pre seed, it should sound a little crazy.

but it should have a r a r a reasonable, you know, like if it works, you know, everybody should love it. It's like like Airbnb, they they pitched like people are gonna rent people's couches. And and it sounded fucking crazy. But you know what? If they did rent people's couches, it could be a very big business and you could really disrupt hotels. And in fact, it did. and and Travis's first thing on Uber, like, you know, we we got plenty of taxis. Why why is the market gonna be bigger? Well, because you know, geolocation and whatever is gonna make

Arkady (37:55.097) Yes.

Martin Tobias (38:04.766) the market for ride shares a hundred times bigger than the market for taxis. And it was a little bit delusional, but it it it he was right. And he he just found the people that that agreed with his delusion a little bit. But it it was based on reality. The r the reality that unlocked Uber was the GPS chip in a cell phone that allowed you to locate somebody and and that was a technological opening that allowed you to build something that you could never build before.

and so it was o optimistic and aggressive, but it was unlocked by something real in the world.

Arkady (38:45.442) Yes, and this is this is a great example. If for example Travis, when he was building Uber, was building Uber before GPS was in every cell phone and he was hoping that something would change, it's a fail. But he believed in something that a lot of people would call delusional. He believed that he can wrap the whole country and regulations and whatever around his finger and he will find a way to not build a taxi company but build an information company.

Martin Tobias (38:55.365) It's a fail.

It's a fail.

Arkady (39:14.806) And he figured out a way to do this. You can like human systems are malleable, whether it's governments or or industries or relationship. Real physics of real things is less malleable.

Martin Tobias (39:14.823) Information. Yeah, exactly.

Yeah, okay.

Mm-hmm.

Yeah. And and that's a key insight I've gotten from you and I appreciate that. Thank you, Arcady, for the time. Where can people find you and communicate with you? Are you on Twitter? Are you on LinkedIn? Where where LinkedIn. Okay. well thank you for this. I I will wrap it up here and I look forward to talking to you next time I come down to San Francisco.

Arkady (39:32.568) Thank you.

Arkady (39:37.416) Link LinkedIn. LinkedIn is the best.

Arkady (39:43.106) Thank you.

Arkady (39:50.968) Appreciate you, Martin.

Martin Tobias (39:52.431) All right.