Capital countdownThe early-stage venture capital firm, which focuses on industrial startups with solid technology, will close its doors by the end of March and return uninvested capital, the company’s founder and solo general partner, Jay Malik, said in an annual letter.
In the letter, seen by TechCrunch, Malik says he decided to close the fund after arriving at two key findings about the hard economics of investing in early-stage technology: that “financing industrial startups is not inefficient enough to justify our existence” and that “larger venture firms “Multi-stage companies are better positioned to generate strong returns on the most valuable industrial startups.”
In other words, the company is unlikely to achieve consistent excess returns based on capital constraints and amplified competition from larger companies.
The three-year-old company’s sudden closure suggests there are stronger headwinds for early-stage hard technology funds than overtly optimistic narratives about “building for America” might suggest. The clearly written message reads like a cup of cold water to the face.
“Despite our performance to date, I have concluded that new investments are unlikely to deliver strong returns,” says Malik. “As a result, I no longer believe that Countdown’s existence is justified, for both LPs and Countdown management.” Malik declined to comment on this story.
The company has backed some of the most well-known names in the aerospace and defense sector, including large satellite bus developer K2 Space, automation company Hadrian, and cybersecurity company Galvanick. A total of 12 investments are listed on the company’s website. Among the LPs on Countdown are Craft Ventures’ David Sacks, Banana Capital’s Turner Novak, and Homebrew VC’s Hunter Walk.
Notably, Countdown was relatively early in the American technical renaissance; The firm closed its first fund long before Andreessen Horowitz launched its American Dynamics practice, which is probably the largest and best-known US fund focused on supporting the “national interest” across sectors such as manufacturing, aviation and others.
TechCrunch He covered the $15 million Countdown Fund II in September 2022; At the time, Malik said the company was filling a very early-stage void for capital-intensive companies. However, a year and a bit later, it has become clear that the early opportunities Malik was targeting have not panned out as expected. The first countdown fund was $3 million.
The letter assumes larger narratives about industrial companies investing in early-stage hard technology, casting doubt on the ability of small niche funds to compete against incumbent multi-stage companies.
Malik explicitly touches on this fact at the end of the letter, when he writes: “To be clear, we do not anticipate venture capital or future success for solid technology companies at scale in general. We are optimistic about the ability of small, early-stage funds — especially those focused sectors – to continue exploiting these opportunities profitably.
In the letter, Malik makes the connection between large multi-stage companies investing in industrial startups with solid technology and slowing growth in software-as-a-service (SaaS) businesses. But he says that the growth rate of the total value of industrial startups will not exceed the rate of investment from large companies. “Therefore, we believe that early access to the best companies for an early-stage niche company like Countdown will become more limited,” he says. “The most successful early-stage niche companies may simply resemble less profitable ‘derivatives’ of high-performing multi-stage companies, such as Founders Fund.”
Malik goes on to say that he believes Countdown has had or can develop competitive advantages to beat other companies, whether multi-stage or early-stage, but that these companies are unlikely to prevail. These advantages can be things like custody or other methods that require more time and money than a small AUM company can afford.
He said this lack of competitive advantage was already noticeable: In three cases, Countdown came close to investing in the company’s first round, only for the company to be priced out by a larger, multi-stage company: “The 50-100% price difference is in the pre-seed and seed stage.” Incorporation is irrelevant for a multi-stage company managing billions of dollars, but it can and should be the difference between yes and no for a company our size.
Another problem, Malik says, is that high-performing industrial startups are not accessible to early-stage companies because they are priced efficiently early on. For example, Malik estimates that Anduril, The Boring Company, and Redwood Materials were priced at about $60 million, $1 billion, and $200 million, respectively, in their first overseas rounds; Countdown had to invest a huge chunk of its money to acquire just 3% of each company.
Malik said that by the end of March, the company will complete all pending investments, return capital, cancel all unjustified liabilities and cease operations permanently except for current asset management.