20VC Why We Will Continue To See An Explosion In Deep Tech Financing, Why Much of Silicon Valley's Talent Is Going To Waste & How Fund Cycles Need To Be Adjusted To Work With Deep Tech with Seth Bannon, Founding Partner @ Fifty Years

In a conversation with Harry Stebbings on the 20 minutes VC podcast, Seth Bannon, founding partner at 50 Years, discusses his journey from political technology to venture capital, focusing on startups that solve systemic problems through technology. Bannon's firm, known for investments in sustainable tech like cultured meat and small satellites, operates at the intersection of impact and profit, aiming to back companies that can achieve both societal good and financial success. They address the shift in business purpose driven by millennial attitudes, emphasizing the importance of aligning company missions with societal and environmental goals to attract top talent. Bannon also touches on the evolving landscape of deep tech investment, the challenges of distinguishing truly mission-driven founders, and the potential for significant returns in this space despite longer exit timelines.

• Harry Stebbings is the host of the 20 Minute VC podcast.
• Seth Bannon is the founding partner at 50 Years, a seed fund in San Francisco.
• 50 Years invests in startups that solve the world's biggest problems with technology, such as cultured meat and small satellites for internet coverage.
• Seth is a Y Combinator graduate and has been on Forbes 30 under 30 for social entrepreneurship.
• Richard Chen at Vitruvian provided the introduction to Seth for the podcast.
• Harry Stebbings also mentions sponsors WePay and Pipedrive.

"Joining us in the hot seat today, I'm thrilled to welcome Seth Bannon. Seth is a founding partner at 50 years, in my opinion, one of San Francisco's most exciting seed funds backing entrepreneur ##preneurs solving the world's biggest problems with technology."

This quote introduces Seth Bannon, emphasizing the significance of his work and the focus of his investment fund on technology-driven solutions to major global issues.

• Seth Bannon started in electoral politics, working on campaigns since age 14.
• He was dissatisfied with the outdated technology in politics compared to the video games he played.
• Seth created a product to address this gap, which led to the formation of a startup.
• The startup attracted a $600,000 seed round and subsequent investment after joining Y Combinator.
• Seth's experience with investors inspired him to create 50 Years, a fund that cares about the "why" of companies and possesses technological and startup expertise.

"And I think the first customers were some city council members in New Haven, Connecticut, and they were paying us like $50 a month. And we thought that was just unbelievable that someone would pay us for this thing we built."

This quote reflects on the humble beginnings of Seth's startup journey and the initial validation of his product in the market.

• The Friedman Doctrine states that the sole purpose of business is to increase profits or shareholder value.
• It was popularized by Milton Friedman in a 1971 New York Times op-ed.
• Seth Bannon criticizes the doctrine for allowing businesses to pursue profit at the cost of negative externalities.
• Bannon believes the doctrine has been detrimental and has limited entrepreneurs from addressing broader social responsibilities.

"The Friedman doctrine, in a nutshell, is this idea that the purpose of business, and the sole purpose of business, is to increase profits, or put another way, to increase shareholder value."

This quote summarizes the Friedman Doctrine, which Seth Bannon argues has had a negative impact on society by encouraging businesses to prioritize profits over social and environmental considerations.## Business Potential and Societal Impact

• Businesses can generate massive profits and solve societal or environmental problems simultaneously.
• The analogy of cloud-based companies shows that adopting new strategies can lead to advantages and profit maximization.
• Profit maximization and societal enhancement are not mutually exclusive; they can coexist and reinforce each other.

"And one of, I think the analogies that I like to give is at some point people thought the transition to the cloud was going to be a really big deal and that cloud-based companies would have very real advantages in the marketplace versus ones that were not cloud-based."

This quote illustrates that just as cloud-based strategies were once seen as innovative and profitable, businesses focusing on societal and environmental issues can also be advantageous and profitable.

• Millennials view the purpose of business differently, focusing on improving society or protecting the environment.
• A significant portion of millennials believes business success should be measured beyond financial performance.
• The shift in perspective is global, with similar sentiments across different countries.
• This generational change is driving businesses to adapt to new models of success that include societal and environmental considerations.

"47%, which was a plurality in the survey, said, the purpose of business is to improve society or protect the environment."

This quote highlights the predominant millennial belief that businesses should serve a purpose beyond just making money, emphasizing societal and environmental improvement.

• Companies with a societal or environmental focus have an advantage in attracting top talent.
• There is a growing trend among millennials to seek employment with businesses that align with their impact values.
• Many millennials in senior management positions are considering leaving their jobs due to misalignment with their values.
• The trend includes MBA students willing to take pay cuts to work for companies with positive societal or environmental missions.

"Over half, I think it was, 54%, believed that businesses had no ambition beyond profits. And what that means is that millennials at these companies are planning on leaving."

This quote emphasizes the disconnect between millennial values and the perceived profit-only focus of many businesses, leading to potential high turnover rates among millennial employees.

• Impact investing does not require a shift in traditional investment strategies such as ownership percentages or follow-on financing.
• Investors can apply an additional lens of societal and environmental impact to their existing investment frameworks.
• The challenge is distinguishing between businesses genuinely aiming for both impact and profit and those only focused on societal good.

"We just apply on top of that, this additional lens of we only want to invest in companies that are solving these big systemic problems."

The quote clarifies that the speaker's investment approach involves adding a criterion for societal and environmental impact to their standard investment analysis.

• Identifying founders who are committed to building valuable businesses with positive impact can be challenging.
• It's essential for businesses to integrate impact directly into their profit models to avoid conflicts and ensure sustainability.
• The "one for one" model is less favored because the societal good must be justified financially at each step.

"You have to find a problem where the more money you make, the more good you do. The more good you do, the more money you make."

This quote explains the ideal business model for impact investing, where profit and societal good are inherently linked and reinforce each other.

• It's becoming increasingly difficult to compete with tech giants in pure SaaS plays.
• The cost and complexity of launching deep tech businesses have decreased, making it an opportune time to invest.
• Synthetic biology is one area where the barriers to entry have significantly lowered.

"Five years ago, if you were going to launch a sin Biostap, the very first step would be to raise $5 million and build out a lab before you did anything else."

This quote indicates the changing landscape of deep tech investment, where initial costs and barriers have decreased, making it a more accessible and attractive investment area.## Deep Tech Investment Dynamics

• Deep tech sectors now require less capital due to advancements like shared wet labs, cloud laboratories, and CRISPR.
• The cost of sequencing has decreased faster than Moore's Law, enabling more innovation with less funding.
• Deep tech companies often have longer development timelines and require support over a longer lifecycle.

"So things like shared wet labs or cloud laboratories, or things like CRISPR enabling genome editing to be done cheaply and efficiently, or things like the cost of sequencing dropping faster than Moore's Law."

This quote highlights the technological advancements that have reduced the cost of innovation in deep tech, making it more accessible and feasible with less capital.

• Biology-based companies cannot force progress like software companies can; progress is more unpredictable.
• Preference for supporting companies with clear product development paths to test market demand early.
• Avoiding companies with binary outcomes based on regulatory approval.
• Favoring companies that can transition to debt financing after initial equity rounds.

"We try and only support companies that have a very clear product development."

This quote emphasizes the importance of having a clear product development strategy to ensure that a company can test market demand and have a more predictable path to success.

• The pool of capital for deep tech is increasing, with more attention from later stage investors and seed investors planning for the future landscape.
• Y Combinator has increased its focus on synthetic biology and biotech companies, indicating a shift in early-stage investment trends.

"We think that the transition is definitely heading that way."

Seth Bannon suggests that the trend in investment is moving towards supporting deep tech companies, with more capital becoming available in the future.

• Deep tech companies with heavy IP are potential acquisition targets for incumbents.
• Screening for founders committed to long-term goals and disruption is crucial.
• Founders intent on significant industry disruption are less likely to sell early.

"So we've invested in a couple of companies that are either using directed evolution of enzymes or synthetic biology to make industrial chemicals. And the founders of these companies are absolutely intent on taking down DuPont, taking down Dow..."

Seth Bannon explains that they invest in founders with ambitions to revolutionize industries, which aligns with the goal of creating sustainable and valuable companies rather than quick exits.

• Assessing founder commitment and tolerance for risk is essential for predicting their response to acquisition offers.
• Founders focused on solving fundamental problems are more likely to resist early acquisitions.

"Our founders are not just driven by being a startup founder or building a business. These are people who see a fundamental problem in the world that they think needs to be solved, and they're out to solve it."

Seth Bannon describes the type of founders they invest in—those who are motivated by solving significant problems, which suggests a greater likelihood of long-term commitment over immediate financial gain.

• Traditional ten-year venture fund cycles may not be suitable for deep tech investments.
• A longer fund lifecycle could provide opportunities that align with the longer development timelines of deep tech companies.
• The maturing secondaries market and increasing liquidity could offer exit opportunities before an IPO.

"I think the biggest opportunity in investing right now might just be a fund that has a 15 to 20 year lifecycle."

Seth Bannon argues that longer fund lifecycles could capitalize on deep tech investments that have longer development periods, offering a significant investment opportunity.

• Investing in tech-heavy industries like synthetic biology requires diligence and a proactive approach to learning.
• Utilizing networks of smart people, academic papers, and technical diligence from experts is key to understanding new industries.

"We read literally every paper that was available on cultured meat in academia and on the scaling techniques."

Seth Bannon illustrates the depth of research and learning required to understand and invest in complex and innovative industries like cultured meat production.## Diligence Process in Venture Capital

• The diligence process involves engaging entrepreneurs with a PhD in the relevant field who are ahead of the entrepreneur being evaluated.
• This approach is designed to be beneficial to the entrepreneur, serving as a mentorship opportunity and potentially opening business relationships.
• Later stage entrepreneurs are typically eager to engage with those at the forefront of their field.
• The investor gains both technical insights and practical business perspectives that might not be available from purely academic sources.
• Building a network to facilitate this process is crucial and more feasible for a fund with a mission that resonates with potential contributors.

"Because ideally, diligence done right is additive for the entrepreneur, so it's not just a waste of time."

This quote underlines the philosophy that due diligence should not only be about verifying information but also adding value to the entrepreneur's experience and growth.

"And then as an investor, you're getting not only a sort of technical diligence, but you're also getting some pragmatic insight that someone purely from academia might not give you."

The quote highlights the dual benefit of this diligence approach for investors: technical validation and practical business advice.

• Seth Bannon's favorite book is "Gödel, Escher, Bach" by Douglas Hofstadter, which sparked his interest in mathematics, cognitive science, and computer science.
• He also recommends "The Idea Factory," a book about Bell Labs, for its lessons on building innovative organizations.
• "The Idea Factory" details the history of Bell Labs and its numerous significant inventions, offering valuable insights for investors and entrepreneurs.

"And the theory behind it has actually largely been discredited by cognitive science research."

This quote refers to the theories discussed in "Gödel, Escher, Bach," indicating that while the book's theories may not hold up to current scientific scrutiny, the book was still personally impactful for Bannon.

"It's the history of Bell Labs... And just the list goes on. And this book examines how they were able to build an organization so consistently innovated."

The quote emphasizes the comprehensive nature of "The Idea Factory" in exploring the success of Bell Labs, making it a recommended read for learning about fostering innovation.

• Mission alignment is crucial for a new fund to get into competitive investment deals.
• Entrepreneurs seek investors who understand the comprehensive picture of their business, including impact missions and profit generation.
• Funds with a clear mission can appeal to entrepreneurs who value having investors aligned with their business goals.

"So the co investors on some of our last deals were sequoia, Union Square Ventures, general Catalyst, Kosla."

This quote lists some of the prominent co-investors involved in deals with Seth Bannon's fund, demonstrating the competitive nature of the rounds and the caliber of investors attracted by mission alignment.

"And these are often very competitive rounds. And as a new fund, it's hard to necessarily prove your worth."

The quote acknowledges the challenges faced by new funds in proving their value to entrepreneurs in competitive investment landscapes.

• Seth Bannon believes that animal agriculture will be eliminated within the next hundred years.
• This belief is distinct from common perspectives and is related to the future of business and sustainability.

"I believe that animal agriculture will be eliminated from the face of the earth within the next hundred years."

The quote reveals Seth Bannon's long-term belief about the sustainability and ethical evolution of agriculture, suggesting a significant shift in industry practices.

• Seth Bannon reads Hacker News extensively, finding value in the insights from the community, including expert commentary on technical topics.
• The comment threads on Hacker News are considered unusually insightful for an internet forum.

"I read way too much hacker news."

This quote indicates Seth Bannon's frequent engagement with Hacker News as a source of information and discussion relevant to the tech industry.

• Seth Bannon observes that many talented individuals in Silicon Valley are working on trivial pursuits, leading to existential crises.
• He advocates for the realization that one can work on interesting problems, with great people, make money, and do good without compromise.
• There is a desire for a shift in Silicon Valley's focus towards more meaningful and impactful work.

"And I see it around me a lot, where people are going through existential crises and you talk to them and you figure out that they are spending all their days figuring out how to squeeze a bit more money out of every ad impression."

The quote highlights the misalignment between the potential of the talent in Silicon Valley and the sometimes trivial nature of their work, leading to dissatisfaction.

• Athelis, founded by Stanford dropouts, created a device for rapid and accurate blood diagnostics using a single drop of blood.
• The device is cost-effective, quick, and uses microfluidics engineering and machine learning for diagnostics.
• The investment was an easy decision due to the founders' brilliance and passion, the potential for substantial healthcare cost reduction, and the ability to make blood diagnostics more accessible.

"The founders are incredibly brilliant and passionate. This is one of those things where they can not only reduce the healthcare cost in the developed world substantially while making a ridiculous amount of money, but they can make blood diagnostics available to people who just before were not able."

This quote explains the reasons for investing in Athelis, emphasizing the founders' capabilities, the impact on healthcare costs, and the increased accessibility of blood diagnostics.

• The podcast concludes with promotional mentions for WePay and Pipedrive, highlighting their services and benefits for online platforms and sales management.
• WePay provides integrated payments processing with minimal friction and fraud exposure, while Pipedrive offers a sales CRM with a clear visual pipeline interface.

"WePay helps online platforms increase revenue through integrated payments processing... And how could we forget Pipedrive, something we use here every day at the 20 minutes vc to manage the pipeline for guests."

The quote serves as an endorsement for WePay and Pipedrive, suggesting their utility for online platforms and sales management in the context of the podcast's operations.