Investing In Innovation: Opportunities In Dual-Use Tech With Sherman Williams, Part 2

 

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Welcome to another episode of The 7 in 7 Show with Zack Ellison, which features full-length interviews with the world’s leading investors in innovation.

The show this week features Sherman Williams, the co-founder and Managing Partner of AIN Ventures. Sherman has an extensive history investing in dual-use technology subsegments, such as space technology and healthcare technology. Sherman has been the VC-in-Residence to several Techstars programs and is also a Kauffman Fellow (’26).

Prior to becoming an early-stage investor, Sherman gathered six years of financial transaction experience as a Healthcare Technology M&A Investment Banker. Sherman started his career as a Naval Intelligence Officer and holds an MBA from the University of Chicago and a Bachelor of Science degree from the United States Naval Academy.

In this episode, we discuss:

1. Big Investment Opportunities in Dual-Use Technologies
2. Reasons that Military Veterans Make Great Founders
3. In-the-Box Experience for Out-of-the-Box Thinking
4. Venture Debt as a Founder-Friendly Complement to Equity Financing
5. The Importance of Founder Leadership, Resourcefulness, and Grit
6. Why Adaptability Is Imperative for Success
7. The Significance of Technical Expertise in Founding Teams

Investing In Innovation: Opportunities In Dual-Use Tech With Sherman Williams, Part 2

AIN Ventures

This is part two of my conversation with Sherman Williams. Sherman is the Managing General Partner of AIN Ventures and is a military veteran. He graduated from the Naval Academy, did a number of tours overseas, served our country for over seven years in the Navy, and then went to business school at the University of Chicago. We were classmates and then transitioned into investment banking, very successfully, and later into venture capital. Now, he runs AIN Ventures. Sherman, talk briefly to recap for everybody what AIN Ventures focuses on.

AIN is an early-stage investment fund that invests at the pre-seed and seed stages into companies that sit at the intersection of dual-use and deep technology. Dual-use means these companies have both government and commercial applications. Deep technology means companies that are building advanced technologies. Advanced means their science and engineering advancements are out of the R&D phase, but these technologies do not yet have wide-scale commercial adoption. These same technologies are assessed to seed markets and/or create branding markets.

Within that, we invest specifically in sustainability technology, life sciences, space technology, and AI/ML dev tools. Those are our core focus areas for deep tech. I don’t want to conflate the two, but we also invest in veteran startups. The reason why I say I do not want to conflate the two is that our deep technology companies do not need to be veteran-led. However, if we do anything outside of deep technology, it will be a veteran-led startup because we believe these veterans come with unique leadership, determination, and grit attributes that make them wildly successful founders.

The Venture Ecosystem Today

In terms of what you are seeing in the venture ecosystem, there’s a lot of stuff going on, what’s your take on where we are at and where there are risks and opportunities?

We are in a pretty rough time for venture on a macro scale. I’ll give you an overview. It’s a pretty rough time for venture on a macro scale. For our specific investment areas, those dual-use areas that have both government and commercial applications this is the best of the Golden Age. This is the best time ever since there was a robust education community.

 

 

The last time there was geopolitical conflict on this scale that involved technology, military, and economics, etc., was 1989, prior to the fall of the Wall. At that time, there was a venture market, but it wasn’t robust. We are back in a true geopolitical conflict, effectively with the Chinese and the Russians. There is a robust venture market and a strong ecosystem, and the tissues and fibers that hold together the innovation ecosystem in the United States, including venture capital, are extremely strong. That ecosystem has a lot to give to the United States to stay ahead technologically and, eventually, economically in this three-way battle, soft, not hard, against the Chinese and the Russians.

To recap, you’ve got an amazing opportunity, given your fund’s focus but outside of what you are doing, at the broader level, there are a lot of challenges. Let’s talk a little bit about the funding environment for companies.

Let me go back to that macro piece that is struggling. It’s highly correlated to what you do. What you are seeing is interest rates are going up, and have gone up dramatically. If you are an investor in debt, if you think about fixed income yield, you can make it right now, I have heard people getting 15% or 16% off of that. When you have to think about, “Where does that next marginal dollar go?” Do you want to take the risk of the venture, or are you perfectly fine locking in a 15% or 16% yield?

I think anyone is perfectly fine with investing in a 15% or 16% yield. A lot of extra investors are not people investing for the returns, but they are investing to see something deeper than financial returns. Financial returns come, but they are investing to see innovation happen, and technological innovation will move humanity forward. If you look at that from a purely financial standpoint, a lot of people are saying, “I will take my 16% yield.” As those interest rates have gone up, you see people slowly but surely go risk-off and stop taking a chance on things like venture capital. That is what is causing a problem.

Number one, it’s tough to raise capital. The reason why if you go underlying, it’s easy to say it’s tough to raise capital. What is happening is that companies that are public and that are more risky, as well as those that are late-stage growth equity-style companies, are not getting the valuations they see. That is an issue.

From a high-level standpoint, there are a lot of challenges in the VC ecosystem. How would you elaborate on that?

The challenges right now in the VC ecosystem are that, when you dig under the surface, there are certain growth companies in the public markets. There’s typically a lag. You could pull the research about a 6 to 9-month lag between down rounds in the public markets and down rounds in the private markets. You are seeing valuation compression in the public markets, so those private companies that are consistently raising money in the private markets are not getting marked up to the degree that they once were. A lot of them have gotten marked down at the protective stage, or it’s been flat.

What you then have is a situation where that stuff rolls downhill, where the price is getting cheaper and cheaper. It’s like, “Why am I investing at this valuation level? That doesn’t make any sense to me if I’m not going to get the subsequent markup that I would expect, that I did, let’s say, 24 or 36 months ago.” That’s number one.

The other thing is, like I said before, when it comes to investing in debt, you can get such high returns on debt right now. People are saying, “I would love to get a 1,000% X return on my investment, but it’s hard to call if that’s going to happen. I’m perfectly fine with a 15% or 16% return on my investment. I’m good to go there.”

I don’t know if this is true. I do question how many people who invest in ventures are either in the wealth preservation game or the wealth creation game. If you bucket people and put people in those two buckets, you’ll start to get your answer about how they will see that. Irrespective, those people will be involved in the venture because the space has proven itself. Look at the S&P 500. Look at the largest companies. Not the majority, but a good chunk of the technology is much better.

It’s a situation where people are being cautious for now. They have pulled back to take a wait-and-see approach, and that is affecting everyone from venture funds that are trying to raise fresh capital and that subsequently affects the founders because it’s a lot more competitive with respect to whether you’ll get capital from a fund, and then the valuation that you were seeking which reflects into your dilution as the founder is likely not where you want it to be. Let’s say it’s not where it was several months ago.

Valuations have fallen quite a bit. We might be able to say that part of the pain now is because of the “success” that companies experienced in fundraising in 2021 and 2022, to some extent, because valuations were so high there was nowhere to go but down. Now, valuations are lower, so that’s one factor. Another would be what you said about interest rates being up quite a bit. Now, the risk-free rate is up substantially, and you can get 5.5% in a 6-month T-bill. You can get 15% to 20% in pretty high-quality debt products. You get over 20% all-in on venture debt right now with very low risk.

From an allocation perspective, a lot of people have been shifting out of what I’d call more speculative equity investments and moving into less risky credit investments in general. We’ve got a couple of themes coalescing. What that means for founders is that they are having trouble raising capital in the amount they want, at the valuation they want, and as quickly as they want. It’s like three strikes against them at this point. We have seen that across all stages, but it’s most pronounced in later-stage startups, less so in the very early stage, which tend to be immune because most of those companies are pre-revenue anyway. They don’t fluctuate as much with the macro tide.

Investors need to think about the growth of the market, not just its size. Share on X

There is fluctuation in the smaller markets, but there’s something that has occurred in smaller markets, and this is another variable that needs to be introduced. In 2020 and 2021, funds raised so much capital, and they have to put that capital to work. At the early stages, you have so much capital, but you are still fighting for only so many good deals. That creates a floor on the valuation for those early-stage companies, and that’s another metric that needs to be considered.

It’s great that you pointed out that mechanism because that is why those valuations tend to stay higher even when there’s a lot of macro stress. The problem for a lot of those companies is that they don’t have as many options when it comes to Series B, C, and D because that money is not flowing. Those folks want to see more traction, and the money there can move more easily. If they don’t like a middle-market growth equity deal, they can venture elsewhere with that money.

That’s a great point to highlight that money can move much more easily. The reaction you’re seeing at the early stage, deals are still getting done. The prices haven’t come down as dramatically as you would think. However, companies are very focused internally on path profitability because a lot of companies are saying there may not be a Series B. I’m not even betting on a Series C for the foreseeable future until macroeconomic situations change. That’s what a lot of people are starting to think.

We have seen a lot of people extending the runway. At least the smart startups and the smart VCs that back them are keen on extending the runway, improving liquidity, strengthening the balance sheet, and, to your point, getting to break even and profitability much more quickly. There’s a lot less focus now on growth at all costs and a much greater focus on, “Can we survive a deep recession? Let’s build out now so that when this recession hits, which it hasn’t yet, we are ready for it.”

What’s always crazy to me is that folks talk about how difficult it is now. Over the last several months, it’s been very difficult for startups to raise capital. A lot of startups are going under, including some very big-name unicorns. For example, Convoy went under. They raised $206 million in the last round. They are a multibillion dollar company and now they are gone.

There are excellent companies running out of runway, and cash is king. A lot of folks are now waking up to that reality. It’s more about survival now than it is about how quickly you are growing. That’s one big thing we have seen. We have also seen a lot of folks hesitant to do down rounds. They have the ability to raise more capital, but they are trying to hold off on that because they don’t want to issue more shares and sell more equity at a much lower valuation. They are trying to wait it out and wait for valuations to come back up.

Unfortunately, I don’t think that’s happening anytime soon because, as you pointed out, the private markets follow the public markets and vice versa. It works in both directions, but generally, private follows public. Public markets are still doing quite well. September was not a great month, and October hasn’t been great, but the reality is the crap hasn’t hit the fan yet and it will. When it does, if public markets are down substantially, then private market valuations are going to be down substantially as well. I do think there’s that risk that people are trying to bridge to a better environment, but they might be bridging to nowhere.

They are bridging nowhere unless they get a problem. For our specific area of deep tech, you don’t have those problems. We don’t take a scientific risk, but once that engineering risk is overcome, there’s typically a market there. In our companies, a key characteristic is there’s a new science that has been done that hasn’t been done before. The company has patents. The company has overcome engineering risk or is working to overcome the engineering risk. Once that’s overcome, there’s a valuation step-up.

I’m a pre-seed investor. My calculation is radically different from someone at, let’s say, the Series B level because they need to be looking at the exit setup. I think through that. I’m still trying to usher a company along and overcome certain hurdles, typically engineering hurdles, building out the team, initial go-to-market, etc.

Investment Principles And Processes

This is a good segue into my question about your investment principles and processes. What are the key processes and principles that you live by?

We are a bet the jockey, not the horse type of fund. A lot of my principles stem from the University of Chicago. A lot of my principles were developed from learning there, and then I have seen it. I have had the good fortune of seeing it for seven years in investment banking. Investing often looks at the numbers, but it’s typically a rock-star founder who is able to create wealth. There are some founders with great technology who aren’t necessarily rock stars. What does that mean? Our investment decision boils down to three key items in this order.

Number one is the quality of the team. I will say the farther away the company is from selling products, the more important the team becomes. Number two is the size and growth of the market because you often see in deep technology companies, you’ll invest in something where you’ll be hitched to something. The market nowadays is quite small. However, several years from now, this could be a massive market. You’ve got to think about the growth of the market, not just the size of the market. A lot of investors make mistakes there. They’ll say, “I’m not investing here because the market is too small,” without considering if it’s a growth market.

Question on that. What’s your typical investment horizon, the time frame that you are looking to monetize this investment?

We have a ten-year life cycle fund. I want to do the majority of my investments in three years. You’re looking at about a seven-year harvest period. What I’m trying to see is significant markups in the company during that time. The last key component involved in our investment process is technological differentiation. We invest in companies where that is important, but it’s number three. It’s not the most important thing.

 

Number one is the team. Number two is the size of the market. Number three is technological differentiation. If I’m investing in a veteran-led company that doesn’t have deep technology, I’m looking for a unique go-to-market strategy or unique relationships/partnerships. We talked about that in our last segment is people who’ve been in the box got some ideas as far as being out of the box. That’s what I’m looking for.

How do you define deep tech for folks who don’t know? It’s a very broad term. What does that mean?

Deep technology or companies that are building advanced technologies, there’s some scientific and engineering advancement. Companies go to the advanced technologies that are out of the R&D phase, but those technologies do not yet have wide-scale commercial adoption and those same technologies this litmus test is that those same technologies disrupt an existing market or create a brand-new market, and that is how we define deep technology.

Would you define AI as a deep technology?

Almost 100%. They are considered to be deep technology. We are looking at several now. When it comes to AI, we look at AI dev tools. We look at things that make large language models better. A big area we have been looking at is domain-adaptive language models. A big issue with large language models is that you have a lot of hallucinations. A lot of things that you do with large language models will give you the wrong answer every single time. Those are anomalies in code, anomalies in the system. They don’t necessarily return the absolute best answer let’s say in a regulated industry like insurance or compliance, something along those lines.

We have been looking at companies that have a much greater degree of accuracy when it comes to dealing with AI and ML. There’s that. Also, companies that make life easier to help prepare data. Make life easier for an AI or ML software engineer. It helps them move faster. They can more quickly apply their model to a set of data.

I talked about AI with everybody who comes on the show now. It’s so topical. Are there pieces of advice that you would give to investors who want to be involved in AI but also want to try to avoid some of that early mover risk? There’s a lot of hype. Adrian Mendoza was on an episode. He ventures in Boston. He called it the second hype cycle of AI, where there’s so much hype around it.

People who aren’t necessarily sophisticated and don’t understand AI or machine learning or its applications are diving in because they are getting sold a bill of goods, essentially. They’re getting sold snake oil by everybody out there saying, “We have got something in AI that’s going to make you a bunch of money,” and people are funding it. The reality is probably 90% to 95% of those investments are going to be worthless, but I want to get your take on how an investor can invest without taking all that risk.

In the early stages, no matter what you think. At some point, you have to accept a certain level of risk. I do think people over-optimize for the wrong thing. You have to accept some levels. Let me do this a different way. I’m speaking to investors now. I believe that you need to focus on how to understand an investment in a certain segment, whether it be AI or whatever. There are a couple of things you need to do if you are underwriting an investment in any segment. You need to assess the founder. What is unique about them? The exact specific market. Think about TAM, SAM, SOM, Serviceable Obtainable Market.  Was that the exact initial market that they were building in?

These are lessons learned from them attacking the Serviceable Obtainable Market. Is it going to bear fruit as they go after the Serviceable Addressable Market and then, eventually, the Total Addressable Market later on in the company’s life cycle? You need to think about that. You need to bring around technological experts who know what they are doing. They understand the tech. Be careful. They are not going to be able to assess the entrepreneur necessarily, but they will be able to set the tech.

For application-layer AI, that’s a little bit tougher because typically, building something off the back of work that was already done with, let’s say, OpenAI or Bard, or something along those lines. For our AI tools, I can go to academic experts. What we did at AIN is we formed a Scientific Advisory Board for PhDs to help us look at tech from different sets.

That’s a baseline of what you have to do if you are investigating areas like ours. You have to go out and talk to those experts, but remember, their data points are only one data point in the overall schema of the underwriting memo. The most important thing is, “I’m going to give this person a bunch of pizzas on the corner. Can they sell out, come back with the boxes, and maybe even sell a darn box?”

You have to assess whether or not the entrepreneur can do that. A lot of that is pattern matching. There are some negative things that can happen with patterns and negative consequences in pattern matching. You only go out to people who are like-minded, but we can get into this more. That’s why you want to have diverse people around the table, with diverse thoughts and diversity of thought around the table so that you can surface people that other folks may have overlooked.

You can have all the right people on your team but still don't win, so you have to play the game. You have to take the risk. Share on X

Mistakes That LPS Make

Going back to your comment about talking with LPs. You are successfully raising your funds, and that’s going quite well. What are mistakes that you see LPs making in terms of investing in innovation?

I assess LPs, which must be giving me money. The issue I have as a deep tech investor is that I have had LPs say, “I don’t understand your space. I’m not going to invest.” It makes sense. If you don’t understand, then you should not invest, but then why does your ecosystem not have anyone around it? Why not even tap into someone to help you deal with that investment?

The internet was a category in the mid-’90s. It was, “We invested in the internet.” “What is that?” Maybe some ventures, “We don’t do that. That doesn’t make any sense.” “You’re going to miss out. That’s going to revolutionize the world.” Folks that say they didn’t necessarily invest in social media. Those are some of the biggest companies that were built. There was tremendous wealth creation in that and they are going to be penalized for not going into that segment.

Here’s the reality. It’s all about incentives like bringing it back to Chicago. It’s all about alignment of incentives. A lot of these LPs, if they take a bet on a Fund One and that fund doesn’t work out, that could be a fireable situation or offense. If they do take a bet on a tried-and-true VC that’s on Fund 5, or 6, or 10, or whatever, and that VC doesn’t work out, that is bad.

A lot of LPs are not incentivized to invest in the early-stage managers who are finding the next promising things. We have this statistical, this empirical evidence that first-time funds outperform other funds. That is a complaint that I have, and that is an issue. That’s why for myself and the rest of my life, I want to meet extremely thoughtful, data-informed, with unique perspectives young people and I want to invest in their fund going forward. From my actual underwriting standpoint, there’s this misalignment of incentives. For a lot of LPs, that becomes an issue.

I’m not complaining whatsoever. If this gets clipped up in a sound bite, I’m not complaining. It is what it is and that’s why you want to pay it forward. As a fund manager, when you meet unique, newer funds, you want to put some money to work into those folks because you knew how it was. You knew that a lot of LPs miss it because they are not necessarily at the bleeding edge of innovation, some of those LPs. No faults of their own. Everyone has their tasks and their jobs to do.

A lot of people want to bet on the race after it’s been run, and that’s not feasible. I have talked to 1,500 prospective LPs, probably more than that, over the last couple of years. Most are not going to be early movers, certainly not first movers, and that’s okay. There are folks who make a lot of money by being early movers, and there are folks who make less money by not being early movers. It all goes back to one’s personal incentive structure, like you said. Rule number one in business is understanding the sentence structure of the person sitting across from you and dictating how to handle the situation.

There are some LPS I have a conversation with, but they are in a tough place, too. I’m not complaining about it because if I were in their position, I may also choose as they choose. I will say that I love innovation and new technology. I wouldn’t say I will put myself in their shoes, but if I were in their shoes, I might say that I wouldn’t make the same choice.

It’s like, “Let me go do Sequoia fund. Let me do this guy that spun out of this fund to whatever have you because it makes a little bit more sense.” Maybe they have a bunch of angel investments here and there. “I’m not willing to take that level of risk,” and they end up waiting. There are actual consequences for that. There’s a relatively low loss of value creation if they had gotten in early with that GP.

A lot of folks think it’s an all-or-nothing decision, and so they don’t necessarily want to take a big bet on an early fund or a fund strategy that they don’t necessarily understand something like deep tech, for instance. They also don’t want to have too many line items. That’s a common refrain that I hear people say, “I like XYZ idea, but I’ve already got 100 LP commitments out, and I don’t want any more.”

That is a legitimate decision by the LPs. That makes sense. I hear from a lot of LPs, “We don’t have any room for more managers.” It is what it is, and they are right. They can’t have new managers. It’s the situation. Here’s the thing and this is why I’m not complaining. I learned this by playing football growing up, being in the military, and being an investment banker. You can do everything and still not win. That’s why you play the game. We’ve got to win. That was the point. That’s what’s exciting. You can have all the right people on your team and you still don’t win. You’ve got to play the game. You’ve got to take the risk.

I would say that it’s not wildly risky, but it’s riskier than investing in six-month treasury bills. One of the things you have to do as an investor is diversify. A lot aren’t as diversified as they think. They think of venture as one category, and they might pick one manager within that category. To me, that’s laughable because there are so many different flavors of innovation investing. I have talked about this many times, so I won’t hash it, but suffice it to say the smartest thing an investor can do if they want to make money is invest in innovation, but across multiple products, and debt and equity at different stages. You want to have diversification within that innovation pool, if you will.

I cannot agree more. Venture debt plays a massive role in the innovation ecosystem.

Venture Debt From A Founder’s Perspective

What do you think about venture debt from a founder’s perspective? When you think about portfolio companies, and as they grow, how should they be thinking about venture debt?

 

Venture debt is a great solution to top up as a complement to equity. It is a great item to use in order to top up within the context of not taking additional dilution as a founder or for your earlier investors. I do think it’s a great solution. All venture debt was not created equal. Companies were not created equal to be able to take on venture debt, and my specific space of dual-use tech for companies at times gets government contracts.

Although it’s very difficult to do, when they do it, your contract being filled is, for lack of a better term, effectively backed by the full faith and credit of the United States government. It’s like what Warren Buffett says, “When in doubt, bet on the United States government.” Bet on the United States system. We have a lot of issues and a lot of fraying right now. A lot of crazy stuff going on at the House.

The House can actually pass bills right now. I do think that we will get it together. I’m a venture investor. I’m naturally optimistic. I believe we will get it together. At some point, at a certain level, if I have a company that gets $20 million to $30 million in actual contract revenue with the federal government, there should be a factoring/debt situation for a company like that.

That’s the perfect type of company that should be utilizing debt because they have recurring revenue. That’s going to come in with a very high probability, and therefore, they should raise as little equity as possible and leverage the company as much as possible. Ultimately, reduce that dilution to the founders and the existing shareholders. The other thing I want to ask you about is, in terms of reducing the need for down rounds, the role that plays in that equation.

If you are trying to raise a certain amount of capital and you are not able to get there without effectively taking on a down round, venture debt is a nice supplement there. However, my view on down rounds, particularly for d-tech, is that, at some point, guys, what are we trying to do? At some point, you have to say, “I’m not going to win this marathon. Let me finish this darn thing.” I’m not coming up as number one in this marathon, but let me finish.

I’ve run numerous marathons. I ran one back in 2018. I had something go wrong. An injury popped up, cramps popped up badly. I had a 30-degree temperature difference from where I trained. It became a testament to exercise. You owe it. You do it. When you employ people and you have hundreds of people working for you, let’s even get to take a down round. Look what Instacart did. They reset the stock options and say, “It’s a down round. Reset the stock option price.” That is the right thing to do and let’s live to fight yet another day. Let’s try to make it happen. We have the next private race. Let’s try to make it happen in the public markets.

You have to be realistic, particularly if you are a founder, and here is a cost basis. People say there’s no cost basis. No. There’s opportunity cost security. You did something else. There are life costs like their life that you overtook. I had a founder who was texting me saying, “I’m trying to get to the next round, but people are buzzing around me selling it.”

I said, “You need to take a real look in the mirror, figure out if you have the energy to keep going, and if not, any inkling of doubt, sell. I’m not going to give you a pep talk because the day you are, the man in the ring. You’ve got to be in it yourself. I can be behind the roads, but I’m not in the fight with you. You need to know if you are willing to keep going.” That’s the mental dynamics and I mentioned the financial dynamics that involve these down rounds. Venture debt is a nice supplement to mitigate that to some degree, but if you do have to take a down round, that’s the way the market is pricing things, it is what it is, just stay alive.

You are right. There’s nothing you can do about it.

Go find another buyer.

Advice For Founders

Staying with this theme of founders, we talked about leadership, persistence, and grit as three things that you look for and that also military veterans tend to have. What are some other pieces of advice that you would give to founders who are maybe struggling to raise capital, aren’t happy with their valuations, or haven’t seen the traction they want because maybe certain aspects of the economy are going their way? What would you say to them?

Something that was said, another lesson learned, is get out there and pitch. Be sensible, but don’t hold these too close to the chest. Get that MVP out there as fast as possible. If you are going up to the deep tech company, start developing partnerships. People who can potentially use your product, start floating it by them and getting their feedback immediately. Start that clock as fast as possible. That’s something that founders need to do.

The other thing too is that founder-market fit is something I have learned from working with the Techstars organization, helping out companies there. Founder-market fit is huge. Look around and say, “Do I have the best team to execute on this?” I will bring my own fund home. We have the best team to execute on our investment pieces. We are decent. Have we peaked? No. We are trying to surround ourselves with much better people. We want to look back a few years from now and say, “What was this? We would not hit on the level we need to be. This is night and day.”

Get out there and pitch, pitch, pitch. Be sensible but don't hold things too close to the chest. Share on X

Consistently up-leveling your team is a big thing for founders. You think about founder-market fit, besides you getting a product in the market, which is key. That’s the big joke, but besides that, you have to think about one thing we look for is are you able to recruit top-tier people to your company? People who bypass opportunities to go do something else to join you on your crazy endeavor.

That is something that we think about heavily and we look for. Who are you able to surround yourself with? That’s free because you try to convince them to work with you or for you for free. Even if they don’t work for you ten hours a week and they are going to come on full-time upon a full raise, who are you able to get into your circle? That’s something else that’s important advice I have for founders.

All this signaling is a cool story, but the brass tacks are revenue. Are you able to generate revenue? Some people are hustlers. Some people know how to make it happen, and you need to be that. You need to figure out a way to generate a dollar. For our deep tech companies, I don’t harp on the simple process because there are a lot of issues with the simple process. Tremendous issues.

We ran a study before. There was a negative correlation between your company’s successful raising venture capital funding and going out getting massive amounts of service. We ran that study. That’s a negative correlation but if you need a grant to keep going, go get it. The most attractive thing is seeing you do a lot with no money raised, and then the money flows.

I have a friend, Frederik Groce. He started the BLCK VC organization. There’s a great quote that he says, “Do the work before you do the work.” When I come to you and say, “Are you qualified,” or, “Is this good enough?” We are already doing it. What are we talking about? We figured it out. We found a way to bootstrap, friends and family. I get it. Not everyone has the friends and family to put up $1 billion. I see people raise $20,000 or $10,000 from friends and family. I met a company that raised $7 million. I was like, “Can I be in the network?” You need to be as scrappy as possible.

That resonates with me as resourcefulness. One thing I can’t stand is when somebody needs to do something and say, “I’ve never done this before,” as if that’s a reason that they can’t do it in the future. It drives me up the wall. The response should be, “I will figure out how to do that. I will do whatever it takes. I will nail it and I will never make the same mistake twice.”

We have a saying, and I said it on the show. It’s a saying in the Navy, I don’t know if they are doing the services. It’s called “A Message to Garcia.” Google it. Look it up. It means, “Figure the F out.” I don’t say this from a position of privilege. I do have privilege in life. I’m trying to say this without the privilege involved. There’s some level of privilege that I do have, but you have to figure it out.

There are so many things that I want to do with our fun AIN. Things I want to add to what we do. We don’t have the money for it, but I’m figuring it out. People are working for free with the promise of something later, or helping me out a couple of hours a day. Whatever you have. You figure it out. There’s an economic event down the line in the future for that.

I’m doing what I have to do. I’m in the fight, too, as a startup fund manager. This is a startup. My job difficulty level is 9, but that’s on a scale of 1 to 99. A founder’s job is much harder, and that’s because of the idiosyncratic risks. You take an individual risk on that company, whereas I’m spreading investments along multiple companies.

I’m fully aware that I’m not in there to fight every day with the founder. I try to be as helpful as possible. I’m an assistant, but I’m not in there pounding the pavement for sales. I’m paving my way, but it’s not the same way, and what the founder does is much harder than what we would do in a venture fund, in my personal opinion.

You are adding value outside of just capital.

We focus heavily. We run a syndicate. The Academy Investor Network syndicate is made up of 500 or 600 service academy graduates to selectively reach out to some of them and say, “Can you help this company in some way, shape, or form?” That’s a core component of our network, which is much bigger than those academy grads that are within our syndicate, but we are trying to provide more capital to these companies.

Relevant Themes For Founders, VCs, And LPS

We are about out of time. I wanted to ask you about themes that are going to be relevant for founders and VCs, and also, LPs in the space, over the coming years. What are the big things that everybody should be thinking about?

 

I have several things. We are experiencing a technological paradigm shift. That’s been slowly coming, but it’s going to be brought to the real world for your average person to experience, and you are seeing that with artificial intelligence and synthetic biology. You are seeing that within the telecom space, folks like Starlink and Amazon put up two types of satellites, and they’re putting up their satellite network.

This is a fellow investor, Seraphim. They have invested not only in telecom but also in ten different satellite constellations. You are going to see how that affects real life. If you want to be part of the wealth creation story for the next 20 or 30 years, you want to get ahead of that. Shameless plug, you want to talk to this. It’s about funds like deep tech funds that are great, that you want to talk to that are kind of pushing on that technological shift.

Another theme is that we don’t do this, but living in New York City and spending a lot of time in LA and San Francisco, you are starting to see a shift in how people work and live. That future work concept. There’s a whole ecosystem of companies that are going to be born to best support that shift because people are saying, “I’m not going into the office to go punch a clock five days a week,” for a lot of jobs. In some jobs, you have a choice, and in our companies, the tech companies, you’ve got to build something in real life. You got to punch a card. You got to go build it.

I’m saying, outside of what we do, there’s a massive shift that’s occurring there that a lot of people aren’t seeing. It’s coming, and folks need to get ahead of it. One thing about founding a company. You can support that space. If you’re an LP, think about backing the fund. I will look at some future work funds. I have several in my network that I’m happy to introduce to you, and they are fundraisers.

Another thing is from a healthcare standpoint: synthetic biology and the offshoots of that are going to bring revolutionary changes to the human body and how long we can live. My father had a health issue and there wasn’t much they could do. He’s completely overcome it because of modern medicine. He didn’t go to a research hospital. He was at a community hospital.

For the diagnostic procedure he had to identify the issues, and it started getting covered by CMS. If this was a few years ago, it wouldn’t be covered. We would have had to scrape together the money to be able to support, to be able to get that. He would have had to switch hospitals and all this other stuff. That synthetic biology revolution, and not only the synthetic biology revolution, but also, the digital health revolution. The persistent surveillance of human health is going to revolutionize how humans live and work. That’s going to result in us living longer for the people that do listen. It’s going to be natural selection. People that don’t listen will die earlier. People that do listen will be fine.

I want to comment on that briefly. It’s funny because you and I live in bubbles, in a sense. After all, I’m in LA, in Santa Monica. The people that I hang out with are all like elite athletes, typically at Gold’s Gym in Venice. I see Arnold Schwarzenegger there four days a week, and I see the world’s leading Instagram folks and a bunch of NFL and NBA and ex-pro athletes come in. They are all in phenomenal shape. They are all doing this monitoring of their health in all kinds of ways that did not exist before.

If you want some of the training that goes on in the NFL or NBA now, there you go. If you watch some of the stuff that they even have on TV or Netflix, you see how folks are training. I was talking about this with one of my buddies who played in the NFL for a long time. He’s like, “If we had this when we were growing up several years ago, it would have been a completely different story.” Granted, the competition would have been better too.

They would have had access to the same tools.

To your point, not everybody accesses them. What is interesting right now is that you’ve got these tools and training techniques that are beyond the scope of anything we probably could have imagined, even a couple of years ago. If you look at broader statistics of the US population, people are more obese now than ever before. Their average life expectancy is declining for certain people and groups of the population, which is mind-boggling to me.

We do live in bubbles. One of the big things that went to happen when you come out with a different treatment for patients. Medicare and Medicaid cover about 37% of the population. There’s 60% that’s not coming. Private insurance and some people don’t have coverage, but this is very small because of the Affordable Care Act. Very few people do not have coverage.

You have to think about the cost of the system. There are insurance products that can be created if you are not taking advantage of these tools. You are living a lifestyle where you’re eating what you’re eating or not working yourself out to obesity. I think that that revolution is coming. I remember you are talking about how people are now. As a venture investor who’s optimistic, I’m thinking about 10 15, 20 years down the line. I’m already thinking about finding loans. We’ve got multiple life science investments in this fund already, but I’m already about fund two and lining up the pipeline for that.

There’s a lot to happen there. The other massive gain, I talked about space a little bit. I talked about life sciences. I think that one of the greatest wealth creation opportunities in our lifetime is the energy transition from fossil fuels to effective electrification, the ability to harness. The first Law of Thermodynamics is that energy can neither be created nor destroyed. Harnessing energy and then being able to store said energy. It’s going to take some time.

I think fossil fuels are still going to play a part many years from now. Coal is still going to play a part a little bit. It’ll shrink and so will the fossil fuel. They are still going to play a part, but at the end of the day, this energy transition is going to happen, and it is coming. If there’s a family office reading and you can have a 20 or 30-year viewpoint, or if you are an endowment fund or something along those lines, there is tremendous wealth creation that will occur because of the nature of the transition.

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Here’s the thing. It’s not about being greedy, we are getting to the inflection point where some of the renewables are cheaper than fossil fuels out there. As you start, it truly improves, it’s going to take some time, all about better technology and capacity, it’s going to make economic sense. People may scoff, “It won’t be in the next 5 years,” but it will be in 10 years.

You ask anybody, “Do you want to be here ten years from now?” Do you want to be able to clip some yield off of one of your pay, the investments you made in 2023? We all think that we will be here 10, 15, 20, or 30 years from now. Those are some of the areas. I talked about a book a little bit because those are the areas we invest in. Those are some of the areas that are ripe for massive disruption and because of that, there’s tremendous wealth creation that can be gained there.

The one unique aspect of those technologies that did not exist with the software revolution of the ’90s and the 2000s is that each of those issues I have mentioned are national security issues. That is a massive difference that people have not wrapped their heads around. In our fund, we have a thought leadership section on our website, AINVentures.com, where we address that. The energy transition, that’s a national security issue. You know why one of the leading green initiatives in the United States, is the Department of Defense. What’s the largest logistics agency in the world? Defense Logistics Agency.

You think about space. Where does all the money for space come from? The United States government. Have you used Google Maps, Waze, or whatever? Your taxpayer dollars is why you were able to use that because you are using GPS. A lot of synthetic biology when it comes to being able to do diagnostics, assess rapid pathogens, healthcare surveillance for potential pandemic outbreaks, that was the government. We all have shots in our arms because of Operation Warp Speed.

That’s what saved millions of lives. You could be anti-vax in the sense of, “I’m healthy. Why do I need the vaccine?” Cool story, but 890,000 people needed it, and their lives were saved. People in France won’t even believe that. We can discuss that another day, but being the involvement of the government and governments around the world in the technology that is going to define the 2020s through the 2016s, a lot of them are backed by the government directly. The software is backed indirectly. Someone had to give grants to set up the fiber optic cable. A lot of stuff was done by the government originally, but it took some time. You are going to see direct benefits.

That’s why I love your thesis about investing in dual-use technologies and also investing in veterans who have better access to a lot of those dual-use technologies, and a better understanding of the market in many places as well. That’s a winning thesis. We agree with that at ARI. It’s part of our thesis as well in terms of sectors that we look at and that we like, and types of founders that we want to back. It’s two big green check marks. We will use veteran founders to win.

Our companies do get contracts eventually, but not everyone is going to be a winner. However, the companies that eventually get contracts with the government are great venture debt candidates for the next race.

One of our sweet spots that we want to get deeply involved in is funding veterans and dual-use technology companies that have reached that post-revenue stage. Now, they have sticky revenues, whether from the government or some other customers. It’s all about having proven themselves, and now they have already been largely de-risked, and the founders are keen to maintain as much equity. The company can reduce its cost of capital, shore up its liquidity, and extend its runway. It’s a win for everybody.

They get cheaper funding. They get more funding. We get a solid investment that’s going to produce a very attractive and low-risk return for our investors, and everybody wins. That’s the way investing should be. That’s gotten away from that in the last couple of years, or maybe it’s always been like this. It seems to me like there are so many folks who are out there trying to make a quick buck, but they are not thinking about the long-term value they are adding for their customers.

I hate to harp on it, but I can’t stand some of these newfangled investments that we have seen over the last couple of years. Cryptocurrencies. They are not even real. You are going to make a lot of money as the producer of that initially because you are going to sell it to somebody who doesn’t know what they are getting into. There needs to be a rebound or ricocheting back to investing that benefits all parties involved.

The markets will often do that for you. People focus on crypto. I’m not hating crypto. I believe in Web3. Certain MLs are Web3 vigorously. I do, but I do believe that it had a crazy hype cycle. Things got out of hand, and the market will tell you. The market did tell the community. There are certain elements of that with too much hype. The market will speak. That’s what you have to ask for some underwriting capability. If you are in a venture, this is a slow way to make money.

When I look at an investment in 2023, I’m trying to assess what the future will be in 2030, because of the QSBS and how early we invest. I don’t even give a darn about anything before 2028. I want to sit on it for years. I get the benefits of the QSBS Qualified Small Business Stock tax. You have to take a long view. A lot of times, those folks, the market will take care of those people.

That’s where venture debt differs quite substantially from venture equity, especially the seed stage, in the sense that our time frame is not nearly as long. You are looking out ten-year horizons. We don’t need to do that. We need to know if this company is going to repay its loan. That’s what makes it a lot easier for us. It’s not nearly as hard to look at 2 years as it is to look out 10. I have no idea what the world is going to look like in ten years. I will tell you that. I can also tell you about this.  I have been good at pegging where the market’s going over two-year horizons for the last several years.

 

I’ve pretty much nailed every big theme in the last several years, including the venture debt thing that we are seeing right now. I’m very confident in my ability to make great investments within a 2 to 3-year period. That’s why venture debt is a great complement to venture equity as an investor, too. Not as a founder who wants to diversify their cap table, but as an investor in innovation, you want to have some longer maturity-type investments that may be a 10 or 15-year life cycle like a seed stage file, but then you also want to get paid to wait sometimes.

That’s what I tell our LPs. You are going to make your 15% every year, and you are going to have equity kickers on the deals. With companies that go public or exit, and the evaluations are attractive, you are going to make a lot of money on the equity side as well. My view is, don’t have one or the other, but have a little bit of all of them.

You can allocate based on your risk preferences and your timeline. Like I said in a previous episode, I have had investors say that they like venture debt because they want to be alive to harvest the investment. I’m part of a big angel syndicate out here in LA, which is the biggest angel syndicate in the world, and there are many investors who have said, “I got to stop angel investing because I’m going to be dead before these investments make me any money. I’m starting to move out of angel investing into venture debt, for instance, because I can earn some money while I’m still alive.”

Tell them to establish trust, too. The money can go to them.

These guys, they are very successful. They used to run a number of big public companies that you would know. Anyhow, it’s been great having you on. It’s valuable having you on, value your time and thoughts. Anything you want to leave us with in terms of parting thoughts and the best ways to get in touch with you?

Parting thoughts. Just keep building despite the noise and chaos. Create the future you want to see. Hopefully, it’s a good one. Create the future that you want to see that’s authentic to you. You can get in touch with me via our website, AINVentures.com. We have a portal to submit the decks. I will even give out my email Sherman@AcademyInvestor.com. I’m not afraid to get on an email. I get blown up, but somehow, I find a way to get to the zero inbox.

This is outstanding. I love talking about the future. I want to say that I don’t know what the future will look like, but I think about it all. I’m making it my job to think about it, and I’m betting on companies that I think will play a massive key role in what the future will look like. I’m always happy to talk about that. I want to throw a shoutout because there’s some product coming out. We often, at our fund, publish thought leadership work.

We have more coming out along those lines for the fund, but we are very data-informed investors. We post stuff. Please, from time to time, look at our website, AINVentures.com, in the thought leadership section, and you can see some of the thought leadership work that we have been consistently putting out. Thank you.

I have read some of it. It’s great. I encourage people to look at that, for sure. I said this previously. People who read are going to have a huge competitive advantage, and then people who read good stuff by smart people are going to have even more. Reading your stuff and the thought leadership of others like you is going to put investors in that top 1%. That’s the answer. There are no tricks here.

That’s for people who don’t invest in funds and said they wanted to do their own thing and go direct. We consistently have deals coming up. We do SPVs all the time. We should talk there also. There may be some other one-off things that we have unique access to. You may want to talk to us. We have a theme and thesis. It’s all out there for you to see. You can read it on our website. We send you the investment record from when we first invested. You can say, “I agree,” or “I don’t.” Let’s talk.

Thanks again for coming on, Sherman, and thanks, everybody, for reading the show. See you next time.

 

Important Links

• Zack Ellison on LinkedIn
• Applied Real Intelligence (A.R.I.)
• 7 in 7 Show with Zack Ellison on Apple
• 7 in 7 Show with Zack Ellison on Spotify
• 7 in 7 Show with Zack Ellison on YouTube
• 7 in 7 Show with Zack Ellison on Amazon Music
• Sherman William on LinkedIn
• AIN Ventures
• Adrian Mendoza’s Past Episode referenced in this episode
• Sherman Williams’ Email Address
• Sherman William on Twitter
• 7 in 7 Show Disclaimer

 

About Sherman Williams

Mission Driven: I seek to invest in innovators that are changing the world. I am currently doing this through AIN Ventures, where I am the cofounder and Managing Partner. AIN Ventures invests in dual-use technology (companies that make our country safer, operate more efficiently and have a strong commercial use case), and veteran-led startups (industry agnostic). (https://www.ainventures.com/)

I consider myself quite lucky because I also get to invest in entrepreneurs through Techstars LA, including the Techstars SpaceTech program (https://www.techstars.com/accelerators/los-angeles)

Always Seeking to Improve: Kauffman Fellows Class 26 (https://www.kauffmanfellows.org/the-kauffman-fellows-program)

Personality: I am ESTP. I operate with a purpose and there is passion and drive behind the purpose. I am trying to maximize my eulogy virtues along with my resume virtues, and this thought process permeates throughout all the work that I do.

Experience: Growing up in Chicago and serving as a Naval Officer molded me. I have had a few other experiences along the way, primarily as an M&A Investment Banker.

U.S. Naval Academy (B.S) and Chicago Booth (MBA) Graduate.