Construct Capital's Dayna Grayson on re-industrialization, defense as early adopter, and why debt financing is broken for hardware startups

Octa helps you assign every agent a trusted identity so you get the power of AI without the risk. Secure every agent, secure any agent. And without further ado, we'll bring in Jana Grayson. Welcome to the show. Thank you so much for coming on down to the TVP [music] Ultra Dome. Uh first time on the show. Please introduce yourself for everyone.

So uh Dana Grayson, founder of Construct Capital with Rachel Holt. We started in 2020.

Um I spent about a decade prior to that, a little bit less at NEA doing early stage investing. Started a smaller boutique firm in Boston. That's where I learned venture. Had a small stint in product design at a company that had gone public and that's what sucked me on over to the venture side.

Was there any particular focus at NEA stage-wise, sector-wise?

Yes, definitely. So NEA, big firm, tech, healthcare, early stage, later stage, at least that's how they organized then. I was early stage tech mostly outside the Bay Area but that's because I lived on the east coast.

Sure.

Of course. Did some stuff on the Bay Area too.

My first investment was a company called On Shape which is a CAD company. CAD in the cloud brought CAD like next generation

now based on what you're doing now. Okay. Continue.

So exactly like that that was a pure SAS investment. I was a SAS you know like software developer prior to that.

Always enterprise SAS enterprise software. Um through on shape I saw like okay if you actually bring like collaboration to product design like real product physical product design makeup cloud like Google docs that affects like the whole downstream manufacturing and creation of those projects like you're not FTPing files you're not calling your you know uh manufacturer in China you're like actually able to like instantly change things and iterate on the design a lot faster

so from there I got into u desktop metal with Rick Fulip who I had known for years prior. Um, a whole slew basically from 2015 on was doing just exclusively industrial mostly software investing tulip automation.

Before it was coolers

before it was cool and we had a terminology for it outside of just a term for it. Yeah. I didn't have a term for it. I like to say I was like no not hardware not hardware cuz that was like a bad word.

Like the secretly [laughter] we're doing hardware. Was that just a bad word because of the capex intensivity of that category?

Yeah. Yeah. In those days, you had to have and it wasn't that long ago, but you had to have people like Rick who were just like larger than life going to will it to make it happen. You know, you've got now we've got SpaceX hardware was hard. So people were like, uh, like I maybe don't want to invest there or founders would say, well, I could build this thing in the real world, but I could also build some software scale to a million users really fast. Uh, and now hardware is cool, but it's still hard. Like that part hasn't changed. And which is why over the last, you know, I I had a I had a a friend of ours was saying like, man, like I think a lot of these new like hardware American dynamism companies aren't going to make it.

And we were like, yeah, of course that's actually how it's always been, but that doesn't mean you shouldn't invest there. that doesn't mean it's not worth still building in these like it it still fits the venture model even though it's really hard but you're going to get these outlier outcomes still

well you got to keep it simple like in hardware you can't do everything like when I see teams like designing everything new you're like that's going to fail because like you do every little thing new we love companies that are doing like commoditized using commoditized off-the-shelf stuff

for most of it and then innovating where they need to innovate versus like building the whole thing that that's where you can really falter.

I remember talking to a drone company like a decade or two ago that uh didn't use Linux. They were like, "We need our own operating system,"

which is [laughter] like crazy. So, they had like an operating system team, then the software on top of it, then the hardware. It's like they're really

we'd like to be around to see success.

We'd like to be around. And so, that that's what I say. I mean, I think today what you're seeing in industrial tech, you're seeing three main things. You see

AI automation, and we'll of course get to that, I'm sure, in this conversation. And that just being able to do things that are filling the talent shortage.

Yeah.

And boost productivity just like we're seeing in the IT space obviously coming over to not obviously but yeah uh coming over to the industrial world

it's taking longer. Physical AI is going to be longer but it is happening.

I think the other thing that we really see is like you're able to create things and do things that you just weren't able to produce before partly because of the speed. Like you get engineers that are coming over from the tech world where they're used to um someone mentioned earlier on the show like fail fast and do things like that.

Like you have to have that mentality of just like willing it into existence.

We don't usually back people that are coming out of Fortune 100 industrial companies. We back the people that were coming out of Uber or now SpaceX Palunteer.

Yeah. want to back like a people that are coming out of a big company but that became big really quickly versus the industrials company that's like yeah we were started in 1800 and [laughter]

yeah otherwise hardware it's like well this will be ready in two years and you can't accept

that type of cycle.

What do you think about uh why the reindustrialization narrative is so tied to the defense narrative? Yeah. I've had this sort of like random thesis that like maybe if we want to reindustrialize fully like we should make Happy Meal toys here and get back into injection plastic injection molding. Um but like what what are the steps? Obviously there are some accelerants to re-industrialization in the defense context because of supply chain security because of uh the way DC writes contracts and does deals you sort of have one buyer. So maybe you can accelerate, but what's easier or harder about the various pieces of the re-industrialization puzzle?

I think it's definitely become like the early adopter market, which is like ironic.

It is ironic [laughter] that like defense is our early mover. Yeah.

Um but I think it'll happen across the board. I mean when we started construct we really believe that like the world of industrial companies that

could dwarf like you know the whole S&P value today 50 if you projected out 50 years you could have you know industrial companies they should be part of our public markets right but getting back to your question in the defense space that that is just something that you know has to be built on US soil you know you've got to adopt new technology you had the great impetus the oh crap moment when you know Ukraine and Actually, it happened way before that, but that really opened the eyes of like, if we're going to support that, we're running out of stuff faster than we can make it

and like it's a oh crap moment. Not just like we knew this was happening,

which they did know was happening, but it was like an actual depletion. So, they had to escalate.

Um, and there are budgets, there are large incumbents that need to be disrupted if it's all the things. I think the thing that we haven't seen is like we're financial markets investors, you know, we're all totally driven at construct of like we want to see 50 trillion of like new market cap created in our lifetime

in public markets from these spaces. We don't know how that's going to play out yet, but I think we're like,

yeah, what's different about the market for the early stage industrials company? Uh, venture debt is so uh taboo if you're running a software company. It's something that can blow up on you. It requires a different level of financial rigor. Uh, what what are you seeing the best founders do to sort of financial engineer their success when they need to maybe buy a lot of equipment? I think it's a hole in the market right now. I mean, I do think it's [clears throat] a hole. I think debt is a hole. Um, you know, the venture debt guys don't know how to lend to companies that are startups, unprofitable buying hardware and capex. Like, they don't do that. Yeah. You know, and traditional banks that would do that don't do that for unprofitable companies. They lend to get cash flow. So you kind of

or they do, but but

it's like the founder actually has to put their house on the line, you know, [laughter] like it it it very quickly is like, yeah, you can get a loan if you're willing to like, you know, stake your entire financial

life on it and

you venture back startups are not used to doing that.

Yeah.

Yeah. So you have to put these different

instruments together. We don't recommend that like raw startups go out and take debt, but certainly series B stage, you shouldn't be using equity capital to finance a build out of a factory or you know things that are finance. Has there been any uh any movement on equipment financing in the way uh large equipment makers if they're starting to sell to more startups, if there starts to be more activity in the venture community, there's actually crossover and you see more risk takingaking from suppliers deeper in the supply chain because that's also like unlocking liquidity in some ways, right?

Yeah. I mean, vendor financing is great, right? So, um, as well,

yeah, I we've seen some of that certainly at the bigger companies like Hrien and others that are buying at scale now.

Yeah.

What about, uh,

wait, speaking of Hrien, I wanted to ask, do we do we need more Hrians or is Hrien the Hrien for X? And a little anecdote, we were flying back from the Super Bowl and Chris, uh, the founder of Hrien was there and I was like, "Oh, were you were you at the game? I didn't see you." And he's like, "No." I was like had some business [laughter] meeting and I was like that's that's bullish. Like it was like a late late Sunday night flight. Like he was he was he was locked in.

Well, I have both sides of that bet because my job depends on more Hrians, but I would love Adrien to be the only Hrien. We plow it all into that. But um I I think you've truly succeeded when you hear people saying I'm the Hrien of X. You know, we sit in a position where we're like, "Yeah, not really." Mhm.

Um, [laughter]

it's like, do you know what Hrien does?

But that's okay, too. I mean, that's the sign of success. We're the Uber [clears throat] of, we're the, you know, Door Dash of, we're the Google of, we're the whatever. But um I think what Adrian's done so well and you guys probably know is just rebuilding the whole stack and like really um you know not saying like never say die until it's full automation but like getting real return on you know I mean they hit this market that was like supply going down and demand going up

and like when we first invested we weren't we didn't even see the defense stuff right like we we loved that it would happen and we thought it would happen we were investing purely on aeros space and just our own belief in re-industrialization

uh and that and that was already demand going up but then you have like double demand like there are very few

companies like you know people say you get lucky I don't believe in luck I don't believe in uh I do believe in timing but not everybody can like have return on timing or you know like you would on luck or return on

investment that way

what can we uh do we need to be learning more from China on the manufacturing side it feels like They learned

plenty of things from us. We they were the factory of the world. They learned like what it took to make a great product. And then, you know, you look at BYD and companies like that uh learning from Tesla, whether Tesla

uh likes it or not. Uh we've talked to T1 Energy. When we saw T1 Energy like launch or at least like put out a launch video last year, we got super excited because it looked like a Shenzen style factory in the US and we were like, "Wow, America is back." And then we realized that uh it had a Chinese history. Uh but what what can we learn from China? Does that do we need to be taking that more seriously versus the American, you know, pull yourself up by your bootstraps and figure it out approach that? Um, I mean, sure, I think you should always know, you know, keep your competitors close, be learning from them, but be learning from them in a way that you can like leaprog. I mean, I think what we're good at in the US is, you know, the things that you guys have been talking about all day, AI, you know, systems, and if you're going to play the catch-up game, like we're probably not going to catch up. Like if you're going to play the leap frog game, you've got, you know, to reinvent the way automation is done through what we do well with AI and software and

and systems. So I would say like be aware, but like we're not we don't have that culture. We don't have a we don't have the worker talent available. Um you know, Steve Jobs said like we wouldn't even be able to do the tooling of the iPhone in this country with people that do it because we don't have the skill set. So we've got to find something else. I I firmly believe and it's been a original point of view or thesis of construct since we started of like manufacturing and production will look different in this country decentralized different you know smaller formats that was the promise of additive manufacturing which I think is still finding its way

but um you can do a lot of different things not you know you don't need humanoid robotics going everywhere you may we may end up with that um but we have a few steps in between of just automating factories

I want to back to the government as a interesting buyer of new technology, re-industrialization technology, defense technology. Uh I'm interested to hear what you're seeing best practices look like on ramping up a business that sells to the government. I'm familiar with the SBIRS then getting to program of record. Has anything changed there? What are you seeing founders sort of match to based on their fundraising in the private markets relative to traction in DC?

Um, I think it's it's probably more a can and like I'm speaking sort of naively here because we're not a bio we're not biotech investors, but if you think about like the biotech world, right? You take different markers. You're like, okay, you've got FDA clearance and like you can go public or like you've applied for this, you know, you've got to this clinical trial. Oh my god, it's amazing. I'm like, I don't remember if that's amazing or not. But like I think those are the signals you can take of like getting a program of record, how you navigate that.

Um,

but you know, these markets are murial, too. So, we're in a really great time now where there's a lot of spending, a lot of new programs, a lot of disruption, a lot of like unseeding, uh, a lot of neoprimes that everyone's talking about. Um, so

what does it take to work for you as an investor?

Do you have to be a great angel investor? Do you need a portfolio? Do you need to be an operator? What are you looking for folks? Yeah. And the folks you hire.

Yeah. You know, um, and we think of ourselves as like if you take the way venture has gone and like the bulge bracket Yep.

VCs and the boutique VCs. We're boutique VC. I came from a bulge bracket place. Yeah.

Voted with my feet. that change has been going on for a while. It's great to see some a couple firms, you know, declaring success there. Um, but like

declaring success,

well, being successful, I [laughter] think being able to success because they were declaring their path for a long time and I think they can declare success raising what was it Andreason 15% of all venture capital maybe more 18% I can't remember. You

hit that real meaningful market share.

That's like that's that's success. It is. Yeah,

that's hat tap, you know. Um,

so

but if you follow like I've been studying that for a while because I came from a boutique firm in Boston. I went to NEA.

Um, [clears throat]

I don't think the way to look at it is look at other and I'll get back to your questions about how we hire, but I don't think the way to look at it is how um other venture capitals are doing it. Like we look at like other financial markets, other asset classes like hedge funds. Yeah. So if you look at like hedge funds, you've got like the Bridgewaters, the Bulge Bracket, and then you've got like

the bowpost, you know, the boutiques. Yeah.

We're very much a bow post. So how would we or we aspire to be?

Yeah. Who you hire?

We aspire to be. So how we hire is we hire that analyst type thinker.

Who um unlike in the hedge fund world, you can't do a lot of like analyst based research. Sure.

Behind your desk. Yeah.

Our research is going out, meeting people, being in the field. Like you have to learn on the front lines. But people that form that point of view

and we work in a very team- based approach. So, you know, if they've spent 30 hours working on something and I've spent, you know, two hours meeting the founder for the first time, I'm going to like want to collaborate with what they've learned and what they've seen. And then I can also help them, you know, think about winning the deal and how to do this and and so we want people who are original thinkers who have points of view and are scrappy and can go out and [clears throat]

hunt it down. Is there anything that jumps out on a resume? [sighs]

I mean, we want to see success in that analytical rigor,

but we want to see that combination of self-starterism.

Sure.

You know.

Yeah.

So, uh, we do like the analytical rigor, but you can get you can get sidetracked by that because there a lot of great, you know, bankers out there. VC is just so interesting because you have somebody like Andrew Reid Goldman background then you have some so many founders, you have operators, you have people

anywhere from all over the place. It's

Yeah. When I first got into venture, I was at a business school thing and I heard a venture capitalist speak and he's like, "You've got to have been an engineer."

Oh yeah.

You had to been a company that went public. Yeah.

And then you got to go to business school. And I was like,

oh, I've done those three things. [laughter] But it's funny you could do anything or you need to be a banker.

A non-traditional background. [laughter]

Yeah. You know, we make that joke, but like there really are so many other backgrounds. You see, more so than other than other career.

What's your uh what's your health tech stack? I see you got the Whoop and the Apple.

Well, I'm ridiculous. Yeah, I got the Whoop. I love the Whoop. Um

shout out Will Ahmed.

Yeah. Yeah. We should have invested in him a long time ago. Um I love the Whoop and I'm a proud customer. I This is my iPhone finder.

Okay.

iPhone [laughter] finder. Got it. Got it. Got it.

So, and it's a t It's a watch.

Um and then, you know, I also, you know, do the bands when you go out to different workout classes and stuff. So,

nice.

I have a I'm a single stream device for one single thing. This is probably more sleep than

You got two wrists for a reason, right?

You were giving this advice to a friend. He was like, "I love the Apple Watch." I was like, "That doesn't mean you can't get an RM for the other wrist." [laughter]

I haven't done the Ora. I don't like I don't like uh that form factor, but they're just

Well, uh I hope you let us know when you find a real Hrien for X and

they're out there. We We've done a lot. Energy. Energy is a big space. Power.

Energy is a fascinating space.

Great one.

Yeah.

Awesome. Oh, great to meet you.

Congrats.

Thank you so much for coming by the show. We'll talk to you soon. And we