Countdown Chapteran early-stage venture capital firm focused on hard-tech industrial startups, will close by the end of March and return uninvested capital, the firm’s founder and solo general partner Jai Malik said in an annual letter.
In the letter, seen by TechCrunch, Malik says he decided to close the fund after reaching two key conclusions about the economics of investing in hard tech early stages: that “funding industrial startups is not efficient enough to justify our existence” and that “larger multi-stage venture firms are better positioned to generate strong returns on the most valuable industrial startups”.
In other words, that the firm is unlikely to consistently generate excess returns given capital constraints and increasing competition from large incumbents.
The three-year-old company’s sudden shutdown suggests there are stronger headwinds for early-stage hard-tech capital than overtly optimistic narratives about “building for America” might suggest. The letter written in clear letters looks like a cold glass of water to the face.
“Despite our performance to date, I have come to the conclusion that new investments are unlikely to generate strong returns,” says Malik. “As a result, I no longer believe that Countdown’s existence is justified, both for LPs and Countdown management.” Malik declined to comment for this story.
The company has backed some of the best-known names in aerospace and defense, including major satellite shuttle developer K2 Space, machining startup Hadrian and cybersecurity firm Galvanick. A total of 12 investments are listed on the company’s website. Countdown LPs include Craft Ventures’ David Sacks, Banana Capital’s Turner Novak and Homebrew VC’s Hunter Walk.
Notably, the countdown was relatively early for the American hard-tech Renaissance. the firm closed its first fund long before Andreessen Horowitz started his American Dynamism practice, probably the largest and best-known US fund focused on supporting the “national interest” in areas such as manufacturing, aviation and others.
TechCrunch covered Countdown’s second $15 million fund in September 2022; at the time, Malik said the company was filling a gap in the very early stages for capital-intensive businesses. A year and a bit later, however, it’s clear that the opportunities Malik targeted early on have not panned out as expected. Countdown’s first box office was $3 million.
The letter sets larger narratives for early-stage hard-tech industry investments that call into question the ability of small, niche funds to compete with multi-stage incumbents.
Malik explicitly touches on this fact towards the end of the letter, when he writes: “To be clear, we are not a risk to venture capital or the future success of enterprise-scale hard-tech companies in general. We are bullish on the ability of small early-stage funds—particularly those that are segment-focused—to continue to profitably exploit these opportunities.”
In the letter, Malik links large multi-stage companies investing in hard-tech industrial startups to slowing growth in software-as-a-service (SaaS) businesses. However, he says the rate of growth in overall value for industrial startups will not outpace the rate of investment by large companies. “Consequently, we believe that early access to the best companies for a niche early-stage venture firm like Countdown will become more limited,” he says. “The most successful early-stage, niche companies may simply look like less profitable ‘derivatives’ of top-performing multi-stage companies like Founders Fund.”
Malik goes on to say that he believed Countdown had or could develop competitive advantages to overcome competition from other multi- or early-stage companies, but that these were “unlikely to prevail.” Those advantages could be things like incubation or other approaches that require more time and money than the small AUM company could afford.
He said this lack of competitive advantage was already noticeable: On three occasions, Countdown came close to investing in a company’s first round, only to have the company priced out by a larger multi-stage firm: “Price 50-100% The difference in stage of prenatal and seed doesn’t matter to a multi-stage company that manages billions of dollars, but it can and should be the difference between a yes and a no for a company of our size.”
Another issue, Malik says, is that top-performing industrial startups aren’t accessible to early-stage companies because they’re effectively priced out early. For example, Malik estimates that Anduril, The Boring Company, and Redwood Materials were valued at about $60 million, $1 billion, and $200 million, respectively, in their first outside rounds. Countdown would have to invest a huge chunk of its capital to acquire even just 3% of each company.
By the end of March, the company will complete all pending investments, return capital, cancel all unnecessary commitments and permanently cease operations except for the management of current assets, Malik said.
