For this week’s newsletter, I’m interviewing venture capital investor Sunil Nagaraj. Sunil is the founding partner of Ubiquity Ventures, a seed-stage venture capital firm he started in 2017. He previously was a Principal at Bessemer Venture Partners where he led early investments in space companies like Rocket Lab and Spire Global, as well as other unicorn companies including Zapier and Auth0. At Ubiquity, Sunil invests in “software beyond the screen” and his space investments include Loft Orbital and Muon Space. He also serves as President of the Astronomical Society of the Pacific, the oldest astronomy education and outreach organization in the world.

In the interview, we talk about the three questions he asks himself before making an investment, what he learned from starting his own venture capital firm, and much more. Let’s dive in!

At Ubiquity, you like to say that you invest in “software beyond the screen” and that you are a “nerdy and early” investor. Can you expand more about your approach to venture capital?

When I say that I invest in “software beyond the screen”, the focus is on powerful software, but not software tied to a personal computer or smartphone. It’s about software permeating the real physical world. That can mean software running on rockets, software that can run on cows, software that can run in space, on the side of a building, or in a hospital hallway. All of those are real Ubiquity portfolio companies and I think the opportunity here is massive, it’s the ability to solve real-world physical problems, but at the pace of software solutions.

Software can be a hundred times faster and cheaper to solve a problem. That was the case for Rocket Lab. When new rocket companies develop a rocket, it might be a $5 billion dollar program to get the vehicle working and Rocket Lab did it closer to the order of $50 million, so 100 times cheaper. That’s because Rocket Lab has software that’s core to their electric turbopump engine and a few other elements of their system. So when I say “software beyond the screen”, I mean powerful software starting to penetrate the real physical world and that’s why my VC firm is called Ubiquity Ventures, it’s a reference to ubiquitous software.

More tactically, that means that the areas I invest in have to do with smart hardware or machine learning. I view those two technologies as ways that software can jump off the screen. When it jumps off the screen, it needs somewhere to land and that’s typically smart hardware. Furthermore, when software jumps off the screen it also needs to understand, navigate, perceive, and adapt to the real world, which is also a great match for machine learning. Today Ubiquity is a roughly $100 million venture capital firm investing in smart hardware and machine learning but it’s a lot more fun to describe it as “software beyond the screen”.

The other side of your question on “nerdy and early”, I take very seriously as well. There are two ways to practice venture capital. One way is to look at businesses that have metrics to evaluate. You analyze the metrics in a Microsoft Excel spreadsheet, crunch the figures, and come out with an investment decision. I find that to be a bit boring. I also find that it misses a lot of upside compared to the second way of practicing venture capital: diving deep into code and technical trends, well before a company has revenue metrics or even usage metrics.

So when I say “nerdy and early”, those two things go hand in hand. Early means that for about a third of the companies I invest in, I invest the day they’re incorporated. So very, very early. I usually refer to this as seed or pre-seed investing. However, you can’t be “early” in my opinion if you can’t be “nerdy”, because if you’re “early” and you ask for an excel model, most entrepreneurs at that stage don’t have an excel model or traction figures. Most entrepreneurs I back don’t have revenue, so what I have to turn to instead is following technical trends, following technical people, and investing behind really big technical ideas that fall in line with software beyond the screen. So if it is a low-cost, lightweight physical solution to a physical problem that leverages a lot of software or smart hardware, then that falls in line with my thesis. “Nerdy and early” means that I try to spend my time hanging out with technical folks and understanding technical trends from the source, rather than reading about them in a Gartner report, at which point they’re lagging trends.

Ubiquity Ventures was an early investor in Loft Orbital, a company only four years old, that is already signing customer partnerships of over $100M. What do you look for in potential early-stage space investments and what did you see in Loft Orbital when you first invested years ago?

With early-stage investing, when I’m investing before there are many metrics, I usually ask myself three very specific questions. It might be natural simply to ask myself “Do I like this product?”, but I think that’s a terrible way to make investments. I’m not looking for companies that I would use as a customer, so it doesn’t make sense to ask, “would I ever use the product myself?”. I think it’s very tempting to do that, especially when you watch something like Shark Tank and they’ll say “oh I would never use that”.

The three questions I ask myself are “Does anybody want this product?”, “Are there a lot of those people?”, and “Can this entrepreneur find them?”. Those three questions keep things simple, but they correspond to the business concepts of product-market fit, market size, and unit economics. In my day-to-day, most of my time is spent on question number one, “Does anybody want it?”. That’s trickier than it seems to evaluate. When I hear a pitch it is pretty helpful if an entrepreneur includes some customer quotes, prospective customer quotes, or expert quotes. During my own post-meeting diligence, I’ll often call a potential customer and describe this new product, but they’ll say “oh I don’t want that”. If I ended the diligence call there, that could be a mistake, so I’ll usually have to explain more and navigate the nuance of a prospective customer’s mind in order to figure out if this would be a good fit. So that’s the trickiest thing I do. I try to figure out if customers might buy the product or service in the future if it existed. Steve Jobs has a famous quote “it’s not the customer’s job to know what they want”, so it’s this delicate process of figuring out what might work if it existed.

If we shift gears to Loft Orbital, this was an investment where it was in one of my focus areas. I’ve met hundreds of space companies and what stood out about Loft was something I see very rarely among space startups. Loft Orbital had a pipeline of customers that spanned multiple categories. A lot of space startups have customers that are also space startups, so it’s risk-on-risk or startup-on-startup risk, which is tricky. Loft Orbital had interested customers across government, defense, domestic, international, legacy space, and new space. That diversity of customer pipeline was a really helpful signal to me that this is something attractive to a larger market and it’s a bit more real. When a larger company is interested in being a customer, it carries a bit more weight than if a small startup is.

The broader Loft Orbital thesis is that if we made space easier to access it would accelerate the size of the space market. As a result, I often compare Loft Orbital to Amazon Web Services. When AWS makes it easier to get your app or your code out to the world, you have the emergence of Web 2.0 and tons of internet startups exploding. I think AWS and other cloud infrastructure providers were behind that. You write your code, give it to them and they host it on their services, with cooling and electricity, and put it on the internet. You don’t even know where it is, but it is live to the whole world.

That’s conceptually very similar to Loft Orbital. You give Loft your payload, they certify it, get the FCC license, thermal test it, vibration test it, and then launch it for you into space and downlink the data. As a result, you can use space without being an expert in space. Between those two factors, diverse pipeline and great thematic fit, it was an easy decision to invest in Loft Orbital.

You’ve been a venture capital investor in early-stage space companies for nearly 10 years. How has the space industry changed in that time?

At my old firm, Bessemer, where I was until 2017, one of my old colleagues David Cowan invested in Skybox in 2010. Skybox sold to Google in 2014, which is when I got deeply involved in the space sector. Later that year in 2014 we invested in Rocket Lab’s Series B. At the time, they had conducted something like a two-second hot-fire test on one engine, so they were very early in their development. I would go to space conferences and be the only VC there –not a single other venture capitalist was present. Dedicated space venture capitalists didn’t exist as space hadn’t hit the radar of a lot of investors.

Space ideas were not yet tuned for the venture capital model, which would involve raising a seed round, then a year later raising a Series A, a year later raising a Series B, and so on. You have to fit the mold if you want to raise venture capital. Another part of the mold is that your idea can go from start to exit in less than ten years because venture capital funds are set up for ten years. None of those structures are important to the actual development of space technology, but you have to fit them if you’re going to take standard venture capital funding. What’s happened over the last ten years is that the average space founder now knows how to adapt their roadmap to fit the model so that they can secure this kind of capital.

At today’s space conferences, there are a dozen VCs actively participating which is a good thing for the industry. Now when people say ridiculous things like “space is hard” or “space is expensive” or “things blow up in space”, there’s enough conventional wisdom floating around the valley that says “no, that’s not necessarily true anymore” and that’s really powerful. I like to think I played a role in helping that trend. At every conference I went to, I’d speak on stage about why VCs are flocking to space and I’d go on my soapbox about “don’t say space is hard because it’s detrimental to the industry and it’s also not accurate anymore.” I think the space industry is feeling more like the tech industry with lower capex solutions, faster time to market, more agile iteration, and more VCs floating around. Now, we’re seeing a few dozen companies that have successfully raised late-stage funding rounds and are fitting the trajectory of a typical tech company.

What excites you most about the future of the space industry?

One of the most exciting parts about Loft Orbital serving as the AWS of space is that we don’t even know what applications will result. It’s a little bit like sitting in 1995 and AOL dial-up has been invented, and we don’t know what we’re going to do with it next. As internet access became more pervasive, people thought of all sorts of crazy things, including delivery, online dating, storage, e-commerce, blogging, and others. Those things are coming in the space industry. I don’t know what they are and I’m not smart enough to see around that corner, but I am happy to be invested in a company (Loft Orbital) that’s helping to accelerate that trend and basically let a lot more people experiment with space.

I would say the advent of AWS and super easy access to web servers probably let a hundred times more people experiment with internet technologies and get their apps to the world. I hope that’s the case with space, if we have a hundred times more people experimenting with ideas for space, there will be things we haven’t even imagined. As we know, there are the main space categories of imaging, communications, navigation, and tourism. I hope an equal number of new categories emerge as well.

With the internet today, you can run a multi-billion dollar software company and have never seen a server in your life – and that’s potentially a good thing. Similarly, there’s a transition going on now where you can start to operate in space without having to lay all the groundwork for building a full satellite. You can give your payload to someone like Loft Orbital and have them host it for you.

You have had the unique experience of not only being a venture investor but also founding your own venture capital firm. What were some of the biggest challenges and learnings in the process of starting your own fund?

Raising a fund is very different from raising money for a startup. I’ve raised money for my own startup in 2009/2010 and then I’ve invested in startups, but raising money for a fund means that you’re asking people to give you money without a specific place it’s going to go. When any of the Ubiquity companies raise money, there’s a pitch, “here’s the product, here are the people, here are the customers”. It’s fairly specific. At the very beginning of any fund, especially your first fund, which I raised in 2017, it’s just a bunch of slides.

Ubiquity’s fund I was a $30M fund, so I offered my investors fewer specifics than a seed-stage startup would, but I was asking for 10x more than a seed-stage startup. That’s a big leap of faith and I’m appreciative that my early Limited Partners, the investors in my fund, backed me with no concrete specifics about where the money was going to go. I told them that I would invest in 20 companies that would fit into the themes we outlined earlier. Then I asked them to trust me. It’s a fundamentally different process and I don’t think I appreciated how big of a leap of faith LPs have to take, especially in a first fund but generally in any fund. Unlike investing in a startup, you’re committing capital for the next ten years with much less governance than in a typical startup investment.

To the extent anyone’s considering raising a new fund, the key is to gain trust with as many LPs as possible, and try to push from vague themes to more specifics. It also usually helps a lot when you have one investment in your fund, so if you can raise a little bit of your fund and put one investment into the fund, it means you’re serious, you’re already starting, but most importantly, folks can evaluate that one company as a concrete asset as opposed to a thematic idea.

Beyond investing, you also have a deep personal passion for space. In fact, you currently are President of the Astronomical Society of the Pacific, a role that was previously held by such giants in Astronomy as Edwin Hubble and Frank Drake. Where does your passion for space come from and can you please tell us about some of the space-related programs you are personally involved in?

There is a distinction between what people refer to as the space industry and the world of astronomy. In the commercial space industry, we use the word space and that industry involves subjects like rocket fuel, airframes, and engine architectures. In astronomy, you’re more involved with education and institutional research and the scientific study of galaxies, exoplanets, and physics. So I’m passionate about both and luckily they have a little bit of synergy, but I’ve found they tend to be distinct worlds.

My passion for astronomy originated before I can remember, I’ve always been obsessed with stars, planets, and questions of “where did we come from”. I was especially interested in the search for exoplanets and life, so I’m a little involved in the SETI (Search for Extraterrestrial Intelligence) Institute. I was a little involved in the Kepler project as well, which was a search for other Earth-like planets in our Milky Way galaxy. Now I’m with the Astronomical Society of the Pacific (ASP). It is a parallel effort to investing in space and it’s quite fun.

One neat thing from the ASP, a relatively recent project we did, was to create the astronomy badge for the girl scouts. So we do a wide variety of educational outreach projects to push astronomy as an entry into science. It’s an easy way to connect the dots as to why science matters and for people to fall in love with astronomy, it doesn’t mean they need to be a professional astronomer, but it is a good way to enter STEM fields

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