Countdown Capital, one of the pioneers in the venture capital space focusing on early-stage industrial tech startups, has announced its decision to cease operations by the end of March. As per the annual letter from the firm’s founder and solo general partner, Jai Malik, the uninvested capital will be returned.
According to Malik’s letter, which was seen and analyzed by TechCrunch, two major realizations led to the decision to shut down the fund.
“Funding industrial startups is not inefficient enough to justify our existence, and larger, multi-stage venture firms are best positioned to generate strong returns on the most valuable industrial startups.”
In simpler terms, Malik implied that due to capital restrictions and intensifying competition from larger incumbents, the firm would likely not be able to consistently achieve excess returns.
Despite the firm’s performance to date, Malik concluded that new investments would likely not result in robust returns. This led him to question the validity of Countdown’s existence for both the Limited Partners (LPs) and the management of Countdown. He stated,
“I no longer believe that Countdown’s existence is justified, for both our LPs and Countdown management.”
However, Malik chose not to comment further on the matter.
Countdown Capital has had an impressive portfolio, backing some of the most notable names in the aerospace and defense sector. Among these were large satellite bus developer K2 Space, machining startup Hadrian, and cybersecurity company Galvanick. The firm’s website lists a total of 12 investments.
Among Countdown’s LPs were David Sacks of Craft Ventures, Turner Novak of Banana Capital, and Hunter Walk of Homebrew VC.
Countdown Capital was one of the early entrants in the American hard tech renaissance. The firm closed its first fund well before Andreessen Horowitz launched its American Dynamism practice, which is likely the largest and best-known U.S. fund focused on shoring up “the national interest” across sectors like manufacturing, aviation, and others.
In September 2022, TechCrunch covered Countdown’s second $15 million fund. At the time, Malik stated that the firm was filling a void at the early stages for capital-intensive businesses. However, a year and some months later, it became clear that the early-stage opportunities Malik was targeting did not pan out as expected. Countdown’s first fund was $3 million.
In his letter, Malik pointed out larger narratives about early-stage hard tech industrials investing that cast doubt on the ability of small, specialist funds to compete against multi-stage incumbents. He explained,
“We’re bearish on the ability of small, early-stage funds — particularly sectionally focused ones — to continue exploiting these opportunities profitably.”
Malik drew a connection between large multi-stage firms investing in hard tech industrial startups and the slowdown in growth in software-as-a-service (SaaS) businesses. However, he argued that the rate of overall value growth for industrial startups would not outpace the rate of investment from large firms.
“Consequently, we think early access to the best companies for a specialized, early-stage venture firm like Countdown will become more limited.”
He suggested that the most successful early-stage, specialist firms might simply resemble less-profitable ‘derivatives’ of top-performing multi-stage firms, like Founders Fund.
Malik admitted that he believed Countdown had or could develop competitive advantages to outcompete against other firms, multi-stage or early-stage. However, he conceded that these advantages “are unlikely to prevail.” These advantages could include incubation or other approaches that require more time and money than the small-AUM firm could afford.
He acknowledged that this lack of competitive advantage was already noticeable. In three instances, Countdown was close to investing in a company’s first round, only to be outbid by a larger multi-stage firm.
Malik pointed out another issue – that top-performing industrial startups are inaccessible to early-stage firms because they are priced efficiently early on. For example, he estimated that Anduril, The Boring Company, and Redwood Materials were priced at approximately $60 million, $1 billion, and $200 million, respectively, in their first outside rounds.
To acquire just 3% of each company, Countdown would have had to invest a significant portion of its fund.
By the end of March, Countdown Capital will complete all pending investments, return capital, cancel all uncalled commitments, and permanently cease operation apart from the current asset management, according to Malik’s letter.
This unexpected closure of a three-year-old firm suggests that the overtly optimistic narratives about “building for America” may not reflect the reality of the headwinds facing early-stage hard tech funds. Malik’s incisively written letter serves as a reality check, like a cold glass of water to the face.
