Brave Capital: A Mini-Manifesto

Greetings and welcome to the March edition of our newsletter! Lots of good things to report this month. Team Overlap is now four people strong with the addition of Irene Edwards, our new Director of Content + Comms , who brings her storytelling skills and deep experience in legacy media to the world of venture/frontier tech. We’re also mostly done with building out our company systems and are now readying ourselves for official introductions to prospective counterparties. It’s an exciting time, and we’re grateful to you all for joining us on the journey.

And with that, let’s launch into a key aspect of the Overlap mission: making the case for Brave Capital.

What does it mean to be “Brave?”

Does it mean to avoid risk? Certainly not.

Nor, conversely, does it mean to be cavalier about risk, or ignorant of it, either.

The essence of being brave is knowing that something is risky, but doing it anyway, because the reasons for trying and the rewards for being successful are worth it.

Bravery is universally viewed as a virtue, whether in the context of war, politics, justice, medicine, or any of a number of other fields of human endeavor. The one place where you rarely, if ever, hear the term is in the context of investing. Investors are quick to embrace the virtues of prudence, balance, and even contrarianism, but nobody of importance has yet described themselves as a Brave investor.

We want to change that.

We’ve spent a lot of time in past newsletters explaining commonplace ideas from the Sustainable and Venture investing ecosystems. Today, we’re going to go a step further and discuss a relatively new idea that Overlap seeks to bring to the forefront—the concept that we call “Brave Capital.”

To us, Brave Capital is an articulation of a convergence of efforts already underway in the innovative circles of finance. It is a subset of the world-positive investing framework we discussed a few months ago in this newsletter , and is part of the ecosystem of “Catalytic Capital ” that seeks to utilize patience, risk tolerance, and flexibility to fuel innovation at a transformative pace.

More specifically, Brave Capital aims to achieve compelling long-term returns by investing in new and emerging corporate structures and frameworks that (1) require very long timelines and (2) do not have robust track records, but which nevertheless (3) contain enormous promise in terms of both profit and societal impact. If Venture Capital is high risk/reward (as discussed last month ), and Frontier Tech is an amplified subset of risk/reward within Venture , then Brave Capital takes us further down the rabbit hole. It seeks opportunities that even institutional frontier tech VCs shy away from—not out of a lack of enthusiasm, but because of the pressing realities of fund duration and LP risk parameters.

To wit: If an institutional VC comes across an investment opportunity that has a likely timescale of 15–20 years, they must almost always reject it, given the realities of having a fund life of 10 years and the desire to return capital to LPs within a market-standard timeframe. Similarly, if that same VC is shown an opportunity to invest in a completely different type of operating company, with a different value proposition from that of a classic startup, it makes it harder to underwrite and/or articulate the risk within the context of the rest of the fund portfolio.

These are the reasons that Brave Capital opportunities have primarily been neglected. Yet despite these headwinds, there are plenty of entrepreneurs, academics, and executives working to push the envelope with novel investment paradigms that fit the profile of Brave Capital (examples below). One of Overlap’s essential long-term goals is to shine a spotlight on these efforts and collaborate with willing, Brave funders (primarily foundations and high-net worth individuals that don’t have the same restrictions as other large LPs) to demystify these efforts and develop underwriting frameworks to assess and price their unique and dynamic risks. This process will hopefully lead to outsized returns for these Brave Capital investors—and create enough infrastructure around these efforts for them to eventually be considered mainstream.

In many ways, the recent early successes of Breakthrough Energy and OpenAI are both validators of what Brave Capital can do, if it were to expand and be considered an asset class. Breakthrough was founded in 2015 by Bill Gates with a mission of investing in high-risk, high-return clean energy innovations with a timescale of 20+ years. Not surprisingly, the effort is funded primarily by Ultra-High Net Worth individuals who have made a choice to be Brave with their capital. This Bravery seems to be paying off; the firm has claimed numerous successes in its efforts to date, and its startups (including this , this , and this ) are making some of the biggest moves in climate technology possible. OpenAI was also founded by a group of billionaire investors in 2015 with a goal of creating responsible breakthroughs in artificial intelligence. The company’s GPT-3 project has become very well-known, and is the source of the rapid acceleration and proliferation of natural language artificial intelligence that we’re seeing in the market today, including ChatGPT and the panoply of AI-driven image generation tools .

The fact that both Breakthrough and OpenAI have built up so much momentum in less than a decade (i.e., well within their initial timescales) serves as additional encouragement that we should be leaning in and doing more of this.

Below are some examples of Brave Capital frameworks that are presently emerging. To state the obvious, these are not Overlap’s “ideas.” Some of these efforts have been the work of groups of brilliant people over many years. Our goal is to drive attention to what these innovators are doing, and develop pathways for additional capital toward their objectives.

Brave Capital Example #1: Focused Research Organizations (FROs)

Every frontier tech company is based on an innovative breakthrough. Likewise, every innovative breakthrough is based on the work done by researchers in a lab.

Where are these researchers? Mostly at universities. Colleges are responsible for a large proportion of the scientific research being done in society today. Although located within not-for-profit entities, university research organizations can nevertheless generate significant revenue for their schools through a process known as “Tech Transfer.” Tech Transfer is the act of licensing, or transferring, intellectual property and patents of discoveries made within an organization (in this case, a university) to a startup or established company that wants to create a business relying on said discoveries. Through this process, the university receives a revenue stream in the form of licensing fees, or in some cases, a % ownership of the company.

The revenue stream from tech transfer can be quite lucrative. For instance, Stanford University’s Tech Transfer office reported revenues of $89 million in 2022:

In the same year, MIT announced a similar level ($83 million). And while this is likely a one-off event, the University of Pennsylvania reportedly received approximately $1 billion in Tech Transfer revenues in 2022—primarily attributable to royalties from Pfizer/BioNTech and Moderna’s COVID-19 vaccines, which came out of UPenn’s pioneering mRNA research.

Of course, universities are not solely dedicated to generating licensable research. They also teach, house, and feed undergraduates; sponsor enormous athletics programs; operate library, medical, and security organizations; employ thousands of professionals; and are focused on a host of other activities, all of which compete with the school’s research efforts for time, attention, and resources. The classical rigors of the academic environment—the internal pressures of staying on tenure track, getting published, and teaching students—also drain time and energy from a university’s core research professionals. The incentive structure encourages projects focused on individual work by a professor, their postdocs, and students, or small collaborations that can fit in the co-first-author list of a paper, rather than scalable startup-like R&D endeavors.

Which begs the question: What if it were possible to remove these distractions from the research process and create an organization that distills a university’s scientific research–generating and Tech Transfer components into a purpose-built organization around a central area of discovery?

Enter the Focused Research Organization, or FRO. FROs seek to do exactly that—dedicate a pool of capital to hiring top-class researchers in a specific field; fit them out with the lab infrastructure required; and give them a mandate to tackle a focused problem with only limited, periodic oversight or interference. In other words: get out of their way and let them build discovery platforms.

FROs are a bold experiment, and one that resonates with a basic level of sensibility.

The biggest name in FROs today is a firm called Convergent Research , which was incubated and funded by Schmidt Futures (Eric Schmidt’s family foundation) and is now an independent nonprofit. Convergent launched two separate FROs in 2021, and their respective teams are off and running with their research. The two FROs currently being sponsored by Convergent are E11 Bio , which is developing technologies to assist in mapping the human brain; and Cultivarium ,?which is developing tools to assist scientists in the genetic manipulation and engineering of microorganisms.

It’s important to note a few common characteristics of these two FROs. First, they are conducting their research in a near-frontier of applied science—one adjacent to areas where there have been step-changes in discovery in the recent decade, which these researchers can take advantage of to increase their likelihood of success. For instance, Cultivarium’s work relies on the breakthroughs in CRISPR technology to rapidly advance the speed of gene editing and sequencing. In addition, neither group is focused on only one specific narrow problem, but rather on opening up a field of study with potentially powerful discoveries. This allows for diversification of the “bet” in funding an FRO, since there will be numerous pathways to success building on what the FRO builds—as opposed to a binary “we did it” or “we failed.”

FRO projects are important not only for the discoveries they focus on, but also because they seek to create proof of concept that the FRO model “works.” In other words, can FROs develop enough actionable discoveries to merit their cost and buildout? Given that Convergent is a nonprofit (as are these two first FROs), they focus primarily on answering that question from a societal standpoint. However, if these first several FROs demonstrate proof of concept, there’s nothing preventing a group of interested parties from porting the framework into a for-profit construct.

The initial two FROs from Convergent have their first public sharing of findings in 2024. At that time, we’ll learn more about their viability as enterprises. If their initial research is promising, then the time might be right to lean into the concept with additional Brave Capital—by creating a diversified pool of for-profit FROs and funding them through a single investment vehicle.

To state the obvious, seeing a return on an investment in a pool of de novo FROs would take considerable time. First, the FROs would need to be set up, with time and effort spent recruiting people to the cause and standing up organizational infrastructure. Once that’s done, the teams would need to start researching, and hope that within a reasonable timeframe (~5 years) they could cultivate sufficient IP to license/transfer out to early-stage commercial efforts (likely startups in the pre-seed stage). From there, it could take another 5–10 years for those new startups to commercialize their technology and start generating material licensing revenues for the FROs. Base case, you’re probably talking about 15–20 years to recoup your original investment. This, along with the lack of a deep historical track record in the asset class, is what qualifies a theoretical investment into FROs as a Brave Capital opportunity.

But once that time has passed? Imagine a diversified pool of 10 FROs, each with a different mandate in a relevant, near-field area of expertise, utilizing cutting-edge developments in an effort to generate as much compelling IP as possible. It would be innovation infrastructure in its truest form. Over time, one could easily see the licensing streams compounding rapidly and generating enough earnings to grow the best-performing FROs in a perpetual flywheel. Seems like a compelling opportunity to me.

Brave Capital Example #2: First of a Kind (”FOAK”) Infrastructure

Frequent readers of this newsletter will note that I’ve used the term “Valley of Death” several times in the past months to articulate the funding gaps that exist in the financing lifecycle of some frontier tech companies. Readers of last month’s post will also have a sense of the different mindsets of early- and late-stage investors when it comes to risk and return. In short, VCs are comfortable with taking a lot of risk, so long as there’s a chance to make an enormous return as a result; while later-stage investors are willing to settle for less return, so long as they have a pathway toward greater downside protection.

Unfortunately, certain investment opportunities are “in-betweeners.” There’s some element of downside protection and some element of outsized upside, but they come together in an unusual way, and the inherent biases and concerns of both investor camps (early- and late-stage) makes it difficult for either to pull the trigger on an investment. Such areas require an investor Brave enough to take elements of both approaches to effectively underwrite a transaction.

A perfect example is the dilemma faced by a company looking to construct a “First of a Kind” (FOAK) industrial-scale facility for manufacturing some new product, compound, or material.

Let’s say you’ve created a new chemical process that demonstrates a clear environmental benefit—for instance, utilizing CO? as a feedstock to create a plastic compound previously derived from crude oil. Such a product would not only reduce the demand for oil but would also proactively remove carbon from the atmosphere—a double win for the environment!

Such companies exist in Venture today (we’ve even invested in some!), but scaling is always an issue. There's plenty of capital available for early-stage lab testing and small sample batch production; but to truly become cost-competitive with legacy products, these businesses typically need to scale their operations many-fold.

In order to do so, a large demonstration facility (in this case, a chemical reactor) must be built, at a cost that can reach up to hundreds of millions of dollars. Unfortunately, given that the company in this scenario has not yet benefited from the increased throughput or reduced cost of said facility, it doesn’t yet have the revenue and/or profit history that the later-stage investors who usually finance such facilities require in their diligence processes. It’s a classic chicken-and-egg problem—currently “solved” by companies either funding this kind of expansion with overly dilutive equity, or being unable to scale to their full potential.

A lot of intelligent people and groups are focusing their efforts around this issue , given its pressing urgency toward scaling up climate-preserving industrial models. Simply put, we need some intelligent investors to be Brave about underwriting the nuances of such a build, and to develop a financing structure that blends elements of classic later-stage project finance (via coupon, collateral coverage, liquidation preference, etc.) with early-stage equity upside (via warrants, conversion features, and the like). It will require investors fluent in both East Coast and West Coast financing to bridge this gap. Overlap is uniquely positioned to bring these stakeholders together. We will be spending time cultivating the right mix of capital and incentive to get some of these projects funded more efficiently.

Other Brave Capital Examples

There are plenty of other interesting frameworks that could benefit from Brave Capital. I’ve included three more below that, for the sake of brevity, I’ll contain to a couple of paragraphs each.

• Government Tech Transfer Accelerator/Incubator: The federal government dedicates a large share of budget for research and development through a number of departments (including Energy, Defense, Health, Space, and Commerce). All this research is the property of the U.S. government, although it is accessible via Tech Transfer mechanisms to the funders of the research—the U.S. taxpayer. Specialist firms such as FedTech help the government execute its most pressing Tech Transfers with the private sector. Unfortunately, dealing with government research offices differs in many important ways from the private sector, and for that reason, there are very few firms specializing in utilizing government-created IP. To take a quick glimpse down the rabbit hole: Hundreds of national and federal labs all have different priorities, budgets, staffing, processes, negotiations, researchers, and incentives that can make working with them challenging, to say the least. There is no centralized database of available technologies, so finding one you want to license can be like finding a needle in a haystack. FedTech has begun building startup studios focused entirely on the nuances of government Tech Transfer in order to create an efficient pathway toward getting these discoveries into the hands of the right founders and executives—thereby creating a set of compelling early-stage investment opportunities. Similar to Convergent’s pioneering work in FROs, the work that FedTech is doing could benefit from additional resources and capital, and would similarly leverage a vast untapped opportunity to rapidly accelerate technological change.
• Private ARPA: Many of you have already heard of DARPA (The “Defense Advanced Research Project Agency”), a small-but-famous unit within the US Department of Defense which has yielded massive societal innovation over time—think GPS, stealth aircraft, and the predecessor of the modern Internet. DARPA has embraced a unique operating model that allows it to be significantly more nimble than the rest of the “Pentagon”—its framework consists of bringing on a single program manager with a relatively short tenure and a high degree of autonomy, who then outsources parallel research projects to distributed teams towards a focused goal. This allows for an exploratory phase during which many different approaches can be tested. The most promising of these programs then run for a longer period of time than the exploratory phase, where demonstrable results are hopefully achieved. More recently, we have seen the emergence of the Private ARPA, or “PARPA” model: a new kind of private-sector organization that emulates the governmental model to pursue paradigm-shifting technologies that typically fall outside the parameters of industry and academia. (See Speculative Technologies and Wellcome Leap .) Many PARPA models as currently manifested rely on a hybrid for-profit/nonprofit structure: the nonprofit coordinates the research, while the for-profit generates earnings from any startups/IP that spin out of the programs and funnels funding back to the nonprofit. We believe that continued exploration of the PARPA model could yield some potentially scalable and groundbreaking innovation opportunities with more self-sustaining funding than the typical not-for-profit models allow.
• ”Pre-Moonshot Infrastructure”: This is our term for targeting a pool of capital to invest in intermediate technologies that will likely be required for an important future field of advancement—even if the large, “moonshot” end use case hasn’t been commercialized yet. For instance: There are a number of potentially interesting applications for carbon nanotubes (an incredibly strong and lightweight cabling material) envisioned for the future of space exploration and space industrialization/manufacturing. The level of industrial/commercial activity in those fields is not yet large enough to articulate a near-term revenue opportunity to encourage significant venture investment in carbon nanotubes. Having said that, it might make sense to direct capital and resources toward developing and finding interim use cases for carbon nanotubes, which could generate a small level of profitability and position a company well for the eventual demand coming from the cultivation of this market as the space economy develops over time. If a number of such technologies and interim use cases could be identified around a specific long-term goal (in this case, space exploration and industrialization), one could create a portfolio of investments that could eke out modest performance in the near term, with the potential for a significant multiplier on returns if the longer-term use cases come to fruition.

We hope you enjoyed this overview of Brave Capital, and that the opportunity is as exciting to you as it is to us. We are open and ready to collaborate with anyone interested in creating or funding some of these new paradigms.