Mithril Capital’s Ajay Royan Talks About Working with Peter Thiel and Why ‘Investing Is Hard’
It’s been an interesting month for Ajay Royan. On the one hand, Mithril Capital—the venture capital firm he co-founded with Peter Thiel in 2012—just had its biggest win to date after Johnson & Johnson agreed to buy Mithril-backed medical robotics firm Auris Health for $3.4 billion.
The deal, which has been described as the largest-ever acquisition of a venture-backed medical technology firm, could eventually be worth up to $5.75 billion if Auris hits certain milestones. In that event, it would end up returning up to $900 million to Mithril, which was the largest investor in Auris with a 15% stake in the company.
On the flip side, Royan and his firm were also on the receiving end of some bad publicity last week after tech news outlet Recode published an article about Mithril that reported on “drama, disarray and unanswered questions about its finances.” The story questions a “disappointed” Thiel’s supposedly diminishing influence at Mithril; claims discontent among limited partners about the firm’s management fees; and describes Royan’s decision to move his 17-person firm’s headquarters from San Francisco to Austin, Texas, as unpopular among employees.
When he sat down with Fortune in New York earlier this week, the India-born, Abu Dhabi- and Canada-raised Royan was happy to discuss a career that has taken him from an initial sit-down meeting with Thiel in 2002, to a decade-long stint at Thiel’s Clarium Capital hedge fund, to his current role at the helm of his own investment firm. And the 39-year-old, who graduated from Yale at the age of 20, was eager to impart the ideas that have driven Mithril’s investments in forward-thinking, predominantly tech-oriented companies like Auris.
But Royan was also more than willing to address some of the reported criticisms of his firm. And to hear him describe it, some of those criticisms—such as questions over Mithril’s relatively deliberate rate of capital deployment, for instance—are rooted in misconceptions about the company and the very philosophy by which it conducts business.
“The question is not is Mithril investing too slow; the question is are we all, including Mithril, investing too fast?” Royan says, acknowledging that the company has only deployed about an eighth of the capital in its second, $740 million fund. “Because there is a lot of capital in the market right now, and you have to be even more focused on differentiation and discipline.”
Mithril has been labeled everything from a tech-focused investment firm to a late-stage venture capital firm. How would you describe the company and the principles that guide its investments?
Ajay Royan: Mithril is still a startup; it’s just six years old. If you look at the world of startups, it takes about 10 years for a company to mature these days. It used to be very different in the ‘90s, when I came to the U.S. for the first time; you’d have companies that would get started in January of the year, and they’d go public before the year ended or early the following year. That’s gone. You need to establish real success and ownership of a well-defined market. That’s what I say to all the companies we invest in.
I would say the same to us. We’re a startup that’s trying to find new ways to deploy or underwrite productive risk. If you had to classify it, of course venture capital is how you would classify it. But really, it’s about how do you thoughtfully invest in growth on an unlevered basis? This is something I started thinking about after the ‘08 financial crisis: How do you build something that does not get upended by a cycle? How do you compound through financial cycle ups-and-downs? That’s the high-level problem that I wanted to try to solve.
So how do you identify the companies that allow you to solve that problem?
Say there’s a two-by-two [matrix] and the two dimensions are intrinsic value and productive value. The question is what’s on the top right quadrant, which is both high intrinsic value and high productive value? If you have high intrinsic value but don’t care about productive value, then you might have gold—or Bitcoin, in the 21st century sense. Those are reserve assets that you can own and you don’t care about being able to use them in productive work. But high intrinsic value and high productive value?
The number one focus is thinking about scarcity value and usefulness. Because if it’s scarce and not useful, then it falls into the bottom right quadrant. We operate mainly in scarce technology assets; we think we can build an edge in scarce technology assets and do unlevered growth, and that’s what Mithril is all about. If you want an archetype of what that looks like, you would basically look at something like Auris, and frankly the rest of our portfolio.
One of the things I’m most pleased about is that we have built a body of work that is quite different from what is normative in Silicon Valley. If you drew a map of the continent, you’d see we had Auris in Redwood City, in the Bay Area. Then in Kansas City we have a company called C2FO, which stands for collaborative cash flow optimization; I would argue it’s the world’s largest working capital exchange, right in the middle of the country. And then there’s Adimab, which is a company in New Hampshire, right by Dartmouth; they’re like Qualcomm for immunotherapy, meaning they power over 250 immunotherapy drugs with antibodies and they get a piece of the economics of every drug.
These are very different companies, very different industries, but very consistent to us in having the scarcity value and doing something useful. They don’t all grow super fast at the same time on an annual basis, but they are very steady takers of market share over time, because over time it becomes obvious that this is the best way to do something. These companies are located all over the place. Right now, two-thirds of my portfolio is outside Silicon Valley—and then the ones in the Bay Area, like Auris, are so apart from what’s normative in the Bay Area that they could be anywhere.
Would you agree with the characterization that Mithril is mostly a late-stage investment firm?
From where I sit, I want to invest in a company the first time it becomes clear what market they’re going after and whether they can address that market powerfully in product. Sometimes companies are baby companies through several rounds of funding. People think, ‘Oh you’re seed stage and then you’re Series A and then you grow up.’ I know companies that haven’t grown up in Series C—they’re still trying to figure out who they are. It’s a little bit like self-awareness for a human being. You meet these super precocious, self-aware teenagers, and then you meet young adults who haven’t quite figured out who they are yet, and that’s OK.
Companies are groups of people, so they’re similar. And our interest is in finding the company that has a founder and a team that has a strong view of themselves when they grow up and what they want to be. They’ve figured out something that’s a secret, and it’s a valuable secret that’s defensible, and they’ve protected that secret inside a product. Because if the secret is a marketing secret, or something easily replicable through messaging or positioning by a competitor, that would be less valuable.
How did Auris fit that investment profile?
With Auris, we realized there aren’t going to be enough surgeons to address the needs of the additional 5 billion people who are going to be on earth, and everyone deserves equally good healthcare, and you’ve got to find a way to deliver that with technology. So, what is the equivalent of cell phones for surgery? It sounds crazy, but what is the iPhone of surgery, where you can deliver an insanely sophisticated platform but be able to operate it in a very intuitive and simple fashion? That was the thesis behind Auris; it was not an instrument that we were funding, we were funding a platform and a way of training people in surgery.
It’s been reported that Mithril has only deployed around $90 million of the $740 million raised through your second fund, which closed in January 2017. What are your reasons for the relatively deliberate deployment of capital?
People like to think [venture capital investing] is this, “20% a year for five years—that’s what you’re supposed to invest.” My view is, it should be like a rifle. If you’re walking around with a machine gun, you’ll just feel like you have to shoot a lot of bullets, and we should not do that. We just need to be slow and steady; that’s what we did with our first [$540 million] fund, and we’re doing exactly the same with the second fund.
I expect that the 2019-20 period will be the equivalent of the 2014-15 period for the first fund. We invested in Auris in 2014. I want to find the next Auris, and it’s going to be episodic and idiosyncratic, and that’s exactly the way it should be.
But you can’t say for sure when you expect to be fully deployed with the second fund?
That would be dangerous. I think any limitations on absolute returns is dangerous, because it creates a blind spot where there shouldn’t be one. It’s hard enough to do this. If I had to create a t-shirt for Mithril, it would say “Investing is hard” on the front, it and would say “Investing is really hard” on the back.
What motivated the firm’s relocation to Austin, and how has that move been for you thus far?
The short answer is I love it. If you have the ability to do a startup—and again, Mithril is a startup—then you have the ability to think from first principles about every feature of the startup. There are things you get locked into by circumstance; we were organically started in San Francisco because of the historical relationship between Peter and myself and the fact that we both lived in S.F. when Mithril got started.
But as the portfolio evolved, by 2016 it was pretty obvious we had this two-thirds-outside-the-Valley dynamic. If I drew a diagram on a map of where our companies are [based], the single most logical place to locate the firm would be the middle of the country—you should be either in like Chicago, Denver, or Austin.
So in that list, [Austin has] good airports, great culture, it’s great for younger people who want to start families and build equity in their homes and things like that. And, good tech culture—you can afford to take risks. I think it’s really important to be able to afford to do a garage startup in the city that you’re located in. You can’t do a garage startup in Silicon Valley, because the garage is $4 million.
What about reports that some people at the firm have been unsettled by the move?
There was some anxiety about, “OK, are we leaving the Valley, and what does it mean?” for some of the team. And the reality is that as a firm, we’re super excited about this because you can travel to the Valley whenever you want. I can be in the Valley in three hours, I can be in New York in three hours, I can be in Canada in three hours, I can be in Chicago in two hours, I can go to Miami in two hours to see our dental robotics company [Neocis] there. And if we need to go international, which we do frequently, there’s daily flights to London from Austin on British Airways, believe it or not. And then from Houston, there are infinite travel destinations.
Everyone’s situation is personal. Generally, people love the fact that Austin is more affordable, more open and they can build a career at a firm like Mithril in a city like Austin. The whole purpose of moving was to be closer to our companies, to search more efficiently and to actually expand the team based in Austin significantly, rather than dealing with the competitive pressures of the Bay Area.
For those who have family situations that have made it hard to move, there will be more anxiety than for others, and for those individuals we’ve offered the opportunity to work remotely. It’s an experiment, it’s not something we’ve done historically; I’m a strong believer in keeping the team in one place. But the only correct way to analyze people issues is at the human level. We still have people working remotely out of San Francisco, and that’s an experiment that we’re running at least this year and next, and we’ll see how it goes.
How involved is Peter Thiel in the day-to-day operations of the firm, given recent reports that he is “not operationally involved” in Mithril?
[Taps his cell phone] He’s right here all the time. Mithril’s been designed a little bit differently on everything, and one of the things that we designed differently was relatively centralized decision-making with a small investment committee. The investment committee has two members: it’s just the two of us. By definition, every single decision has to involve him; otherwise you can’t deploy the capital.
Peter is intrinsic to and has been a part of every single entry and exit discussion at Mithril. The way in which he and I have worked has functionally not changed in 15 years. The reason we have such a small committee is because we didn’t want to make decisions by committee; you want high alignment among those who are making the decisions. Cohesion and context is what we’re going for, and the ability to move fast—that’s our edge. You have to have an investment committee that has a ton of experience through market cycles and with each other, so you know what each other’s blind spots are. I wouldn’t presume to know what Peter’s blind spots are, but he certainly knows where mine are, and that’s critical.
You never invest alone; my advice to anyone doing this is do not invest alone, it’s a dangerous mistake. Someone as great as Warren Buffet has a Charlie Munger. I strongly believe that, Peter strongly believes that, and nothing has changed in how we operate.
What is the dynamic of your relationship with your limited partners at the moment? Have you heard any complaints about your management fees or your rate of deployment?
The single biggest point of feedback that I’ve had from our LPs is that they’re happy we’re very disciplined. We’re in an environment where things are getting deployed faster and people are raising faster. The single largest year for venture investing in history was two years ago, and then again last year, and probably again this year. LPs are feeling both excited and under pressure; they’re excited because the asset class has matured to a certain scale, and then they’re feeling under pressure at some level because funds are coming back for a lot more capital faster than anyone expected. In that environment, we certainly stand out as saying, “Wait.”
A feature of what we’ve done is that the largest single LP in both funds of our funds is Thiel. If you look at Mithril as a whole, the single largest investors are the founders [Royan and Thiel]—its like 20% of the capital. We have that much skin in the game, which is designed into our system. Every single decision we make, our limited partners understand that we are making these decisions as much for ourselves. It’s a very elegant way to set things up, because you’re doing nothing for your partners that you wouldn’t do for yourself.
Every single thing that we have done is designed to create higher returns, and there’s evidence that the body of work is maturing into that outcome for the investors—certainly, Auris is a somewhat spectacular exemplar of what we want to accomplish. We do all of this with what I would call an industry-standard structure. Our fees are 2% like anybody else; in fact, I would say many of the premium funds in the venture space would charge a little more, 2.5% on average. We kept it straightforward at 2% and calibrate it to performance. And we’ve actually had instances where we’ve even waived fees to our investors when we feel that we’re gonna be spending less than we need. So we’ve had no issues with LPs about any of this at all, because its standard and because the returns are well above standard, at least for now.
Lastly, what’s your take on the general investment environment at large right now, considering the valuations that are out there and the sentiment that we may be in the later stages of the economic cycle?
The way I think about it is there are two questions: what’s the quality of the companies being built, and how much more can they grow relative to where they are today? The average numbers are much higher: there are more unicorns than ever, more decacorns than ever, more billion-dollar funding rounds.
I’m gonna say something that sounds paradoxical, but it’s totally true: there have never been more high-quality companies than there are now, and there’s never been more froth than there’s been now. And it makes sense that the two are correlated. So now is the time to be 10x more discerning, because there’s a lot of stuff that’s a little bit frothy that will look just as good as the stuff that’s amazing—and if you look at it statistically, there’s way more amazing going on than before, but there’s a hell of a lot more froth going on as well.
We had this discussion internally where one of our guys was asking, “Is this a good time to be an investor or a founder?” It’s an interesting question. The mechanical answer is, well, the funding environment is really salubrious, so it’s better to be a founder—you can just go and raise money with very low dilution. But the reality is, so can everyone else, so the competition is a lot more. So if you’re a founder, you really need to work 10x harder at doing something that is much more competitively valuable to justify the unit of risk capital that you’re taking.