Eight years ago, Brian Garrett and his partners sensed the ground shifting.
At the time, Crosscut Ventures, where Garrett is co-founder and managing partner, had been investing in early stage startups in Los Angeles and Southern California for nearly a decade. It focused mostly on software companies, but it started shifting its attention to hardware, too, as promising founders gravitated toward it.
“At that point, SpaceX was very established,” he told TechCrunch. “Mostly, people started to spin out of SpaceX because they had rung the bell and sent stuff up [into space] and back.”
But the founders who came from SpaceX weren’t quite the same as those who helped kickstart LA’s startup scene nearly 20 years ago.
“Those entrepreneurs — you know, I sort of joke, but it’s true — when they think about starting a company, they don’t come with small ideas,” Garrett said. “They just sent a rocket up and back and landed it on a dime. They’re not thinking about a D2C e-commerce apparel brand as their next startup. They’re thinking about big, hairy problems that humanity is facing, and those seem to really be centering around climate problems.”
The focus of the new $100 million fund, Crosscut’s sixth, will include energy and power, space and underwater exploration, advanced manufacturing, advanced materials, and security and defense. That’s a broad range, but Garrett said the uniting theme is “frontier tech.”
Climate is a through line in several of those verticals. One technology, advanced nuclear, which the firm has a “pretty significant thesis around,” Garrett said, arguably fits in each of them. The same is true of transmission and grid technologies, another Crosscut interest.
Given the focus on hardware-centric technologies, Garrett said the fund is realistic about how long those investments can take to mature. “They can’t all be big hardware swings that are going to take a billion dollars to build. We have to build portfolios smartly and blend them with some software.”
Despite the costs, hardware remains alluring to investors for several reasons: The opportunity to have an impact can be bigger when hardware is involved, especially in something like climate where the problem is driven by the burning of fossil fuels, something no amount of software can completely eliminate.
But hardware startups face challenges that their software cousins do not, particularly accessing capital to prove the commercial viability of the core technology. The problem is most acute in the middle stages of the venture capital stack, typically around Series B or C. It’s called the “valley of death,” the “missing middle,” or the “first-of-a-kind problem,” and founders and investors have started exploring creative ways to bridge the gap.
Seed-stage funds like Crosscut aren’t usually built for that, which is why it will be bringing on a new partner later this year who has expertise in growth and project finance. “We’re trying to build the full stack, the full platform,” Garrett said. “It’s going to take some time, but the idea is to come up with creative financing solutions.”
Growth and project finance dollars should help Crosscut support its most promising hardware startups without taking shortcuts to squeeze them into the usual ten-year venture fund lifecycle. “It gives LPs a product of their choosing that fits their risk-reward profile and time frame.”
Though Crosscut has been drifting toward climate for a while now, Garrett said the focus of the new seed fund, which it’s in the process of raising, is more than just a product of the partners’ interests. “It’s really about understanding what type of problems are being approached by the best entrepreneurs,” he said.
Garrett said that Crosscut has been seeing a number of talented founders emerging from the likes of SpaceX, Anduril, Northrop, and Boeing, all of which have a significant presence in Southern California. Given that, along with the number of investment opportunities they’re seeing across frontier tech, “it just made sense to realign the firm.”
