The following interview is a conversation we had with Lucas Nelson, Partner at Lytical Ventures, on our podcast Category Visionaries. You can view the full episode here: Funding the Future: Lucas Nelson, Partner at Lytical Ventures

Lucas Nelson
My pleasure. Thank you for having me. And thank everyone for listening. 

Brett
Yeah, no problem. So, to kick things off, can you tell our audience a bit more about who you are, your background, and how you made your way into the world of venture? 

Lucas Nelson
Sure. So I’m a proud geek hacker turned VC. I was breaking the commitments for a living for the better part of a decade. I since went to business school, switched sides of the table. I’ve been doing venture for probably the past, I don’t know, let’s say eight years. So, you know, started out in New York, went to B school at Dartmouth, and then moved out to Bay Area for a couple of years and then back to New York, where I’ve been doing venture capital ever since. Nice. 

Brett
Amazing. And can you tell us a bit about your fund, the history of the fund, and any of the notable investments that you’ve made to date? 

Lucas Nelson
Sure. So Lynnical Ventures is a relatively new fund. We raised about $35 million in 2019 for fund one. We’re actually in the middle of fundraising for fund two, we’ve raised about 45 million. So about halfway there on fund two, and we focus on early stage cybersecurity, data analytics and then AI in those two swim lanes. So functionally, corporations have an obligation of their data. They need to protect that data, turn insights and wisdom and monetize it. So if your company does one of those three things, you’re in our wheelhouse. We lovingly call that enterprise intelligence. 

Brett
Amazing. And could you maybe just give us a high level overview? From your perspective? How would you summarize the state of venture today? 

Lucas Nelson
So I’ve been at Venture for a number of years, and the last, let’s call it five to six years have been pretty interesting. Right. So went into a period where momentum investing was probably the way to go. That’s what a lot of people are doing. Let’s call it diligence light right. Is what was happening. And those days, I believe, are over. Right. So you’ve seen a bunch of funds and I won’t names, but we know who they are that were doing diligence light that have pretty much blown up, right? Their marks are down 50 70%. They were holding public companies that are down. And so that is going to cause a whole bunch of people to rethink the way they were doing venture. So to my mind, a bunch of investors and funds that are going to get hurt in the current environment won’t necessarily be hurt because they did companies that aren’t interesting or good, but it’s because they did them at multiples that aren’t sustainable. 

Lucas Nelson
Right? So if you were paying, I don’t know, 20, 30, 50 times arr for a company, and now the public markets are valuing that growth at, I don’t know, six to twelve times arr, you got to get a lot of growth out of that company to be flat. And so I think that’s going to hurt venture investors and returns more than picking the wrong company, actually. So that’s kind of what I see. The other thing I think I find interesting, so this is my nerdery about early stage venture is kind of the renaming of the Series A and Seed Round, right? So seed rounds used to be a couple of million dollars, one to two, maybe three, in a company that didn’t have any revenue. That feels like precede down. And my mind is what happened is seed funds just raised more and more money to the point where they couldn’t deploy $500,000 checks anymore. 

Lucas Nelson
They needed to write one, two $3 million checks out of their 100 and 5200 million dollar seed funds. And those fund sizes are where Series A investors usually played. So Series A kind of moved a little later. Series Seed is really Series A these days, but they didn’t want to rename it. These are LPs. Invest in the seed fund. Not a series, a fund. So that’s kind of the state of the industry. The question I think that Beg here is do seed rounds snap back to being kind of what they were in 2018, 2019, or are they big forever now because those people have raised enough money that the nomenclature has never gone back. What’s your prediction? 

Brett
Do you think they’re going to fall back? 

Lucas Nelson
I think that you’re going to need a little more traction to get a series scene done right. So they’re going to look more like traditional A’s. But I don’t think the round sizes drop because I don’t think those funds you’ve raised $100 million, you can’t go back to writing 250K checks, right? You just don’t have enough time. Time or bandwidth. So your seed rounds are going to stay bigger. I think they’re going to require people to be a little taller to get those rounds. You must be this tall to ride the ride. Well, I think that seed rounds are going to start to look like a’s did back in 2018. But they don’t want to change their name, right? If you’re fund X who’s known as a great seed investor. You don’t want to admit that you’re now doing Series A’s, right? Like, that’s not your brand. 

Lucas Nelson
Admits me the wrong term, but it’s not your brand. So you’re going to just make bigger seed rounds. So I think that’s here to stay. I think the people that were traditionally doing seeds or who want to do what looks like seed are just going to start calling it precede move earlier. 

Brett
And do you think crossover funds are going to continue to be a big deal and focus? And if so, are they going to go more and more early stage or what do you think is going to happen to the crossover funds? 

Lucas Nelson
All right, so let me first give a definition of what you call crossover funds and then I’ll say provocative things from there. 

Brett
So on my end, I would define it. And this could be wrong, but it’s a hedge fund that moved into venture investing. 

Lucas Nelson
Yes. Okay. So my statement here is twofold. One, you can kind of always call the top of a cycle anytime hedge funds move into super early stage because it’s not what they were designed to do. Right? They’re designed to have a lot of assets under management and deploy a lot of capital. And early stage investing is about usually about getting your hands dirty and actually helping companies. And those two things don’t necessarily meet. Could they? Sure, there’s some very large funds who deploy big capital and still help their entrepreneurs, but that’s not called a hedge fund. Okay. Part one. Part two, they may move earlier stage because the capital they have left in their funds means that’s what they can afford to do, right? You can see, oh, hey, I’ve got a billion dollar fund, but I’ve already committed 800 million of it. I’ve got 200 million left. 

Lucas Nelson
I’m down 60 or 70%. I really need to hit some home runs and I can’t go write a bunch of 100 million dollar checks to do it. I better do some Series C, Series A and hope that I can get myself back to square. So that’s an option for them, but that’s kind of on a case by case basis rather than a generalized strategy across the board basis. Got it. 

Brett
That makes a lot of sense. And if we take a deeper look into venture, what excites you most about the market today and what frustrates you the most about the world of venture? 

Lucas Nelson
All right, so I like working with technical founders. That’s my background, right? I’ve broken computers for a living. I know how to hack things. So I like working with passionate technical founders and helping them figure out the business side of things and go to market, that sort of thing. So that’s what I like to do personally from paying. What’s interesting about the market today, I look like an old school bespoke venture capitalist. So if you go back 20 years and look at most of the funds out there. They were small partnerships, they got involved early and most of them kind of got their hands dirty. That has changed in the past five or six years, where writing big checks in momentum rounds, not taking a board seat, was in vogue. I don’t like doing that kind of thing. It’s not what I know how to do. 

Lucas Nelson
So I’m excited for the market to be coming back to us. Right. When I talked about revenue and being profitable and getting profitability in 2021 2022, I sounded quaint. Now that advice is what everyone is saying. So I like the fact the markets come back to me in some ways. So that’s what excites me. What did I not like about the market? Anytime most of your business school, I’ll pick on HBS because I didn’t go there. Most of your HBS Grads are going into a sector. That sector is overheated. Right. Like HBS grads predict tops of markets pretty reliably. And so when a bunch of HBS people wanted to either get into startups or wanted to get into venture capital, you knew you were at the top. Right. They’re very smart people that can look at a thing and say, yep, this is the place where everything’s happening. 

Lucas Nelson
Unfortunately, that’s usually at the top. So I didn’t love that. And then kind of overall, I liked highly technical founders. So the rise of the programmer I didn’t love. Right. I guess no one wants to be called a programmer, so let me be fair. But you get the idea. Like, I really do kind of hardcore technical people. That’s what interests me. People want to solve problems at a deep place rather than kind of the party culture that became the norm both in 1999 let me be very clear, and again in 2021 2022. 

Brett
Interesting. And when it comes to attracting the right types of founders that you want to fund, that you want to invest in, what do you do to really stand out? Because there are a lot of VC firms out there today. There’s a lot of solo capitalists or solo investors out there today. So what do you think you’re getting right? And how are you standing out? 

Lucas Nelson
Sure. So lytical we’re highly specialized, so we focus on cybersecurity and data analytics. That’s pretty much all we do. We’ve got a network of advisors. On the Cybersecurity side, it’s a bunch of CISOs. On the AI side, it’s a bunch of practitioners and thought leaders. So we’ve got about ten of them on each side that we talk to, correlate that really can help our companies out a lot. Right. So if you’re a cybersecurity company and you’re selling to the enterprise, going and tapping into ten world class CISOs and getting their honest take on what you’re doing is incredibly valuable. This sounds obvious, but I know my market really well. I’ve been in Cybersecurity 2030 years now, and so that’s a market where I can see an idea and pretty quickly figure out, yes, there’s something really new here, or this has been done before. Here’s probably why it won’t work. 

Lucas Nelson
And for a Founder to talk to someone who actually gets the idea in the first, let’s say two to three minutes, as opposed to needing the entire run up of why this market is important, how they’re going to attack it, who they’re selling to, I can cut through a bunch of that. So in the first meetings, that’s attractive, but in board meetings, again, it’s attractive. As someone who’s got years of experience in your space, rather than trying to figure it out and fly at the time in the tier, so to speak. 

Brett
And when you’re advising your portfolio founders today, what are you telling them? What types of advice are you giving them in navigating this current market? 

Lucas Nelson
We’re giving the same advice today that were giving in 20, 20, 21, 20 19. So, as I said before, we’re a bit old school in that whenever we looked at companies, we said, don’t take more money than you need at any given round. This is the most dilutive capital you’re going to take. It’s always going to be cheaper later when you’re bigger. So take only the money you need and then figure out the metrics you need to get to get that next round done at a sane multiple. And that last piece is the thing that I think might be slightly different. I don’t think it’s counterintuitive. I think it was counterintuitive in 2021 when I told my founders, hey, I understand that you’re seeing firm sheets at 50 or 100 times arr, which I thought was crazy, but we can’t sustain that. Someone say, well, snowflakes 100 times next twelve months. 

Lucas Nelson
Yeah, so you’re going to get valued at the same value as the best performing company ever. That’s crazy. Why don’t we look at historicals where eight to twelve was pretty good. And now when you look in the public market, you’re seeing six and a half even that eight to twelve sounds aggressive, but that’s the same advice people giving. Hey, you need to be able to grow into a valuation that’s supported by kind of public market comps. And, yeah, ten times arr used to be a great number. I think at the end of this year, it will be a great number again, because the public markets, you’ll be able to get stuff cheaper, growth cheaper in the public markets than in the privates, if people are still probably do 20 or 30 times the error. 

Brett
And in terms of go to market, what are some of the most common things you see your portfolio founders struggle with? 

Lucas Nelson
Yeah, so in cybersecurity, there’s this great untapped market. It’s giant. It’s SMB. Right? No one sells SMB tools. There’s no big cybersecurity player that really handles this well. And so a lot of our startups say, oh, I’m going to go after that. And it is, it’s a giant market, and the first set of sales are pretty easy because you know a couple of people in the space and you can make the first five or ten sales. And then the real problem hits you of how do you efficiently market when you’re small to these really small players. And so it’s a place that a lot of startups try for a quarter or two and then bail out of, right? Because it turns out it’s just too hard to reach them. And so then they go to SME or Enterprise, which is a place where buying cybersecurity is something people understand. 

Lucas Nelson
They’ve got a budget line item for it’s all good. So that’s one place that we see often. My favorite founders, you got a company called Threatkey where the Founder was like, hey, went to SMB and I gave the warning I always give. And he came back, I think, five weeks later and said, yep, I’ve run a whole bunch of email tests and this is going to work. The customer acquisition costs are not going to work out. I’m moving to SME. And that may have been the fastest learning I’ve seen out of a Founder so far. He ran the data for five weeks. It’s like, oh, this is just not going to work. Whereas normally it takes everyone, I don’t know, let’s call it two months, maybe four. So that’s kind of the go to market that worries me the most. It’s going after this giant, untapped market. 

Lucas Nelson
But if you’re not going to have $100 million to spend on marketing, how do you really reach it? 

Brett
Interesting. And what about category creation? I know that’s a hot topic in cybersecurity, and it seems like the cybersecurity world really loves to just make up acronyms and make up different categories. At least that’s what I saw when I went to Black Hat for the first time this year. So what are your thoughts when it comes to category creation? If you have a Founder come to you and say, hey, we’re creating a new category, what do you tell them to do next? Do they do certain types of research that you guide them through or what happens from there? 

Lucas Nelson
Okay, so category creation, as a general concept, I don’t think about all that much, right. That’s not how I view the world. What I will say in cybersecurity is there’s an ability to know where the puck is going, right? So the Wayne Gretzky quote, don’t go where the puck is going. For cybersecurity, that problem is easier than most, because you look at any given technology that is taking off, and two to three years from now, they’re going to have cybersecurity problems. Right now, knowing how to fix those problems is often the question. So you look at IoT and you say, oh, IoT is going to be big agree it’s going to have a cybersecurity problem. Yes. The question is, how do you solve it? Right? Is it an IoT firewall? Probably not. Is it selling secure firmware updates to everybody? Maybe. There’s all these different ways of tackling that problem. 

Lucas Nelson
So you know there’s going to be a problem. You can see the accident waiting to happen. And the only question is how do you solve it in a unique way that isn’t a obvious, but B works. And so that’s kind of how I view category creation and cybersecurity. It’s not often you see real, like, hey, I’m going totally disrupt the cyber world because it’s been around for a long time. A and B, it’s usually a cat and mouse game of innovation, right? The defenders figure out something so the attackers figure out something new and back and forth. So you don’t usually see these kind of sweeping new like, well, we’re going to do it wholly different. Zero trust would be like, Google came out and said, we’re going to do this completely different. So that’s a category creator. We’re a seed company. So we’ve got a bunch of ideas that we think could be category creators. 

Lucas Nelson
We got companies that like, yes, they could be at the seed stage. It’s so early that it’s really hard to tell whether you’re creating a category or you’re just a big fish in a pond that’s not going to grow all that fast. 

Brett
Makes a lot of sense. And I think that’s super helpful for founders to hear. We’ve done about 100 episodes now with founders, and I asked them the question, are you creating a new market category or transforming an existing one? And I would say 80% of them say category creation, but I don’t know if the world can handle that many new categories. So I’m curious to see how that plays out. But I think that’s super helpful advice for founders to consider. 

Lucas Nelson
And if we zoom out, here a. 

Brett
Couple more questions for you before we wrap. So what types of opportunities are you looking for? And are there any specific market opportunities that you’re super eager to invest and back right now? 

Lucas Nelson
Yeah, I’m all in on web three based generative, AI on satellites. No, I’m jumping here. Okay. So I’m going to tell you my last thesis. About 18 months. Two years ago, I noticed that this is going to be some obvious, but I’ll get there. Everyone was moving to the cloud. Well, duh. But the way you move the cloud, first you take your workloads and just move in the cloud, right? So it’s the same exact program. It’s just running on somebody else’s heart. Cool. But then you start to retool your architecture to use the building blocks that are provided by Google or AWS or Azure. And that fundamentally changes what cybersecurity companies can do, right? So to the old guard, you collect all these logs. Things splunk, you search the logs, cool. The new way. You get an API key and you just query. We’ll say AWS. 

Lucas Nelson
You just query, AWS, say, hey, what’s the answer to this question? So all that log work goes away and it actually gives these tools kind of superpowers things that would have taken a long time or made a database or a log engine fall over are now trivial, right? So I saw that starting to happen maybe two years ago and I was like, oh, that’s powerful. So I tried to find companies that fit that mold, right? I’ve got a few, if you go to my website, you can find them. I’m not going to talk my book right here, but now I’m starting to switch. I believe that is becoming well understood, right? More and more CISOs have enough stuff, cloud native that they’re like, oh yes, I see that problem, rather than, oh, that’s an interesting theoretical problem that I hope to get to someday. So I’m now trying to look at what are the next technologies that are taking over today and kind of where I can play with those. 

Lucas Nelson
I do think quantum computing is interesting. I don’t think quantum hardware is someplace I’ll play. And NIST is already releasing algorithms, so maybe not there. But I do think that is going to change a bunch of the way some stuff gets done. So that’s kind of a fun thing to think about, if nothing else. Again, I think Kubernetes Security in its early days, it’s got a few players, but I don’t think that’s a completely solved problem yet. And then interoperability across these big players I think is really interesting. Last but not least, I’ll give everyone an obvious secret. Microsoft is about to run the board on Cybersecurity, right? So Microsoft has an endpoint security agent called Defender. It is better than good enough. They’ve got a cloud based SIM tool security incident and event management tool Sentinel that lives in Azure and they’re walking out with their bundling strategy that’s worked 100 times before and I got to do it again. 

Lucas Nelson
So you go to Microsoft and say, hey, I really want to get 365 and Office and my tools, they say great, and we’ll basically give you the fender for free. And any data that you’re putting into Azure that comes from our products is free. And if you get rid of your big log management tool, let’s say splunk, and you get rid of your endpoint agent, let’s say CrowdStrike that’ll pay for this year’s licenses for 365. And if you’re a CIO, you’re like, oh, I’m about to enter a recession, and I can save money and get one of my biggest line items for free this year. Done. So Microsoft is about to pronounce everybody. I’m not saying their products are the best. They’re good. Let me be very fair. They’re not bad, they’re good products, but they’re about to trace everybody. So if you’re avoiding that problem, give me a call. 

Brett
We work with a company or we did work with a company called Risk IQ. Do you know risk IQ? 

Lucas Nelson
I do. Nice. 

Brett
Yeah, so we’re working with them for like, four years and yeah, they just got acquired by Microsoft. I think it was 2021. And they just did the final wrap up a couple of months ago, so makes a lot of sense. 

Lucas Nelson
Lucas I think that’s all we’re going. 

Brett
To have time to cover for today. 

Lucas Nelson
Before we wrap, if people want to. 

Brett
Get in touch with you or founders want to share some ideas with you, where’s the best place for them to go? 

Lucas Nelson
Sure. Our website, www.lyticalventures.com. Lucas at will work. If you’re a Twitter user, lucas Nelson V will get to me. Any one of those would be great. 

Brett
Awesome. Lucas, thank you so much for taking the time to chat with us. Really appreciate it and really enjoyed this conversation. 

Lucas Nelson
Blows mine. Brett, have a great day. 

Brett
All right, you too. 

Lucas Nelson
Keep in touch.