Richard Deulofeut is a Venture and Regulatory Associate at Trust Ventures, an early-stage venture capital firm that invests in companies facing significant public policy barriers. Richard is a former venture associate with the Innovation Fund at the University of Chicago, where he conducted diligence reviews of big data and energy startups. He holds a B.A. and J.D. from the University of Chicago and previously clerked for Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware.
In October of 2019, Trust Ventures raised $70M for their second fund. Since then, they’ve made six investments within industries including education technology, health insurance, and energy technology.
You can find Richard on Twitter and LinkedIn.
KEY THEMES:
Venture investing
There’s plenty of venture capital in the market right now, so it’s advantageous for a venture firm to provide a specialized value-add to a more narrow subset of companies.
Trust Ventures screens potential portfolio companies by running two parallel diligence processes: The first is to understand the market, the opportunity, the team, and their background. The second is to better understand the company's regulatory challenges and long-term policy goals.
The most promising companies operating in highly-regulated industries all share one characteristic in common: No one is talking about the problem/market inefficiency.
Lessons in policy advocacy
As a founder, geography is much more consequential (from a regulatory perspective) if you're operating in a single market, as opposed to multiple markets.
Operating in multiple markets allows a company to diffuse existential regulatory risk.
"You're very unlikely to move policy if you can't demonstrate that you're helping some new set of consumers or a new set of entrepreneurial opportunities in a way that tells a positive story."
It’s crucial that a company remains thoughtful about how they go about engaging with the policy issue in front of them. They need a plan.
The teams that see the most success when addressing policy barriers have a strong intuition about which goals will be easiest to accomplish, and which will be the most difficult. They employ a geography-based approach that selects for the places/markets that are easiest to do business in (the low-hanging fruit).
Looking forward
It's very likely that marketplace companies will continue to pursue more highly regulated industries.
Governments are now far more aware of the innovation occurring within their cities and are more sensitive to the potential negative consequences of new technologies.
Founders must now pay attention to government goals/interests, an understand the risk that officials will disrupt business through regulatory enforcement.
It is likely that regulatory enforcement activities are going to become a part of the new normal.
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Are you making any major changes to your investment scope after closing Fund II?
No, actually I think we're going to keep it the same. We're writing slightly larger checks and we’re writing them more frequently. Over the past couple of months, we’ve been making a lot of pre-seed and seed bets as we see new companies and new technologies pop up as a result of COVID. I think right now we're seeing a ton of entrepreneurs take advantage of massive sea changes in consumer adoption behavior. And these are all new opportunities that candidly would have been very hard to build 12 months ago.
For instance, we've invested in two different education technology companies. One is selling insurance policies to universities in order to guarantee the financial outcomes of a student's degree. That’s Degree Insurance. And, while I’m sure this product would have sold well before COVID, it has become even more important now as universities are pinched to enroll new students while trying to validate the value of a college education. We’ve seen universities come under massive pressure from parents and students who are beginning to ask, “Why am I paying full tuition if I’m not able to learn on campus?” So, how do you reassure families that they’re going to receive the same value from a college degree even in this new world? So, I think this company’s solution makes a ton of sense.
The second investment we’ve made has been in the pandemic pod movement. Basically, educational cohorts consisting of six to seven students that are becoming the alternative to private schools. Historically, I think that parents have really loathed any changes in their children’s educational framework. But, as you know, we’re in unprecedented times. So now, we’re seeing this massive shift towards smaller group education that I think has been slowly building traction for years. So now, entrepreneurs are seeing the opportunity to change these educational frameworks arise almost organically. Albeit under less than fortunate circumstances. But it’s definitely a silver lining.
Is that the SchoolHouse deal?
Yeah. The founders are just fantastic entrepreneurs. They've got several decades of experience between the two of them working in EdTech. It takes a really special group of entrepreneurs to walk into a space like education technology and go effectively from no product, to MVP, to scalable MVP in the span of just a few months. So they've done a great job managing their massive initial traction, and now we’re going to see how they can continue that momentum going into the next school year.
How did you get involved in venture investing?
I think it's a fairly common experience for everyone to have a unique entry point into venture. With our fund, specifically, I think we have a lot of unique entry points. And, that's mainly because we work with policy. When you're working with policy, there is a set of skills required: to speak to entrepreneurs in an effective manner and understand how to properly engage their policy concerns. These skills aren’t going to be things you learn in law school or even at a law firm. You’re probably not going to learn them at a startup unless you’ve worked in an advocacy role, and there are only a few of those types of roles that have emerged so far.
At Trust Ventures, we help solve core regulatory challenges faced by startups operating in heavily regulated industries. So, we’re not writing deal documents. We’re going in and attempting to resolve public policy challenges as a means of adding substantial value to the company. However, that specific form of legal expertise is not always going to be well known.
For instance, if you’re running a company that’s producing plant-based or cultured meat, there are a number of legal and regulatory hurdles that you must overcome before you can launch a product. The entrepreneur needs to know things such as how to address labeling concerns, how to identify the right attorneys to carry out GRAS certification, how to remain compliant with consumer advocacy laws, and how to navigate the ongoing discussions at the FDA and USDA. So, an entrepreneur might know some lawyers who are skilled at startup-level work, but that doesn’t mean the person has the full story. And, as the company continues to scale, it becomes increasingly difficult to find the best attorneys and the best advocates who can have those conversations about its core product: food. That’s one example of an area where we think we can provide additional value as venture investors.
So, in order to possess that level of experience with such a specialized background, a venture investor needs to have faced those same core regulatory challenges in a wide variety of roles within a wide variety of industries. Fortunately, back when I was in law school, I was lucky enough to get sucked into a set of engagements focused on the gig economy. I began working with earlier-stage companies that wanted to engage in these types of issues about how to structure benefits for gig-economy workers. They didn’t want to simply accept the model being employed by companies like Uber because, of course, what’s good for Uber is not necessarily going to be good for everybody else.
So, the engagement I was given started small and then expanded to a wide variety of issues. I ended up working on projects in areas as diverse as short-term rentals to FDA level advertisement issues and compliance challenges. Now, at Trust, we provide legal guidance to companies operating everywhere, from education technology to nuclear energy.
It was the realization of one of Trust Ventures’ co-founders, Salen Churi (who also happened to be one of my old bosses and law school professors) that someone with my experience could really help the fund scale its current model. Working at Trust Ventures also allowed me to continue the work that I had been doing on my own through a variety of ad hoc positions. And, you know, there aren’t that many organizations in the country that have the capacity to do this type of work. In order for this model to be able to properly scale, you really need to have that right set of legal minds. And, in order to make a meaningful difference, they need to be constantly thinking about the problem, the context, the resources available, and different advocacy tools at your disposal. Fortunately, I think we have a scalable model and team here that does all of that. As a result, we've been able to support quite a few companies so far.
Does Trust Ventures’ value-add shape its approach to investing?
Yes. We are a very restricted fund because there's plenty of venture capital out in the universe these days. What we're essentially doing is trying to be helpful. So we spend an inordinate amount of time looking at how we can engage with a particular regulatory concern and how effective we can be when addressing it. We make that a core part of our mission. It’s not just written on our website. It’s absolutely something that we’re doing from day one after we’ve spoken with a company.
This basically means that we're running two parallel diligence processes: One to understand the market, the opportunity, the team, and their background. The other is to better understand the company’s regulatory challenges and long-term goals. What's really on their policy wish list? How much do they understand about what's going on in their space? What do they know? What don’t they know? How can we at Trust Ventures fill in those gaps? Can we really achieve meaningful change in this industry?
Sometimes we surprise ourselves. Occasionally there are deals we evaluate that, at least initially, didn’t seem like a potentially strong fit. However after conducting our two-sided diligence process, it turns out to be an incredibly interesting opportunity. For instance we’re working with a company in the self-funded health insurance space, Sana Benefits, which just announced their Series A raise. And, I had no idea what the state-level regulations for self-funded healthcare in the U.S. looked like before we started that project. But, as we dug deeper, we realized that it’s riddled with incredibly archaic laws and a huge number of incentives built in for larger companies. Not only that, but there are a lot of restrictions for small companies who, more than anyone, could benefit from having more affordable, flexible health insurance to offer their employees. We realized we had this great story of an entire class of consumers (small business owners) that could really benefit from regulatory change. And, no one was talking about it.
Part of that conversation involves working closely with a company to achieve their policy goals. When looking at the example of Sana, I think it would be very difficult for other entrepreneurs or even other venture firms to do what we do at Trust. You know, not everyone is spending their time thinking about self-funded health insurance regulations. It’s tough to go in and do that level of diligence on such a specific problem. It entails pages of writeup detailing the 50-state landscape of self-funded healthcare, the policies that the company is looking to address, the supporters of those policies, and arguments for and against those regulations.
In addition, when you're doing advocacy work, it’s important to consider how these companies are ultimately benefiting the community. You're very unlikely to move policy if you can't demonstrate that you're helping some new set of consumers or a new set of entrepreneurial opportunities in a way that tells a positive story. So we’re always looking through that second lens to figure out if there’s a greater story to tell. Who’s benefiting from this? Who isn’t?
So we conduct extensive analysis of the market opportunity as both an economic concern and a political concern. We want to know the political geography underlying a specific issue, as well as how it will play out over time. We’re always advising our founders regarding the types of decisions they can make in order to move towards a specific policy goal over time. That’s partially why we’re based out of Austin. We wanted to prove to companies that they could run a successful business here while also positioning themselves in a jurisdiction where government officials are more likely to support their level of innovation. I can’t say the same for places like California or Massachusetts or New York where early-stage companies are always at risk of getting slammed by regulators.
Was that a part of the plan when the firm was founded in Austin?
Yeah, absolutely. When thinking about which geography makes the most sense to start a venture firm like Trust, our General Partners, Brian and Sal, wanted to drive a message of positive regulatory engagement from day one. From a founder’s perspective, your geography matters a lot more when operating in a single market, as opposed to a larger growth-stage company that might be operating in 20+ markets. A company like Uber has been able to fight an advocacy campaign more aggressively in some markets without putting the entire business at risk. This is opposed to something like a small robot delivery service that’s operating a couple of pilot programs in the same city. If the city approaches you with a cease and desist, that can have a much larger impact on your business. Candidly, your customers might not be willing to wait until you solve that regulatory problem.
What do you believe are some of the industries that could benefit the most from regulatory disruption?
That’s a great question. Based on what we’re seeing right now, I think education is an area where we’re going to see some of the greatest disruption—especially coming out of COVID—but we covered that previously.
What I think is most interesting about the effects of the pandemic is how regulators have taken a different approach to how they regulate a whole slew of areas. I give huge credit to the FDA. They’ve done a tremendous job giving emergency use authorizations not only to COVID vaccines and therapies (which I know they’re working on quite actively), but more importantly to telemedicine products that were previously restrictive in use. This also includes different types of therapies, hardware devices, and services with narrow scopes that were given a much broader mandate to go out to market. And, you know, many of these were not necessarily required to go through the entire FDA approval process as they typically would, in the interest of getting the broadest healthcare to consumers in the easiest way possible during a time of national crisis. I think the FDA has really stepped up to fill this approval gap during the pandemic and, in doing so, took a great risk by promoting some very large levels of deregulation. However, that risk has paid off and has proven to be necessary to help guide the country during this uncertain time.
In addition to healthcare, I think we’re going to see further regulatory work around things like employer-based financial benefits. Business owners are now wondering how remote work will change employee benefits. What are we going to do with 401K plans, college matching programs, and other benefits? I think this question is going to be significant. During the pandemic, employers have started restructuring employee benefits in an attempt to create a more sustainable business model, sometimes at the employees’ expense. So, as some workers transition to more flexible work arrangements and small businesses get back on their feet, we need to find better ways to provide benefits to employees.
So, you know, we're very excited to see companies working hard on those types of challenges. And one of the great things about working in venture is that entrepreneurs always surprise us. If we knew every regulatory issue that will arise in the coming years, we could certainly be spinning out the companies ourselves. But I’m always excited to speak to entrepreneurs about entirely new opportunities in industries we knew nothing about.
Is there a common regulatory challenge faced by all companies in the Trust Ventures portfolio?
They have to be thoughtful about how they go about engaging with the policy issue in front of them. And that can be wildly different depending on what the company is doing, but they should have a general plan.
Ultimately, all of these companies are doing the same thing when addressing regulatory challenges. They’re creating a playbook, a geographic go-to-market strategy, and an engagement timeline for any given policy concern.
And we’ve found that the teams that are most successful have a strong intuition about what’s going to be easy for them to accomplish, and what’s going to be hard for them to accomplish. That way, they’re not pivoting so hard between different opportunities. These teams know there are certain places that are going to be easiest to do business in—the low hanging fruit—and there are places that will need much more work. And, if we want to help those teams get on top of the more difficult geographies, we’re going to be looking at a multi-year project. But the most important part of the process is setting goals and gaining a deep understanding of the policy issue you’re addressing. After all, it’s much harder to pivot into policy advocacy right before a product launch.
With a product, you can always expand geographically into new markets or reach a new set of consumers. But when it comes to policy, you actually have to go out and talk to a discrete set of people. You have to talk to legislative officials. You have to understand who your allies are. You have to speak with coalition partners and non-profit groups. You have to know all of these individuals who have invested a significant amount of time in a particular issue. You want to make sure you fully understand what a specific situation calls for and the extent of your ability to make a difference.
The unfortunate truth is that if you want a given policy to change, you have to be willing to work within this slower… more patient view of politics. For instance, we’re in an election season right now, which means that things can move a bit slower in Washington — even in the midst of the pandemic. That’s something that we need to work around. Of course, that doesn’t mean that work isn’t happening. But, it’s something that must be taken into consideration when trying to develop a reasonable timeline. So to have that level of understanding is absolutely critical.
Now, I don't think startup founders need to possess an expert level of understanding from day one, but they should at least be trying to develop it. And that's what we like to see when we're investing in founders. We often ask ourselves, “Is this founder at least aware of the problems and thinking about them in the proper way?” and, “Does this founder understand the severity of the policy issue?”
Do you think that a brute force, Uber-like, approach to regulators still works?
I think it's harder. Governments are much more aware of the innovation occurring within their cities and are looking out for the negative consequences of new startups and technologies. One of the things that gave Uber an edge was the fact that cities hadn’t yet gotten burned by Uber. Now, I think the conversation has shifted and there is a little bit more skepticism of technology services. People are beginning to closely consider the kinds of technology they want and in what context they want them. So entrepreneurs need to be more upfront when handling those issues now than they did ten years ago. That doesn't mean you can't roll out your service and show the tremendous amount of good that your company is providing, and then go back and have those conversations in tandem with policy professionals. It just means that you have to really pay attention to government interests, and the likelihood they're going to come back with a disruptive enforcement.
Candidly, part of Uber’s success is related to how Uber structured its platform — and it's to their credit. It’s fairly hard to impound somebody's car for trying to make some extra bucks on the side. But, it's really easy to impound scooters that are owned by a high-growth company in Silicon Valley, as an example.
And, unsurprisingly, cities felt very comfortable going impounding scooters in areas where they felt the companies weren’t complying. It’s those strategies and enforcement activities that I think are going to become a part of the new normal. Cities are becoming more proactive in the way they allow technology to be deployed, particularly into their public infrastructure.
Why now?
Well, really, I think it was needed a long time ago as well. Up until recently, we’ve seen so many companies fail to do things the appropriate way and stumble. And there’s no need to be making those sorts of mistakes. I think there are plenty of ways that an early stage company can effectively mitigate regulatory risk in a way that makes sense. This also puts you on the better side of compliance. However, we’ve seen countless companies fail to put in the initial effort to properly mitigate the risk, and it inevitably leads to major stumbling blocks later on down the road. And, unfortunately, this has created a negative perception of the tech industry writ large. However, this friction between companies and regulators has become more dramatic in an age where technology and politics has come to a head. And I don’t just mean that in terms of small startups — it’s also, obviously, big tech. And that's a relatively new conversation that has really picked up recently. It has gotten to the point that we're now having frequent congressional hearings on a wide variety of issues that implicate technology; things that we haven't seen since Microsoft’s 1998 congressional hearing.
So, you know, I think there’s just a massive amount of exposure to policy now in a way that has simply become a forefront issue in tech. And if you're a young company who thinks you might face those concerns, now is the time to really think about those issues earlier on. There are just more companies that need that level of service now. And I can see that from the conversations we have with startup founders now — they get it.
During these conversations, founders immediately understand that policy is not something that they have easy access to. It’s hard enough to get a deal lawyer to do their financial documentation. And that’s already expensive. How is a new company supposed to afford to find someone who can help advocate for them on a core political level? That's typically not something that lawyers are very good at doing. And even if they are, they're not cheap. And so, finding a way to be able to proactively offer those services made a ton of sense many years ago and it's certainly a strong selling point today. Especially now that we’re seeing even the largest tech companies struggling to deal with these types of initiatives.
What are you excited about at the moment?
For us, I think the excitement has really been around the amount of work that is still being done in established models like e-commerce and marketplaces. I think we're entering this new phase of the economy where we’ll begin to see an entirely new set of high-end, professionalized marketplaces. Andreessen Horowitz has actually written extensively on what the future of marketplaces looks like. One of the things that we tend to agree on is that it's very likely that these marketplaces are going to go after more highly regulated industries.
For instance, a few weeks ago we spoke with Vitable Health, a company coming out of the last YC batch. We learned that they’re providing a set of services to allow nurse practitioners to conduct house calls and effectively act as a substitute to primary care and emergency clinic services. It makes a ton of sense. I think there's a lot of value to be had in creating a more efficient offering for on-demand medicine.
I like that concept a lot. But what’s interesting to me is that this is not just a telemedicine service. It’s a service offering for nurse practitioners. Eventually, it could become a major employment source for nurse practitioners nationwide. However, in order to accomplish that, we have to look at the regulatory hurdles regarding what a nurse practitioner is legally permitted to do. Which, as it turns out, differs widely between the states. In this case, I think about 50% of the states allow nurse practitioners to prescribe medications without an attending physician's approval and 50% don’t. Ironically enough, many of the more populous states with larger medical community groups don’t allow nurse practitioners to prescribe medications. So that’s a great example of a professional marketplace that will likely face quite a few regulatory challenges. But, I also suspect that we are seeing a lot more attempts at making those future opportunities a reality.
We're also seeing additional work being done in the alternative energy space. We’re already seeing a lot more funding in clean energy and carbon initiatives than we did a few years ago. So far, we’ve seen everything from synthetic agricultural products to timber products to tree-planting initiatives to renewable energy power plants. Every single one of those has a different type of regulatory angle. They each have second and third degree impacts on the environment, particularly in ways that don’t cleanly fit within our pre-existing environmental policy initiatives. From a policy perspective, planting trees today is easier than planting a synthetic tree or building a geothermal power plant. But we need to rethink all of that.
And I suspect that we’re going to have to decide as a society what we want to accomplish and how quickly we want to approve projects in pursuit of those goals. I mean, most of the rules that were written for energy project building review and maintenance were written for a different time. Back then, energy projects were much larger and heavily financed by public-private sector partnerships. I suspect we just won't see that going forward. We're seeing a lot more diversity regarding what a clean tech project can look like, and that requires very in-depth conversations with regulators.
For instance, one of our portfolio companies, Oklo, is a 4th generation modular nuclear energy company that’s focused on providing a smaller reactor that runs off of nuclear waste. Oklo has a really interesting set of use cases — rural communities, key infrastructure power-and can provide an incredible value to society. In fact, they were the first 4th generation modular nuclear reactor company in history to have their application accepted by the Nuclear Regulatory Commission (NRC). Not approved yet, but accepted.
It’s a really big step, both for the organization and for the 4th generation nuclear universe writ large. This tells us that the NRC is willing to account for new, innovative models in an industry that really hasn't changed since the ‘60s. But, that’s just the beginning of the discussion. At the end of the day you can have a design approved, but you still need to go back to the NRC to understand what is going to be considered acceptable operations from a regulatory perspective. For example, do we still need a massive security force around every nuclear plant if it's a low-risk facility and we're no longer in the Cold War? In that case, we still need to change the regulation in order to make that a reality.
So, I think there’s still plenty of work to be done. But, there are countless frontier opportunities that need regulatory reform. Hopefully nuclear is just the start.
Is there any industry that you think could benefit from a greater degree of regulation?
Yeah, I mean that's a really interesting question.
Like anything in life, It really depends on what the regulation looks like. The problem with regulation is the way you structure it, not the intent with which somebody brings up a legislative change.
For instance, let’s look at the big tech example. There’s a substantial conversation today around antitrust proceedings and whether or not we believe that companies like Apple, Facebook, or Amazon should be under scrutiny for antitrust violations. But I think it's hard to employ antitrust as a legal mechanism against these types of big tech companies under a historical view of antitrust law. But on the other hand, I understand where people are coming from. They feel hurt because they don't understand how Apple or Google (through Android), for instance, can maintain this singular entry point into the market through their app store. That's the conversation we're having right now with the Epic Games lawsuit. And, you know, they make a great point about Apple’s control of the mobile app marketplace, but is antitrust the right vehicle to enforce that? So the question then becomes, “How do we craft a new set of compromises?” and also, “How do we tailor a solution specific to the situation?”
And, it's important to consider the long-term, unintended consequences of what you’re doing in a situation like this. For instance, in Australia, regulators have created this proposed law that would require companies like Google and Facebook to revenue-share with media outlets for the distribution the platforms provide. It’s a messy, complex draft law, but I believe that’s the gist.
The idea is that these tech companies should be compensating media companies being able to utilize their content, despite the fact that the platforms are giving media articles distribution for free. But one unforeseen consequence might be that companies like Facebook and Google decide that they no longer want to allow media from any media outlet on their platform at all! Ultimately, that would be a huge problem for media companies in Australia because they need these platforms to amplify their own content. If you’re not being circulated through a Facebook or a Google, have you really won? Or, did you just try to call the bluff of a major tech company and then hurt yourself?
Not fully understanding the consequences of your regulatory action can have much bigger consequences as a result. So, I think there are going to be plenty of areas where we as a society need to have a conversation. Especially when it comes to things like tech innovation. For instance, facial recognition is a great example of an area where we need to be careful that we're not creating discriminatory consequences as a result of the deployment that we’re allowing. That said, we need to be crafting these rules very specifically around what the issues really are, rather than trying to fit them into these byzantine legal schemes that can ultimately do a lot more harm than good.