Ajay Royan – Superman Over the Golden Gate Bridge

Notes from a wide-ranging conversation with Ajay Royan in San Francisco.

How did you get Interested in investing?

I have always been a curious person, partly because of science fiction, and partly because of life experience. I liked thinking about systems and how things work. I have always wanted to be an entrepreneur with an eye towards building valuable, lasting things.

At the age of ten, I was lucky enough to be exposed to the stock market. My father gave me a job recording stocks on spreadsheets, which sparked a lifelong interest in the markets, in human psychology, and in finding sources of real value.

But finance is only important if it can mobilize basic economic activity. As a Canadian, I’ve always felt that our continent’s development is one of history’s great success stories. Exploration, rapid tech innovation, and financial innovation combined to improve people’s quality of life and, indirectly, increase personal freedom.

I went to Yale because I wanted to study with excellent teachers and learn about the ideas that changed the world. New Haven is the first planned city in America, and the home of the cotton gin and the Winchester factory. It was a great place to be immersed in the history of technology even predating the industrial revolution.

I’ve never been fixated on credentials or a particular career path, but I wanted to learn how to build strong businesses. So after graduation I worked with Deloitte in Canada for two years. I learned how complex accounting works by reading 10-Ks. As a young analyst, I learned how economic policy affects businesses small and large by helping clients think through their challenges with a competitive strategy and innovation. But the greatest education was the decade-long entrepreneurial investing career that I’ve had with Peter Thiel, who was and remains a wonderful mentor.

More broadly, these lessons seemed to point to three critical areas: macro-economics, technology and finance—all broad and powerful drivers of change that could be a company’s greatest ally, or swiftly turn into its worst enemy.

What should businesses focus on?

Mithril is interested in businesses that are not just optimized for growth, but also optimized for durability. In order to determine whether or not a business is durable, we ask questions like:

1. What does the world need now, and what will it need in the future? These represent potentially valuable markets.
2. What technologies excite you?
3. In the last 20+ years, what areas have suffered from underinvestment?
4. What are good businesses?

The key to being a successful entrepreneur or investor is having good answers to all four questions.
Mithril invests in teams and technologies with strong potential to scale. We help the companies in our portfolio navigate critical inflection points and unlock long-term growth.

How do you think about the energy industry?

The broader economy experiences critical inflection points, as well. One critical inflection point was around 1982. The OPEC crisis had ended, and Reagan had been elected. We saw the birth of a bull market that lasted until 2000. The S&P did quite well. Emerging markets did quite well. Return on risk capital went up. But outside of the digital realm, real innovation did not get back on track.

On the energy side, low oil prices are good for consumers, but they don’t exactly stimulate great investment in new energy technologies. How do you get funding to grow an energy company or develop an energy technology when oil is selling for only $15 a barrel?   Mithril sees the future demand for energy as an emerging market. We look at the global energy supply and what the modern industrial economy needs, as well as the world’s overall dependency on oil.

From an investor’s perspective, food, water and fuel are intrinsically valuable and have high productive value. Obviously, the abundance or scarcity of each affects the others. We constantly ask ourselves what will have these same values in the future. We believe unique technologies backed up by strong business models represent the best prospect for high quality, unlevered growth.

How does energy affect transformation?

Energy abundance fueled the modern industrial age, and the future price of energy will drive the expansion or contraction of trade. Anything we can do to increase energy production with low emissions or none at all will be extremely valuable. And, in our networked economy, have positive knock-on effects on agriculture and industrial production.

We should assume that some important energy innovations are carrying more of our hopes than they can bear, while others are being overlooked when they could make a difference. The most widely discussed current trend in the energy market is fracking, the process of extracting natural gas from shale rock layers. Actually, the first fracking systems were developed back in the 1930’s, but they were mostly ignored for decades, including during the oil shocks. Now, fracking is on everyone’s lips. It has its limitations, to say the least, which is why the search for better oil and gas technology is so urgent.

Clean tech is another category of energy technology that’s had a moment in the sun. But one could argue that the most successful clean tech company of this age is not a solar, wind, or hydropower company. The best clean tech company today might well be Tesla. Elon Musk’s secret was to focus on a narrow and well-defined market: high-end electric sports cars, and to build a vertically integrated business to bring that market to life. We need more Elons and more Teslas.

What is the mithril difference?

Entrepreneurs seem to seek Mithril because we reinforce their vision and help them become more ambitious in the markets they seek to dominate.

We are, first and foremost, investors. Patient, high-conviction investors. CEOs respect and appreciate that clarity and focus. And, in addition to money, the team at Mithril provides strategic advice, introductions, and other support to enhance growth. We really enjoy working directly with CEOs, CTOs, and boards.

Where are the investment opportunities of the future?

Some of the great investment opportunities are squarely in the hotbed of innovation, namely, computers. Advanced networks (of both computers and humans), data analysis, and cyber-security are all enjoying tremendous growth that will benefit consumers, entrepreneurs, and investors.

On the other hand, many great opportunities are in industries that have been relatively underserved by the computer revolution, as well as a lack of risk capital directed towards fundamental tech and business model transformations. The most obvious such areas include oil & gas, nuclear-related tech, transportation, and even mining. The less obvious industries include health care—such as medical devices and treatment platforms—as well as education and financial services. In the latter group, the appearance of innovation has raced ahead, while actual opportunity remains to be captured.