Next in the Seed Series, we talk with Katie Rae, CEO of The Engine. We talk about deep tech, patient capital, The Engine’s relationship to MIT, and how The Engine is spreading its knowledge across university ecosystems. The following has been edited for brevity and clarity.
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Gené: Welcome to Katie Rae, CEO and Managing Partner of The Engine. How did you get into this role of an operator in tech, and then switch to investing?
Katie: I ended up at business school where I met my first set of engineers who wanted to start a company. I was so naive that I thought maybe I could help them do it. We just started a company. It was that simple. It’s where I learned what a venture capitalist was, what an angel investor was, and from there I joined Elon Musk’s first startup called zip2. I learned how to be a general manager, how to run things, and build technology companies.
I had helped so many people start companies over the years, I wanted to learn how to be an investor. I met Brad Feld at Foundry. He was one of the first people I called and said, ‘Brad, you’ve been doing this for a long time. How should I think about this?’ He’s such an open wonderful person that he very earnestly sat down with me and started to talk about it. He said, we’re just kicking off Techstars. You want to learn how to run a fund? He and David Cohen hired me to run the Boston program of Techstars. This is late 2010. It all kind of went from there. Then I decided to leave Techstars and raise my own fund. I started a firm called Project 11.
Gené: What did you learn through running Techstars in Boston?
Katie: There’s almost no shortcut in venture. You have to see your first two to three thousand companies before you can start to judge teams fairly. Do they meet the bar or not? Everyone gave the same number, two to three thousand companies. For most people that takes five to seven years. But when you run Techstars, in the first year I met two thousand companies.
The second thing I learned is that the effort you put into this, and the love you show for the entrepreneurs, is so fundamental to great outcomes. You really learn to trust each other. Because without that trust people just block each other off, and they stop telling the truth or they stop revealing what’s actually happening. It was so shockingly apparent to me that you have to be genuine in these relationships. It’s not a transactional business, and certainly not in the seed stage. These are early companies where a hundred things could go wrong, but only one needs to go really right to win. If you’re focused on all the wrong, you will kill these companies. That’s what I learned.
It’s a lesson that gets replayed in almost every piece of life, whether it’s your relationship with a spouse, or your children. It’s always that same lesson.
Gené: The Engine was founded fairly recently in 2016. I think you joined in 2017?
Katie: It was formed as an entity at the end of 2016. We closed the funded in 2017.
Gené: The Engine is part of MIT, is that correct?
Katie: It’s a spin out of MIT. It’s a for profit spin out, an independent entity. We have a board of directors in which two members are from MIT. Then we have six members outside MIT.1
Gené: What is different about The Engine?
Katie: I’ll tell you what’s the same and what’s different. We are a public benefit corp at the very top, and some other funds are that as well. But we’re on a mission to create, enormous impactful tough tech companies. We start within the Boston region. We are targeted on solving really big problems with technology. That’s why you see us in things like clean energy, or how to cure disease, or feed the world’s people. At the top, we have a true mission, and our board holds us accountable to that mission.
MIT’s mission is also impact, and not only through technology. Our missions are aligned. We have access to things that are very unusual. This deep rich history of incredible technology development, and people, but also facilities. MIT opened all their facilities to the startups. They helped us build out this first space. We’re thinking about how to 10X everything we’re doing. It’s why the breakthroughs matter because they actually have to impact the world. It’s not for knowledge only, it’s both for knowledge and to impact the world.
Gené: What is the connection with MIT Media lab?
Katie: The Media Lab is part of the institute, and it’s funded quite differently. The way we work across MIT is we work with all the different professors, postdocs, and PhDs and some of the undergrads, on the companies they’re thinking of creating. We try to work with the ones that we believe are in this kind of tough tech zone and are ready to spin out of the university. We will nurture very early, and try to help those companies along and then fund them when we think they’re ready to spin out.
Gené: How do you plan to invest the $205 million fund?
Katie: We’ve made 19 investments to date. It’ll probably be about 30 companies to 35 companies in this portfolio. We fund the gap between the lab and other venture capital. We do the first four years of a company. So pre-seed to Series A. If we were willing to invest into technical risk, the returns could be extraordinary. We spend the majority of our time in true technical risk with massive opportunity, if they get through that technical risk.
Gené: How many partners on the team?
Gené: How much do you typically invest? And how much equity do you like to get for that investment?
Katie: We like to get 10 to 20 percent of the company and the investment varies. Our first checks are from one to five million dollars. Sometimes we do experimental checks that are less than that because there’s something to prove out, or we’ve got to develop the team.
Gené: What is the time frame for patient capital?
Katie: Whatever the biggest technical risk is, you want to take that out in the first four years. That’s what opens all kinds of capital to the company, whether it’s venture capital, or non dilutive capital, or project finance capital. Most funds are 10 years, which means that you must be in market truly deeply within the first four years. Otherwise, you’re not going to get to exit within 10 years. We like to have a slightly longer time frame than that. Ours is up to 18 years. And that allows us to take a different set of risks in technology that we think are really important. For Commonwealth Fusion, if this is the first commercialized fusion company, it will be very valuable. But it will take a number of years, more than most venture capital is willing to take to get there. Maybe four or five years longer. If they get there, the win is enormous. You’ll see those across the tough tech space, whether it’s in biology, or chemistry, or physics.
Gené: Are there a couple of companies that you’re excited by and why?
Katie: Commonwealth Fusion is doing something really extraordinary. It’s an almost perfect Engine story. It’s built off of 50 years of research, in the plasma fusion center, and billions of dollars of U.S. government funding. An incredible team of postdocs launched the company out of MIT. What they’re doing is miniaturising a fusion plant, with an invention that allows them to get to net positive energy. The problem is that it hasn’t generated net energy, because it takes so much energy to run the power plant. We believe what they’ve invented will allow you to get there. If that’s true, you basically have endless clean energy. This is a team that has already proven out a bunch of the most significant milestones, and will continue to do that over the next two to three years. They are a year old as a company.
Another one that that’s probably more accessible. There’s a company here called Kytopen. It’s built by a mechanical engineer out of MIT and a research biologist. They looked at the biotech industry and said, ‘Why are there PhDs basically injecting things into cells?’ Would there be a way to speed this up in the biotech industry by ten thousand X. It’s a platform. It affects almost every biotech company. They are 18 months old. We did the seed round.
Gené: Is there anyone else doing what you’re trying to do around the world?
Katie: I’ve talked to probably 150 universities in the last two years. I think there are some gating factors for some of the universities, but I think you’re gonna see more of these partnerships. They have so much physical infrastructure that tough tech companies need. There is discipline that is important to company development by getting capital in, which formalizes a board and formalizes a process of focusing on things that could be enormous.
One of the things we love to do is help others. Teach others what we’ve learned already, in collaboration, so that we can learn together. There are some venture funds like Lux Capital and Founders Fund that do look at these big breakthrough technologies. We do a lot of work with Breakthrough Energy Ventures on the clean energy side. These are funds that have the same longer time frame, big technology focus.
Gené: Are pockets around the U.S. that are focused on deep tech outside of Boston Cambridge?
Katie: You could look at Berkeley or places in the Bay Area, Stanford, and LA. There are pockets, certainly at the big universities like University of Iowa, University of Illinois, any of the big research universities. The concentration of startups really does end up mattering. When you’re one of three startups in an ecosystem versus one of three hundred, it makes a big difference. Concentrating these tough tech startups is very much on purpose. All the research will tell you that it is good for all of them, whether it’s talent or capital or infrastructure that clustering does matter. We think this is one of the best places in the country to do companies like this.
Gené: Is there anything we didn’t cover?
Katie: Sometimes people get confused between impact and returns. I don’t think you have to sacrifice return to go after really big impactful companies.
The second is that we really bet on scientists and engineers growing into the leadership of the company. We think it is fundamental that you have inventors that understand this technology, but then also want to grow into great business people. If you nurture them in growing into business leaders, they catch on super-quickly, and have the total package for running a company.
Gené: And these are people who haven’t gone through business school?
Katie: Most have gotten a PhD and probably done a postdoc. We don’t want people to think, you can’t be the CEO unless you have an MBA. Lots of great MBAs are great CEOs. But if you’re running a fusion company, you better know a lot about fusion or if you’re doing a biology company, you better know a lot about that. We like to build the business expertise around someone.
Gené: Well, thank you Katie.
Illustration: Li-Anne Dias.
The Engine reached out after publication to provide a statement regarding its spinout: “Spun out of MIT, The Engine is an independent venture firm investing in early-stage Tough Tech companies, bridging their gap between discovery and commercialization. We accelerate their path to market by providing the companies with the long-term capital, knowledge, network connections, and specialized equipment and labs they need to thrive.”↩