The firm invests in sectors like artificial intelligence, space, defense, and healthcare
Venture capital used to be a cottage industry, with very few investing in tomorrow’s products and services. Oh, how times have changed! While there are more startups than ever, there’s also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We’re highlighting key members of the community to find out.
Rusty Ralston is the co-founder and General Partner at Swell VC.
The firm invests in visionary entrepreneurs, nurturing companies that redefine boundaries in sectors like artificial intelligence, space, defense, and healthcare.
Prior to Swell, Ralston’s career journey was anything but linear. He was an early employee at an AI-driven Natural Language Processing recruiting startup, playing a crucial role in the early exploration of AI’s potential. His time at GE in enterprise software sales sharpened his ability to navigate intricate business ecosystems. At Creative Artists Agency, he honed a skill crucial in the VC world: identifying and nurturing exceptional talent.
Ralston’s diverse background is the bedrock of his investment philosophy, combining a strong understanding of technology with an instinct for spotting transformative talent and opportunities.
VatorNews: Let’s start with getting a high level view of the firm: tell me about Swell VC, about where you sit in the venture ecosystem, how you view investing, and your methodology.
Rusty Ralston: At Swell we’re really built around a core thesis, and that is: you win with people. You could consider it a cliche, but it really is the truth when it comes to early stage investing. We’re an early stage venture firm, we invest in pre-seed and seed, focusing on what we believe are category defining companies. From the get go, from our start, Jay Patil and I have been obsessed with building high performing teams, going back to our experience as the first employees at an AI recruiting startup, so we really understand early stage startups. We were some of the first employees at a company, so we have that background; at that venture-backed startup where we met, our customers were actually founders, and we were supporting founders with recruiting. So, that’s still very close to what we do and it’s how we support portfolio companies, by having two GPs that actually focus on the recruiting instead of farming it out to the talent platform or someone else with less skin in the game. That’s our big focus and this approach has, fortunately, led to some exits, some great follow-ons from amazing investors and, hopefully this year, we’ll have our first seed to a unicorn story.
VN: Recruiting seems to be a big focus for you. So, talk about that aspect of it, and how you provide that and how that’s a little bit different from other firms.
RR: It’s probably worth mentioning our background: Jay and I met at an AI startup almost 15 years ago and, if you can imagine AI 15 years ago, it was very different. So, we were very early into AI, we were working at a New York City startup, we were backed by John Elton, who’s now at Greycroft, and as well as prolific New York investor Jeff Judge, and we were building a platform to assess salespeople. So, the goal was to record a phone call and use AI and NLP to essentially transcribe and make sense of that call and then rate the person on the characteristics that make salespeople great at what they do, which is drive, motivation, empathy, relationship building, all of these types of things. To collect data at that time, you couldn’t just buy the training sets; nowadays, you could pretty much put your data on anything and use it to train your algorithms, but then we couldn’t, so we actually had to build a recruiting firm at the startup to capture data, if you can imagine that. That would record the calls and then we had the data to train the platform. Because of that, our VCs introduced us to 75 to 100 companies that they had backed, and they said, “great, you’re building a recruiting company, you can work with these companies,” so that’s where we got our start serving founders and that has continued to today, which is still our edge. We spent over 10,000 hours speaking to thousands of founders interviewing thousands of potential hires, and helped recruit teams for startups that were acquired or became industry leaders. And it was that process of cultivating the sense of really knowing who’s truly great or not where we proved what we could do. We could also recognize who had started DNA and we coined this term because someone who works at Google or Facebook might not be a great employee for a startup; you really have to have that like value creation, instead of that value management, type of mindset.
So, when the tech didn’t pan out, we spun out and started to combine this recruiting piece with the investing piece. Still to this day, we actually work directly with founders and we get hands on and we help them make their most critical hires, almost like a retained search firm embedded within a venture company. One of the biggest differences that we saw between us and other funds was that there was this principal agent problem because, typically, a venture fund has a signer and a servicer, you have someone who writes the check into the startup and they say, “hey, I’m investing in the company, here’s a check,” and then they say, “I can’t help you with recruiting but go talk to her head of talent platform, head of recruiting platform,” but the problem is that that person has very little to no skin in the game or GP carry. They don’t have the incentives to really move mountains for founders when it comes to recruiting and, also a secret in the industry is that, the best recruiters are making incredible amounts of money and the chances that they work at a recruiting platform at a VC are slim to none. So, Jay and I essentially decided that this was a problem, we had a really great background to solve it and, therefore, when we work with companies, and we have a very concentrated portfolio so we can do this, we get really hands-on in being an assessment layer for them to evaluate people and also have a playbook for them that we share. Then, the most critical piece is that we just get hands on, and we’ll go out there and help them hire directly the best people in the country all the way from the search to the process to actually helping with the offer and closing the candidates. So, that’s just something that’s a little bit different about what we do at Swell.
VN: What are your categories of interest? Where do you actually invest?
RR: We really invest in companies that can potentially transform an entire industry. Obviously, that involves a lot of AI, but the sectors are everything from space to healthcare to defense. We’re really looking for, first and foremost, extraordinary founders and then, can they build category creating companies? Because of that category creation piece, it really leads us into a variety of sectors. Actually, one of our founders, Robin at Credal AI, was just like, “hey, you guys invest in the stuff that matters and founders who have a big vision, a big purpose, a big mission.” And so, that means we don’t invest in just another SaaS company or just another productivity tool; that is not in our sweet spot. We are investing in things like B2B infrastructure and enterprise software across a variety of industries. AI is really baked into almost every company, so we don’t consider AI its own category, it’s really within the sector. That means, for example, healthcare solutions that really can revolutionize patient treatment in different ways. An example of that would be ScienceIO, a company that has built LLMs for biomedical data going back five years ago when we invested and they recently exited a couple of months ago. We also have interest in companies that are in space tech, so we were early investors before the Series A in a company called Loft Orbital, and they make space access incredibly simple for enterprises and the federal government. You could consider them almost like AWS for space, so they do space Infrastructure as a service and they’re a company that’s quickly becoming pretty massive.
Other sectors that are really interesting to us are our e-commerce supply chain: we love technologies that can really transform commerce infrastructure and supply chain. Companies like Crisp here in New York City: they work with some of the biggest retailers in the world, they work with most of the top 100 CPG brands, in both reducing food waste and boosting the margins of those companies. And then the last piece that’s really interesting, that we’ve really keyed in on going almost five years back, are companies that are in national interests, like defense, national infrastructure, and security, and that also has some cybersecurity pieces too. So, Loft Orbital does a lot of business within that sector, and we have a couple other portfolio companies in that as well.
VN: It sounds like you’re investing in AI, and that you’re vertical agnostic because AI can be in any vertical. Any vertical can adopt that technology. Is that right?
RR: When you look at the companies that we’ve invested in, it’s Loft Orbital essentially ships GPUs into space to do AI processing in space so the data feeds don’t even have to come back to Earth, and ScienceIO in healthcare and Credal AI in cybersecurity. So, yeah, we definitely do a lot of those.
VN: AI is a bit of a buzzword at this point. Rock Health came out with their Q1 report recently and it said that almost 50% of companies in the healthcare space that raised funding used AI, or had AI somewhere in their description. So, almost every company is saying they’re an AI company. How do you differentiate between the real AI companies and the ones that are just using the terminology and not really using the technology, just using it as a buzzword to get funding?
RR: There are a couple ways to differentiate. One is, are they focused on solving a real problem? It doesn’t matter if there’s AI or not, let’s just talk about what’s the problem and what are ways to solve it. And just first principles, like a very simple look at the business, you can tell that sometimes it’s AI looking for a problem versus a problem that can be solved with AI, potentially. Second, anyone who says LLMs solve anything is wrong: LLMs have massive limitations, and you can combine LLMs with other types of AI to solve problems, but you can’t just throw an LLM at everything and think that it will solve it. Another piece is really just the caliber of the founders: the lowest caliber founders constantly jump from hot trend to hot trend; you might even see a founder on Twitter jump from crypto to the Web3 to AI, so your highest caliber founders in the country are founders that have spent the last five years plus in the industry, creating value in the industry, solving real problems in the industry, and have incredible track records. Therefore, you can tell very quickly, are they just making stuff up about AI to try to raise money quicker? Or is there some breakthrough that they feel that they’re onto?
VN: If you had to define the macro trend that you’re betting on, would that be? Is it the proliferation of AI? Is that what you’re betting on?
RR: It’s probably more just the significant impact of digital transformation across sectors. So, we do have a focus on the rise of AI and other types of technologies within critical industries and infrastructure, and so the technology breakthrough, combined with really incredible founders, will yield the creation of new categories, and that will drive forward societal and economic changes. So, the macro is our belief that technology continues to reshape the world at a very fast pace, so it’s not just the AI play, it’s digital transformation across sectors, including healthcare space, B2B commerce, infrastructure, things like that.
VN: What’s the current size of your fund? And how many investments do you make in a typical year?
RR: We’re currently raising a $15 million Fund II. We have a pretty concentrated portfolio, that’s key to what we do, it’s central to our model. We believe outsized returns in early stage ventures come from finding founders that are pursuing massive opportunities without spreading the bets across 50 plus investments. So, every one of our checks needs to have that fund returning potential and we only back founders where we have that extreme level of high conviction that their company can define a category. The concentration also allows us to really engage and support our portfolio companies with the recruiting piece that I mentioned. We’re doing around four investments per year.
VN: What does that come out to in terms of initial checks, and then over the life of the company?
RR: It’s really almost 20 companies total, initial checks are between $500,000 to $800,000 and almost all of our capital is allocated in our first check, which is at pre-seed or seed.
VN: At seed or pre-seed, at that point are you there any traction that you need from that company, any numbers that you want to see? Maybe a minimum amount of ARR or A minimum number of customers? I guess it would depend on the category, like maybe healthcare companies are different from cybersecurity companies, but generally, are there minimum numbers that you want to see to invest in a company?
RR: A lot of investors say they’re pre-seed investors, and then they talk to a company and they’re like, “are you at $500k yet? Because that’s our threshold,” which is just funny. We don’t have a minimum threshold of revenue or user traction or all those things, we really focus on the founder’s track record, the market creating potential, exceptional product development, early market validation is also great, but we’re particularly interested in the caliber of founders that have that vision and the ability to execute on it. If you look at some of our biggest winners, like Loft Orbital, we invested in them when there was no product, there was no satellite in space. If you look at Crisp, which is B2B infrastructure in supply chain and commerce, we invested in them when it was just the two co-founders, there was barely a line of code. So, it’s true pre-seed investing and there’s no minimum threshold when it comes to revenue or traction. We like to invest when it’s just two founders sitting across from us at a coffee shop and it’s just their track record to go on and their vision of what the world can become with their technology.
VN: I’d love to hear your diligence process for the founders. You’ve mentioned a couple of times already that you’re founder focused, as well as that having that experience in the recruiting space and being able to determine who would be a good person to invest in. What is the diligence process there for you? What are you looking for in that founder or that entrepreneur to make you want to invest in them?
RR: We love founders with a commercial mindset and a huge vision. We also look for this founder market fit, you could call it: do they really understand the product? Maybe they have some sort of insider secret from working in that sector. We also look for founders that have previously created value from scratch, so that tends to be experience at an early stage startup, or even potentially a previous founder. Other things like track record and launching new products is a key. We also like to have a technical counterpart as part of the founding team. One of the things that people don’t think about, but that we really care about, is we invest in founders that are their talent magnets. The founders that we look to invest in are talent magnets, and they can close any candidate, the top people in the world, to work at their company, but what we can do is broaden their access and give them even more access to the top 1% of caliber of people.
Obviously, you have to have incredibly smart people, you have to have some of the characteristics I mentioned, but, outside of that, the thing that we really place an extraordinary emphasis on is their personality traits and their personal story. We really look for this incredible, frightening level of drive and motivation: someone who’s very, very urgent, and someone who has a massive chip on their shoulder. We don’t take a normal VC approach to this, we’re not just asking them, “tell me about your background,” and looking at their LinkedIn, their resume, “oh, you worked at Stripe, you can start a company, that’s great.” We go beyond that and ask, “what are the good or bad things that’s happened to you across your life and impact now? What drives you at your core? What was your childhood like? What were your parents like? What are the most challenging things that you went through in your life? And how did you come out of that?” Those things really shape a person and determine their motivation and what they want to make up their life. We have seen so many times that we can find people that have this heightened sense of drive and motivation and this inevitability about success and these founders that have great character and integrity will also just push so hard and have this burning desire to solve a customer’s problem and a burning desire to win. That’s the intangible stuff that we really hone in on, besides the obvious thing.
VN: You’re getting to the core of a person. You’re asking about their childhood, and all that stuff. You’re doing a much deeper dive.
RR: The deeper we can there to truly understand a person and what makes them tick, and what motivates them, then the better understanding will have about the likelihood of success with their business.
VN: Let’s talk a little bit about the market currently with valuations. When you look at healthcare, 2020 and 2021 saw a huge amount of investment going into that space, for obvious reasons. And then, once the pandemic ended, things popped. And it feels like that’s been the case for venture in general, not just in healthcare, but that was more like the very easy to see rise and fall. So, how do you see just venture overall in the last couple of years? Where do you see valuations now versus two years ago? And what does that mean for the companies that are trying to raise new funds, new rounds? Companies that raised previously that are now raising their Series A or Series B, but also the companies that are raising their first couple of rounds, how does that affect them?
RR: Typically we see pre-seed and see evaluations in the range of $5 to $20 million. That’s a pretty broad range but, depending on the sector, depending upon the business and how far they are along, typically, in that range. Like you mentioned before, when companies really tout the AI angle, they tend to have some inflated valuations and, therefore, you will see some deals that, right off the bat at pre-seed, can exceed those types of numbers. I’m not talking about a foundational model, like an LLM company that needs to raise to compute GPUs, but companies that mentioned AI in their deck and in their raise, there’s definitely some overheated valuations there when it comes to AI. But, in general, it’s in that $5 or $20 million range.
What it does present is an opportunity for those companies and a challenge to really drive revenue. Once you get to a Series A, it’s not about the story you can tell anymore; in the bubble you could raise an A on a story but now you have to have traction, you have to have significant ARR, the bar for a Series A and Series B is very high. So, the market is a lot more real, the market is less reliant on just great stories, and you have to have significant revenues and traction to continue fundraising.
VN: It’s interesting what you said about companies that say that they’re AI. As we talked about before, it’s become a bit of a buzzword, a bit of companies just saying, “I’m an AI company,” when they’re not really. If they’re raising a lot of money based on that, but they’re not really AI companies, are a lot of firms not doing the due diligence that they should do on that technology? Are they seeing that, “oh, you’re an AI company, therefore, you’re worth X,” but not really drilling down and seeing if this is real, actual AI technology and if this really sustainable and a differentiated technology? Are they throwing money at it without really doing the work?
RR: It depends on who the investors are. Generally, people are doing the work, however you have a lot of demand from LPs and demand from funds to invest in this transformational time period right now. Therefore, when you have what you perceive to be high caliber founders, they may not be high caliber but they may have worked at a known company, and so when you have people who worked at a known entity, and you have the mention of AI, and then you have the market force of these massive funds that you need to deploy, you can then have founders with leverage to raise at higher valuations. Who’s to say that they’re wrong about that? If you have the leverage so you can raise at higher evaluations, and that’s what the market dictates, of course you should.
From an investor perspective, it’s really just figuring out what founders are real and what founders are looking to solve a customer’s problem, and are obsessive about solving the customer’s problems. That may involve AI and it may not but, from the investor’s perspective, you really have to get into that, versus saying, “oh, here’s an AI agent for this, here’s an AI agent for this,” and then you talk to the potential customers while doing research on the market, the market says, “Oh, we don’t even need that.” It just requires diligence, the markets at play, there’s a lot of different factors that contribute to the valuations, but they’re all tied together.
VN: If you say you’re an AI company, but you don’t have differentiated technology, you’re going to get to a point where you’re going to run out of that runway because the market is going to basically say, “we don’t want this or we don’t need this,” or, “this doesn’t really help us.” You can only last so long on technology that’s not really differentiated.
RR: Exactly. The truth will eventually come out and the companies that have built incredible technology, and have all the ingredients of what it takes for success, will become successful and the companies that don’t really have great technology, and don’t have the ingredients for success, won’t make it to the next round.
VN: Talk a bit about your differentiation as a firm. Earlier you mentioned the recruiting part of it, and that’s one of your differentiators, but I’d love to hear about how you differentiate yourself to LPs. Obviously, a lot of firms are going after the same limited partners so you have to pitch yourself to them and say, “here’s why I should be the one to deploy your capital.” What do you say to them? How do you differentiate from other firms?
RR: Jay and I are fortunate to have been partners for the past 15 years. We also have early stage startup experience and our track record with companies is verifiable, so the way we differentiate ourselves is our judgment, especially in the bubble when most first funds that were started in that time were just spray and pray funds that invested in 50, or even 100, companies. We did the opposite and said, “we’re only going to invest in 12 companies out of the entire fund, and show that we can actually pick winners.” That experience, going back to the AI startup, and talking on the recruiting side and talking to thousands and thousands of people, cultivating our judgment, that’s something that we’ve cultivated for a while, and we flex that muscle going against the grain in the bubble environment and now that has really paid off into where we are now. So, one is judgment and two is really the way we support our portfolio companies: no other venture firm in America has two GPs that work so closely with founders when it comes to recruiting. Our LPs really understand that, they’ve built and sold tech companies to some pretty significant exits and so when we talk to LPs they really understand what it takes to build a company, and how we can be influential in, not only mitigating the risks, but really putting the gas on acceleration there.
VN: Talk about it also from the point of view of the entrepreneur. The best companies can take money from any firm, they’ll have the firms competing over them, so you have to pitch yourself to the entrepreneurs as well. So, what do you say to them?
RR: It’s not just picking winners, it’s getting the winners to choose you. We work with great companies because elite founders recognize the team’s impact on success and choose Swell for their cap table, even when they’re oversubscribed. We help portfolio companies make amazing hires. They get both Jay and myself in their corner for the next decade, with direct operational support and strategic guidance when it comes to growing the company and making those critical hires. So, that’s what is really different in how we work with founders. The great thing about this is it’s not just the pitch, it’s real and we have a track record of it over the past decades. We really lean into that.
VN: We always like to hear about some of the companies that you have money into. You talked about a couple of the companies you’ve invested in so if you want to talk about those companies that would be great, if you want to talk about different ones that’s fine, but pick two or three of your portfolio companies and talk about what it was about those companies and why you wanted to invest in them. What was it about those founders, or that company, that made it enticing for you?
RR: One example is Loft Orbital, I mentioned them, they’re making space simple. You could think of it as like AWS for space. We invested before the Series A, they’re now a lot further along, in the hundreds of millions of revenue range, and we saw several things: one was the caliber of the founders. The founder previously worked at a company called Spire, which is in space tech and has now IPOed, and they were some of the first employees there. They closed some of the first government deals that the company did, they really created all this value from scratch as some of the first employees in this company. In addition to the caliber of the founders, they had this insider edge and advantage and secret in seeing this massive market potential. And so, we really saw this as a market defining type of opportunity if they win. We don’t invest in companies where they’re one of 30 competitors, we truly seek out the companies that can really define an entire segment, and so we thought Loft really and truly had that potential, and they had the caliber of founders that we look for. That’s what a Swell deal is, it’s those two things together. And so, that’s an example where they’ve gone on to become a massive company working with everyone from Microsoft Azure to the federal government to all kinds of customers.
Another example is Crisp, which was founded by Are Traasdahl and Dag Liodden. It’s becoming the de facto standard for commerce infrastructure, so they work with Nestle, Kraft, Unilever, 70 of the top 100 CPG brands in the world, and have raised $85 million so far. They just got named CPG Retail Partner of the Year by Databricks. What we really saw with Crisp was they have this idea of actually building the pipes, almost like a Plaid or Stripe-like company for data infrastructure in the supply chain. So, really creating infrastructure and connections between the data that didn’t exist before and that’s allowed them to really go out and potentially capture a massive market, which they do an incredible job at. Also, the founders really met exactly what we look for: commercially driven, incredible track records, background; we actually knew the founder from his last company, Tapad, which we were some of the first investors, we helped them hire 40 people out of 150 at the company, and the company was eventually acquired for $360 million in about six years. And so, that was our first experience with investing in Are Traasdahl, the founder. After that exit, we partnered closely to build his company: he had so many investors at Tapad, and it’s such a connected person, he knew tons of VCs, but he only chose Swell and one other VC to participate in the round. Are is just the archetype of the founder that we really seek when looking to invest in people.
VN: You talked about working for the AI recruiting company and then becoming a VC. What was that transition like? What were some of the lessons that you had to learn going from basically the operator side to the VC side? What are some of the things that maybe surprised you when you started investing?
RR: We didn’t come from traditional venture backgrounds, we didn’t work at the big funds, we didn’t have big finance backgrounds, we didn’t go to the Ivy Leagues. There are all these things that maybe are a little bit different about us and our road into venture and, because of that, we didn’t grow up, and decide, “okay, we can do venture, we already have a $30 million fund in our back pocket.” We really had to prove it. And so, before we took a single dollar from outside investors, we essentially launched a proof of concept fund with the revenue we were driving from recruiting, so we had to put our own skin in the game into a half dozen companies to prove our own model of this investing and recruiting coming together. That’s where we started. As we evolved obviously it’s become a lot more formalized as you get into an actual fund; when you’re at that stage and you’re so focused on actually doing the investing, which is the most important part, you don’t understand fundraising yet and how an investor actually has to raise from LPs and that whole process and talking to LPs. One thing that you learn, and don’t know going into it, is that venture capital is sales. I mean, you are selling, you’re talking to LPs about your fund, you’re raising money, raising money is sales. You are investing in companies, the best companies don’t need your money, so you have to sell yourself into the companies. So, it really is sales on both sides and that’s one of the things we’ve learned and one of the key aspects of VC.
VN: What’s the part of the job that you really liked the most? When you go to work every day doing this, what really motivates you? What really excites you about being venture capitalist?
RR: The part of the job that I love the most, that excites me is, every day, is talking to extraordinary people. I love it. The ideas that you discuss with people about different industries and their vision for the future and how they’re willing this vision into reality, just the caliber of people is amazing, and it’s something that I love to do every day. So that, for me, is just so fascinating and interesting, I’m such a curious person and, whether we invest in the company or not, to be able to learn from just such brilliant people in how they think and how they look at a market and what they build as a solution it’s probably my favorite part. It’ just spending time with entrepreneurs and just getting a better sense of how they see the world and how they want to bring that into existence.