What Happened at Mithril When Peter Thiel Wasn’t Around

(Bloomberg) -- When Ajay Royan started Mithril Capital in 2012 at the age of 32, he’d never worked at a venture firm or managed a team. Hailing from a modest background in India, his sharp mind distinguished him in and out of school, but he lacked the funds to invest in technology startups. What Royan did have was a curiously strong relationship with the fabulously wealthy and powerful investor Peter Thiel.

Royan had worked at Thiel’s hedge fund Clarium Capital—infamous for a spectacular collapse that vaporized more than $6 billion in value between 2008 and 2012. Unlike most of Thiel’s employees who fled Clarium as it cratered, Royan stuck around. He wasn’t awarded a huge salary for his loyalty, but he earned something infinitely more valuable: Thiel’s trust and financial backing to build and manage a venture firm.

Thiel put up $100 million to start Mithril. His name and reputation helped attract dozens of prominent investors who followed his lead, pouring hundreds of millions of dollars into the new fund. Then, for the most part, Thiel left Royan and his team to their own devices. While Thiel busied himself with other pursuits—backing a lawsuit against gossip site Gawker, advising the Trump administration on technology matters, dreaming of floating cities and radical life extension—his protege came under fire for allegedly mismanaging Mithril and driving off most of the firm’s top managers. 

The drama centers on an epic falling-out between Royan and his former general counsel, Crystal McKellar, who left Mithril earlier this year. In a lawsuit filed in October, Royan accuses McKellar of instigating a “whisper campaign” claiming that he committed financial fraud connected to how Mithril collects and spends management fees. A second lawsuit filed about two weeks later by Mithril accuses McKellar of breaching confidentiality and other agreements and seeks a declaration that she was fired for cause as a result of those actions.

On Thursday, McKellar returned fire with her own lawsuit, in which she reiterates allegations of financial fraud and says Thiel considered shutting down Mithril before being persuaded to give Royan a chance to get the firm back on track. In the complaint she quotes Thiel as saying: “I can’t believe how greedy Ajay is. Ajay has broken Mithril.” In a statement, a spokesman for Mithril said that the allegations in McKellar’s suit were false, “as evidence in Mithril’s lawsuit against her demonstrates.” He added: “Mithril is confident they will be proven as such in court.”

Last month, in an interview overseen by two crisis-management consultants, Royan denied doing anything wrong. “The core of this entire allegation is that there’s some financial issues at the firm,” he said during the almost three-hour conversation. “There are freaking zero issues.” 

Royan’s reputation—and by extension Thiel’s—was losing luster even before the lawsuits. In recent months, McKellar's concerns coincided with complaints from some investors that Royan is an overly timid deal-maker who has invested just a quarter of Mithril’s newest fund. Former employees and others in Thiel’s extended network have criticized Royan for keeping their names on the website after they left—giving the appearance that the team was larger than it actually was. Several former and existing Mithril employees also said they find it unseemly that Royan put his father and sister on the payroll.

So far most investors are keeping the faith. Two major backers reaffirmed their support for Royan and his investing strategy, according to letters written by them and reviewed by Bloomberg. One praised his “patience to not chase inflated pricing” and “world-wide view of investment opportunities.” With the addition of McKellar's suit, which describes Mithril as operating on the power of Thiel’s name but largely ignored by the man himself, that faith will be further tested. Thiel didn’t respond to a request for comment. In the interview, Royan described his patron as “blown away. Like shocked” about allegations of fraud and mismanagement. He added: “I’m not happy, he’s not happy.”

Founded in 2012, Mithril is named after the super-strong armor worn by characters in “The Lord of the Rings.” (Thiel, an unabashed Tolkien fan, also mined the trilogy for the name of his data software company, which he tagged Palantir after the books’ magical communication orbs.) Even before Mithril opened its doors, there were problems. Investors at Founders Fund, the venture firm Thiel started several years earlier, were unhappy that Mithril would operate just a few steps from their office on San Francisco’s leafy Presidio campus, according to people with knowledge of the situation. Mithril could have provided a natural complement to early-stage Founders Fund deals by bankrolling some of their more mature startups. But instead of cooperating, Thiel’s two firms competed from the start.

In an episode that has not previously been reported, Mithril and Founders Fund clashed over the right to invest in Airbnb Inc. According to two people with direct knowledge of the situation, Mithril locked the deal down as one of its first, crowing about its early stake in the vacation rental startup to newly committed investors. The move rankled many at Founders Fund who felt that because Thiel was already an Airbnb backer they had the first right to invest. After heated exchanges between the two firms, Founders Fund prevailed, leading a $200 million round at a $2.3 billion valuation. Airbnb is now worth $31 billion.

“We had egg on our face,” said a former Mithril employee who, fearing retribution for speaking publicly, asked not to be identified. To help smooth frustrations between his warring fiefdoms, according to the same people, Thiel helped arrange a Mithril investment in Palantir. Thiel had already steered Founders Fund to invest in the company, which has secured billions in government and private-sector contracts, but has never turned an annual profit in 15 years. Said the former employee about letting Mithril take a stake in Palantir: “It was like, ‘Hey look at this other shiny thing.’”

The initial drama notwithstanding, Mithril’s first fund was fairly typical, with nearly a dozen employees who had all worked with or known Thiel previously finding and funding startups for the firm. Johnson & Johnson acquired one of those earlier this year, snapping up surgical robotics company Auris Health Inc. for $3.4 billion in a deal that delivered Mithril an exit of roughly $510 million. If Auris hits additional milestones, Mithril’s haul will be $870 million, more than returning the entire $540 million fund on that one deal.

But back in 2015, when investors were asked to commit to a second larger Mithril fund of $740 million, they didn’t know Auris would be the largest acquisition of a venture-backed medical device company in history. They were mostly betting on Thiel’s reputation.

Silicon Valley doesn’t have oligarchs, but Thiel, 52, comes mighty close. He helped build PayPal and when EBay Inc. bought it in 2002 and parlayed the payout into venture investing—writing a now-famous first check to Facebook Inc. That set him on the path to becoming a billionaire. Now, with his Facebook board seat, consigliere status within the Trump administration and expansive network of powerful friends including Elon Musk and Reid Hoffman, Thiel is an influential and, for many, coveted investing partner.

His association with Mithril was good enough for the Getty family, Singapore’s Temasek Holdings Pte and dozens of others who joined Thiel to invest a combined $540 million in the fledgling firm’s first fund. Though Thiel is featured prominently on the firm’s website, he has never played a role in daily operations or management.

In fact, Thiel has no fiduciary responsibility to Mithril and is free to engage in investing activities that compete with the firm, according to documents reviewed by Bloomberg. “Peter has no control, responsibility or oversight with respect to the manager’s or general partner’s financial reporting and controls, or their disclosure and investor reporting,” states a memorandum between Mithril and investors.

Instead, Royan ran the shop and quickly became known for making unconventional choices. The most unorthodox, perhaps, is how he structured Mithril’s management fees. Venture firms typically charge 2% of a fund’s capital to pay for salaries and other operating expenses while investments mature. Fees typically begin tapering off after five years or so as partners harvest profits from their startups. Mithril was structured that way too, but with a twist.

A separate management company operated by Royan collected the fees. In financial statements shared with the limited partners in 2017 and 2018, the firm said it was waiving 25% of the fees. In fact, that isn’t exactly what happened. The investors actually paid the full $11.7 million in 2017 and $11.9 million in 2018. But $3 million of that each year was renamed a special “contribution,” which Royan then used to make a personal investment back into the fund. Directors at venture funds are often required to commit their own capital alongside fund investors to strengthen alignment, and this is how Mithril structured that commitment.

Royan characterized the fees as standard and said no investors have complained. He said former general counsel McKellar crafted and approved the fee structure; in the first lawsuit he accuses her of weaponizing the fees in an attempt to sully Mithril’s reputation at a time when she has started her own venture firm. “The core of this entire thing is a subterfuge about how we’re actually set up, which has been transparent from day zero,” Royan said.

Mithril’s second lawsuit against McKellar, filed in mid-October, requests a monetary award for damages as well as a declaration Mithril terminated her for cause. She deleted more than 98% of all text messages on her company-issued phone before returning it, according to vendor analysis using carrier records included in the suit. 

McKellar, who played Becky Slater in the “Wonder Years” television show and met Royan at Yale University, denied the claims made in the two Mithril lawsuits, characterizing them as retaliatory. In her own suit, McKellar paints herself as a whistleblower who was wrongly terminated. In the suit she says she tried to correct problems at the firm, and when she realized she would be unsuccessful, she contacted the Federal Bureau of Investigation and the Securities and Exchange Commission to protect investors. (The SEC and FBI declined to comment.) She describes a phone call with Thiel, during which she says he told her he wanted to be more involved at Mithril, but Royan had kept him out of the loop. She subsequently met Thiel at his Los Angeles home, according to the complaint, and discussed the fees, investor relations and Royan’s management style.

They agreed to meet again at the house the following day with Royan. During that meeting, McKellar alleges, Royan mischaracterized what was going on at Mithril, and she was forced to contradict him. Thiel threatened to shutter Mithril but Royan appeared “chastened” and promised to implement various fixes. Thiel then relented. In the complaint, McKellar says she tried to implement the fixes but was ultimately thwarted by Royan and officially left Mithril in February, although she continued as an adviser through the summer. 

Several former employees told Bloomberg that Royan’s flawed leadership helped set the stage for the recent troubles. They say he was rarely at the San Francisco office and when he was there did little to foster esprit de corps. He held himself apart—and  some say above—others, communicating infrequently and creating what one ex-employee described as a caste system. “It was like he was Brahmin and we were untouchables,” said this person, who after realizing he would get little mentoring from Royan and virtually no contact with Thiel, decided to leave.

He has had plenty of company. Not one of nine team members featured on Mithril’s site in July 2014 are still with the firm. Other more recent hires have also departed. The steady stream of departures is unusual for the venture industry, where it can take several years for investments to pay off, and employees typically stick around to see them through. The talent drain was a touchy subject for Thiel, according to people familiar with his thinking. Like other Mithril investors, he expected Royan to use the management fees to build a sharp investing team adept at finding and evaluating deals.

When told departed colleagues faulted his management style, Royan expressed surprise. “If there are issues you’re hearing, I haven’t heard them,” he said. He explained there is no mechanism for employees to voice concerns because he doesn’t believe formal processes unearth substantive issues. Royan also dismissed concerns about the high rate of turnover, arguing that Mithril resembles a private-equity firm in that it relies more on financial models than superstar deal-hunters. 

Former employees said low salaries were another irritant. According to two of them, the pay was below market rate and the share of profits was designed to be 1.2% rather than the promised 2%. Mithril’s management company, which is majority owned and operated by Royan, gets that 2% and employees are paid after Royan’s management firm takes its cut, the two former employees said. One of them said the arrangement was especially upsetting because he only learned about it two years after starting work at Mithril, over drinks with others in Thiel’s network. In a statement, the firm said: “Mithril pays competitive compensation tied to an individual’s qualifications and role, with significant upside when the fund outperforms.”

Either by accident or design, Mithril maintained the appearance of having a fully staffed operation. Apache Web server co-developer and open-source advocate Brian Behlendorf was a major selling point to investors while Royan was raising Mithril’s second fund. Less than a month after the fund closed, Behlendorf quit. Still, he remained a prominent fixture on the firm’s website for more than a year. Behlendorf declined to comment. 

JD Vance, who wrote the bestselling memoir “Hillbilly Elegy,” joined Mithril in September 2016. He quit about a year later to join Steve Case’s Rise of the Rest Fund but remained on the site as a managing director for another six months. He has since removed any mention of Mithril from his LinkedIn profile. Vance, whose photo on the site was misidentified for much of his tenure as another employee named Sam Ecker, also declined to comment.

Royan said there was never any intent to deceive anyone and that Mithril has “possibly the least updated website in the world. We have to call an external person and have them update it.” Royan took down Mithril’s team page last month to protect identities of team members from what he described as harassment from a reporter. 

One person was never listed on the site, despite being retained as a consultant: Royan’s father. Asked about the arrangement, Royan said it’s one of several such advisory roles he finances from his portion of the management fees. “I need counsel and I have multiple people I get counsel from,” he said. “These are not people that are on my team or my professional staff. One of these advisers happens to be my dad and that’s fine. End of discussion.” He added: “He’s the man who taught me everything.”  Through a Mithril spokesman, Royan’s father declined to comment.

Mithril also employs Ajay’s sister Anuja Royan as a managing director with a focus on operations and finance. She joined the firm in 2015 after a decade of experience building financial models at private equity groups Counsel Corp. and Hilco Consumer Capital and handling audit and assurance at Ernst & Young. Her name did appear on the website. Through a Mithril spokesman, Anuja also declined to comment.

In January, Royan decamped from San Francisco and opened a new Mithril headquarters in Austin. Explaining the move, he said he chose the Texas tech hub because it’s centrally located, cheaper and embraces more diverse thinking than the east or west coasts. (His comments echoed Thiel’s own disparagement and abandonment of Silicon Valley.) While the larger venture and tech community took the move in stride, most Mithril team members didn’t want to relocate. So far, just a few have made the move with Royan. In December, investors will gather at Mithril’s first annual meeting in four years—an event requested by Cambridge Associates, a global investment firm that advises other investors about which venture firms to back. During the meeting Mihtril will update the group on performance and future plans as it gets closer to raising a third fund.

With the new location—and almost a dozen new hires—Royan seems to be hoping he can start fresh and put the recent unpleasantness behind him. In a letter reviewed by Bloomberg, a major investor in both Mithril funds and member of the firm’s LP committee said after reviewing the firm’s financials, visiting the Austin office and evaluating allegations of misconduct and employee departures, her firm found no cause for concern. “You have our unequivocal support,” she wrote. 

With the claims in McKellar’s lawsuit challenging Royan’s integrity, he’s redoubling efforts to polish his and Mithril’s image in an industry where reputation is everything because results can take a decade. Said Royan: “It’s a trust business.”

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net, Mark Milian

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