Mithril Capital promised to be the “capstone” to Peter Thiel’s investment empire. It ended up as a major distraction.

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Seven years ago, a smooth-talking associate of Peter Thiel promised that he had launched the “capstone” to Thiel’s investment empire, naming their new firm after a mythical metal in Lord of the Rings because it was flashy yet permanent.

“It’s invaluable,” leader Ajay Royan told one interviewer about Mithril Capital. “It’s lifesaving. It’s sustainable. It has all of the things we’d like to be associated with.”

But Mithril Capital is primarily associated with some other things these days: drama, disarray, and unanswered questions about its finances.

Mithril had its best moment yet last week when a portfolio company, Auris Health, sold to Johnson & Johnson for more than $3 billion — returning at least $500 million to the fund.

All appears well. But behind the scenes, a far different story has been unfolding.

The late-stage investment firm has been a slow-burning mess for the past several months, angering current and former employees, limited partners, and, crucially, Thiel himself, sources say.

The firm’s troubles have disappointed Silicon Valley’s highest-profile investor, according to multiple people close to Thiel, who has lent his brand name to the firm but is not operationally involved. And it has left a long list of scorned parties, slowly shrinking the firm’s headcount of investors — despite having more than $1.3 billion in assets under management.

That has all raised questions about what exactly is happening with the money and how Royan is handling it, according to a dozen former employees, investors in the fund, and other people close to the matter who spoke with Recode.

Mithril declined multiple requests to make Royan available for an interview for this story. The firm also declined to comment on the record to address any specific pieces of reporting.

“Mithril has invested deliberately and differently. We owe the success of this patient approach to entrepreneurs who work for the long term amid a trend-ridden industry,” a Mithril spokesperson said.

This is a classic Silicon Valley story of big celebrities, big paydays, and what can happen when you pair big money with little accountability. But it is not a five-alarm fire in the orbit of Thiel, who is proudly “contrarian” and no stranger to drama.

Despite raising $740 million for its second fund — with a first close in April 2016 — Mithril Capital has invested only about $90 million of the cash, according to multiple people with knowledge of the figures. That’s highly unusual for a firm at this point in its investment period; a typical firm would probably be spending at a three- or four-times faster clip.

Royan has long been clear that he wants to be able to wait out high valuations that have dominated tech investing over the past decade — crafting a 12-year fund instead of the usual 10-year fund to give him more flexibility.

Raised in Abu Dhabi and Canada, Royan graduated from Yale at age 20 and got to know Thiel while he was becoming a minor celebrity at PayPal. The two have now worked together for 16 years. Mithril has always been a somewhat unusual firm, industry observers say, with an emphasis on investing outside of Silicon Valley in places like Kansas City and with a single clear leader, Royan, instead of a broad partnership.

“Mithril is a unique fund: By design, its orthogonal approach is not for everybody, and it’s been uniquely successful,” said Jeremiah Hall, a spokesperson for Thiel. “As the largest LP in Mithril and the chairman of its investment committee, Peter is proud of Ajay’s leadership.”

But not all are happy with Royan. Troubling to some are concerns about Mithril’s management fees, which an investment firm uses to pay for operational costs like salaries, travel, and rent. Despite Thiel co-founding the firm, Royan has told people that he and his entities control 100 percent of the management company, meaning that he would be entitled to 100 percent of the fees and would decide where they go, sources say.

The source with knowledge of Mithril’s thinking disputed the ownership structure of the management committee but declined to provide any details.

Paperwork filed with the SEC shows that more than 75 percent of the management company is owned by a limited company in the Cayman Islands called Talleus, which in turn is owned 75 percent or more by Royan.

The firm is likely collecting as much as $20 million a year in management fees, sources familiar with the figures say.

We don’t know exactly how much the firm spends, but people close to Mithril say they can’t imagine that the firm, given its staff size, is spending more than half of that on operational expenses. Royan’s salary, like that of other venture capitalists, is not publicly disclosed.

One limited partner called the fees, given the size of Mithril’s staff, “outrageous.”

The source with knowledge of Mithril’s thinking disputed the $20 million figure but also declined to provide an alternative.

Perhaps the only other person with that data? Royan’s sister, Anuja Royan, who he hired as the firm’s chief financial officer — she has a separate staff that is technically part of an affiliate based in Canada called Mithril360. While she is well credentialed as a former public company CFO, her role has troubled some former employees, limited partners, and others close to the firm and raised questions about its internal transparency and governance.

“A lot of things that were really transparent suddenly became not transparent at all,” said one former employee.

Ajay Royan told Bloomberg in 2017 that Mithril does not “charge excessive fees.” But he was not exactly known for being thrifty with management money. Former employees describe Friday catered lunches where costs could run over $100 per person, and Royan was known internally for a “book ordering problem” — a former employee said that “unbelievable amounts of books” would be delivered each week to the office by Amazon to maintain the firm’s extensive library.

This was all before Royan late last year surprised some in his orbit, including some of his employees and portfolio company founders, sources say, by suddenly announcing internally that the firm was moving to downtown Austin, Texas — one of the lowest-taxed states in the country. Royan has since said he was thinking about moving the firm since 2016 after growing frustrated with Silicon Valley.

“What made [Silicon Valley] really attractive was it was one giant incubator as a society, with a lot of pay-it-forward culture and a low cost of trying,” he told TechCrunch last year. “Now I’m worried about all three of those.”

That decision has been unpopular internally, however. Some employees have been resisting moving to Austin and leaving the heart of the tech ecosystem.

They’re now in limbo. Over the past month, four junior employees in San Francisco — some of whom are the children of limited partners in the fund — believed that they were soon to be terminated because they would not move to Austin, according to former Mithril employees in touch with current employees.

Then at the last second — as Recode was making inquiries about this story — the employees were spared. One employee, an executive assistant, was let go. But the rest have been operating in some fear of looming axings and are now without an office.

The source with knowledge of Mithril’s thinking confirmed that the firm did ask all its employees to move to Austin, but insisted that it was open to its employees working remotely.

This has all led to a work environment that alternates between absent and intimidating, sources say, and where Royan has a reputation for being a difficult boss.

In an industry where turnover is rare, at least 11 members of the investing team have left the firm since the firm’s founding in 2012; five departed after the second fund had its first close in the spring of 2016. Four of those 11 were managing directors. That turnover has forced at least some founders to have to cycle through multiple different people from Mithril on their board, which can be frustrating for a CEO.

While those 11 are of different seniority levels, a common concern for multiple people across the organization has been the salaries that Mithril has paid to its investors, which multiple sources described as below-market.

In a work hierarchy described as very top-down, some sources describe Royan, who now splits his time among Austin, San Francisco, and Canada, as hard to get ahold of and say communication is an issue. That can be true for Mithril’s limited partners, even the venture firm’s own investors. Those relationships are tightly controlled by Royan, who is the firm’s sole managing general partner, and who in general likes to avoid confrontation, former employees say.

Limited partners have included the Singaporean sovereign wealth fund Temasek, the philanthropic MacArthur Foundation, and a heavy mix of personal offices that manage family money from overseas, sources say. Money has come from the billionaire empires of Egypt’s Sawiris family and Malaysia’s Krishnan family.

To be sure, some limited partners still speak highly of Royan and are sympathetic to his argument about being slow and steady with deals at a time of high valuations in Silicon Valley. And the sale of Auris, the medical robotics company, should quiet some concerns about his strategy.

But other limited partners have been trying to survey their options. Some limited partners have tried confronting Royan over his spending rate, one person briefed on one exchange said. And it’s especially hard for limited partners to organize themselves since Mithril unusually does not have a regular annual meeting — during which limited partners typically trade contacts.

The firm may be listening to the calls for change — last week, it posted a job listing for a chief accounting officer, a new position, in Austin to handle financials and deal with limited partners.

But it wasn’t always this dramatic.

A first fund is raised on reputation — in this case, Peter Thiel’s. Investors, perhaps seeing it as a way to get into Thiel’s choosier, earlier-stage venture arm, Founders Fund, flocked to Mithril Capital in 2012 given its $100 million blessing from Thiel. And its first fund has performed quite well, sources say, with investments in not just Auris but also Thiel’s data analytics company Palantir. It was a pretty normal fund.

Thiel doubled his personal investment in the second fund, announced in January 2017, to nearly $200 million, sources say. But that’s when the spigot got clogged. Royan appeared no longer interested in deals. Why?

“[W]rite clichés on a roulette board and just roll the wheel,” said one former employee. “Too expensive. Founders have too narrow a vision. Too crowded a space.

“He literally did not want to compete. If there was a process or bidding war or something resembling a competition, he would just walk,” the employee said. “And he would just say, ‘I don’t want to outbid.’”

The source with knowledge of Mithril’s thinking said the pace of spending in the second fund was about equivalent to the pace in the first fund.

Now, a further challenge is that the team simply may be too small to compete, with only a few professional investors who can lead their own deals remaining. The source with knowledge of Mithril’s thinking said it employs 17 people, but that figure includes many people who work for Mithril360 and in support functions. Only eight employees are listed on the firm’s website.

Lurking behind the scenes has been Thiel, who has paid relatively little attention to the drama at Mithril in recent years. But as Recode began inquiring about the state of his late-stage venture arm, Thiel in recent weeks has become increasingly agitated with Royan and the state of affairs there, people say.

Thiel, who is technically the chair of Mithril’s investment committee, has worked with Royan for going on two decades, dating back to their work at Clarium Capital, Thiel’s hedge fund. But like Royan, Thiel can also be non-confrontational, and associates of his say they have been reluctant to bring up the situation at Mithril with him. So the problem has festered.

Now, he is described by associates to be frustrated, disappointed, and a little embarrassed. After all, Thiel gave his imprimatur to Royan’s fund in the first place.

But Thiel’s focus is less on Silicon Valley investments and more on other pursuits. He’s active in politics. He has made noise — but with little evident follow-through so far — about building a conservative media company. And he sold his San Francisco mansion and moved to Los Angeles (although Recode has learned that he recently bought a previously unreported house in Palo Alto), motivated by a revulsion to Silicon Valley’s politics and culture.

Royan, too, appears sick of the Bay Area. Mithril has given up its modern industrial office in San Francisco’s Presidio.

But despite announcing plans to move to Austin five months ago, Mithril Capital’s office — overlooking the Texas Capitol — today remains sparsely furnished.

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