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CleanTechies
Dealing w/ Bandwagoning, The Value of Incubators, & Moats, with Alex Mitchell (Full Turn Capital)
Ever wondered how CleanTech investments and business models are shaping the industry? In this episode, we're joined by Alex Mitchell, founder of Full Turn Capital, to explore the ins and outs of investing in the climate tech space. From understanding the potential of pre-seed and seed stage businesses to creating long-term competitive advantages, we discuss it all with Alex.
Dive into the challenges and opportunities of investing in early-stage startups, as well as how to craft compelling pitches for venture capitalists and avoid the pitfalls of bandwagoning in the tech world. Alex also shares his insights on the value of incubators like Los Angeles CleanTech Incubator (LACI), where he serves as a senior advisor, and the spectrum of services they offer to help startups grow and succeed.
Whether you're a founder, investor, or just curious about the CleanTech industry, this episode is packed with valuable insights and actionable advice. Join us as we explore the many facets of the CleanTech space with Alex Mitchell, and learn how investing in climate tech business models can make a quantifiable impact on greenhouse gas emissions. Don't miss out on this fascinating discussion!
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Hello everyone and welcome back to the Clean Techies podcast, where we interview Climatech founders and VCs to discuss all things building and investing to solve the biggest challenge of our generation climate change. Today we have a pretty wandering episode with Alex Mitchell, the founder of Full Turn Capital, and in this conversation we start out talking about different business models in the climate tech space. We then talked about moats, which is actually a new topic we haven't brought up before. Another segment that felt very valuable was the section on debt financing types. He offered different ways to fund your project instead of just raising VC money, and then we talked about deal flow as an investor and how to navigate bandwagoning. I thought that was actually a pretty fun conversation as well, and then, to wrap up the conversation, we talk about the value of incubators, which is something I'm pretty interested about. So I thought that was quite fun to talk about, but without any further delay, enjoy the episode.
Speaker 1:Alright, man, welcome to the podcast. How are you doing today? I'm good. How are you? I can't complain. I can't complain. I might have complained before the show, but we'll leave that for our offline conversation. Man, how's things in sunny California?
Speaker 2:You know we're just about to hit Memorial Day weekend. I have family visiting, so things are good.
Speaker 1:Things are great, i can imagine in LA you obviously have terrible traffic all the time, right, but on the Memorial Day weekend it's probably particularly bad, as everybody's leaving to go to the mountains or somewhere in California.
Speaker 2:Or heading to the beach, etc. Yes, but that's maybe one of the benefits of choosing to be a car-free, angelino is you can avoid some of that traffic.
Speaker 1:Yeah, that'd be interesting. Maybe we'll talk about that today. I would like to see a future where more cities in the US have good public transit or other ways to get around. Who knows, it doesn't have public transit, but yeah, let's get started. So tell us a little bit about yourself, kind of give us a background and what you're doing today.
Speaker 2:Yeah Well, look again. thank you so much for having me. I count my clean tech from a real deep interest in transportation. Like a lot of young adolescent boys, i had a real interest in the automotive industry, but maybe more from an industry perspective and not just cars are cool. So when I was a teenager I took my savings of money from lawn mowing and babysitting and put that in stock in a car company called Chrysler and started writing the CEO letters about how he could do business better.
Speaker 1:That's awesome actually. Yeah, That's actually really cool.
Speaker 2:And it was interesting. I mean the stock appreciated a lot during high school So that helped me afford college but also actually led to my college internship at a car company, at Chrysler, because they remembered me from when I was 13 and wanted to stay in touch. So that was sort of like. Transportation has been a lifelong passion of mine. I grew up in Wisconsin. Back in the day there used to be a manufacturing industry that touched automotive in Wisconsin. A lot less today, but that was just a part of my sort of formative years. That interest in automotive And then my interest in climate came a little bit later.
Speaker 2:I was in my early 30s working at Toyota And the Prius was a relatively new par at that time to a second generation And it started me down a journey of really thinking and understanding why the Prius was on the market and what that represented. And up until that point I'd really thought about all the positive benefits of transportation. Right, moving people and goods around the world is what creates access to education, access to jobs, access to health care. But when I started peeling back the onion on okay, like why is the Prius important? It led me down a lot of research on really understanding some of the negative impacts of transportation, particularly from a greenhouse gas perspective. So I did a lot of research and said, gosh, i think, if that's what climate scientists are telling us and I believe in data I really want to make sure that I'm focused on making sure that the transportation sector can decarbonize as quickly as possible. So that's what I've been doing the last 15 years.
Speaker 2:I worked at an EV startup in what we now call CleanTech 1.0. I worked for the World Economic Forum doing pre-competitive research in sustainable mobility, worked for what was then called Pujo Nostalantis on a lot of electrification strategy And then, more recently, over the last five years, i have been investing in startups, and that includes about five years at Los Angeles CleanTech Incubator, where I'm currently a senior advisor but was in a day-to-day management role. Probably a lot of the audience knows Lacey, a non-profit CleanTech Incubator that focuses on zero emissions, mobility, clean energy and circular economy And oversaw our startup-facing work, the recruitment programs, as well as the investments we made. And now my day job is serving as a senior advisor to Lacey, while I invest full-time in decarbonization of transportation via a firm called Full-Turn Capital. So that's my story.
Speaker 1:Hey there, Quick break to remind any founders or VCs listening. If you are looking for deal flow, seeking to raise funding, looking for partners to help service your needs, or perhaps you're looking for corporate investment partners, feel free to reach out to us through our Slack channel, which can be found in the description. Because we meet a lot of people in this space. we set aside time each week to make introductions to the various people that we encounter. This is something we do free of charge in order to help these incredible companies solving climate change to scale. Looking forward to hearing from you in the Slack channel. I love it, man. I didn't realize you were from Wisconsin too. I didn't mention that, but I'm also from Wisconsin originally.
Speaker 2:Oh wow, There's not many people from Wisconsin.
Speaker 1:There's fewer people in the whole state than there is in New York City, for example. That's kind of interesting, but okay, this is awesome. So I'm really curious about one thing in particular, which is how did you go from what you were doing with a group of PSA and during Planet and then going into kind of an advisory role or an investing role with Lacey? Could you talk a little? bit more about that and your role there.
Speaker 2:Sure. So Lacey's now almost 11 years old, one of the very first clean tech incubators in the nation and certainly known as one of the best globally really, at that intersection of helping early stage founders figure out how to scale and grow their businesses. So I held a couple of different leadership positions at Lacey, but really the last one was was everything founder facing for Lacey? So the startups we recruited into our portfolio, then the programs we have. you know, our core incubation program at Lacey is a two year program that kicks off with, you know, three and a half months of curriculum, et cetera. And then the other thing I was overseeing was our investments. So Lacey has a venture capital fund as well as a debt fund, and so making sure we were supporting the right startups at the right time with the right instrument, whether that was venture capital dollars or debt.
Speaker 1:Interesting, okay, very cool. So I guess one thing I'd be keen to understand right now is what would you, could you tell us more about your investment thesis, like, what specifically do you focus on and why that? I mean there's a lot of different ways to look at climate and investing, so I'm kind of curious to get your take on that. Sure.
Speaker 2:And I'll separate my role as a senior advisor from Lacey from what I personally invest in.
Speaker 2:And so what I'm really personally investing in is really the red thread of what I've been doing, that last 15 years or so of my career, which is taking a look at, you know, pre seed and seed stage business models across mobility.
Speaker 2:And mobility for me is, you know, surface transport, so cars, three wheelers, two wheelers, trains, buses, trucks, but also aviation and maritime, so boat ships and planes, and really all the businesses there that are at that pre seed and seed stage where we say, hey, there's really a strong amount of financial potential of this business, but, as this business scales, really also understanding what's the greenhouse gas impact of that business and how can that take us on a trajectory, that's much more Paris aligned.
Speaker 2:So really looking at all the businesses where I say, hey, there's really strong growth but there's also a really strong and quantifiable greenhouse gas impact by adopting this technology or this business model. So that's sort of what I look for. I mean, that's that's sort of what's the you know, sort of the focus. Obviously, when I look at a particular deal, there's a lot more than that, including founder tenacity and grit, product market fit And a lot about the sort of capital stack, given that clean tech can be sometimes more capital intensive than, say, doing dog walking as a service or, you know, a software app. But really fundamentally it's about those pre seed and seed stage businesses where you say, look, there's huge growth potential here for the business, but also potential really meaningful climate impacts in this business.
Speaker 1:You know, i think it's kind of interesting I haven't necessarily articulated this on the show prior, but it's kind of interesting to hear you talk about this that really a good investment kind of area for climate tech only has to be something that has a lot of carbon emissions Right, because if you can in a really productive way solve reducing the carbon emissions, you already know that you have product market fit. And obviously this has kind of like been said between the lines within the show before, but I just think it's interesting to look into it. And do you have much perspective on investing into none like climate related markets in the past at all where you could kind of compare, maybe, the mindsets of people there? I'm not sure if you mentioned anything in your background.
Speaker 2:I mean, i haven't done a ton of investing outside of climate tech and clean tech, but one thing I observe is I have a number of friends who are venture investors. you know, maybe they're like B2B SaaS journalists, right, that's their sweet spot is like, look, i love investing in software businesses that are B2B. And as I talk to those folks and then I work with folks in the clean tech space, i think there's a lot of differences just in terms of cooperation. right, if you're a VC who focuses on B2B SaaS and that's your sweet spot, i tend to observe in a lot of the folks I know in that spot that they view each and every deal as, like, very competitive, which is to say, you know, if I have access to this deal, i would be very tight-lipped about it. I won't share this with anybody. It will be really secretive about what I'm up to, whereas what I see a lot more in the climate space is just a lot more of collaboration where, you know, i will definitely take the time to follow up with a founder, you know, rather than just ghosting them, which is a frequent complaint of founders about like, look, it wasn't a fit for this VC, fine, but I never heard why.
Speaker 2:I think that's important and that's a frequent thing in the clean tech space that the investors do reach out back out to the founders and say, hey, here's why it's not a fit for us. But they also are much more likely to say but I know two or three other investors for whom I think you're a better fit than my fund. Let me think about you know, let me do the transition and the handoff so that I can make sure you find the right way to get funded. I think that's one of the biggest differences, just in terms of mindset, and that probably has to do with both people being in the climate space for the right reasons, which is, we need to generate these environmental outcomes. But also, you know, a function of, like, clean tech is growing really quickly and that's a good thing, and we wanna really make sure that all the right ideas get funded, whether it's by any individual's fund or somebody else's fund. like everybody in climate tech cares about making sure those businesses get funded.
Speaker 1:Mm-hmm. Hey, there are. you building a climate tech business and looking for very specialized talent? Consider reaching out to our sponsors, next Wave Partners. Next Wave are experts in talent acquisition, recruitment and retention across the climate tech, renewables and ESG spaces globally. So if your team is growing or you're looking to make a career change yourself, feel free to reach out to Next Wave at next-wavepartnerscom or reach out to one of their consultants directly via their LinkedIn page.
Speaker 1:Yeah, i definitely think it's interesting. You know I don't have any personal explosion, necessarily in any real capacity to those other regular funds, but I have noticed a lot of collaboration in the climate tech space And it's all about alignment right Everything. almost every person has mentioned that. It matters who your investors are. right, They have to be aligned with your interests or your kind of mission, because if there's a misalignment on the thesis or something, you know it's not gonna work out nicely, so they'll just find somebody else who's better suited. You know there's a lot of very interesting business models in climate tech. I think that that's been one of my favorite things is seeing the new business models that are out there. Could you maybe talk about some of your favorite kind of clean tech business models that you've seen?
Speaker 2:Yeah, maybe just taking a giant step back. What I've noticed about clean tech right now versus 10 years ago is how many business models are possible today that weren't possible 10, 12 years ago. So you know, clean tech 1.0, it was very much of a manufacturer model, right, people were building EV chargers and people were building solar assets and that's where a lot of the venture dollars were going into, which now, in retrospect, you know that clean tech 1.0 didn't work out particularly well And. But what has happened is we've learned a lot more about clean tech since then and sort of what's the right financing solution for the right asset. So now we have lots of assets in the ground right EV chargers, solar battery, like there's just huge amount of assets in the world from a clean tech perspective. That didn't exist 10 years ago And that's fantastic because that allows people to build different models on top of those assets.
Speaker 2:Marketplaces, right Marketplaces in clean tech didn't exist 10 years ago. Now they do. A particular thing I'm seeing at sort of a thread right now is obviously there's still in clean tech. There tends to be a lot of higher upfront costs of assets, right Whether that's a battery, electric vehicle, something else but much lower running costs right. Everybody knows it's a lot cheaper to fuel an EV than it is to fuel a gasoline power car.
Speaker 2:So what I'm seeing is a lot more businesses, subscription hardware as a service, et cetera, that uses sort of fintech solutions and fintech approaches to make the initial customer cost of adopting that new technology a lot cheaper than having the customer worry about a giant cat-back. So you're seeing a lot of you know marketplaces, subscription hardware as a service, et cetera, that are all focused on one of those levers of how do we make this? you know, knowing that the long-term cost of ownership of this asset over 10 years, 15 years is cheaper, but the upfront cost is really significant, how do we use fintech solutions to help customers defray that cost? So that's like a definitely happening in a lot of different parts of clean tech is that you know hardware as a service model which again, didn't really exist 10 years ago but now is diffused throughout the clean tech ecosystem.
Speaker 1:Yeah, i do think it's kind of interesting The idea of when you're spending on something. Like you know, i've tried to convince my parents to get an electric vehicle many times right, because they'd usually drive about 50 miles. One, you know two and from the town that they spend a lot of time in right Three, four or five times a week sometimes right, and I'm like you guys are constantly guessing this thing up. But you should get it right, but it is difficult because of the upfront cost. But I do think that a lot of these purchases yes, maybe the you know, the companies who come up with a hardware as a service type of model but there's also a certain kind of, i guess, mindset shift.
Speaker 1:I think that we I would like to see in consumers which is being more thoughtful about what they purchase in the first place. Right, yes, it is more expensive, so you have to maybe save up for it and you think more about these purchases And then you can start to become a little bit more conscious of why are you buying it? Do you need it? Maybe there's a better option out there instead of just applying that kind of buy it now, i need it now, mentality to everything, cause you tend to do that with larger purchases, but if you don't have the mentality at all for larger purchases, especially, then it's going to kind of flow down to all the tiny purchases and all the wasteful. You know, i really don't need these things right. So I would be curious to see like and mass, does climate tech and it's climate tech, you know, technologies that come up for people to use actually change the psychology of purchasing in the consumer space? I don't know if you have any thoughts there.
Speaker 2:Yeah, you know it's interesting, Obviously, yeah, there's, i do see, and some of this is sort of outside of mobility and more focused on circular economy et cetera, but I do notice a tendency amongst younger generations to be a lot more conscious about what they purchase and is it repairable.
Speaker 2:I think actually, you know, sort of on that point, one of the things we're going to be faced with is, as it relates to that notion of circularity, is we're sort of up against an insurmountable amount of new capacity needed in terms of vehicle electrification and not enough factories in the world, and you know so, even today, if every single medium and heavy duty truck factory in the world started producing only zero emissions vehicles, it probably wouldn't be enough.
Speaker 2:There's just not enough factory capacity globally to keep us Paris aligned, and so what I think we're going to end up with in a lot of cases is a circular economy approach where fleet managers take that same consumer approach of sustainability and say, okay, i have a dump truck, a street sweeper or whatever.
Speaker 2:It is five years old, it has 20 years more of a lifespan, or whatever it is in that vehicle class, rather than just scrap this vehicle and buy a new EV street sweeper. I'm going to actually think about retrofitting this street sweeper and making it electric, you know, partly because there's not enough vehicles available, you know the supply is smaller than demand, partly because the economics are going to look pretty good on taking that approach of why should I scrap a perfectly good five year old street sweeper and why shouldn't I just think about ripping out the powertrain and replacing it with electric? So that's probably an example of where that same mentality is permeating mobility right Of saying like let's just not like get rid of all these assets. Let's think about ways of taking the existing assets we have and making them sort of more future proof and durable.
Speaker 2:To get out of that cycle of like let's just buy something new, let's just, you know, keep purchasing our way through the problem.
Speaker 1:Hey, there are you building a climate tech business and looking for very specialized talent? Consider reaching out to our sponsors, next Wave Partners. Next Wave are experts in talent acquisition, recruitment and retention across the climate tech, renewables and ESG spaces globally. So if your team is growing or you're looking to make a career change yourself, feel free to reach out to Next Wave at Next-WavePartnerscom, or reach out to one of their consultants directly via their LinkedIn page.
Speaker 2:To your point. Sometimes it's a lot better to take a look at the existing assets you have and say, how can I just use these rather than buying something new.
Speaker 1:Yeah, and I think that there's a certain level of sophistication that obviously commercial use cases have, because they're always looking at hey, how much is this gonna cost me over the lifetime value? And those are the customers where, if you haven't figured out the financing model for hardware as a service, maybe you can convince commercial use cases to purchase upfront, because they are used to capital expenditure and then kind of amortizing it over the course of it's a lifetime. So maybe for people building that could be something worth noting. And on that note, since you've probably seen a pretty good amount of startups doing things in the space, what would your particular advice be to, whether it's hardware as a service, for a business model or something else? you've seen where these people tend to make, or founders tend to make, a pretty common mistake. Is there anything that you would kind of offer as advice there?
Speaker 2:You mean in particular in the hardware space.
Speaker 1:For any particular business model where you're like, oh man, it's another one of these. they're making this mistake this time, Like anything like that, because they have a lot of these new business models and people just aren't familiar with it.
Speaker 2:Yeah, sure, i mean a couple of like pieces of founder advice. One is I think people as founders definitely get caught up in. This is my features advantage versus the competitive set. Whether it's a grid or a table, it's always like, look, i've got the best features versus my peers. That's a sort of a short sighted way of looking at it, because usually you're comparing yourself to either maybe a series B or C stage company in your pre seed or you're comparing yourself to a legacy company like a general motors or an ABB or somebody who's got a massive, massive budget. And so it's a little naive to assume that, like that, your competitor who has a series C stage funding, or your competitor whose General Motors is not also innovating on features right now, most likely they have a lot more in the features pipeline than you do as a startup. So one thing is always to think about just what's your right to win over the long term in that space, knowing that your series C competitor and that you know European multinational are going to be deploying all their resources on feature additions over time. What's going to be the thing that you do differently that allows you to get through that sort of onslaught from those competitors because, again, features are very the commodities very quickly And so you really need to think about like your enduring source of competitive advantage in a way that's not just you know hey, i've got this widget on this device that other folks don't have because that's very unlikely to be defensible. So that's a one piece of advice and I think the other is on knowing the current legislation in your space. Like all credit due to the federal government, the inflation reduction act has unleashed like a very different in a good way, sort of competitive playing field than existed in two, three years ago, and it's really important for founders to understand the ins and outs of what the inflation reduction act and chips act. It set bipartisan infrastructure bill, created as a competitive set, to be able to justify and understand and explain like look, this is exactly how we're taking advantage of this, etc. And that also applies to other regions. The world, eu has the Green New Deal, etc. But really having an understanding of those new policy developments because they change markets And then the final one, maybe linked to hardware and hardware as a service, etc.
Speaker 2:Is really being smart on what's your full capital stack solution And sort of my statement there is in retrospect, if you're trying to launch, maybe, a scooter business which has really good climate impacts, taking 300, 300 million of venture capital dollars and buying commodity scooters was probably not the right capital decision. Right like, venture capital dollars should be funding your high risk bets, your innovation, your software development. But if you're buying you know hardware off the shelf that's commodity. You better be really smart and disciplined up front about understanding well what sort of what sort of equipment financing solutions are available, what sort of debt providers can I tap into, because it's definitely not a good use of capital to venture capital dollars and just buy you know millions of commodity hardware. So always a good idea for founders, even though it's painful because you're like, look, i'm just trying to raise a pre seed round of venture capital or angel funding to venture capital dollars. So whatever, i don't know yet.
Speaker 2:The debt world That's okay, but you need to pretty quickly identify like what are the available debt solutions and how could I tap into them and at what point can I start tapping into them?
Speaker 2:or grants or whatever it is that says look, there is some, some capital expense costs to building this business. I'm going to be very smart about being disciplined in terms of finding the right capital source for that business.
Speaker 1:I think I did not have prepared as a question, but I think I'd like to ask it and see what your thoughts are on. This is. You've mentioned a couple things in this last answer here that relate to the moat that people have right And you know you talked about. If you're just built, buying commodity hardware, you know how are you going to get acquired. Maybe you can make an impact on climate, but maybe it's an operations business. Could you talk a little bit about the kinds of moats that you find you know, from an investment perspective, as to be to be the most attractive? because despite us, you know, trying to solve climate change, there still has to be some sort of moat right. There has to be a real asset. That's why the investors from a venture perspective would come in. So could you talk about moats in this?
Speaker 2:space a little bit. Yeah, yeah, there's. There's a lot of different ways, i think, to create a moat and fundamentally, you're, i think you know what you're often answering is what is going to be the thing that's going to provide us with resiliency when we're attacked by, again, a later stage startup that might have raised a monster series, cd or a legacy company? And so the way to think about that is like literally game it out as a founder and be like, okay, i succeed, and then it inspires 10 other competitors to come after me. Some of them are legacy, some of them are better funded startups like what's the thing that makes me, makes me succeed, and that's a really, really useful exercise for founders.
Speaker 2:Some of the moats that you see are around IP and the defensibility that IP or trade know how. That some of that has an angle of legal protection, but a decent chunk of it is number of units deployed etc. Which has a learning curve associated with efficiencies etc. So the sort of grade secrets IP is certainly one angle that people can think about from a moat. So even if you're trying to find commodity hardware, the way you deploy that hardware, how you marry that with software, etc. All of that can have some pretty interesting IP around it. They can take a lot of time for somebody else to reverse, engineer, decipher, because all the time you might be installing on top of that mode with with further software additions. So that's one.
Speaker 2:Certainly another potential mode is the sort of land grab. If you're the first in the marketplace, you definitely set a tone and a standard that other people have to try to dislodge you. That's potential advantages of being first in a market is you could lock up competitors and say hey, or customers and say hey. You know, in exchange for you coming with us with, there's going to be a, you know, two year, three year exclusivity, etc. And link to that, you know, two sided marketplaces tend to be pretty good in terms of moats because you've got both buyers and sellers and for somebody to build that takes takes a whole lot of time.
Speaker 2:Another moat can be a brand that you are maniacal and focused on, about building over time in a way that resonates with people, you know, in a really meaningful way. You know, in some ways Tesla has built many different modes, one around the charging infrastructure network, but certainly one around brand. Maybe the brand is a little bit weaker today than it was a year or two ago, but certainly there's a lot of legacy OEMs, car companies who built a brand over 100 years, who said gosh, i would like to have the brand attributes and brand affinity that Tesla has. That in some ways also serves as a mode. A couple of different ways two-sided marketplaces, customer lockup via first land grab, brand and IP are often some of the ones that I see people work through to develop that competitive advantage that helps them survive the onslaught of competitors.
Speaker 1:Then one other thing I wanted to go back to, which you mentioned, was around people maybe having a solution that could be they could use debt financing to fix it, but they're not familiar with the space yet, so they raise venture capital. Are there any pieces of advice on how people can figure that out, any resources or I don't know? just general thoughts on that idea of maybe, hey, we don't understand debt, so we're just going to go with VC for now, but after we raise a seed, or a very small, maybe a pre-seed, we'll then determine that. What have you seen there? I'd like to dig into that more.
Speaker 2:Sure, well, one is. I mentioned debt, but I would also underscore grants. One thing that some people forgot about relatively quickly with the Inflation Reduction Act is it's not just a series of tax breaks for certain clean technologies, it's also probably the most unprecedented offering of grants to help buy down technology costs and deployment across the clean tech sector. So start-ups should that's publicly available information, the DOE, the DOT, etc. They try to do a very good job, albeit with not the most up-to-date websites, but they still try to do a very good job of making everybody aware of this. grant is coming. It's now available. Competitive applications look like this. So there's a number of websites that folks can follow just to be kept abreast of grant opportunities. One website that I use is opengrantsio. It's just a free website that allows you to track some of the major grants, both from the Feds, but also at the state and even philanthropic. So don't rest on grants because again, the federal government in the US is giving away more in grants to buy down the cost of clean tech experiments than has ever happened in probably the history of the US. So that's one.
Speaker 2:And then on debt, i actually wrote a deep dive. I run a newsletter that publishes every two weeks around sort of sustainability with a particular on mobility, and I did do a deep dive a couple weeks ago on the debt side of the equation. So if people are interested in just listing casually on audio, like Alex Mitchell's, sustainability debt, you can look at what I wrote there. But a couple of the principles and things to think through is debt fundamentally for a startup you're going to want to think through. is this a specific transaction that I'm trying to finance or my finance part of the company itself? Transactions tend to be a little bit easier to get financing on as an earlier stage startup than the actual company itself. So what do I mean by a transaction? That could be like a customer contract, right, like you're an early stage startup and yet you've gotten a six, seven figure contract with the utility, with a large car company, whatever else, but they're not going to pay you back for another six, seven months but you've got to purchase those batteries, that EV infrastructure.
Speaker 2:now That would be an example where you should think about debt financing. and how might I tap into somebody that can lend against that? you know, customer purchase order, et cetera. The other thing that often becomes a solution and a tool for founders again not from the get go, but is once you're in the revenue generating phase is revenue based financing, which allows you to basically get at the organization level, the company level, some financing that is basically predicated on your future revenue growth And you know somebody will effectively take a cut of your future revenue and give you funding today to grow your business further. So you know sort of a couple of different options. you know customer financing, revenue based financing and certainly like equipment financing as you purchase equipment are all things that people should think about. What's the right use of capital for that? Because you definitely only want to use venture capital dollars to buy hardware, or at least decent amounts of hardware when you have to, not because you know like you should look for other sources first.
Speaker 1:And it's also nice to keep equity in your pocket.
Speaker 2:Yeah, you keep a little bit of ownership of the company, for yourself for sure.
Speaker 1:Exactly All right. So I want to shift a little bit more to kind of your investment thesis, so kind of talking about how you manage deal flow and what you're working on there. So I'm kind of curious to understand from that perspective. Let's just start with deal flow in particular.
Speaker 2:Yeah, Deal flow. I'm always looking for, you know, hardware and software or hardware combined with software again, anything in that space of pre-seed or seed stage that is, around moving people and goods around the planet while decreasing our greenhouse gas emissions. I actually am really fortunate. I run a newsletter that's about investing in this space and I get actually a decent chunk of my deal flow from that newsletter. Startups reach out to me and say, hey, i just came out of stealth or you know about to come out of stealth. Could you, you know, include a nod to me in your next issue? I also have a lot of VC friends who subscribe to that newsletter and reach out to me saying, you know, to the point of what you were talking about earlier, saying, hey, this wasn't quite a fit for me, but I think it's, you know, got real legs and they could benefit from being featured in the newsletter.
Speaker 2:The other thing is I tend to be very open on inbounds, right, that's one thing where some folks in the venture space are more you've got to get to me via connection. I really am a believer in serendipity, heterogeneity of your network really trying to be open to new sources of deal flow. So I'm totally open to folks, you know, reaching out directly to me with a pitch and, in the spirit of what I said earlier, like I also try to do the digging in when, when I'm like oh, this might not be a fit for me, refer that out to a couple of friends who I think might be a better fit. The only thing I would say there, and my caution I would give to founders, is I'll reply to every tailored pitch.
Speaker 2:I don't, definitely I don't have the bandwidth to reply to the generic like I'm. I'm praying and spraying with 200 VCs and just hoping one or two or three of them reach back. I you know, for example, i don't currently invest in sustainable water technology or plastics recycling. I love both those businesses and I love the people doing it, but that's not what I'm currently investing in. And so if somebody reaches out to me with a generic pitch to sign that, they probably haven't done the research, haven't looked at the website and haven't saw what I do, and those I'm not likely to reply to. But anybody who comes to me with like sort of a tailored couple of sentences is like here's where I'm reaching out to you, i'll take the time to look at the deck often, take the time to get on the get on a call with them and assess out whether it's a good idea for me or somebody else to continue it.
Speaker 1:Yeah, so I don't necessarily work in this space, but because of some of the things I'm involved in, like forward VC, as a mentor, i get all these people reaching out And I can't imagine if they're reaching out to me. that means they're hitting a lot of people with such a non-tailored thing as, like, you definitely did not spend even two seconds, you know, looking at my profile. So that's interesting, but I guess, with that said, maybe you could talk a little bit about why. what, specifically, are the things that really help you understand a pitch right? What are the components that need to be included in a deck for you to truly okay? A, this is in the mobility space, you know, even though people are reaching out with other things, when it's clearly stated on your website. but A, you know this is in my space, but beyond that, how do I determine whether or not this is for me? What are those key components?
Speaker 2:Yeah, given that I invest at the preceding seed stage, one of the really really important things is you're fundamentally investing in people. at this stage, you know, by series C and D, you can be in a situation and a time where actually the founding team might have stepped down and they brought in, you know, somebody who's got experience with IPO markets et cetera. That's not what you're looking at at preceding seed. You're fundamentally making a bet on the individuals themselves. So I'm definitely going deep on who is this person? what motivates them? what in their lived experiences brought them to this point? how do they show grit and determination? because that goes a lot further than prestige. You know, just because somebody went to X University or worked at Y Consultancy Investment Bank, that's infinitely less valuable than somebody who's just got that hustle and grit and drive and determination. So that's definitely something super important. And I think actually a lot of people leave themselves out of the pitch or try to minimize themselves out of fear of, you know, self-promoting or you know not getting the investor's attention about the pitch or the business model. but, like fundamentally the preceding seed, it's really about the individual, because you as the investor know that that business will likely have a pivot or two And so it may go away from that original concept over time. And that's why it's so important for the founder and the investor to see eye to eye about who the founder is, what he or she brings to the table, et cetera. So the grit and determination and sort of story of the founder is super important, and don't forget that. Another thing is the size of opportunity. I don't necessarily find a lot of the analysis behind TAM and SOM and et cetera to be super compelling, but it still is fundamental to understand. are we talking about something that's big and can generate venture scale returns? Are we talking about something that's a smaller business? proving that this is a really big idea is vital for the sort of alignment with venture economics.
Speaker 2:And then, third thing, which I think a lot of founders miss and is really important, is timing. There are can actually be really dangerous, just as dangerous to be too late to a market visit as it can be to be too early. looking back, for example, on a really company that raised a ton of money during clean tech 1.0 was called Better Place, which was a battery swap network for vehicles. That is a business that raised a ton of money and went bankrupt, but that's a business that's now just beginning to reemerge, as the favorability of the marketplace allows it. battery swap as a technology.
Speaker 2:I think a lot of founders don't think enough and really articulate enough about why now. Is there a risk that I'm being too early in this market and there's not enough customers yet, there's not enough demand? Or is there a risk that I'm going to make it too late? But there is actually a penalty to being too early, and so you really really want to think through why is now the best time to launch this business and not in two years from now, not in one year from now, because that has a huge impact. There's definitely some pain associated with being too early to market.
Speaker 1:Talking about this too early, too late thing reminds me of I think it would be probably almost two years ago, when I remember a lot of people talking about the idea of tracking carbon emissions. And then you have a couple ESG data tracking platforms that were already there And you didn't really know about them that well, because it just it wasn't necessarily a hot topic. And then fast forward maybe seven, eight months And then suddenly there's 100,000 of these right in your LinkedIn inbox every single day, trying to hit you up. Hey, we've got this ESG data platform And this is a question I have prepared which is around kind of bandwagoning right, where people because they're like, okay, climate is an issue we need to solve, let's get to it.
Speaker 1:And they see this idea that's like oh, this is very clearly a great idea, we need to solve this. And, especially because it's software, a whole bunch of people rush in. Right, it doesn't require brand new technology or something like that. Right, it's just a software product. And then you've got all these people rushing in and then maybe you pair that with investors who are newer to the space. In particular, i think that moment in time was a bad one, because you had a lot of people from VC traditionally just moving into like, oh, here's a software play in, you know in in climate, so let's get on it. Do you have any comments on this idea of, like, how do we prevent this kind of thing from happening, where people just pile into one thing just because, hey, this seems like this really good firm over there is doing it, so let's do it too. How? what are your thoughts on that in general and how it can be harmful?
Speaker 2:Yeah, i mean, part of that is just the nature of innovation.
Speaker 2:Somebody, you know, strikes up an idea, concept and invites imitation, which is the sincerest form of flattery, and there's a lot of cases where the first mover doesn't win a market. You know, it's somebody who's who's later in the market who ends up winning. So I don't necessarily have a challenge with bandwagoning in general because, again, a lot of companies who are first movers make mistakes, they fail, they don't, they don't adequately learn, and fast followers can sometimes succeed. You know, an example of that that touches the transportation space was Uber was not the first person to do peer-to-peer ride hail, that was a company called Sidecar and Uber happened to out execute Sidecar on on peer-to-peer ride hailing. I, i like, like you, have seen the growth of carbon accounting, the explosive growth of that space, and you know, similarly, there's a lot of folks now focused on medium and heavy duty fleet decarbonization. You know, we sort of acknowledge that like, hey, the passenger car thing is tipping fairly quickly towards electrification but it's a thorny or problem for medium and heavy duty fleets. What I would say both of those have in common that I've observed as it relates to bandwagoning, is that the thing I just talked about earlier, which is like how does it link to the founders story and who the founder is? Because that's where, often, you know, sustainability of the business can happen when you have a founder who's deeply passionate, steeped in the area, already knows the topic, rather than somebody who says, hey, it appears like a lot of people are doing fleet decarbonization. Let me jump into the space. You know.
Speaker 2:That's very different from somebody who says I grew up in a, in a household where we had a fleet management business. I was actually a whatever a truck driver during my university years to help pay the bills. Or you know even somebody who says, hey, i acknowledge that a lot of people are in this space. To really deepen my customer discovery, i spent the last four months either riding along in other people's trucks or being my own independent truck driver to help get a sense of understanding. So I think a lot of the what I look for as like a market sort of starts to bandwagon is where is there better sort of founder fit with that business model, who has actual you know, personal lived experience related to that? who has done the customer discovery of saying, oh yeah, i haven't just launched like a fleet decarbonization business. But I spent the last you know four months talking to 100 fleets and I really itemized what I was looking for. So that's one thing you know.
Speaker 2:On, bandwagoning is looking for founders who have a legitimate personal you know sort of let's call it skin in the game on the topic.
Speaker 2:That's, that's certainly one thing. Another thing is is I always try to take a look at sort of who's behind the bandwagoning, and an example of that is in hydrogen, where maybe some of the I'm definitely not rose colored glasses optimist on the role of hydrogen in all forms of surface transportation. Hydrogen has really a lot of limits in my mind, but a lot of what is prompting some of the momentum or bandwagoning around hydrogen is sort of oil and gas companies looking for a way to minimize maybe sort of the transformation on their business to adapt to the decarbonized era and saying, well, you know, like let's just push hydrogen, it's fairly aligned with our current business processes and structures. So you know also good, when a market starts to bandwagon, really understanding who's who's sort of excited about that and why, because that sort of tells you a lot about you know, whether this is a demand driven bandwagon, supply driven bandwagon and in the case of hydrogen, sometimes it's much more of a supply driven bandwagon market.
Speaker 1:Yeah, it's quite interesting actually, That's, i've always wondered how people determine, you know, if they're really being thoughtful, what you know what investments to make there, or especially when there's a lot of them popping up. I think it's fine, i think it's kind of funny when you see that this is kind of unrelated. But you see, with the big AI bubble right now, that literally everybody has to put AI in their picture in some way, right, like, if they don't, they're probably being silly, right. But also I found it funny that a lot of people I've seen who are big in AI right now, you look at, like, some of their past work and they were just recently in the Web 3 bubble too, right. I just wonder, like, is it the nature of some people that just chase that big trend, right? Yeah, you know.
Speaker 2:I think that is and that's sort of beckets again to like the benefit of, as a founder, the importance of finding investors who are aligned with you. You know I've been with CleanTech since 2010,. And there's definitely been some times over the last five to 10 years where CleanTech was a four-letter word and investors were like ugh, like what a terrible segment. And there's a whole host of folks who said, you know, i choose to go forward with CleanTech rather than adopting the latest trend. But there's also founders for whom, you know, being associated with an investor who's maybe frequently changed their focus area is exciting because they say, hey, this investor is going to help me keep an eye on what's the next big thing. I'm unabashedly focused and sort of, you know, narrow in what I get excited about from investing And that's again that decarbonization of mobility And I'll be with that through the ups and downs And that's sort of my angle as an investor.
Speaker 2:But you know there's other investors who say, hey, part of my generating, you know, good returns is really seeing the AI. You know opportunity for other people do, and I saw crypto before, other people did in Web 3, et cetera, and I just surfed that wave over and over again, and you know that's probably a good fit for certain founders and certain investors, but it speaks to the importance of a you know, when you're a founder, of really doing some research on, like, who am I taking a check from? Yes, i need a check, but don't just take any check. Take a check with somebody where you're like, hey, you know sort of what, the values that are, insights, their focus, whatever is that aligned with what I need and want from an investor? Or am I just, you know, conveniently taking a check right now?
Speaker 1:Yeah, that's interesting, i think. I also think that there's something kind of in the tech space broadly that there's kind of this I need to call it like I don't know how I would refer to it. I would want to say like bottom dwellers or something. The people in the tech spaces who are just like this is an industry, right, you come up with an idea, you go raise money, you live a certain lifestyle, you get to party and then you just, yeah, it doesn't work out, but that's okay, because in Silicon Valley, investing is not a big deal right, and then it just keep doing it. I've seen people like this where it's like, okay, they're just doing it again, but it's okay. I do want to get onto something that I think is quite interesting, which you can speak to probably much better than almost any guests I've had on so far, which is this idea of incubators. So could you talk a little bit about the incubator and the process there and what you see as the value with an incubator?
Speaker 2:Yeah, well, let me talk about Lacey and what I had as capacity in terms of what I was doing at Lacey, and then a little bit more broadly around incubators in general. So, like I said, lacey is an 11-year-old nonprofit clean tech incubator mission of creating inclusive green economy. I'm now an advisor, but previously I was in the line management role of running all the founder-facing work, so supporting about 50 clean tech startups at once across zero emissions, utility, clean energy and circular economy. The core incubation program of Lacey is a two-year program that starts off with about three and a half months of curriculum. where Lacey is unique as an incubator is really focused on what I sometimes refer to as the three P's pilots, policy and partnerships. So Lacey, for its incubation program, gives startups about $20,000 to $50,000 to defray the cost of their first customer deployment. A lot more important than that, though, lacey really has developed a real body of work around that first customer deployment, that pilot experience that is taught in the curriculum of how to structure a pilot, how to think about risk, what metrics to track that help you avoid the valley of death, all that sort of stuff. Policy Lacey really leads into making sure startups understanding I mentioned the Inflation Reduction Act, etc. exposing startups to that and helping them understand that. And then partners Lacey just has a strong stable of corporate and government partners. An example of that is well, same just Department of Water and Power is one of the founding partners of Lacey, the largest municipal and utility in the US, and is always working with Lacey startups and piloting a technology, piloting a concept. So that's a little bit about Lacey.
Speaker 2:What I think of incubators and venture capital is existing along a spectrum of sort of a sort of services for startups, and maybe one in the spectrum. you have venture capital, which is cash and some services advice, connections, mentorship, board governance at times And then incubators, maybe sometimes being a little bit of the other end of the spectrum, which is probably less money and more services. So in the case of Lacey, for example, the founders they get one hour per week of executive coaching. They also get a budget to tap into a credit system of paid services with legal accounting, marketing, whatever else. So I think of incubation and venture capital as sort of like a spectrum of a trade off between dollars and services. What I think is important in both cases is for founders to really think through like, what do I want out of that experience And I've observed over time that the startups were the most vague like, oh, i just want to help or I kind of want the logo of this or this incubator.
Speaker 2:that's significantly less valuable than coming to the door and saying like, hey, i'm at just beginning commercialization stages. I want to use the next year to really trial with both whatever hardware as a service and the manufacturing sales model and see a fee for service, whatever it is, and see which has superior economics, that as I go out for my seed raise, i've got really good traction. So that's probably the biggest thing that founders need to think about is like be really crisp and clear with yourself and when you apply, about what are the two or three things I want to accomplish as KPIs outcomes with this incubator or accelerator, so that you know you're holding yourself accountable but you're also holding them accountable to that as you go through the program.
Speaker 1:So who are the people who go into the program? Kind of curious, like how do you, what stage are they usually at, and then how do they determine whether or not to accept them?
Speaker 2:Yeah. So when a founder is applying to Lacey they've used for the Lacey's incubation program. Lacey has multiple different programs, but the best known is the core incubation program. They've usually got a functioning and ready for commercialization prototype. They are ready to take on revenue. Therefore They have two full-time founders, or at least an understanding of, if there's only one, why there's one and not two. But they need to be ready to go full-time And obviously it's got to have some of those climate impacts that Lacey cares about and in those sectors of zero emissions, mobility, clean energy and circular economy for Lacey.
Speaker 2:And then, what Lacey's looking for as an incubator when somebody applies is similar to what I mentioned personally. Is that founder grit and tenacity. Does the founder have the ability to really face a challenging moment and come through it? for an incubator, all incubators, but including Lacey, look for is this founder coachable? Because fundamentally I mentioned that spectrum of services versus dollars The services only work if somebody's willing to listen, take the feedback and be told. Yeah, this pitch deck really needs to be redone to be able to be put in front of investors, so coachability is really key. Lacey's a nonprofit, so they also care.
Speaker 2:One of the things Lacey cares about is job generation potential. Can this company become a meaningful economic development opportunity, particularly in the LA region? But also looking for things that the later venture capital community might care about How big is this idea? And, as it scales, how much climate impact is there going to be? Those are key factors that go into like is this a good fit to bring this founder? And then the third thing is in the interview process, lacey will ask what are you hoping to get out of this program? And when founders haven't put a lot of thought into it, they're just like oh, i'd like the Lacey name or I want to be part of the network. That's very different than saying look, as I look through the next two years, here's what I think looks like for success for me And here's what I hope incubation services can help me achieve.
Speaker 1:On a more broad note, with incubators I'm kind of curious your thoughts on how they're most valuable, Because it sounds as though this one is largely focused on, hey, what are problems we can solve locally in LA? But because of that they also likely have, as you mentioned, some of the founding partners of that. they have network that is very valuable in that space. Obviously, most of these companies are going to likely go on to build and expand beyond that market. But I'm just kind of curious because usually these things are very difficult Building a company and building a network where you're going to get value, it comes down to having a very high quality number of small, small issue number of contacts. It's not like you get thrown into a pool of 10,000 people and here's the value. So can you talk about your kind of philosophy on incubators? if you have one, How are they a best position if somebody wants to build one, And where might it be valuable versus hey, this is probably not a great application of that time and effort.
Speaker 2:You're talking about, if somebody wants to build an incubator themselves.
Speaker 1:Yeah, either building an incubator or people considering joining one. Which ones to join? Because I want to understand from your perspective where can an incubator be very, very valuable versus hey, this is probably a bad idea or a waste of time.
Speaker 2:Yeah, Again, that definitely comes down to what the founder articulates. They're really looking to get out of the program. But, for example, Lacey in part thanks to its leadership and part thanks to 11 years on the ground, Lacey has that local network of the major utilities, the public transportation authorities, city governments, but also corporates like BMW at the table, And so if you say, hey, look, Lacey does pilots and they actually happen to have all the major corporate and government partners who are leaders locally in deploying clean technologies, that makes Lacey a very good fit for somebody who says, look, highlighting my technology in situ in the second biggest city in the US is of real importance. One of the things that I think founders definitely do want to think about as they think about which incubator is right for me is that is duration and your peer cohort and how much of that is in person versus remote. There are some founders for whom, look, I am committed to staying in Missoula, Montana, That's where my startup is. I'm not really wanting to move. That would lead you much more to a digital first experience or an incubator accelerator where you say, look, I might move to LA, Miami, Chicago, whatever, for three months and then be right back home.
Speaker 2:There are other founders for whom that in-person experience over the long haul is vital And they say I want a peer cohort of folks who I've spent six months on the ground with so that when I call them up two years later and say, hey, I'm having trouble with my CFO, I think I might need to fire him or her. They have a really deep peer network. I think fundamentally what some folks don't realize when they look at an incubator is you get a lot of value during and after the program with the incubator itself. But you would be very well-served to build those relationships with your peers in the incubation program, other founders because that becomes your sort of wolf pack or your hunting pack over the course of your career.
Speaker 2:The most impressive Lacey startups are the ones who say, hey, I'm really busy, I'm trying to do my seed raise, but I'm going to spend 45 minutes with this other founder cranking on this problem. She's got and it'll probably pay back at some point And it does. Those who give without expectation sort of get something later on. And those are the kind of founders who then come back to you six months later be like hey, guess what? I just submitted a joint RFP response with this other founder and now we just signed a contract that Maddox could have gotten on our own, So that, like here, network within the incubators is super important to think through.
Speaker 1:Yeah, that is pretty fascinating. That idea of building networks and building relationships with people you're already in proximity to is something I've noticed I think a lot of people are very bad at. There's a lot of times where you have great I don't know if you want to, it sounds very commercial but you have great assets right These people around you who, yeah, maybe they are not necessarily in a position to help you at this exact moment, but you don't know what they might be able to help you accomplish later on, or the insight they can have for you, and I think for me, one of the biggest things was from moving from Wisconsin to New York is I realized that if you're going to get a meeting with somebody in New York, you have to have a very particular reason, and I found that to be a little bit annoying. I was like, well, how do you know? Like what, if I can help you Right in Wisconsin they're like, yeah, let's get a coffee for an hour and have no agenda, right, but in New York it's a different world.
Speaker 1:But we are out of time here. Any kind of final calls to action or things you want to wrap up with? any final thoughts?
Speaker 2:No, i mean, I just I'm grateful to you for hosting this podcast. I celebrate you, know, as somebody who had my climate awakening, you know, 14 or so years ago. Each week, each month, there's more folks who want to come into the climate space, and that's exactly what we want, what we need That more would be founders are saying hey, rather than tackling creating something that doesn't have environmental impact, i'm going to focus on creating something that does, and I just I love that folks are doing that. So thank you for creating a platform for, you know, people who are new to the climate space to learn more about it so that they can figure out how do I best, you know, sort of contribute both to like my professional development, but also to making sure we have climate outcomes.
Speaker 1:Yeah, so I really appreciate that. I think for me it's fascinating being from a place where there's not a lot of people who are interested in climate at least not where I'm from, in particular county and seeing that the fact a lot of the people who've come on the show have come from conventional industries who knew the space very well and therefore were able to actually make a much greater climate impact than somebody who's just like hey, let's solve a problem and trying to find kind of a you know like a hammer with looking for a nail. So I do hope I don't know how you distribute you know content to an audience that's not necessarily looking for it, but hopefully it falls upon some of you. So it's been a pleasure having you on. I'd be very keen to continue following on your journey and then have you on again in the future. I think there's more conversation to be had here. So thanks, so thanks, so much for coming on, Alex.
Speaker 1:Thank you, Silas.
