#116 Consultative VC, Understanding Customers (as a VC), Developing Industry Networks for Your PortCos, & More w/ Rick Zullo (Equal Ventures)

In this episode Silas Mahner (@silasmahner) and Rick Zullo (@Rick_Zullo) discuss, Rick's career trajectory to VC, the thesis behind Equal Ventures, his thoughts on the CTVC's H1 Funding report, and his advice to founders and VCs.

This episode is densely packed with value as Rick has clearly thought a lot about these problems. Perhaps my favorite takeaways are 1) that he views VC as more Consulting with Equity than banking and 2) was how they develop industry connections and understanding so that they can actually help their PortCos succeed.

Enjoy the Episode! 🌎

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Links:
**Connect w/ Rick on Linkedin: https://www.linkedin.com/in/rickzullo/
**Follow Rick on Twitter (X.com): https://twitter.com/Rick_Zullo **Equal VC Website: https://www.equal.vc/
**Check out our Sponsor, NextWave Partners: https://www.next-wavepartners.com/
**Follow CleanTechies on LinkedIn: https://www.linkedin.com/company/clean-techies/

**HMU on Twitter: @silasmahner

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Other episodes you might enjoy:
**Most Recent Episode: How Logical Buildings Built the First Residential & C&I Energy Management Service w/ CEO, Jeff Hendler
**Similar Topic: How to Raise Money for your ClimateTech Startup w/ Tommy Leep, founder of Jetstream VC
**Something Totally Different: How to build an MVP with a complex ClimateTech Startup - Andy Frank, Founder of Sealed

Transcript

Rick Zullo: 0:00

I'm candlelight. There's never been a less attractive time to be a seed investor. Historically, the premium of a late stage valuation to an early stage valuation has been about 20 to 25 times. So like think of that as like. Early stage valuation 10 million, late stage valuation 250 million.

Silas Mahner: 0:23

Hey there. Thanks so much for being a paid subscriber for the Clean Techies podcast. Because of your support, we can continue to do what we do. Enjoy the underbridge version of this episode.

Silas Mahner: 0:34

Welcome back to the Clean Techies podcast, where we interview climate tech founders and VCs to discuss all things building and investing to solve the biggest challenge of our generation climate change. Today, we have the pleasure of speaking with Rick Zulo, a co-founder and GP at Equal Ventures, where they are investing in startups that serve to help legacy industries innovate. They take an incredible approach to how they invest by doing deep research in each space before investing. So, in other words, they don't find a deal, do some research and then decide whether or not to write a check. They come up with a thesis, research it and then find companies solving those specific issues and, in some cases, find companies adjacent and then help them to pivot with new business models or things of that nature. Rick has a really great perspective generally on VC and it was such a pleasure to have him on.

Silas Mahner: 1:21

Likely, this is one of the most densely value packed episodes we have done so far. Let us know what you think after listening and if this is your first time, please follow along by subscribing to the pod and to the sub-stack. Enjoy the episode. All right, welcome to the show. How's it going?

Rick Zullo: 1:37

Going well, excited to be here.

Silas Mahner: 1:39

I'm super glad to have you on, Rick. I appreciate you making the time and your evening. I know you've got a late night at the office, but let's kick things off straight away by just give us a quick intro to yourself, who you are, what you're doing, kind of where you came from.

Rick Zullo: 1:51

Yep Name is Rick Zula. I'm one of the co-founders and general partners. I had a firm called Equal Ventures that I started back in 2019. We are a early stage venture firm focused on bridging the digital divide, and what that really means is investing in technologies that are digitally transforming the sectors that we focus on, and we think that these are the sectors that are the most impactful to human life. It's the social safety net, with things like insurance, the energy around us, things like climate, the way that we move things and supply chain and the way that we buy things in commerce. So that's the focus of our fun, and now we've been fortunate to have some great LPs to support us on that journey and fortunate to work with some great founders a long way.

Silas Mahner: 2:34

Very nice and we can get into more of the story in a second. But I'm kind of curious. A lot of people, vc is kind of idealized as like the pinnacle where you want to reach. So when you were kicking off your career, did you dream that you had one day I want to be a VC, or did you have a very clear goal of getting there? Was that something that you kind of fell into or intentionally went towards?

Rick Zullo: 2:55

Yeah, I'll smirk a little bit on that because I think, like you know, vc seems very idealized until you're in it. Then you have some late nights and it's less about like podcast and so forth, and I'm on 10 boards now and that comes with a lot of things and I love what I do, but it's definitely a boom the bust profession. So if you're looking to get rich quick, you better off being an entrepreneur or working as a hedge fund or something else like that, and there's no real thing as work life balance in this. As you can see, your worst service profession were with entrepreneurs 100% of our time. But I am one of those strange people that, like I kind of wanted to be in venture capital, private equity, before I even knew what it was. So when I was in college it was the mid 2000s like I'm an old guy and with that there weren't things like tech crunch and crunch base and I didn't grow up and kind of tackle startups circles. But this whole concept of being a consultant but also having equity in the companies that you worked with was something that really fascinated me. So I basically figured out what venture capital and private equity were and I think if you look at the size of those asset classes back then, they're a much, much, much, much, much smaller scale than what they are today.

Rick Zullo: 4:14

And I went to a school that virtually no one has ever come from in venture capital. I went to university originally for college. I graduated with a dual degree in leadership studies and economics and with that there wasn't a real clear path to venture capital and private equity. Kindly, I had no idea what the difference was between the two, but people told me to go get either work at a consulting firm or investment bank, go to business school and then maybe I have a shot and still probably 99% chance. That wasn't going to happen and did that.

Rick Zullo: 4:47

Spent five years in consulting, probably applied to 400, 500 venture capital and private equity firms along the way and got rejected by every single one, other than during the height of the clean tech crisis. Got a couple of job offers that were only rescinded and taken away as Harry Reid pushed away the climate bill and I remember exactly where I was when they announced that they were moving forward with ACA. And the phone call that I got from the venture firm that I just like, giving me a verbal offer 15 minutes later being like sorry your offer is no longer standing and that was a huge, huge morale hit to me. Like just to be like, I finally made it to the other side and I'm going to go get a job at this clean tech venture capital firm. That's exactly what I wanted to do and then to see that evaporate.

Rick Zullo: 5:34

So you know, I ended up going through that journey with Deloitte and, you know, fortunately I had the chance to work with some venture capital and private equity clients and then, shortly before business school, came across a private equity firm that was willing to hire me. You know that happened to work in the tech sector doing lower middle market buyouts of vertical software companies and you know, they helped me go through calling me a business school and I was fortunate to work with a couple of internships at first round capital and battery capital and foundation capital along the way, and then was lucky enough, after waiting, an entire summer after business school with no paycheck. Well, my wife worked at a nonprofit that I left at paid consulting and private equity for my consulting firm, willing to sponsor me, and my wife is like, yeah, you just spent $120,000 on business school and you don't have a job. And you know, are we sure this is the right call and you know, sure enough, like things worked out. I landed at a great venture firm and life bank that you know really enabled me to pursue my thesis.

Rick Zullo: 6:36

But you know, it took 10 years to get there or seven years to get there, and you know, with that I've been in venture and private equity investing for about 10 years now. But it definitely wasn't a straightforward journey. And I look at some of the folks at our team today who you know, got into venture when they were, you know, right out of school with, you know, one of the killers on our team, simran. She's our climate product owner and she joined us right out of college and I'm like I don't know how, like I was never as put together as she was when I was her age. So you know, we're all built a little bit differently, I guess.

Silas Mahner: 7:08

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. Yeah, I really appreciate that.

Silas Mahner: 7:35

That's a honestly it may it may not seem like it to you, but I think it's pretty inspiring to hear people talk a little bit about, like, the difficulties, because usually it's just like oh yeah, I'm a VC, right, Like come, you know, come, come here, I'll debate if I want to invest in you and stuff like that, Right, and it's just really great to hear the kind of the journey. I am curious, though you mentioned that you're essentially your kind of a goal was to work in clean tech VC. How did you get into? Obviously it was called clean tech before it's called climate tech. But how did you get interested in climate specifically?

Rick Zullo: 8:10

Yeah, I mean, honestly, climate was something that, like, very much was important to me, like even as a child, like I grew up on, you know, like bringing the UNICEF box to every house that I could like, literally.

Rick Zullo: 8:23

I got grounded when I was like eight because my parents couldn't find me because it was going door to door with you know the you know my UNICEF box to do that and I'm ghosting on the name of whatever the environmental superhero was, but, like you know, that was like my lunchbox when I was like six, seven years old and, yeah, you know so, you know, with that that had always been part of it. And, honestly, one of the big reasons why I went to you know, richmond was that they had this program around leadership studies which was really about you know how do you do well by doing good and you know, kind of the nexus of you know how you could be a leader or services society, while also, you know, you know having an actual career. And you know, my whole academic experience was really around environmental economics. Like I wrote my, you know, honor thesis on how environmental, environmental conditions in a country could be a leading indicator of economic progress rather than a lagging indicator, as it is in the US and so forth. And you know the that was a big focus of me of how we could go and make sure that concepts like sustainability and, you know, things like the human development index that we could focus on economic indicators beyond just GDP and so forth.

Rick Zullo: 9:42

I was fortunate to work under some great professors who ultimately several of them actually were ultimately became professors at Columbia, both on the leadership and economic faculty, so I guess I caught the right ones.

Rick Zullo: 9:55

But even in college I was working on microfinance in Latin America, internships with big Fortune 500 companies on sustainability. This has been something that was really pervasive in my career and, frankly, it had led a big role in my life. My wife is an extremely big sustainability person. She ran Green Building at NRDC for a bunch of years. She was in the Market Advisory Board for USGBC for a while. She's a Chief Impact Officer of a real estate private equity fund right now. So I think climate is something that's hard not to be personal If you honestly care a ton about it, and I was able, first five, six years of my career, to make that my career. I joined Deloitte really principally because I was under the arm of a mentor who said that he would really guide me to the ability to work on those type of assignments, rather than had I gone to another firm or joined a generalist program I would have worked on a ton of other stuff that.

Rick Zullo: 10:56

I wasn't really interested in and happened to be in DC back in 2007 through 2012, which might have been the most exciting five years of clean energy movement bus cycle that we've had leading up to this cycle, but certainly DC was the most exciting place in terms of what was happening with the Recovery Act and what was happening in a low guarantee program and all that.

Rick Zullo: 11:19

I was fortunate to have some exposure to that on the client side and be able to do some work with the Department of Energy and that was an exciting and thrilling place and a lot of lessons learned to come out of that. But you know, I knew that climate was a big part of my career until it started to become a question whether climate could be part of my career.

Silas Mahner: 11:39

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.

Rick Zullo: 12:02

You know, I interviewed with Aventure Capital as our venture capital firm and I remember this was probably 2010,. You know. So the clean tech bubble had already burst and you know, the recruiters that put me in touch said, all right, just instead of saying clean tech, say high tech, like you know, on everything. So I remember scrubbing my resume and like removing you know, hey, did this project for this, like you know high tech, you know, start up in this space. Or like this diligence assignment for this private equity firm, focus on and you know, all focused on like scrubbing it to make sure it wasn't like energy related and that I just have worked on all these novel technologies. And you know, and none of it was lying, but it was just like you know, very much hiding the fact that it was energy because after the clean tech bubble, you were unhirable. And you know exactly, you know, in venture capital.

Silas Mahner: 12:53

I really find the backlash against things and this happens, I think, especially in Silicon Valley maybe I'm wrong, maybe it's other places too but there's so much backlash against something that like, oh man, that was terrible, like we definitely got to swipe that under the rug, you know.

Rick Zullo: 13:07

Yeah, there's a lot of baby chasing out there where, like, people will love to be on a bandwagon when it's rolling and then, like you know, the first to jump off of when it's not. You know, vcs in general are sheep and the only way to get real returns is to break from that and be in the herd. But I'll say that that particular venture capital firm, as it kind of sussed out that they're like okay, wait, like so you're not a cloud guy, you're not like a IT infrastructure guy, you're not like this deep, like what are you? I was like most things were in clean tech and he just goes. That must be tough, yeah, and like that was the end of the interview. It was like, okay, like we can keep this going, but he's like, he's like like we're never hiring a clean tech person right now. So, like you know, nice guy, nice to meet you.

Rick Zullo: 13:50

You got to make a career change and you know, be honest, like you know, I felt a lot of that. I mean, you know, some of the last consulting assignments I was on, I was, you know, running around foreign countries and, you know, doing work that I thought felt was incredibly impactful and I really loved doing it. But, you know, as you think about starting a family and you're running around, you know, places like Dhaka, bangladesh, six days before your wedding, you know, and you start really questioning, okay, like, is this really like the career that I wanted to have? So, you know, part of the rationalization was, you know, my wife is going to continue on and focus on buildings, and that was going to be, you know how she did. And I was going to find my way into the investment world and hopefully come back to energy someday in a way that I could.

Rick Zullo: 14:30

But you know, I was very much at a point that I like been pigeonholed in my career and was finding my options extremely, extremely limited. So I made this jump into, you know, technology, private equity, and it was like anything that I could apply from my energy experience. I was trying to bolt it on, like it was like, okay, like industrial automation of like energy companies or like oil field services, like an automation of that. Like you know, let's look at buyouts in these two places, you know, and we ended up doing stuff with financial services and so forth, a bunch of other categories. But you know, I kept on like trying to bring back my experiences from smart grid and clean tech and all this you know kind of.

Rick Zullo: 15:05

You know I would say the energy sector was one of the first places with, you know, pulling data from hardware devices, so it was very big on industrial IoT early on in this kind of industry 4.0. You know Wave and fortunately that opened up the doors to you know what has ultimately become predominant thesis, you know here at Equal. But again, not an easy journey and you find a hard way to like. If you're passionate about something you'll eventually get there. But you know you might have to take a couple of detours along the way.

Silas Mahner: 15:33

Yeah, but I think it's also worth noting that there's so much value you learn, like it's very hard to see that in a moment, yes, but throughout that journey, like there's so many things you experience that can really help inform you to become a better, a better VC, right? Maybe you can comment? You mentioned you've got somebody who came straight from uni who is killing it right and doing a great job. So obviously it depends on the situation, but there's obviously that value that you get from being in your career and seeing things differently, right? Yeah.

Rick Zullo: 16:03

There's you and I were talking about books right before this and I think there's like an incredible you know, like book called Napoleon's Glance, you know, which is about you know, taking you know different sectors of expertise and mashing them in. Like if you look at Google, you know, it's like you know two insights across two very different ends of the technology spectrum. Napoleon the reference to the book, you know, was really he was truly a historian before being a leader and he would study battle maps endlessly. And this is the way reason why Warren Buffett just is like constantly reading. He's constantly studying to see how is an insight from one thing you know and how can you mash that up against an insight from another. There's a fabulous book called Range. That's kind of about this, like meshing of insights from journalism, kind of like that's one of the reasons why, like I love, like we're firm that invest, you know, and I love energy and energy is big passion.

Rick Zullo: 16:51

but like I love insurance too, and I love supply chain and I think you know these industries definitely have so many intersections. We're looking at climate insurance and a lot around that and risk management and so forth, and that's especially as it's related to building, very, very fascinating. You look at supply chain systems and how to make them more sustainable. Obviously, that's such a tremendous source. You know the missions like lots of implications, you know but you know the ability to pull insights across these markets and be able to say, wow, like something really interesting is happening here.

Rick Zullo: 17:18

I wonder if that would work in this sector as well.

Rick Zullo: 17:21

You know that I really do believe in cognitive diversity and the fact that we have, you know, a person on our team that focuses on insurance with 100% of their time and you know a person on our team that spends all 100% of their time on climate.

Rick Zullo: 17:32

Like they're both in our office right now working on something together and it's like you have someone who is the COO of an insurance startup that's like raised 40 million bucks and been an insurance technology executive for a long time. And then you have, like this Uber passionate, like climate person, who's you know, three, four years out of school, who's just like absolutely crushed it for us, yeah, and that diversity of thought, a very, very different experience, is like that friction creates fire in a very, very meaningful way, and that's actually like one of the core underpinnings of our firm is that we wouldn't want to be a specialist in one sector because, like, yeah, maybe it's because I'm too ADD, but you know, the ability to pull insights from these different sectors and apply that expertise, you know, we do think, provides a unique advantage.

Silas Mahner: 18:13

Yeah, I do that's. That's a common thread. That has happened with the VCs that seem to do well that I've had on the show there has there's some outside insight, right. They are maybe experts in one particular thing, but they get extra insight from somewhere else. Right, in order to make sure that they're not getting too narrowly focused.

Silas Mahner: 18:29

Because it's like the whole issue with legacy industries, which actually we'll talk about in a second they tend to just do things the way they've been done right, because that's how they are. Like. There's the certain people are in it. They do it the same way, like I grew up with parents who, when they were growing up for farmers and a couple of my uncles and aunts were farmers and they just do things the way they have done it right. When somebody comes in and introduces a new idea, they're pretty skeptical usually, but let's actually get into this.

Silas Mahner: 18:54

So why don't we talk specifically about just kind of the history of you starting equal ventures and just kind of what you do specifically? Talk a little bit more about that. 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.

Rick Zullo: 19:28

Yeah, so when I was, my very first angel investment was a company called Workrise and that company is now worth $3 billion. It's in the energy space and I was fortunate while I was at my prior firm to invest in 10, 11 companies, either through the fund and personally. For them, it thus far become unicorns and the uniting factor across all of them was a really, really bad seed staging experience for them, raising capital, and personally it's because the product that ventured capital is today is not a great product for founders in these legacy industries. If you're building the next version of Datadog, you can walk into any firm in Silicon Valley and speak to someone who is either built versions or iterations of product in that category or invested in other ones. They know your competitive landscape, they know your customers, they know your M&A buyers. They can introduce you to top-flight recruits because they know the culture of companies like that and that ultimately, is like a pretty solid experience. Like if I were building the next version of Datadog, I know that I could go to 25, 30, 50 venture capital firms that could actually provide real value to my company and we think that's like it's because they have a prepared mind in that category Meanwhile, as I was looking at companies like Clearcover or Project 44 or Rig of Now Workrise.

Rick Zullo: 20:53

So many of the interactions that they had with other venture capitalists were all right, like well, here's how I would do this in this industry. And they're like well, our industry doesn't work like that. Or you're spending the first 40 minutes of that conversation explaining the one-on-one of this. And, by the way, at that time Vertical Software was nowhere near as perceived interesting as it is now, and certainly there's been a lot of things to come to be since then. Viva was still not a public company at that point, but over the course of that interaction they would work with a VC who didn't understand their customers, didn't understand their market, had difficulty with bits and atoms, let alone electrons, didn't know their M&A buyers and then broadly gave advice that that was relevant to an IT company or a consumer product that had nothing to do with the industry that they operated, and so that then inherently would have the potential lead to conflict.

Rick Zullo: 21:48

And this was something that I saw across a lot of the companies that I worked with that at the seed stage, before the data was there, it was incredibly hard for all of those companies to raise capital. Now, once there was data behind them, they could actually talk to customers that were customers of the company rather than from their warm network. The companies were off to the races. At that point you could see in the data that these companies were gonna be wildly successful, but it was that really initial stage and I found myself asking how many companies never got that first jack.

Rick Zullo: 22:19

How many companies that I had the chance to be a part of would not have existed had there hadn't been someone to take that lead. And with that, equal started with a very simple premise how do we provide founders of businesses and places like energy supply chain insurance with the same product that other founders and IT consumer and other places have been given for years? And that seemed a little contrarian at the time that we did it, that it needed something that actually had that prepared mind, but I think over the course of our first fund, it's been something that we've been able to prove out that founders do want and need VCs who can leap before the data in some of these sectors by bringing a prepared mind and appreciation for those sectors.

Silas Mahner: 23:09

So this is really fascinating. So there's a couple of things One thing you mentioned before and one just now. All of the biggest mistakes that I've heard founders talk about on here have been usually a lack of market knowledge or understanding, and what you're saying is that the VCs have essentially that built in they understand how the market works and they can give a guidance. This is the thing you mentioned before, which is you were interested in the idea of consulting with an equity stake. That's how you describe VC, which is I've never heard anybody describe it, cause that is not what I think most people view VCS.

Rick Zullo: 23:47

I'm not a banker at the end of the day, like I think I'm a checkbook and I think, like I felt, I was really terrible at private equity.

Rick Zullo: 23:55

I looked at my classmates at CVS and there was a guy from KKR and another guy from Clint Dubier and Lorice and another guy from Apple. I'm like man, I am really dumb in finance compared to these folks. But then when I found myself against the guys from McKinsey or BCG or Band, it was like you know what, like I'm way better at these guys and I had the chance to work on some really cool assignments at Deloitte. I had incredible mentors, like one of my mentors is now global head of the energy practice. So, like, I've gotten to work for the two global heads of the energy practice, you know, in a row, you know Chris Nicholson and then Stanley Porter, you know, and my other mentors now CEO of Deloitte Consulting like in the US, like managed 45,000 employees. I got lucky that I worked with some incredible, incredible people there, you know, but I've always felt myself as a consultant, solving problems and helping people think through problems, rather than a banker, you know, analyzing financial statements and trying to put as much leverage on a model.

Silas Mahner: 24:50

So yeah, but it just. It's so interesting that that, when you said that I wrote that, I was like this is cool. I got to admit this now because I've never heard anybody talk about VC being that way. That's always how I looked at it, because I'm trying to ask VC like, hey, what are you, what are you doing to help leverage you know, gain leverage for your portfolio companies, for example? So maybe you have every firms going to do this differently.

Rick Zullo: 25:09

Like you know, our model is one like I find like firms like Union Square Ventures and Emergence Capital operate with like it's old and, like you know, like guidance and very concentrated mentality.

Rick Zullo: 25:18

And there's other highly, highly, highly successful firms that are asset management oriented, that are like this is about deploying capital and making sure we two to three acts capital and look, a lot of those firms have made way way more money than we will make. But like it is a personal preference for mine that, like I love spending my time working with portfolio companies helping them figure out thorny issues like running. You know we do a lot of strategy work and a bunch of very nerdy research, you know, for our companies and like that's cause it's the thing that I enjoy. It's probably not the best way to make money, but it's the only way that we know how to make money here.

Silas Mahner: 25:52

But it's also especially relevant because, if you're trying to build, so, in the circumstance we're talking about, which is climate, we're trying to solve decarbonization for lots of different spaces, and these are spaces that need to be decarbonized but there's not an existing infrastructure. So I would be curious if you have a framework, for maybe you want to break down for us which legacy industries you focus on and you kind of mentioned it before but maybe break down a little bit more in detail, but explain how do you build out that, let's say, ecosystem or dataset, whatever you want to call it to help those founders to make good decisions and to know okay, this founder has the right things. We just have to help them take it from you know, from A to B.

Rick Zullo: 26:33

Yeah, so our firm is broken up into four segments. And that's commerce-enabled and we'll say, like that is everything non-e-commerce related, like we are 100% focused on like you know wholesale and you know brick and mortar and back and gook of the industry, because we feel like that's been like the area that Silicon Valley has engorged us by being a much larger source of the economics. We'll put that to a side for a second Insurance, which has been a big area. I worked in Chicago. I knew nothing about insurance before I came to Chicago and then you're in kind of the bread basket plays where you have Willis D'Arcy and A Building and first board of a company I was ever put on was an insurance base and it's been remarkably similar.

Rick Zullo: 27:14

When you look at energy markets, insurance markets, blacks want to risk. It is a very, very real thing. Supply chain has been an area that, across a lot of stuff and energy, there's been intersection. We've been particularly involved in freight markets there as well as logistics, and we find that a very interesting. And then the fourth is energy and for energy for us, yes, there are some sustainability considerations, but I'd say the dominant focus for us is really on the power and utility sector. So, like building electrification, how do we think about digital transformation in the grid? How do we think about ways to advance adoption of clean energy renewables via software, either marketplaces or in platforms? And for us, we verticalize our team. Again, we have an expert in each but we perform.

Rick Zullo: 28:04

But really the root of everything is this kind of prepared mind rules, all mantra that we have, that we do bi-weekly research briefings as a team that all of us are responsible for, kind of constantly going and meeting experts in the space, ideating, like taking all this research much like a hedge fund or a research analyst Wall Street research firm would do we take several hundred pages of content, have it summarized across us and use that, dab really deep discussions about what's happening in industry and what we're seeing and what we're hearing from experts, and developing really authentic relationships with those sources, whether it's public companies, ceos, brand analysts covering the space, or founders that we like and respect, or journals and articles that we're reading and using that. All that leads to kind of our ideation phase that we might say, hey, look, it doesn't make sense to me that I'm seeing building systems produce such incredible ROI but the reality is no one's adopting that Like. Why is that the case? Like if there's this big massive movement towards, like real-time energy management systems for building and all of these things like why hasn't this worked? And then we'll go and pull that thread a little bit and we'll actually take that to after discussing and voting on it as a team, like is this an idea that we wanna consider like doing further research on? We will go and actually do like a tremendous deep dive on that and that might be speaking to 25 or 30 building owners in the space that assess their willingness to pay for building systems and look in a bunch of reasons why and why not. I mean going through very much the customer discovery that a founder should be going through and hopefully the founders that we work with do, to identify why the existing status quo hasn't worked and whether there's a path forward to making that work. And then we'll develop a thesis around that of in that case it was counter positioning for clean energy buildings we realized that there was roughly a six to seven X value creation for buying these systems versus what people were willing to pay for them and felt that there's an opportunity to frankly give the way of the software away for free, to go and actually take a percentage of shared savings.

Rick Zullo: 30:15

So we'll go and use that process and speak to a ton of customers and say, hey, like if we brought you a company that did this, like, would you be a buyer? And sure enough, we'll use our network to do that. And we'd like to think of ourselves as consultants to those partners and instead of saying like, hey, go hire McKinsey, like, why don't you use us as a third party resource to go and look at a bunch of cool stuff for you and say we'll send you the stuff that we think is best and we've developed a really collaborative relationship with a lot of folks in industry doing that and just saying, hey, like, we'll send you the stuff that's interesting to us and we don't make it transactional and we don't treat it like it's a, you know, a GOG call, like those are folks that we grab dinner and beers with and we view as an extension of the funk. We call them bridges and if it's an idea that we feel you know really carries weight, like we'll go out and find it. And in some cases we've met like 70, 80 companies adjacent to that category. You know we'll pivot companies and say like, hey, you're a SaaS player right now. Maybe try giving this away for free and speak to a bunch of customers that we know. Some cases we'll start the company.

Rick Zullo: 31:14

I've started four or five companies during my career and they've raised in the area of our head of like, you know, 200 million bucks. You know, and I love being on that day zero at the journey. But you know we do find that process circular. You know that, like, even if idea sucks and we decide that we're not going to pursue it, the whole process of like really showing our passion and depth in these categories just makes us like smarter on the category. You know it unveils other opportunities and it gets us deeper with these bridges that you know like at the end of the day, they just want to see someone who's a passionate about the stuff that they work with.

Rick Zullo: 31:49

Where you know, if you're someone who manages, you know, tens of billions of dollars of building assets and spends hundreds of millions of dollars on energy, and you get to talk to someone who's like an archer and is like, hey, I'm as far about this and like I'm as I couldn't be more excited to talk to you, Like a lot of those folks don't get treated that way by traditional VC.

Rick Zullo: 32:10

You know there have been people who manage hundreds and hundreds and hundreds of millions of energies been, who are like, hey, you know what, you're the first VC that's ever reached that to me. I was like, yeah, I don't know why other people don't do our model. But, like you know, that's great to hear and I'm here. So, at the end of the day, like, all those ideas make it up to our big board of like these are the businesses we would start if we were founders ourselves. And that is our mission that we go out and find the businesses that, if I were a founder, I would start today. And we find that lasering in and focusing on that makes it able so that we can focus on, like, what are the ideas that we think are like the best ideas in the world in these sectors, rather than doing a bunch of deals that are doable. Like we're not in the camp of doing deals that we. Like we're in the camp of doing deals that we love.

Silas Mahner: 32:55

So just to clarify this if I'm not mistaken, in almost every case you will do the research and have like a thesis and then you do this deep research and then you go find the startups not the other way around where they come to you and then you're like well, let's do a research and then you come back to them, cause I'm assuming that research process takes a second.

Rick Zullo: 33:11

Oh yeah, generally speaking, we're like coming up with an idea like probably one to two years before we actually like fund a company there.

Silas Mahner: 33:18

Got it.

Rick Zullo: 33:19

You know the latest investment that I made. I think we published our thesis two years ago and like I've spent, I've looked at 18 companies in the category. You know, honestly, we hadn't found one that we loved. I started, like pitching the idea to some of the most amazing product people. You know that, you know I knew and we found someone that I think is like a truly world-class you know CEO and he, you know him, and I went on a bunch of those early design partner calls and I said, all right, let me prove to you, I'll be your first head of biz dev. You know, and like we went and like secured a bunch of design partners, like he recruited you know, a ton of amazing people and now we're off to the races and I'm like I love that, like being involved day zero and a company like that it's, you know, so incredibly fun. I mean we took our kids to the baseball game, our Yankees game this weekend, you know, and that you know that that feels like you know, amazing feeling to be there, wow, like we're at the start of something huge. So you know, it's not always that we're day zero.

Rick Zullo: 34:16

There's been plenty of cases where you know ThreeFlow, one of our, you know a company in insurance space, like one of our best performing companies. You know it was a SaaS model, like it had been around for four or five years. We showed them a bunch of research and pivoted into the current business model and it's been often in the racist sense. Emergence led their series A, excel, led their series B company skillet. But you know, we do think that bringing that prepared mind and saying, hey, this is an idea that we think is amazing, you're either doing it or you're one step away from it, or we think that you would be an amazing CEO to do this. You know, and being able to lock in with a CEO, you know our founding team and say that, like we are so instantly passionate about this topic.

Rick Zullo: 34:57

You know I'm not a particularly smart person, like I'm not particularly sociable person, but you know, if you have this immensely small island, that it's like okay, I really want to talk about energy APIs. Like let's go and have a four hour conversation about energy APIs and like and that I know, like you know it ends in out of it and so forth. Like I can seem smart for that conversation. Give me a bunch of other conversations. I'm going to seem like an idiot, you know. But, you know, hopefully, or I believe, our founders, you know, you know they appreciate those conversations say like wow, like this guy cannot shut up, like he's so insanely passionate about this and he's knowledgeable about it, you know, and I think that this could be a partner for a business, opposed to someone who's like, read a you know research report maybe one of our research reports and says that they have a thesis in this space.

Silas Mahner: 35:47

Yeah, one really quickly I'd like to go over. A question is around. If you're putting, you mentioned you put another thesis, so do you build? Do you do this all publicly? And if you do so, like? Why do you put it out publicly? Are you not afraid of people taking it, cause a lot of people would have the mentality.

Rick Zullo: 36:02

Yeah, so at the beginning of our fund we didn't publish them publicly and then I would find that and it was very much for that concern I think over the course of our fund we have actually progressively leaked a lot more of ours. So, you know, you can see some of that we've already done in the clean tech space. So, you know, we, you know, partnered with Climatech VC to publish our thesis on clean energy business in a box, like realizing, you know, that there was a similar element to what we just discussed in buildings. They're really the long tail of, you know, solar and clean energy development companies, which is where the vast majority of market share is.

Rick Zullo: 36:41

Clean Energy Development is a very localized game.

Rick Zullo: 36:45

We're unwilling or unable to afford modern software systems and that there was a really irrational willingness to pay because they have high turnover, high seasonality. So we basically came up with the idea to say, all right, what if we gave the software away for free and made money via working capital procurement and a bunch of other business models that we think or novel, that we've seen work in other places, like commerce or supply chain? We went out and looked at a ton of companies in that space and then we were incredibly fortunate that we were able to engage with the founder, who wasn't even raising was profitable at the time. That they met us and bootstrapped their way to already an amazing business and read our report and they were like this is exactly what my business does Like. Have you heard about us? And it turns out they were focused on emerging markets, not the US, and I had done a bunch of emerging markets infrastructure work earlier in my career so it clicked for me, but I think a lot of people missed it because of that.

Rick Zullo: 37:43

And that company has been fantastic since Sotys Energy Solutions. Emily the CEO is incredible. We led the C-Adroun, Unesquare Ventures, led the Series A and what was an incredibly competitive financing and we love that we published our thesis on energy APIs and our platform for energy or Project 44 for energy with CTVC similarly, and I think the combined views of those blog posts and research reports that we have published and there's like a couple hundred thousand and we're gearing up to make an investment in that space. So I think we are getting folks follow us on Substack or Medium or look to our website. We do publish more and more of this research. Sometimes you have to go through it to look through. You got to read the blog post to get to the deck, but we do publish a lot of our research more progressively.

Rick Zullo: 38:34

We do think it's a great way to one, educate the market, two kind of like plan our flag. So one of our other is in insurance, like we've been looking at it all this space for a very long time. A company that's one of the top companies in our pipeline is out raising right now. I've received 11 emails about this company over the last three days because they're meeting with a bunch of BCs and folks are being like so are you guys doing this one and again with me?

Rick Zullo: 39:05

I'm not going to tell them our opinion about it, but they should hopefully be looking to us for a signal, whereas when I came up in venture, I was looking for a signal from anyone else that I could get. And I think now, because we've had this prepared mind point of view and this mindset on really digging in on this problem set and establishing a bunch of customers, people aren't going to come to us for crypto or DevOps or social or whatever. If you're coming to me for any of that, you're probably barking up the wrong tree, but you want to learn about energy APIs, like I may be your guy.

Silas Mahner: 39:39

Yeah, one other thing just to clarify on this part. So maybe it's the reverse usually, because you're looking for certain companies, but what stage and check, size and focus areas would you just state for people who are interested and who are raising should they come to or should they not?

Rick Zullo: 39:55

Yeah, All this is public information. I've announced it on other things, but our first one we did invest at Northwood 20 post, so we are early stage investors. We believe that this is a partnership we did not invest in. We do not own less than 10% of a company at entry point, so historically our checks has been one to two million. Now we're writing checks a little bit larger than that. But we are early investors. We do not care whether you have a product or not. We've invested pre-revenue just as frequently as we've invested post revenue.

Rick Zullo: 40:31

It really depends on the company and what we think is their proximity to product market fit and for us we'll do anything. That's a digital business and that can be a technology enabled service. It can be a SaaS company. It could be a marketplace. It could be a platform business. What we're really looking for is the ability for that company to monopolize a point of value chain and that generally requires them to have like a really strong flywheel around the business and we wanna know that the team can build a category leading company in that space and I'm a big strategy nerd as we're talking about books Like we've developed a lot of our own kind of proprietary frameworks around value creation and how to monopolize, and we very much obsess over how can a company not participate and perform well in a category, but like if all goes according to plan, like which nothing ever does.

Rick Zullo: 41:24

But if it all goes according to plan, like can these folks monopolize the category? And I think that's so important in a sector like energy, which is selling commodities most of the time and there's lots of regional specialization and lots of fragmentation. But if you can develop a monopoly business in a sector as large as energy or, for that matter, insurance or supply chain or commerce, you are looking at the biggest scale outcomes out there. So I think like we've been fortunate to have some great companies start to break out in fund one, but like it's impossible to tell which is going to be the biggest company. But if a single one of them figures out how to monopolize their portion of value chain, the scale of outcomes should be tens of billions, not billions.

Silas Mahner: 42:07

Okay, very cool. I love that, I think. Thanks for the transparency. I really appreciate that. I do want to be conscious of time here, but I want to go and ask kind of one general question about the climate tech VC half one 2023 report on funding. My biggest question is just to get your kind of gut reaction or thoughts on why we're seeing fewer late stage fundings and more early stage fundings. I want to understand if you have an idea around why that trend is happening.

Rick Zullo: 42:41

Yeah, I think it's twofold. So one, this is probably happening across like venture in general. You know there's some research that we put out there around, like you know, alpha versus beta. You know that I gave to our LPs back in May around what we were seeing with funding trends as later stage VCs were moving much earlier in the capital spectrum as they were trying to make their fund cycles last longer, kind of late. There's never been a less attractive time to be a seed investor. Historically, the premium of a late stage valuation to an early stage valuation has been about 20 to 25 times. So like think of that as like early stage valuation 10 million, late stage valuation 200 to 250 million. In 2021, that hit 42 times. So 10 million dollar valuation 429, big client and in the first half of 2023, it was 9.6. So like literally 75% less attractive to be a seed stage. And you're talking about all the risks, all the delusion, all the failure that you could take along the way all the time. Like it was because everyone was moving earlier. The price of seed stage went up, competition at seed stage went up and growth was all of a sudden, everyone who had been paying, doing 20 deals a year at 100 times ARR was all of a sudden alligator arms, so that has happened broadly across the venture space.

Rick Zullo: 44:00

The second part of this is companies in climate tech. Most of them don't have product market fit and this is like there's been a flood of capital into this market. A lot of people are interested in it. Like we have a very cynical point of view on it for what it's worth that like there's a lot of people who understand energy and there's a lot of people who understand, you know, how to build companies. Building companies in energy is a different thing and we think that there's a far smaller universe of folks who know how to do that. Our hope is that we're one of those folks. We've yet to prove that out, but hopeful that we can. But as we've looked at the universe of companies, there's a lot of team in TAM. A lot of people are excited about companies and spaces and a lot of very exciting teams attacking broadly macro oriented like exciting things.

Rick Zullo: 44:45

Very, very few companies have meaningful traction. You know we're fortunate to be in a couple that actually do have meaningful traction and have been able to grow, progress and race follow-on rounds, but very, very few companies are beyond a couple million of revenue if that, and I think that's the reason why late-stage finance is starting to fall off the cliff. You know there's more pressure on some of the heart tech and frontier tech stuff in an environment where you know capital markets are less certain, because you do need to kind of start leaning on what are the companies that are gonna show revenue, cash flows and so forth in the future, you know. So I think the reality is like that's likely going to continue to happen.

Rick Zullo: 45:26

You know we're also seeing a massive pullback in the LP side. There's still more interest in climate than there is in other broader areas of tech. I think you know, generally speaking, there's a lot of interest in solving for climate across different asset classes, whether that's real assets, private equity or venture, you know, and being part of the energy transition. But you know I'll pull back nonetheless. That's afflicting the broader LPGP dynamic.

Silas Mahner: 45:55

Okay, that's helpful. I really appreciate that. That's a helpful. I think that's a very helpful insight. So for the last section here, I wanna just shift a little bit and let's talk about general advice for other founders or VCs. So let's start with probably, in order to make this kind of climate tech revolution happen, there's a lot of other, you know, vcs that need to make good decisions. So what specifically is your advice and we may be sort of talked about this in some ways, but just to get a little bit deeper on it, what is your advice to other VCs from your experience on how to make the right decisions on which companies to invest in, because there is obviously opportunity cost right?

Silas Mahner: 46:39

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