#129 A Decade of Energy Investing, Impact Investment Hurdles, & Launching a 2nd Fund w/ Jason Blumberg (Earth Foundry)

Why you should listen:
**How to succeed in building your company from a seasoned ClimateTech and energy investor
**How to successfully expand your thesis and launch a new fund
**Learn the best ClimateTech industries of the future

Show notes:
In this episode, Silas Mahner (@silasmahner) & Somil Aggarwal (@somil_agg) speak with Jason Blumberg from Earth Foundry. Earth Foundry came out of Energy Foundry, who after a successful decade of investing in energy technologies is expanding its scope to other areas of climate tech.

Jason Blumberg is the co-founder and Managing Director of Earth Foundry. As a former consultant and founder in the energy space, he has sat on many boards and has a wide array of knowledge about energy and beyond to share with us. 

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Links: 

• Connect with Jason: https://www.linkedin.com/in/jasonblumberg/
• Earth Foundry: https://www.earthfoundry.com
• 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) & (@somil_agg)

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• Most Recent Episode: #128 Branding & Marketing Your ClimateTech Startup w/ Anna Konstantinova (AnnaKo.Co)
• Similar Topic: #116 Consultive VC, Understanding Customers (as a VC), Developing Industry Networks for Your PortCos, & More w/ Rick Zullo (Equal Ventures)
• Something Totally Different: #120 Serial Entrepreneur Fundraising, the IRA & Home Electrification, IRA-Dependent Business Models, & More w/ Jeff Chapin (Haven Energy)

Transcript

Speaker 2: 0:08

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. On this episode, Silas and I had the chance to speak with Jason Bloomberg from Earth Foundry. Earth Foundry came out of Energy Foundry who, after a successful decade of investing in energy technologies, is expanding its scope to other areas in climate. Jason Bloomberg is the co-founder and managing director of Earth Foundry. As a former consultant and founder in the energy space, he has sat on the boards of many companies and has a wide array of knowledge about energy and beyond to share with us. Jason's perspective to me was really unique because he has been operating in this industry for almost a decade and has the experiences to show for it. As always, let us know your favorite parts when you finish listening and enjoy the episode.

Speaker 3: 0:59

All right, welcome to the show, jason. How's it going? Good, good Thanks for having me, I appreciate it. Yeah, absolutely Glad to have you calling in from Chicago land. We had our pre-show jokes already out of the way, so nobody has to endure them. But I guess let's get right into things here. Tell us a little bit about yourself, what you're doing today, and a little bit about your career up to this point.

Speaker 4: 1:23

Sure, I run Earth Foundry, which I co-founded with my colleague, sarah Chamberlain. Earth Foundry is an early stage investor in new climate, clean sustainability, tech, whatever you want to call it these days. We started back when clean tech was just coming about as a word. The firm. We've evolved over time, making investments as the first institutional investor into a number of companies that are now top of the mind for folks as being top performers in the space. We built out the model for the firm by learning about the space as we move forward.

Speaker 2: 2:11

Could you talk about the? There's been, for the audience, a change for you, going from Earth Foundry previously Energy Foundry. Could you talk through, just for the audience, at a high level, what really made you want to make that difference?

Speaker 4: 2:25

Sure Energy Foundry is a fund we started a decade ago backing with Amron and Exelon State, Illinois, and really making investments into new innovations that impact the space and have local impact. We've continued to do that and have significant outcomes, both in impact and climate gigatons of climate. We've reduced Returns on the portfolio, which are significant top tier and climate and clean tech and venture overall that success. We've looked at how do we evolve our model as a firm. What I mean by that is expanding from energy as the core into other segments, but also we work with a number of other corporate partners now across the space. Those partners are important for the ecosystem, they're important for the startups and they're important for us.

Speaker 4: 3:24

Those folks want to see innovation come to the market. They want to work with innovation. They want to use innovation. As we've evolved, we've added more corporate partners, Generac being one that's just joined with us, as well as a number of others. Those folks have a more expansive purview and so the broader climate space we're now focused on, or clean tech, such as recycled plastic that has energy content impacts in it, but it also has broader impacts on the world. How do we change the lexicon to really think about all the things that humans are doing to damage the earth, and how do we do that in a way that doesn't happen and really produces better outcomes?

Speaker 4: 4:13

Our goal is to just make it easy for a person to be able to make the decision to use that product and not have it have a negative impact. Climate is a hugely important role, but there's also many others, and energy is a key underpinning of many of those outcomes, and so we look at that. So, as we've looked at expanding and how do we help change the future of the earth and revolutionize the innovations that are coming to market. Earth made more sense than energy is just the only focus.

Speaker 1: 4:47

Impact brands represent the choice to live our lives in alignment with planetary action and our values, to preserve our amazing home for generations to come, be it through solar panels, how you travel, where you're sourcing your materials, the choices we make matter, and I know you know that if you're listening to this podcast. My name is Anna Konstantinova and I'm on a mission to make impact brands our next paradigm. I believe that marketing can be used for us rather than against us, and I want to help you build the best brand possible so we can all pour our strength into solving the biggest issue of our time. Whether you're a founder or an investor representing portfolio companies, let's work together to make sure your brand is seen, heard and remembered the way it deserves to be. And as a thank you to the clean techies community, I'm offering 20% off my newest launch branding sessions with code clean techies.

Speaker 1: 5:38

One word We'll take 60 or 90 minutes to solve one specific problem, whether it be a naming issue, strategy, development, business growth or beyond. Let's put our minds together and move forward with renewed energy. Can't wait to hear what you're working on. Find me at anicoco. That's a n? A? K? O dot co. Talk soon.

Speaker 2: 5:57

Yeah, I that sounds really cool. I think it is very clear the kind of impact that you can achieve. You know, focusing on a wider thesis, not just having to focus on one industry, but the tailwinds of whatever your innovations would impact. You talked about starting an energy and then having this desire to expand. Given everything that you've done, did this align more with the growth of your network? Did it align with you know data that you were looking at that said we can do this? How did you decide to change the model and broad Sure.

Speaker 4: 6:33

So the US is a global leader in innovation by far, and we have research at many institutions that has just continued to be funded and flourish. So, from maybe $8 billion when we started in the national labs to double that now and to compound that all the institutions. And then, if we take that focus and we look at where's the research happening, we then see also incubators, accelerators, and a decade ago or more I got into this industry. 20 years ago there would you'd be lucky to find an accelerator in Chicago that would even touch this, or New York or LA, any big city, and now they all have multiple.

Speaker 4: 7:15

So the platform of innovation that brings things to market from research to the tech transfer, to the incubators, accelerators and entrepreneurs, circling all the way back has evolved in a significant way A little bit of a tailwind of the success of Silicon Valley, but also a market demand and market need, and so that ecosystem has flourished and allowed for much more opportunity.

Speaker 4: 7:42

And even if you look at let's take Oak Ridge National Labs they're not just doing energy, they're doing water, they're doing 3D printing, they're doing things that have significant energy content embedded in it but match a broader set of humanities needs in these spaces, and so it's an evolution of us, but it's also just an evolution of the market space that folks who are in energy are covering all the way through. And how do you deliver better outcomes? Because energy is kind of an underpinning of everything. Even humans, we need energy every day, or we don't survive from food, but also we need that from light and heat and everything else, and so a lot of this is an on demand system that we live in. And how do we optimize that on demand system?

Speaker 3: 8:29

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.

Speaker 2: 8:57

That's really, I think, one thing that's core to what you're saying is an observed reality where you've seen the growth of the industry and the change of how people are thinking about energy. One thing that we have the fortune of doing on this podcast is talking to a lot of people who are first time fund managers, who are now getting into the space at a time where people are starting to branch out. A lot of these people don't have the experience that you have to be able to know about where it comes from. Do you think that your experience seeing the growth of the industry gives you a nuanced perspective on how energy can spread, or is it fairly? Is it fairly something that someone could come into and just kind of observe on their own?

Speaker 4: 9:41

Yeah, so people always want to say that they're smarter over time, but facts are more important and so, for example, when I first got in the industry, I was at McKinsey helping build up and lead their initial climate change focus. Before that I was turning around industrials and I think that was around 2000, 98, 2000. And building on that, that led to the McKinsey area where really doing the first work in clean tech and climate. Before those were words. And if I think about the one of the early pieces of work I did was the future of EVs in 2005, I think before Elon Musk had joined Tesla, and we're like this is gonna be a big deal, and it took a long time for the market to evolve. We are now almost 20 years later. And then people were looking at could we do charging stations at Best Buy as well? We are in the store, and what we penciled out then was that the economics would never work on a charging station without subsidies because the maintenance was more than the value.

Speaker 4: 10:48

And so that evolution is playing out today, where people aren't maintaining their charging stations, but there was a lot of economic value created during that time by folks who got in IPO of their company or SPAC that and got out. So there are different models in venture and the lesson of that is that venture as a class is looking at the delta between today and some point of exit. The enduring company piece of it is about what are the fundamentals of the business.

Speaker 3: 11:19

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Speaker 4: 11:43

Which leads to the key and there's multiple keys in venture. One is pattern recognition. So we see about 1500 startups a year, and those 1500 startups give us a lens that other people don't have. So if I look at a company, I can say, ah, here's the eight other companies that are doing something similar to that, and this one is gonna be better, and here's why At least that's my hypothesis and so I'm able to unpack which one is better because of the deal flow that we have developed. I also see people who are newer saying this space is gonna be hot, and so they fund the one that we think would be the eighth best.

Speaker 4: 12:23

Now is that one not going to win? I mean, partly, who knows? Partly, if the other seven that are better don't get capital, well then that one's got a better shot, and so there is some movement. But it probably not. If you don't have the experience, you don't know you're funding the best one. Back to your previous question of having partners. So we have a number of corporate partners, we have a number of research institutions that we work with and a number of accelerators, and then we look at how can we fund the non-dilutive funding as well, and so, bringing all those pieces together takes a lot of time to build those relationships with the world's leading companies who are looking to us to see which innovations they could engage with, and so, since they have a limited amount of time, we are kind of a gatekeeper on. Look at this, this could be interesting.

Speaker 4: 13:16

And if it is, then they help us with diligence, then they pull through as either a manufacturer, a customer, a channel partner, and so they help pull through that innovation and maybe an acquirer of it. And so we've had all of that from our partners along the way. So that type of network effect produced as hard to replicate as well. For us, that means our portfolio has about an 85% success rate. We're venture is one in 10, ours is like eight in 10. And success means we're making money or we're making a lot of money.

Speaker 4: 13:53

But either way, an entrepreneur who works with us, their likelihood of going home with money in their pocket is a lot higher than others, because of A we think we picked well, and B we know how to pull through the innovation. Then, see, we've seen a lot of mistakes that entrepreneurs make and we try to help them through those. They don't often always listen to us, and I often compare it to telling somebody that they're gonna run into a tree, and then they come back to you with blood on their face and you're like well, you can say I told you so, or you can help them get up and figure out how not to hit the next tree. And so we usually go with how to not hit the next tree, but they learn, and so that's part of the entrepreneurial journey.

Speaker 4: 14:33

So, circling back to your question for first time, fund managers it's a little harder and the key is to go slow and not come out of the gate quickly, and that's the advice we got many times. We've been mentored by a number of leading funds since we started One of them, arch ventures, which is a very successful biotech fund, and those folks have helped us all along and given us advice to just go slow and then issues that we could have. Another one is a ten solicity again, and Wayne Boulais, who's learned a lot over the years. Both these folks have 30, 35 years of experience and then other folks as well who helped us in the early days not make mistakes. So go slow, looking for people who can be mentors and advise you as key. And so these days since we've now become, in some people's books, one of the top rated firms in early stage, climate clean tech venture we do that with other people too.

Speaker 4: 15:35

We help them and give them advice and give back, and so it's a circle.

Speaker 3: 15:43

Hey there, thanks for listening to this episode. If you made it this far, it's likely that you're enjoying the show, so I wanted to ask your help. If you're enjoying it, please give us a review on Apple podcasts and share with somebody in the same industry who might find this interesting. And if you're interested in getting summaries of these episodes, go subscribe to our newsletter that comes out on LinkedIn, and Substack Links can be found in the description. Thanks for your help in growing through each of this show.

Speaker 2: 16:04

Yeah, no, definitely. I think it's really cool to see this is probably what a lot of generalist VCs on their second, third, fourth funds would say about the network that they've built being able to do that in a growing industry, a niche industry like energy. It, you know, pitchbook put the top performing venture funds, I think, about 3X, gave you like 5% of all venture funds in the US. So, to have eight active investments instead of one, you can probably see what is a more aligned success rate, because you have, you know, very, very specific things, such as like interacting with one industry, with one type of entrepreneur an energy entrepreneur, right, and I think it's really cool to see that model being successful in such a specific context.

Speaker 4: 16:49

Yeah. The thing that's a little harder, though, is that when you are in whatever and venture generally follows a trend-based theme, and so it's more of a momentum investing. And when you're in a momentum-based sector, such as AI at the moment, there is a sucking sound towards value creation, and so with that it's a different deployment model, and so there you're looking for best team. You're looking for the niche in the market that you think you can carve out that hasn't developed yet, and so it is team first In our space. If you could have the best team, but they may never be able to beat the incumbent. So let's take span, one of our investments. Unless the CEO had the idea of how do you, how does the circuit panel in the house become a whole new, different product and how do you take the install of battery and solar and EV and reduce the cost by 50 percent? You could not compete against Schneider's Square D-Box because they have been beating the metal down for a hundred years. So we've seen many, many circuit panel innovations over time, and none of them were going to beat Schneider. These folks had a new technology to do that and were able to.

Speaker 4: 18:17

Another investment of ours in Telehid it's a tankless water heater for commercial buildings. Think of Marriott, think of Hyatt. And everybody knew of tankless water heaters. But every time they tried to do one for the commercial space, it would never work and even though you could get 35, 50 percent energy reduction, they would break down because the design couldn't handle the throughput of water. Sri, the founder there, said hey, what if we just completely design it differently from the ground up and something that could do that duty cycle? The story is he had a water heater blow out and he's like this this old technology doesn't work, so you take the boiler in a hospital that has two boilers and burning all the time so they don't have a loss of hot water. Now you replace it with a tankless hot water heater that's similar to the refrigerator coming in and that will disrupt the boiler market completely.

Speaker 4: 19:14

Most people aren't that interested in disrupting the boiler market, but we are, you know, and it's a many, many billion dollar industry and so we disrupt that. It creates a big opportunity, but you could have the best team working on it and they could never figure it out. And that's the delta between a evolving market like AI or like the phones smart phones were a decade ago where you just need the smartest people to figure it out, and this market where you need the best innovations to figure it out. So that's why we see back to your previous question of new investors coming in. A lot of crossover investors and new investors use that momentum's view into our space and they think the disruptive calculation is carbon. So now carbon creates this disruptive market and that creates an edge for that. But carbon and those type of things have never created a disruptive edge, and so the momentum type of investing never at least in our view never carries over that way.

Speaker 3: 20:21

Yeah. So there's a couple of things I'd like to do here. I think one, I have a couple of questions to follow up with what you've mentioned, but I do want to go back a little bit so just to make sure it's really clear. So the origin I want to understand the origin of what was energy foundry and now earth foundry. So you know, in particular, I'm curious about going out and starting and starting energy foundry at the time with those LPs, like how did you go about that? Why did they invest in you? And then, can you also talk about raising the fund for earth foundry, because it's a different situation, right? I want to understand that experience, sure Early, including the time stamps of that.

Speaker 4: 21:00

That has a very specific focus, which we're continuing the focus, and so that has given us some per view but also given us a very specific set of outcomes. And so energy foundry the capital came together and so we they were looking for who was going to run that, and I was a entrepreneur and then previously had been a, like I said, working at McKinsey and then buying and turning around industrials back by the Carlisle group. Our team was, and then before that have had a Vemini and strategy at a Fortune 1000 company. So the capital was coming together and I didn't have to raise that, I helped run it. And then Sarah, my co-founder on this, was running it and it's an Evergreen fund.

Speaker 4: 21:51

And so we ran it for quite some time that way, and then, as we saw that the market would benefit and the fund would benefit from additional capital, we've gone out and raised from private investors into a new fund structure, and so those are different. One is the capital came together. Yeah, I think it's a little like a CVC state fund, a family office back fund structure, and then this new structure is one that is a private capital and has a broader mandate with it, and so that fundraising has been about talking to investors and getting them to believe in the future, of what we could do to both deliver impact and deliver economic returns, and so would you say that.

Speaker 3: 22:41

I mean, I don't want to necessarily spend too much time on this, but I would assume that, given your track record of already doing this in a little bit different format, it's a relatively easy conversation for an LP versus a first time fund manager.

Speaker 4: 22:54

It's a good question. What we find is that a majority of the LPs there's two things we find. Number one is that they typically like to fund people on fund five or four and so that when they think about their risk mitigation parameters, they're still looking for many, many repeat funds. So that is a harder conversation with traditional investors, traditional LPs. The second thing that I'd say is that they all the intangibles, the climate type of intangibles that we deliver gigatons of CO2, plastic out of the ocean.

Speaker 4: 23:44

reduction in pollution, significant reduction in pollution the metrics that it's about 65 to 70% of our founding team is our female or minority backgrounds. Many of the metrics that folks would consider for impact were significant. As I mentioned, most of the folks, when you get under it, they don't care, and so they're like what are the financial returns? We have good financial returns, but still it is well you're not in your fifth fund. Come back then.

Speaker 4: 24:18

The other thing that I'd say is that we've fallen a little bit of a trap with impact driven foundations that they because we've had good returns. That doesn't meet how they think about impact, even though the I think we've offset the equivalent of 60 billion tons of coal, and so if you said that's what you could get for your money, that would be a no brainer. But if it's, you can get that plus your money back and make some. That doesn't fit a lot of them. So there is this weird valley that a lot of folks find themselves in, even folks like us, in this space, where funding is harder to come by, which is why we've leaned in more to corporate partners and and which is a win-win outcome for us and, to hide that worth individuals that are interested in the, that value proposition.

Speaker 3: 25:19

Okay, yeah, so this is interesting. I would have not assumed that, I would have not expected those answers from from the race, but it's very interesting to hear that the you know I obviously we talked a lot of funds here we don't talk to LPs per se, right, but to hear that there's very different segmentation amongst the LP market. If you will, so maybe you know, do you have any, while we're on this topic, like any just kind of key pointers for people who are raising because there are a lot of companies raising right now Sorry, a lot of funds raising what are your main pointers in terms of, like, segmenting that out and kind of navigating through the LP market?

Speaker 4: 25:57

Yeah, I mean, I think. I think if you're raising a fund for the first time, you should think why are you doing this? A lot of people do it because they think that, well, I could be an entrepreneur but I can spread my risk by doing a fund. There's some people who do it because they think it's fun and cool. Being a fund manager is by far, very, very hard because you have no matter what. You have a limited amount of resources, you have a lot of people dragging on your time and you have a lot of risks that you can't control. So you're backing startups who are who you don't have full control over, and so you're betting a lot on a lot of different risk things. That being said, for the right person it's a lot of fun, the impact is tremendous and the outcomes can be great, but it takes a decade for those outcomes to come to fruition too, and some people get into it and don't appreciate that.

Speaker 4: 27:04

So I think for new fund managers, they look at the Silicon Valley momentum that happened, and if you look at returns right now, you can see that isn't happening, and so Pitchbook put out a report that says returns are negative on a one-year rolling basis for venture I would say clean tech we're not seeing that. And climate tech, we're not seeing that. But that's also because we didn't have the euphoric valuation increases. So if you don't get a 40x multiple on your company and then get a compression to 10, well, that's going to cause you to have negative write-downs. If you have a 10x multiple and you have an 8x multiple and your company is doing well, you're going to be up, and so that's where it comes from in that piece.

Speaker 4: 27:48

Circling back to your question, then, because I think people should think long and hard if it's the right decision for them, and if they have the right tools, is understanding the LP landscape. And what for each LP, what is the value proposition that they want? And it differs by LP, and one of my friends who's on his 12th fund will say it's a Christmas tree with ornaments, so you need to make sure you have the right ornaments, and so everybody, some people have different religions, and so I'm Jewish, and so maybe the ornaments wouldn't sell as much to me, and so you've got to understand what that person is, because each one is making a bet on you and it's a one-to-one relationship. And when you have even a large institution, at the end of the day that fund manager is only going to make a handful of new investments each year, and so they have to decide that they bet on you, and that is a complex sales situation that can be challenging for people that have done it for many decades versus people who are newer into it.

Speaker 3: 29:07

So do you have any segmentation on the general? You mentioned ones that they're focused on the impact you can create, so you need to have metrics on that. The other ones are just focused on monetary value. Some might be having other motives, like I don't know if it's corporate partners. They might be saying, hey, we only want to invest in you if you're going to produce deal flow that we can inquire at some point, like do you have any general segmentation, right?

Speaker 4: 29:29

So our segmentation is pretty easy it's based on its corporation, its individuals, its institutions and then foundations. And the institutions are generally financially minded, although may have different metrics. The foundations have metrics that would align with their foundation, but they are breaking the two segments. They break into very impact-leaning goals or they break into traditionally like an institution, because that's how they're separated, with the financial metrics as being really the only thing that matters. And then you have individuals that are looking for returns plus impact metrics, but it's person by person.

Speaker 3: 30:16

Can imagine that one. There's no easy category to put those people in, because it really depends on their story and everything. So I really appreciate that and I appreciate you indulging us on that, because I think it's extremely important for people along the entire value chain to recognize the need for incentive alignment, because if you're ever having friction, it's probably because there's a lack of alignment with sentiment. So I appreciate that. I wanted to go back to one thing which I found quite interesting when I was prepping for this and speaking with Jackie and also you mentioned it again which is you see 1,500 companies a year and that you said because of that, you are able to have pattern recognition to an extent.

Speaker 3: 30:57

So what about the firms that are smaller? Right, two people like three people firms? How can they and do you have any philosophy on whether or not it is absolutely required to be a quote unquote good investor to see X amount of deal of types of companies so you can create the pattern? And I'm going to put two questions here On top of that how can they wait to see the theme before they invest? What if they miss some of the opportunities? Right? Can you put those two things together?

Speaker 4: 31:24

Yeah, so the 1,500 deals a year. We make everyone on our team look at every deal and we meet with 600 startups a year on average. The most funds don't have that discipline in their investing model. We've always had that discipline in our model and it's hard. It takes some real work to make yourself every day do that. I need to work out more, but I definitely work out. When I do that, we make everybody work out, and so that's a discipline that we do, and so you will find most venture funds the way that they do it.

Speaker 4: 32:06

As an individual knows, a market has an idea on it and then that's on the individual that comes in the door that matches that thesis versus that, and so it's a different model.

Speaker 4: 32:19

Back to your question is the way that we've always approached it is whenever we're investing in something, we want to be the smartest potentially in the world on that topic, and so you can do it through deal flow.

Speaker 4: 32:35

You can do it through learning about that topic and really understanding it, and so not a PhD thesis on it, but a business 80-20 on it, but reaching out and talking to the people that know the most there and triangulating the outcome in the future as a way to do it versus betting on your hunch, and so what I would suggest is, if you don't have the deal flow, is to do research on the area you're investing in and have the right relationships to know that the company is going to be disruptive. Because it were back to the previous comment if you're doing an AI chat deal, it's hard to know because the future isn't written and these spaces, the future is written. It's the status quo unless you change the future. And so there are it's a $14 trillion market segment, the clean tech space. So there's a lot of little, very big spaces to disrupt, and that's what everybody's trying to do. They're not trying to create something that doesn't exist yet in humanity as a whole white space and so that's the key is understanding those segments you're investing in.

Speaker 1: 34:00

So that makes sense.

Speaker 3: 34:01

Yeah, it makes sense. So I guess just to try to maybe synthesize this and make sure I've got this right so your take would be that you see the deal flow so that you can have an understanding, and that's your advantage. But another person, who may not have the capacity to do that to people or whatever they, can also still achieve a good outcome in your opinion, if they are willing to put in the effort to research the industries that they have a hunch on and really go deep in another way which, without having to go and see, you know, 1500 deals.

Speaker 4: 34:29

Right and have the specific areas that they're focused on. So they do have to take a little bit of the bet on that. I believe that the typical venture model we believe in this space of the spray and pray one in 10 model doesn't work, and so the typical reason that that works in venture is because you have a market that is evolving and going up, and so you'll typically have three people in California bet on it, one person in Boston, maybe one, maybe two people in Boston, one in Chicago, a few in Europe, a few in Asia, all betting on this whatever innovation idea. And you're all and the ones. What you do is you invest in a few of the similar ideas.

Speaker 4: 35:20

Whatever one doesn't work, you kill it, and then you keep only investing in the one that figures it out, and so that creates this funnel where, okay, you didn't figure it out, you're out of the game. You didn't figure it out, you're out of the game, and so you keep having the evolution Grubhub is a great example Figured out how to do, instead of ordering from calling you order from pushing on your phone. The technology I stack under that that they need, while considered robust, is not their technology. They're leveraging someone else's technology. So that model of who can do it quickest and fastest doesn't hasn't proved to work. It doesn't mean it won't it hasn't proved to work.

Speaker 4: 36:03

So you need a different strategy than most venture and our belief, and that matches knowing your space and knowing what you're disrupting. You could also come from that space, so you could come from that area and have a view on why that would work. But, there's a crossover, it becomes more challenging without having something you're knowledgeable about.

Speaker 3: 36:27

And one last thing I want to add here is would you say that, given the continued and deepening focus on working with corporate partners, that you're able to utilize their interest as a purchaser to help identify some of the areas that maybe have more traction? Because if you're an outsider, like you said, somebody comes from the space. You're like, oh, that's a great idea, I love it. But then if you talk to somebody inside this space, they might say, well, we don't do that for these reasons. Has that been something you've leaned into a lot lately? Has it been helpful as well?

Speaker 4: 36:57

Our friends at GE.

Speaker 4: 36:59

GE was a powerhouse, used to have a shopping list, and so if you know the corporation shopping list that can help you, and so that type of strategy allows for and unlock that you might not have otherwise, which is why you see a number of funds propping up with corporate partners, Because there's many ways to work together, but that is an important differentiator, as if you know what they're interested in, you can do that. The other thing you can do is co-found companies that solve problems. So a little while ago, a big consumer products company came to us and said and it didn't end up moving through but can we work with you to co-found companies that we could actually push through our sustainability value chain? And so we've seen a number of companies come to us and you can co-found to solve, and that produces an outcome that could be successful as well.

Speaker 2: 38:05

Very cool. I really appreciate it. I think a lot of that insight, one of the things that you brought up earlier on. I want to pivot a little bit now to understanding what you're looking at moving forward. I know we've talked a lot about how you've built yourself up to the way that you look at investments today. Energy is obviously a broad term. Clean tech is obviously a very, even broader term. Are there any industries within energy that, with this new fund, with this new thesis, you're looking at more deeply and specifically, to whatever extent you're comfortable, what industries outside of energy you particularly bullish in? I think, especially one of the things that we love to do is figure out where should entrepreneurs be building, based on people who are looking at numbers of deals a day, who can get that insight into what fields are really really hoist for venture investing.

Speaker 4: 38:55

The thing that I'd say is we've had some success, which is good, Similar to Amazon. It's still day one for us. We're still trying to figure out what the future looks like. We're not Amazon, but we're still trying to figure out every day what our edge is, what the future looks like and how we have success building these companies Today's model will not be the same as tomorrow's model and how we evolve as a fund and firm.

Speaker 4: 39:27

In your question, the space is that, if we're talking to entrepreneurs, my number one advice to them is that there is tens of billions, probably hundreds of billions of dollars of research sitting on the shelf at national labs, at universities, at research institutions that are in the tech transfer department is hoping somebody could commercialize. I actually teach at the University of Chicago's MBA and PhD program commercializing science innovation. What we actually do is go get a collection of these, typically groups of four, from six institutions. Last year we had NREL, we had the National Renewable Energy Lab, we had Princeton, we had Gas Technology Institute and a number of others that each give us four technologies. We pair together MBAs plus PhDs to commercialize, see if they can turn it into a business. They do an assessment from the four, which one's the best. Looking at patent search and business model kind of high level innovation, we move to what's the best, based on what has the biggest opportunity in the shortest amount of time. Then finally, we move to an R&D roadmap and business plan. That type of same pathway could be followed by any entrepreneur in a research institution to see if they could commercialize something and turn it into something big.

Speaker 4: 41:02

A number of times you'll find dead ends, just like a venture person. We're looking at something you don't know but you find dead ends. Sometimes that'll work. We had one company that came out of the class that has raised more than $50 million. Now you have this funnel approach of trying to figure that out. If I was talking to an entrepreneur, I'd say go do that. Go look for those institutions and the research that they have, because there's a lot of smart money and dollars that have been spent on that, versus you needing to come up with it in your basement. That's going to be less likely unless you came from that area.

Speaker 2: 41:43

You have two to three industries that you're looking at and specific right now.

Speaker 4: 41:49

That's a good question. Because of our approach, we're looking at all different types of innovations. If we looked at hydrogen, which is hot, we have not seen much innovation there. We've seen a lot of dollars but not much innovation. If I had to look for anything, I'd look for storage and transportation, because if we find something there that unlocks the whole industry but we haven't seen anything, in our view that is the magic bullet there.

Speaker 4: 42:17

But there is a lot of money going there to unlock the industry. There's just less innovation that we've seen than one may expect in other areas. We are looking at interesting biofuels innovation that could change the lexicon for that whole industry. But we've got to see if we believe in that segment and that focus. We've had good success in storage and we are looking at what new innovations could come in energy storage. I think the thing that we find is that a lot of the new innovations are not as disruptive as the ones that have gotten legs. That's slowing down a little bit in that market space. We are looking at all the companies that we're driving into.

Speaker 3: 43:14

One thing I'd be curious to know if you're focused on. You see, generally speaking we'll look at pretty much anything, but it's about the innovation. Is there a particular method you have to measure what counts as truly innovative, where it's like a really big step change? Is there some way of measuring the baseline, and is that the only measure, or is there other things around product market fit and things of that nature that you have to also check the box down the road?

Speaker 4: 43:47

Let's take electricity, for example, the core of our focus in business, LCOE, which is the levelized cost of electricity, which is how most things are measured. It's typically three cents at wholesale. That means that if you're buying it from a wind farm or from a nuclear plant, it is. If you're buying at the commercial scale, it's seven to 10 cents. If you are buying it at your house, it's 12 to 17 cents.

Speaker 4: 44:21

Exclude California, where it can get more pricey when you have. But speaking of California, you have sometimes that it's negative and sometimes that it's 40 cents. You have that variability. If you take that and you come to me and you say I have a new wind turbine that goes on top of a building, how does that compare to seven to 10 cents? That's pretty easy. If it's three cents, wow, I'm really interested. If it's 15 cents, I'm not interested. That's a pretty easy way to think about it. Now we take that and you can apply that to anything. You can apply that back to hydrogen. It's five to seven bucks for green. You got the $3 credit from the IRA or you can buy it from traditional sources and it's $2 or $1. And so I know those cost metrics. And so if you present an innovation, then I understand that. If you are back to electricity on the roof with the wind on your roof, okay, is that continuous power? They'll tell you it is.

Speaker 4: 45:32

But it's not it best it runs 40, 50%, and so we've seen some innovations that could get that to 70 to 90%. And what does that mean for if you can produce power on a more continuous basis versus producing it on a variable basis? And so you can see then that you can price in a battery or storage and figure that out. So it quickly gets complex, but it's easy from the starting point of where, what is the competing product and what does that cost.

Speaker 4: 46:07

And so the tele-hot water heater that I mentioned before costs the same price as putting in a boiler. It takes 25% of the space. You can bring it in as a refrigerator on wheels, you don't need a crane and it uses 35% to 50% less energy. Okay, well, all that is a lot better. Now how do we actually bring that to market? Because the building manager at the hotel doesn't actually get any credit for traditionally, for saving energy or saving CO2. And so why would they take the risk? And so you have a much longer sales cycle than traditional.

Speaker 4: 46:49

Many years ago, when I was back in McKinsey, I worked for one of the biggest. I worked with one of the biggest building manufacturers in the world, and they came to McKinsey and said our R&D program isn't producing the value we want. What should we do? So I took OSB, densglass, some of the other most prevalent building products that have been successful in history. So we had a winner's bias completely, and I said what was the trajectory of those innovations? Well, it took about 7 to 10, no, I'm sorry, it took about 15 years to get to about 30 million in revenue to 40 million in revenue, and at 15 years with 30 to 40 million in revenue, those companies would take off those technology to come billion dollar industries.

Speaker 4: 47:39

So we went and talked to architects who went and talked to building developers who built buildings, and the answer was obvious it took a whole generation of seeing the innovation before the parents would, or the father would have the son. The father would never use it, but the son would see it for the generation and then say, oh, I'll use that technology. So it took a whole generation of family in a contractor role to use this new innovation. And folks would say, well, the architect could just spec it in. The architect isn't responsible for the warranty on the product. So the individual would say I'm not using it because I'm responsible for the warranty. I don't care what the architect says. Now this is sped up some today because we have much, much quicker knowledge to market and we have much better understanding of the technology and people understand innovation.

Speaker 4: 48:38

But it's not a year, it takes a lot more to get to market, and so I give that, because the adoption cycle on these is longer and hard, and so understanding that funding these companies in the right way is a key metric. And a key issue that early fund managers have in the seed space that they don't appreciate is that later investors who are coming in don't understand these cycles of investing, and so they will flood their companies with money which seems great on paper and they will run around and say, look how valuable my company is, and then it will go to zero and they won't understand why. And it's because they didn't match the capital inflows to the adoption cycle of the business and so they end up flaming out.

Speaker 4: 49:24

And that is a learning that we saw from CleanTech 1.0 and we adopted in our business practices, and we're seeing that happen again. Where valuations won't match the company, the company will flame out and we'll see if the restart is available.

Speaker 3: 49:45

That's quite interesting. I've never actually heard that thought about as like. It's kind of like it's included in some ways in TAM, but not exactly, because it's an aspect of how you get to the TAM. So it's actually pretty interesting, I think, to hear about the adoption cycle, one big thing I would like to hear.

Speaker 4: 50:05

Well, I'll also add to that that if you're backing material science companies, you have the same issue. But it's not adoption, it is science development cycles.

Speaker 4: 50:14

And so science development cycles. More money doesn't produce a better outcome. Sometimes you just need time, and so we have a material science company that raised $4 million venture folks and $17 million in non-dilutive and JDAs and that company. Then their next step up and raised was a $65 million raise, as you'd expect at a high valuation, and so the reason that they had that big step up is because they had time to develop where their competitors had raised hundreds of millions of dollars and have trouble even getting around now. That is not a down route.

Speaker 3: 51:00

That is quite interesting. There is somebody else who mentioned the timing to scale things and the actual capital of scale hardware, and in some cases it's not actually that much more, just a little bit different on how the money comes in. But speaking on that topic, I want to ask about the general market around growth Because, if I understand correctly, your focus is on series C and A. Is that correct? Yeah, or pre-seed?

Speaker 4: 51:24

as you'd call it. We're usually the first institutional investor. Okay.

Speaker 3: 51:28

Got it. So you know, given that you focus on those areas and you have the corporate partners to help, kind of guide people towards those potentially as acquisitions or whatever, Thank you. What are you seeing in terms of filling the gap of the growth funding stages? Right, Because I think that we look at the CTVC reports on this recently and there's a relatively large gap In that space. I think Energize did just raise a large, also Chicago a large growth fund, along with a couple others, but how are you seeing that that gaps can be filled, Because it usually requires quite a lot of money to get companies into those stages and through to the IPO or acquisition.

Speaker 4: 52:06

Yeah, so we have seen a huge influx of CVCs that have a high interest in late stage startups. If I look at and we mentioned us having corporate partners but if I look at when we started the fund in 2013, there was very few CVCs. When I say very few, there was. I think in North America at that time there was about 400, 500 venture funds and there was about 50, 100 CVCs. Now there's like 1200 or 50, I don't know. There's an exponential growth in venture funds. It depends how you count it.

Speaker 4: 52:53

And there is almost an equivalent number of CVCs as there is venture funds, and so that has created a huge market opportunity with additional capital. Those venture funds, if they are taking a methodical approach, are likely going late stage as a starting point. While the checks are bigger, they're small compared to a Fortune 100 company and the risk profile is different. Because when you're doing Cedar early stage, you have to do technology risk, you have to assess technology risk, market risk, customer risk, timing risk and financing risk.

Speaker 4: 53:33

When you are doing late stage, you're looking at typically is what's the customer growth trajectory and exit to IPO. So the number of risks that you have to understand and bound is much less, and also your downside risk is likely less, and so when you find new entrants with large balance sheets, they're usually coming in that way into the market. It's also closer to something they could acquire for their business units and so those two make it more likely. So that influx of CVCs has changed the landscape. There are a number of then folks who have raised funds that are later stage or later leading, that invested in our companies across the way, and so Anzoo is one that's in a company of ours, two of them maybe Quantum, which was traditionally a more of a institutional energy investor into projects, has moved into this and they've been a good partner and investor and a number of others along the way that have come in to invest in these.

Speaker 4: 54:52

Yeah, that's kind of interesting. And we have some crossovers like Wellington or EIP as well, that invest many others.

Speaker 3: 55:02

Yeah, got it. Okay, interesting, yeah, that is-.

Speaker 4: 55:05

We have Sequoia in one of our deals and they traditionally would never be in one of our yeah, okay, yeah, it makes sense.

Speaker 3: 55:14

I think it. I guess, collins, I fear is a little bit, because it takes time to raise a fund. But if it's a corporate venture that's going to corporate venture firm that's going to be going in, it's a little bit easier for them to raise not necessarily easy, but they can invest off the balance. You can do a couple of things. But yeah, I appreciate that. Soma, I think you had some other things too. Did you want to go on too?

Speaker 4: 55:35

Yeah, I'd say the only thing to be cognizant of corporate venture is that it's generally more trend-based, so they may or may not be around for your next round, and so that's important to understand. That corporate usually has at least traditionally has had a wave of there is a bunch of them and then there's a lot less. We haven't seen that this time. We've seen more staying power, which is how a corporate venture fund actually has success, because if they just come and go away, then the likelihood is low.

Speaker 4: 56:06

Other folks who we've had invest so Toyota is a corporate, toshiba, and then TDK, national Grid and I so they have all corporates that have Evergy, fifth Wall kind of a, and then crossovers some I mentioned, but just looking Bullpen, alexa, munich, re, so I could keep going, but a lot of also crossover and new funds that have come up into the space.

Speaker 2: 56:44

Yeah, we're getting sort of to the end of the show and we'd love to end with the last question that we always ask. I think this is really special for this episode, especially given that you talked about pattern recognition with entrepreneurs. Generally speaking, what are your top three pieces of advice to entrepreneurs who are looking to seek venture funding and be successful in these industries?

Speaker 4: 57:08

Yeah, I think the number one is know your market landscape. So everyone wants to tell us about their widget, but most of the folks they know why they're better than the status quo, but they don't know why they're better than the status quo three or five years from now. And so if I am a new battery innovation, there's a lot of innovation happening there. So if I look at the curves, how am I better than the future? How am I not better than today? The next is, if you think about building your team, you have to think of your team more like a sports team, where you're adding the right players at the right positions as you need them, and if they don't fit, then they don't fit, going forward at some point as well and just thinking methodically about that, and you're producing a lot of value for the folks. So if you're doing it the right way and you're giving options and paying folks, everyone wins from a successful outcome. So, making sure that you're taking that mindset and not getting stuck. And I think the last is there is this view that if people tell you no, you just need to persevere, and so I see a lot of people spending five years of their life on an innovation that's just not gonna make it in the market. And so what you actually need to do is hear the no's and hear why, and evolve whatever you're doing based on the why. That could be that you need to add a new technology, that could be that you need to shift your product that you're focused on, but whatever it is, understand the why. And if you understand the why, your likelihood of making it through from a no to a yes for you personally is increased significantly.

Speaker 4: 58:58

Because typically, when entrepreneurs are telling us something that isn't going to be a winner, they're not lying to us, they're lying to themselves.

Speaker 4: 59:09

So an entrepreneur will come in and say this is how my product works and it does this and this, and we're like that's not gonna work, like here's the three things that are wrong, and they don't listen.

Speaker 4: 59:18

They just go back out with the three things that are wrong again, and it's cause they truly believe it.

Speaker 4: 59:24

And so if they'd listen on what we think and not just us we're not the smartest people, but we're one opinion but if they listen to a lot of people's opinions, they should start getting a pattern of what is they need to evolve to, and if they do that, the likelihood of success goes up, and that happens even if they do have a successful starting point, because this is a journey being an entrepreneur, it's not a race from point A to point B and so you continually need to evolve, and that is a key knowledge, because if we look at 1500 startups a year and invest in less than 1% of them, there is a lot of folks that we're saying no to, and to me, it's a lot of shattered dreams that I feel bad about, but I'm really hopeful that the feedback we give them can help them become one of our 1% or less, or somebody else's, and so if they can do that, their likelihood of success goes up.

Speaker 4: 1:00:19

Assuming they need venture funding If they can do it without it, that's great too, but that listening and learning is key.

Speaker 3: 1:00:27

I think that's interesting. I think I would just put a pin on that one to say for other venture capitalist listening to make sure you are offering the advice, because maybe if you have a heart, you feel bad about saying no to people, but if you want them to improve, you should give that feedback, because I think that a lot of people, from what I've heard, they're frustrated by just pounding the wall and not getting any answers. It's just a shut door and it seems like everybody's out back having a barbecue. So if they could get a few more pointers as to what they're doing wrong, that would be helpful, and I think that's probably why we do the show. But that's really. I think it's really good.

Speaker 4: 1:01:04

I find that folks don't ask we give it because I was an entrepreneur before and we have that mindset in our team to give feedback to folks and we come from a background of how we were funded which was about delivering impact and local impact, and so that has always put a mindset in us to help folks achieve success. But folks don't ask often and they don't follow up often too. So I will meet people in an event and I'll say, oh, that's kind of interesting. Send me a note. I actually was just I won't name the event, but it was added in the event and I met with 30 entrepreneurs probably, and like 10 of them I said, oh, follow up with me, because this could be interesting, I might learn more. I think three of the 10 followed up and so that's pretty poor, but gives an out, gives a view on that. I did wonder if I was saying something wrong.

Speaker 3: 1:02:05

Is it you or is it me? Maybe you should have to be like yeah, no, no, that is interesting. I think it's sometimes the mundane things right, the things that aren't. It's not new science or anything right, but following up and sales and things like that, you know something. Those things are the most important to actually getting you towards your journey, whether or not it's this company or another or another version of what you're working on.

Speaker 4: 1:02:27

Yeah, or selling your product to your customer.

Speaker 3: 1:02:30

Yeah, yeah, exactly yeah, because if you can have that perseverance with a VC, you probably know how to utilize that in the customer process too. But very good, well, I think let's close things here. I guess, just finally, you know what stage should people be at, like what is kind of the bare minimum requirement they should have in order to reach out for, if they're looking specifically for funding or maybe advice like what do you want to leave the audience with the call to action?

Speaker 4: 1:02:56

So we're early investors and interested in anything If it's a cool technology. We have some that we're co-founding with folks, and then we have some that are pretty evolved, that have had some success, and so any stage at the earlier stage in the climate, clean tech, energy, tech, spaces is of interest to us and we, like I said, we hear a lot of pitches and you'll meet us at a lot of events as well, and everyone on our team is really strong and has a diverse set of backgrounds, but really knows what they're doing. We have a really high caliber team. So I'm not the only one to talk to and I might not be the best person to talk to on a number of things. So, reaching out to Sarah Judy, Henry Emmett, they're all great folks and can deliver a lot of value to the folks that are looking to raise capital or just get feedback.

Speaker 3: 1:03:55

Okay, awesome, very good. Well, we'll definitely send people your way and we really appreciate you. Appreciate you coming on, it's been a pleasure.

Speaker 4: 1:04:01

Yeah, nice talking with you. Thanks for the time and the interest in talking with us. Look forward to future conversations. 100% Da daлич.