Reflecting on H1 2023 CT Funding & Discussing Transferable Tax Credits Along with the Opportunities they Present (Somil & Silas)

In this episode, Silas Mahner (@silasmahner) and Somil Aggarwal (@Somil_Agg) have a discussion about two things.

First, their thoughts and reaction to the H1, 2023 Funding Report by CTVC

Second, a conversation around the transferable tax credits created by the IRA and what areas we think are the biggest areas for growth or opportunity because of those.

Hope you enjoy this episode! 🌎

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Links:
**Connect with Silas: https://www.linkedin.com/in/silasmahner/
**Connect with Somil: https://www.linkedin.com/in/somil-aggarwal/
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**HMU on Twitter: @silasmahner

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Other episodes you might enjoy:
**Most Recent Episode: Incubating Climate Risk / Insurance Solutions as Traditional Insurers Pull Back w/ Stephen Brittain (Insurtech Gateway)
**Similar Topic: Hard Truths About VC, Raising Advice, & Small Fund Limitations w/ Susan Su (Toba Capital)
**Something Totally Different: How Microfinance Helps Unbanked & The Climate Vulnerable w/ Celyn & Kristen (ShareChange)

Chapters

• 0:00 Climate Tech Funding Challenges in 2023
• 7:52 Challenges and Insights in Climate Tech
• 13:52 Raising Venture Capital for Hardware Companies
• 23:57 Opportunities and Challenges in Climate Financing
• 32:10 Potential Growth in Electric Vehicles
• 39:40 Funding and Economic Opportunities Concerns
• 43:30 Challenges and Benefits of Economic Development and Climate Tech

Transcript

Somil Aggarwal: 0:00

There was a report that was put out by Pitchbook which said that corporate VCs had the highest amount of participation that they ever had in 2022. Again, 2023 is a different year. I don't think those numbers have come out yet but especially if you look at Climate Tech corporate VC, it actually doubled from 2021 to 2022.

Silas Mahner: 0:20

Hello and 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, Somil and I had another great conversation. This one is a bit more focused than our last fan boy session over Planetary Capital's announcement, and our two big topics today are, first of all, reviewing CTVC's H1 of 2023 year funding report and offering a few thoughts on that, and then, secondly, we have a discussion around the transferable tax credits offered through the IRA bill. In particular, we are discussing which areas we think could stand to benefit the most in the short term from those transferable tax credits. So a little bit of a discussion around those two points. After you listen, join the discussion with us on Twitter or LinkedIn and let us know your thoughts. We're always keen to engage and continue to challenge each other on what we think the future of climate tech is. Enjoy the episode. All right, mate, welcome back. How's it going?

Somil Aggarwal: 1:19

It's going well. How are you?

Silas Mahner: 1:22

I can't complain, man. It's a beautiful day in New York, is it the same upstate?

Somil Aggarwal: 1:27

It's beautiful here, it's the air quality, for I don't know if the air quality is better or worse right now. It's a gambling act. I got to check.

Silas Mahner: 1:34

It changes every day. It's crazy, honestly, but I know that the humidity came down the last few days and it felt good. I went to an event this week and I wore a suit jacket and I wasn't sweating to death on the way home, so that was a good sign. It was nice that it's cooling down a bit.

Somil Aggarwal: 1:50

That's a good week.

Silas Mahner: 1:52

It is a good week. It's a win. It's a win. It's a win when you can be fashionable even in the heat, right, yeah, all right, man. Well, what are we going to talk about today? Let's have you kick things off.

Somil Aggarwal: 2:02

Well, it's July, it's the second half of the year. So for climate it was a pretty, pretty interesting first half. For investment as a whole, you know, looking at it from the perspective of being an investor, the first half of the year definitely followed the negative market sentiment there was, not only especially in the early stage but more importantly in the later stage of investing you saw a pretty dramatic drop off. I had a great time reading the CTVC report on the state of climate tech within the first year, and so there's a couple of things on there that I think are definitely worth noting. Late stage capital, of course, like I talked about. So late state capital, again, the capital that you see at, like series B, cd, and I think they even made a distinction that this is more like the series, you know, CD growth stage capital had a massive drop off and a bigger drop off than early stage capital.

Somil Aggarwal: 2:59

So early stage capital actually. So seed funding, again, the funding that you see at. Mostly, you know, very famous accelerators are at the pre seed level, sort of tech stars, era, things like that. These are necessary climate accelerators, but again, these are sort of yet the money seeding the ideas and helping you find product market fit. So one of the things that I was really intrigued by was that early stage funding actually grew, while growth stage funding dropped dramatically.

Somil Aggarwal: 3:29

And one of the things that is interesting that you see with early stage funding is you'll oftentimes be driven by a lot of angels, a lot of people who have industry expertise or operating expertise, and so one of the things that I think is likely contributing to a drop in growth stage capital but increase in early stage capital is, while people are worried about negative market sentiment, if you invest early in a company and it pays off, you'll still have return if that company goes and achieve sizable progress.

Somil Aggarwal: 4:00

But you're not going to see that same return if you're investing at the growth stage and you need them to execute at a very high level, right. So that's what I think is really key here is that people are. You know, the market sentiment is really really hitting climate tech hard, and I think that it could be because climate tech doesn't have a very certain future. I mean, there's massive government influxes that are sort of changing the landscape of what's going on, and it continues to evolve. You know, the tax credibility is something that's going to be really interesting to look at, but at the end of the day, I don't think people are very sure about where the winners are going to be, and that's why growth stage funding has ended. But what do you did?

Silas Mahner: 4:40

you have that report.

Silas Mahner: 4:42

Hey there, quick break to remind any founders or VCs listening. If you were 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 mean, I think the the topic of the idea of how the companies are having a hard time raising the later stage. It makes a bit of sense to me when you talk about. You know, if you're very early, you can get a lower exit and still receive a decent return. I'm I'm just kind of curious if there's a little bit of hesitation generally because companies don't know what it's like for a hardware company to go through that process. Yet I think there's a lot of people who invest, who at least were investing. Maybe they're changing their mind now, but they were investing originally in climate tech, kind of under the same idea of regular tech, not realizing like, okay, actually some of these things are harder right In.

Silas Mahner: 5:54

I think the biggest distinction that I've always noticed is that in regular tech it's about finding product market fit and then getting traction right. In climate tech, usually it's just science right. You have to have good science, especially if it's a hardware company. If it's a software company, you just have to be able to make sure that you have good execution right. As long as your product can solve the known problem right, the problem is already there.

Silas Mahner: 6:17

Usually it's not that hard to identify. You know what the issue is. It's just a matter of getting to the market. I think that's a big concern and I think a lot of people just don't know how to do that. Yet there's not a lot of you know Silicon Valley the regular tech investing has been around for years, years, years and years and they have all these guides. There's a lot of people who really have great insights. But in climate tech it's a bit of a different landscape and I believe a lot of people were assuming it was going to be the same right. So they kind of went with those old, those old mentalities and they realized like halfway into this, like okay, this is actually a little bit different, right.

Somil Aggarwal: 6:52

And I think for climate tech it's. Some of it's a mystery, but there are a couple of things that are very obvious about, and I think this comes with a hardware component. So climate has longer sales cycles, and so what that means for product market fit as a whole this is. I remember reading an article in Green Biz that talked about product market fit in climate, and what does that mean? Right, because this affects how you think about the scalability of a company. So climate tech has slightly larger sales cycles and, of course, like we mentioned, it's typically more capital intensive, right? The thing that makes that difficult is that, of course, in terms of returns on your cap table, in terms of how much you're burning and what your profitability is, what your margin is, that definitely takes a hit. So the business itself is just less profitable than your typical high-margin SaaS company A lot of investors. If you're trying to weigh the two, if you're not a climate tech-only fund, if you are a generalist fund, that is definitely a bit of a hesitation.

Somil Aggarwal: 7:52

One of the things that does benefit climate, though, is policy, and policy.

Somil Aggarwal: 7:57

I think there's a couple things that are definitely worth talking about that have happened recently.

Somil Aggarwal: 8:02

Policy is something where you can see a large amount of subsidies or a large amount of tax credits, for example, sustaining your business, but then that changes you to have somewhat of a B to G component. And if not a B to G component, you definitely have to build out the expertise on your team that knows how to navigate those policies and credits, which again takes you outside of the traditional SaaS building company. So this traditional expertise is just having a really hard time, and I'm not saying it's impossible, I'm not saying this is something that won't be solved. But I think those are also some obvious barriers where, if people have to really figure out what to do the next stage, there just might not be a lot of people that know that yet. And it's almost similar to how can there be an expert in tax transferability, for example? That's something I want to talk about today when that just came out, right, when that just happened. So this is maybe just some of the symptoms of this being a truly hot button in very dynamic industry.

Silas Mahner: 8:58

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. Yeah, I think there's a little bit of. I mean, people really rushed into this space because you had so many people setting up funds and starting companies because they're like, oh my gosh, now we realize climate isn't just for the tree huggers or whatever. It's not just for the people who want to do nothing to try to bring us back to a different kind of lifestyle. It's actually an investment opportunity. So you had a lot of people flooding in with little information or not really understanding it, and credit to the people who did move into it. Obviously, it's very helpful to have more money in this space, but I think a lot of people came in with their ideas of what it was before without understanding that.

Silas Mahner: 9:57

Hey, this is a little bit of a different landscape, and I think you talked about the issue on hardware versus software. From what I've seen, there was a lot of companies who, even though they were building like a hardware solution or maybe a light hardware solution with, like an IoT device, they raised and spent like software companies. They thought, okay, we need to raise this much because this is how it usually works and well, that'll give us enough run rate to this time, and we have compounding issues with the economy taking a dump right. That did not help at all because a lot of people were tightening up on their budgets and then it's just very difficult to sell this new technologies, new ideas. It's not like a regular software sale. People know, oh okay, well, this just benefits our team or whatnot. They have to like decide that they're going to change processes.

Silas Mahner: 10:46

In a lot of cases, I think that the adoption phase from the client perspective is also taking a lot longer than expected and I think, when it comes to hardware, a lot of companies substantially underestimated including the VCs, by the way substantially underestimated how long it would take to figure out the hardware. The R&D process is not short by any means. When it comes to hardware, usually it takes a lot longer than expected and I think that's one of the issues I also this might be a topic for another time, but I believe we still are yet to see more nuanced or targeted, specific types of funding that are not venture, not equity raising, to help these companies go through those gaps, and I think that that's probably another topic. But that's one thing that I've noticed, and I also think that part of the reason why it's taking so long is the go to market strategy is usually a little bit off right.

Silas Mahner: 11:45

Something I've seen with a few people on the show is they've had an idea. They were outsiders right, they were outsiders who wanted to make a difference and wanted to make a positive impact on the climate. But they came in and they had no idea how the conventional industry they were targeting actually worked. So they would target the wrong people, right, they would target the wrong customers and they'd run into brick walls and that could be an entire six month delay, right, because these sales cycles first of all take a long time, and once they get to the end of the sales cycle and it's still that whole six months or whatever then they realize, oh my gosh, we have the wrong target audience, right. Then they have to readjust and by that time you're already six months into what's usually like an 18 month, you know, window to get to your next raise. So it's just taking substantially longer. And then it's causing a lot of stress on the founders, right, because they're like, they're stressed out. They can't necessarily afford to hire other people they're you know. There are just so many uncertainties. So this is maybe a decent point.

Silas Mahner: 12:46

I want to bring up something that I wrote about recently, which is the role of conventional professionals or people coming from the conventional industries building climate tech companies.

Silas Mahner: 12:57

There's a lot of companies grid grid wear, in particular, is one that I highlighted, I think, in that post where somebody understood how the industry works. Right, every industry has a little bit of different nuance to it and how they do business, and you, the people who come from those spaces, have an extra advantage when building a climate tech company there, because they understand who the players, how do they want to do business, and they, they know the landscape right. So it's like navigating with a map versus completely going blind, right? So I think that that's something I want to encourage other people is that if you're putting together, if you're a science person, you're putting together a founding team. You should really really consider finding some type of partner, whether it's a co-founder or one of your VCs or something. Finding somebody who knows the map right. They know the landscape, so they can help guide you, because you're going to make a lot of mistakes otherwise.

Somil Aggarwal: 13:52

How? How do you think hardware companies are spending like software companies? You mentioned that. I find that interesting because For software companies obviously there's agile development right. So even if you are I mean one of the things that software enabled is past fast pivots right, and that's different than an R&D and or a hardware venture, which is you're able, if you know, if you have the right team in the right sales engine, you are able to sort of pivot and adapt to whatever you're trying to change. Of course, when it comes to deep tech and hardware investments, it's a little harder, is a little more capital intensive, but I would actually think that for that reason you might want to spend more aggressively to be able to build deep tech fast enough To take advantage of a market opportunity. What did you mean by?

Silas Mahner: 14:32

so I should clarify. What I meant Is they're raising like software companies, right? They're raising, expecting to spend less than they actually have to. That's what I meant to say about that.

Somil Aggarwal: 14:41

Got it, got it. That makes sense. And I think, on top of that, when you know, you mentioned and I think that comes comes back to the point about, like, venture, venture scale right, whether a company should be taking venture dollars or not, that's one of the biggest things that we talk about or we look at, which is does this company actually need Venture scale dollars? Because, as an early-stage company, right, like with my firm or any other firm, if you're going to come in at a certain point in time, you need to be able to see a, a decent size exit in order to actually make return on your dollars. Right, and and that is you know, you know there's some models that take lead and that's a you know again, you're getting more ownership. I can't even imagine if you're following on. You Just need a different level of success in order to return on your money. As the question becomes is it even worth for these companies to raise venture scale? Or should they go for other types of financing, traditional loans, seeking out different partners?

Silas Mahner: 15:39

Sorry, just real quickly. I think that's a super important point because if you raise VC Too much and too early you are screwed. You have no more room to raise VC later on when it matters. Some of the companies that I've noticed that have had huge raises and were able to like go to that scale where they Could get private equity involved to really like fund them at the late stages were companies that took 10, 11, 12 years to really get things perfected right hardware companies I'm talking about. One of those that comes to mind is divert the food waste to energy business. Those companies take a long, long time to get it right Before they can really go and raise and in the meantime they do things on a shoestring budget. They barely get through. They have corporates fund their their kind of pilot projects and things like that. So I think it's a super, super important for founder to consider Should you actually raise VC at the beginning or can you find other ways and other like grants and stuff like that to get going?

Somil Aggarwal: 16:38

Well, the VC has one, Just one. I shouldn't I shouldn't diminish the entire industry to just one benefit, but there are some different flavors of VC, if I can use that word, that can make a difference, and this is something that I believe was brought up in the same ZTBC article. If not, it's something that I definitely have been reading about on the side which is corporate VC, and this is just sort of that blend of Strategics in traditional climate investing right, and I think, one of the things that's important about corporate VC. There was a report that was put out by pitchbook which said that corporate VCs had the highest amount of participation that they ever had in 2022. Again, 2023 is a different year. I don't think those numbers have come out yet, but, especially if you look at climate tech corporate VC, it actually doubled from 2021 to 2022.

Somil Aggarwal: 17:28

The rationale is pretty clear A lot of companies are trying to fund solutions that they can eventually acquire or use that will help them adapt to their Decarbonization and climate strategies.

Somil Aggarwal: 17:39

I think it does demonstrate this idea that, hey, you know your traditional incumbent is not going to be able to pivot and adapt to climate fast enough, so let's go find the people out there that we trust to build our Solutions and then will either be a purchaser or an acquirer.

Somil Aggarwal: 17:56

You know, if you think about sales cycle, that's really we always talk about anchor clients or anchor customers I can really change the face of a startup, right. And so I wonder if founders, if they, you know, if they have the Network and the net and the relationships, people to leverage, I wonder if that should be something that's explored further. If not you know, I was speaking at a high level, institutionalized Maybe there should be some sort of PPP with that that comes in and sort of sets us up at a whole level, given how much interaction there is between corporates and governments and innovators and founders. Right, of course, not something that you know will happen tomorrow, but I'm wondering if that would, given the growth of corporate VC and given the importance of strategic, I'm wondering if that's something people should be thinking about.

Silas Mahner: 18:39

I do think, as a man people should be thinking about. I think that corporates, if I'm not mistaken, usually want to come in later. They don't they don't app often come in as early unless they're doing like a more of a venture studio setup. I know there's some, some big companies that do that it doesn't make me think of. We just recently had on Telstra somebody from Telstra and that was a corporate VC arm of Telstra and they eventually moved off to be independent. But they still work with Telstra and it's a huge purchaser, right. So by them getting in they can automatically get traction and get sales and that can also help the Kind of ironing out the bumps of the technology and the nuance around delivery or customer service or retention and things of that nature, because they have a vested interest. Their customer has a vested interest in their success in some way. So I do think it's something people should consider. I know there can be strings attached that people don't like with corporate VCs in some cases, but I do think that we need to step back and think like is this about me succeeding by myself or Making sure that I succeed in general, because we this is not just. It can't be like an ego thing, right, let's. We have to make these solutions work if we're going to actually solve the problems.

Silas Mahner: 19:52

One other thing that made me that I thought of is the, the strategic investors, especially if they're large. They usually have a regulatory team that understands regulations for their own from themselves, but also from like the new laws coming out, and you can possibly lean on them to understand how you can get value out of that. Like if, as a it has a startup founder, there's a startup, you're not gonna necessarily pay somebody you know 150 grand a year to just like track policy, right, you can't. You can't exactly afford to do that. So you can find partners.

Silas Mahner: 20:25

That's one thing that just came to mind. I'm not sure how relevant that is. 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 hyphen wave partners calm, or reach out to one of their consultants directly via their LinkedIn page.

Somil Aggarwal: 20:51

No, I think it's very relevant. I mean, if you have one of the things you're doing when you're taking investment dollars is sometimes you're adding a board seat You're sometimes at, it could lead to an influx of talent that that venture fund provides. Part of that is especially. I'm a teacher, tg. Who are you bringing in, or what are you bringing in that gives you greater industry knowledge and reach that you didn't have before? So I think it's a very valid point.

Somil Aggarwal: 21:15

I think, to a degree, like you mentioned, I think the only string to balance here and I think this is, you know, good, good, good to ask founders and good to figure out how they navigate this. For those who have gone strategic dollars, well, how do you think about the your product market fit when it comes to this intersecting between policy and corporate? Right, the policy exists, the corporate has their answers to how they can exist within the policy, but how does that affect you as a startup? Are you building sort of a single point solution that will essentially just work for the company? Because of that case, you've, in that case, you've limited your potential for growth. Right and inherently, you might not realize that there could be a stopping point. But on the other hand, if there is some sort of Outcome where you're both able to build a product that's meant to scale and also fulfills your clients needs or your corporate Strategics needs. I think that's a consideration that people need to be thinking about again, each industry. I think this really heavily depends, like you said, on the regulation and what both the corporate is telling you and what the policy is Mandating that you do. So I don't know if there's, you know, a lot of substance for each industry to have this answer yet, but I do think you know you're seeing this from electric vehicles.

Somil Aggarwal: 22:27

Right, governments are coming in and sponsoring Hawaii, for example. Hawaii just became the first state in the United States to sponsor federally funded EV Chargers, right, in a good or a bad way. Honestly, this there's a lot of Companies that I've seen, that I've spoken to Were. Even though this is really good, this eliminates some of their business model. This is a real existential threat to how they planned on operating their EV chargers and sort of this. You know, private to consumer model. So I think you know this. Is it as many resources as you can get to navigate the evolving landscape? You do, but the only thing that I would say to keep in mind is how does that support and how do those restrictions Limit your potential for growth?

Silas Mahner: 23:12

Yeah, no, that makes sense. One other thing I want to bring up before I move on from the first half report here is there's a couple. The thing that you talked about was that early stage funding increased overall just slightly. I think it was not a whole lot, but the total number of early stage checks written was a lot more. I don't remember the exact numbers, but to me that was a bit encouraging because overall, even though it barely increased in terms of total size of funding, the massive number a lot more checks were written, which means that I think companies are being more conservative with how they spend money, but also more companies are getting funded. So at least demonstrates that there's a continue flow of the early stage companies. Yes, will they get to the growth stage? I don't know. Maybe they get acquired early or something else happens.

Silas Mahner: 24:02

But I was just very encouraged by that that there's still more checks being written, which hopefully means that there will be different solutions, because from what I saw the past couple of years was usually there was the companies that didn't know exactly what they were doing, so they would just pile into the same theme as some of the leading investors.

Silas Mahner: 24:25

They would all invest in ESG, data tracking solutions or carbon market solutions, and then there's all these. There's a plethora of them and then, as a result, you have a lot of wasted dollars because there can only be so many winners. So I hope that it kind of evens out. And then one thing I'd be curious to hear if you have any thoughts on is the report mentioned that there was a lot of new investors because there was not as many repeat investors. So to me that made me think okay, there's still new people entering and usually the funds are testing out if they can work together well and then eventually they can raise more money and continue doing follow on investment. But the other thing was, if a lot of the companies are not being repeat investors I think there was not that many that invested in more than four deals that means there's probably still a lot of dry powder that can kind of feed these companies if they run into issues. So I don't know if you had any thoughts on those last two points.

Somil Aggarwal: 25:22

Those are great points, I would say. To break that down, I definitely think it reflects just sort of what we see on from a social media point of view. From a society point of view, there's a lot of interest, but not necessarily a lot of experts. So you have a lot of people that are now willing to come in at the early stage, whether it's investing as an LP in an early stage fund, be an angel, be part of a syndicate. Most and a lot of people within my own network happen to be on the earlier side and I think it's because they had, they were inspired by this idea that, okay, I can step in at the angel stage, I can step in as a syndicate and basically fund and put my dollars into this company that's getting off the ground, getting early, and I think that's a representation of, hey, I have this capital. Maybe I'm a VC for a long time, maybe I'm founder for a long time. I have this dry powder. Let me get in. I'm interested. I feel like this has grabbed my attention Again. What that means from a lack of growth stage capital is that there's not enough experts or not enough understanding of how to scale that. So maybe one of the takeaways and I shouldn't say this is a maybe, but I think there's just I don't know if there's an answer to it yet is, if you're investing in a company, try to take into account, if you think the founder has the understanding of how to get past, you know, the series A, and if they don't, what are the ways in which you could get past the series A? Because one of the things that a lot of VCs do is bring in talent. Right, and I don't have the numbers on hand. It's something worth looking into is the number of CEOs, or the percentage of CEOs that change from an early stage to a growth stage. And it's just because there's different profiles of people. Of course, there are founders who can take it all the way through, but sometimes just a different profile of person that's required at that later stage. So it's assessing for yourself, especially in climate, being such a new industry, do you think you have within your network, or the network of the people you're co-investing in, the ability to bring in the right person to lead this company past the growth stage?

Somil Aggarwal: 27:14

Right, yeah, and so one of the new updates that's really important is tax credits. I mean, it's important enough that all in talked about it, I think not too long ago. We were talking about that beforehand there's new tax credit transferability. So, at a high level for the people listening, tax credit transferability means that there's this ability for the person who's able to get the tax credits to now sell them to third party people for cash. Essentially it's sort of a compensation transaction.

Somil Aggarwal: 27:47

The big thing that supports this bill we're advocating for is that this now makes in theory and this could have been seen in practice, but in theory democratizes the ability for investors not necessarily investors, corporates, any buyers to come in and buy tax credits that they weren't able to do. So it sort of expands the pool of people that are able to participate in this ecosystem and of course, that's very exciting. I mean, you think about what e-commerce did. It's a very loose analogy, but when you bring more people into an ecosystem, not only you building that ecosystem, but then you build an audience on top of which you can do a lot more. Like again, marketplace is our example, social media is another example. Once you build that network, you can do a lot on top of it, and so one of the things that there is an article put out by Illuminate Financial that I was reading and I really resonate with these three. They mentioned four and I think three of them for me really stood out.

Somil Aggarwal: 28:48

Three main areas for opportunity. So the one is increasing market access. How do you get, how do you enter the game of being able to access these credits and one of the marketplaces, one of the platforms, one of the financial services or financial apps, fintech platforms they're going to sell these tax credits and enable the transactions in the first place, right Again, now that this is new, there is the struggle to get this to every person in the world. But again, you saw the growth of other FinTech platforms, starting all the way with PayPal very long ago. Developers demand for people to get access to new types of financial services right. The second is assisting these developers. So the tax credit transferability starts with developers who are able to actually get the tax credits in the first place. So it's people helping the developers being able to handle the administration of these credits and then transferring them out. So essentially I mean, for lack of better terms, it's sort of like a project management solution, but there is white space for that to be important. And again, the last thing is this is a new type of financing.

Somil Aggarwal: 29:51

I think, as even with affordable housing, we've seen a number of deals where there's a lot of emphasis around improving the underwriting and the ways that the financing and loans are performed and understood. There's definitely more of a need now to adapt to that sustainable financing. But those are my thoughts. I think these three are very important. If I had to take an, if I had to index in one obviously I think I'm more of an enthusiast marketplace models. I think there's a lot of ways to understand your marketplace and energize it and, of course, the ability to build sort of this network of people that you're selling this credit to and potentially could be an audience for your platform. I think that's obviously going to unlock new and great potential. But do you and I'm going to put you on the spot here Do you have a favorite that you really would angle towards?

Silas Mahner: 30:36

Yeah, I have some thoughts on it. One thing I just wanted to also reinforce, though, is that the reason I think this is so important is because you have these huge corporates like Amazon and Walmart and Apple, who have made big commitments and have a lot of cash right. They've been made big commitments and at zero they are going to be willing to pay to get those tax credits, and they don't want to be become a developer of projects. You saw before there's a lot of companies with the old tax credits for renewables that were like spinning up renewables like arms. They were like having SPVs that they were involved in so they could access these right. Now they can put the experts and let the experts do their job, and they can just receive the benefit from it. So I think it's really, really important what this bill is doing and just to kind of again get that visual of the corporate money pouring into these other projects in a new way of financing these projects, essentially without having to be involved in the SPV directly.

Silas Mahner: 31:34

But in terms of which areas I'm optimistic, for there's a lot of areas in the bill that were kind of highlighted for the tax credits. The obvious one is clearly going to be renewables right. Renewables will massively benefit from this, the most probably because it's already a relatively well-established vertical. People know how it works, there's a lot of players in it, so that one's going to have a massive boom, which is obviously important because it's essentially the fundamental layer to a clean future is having clean energy right. So that's one. I don't want to talk about them too much because I think it's kind of boring. The area I'm probably the most optimistic for quick growth in is going to be around the commercial electric vehicles, right, or just electric vehicles in general, because now people who own these electric vehicles can get some access to these credits. So companies who do shipping or something like that, stuff like that, with commercial vehicles, even just corporate vehicles that are bought and now are EVs, it's going to really funnel money into those companies and continue to blow up. I think the space is also developed enough that it's most likely posed poised to have the most growth because there's more infrastructure not quite the same as the renewable space, but there's a lot of companies in the space. There's a lot of companies already doing kind of turning these retrofitting, these other vehicles into electric vehicles. So I think that's probably my biggest area for optimism, and in conjunction with that, would be the charging of these vehicles, that the charging model, ev charging model.

Silas Mahner: 33:23

Despite everybody being like super fascinated by it for the past two, two and a half years and saying, oh, it's going to be huge, not a lot of these projects were actually fundable or developable because they didn't have a financial model that could make them work, because there was just simply not going to be enough demand and not enough people using the chargers to actually fund it. So the gas station owners and stuff like that they didn't want to put money in towards it. And then the usual kind of people who would have funded these, people who fund CNI, solar initiatives and storage initiatives. They weren't willing to do it either because they couldn't guarantee the returns from it. But now these people can get benefits from the tax credits. So I think there's a bigger incentive which will really help.

Silas Mahner: 34:07

It's like a chicken and egg situation. Once you also have the chargers, more people will say you know what that range anxiety is really just a myth at this point, like I'm going to go buy myself an EV. The other thing I don't know how impactful this is. This might just be like over optimistic, overly optimistic, but I do believe that because a lot of these commercial truck drivers who are now going to be driving electric trucks instead, they're going to see and they're going to like actually appreciate how these EVs are way better the low maintenance, just like the ease of using them. I really believe it's going to be a point where it's going to influx a lot of the blue collar workers to be like, wow, maybe I should get an EV, like for myself personally, and I don't know if I'm just being like too optimistic about that, but that's something I do think will happen.

Somil Aggarwal: 35:02

I think there's. I might not fully believe that. I think sometimes people can compartmentalize one thing into another. So even if they see more EV, commercial vehicles on the roads, they might have their own resistance for being able to buy an EV, whether it's, you know, whether it's your sort of affinity for a gas car or some other reason that you might not want to. I do think it increases the awareness of electric vehicles and you know, I think every time you see a Rivian, every time I see a Rivian a parking lot, I am reminded that there's real, real developments. It's changing.

Somil Aggarwal: 35:36

The EV space is changing and as much as I agree that I think electric vehicles definitely have this potential, especially with all these different credits, and one of the things that I found interesting that I think I would, I think it's worth looking at is commercial clean vehicles were actually the one part of this plan that wasn't allowed to be transferable. So what that means is a business who buys a commercial car, a commercial clean vehicle, so commercial EV essentially cannot trade those tax credits. And I've been thinking about it and I don't fully understand why there was restriction in that. If I had to assume, I think it could be a geographical play, right. You might not want all of this to be concentrated in California, right? And then this being sold out to a place in on the East Coast, because one of the things that's actually really interesting about the way emissions is spread across the United States is that the coasts are. Transportation is the vast polluter across the coast, and this is something I would love to talk about later. Perhaps another episode is that transportation is actually getting quite a bit of attention in terms of climate deals, and then it's obvious why transportation happens to be the largest polluter for most of the population, because if it's on the coast, you have most of the population.

Somil Aggarwal: 37:00

But I still think that there's room for people to really, really see and see there's room for a really successful solution. And the reason I say that is because, like I said before, with new legislation that's coming out, a lot of business models that EVs were based on will continue to be both. Some will be validated and supercharged and some will be completely eradicated. So I personally think that the friction to getting to large adoption is that and I could justify the play of these texts could it's not being transferable from buying electric vehicles, cause maybe there's that recognition that right now. We don't want to have the electric vehicle marketplace be as volatile, because there's a lot of innovation that's built upon maybe direct buying for electric vehicles and maybe this transferability would eliminate and create a strong chokehold on a lot of electrical vehicle buyers. I'm not too sure, but I have wondered why that exempt status exists.

Silas Mahner: 38:03

I don't know. I think perhaps you can maybe argue both ways on this. But perhaps the smaller companies that maybe have a fleet of 10 or 15 vehicles or something, maybe I don't know, I don't know what your thought is Do you think it's more incentivizing for them to be able to sell the tax credits? If they could sell the tax credits, maybe Just for them to use them themselves? Because I'm wondering, like, how much benefit does it actually create for them individually If you've got like 15 vehicles and you eventually transfer them all over to EVs? I don't know.

Silas Mahner: 38:38

It'd be a question to ask somebody who knows a little bit more about the space. Perhaps.

Somil Aggarwal: 38:42

Yeah, I definitely agree with that. I think there could be what's the silver lining between how many times you can buy a commercial vehicle. Are there people who are buying these vehicles and sort of distributing them out and sort of getting tax credits and returning? I think this is a legitimate question. I don't think we'll talk about it this time, but there's a legitimate question about the uncapped nature of these tax credits. At what point are you creating a rinse and repeat model for someone to just farm this revenue right, farm these credits essentially as their version of revenue, and maybe they're trying to, as, like I mentioned, you probably want this to be focused on the coast, so I don't know if they're trying to limit the transferability of this out of where the problem actually exists.

Silas Mahner: 39:22

Yeah, I'm not entirely certain, I think, on the point around the total value of the tax credits, because people estimate it right. Since it's uncapped, you can't actually say how much the bill will cost, will end up costing the taxpayers. I don't think I'm qualified enough to talk about it. But just to maybe get people thinking about it is that there has to be a certain amount of revenue generated from all of this activity in order to pay for the bill. Right, like if it ends up being like 1.7 trillion, like a lot of people are estimating which, if I'm not mistaken, is substantially higher than what they talked about when they passed the bill, which I think was like something like 350 billion. I gotta double check that number, but it's substantially more right than they talked about. So, from a perspective of getting our country moving forward into a new kind of era, if you will, I think it's great, but I'm just concerned slightly about how we actually gonna end up paying for this. Hopefully, my thought process would be this has to be such an expansive change in the way we live that it will actually make the US like a bit of a leader in terms of being a clean country and it might attract certain people. The one last thing I wanna talk about on this tax credit side was something that I really hope we see is, and then we can end it after this probably is.

Silas Mahner: 40:49

I really liked the credit for production of critical minerals because I think that the US has been so reliant on other countries and there's been such a difficult time to develop any of like mines In the US. I know where I'm from, in Wisconsin. There was at one point I don't remember what type of mine it was, so maybe this is completely irrelevant, but there was gonna be a mine put in up in Ashland, where my grandma's from, and it would have been a huge benefit to the local economy because that is a ghost town, like Ashland used to be a big place, but it's just a ghost town now and a lot of people were excited for it. But permitting mines and doing things of that nature is extremely difficult. So I'm, from like a national security perspective, kind of interested to see how this can work out and, if I'm not mistaken, it'll also be helpful for the recycling side of things, because I believe the bill includes people who are able to recapture these metals from other things. So if we can get new chemistry and new ways of recycling, we could also see a whole new industry coming.

Silas Mahner: 41:56

I know Germany has a lot of recycling technology from the metals perspective. I'd be really keen to see investment from other countries coming here. I know maybe this is again outside the scope of our podcast, but there's a lot of German companies I know who are really not sure what's going on and they're not bullish on the future of Europe. So they're moving out of the country and surprisingly, they're actually choosing the US in a lot of cases, even though it's not the cheapest place to manufacture things. So I would be curious to see if there was a particular reason why they're trying to attract some of those folks here. But I think any other thoughts you wanna?

Somil Aggarwal: 42:36

talk about. Yeah, well, look, I think one thing that's interesting about that is looking at the perspective of another area that has a potential for real economic development upstate New York. This has to do with the my Cart investment, with the CHIPS Act, where there's a lot of fabs and now new potential for chip manufacturing to happen in this region and this investment has potential. I mean, it's one of, I think one of two or three commitments, large commitments from the efforts that Biden in the state of New York really put together for this region.

Somil Aggarwal: 43:06

Another I think I believe it's Intel or IBM is making one in Ohio and so, just as a contrast, I actually think, even though there is, like again, maybe a caution around mining, especially in your area, in your home area, I think there is room for optimism in terms of mining because I think that potentially is an easier lift in terms of actually setting it up.

Somil Aggarwal: 43:30

The reason I say that is because when you bring in, like a large semiconductor or something that requires a little more skilled labor, things that require potentially, you know, a base of people who are willing to get the education that you need to be able to work those jobs, work those engineering jobs, that becomes a bigger lift, that's a harder lift to set up an entire ecosystem that can sustain that kind of growth. In terms of a mining context, you know, in terms of industrials and maybe the area that you're either going into, it could be better poised for success in terms of how quickly they adapt to the labor needs and the needs of the expertise that are required to set up that kind of infrastructure. So, again, I definitely echo the sentiments about it being a big question mark as to whether things can execute, but I do think, from my very limited understanding, that there's reason to be optimistic about that kind of an economic development.

Silas Mahner: 44:22

Yeah, now I think, broadly speaking, I'm really fascinated by this. I know that it's not exactly new news the IRA but I am fascinated by the fact that it allows a lot of different people to see what it's like, to see what climate tech actually is, because I've mentioned this briefly in passing with a lot of guests that have come on. But where I come from in Wisconsin, a lot of people were like ah man, like climate changes are hoax, like it's not real, it's just bad for the economy, blah, blah, blah, blah, blah. And I had no like other perspective until I got into renewables and I started realizing like hey, the technology is cleaner, usually, it's better, like a better product, and it's also cheaper, usually, right, so it's like cheaper, better product and it's good for the environment. So why wouldn't you invest in it?

Silas Mahner: 45:14

And I think that because it became politicized, because the issue of climate change became very politicized, most people, depending on your orientation of like politics, just said nope, that's not interesting. But when they start to see the benefits of it, they'll be like wow, that's actually amazing, right, I talk about this particular issue a lot, which is like my parents could very much benefit from an EV because they never drive more than like a hundred miles at a time and they do it a lot right, so they would be the best person to have an EV. Right but convincing, there is another thing. So, anyways, I think it's a good place to leave it. I feel like we covered a lot and, yeah, looking forward to seeing how this thing plays out.

Somil Aggarwal: 45:54

Yeah, appreciate your minutes, thank you.