#220 How This Top Investor Believes ClimateTech Startups Can Still Exit

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Today, we are speaking with Shaun Abrahamson from Third Sphere. 

Third Sphere is a leading ClimateTech investor that also has a debt strategy for high-volume production startups in the hardware space. They have backed companies like ChargeLab, ClimateBase, Gradient, OneWheel, Therma, Revivn, & Wasted (check out the episode we did with Revivn). 

This is Shaun’s third time on the pod — if this is your first time hearing him, you’ll understand why because he is very thoughtful. 

During NY Climate Week, the Third Sphere team put on a great event titled “Climate Tech Exits.” It was really well beloved by many NY CW attendees. 

They covered:
**Why exits are so crucial to the success of Climate investing 
**The state of climate tech exits
**How it looks compared to tech broadly
**What to learn from the original tech winners like Google & Apple 
**What the paths forward might be
**The patterns of successful founders 

In today’s episode, we recap the key points of their event and then dig into Shaun’s advice to founders on how to ensure they are doing things right, in order to see an exit.

We are sure you’ll find it educational.

📝 Show Notes:
Topics:
**0:00 The Importance of Climate Tech Exits
**2:48 Current State of Climate Tech Investments
**6:06 Challenges in the IPO Market
**8:50 Corporate Venture Capital's Role
**12:08 Future Opportunities in Climate Tech
**14:56 The Shift from Mitigation to Adaptation
**18:11 Building Sustainable Business Models
**21:01 Navigating M&A Opportunities
**23:55 Final Thoughts and Takeaways

Links:
**Shaun Abrahamson | Third Sphere
**Connect with Somil on LinkedIn | Connect with Silas on LinkedIn
**Follow CleanTechies on LinkedIn
**This podcast is NOT investment advice. Do your homework and due diligence before investing in anything discussed on this podcast.

Chapters

• 0:00 The Importance of Climate Tech Exits
• 2:48 Current State of Climate Tech Investments
• 6:06 Challenges in the IPO Market
• 8:50 Corporate Venture Capital's Role
• 12:08 Future Opportunities in Climate Tech
• 14:56 The Shift from Mitigation to Adaptation
• 18:11 Building Sustainable Business Models
• 21:01 Navigating M&A Opportunities
• 23:55 Final Thoughts and Takeaways

Transcript

CleanTechies (00:00)
I think Intel, Google, Intek are folks that have come up with a set of rules whereby they can participate without creating friction at exit. We think that the green premium that I think a lot of founders and investors thought customers would be willing to pay turns out to be quite hard to get customers to pay for.

All right, today we are having Sean Abramson on the pod again. He's the first guest to make it on here three times now. So for a good reason, as you'll see. How are you doing, Sean? Apparently, I'm just long-winded. Perhaps. Perhaps you've got a lot of good ideas too. Maybe, you know, don't set yourself short. You know, today what we're going to do is we're going to be effectively kind of recapping the event that Third Sphere put on during Climate Week titled Climate Tech Exits. It was a really, really beloved event for a good reason, as you'll see.

There were lot people who could not make it. So we wanted to recap that, plus kind of carry on the conversation slightly beyond that. before we do that, for anyone unfamiliar for who you are, Sean, can you just give like a little bit of a TLDR version on ThirdSphere and your history so they can understand the credibility behind this? Sure. So ThirdSphere focuses on primarily mitigation and adaptation focused startups in climate, usually very early stage. So I think roughly the way we've communicated is

probably have a bad logo, an excellent team, a questionable demo. That's kind of, and no customers, but that's kind of our sweet spot. And we've done some variation on that. We've roughly been doing that for 10 years. And so it's got us to about hundred investments, maybe some things that are unusual, at least historically they were unusual. We spend a lot of time on sort of non-equity fundraising. So we've always helped. think the stat we have is.

50 % of the leads in following rounds come from our introductions, but that's on equity. We spend a lot of time on non-equity. One of our concerns is that at the end of the journey, which for a lot of people means that they're selling stock, especially the common stockholders. So the founders and the team should get paid. And that has been less and less common, let's say, in recent years in VC. So it's more important to do the work on things like grants and loans and things like that.

We do a lot of hardware. So we've had a thesis since very early on that not only can you, can you build very valuable hardware companies, most of the most valuable companies in the world today. Certainly the tech ones do hardware and software, but in, in climate that's especially required. Like it's very difficult to influence the physical world if you're not actually doing stuff in the physical world. So not to do software, but, but it's software and very often.

And then maybe the other thing is, you know, stuff that we try not to do, right? So there's a lot of work on first of the kind. We have a thesis on getting to revenue very quickly, which is related to the non-dilutive thesis. And so there are lot of things we would like to do and we think will exist in the world, but probably not. Yeah, no, that makes sense. Thanks for that. I guess you could say recap. If you guys have not already heard the episodes that we did with Sean, you can check them out. 136 and 176.

The first one is more focused on third sphere and the second one more focused on some different topics around partnering with oil and gas and then putting a financial, I guess you could say number on climate impacts. That was a pretty fun episode, I will say. So let's get into the meat of this then. A lot of people talk about why exits are so important in VC, but could you just give us the quick kind of reasoning as to why it actually matters and how the system works itself? Yeah. So I think if we think about how climate solutions get built and deployed,

There's certainly policy help, but the things that are getting helped are mostly private companies. And those private companies are being funded mostly with private capital. There's a percent of that private capital that will always invest no matter what the return is. As long as they have money, if you give them a dollar back, they'll put a dollar back into climate, but that's a very small percent. Most of the investors are investing in climate, but they are also looking at things like AI. They're looking at things like biotech.

healthcare, et cetera. So it's a competitive market. Ultimately, there can be good press, can be, you know, we can be excited about things like EV adoption, et cetera, et cetera. But what most of the private capital investors are looking at is money coming back, which is to say, are they able to sell stock at some point, which usually happens in a few ways. Do you IPO or you're acquired? Or we'll talk a little bit about secondary market. And what we've done is we've sent a lot of money out.

into building things and very little has come back. And so there's a risk that at exactly the moment we really want to ramp up, there actually isn't that much interest from private capital. Interest is probably the wrong word, I should say. There is interest. There just isn't a lot of capital because it has other choices. Yeah, no, that makes sense. So in general, if we can't have exits, it's because of the LPs in the market, they're not going to see the returns, the majority of them at least.

and they're not going to continue to invest in climate is the short answer. So that's why the whole capital cycle has to work in the VC's role in kind of being an intermediary. the ideal world, I think what happens in VC is you say you're aiming for something between three, if you want to be in the top 25%, five, if you want to be in the top few percent, a multiple of three or five X the original investment after all the fees and everything else. Okay. And so practically what you would like to have happen is return three or four X the investment.

have some percent of that, maybe half, maybe a third come back into climate. So just thinking about that as a cycle of reinvestment, you can't do that until you're distributing cash. Yeah, understood. So, and then I guess in the presentation, you guys set the scene with a number of, there's a lot of slides that we could talk about, but I wanted to just offer to you, what were the core things that you think are important to bring up for kind of the state of climate tech exits, if you will.

Yeah, I mean, I think it's sort of good news, bad news, or it depends what you like for us. we'll do the bad, maybe the bad news is, you know, there just hasn't been the IPO market is effectively closed. I think the good, the good news to the extent is good news is that's not just a climate problem, you know, related to that, you know, I think for a while we were hearing from LPs that there was a lot of climate SPAC activity. A lot of that activity has gone to zero.

meaning companies listed and ultimately are worth nothing. So depending on what you're looking at, there's, you know, BERT, Proterra, there's, you know, we don't have to name, but just to give you a sense, folks will, if you go and look at those stock techers, it's very unhappy. I guess the good news is that is not a climate specific thing. That is a SPAC specific thing. In other words, if SPAC was used as a funding vehicle,

anything that used that and literally every kind of company was using that. Climate isn't really overrepresented. So again, I think what we're looking for is, you know, ideally this is not a systemic climate problem. This was just a finance problem. So I think that's been the big one. think, you know, some of the more positive things there is &A activity. It seems quite narrow still, meaning we're talking about things like renewables, like very mature.

It's not the kind of stuff. I mean, there are some VCs investing in variations of let's say, you know, solar deployment in India, right? So it's not to say that solar isn't attracting VC. There is some, but it's by far the minority. But that's the bulk of PE. And some of that may just be a lag, right? Like those companies are relatively mature. You know, if you go back and look at when SunRino, SolarCity went public, we've had enough time elapsed. So it's not a total surprise.

The, I guess the good news is that CVCs are super active in general. There's, seem to be especially active in climate and they're active from very early on, meaning they used to show up at series A and B. They now show up sometimes at pre-seed, but usually at seed. Having a CVC on the cap table just increases your probability of having &A discussions. That worries some investors, I think, but overall that seems very positive, right? There's some correlation.

between that activity and the exits that will happen, seven or so years later after seed. Yeah. Can you talk about why some investors are worried about that? Are they just worried about getting bought too early before the valuations go up? Yeah, there's certainly that. mean, we've had that experience. It's sort of a tough conversation with the founder who said, I really want to go and do this thing. Very often for founders, it's great, right? They can take $5 to $10 million off the table if it's early.

You know, for investors, think at sort of two or three, even 10 X, it's nice, but that's not, you know, when, when we think about investing, we already think about things that could be 50 X, right? The math for us always comes back to one or two companies, probably one that pays for everything. Yeah. And so don't want folks to get off the ride too soon, right? Like keep your arms and legs and, and go for the full ride.

So that's one. think the other is there's some really good examples, think Intel, Google, Intek of folks that have come up with a set of rules whereby they can participate without creating friction at exit. And what could friction look like? Well, if you are on a board, let's say you Google and Apple decided to come and make an offer. Well, Apple may not even...

make an offer if they thought Google would see it. So you're losing some optionality to exit or Apple might actually make an offer and then Google could complicate it by countering in which case, now that VC has to go back to Apple or that investment bank has to go back to Apple and say, I'm sorry, we didn't realize we're going to start a bidding war. There's a lot of variations of that. In the tech world, generally it's settled down. You wouldn't have Google on the board because they understand that that complicates.

things. what happens in, I won't pick an industry, but let's just say outside of tech, the level of experience working with tech is lower, not a shock. And so there's generally nervousness about taking the time to educate the CBC about what can they actually ask for. Right. So I'm, say I'm in the cement business. I found a cement company that I'm very excited about. I'm actually going to be their first customer. I'm going to put in some money.

Well, I created a lot of value, right? By being the customer, I've actually validated and increased the value of the company. I should probably get something else. Totally not unreasonable. The question is what else can you get that still allows the company to grow? And that's very often where things get sort of interesting is you have a customer or supplier that wants to play multiple roles and they're not actually sure what's reasonable to ask for.

So you guys probably spend a lot of time talking to your founders about that because you've seen it a few times now. Yeah. mean, think, I mean, you've got to remember that the goal for when corporates are investing, if you do that, let's, if you took a deal that we would consider to be excellent founders, VCs, cetera, if you made a hundred X on your initial investment, right? So turn a million dollars into a hundred million dollars. Very exciting. Right. Everyone's happy.

Unless your business revenue is in the tens or hundreds of billions a year, in which case, who cares? That's not the reason to do it. What you would like is, rather than the hundred million in return, is to have a business that you could buy that would generate revenue for years and years in the future, or block one of your competitors from buying it. are blocked. So, I think...

You have to remember why folks are in the game. And then I think you have to remind founders that, yeah, your contract that you're doing today is nice, but it may not be worth certain concessions. yeah, just reminding that like financial investors like us are not always aligned, right? We just care about different things. So there's a fair amount. think also like it's hard for founders because they're having to master a lot of stuff, right? Like they're going and learning about customers. Great.

Some of them already know their customers in detail. come from the industry, whatever, but you've got that. Now you're to learn about VCs again, maybe a second time founder, you know, a little bit about VCs. Then you're going to meet corporate development people who are like a whole other breed of characters, you know? And so, and, so you want to understand their incentives, motivation, the style of work, you know, how to negotiate, you know, they often negotiate against themselves. They're telling you they're to help. then they ask you for terms.

So we do spend more and more time. I think like what we've noticed certainly more recently, like post 2021 as part of an overall venture correction, there's much more CBC activity in our portfolio. Yeah. So just to try to recap it. So the kind of current state is things are down across the board. It's not just climate. It's kind of across tech in general.

And there is more &A activity happening or there still is some activity happening, but it's happening earlier where CVCs are getting involved, which kind of presents a couple of different future opportunities. Did I miss any core pieces there before we move into what the future might look like? No, no, can keep rolling. So I guess on that topic then, what do you see as a potential kind of future opportunities or how might things shape up from your perspective? Yeah, I mean, I think, do we want to do election predictions?

I'll stay away from that. I mean, I think there's some parts of the IRA that probably don't get affected and that is important. Right? Like think there's a certain part of climate. There's certain types of deals that are getting underwritten because of that. And so, you know, it should remain robust. I think the parts that are safe have to do with the tax code. The parts that are maybe less safe or more explicit subsidies for things like heat pumps. So, you know, I think they're

It's not broadly a climate challenge, there may be, depending on which way things go, there may be challenges for some subsets. On the &A front, yeah, I mean, there's a current sort of policy environment where deals are not getting to the end. They've been scrutinized and reviewed and abandoned at a rate that hasn't happened before. Right? So could be antitrust. It's not a U.S. thing only. It's happening a lot in Europe. But there's, on the one side, we're encouraging people to build things.

And then at the end, we discouraging people from buying them. there's some, know, and I don't know, that second thing could swing more wildly depending on what happens. that, you know, so trying to place bets. There are a few things that are dependent on the election. I think independent of the election, we think that the green premium that I think a lot of founders and investors thought customers would be willing to pay.

turns out to be quite hard to get customers to pay for. So I think in EVs, we're getting to parity and there's still speed bumps in EVs. So it's not just the premium. There's also some perception issues. It's sort of wild that China is growing really quickly in terms of EV adoption. One of the good things that I've heard is, well, there's no real baseline and it's not like they're coming off of like gas powered.

exhaust sounds where, you know, there's a group of people like, hey, I just don't like the way this feels and sounds and things like that. But we think overall, there's a lot of mitigation that will slow and is slowing. But what's replacing a lot of the interest is adaptation, right? And so you don't need to look very far to see insurance rates are going up, et cetera, et cetera. The subset of resilience companies generally attract more interest growing faster.

easier able to raise funds that probably remains true in the coming years. And then mitigation probably has some gaps depending on incentives, depending on a lot of things, but it's less certain than it was, let's say, two years ago. Is that primarily due to policy, the mitigation kind of? think it's, I mean, I think policy is always useful, but in the end, like this is still about customers making decisions, right? Whether it's consumer or business, and sometimes those decisions are to not do anything.

right, a lot of the time, right? So you've to make decisions about what cement to buy. You've got to make decisions about what aviation fuel. You've got to make lots of things that we can try and regulate. think what we're finding is that a lot of the more aggressive regulations are getting pushed back. Either the timelines are getting pushed back or, you know, the exemptions are increasing. Things like Local Law 97, you know, it's a constant battle just to keep everything.

Under that law, there's lots of people trying to carve stuff out and be excluded. So that's going to be a battle, but it is customers. When you see things like, I mean, we have a recent investment in a company called Navoya that does, you know, they're building an electric only truck fleet, like semi trucks. When you get close to diesel, even a parity to diesel truck, like for a shipping route, it's over. Like it's over. Most brands, most large companies are like,

same price, let's do that. And so- that mainly because they actually have these sustainability commitments or just because they see the reliability of the vehicles, for example? Some do and some are very, very eager to tell everyone that they finally figured this out. Right? So you can sort of see, I mean, the funny thing was like literally on the first day, they were getting called.

calls not from the customer, but from the PR agency. So there's some of that, they are the bigger conversations about larger contracts are straight, like ruthlessly economics. And so I think that's good news. Like I think if you, are more and more things that cross that threshold where if you win even a little bit, then it really is kind of a tipping point and off you go.

Like they have overwhelming demand. I've never seen anything quite like it. And it really is being able to show up in the same market. You're selling the same way. looks, you know, it really looks like a commodity, but it's better. It literally is better, faster and cheaper. It's like classic tech winning. Yeah. Yeah. So if you can get that, it's usually a game over, right? Yeah. Because who wouldn't take better in and cheaper if it's also green, right? That's just another incentive. So.

Okay. I guess, do you have any other thoughts around like maybe the bull case if things start to go really well? You mentioned a couple of things in the presentation around if there's some big exits, for example. Yeah. I think that there's a virtuous cycle. I think if you go back to sort of what was big tech 20 years ago, well, it was sort of medium and small tech. And then a few winners managed to consolidate and buy. So if you go and look at something like Google,

You know, after search, they bought things. Android was acquired, YouTube was acquired, can go on. Nest, which has been an inspiration for us to even start investing in climate, was acquired. So there's reason to believe that, let's say, think like Redwood Materials is on the list of secondaries for high probability of IPO. There's good reason to think that the sort of reverse logistics part of batteries.

gets rapidly consolidated if they go public, right? Because they would be the group that has the cash to acquire, that can sort of go through the stack and figure out what pieces they need. And so that's the bull case is that as soon as you get a few things through that, it's not just about the IPO, it's about dragging along a whole bunch of other exits that are likely to be acquired or merged into that. And then similarly, I think in PE, I think what we've seen in PE is they are

areas of activity. let's say like waste management. It's an industry that tends to have similar structures, but very localized geographically. So if you wanted to do a roll up, that's kind of the best structure. You're just going around and looking for the local player that you want. You roll them up into a larger structure. They can use a lot of the software, the buying power of trucks, whatever it is, but it's their businesses like that that fit PE really well. So those sub-sectors, think will also, we have

you know, some exposure to them. I think they surprising in some cases, like what's interesting to PE. And then the other thing that's interesting in PE is they've raised an enormous amount of private credit. And so often the way that the VC ecosystem and climate will interact with PE is not the private equity part. It actually starts with the private credit part. And I don't know what that means yet.

I don't know if private credit then goes to the other side of the house and says, hey, look, we've got this company growing like crazy. Look how much we lending to them. You should own the equity. I think it's a little bit too early, but it seems like that would be, you know, they have free early signal into the high growth companies that are borrowing. That aligns with IRA. It aligns with a lot of asset intensive businesses, which is very common in climate. So those are the bull cases where, you you have a virtuous cycle.

on the IPO front. And then you have, we talked a little bit about CBCs, but then you also have PE getting pulled into an environment where they actually have the first look at some of the most interesting stuff because they've seen the businesses through their credit arms. That's interesting. mean, this goes back a little bit to your point around companies getting bought early. And I always think about that, like how many of these climate tech companies can actually become the winner rather than just get absorbed by another company. And

It sounds like you're saying there's a possibility private equity could come in and back a few of those to try to do it. Or you've got some larger companies like Redwood who could IPO and then could actually become their own standalone like monster if you will. Yeah. So, mean, so all of those scenarios are selfishly from my perspective as an investor and from the common stockholder founders and teams perspective of having a large enough exit that they get paid. There is another interesting thing that's been going on for the last 12 months.

that a lot of our portfolio companies benefit from, which is as the fundraising environment gets harder. So I can talk about the ones that are public. There's a company called Cycle in Berlin. They run e-bike leasing. can, personally you can do it or in the delivery, various delivery businesses rent fleets from them. As funding slowed down last year, a bunch of their competitors were less prepared. However you want to think about that, weren't paying attention, didn't have enough cash, whatever it is.

But they landed up having conversations with those founders who said, well, actually, I could wind this down. I could sell for a discount or I could just effectively join your team. So I'll get on the cap table of cycle and you effectively get our business. And if I do that two or three times, we become the leader in Europe, which is effectively what's happening. That sort of mini PE, if you like, and I'll call it mini PE because the amounts of cash involved are quite low. In fact, in some cases, there's no cash.

It's just folks saying, I'm going to take equity that I have, which I can offer to someone, which is still more valuable and still more believable than alternatives, which are really bad. It's winding down for selling it at this time. So, I think that's sort of once in a cycle. I don't think that happens a lot. It's maybe once in a 10 year thing where you have an aggressive correction and venture back companies can actually go out and do roll-ups. see that it's like,

For the VCs on the other side of that, like it's great for our companies. We just have companies that grew revenue three, four times, became the leader in a category. I'm super happy. If you are one of the companies that got rolled in and got some equity, the preferred stockholders in that deal probably didn't do great. They may get their money back at some point, but that's probably the best case. Yeah. And I think something along this, optimistic out, like view of the future.

Maybe I'm being too optimistic, but I think if we have a change in administration, my hope is that people will use the next four years as a way to make climate truly bipartisan so that you can start to see winds that will then be resilient no matter what's going on. And you talked about this kind of focus on adaptation instead. And I think it tends to lean that people who are like, if climate change is real, we'll just suck all the carbon out of the air, like some of these other solutions or whatever.

People tend to be more in favor of those. that would be a case for those pieces, Yeah. Look, think the dark humor part of climate is the adaptation sort of, you know, I wish we could learn differently. Meaning, it would be nice if people could get together and say, hey, we modeled this out. By the way, this is what I thought. When I was finishing grad school, I...

got to look at the first LCAs is like late 90s. I remember like joking with my professor at the time that it looked like an accounting problem, like climate looked like an accounting problem. And I was like, yeah, reasonable people, the adults will get together, we'll do the math and like, yeah, of course we'll decarbonize. But I think the unfortunate way is we learn the hard way. The hard way is like, people have to lose their homes, people have to file insurance claims that don't get fully paid out. Like it's gonna be...

And I mean, we talk about it, it's like avoidable suffering. think that's the most frustrating part of watching this is like, we knew the answer to a lot of these things, but also getting people motivated, getting the political activity probably requires a disaster, right? Like great financial crisis, we did a bunch of stuff. can argue about the efficacy of some of that stuff. We didn't look at the financial system and say, Hey, there's inherent risk. We're like, shit, it broke. We need to fix it. So we're doing the very expensive.

very difficult version of that with climate. Yeah, now that makes a lot of sense. So I do want to recap this here. So we've already effectively talked about the exit strategies, right? So you said engage early with CVCs, generally speaking. The path to PE might be through different parts of the capital stack. I think you explained that through the credit side of things, correct? then the possible method of just kind of doing a roll up by merging.

with other companies that are maybe not winning as often. So those are your kind of three possible exit strategies for founders thinking right now, if we're focusing on that question of how to get an exit. Yeah. I mean, the third one, again, like I think the third one is live to fight another day. I don't know if those are the types of exits that investors will be happy about. It's sort of a cheat code if you land up being the acquirer. Just one other way in which that's important is to get to an exit, you need to be at a certain scale.

Right? Like CVCs are interested at any scale, but PE tends to have a minimum kind of viable scale and the public markets certainly do. so, sort of agreeing to be acquired for stock really just gives everyone a better shot. Right? So if you effectively merge three companies, create the winner, you've basically said to the PE world, Hey, we're the logical target. If you want to do stuff in e-bikes.

Yeah, I think it's important though, especially for people who genuinely care about climate, it's easy to get stuck into the fact that, we need to win. But at end of the day, you want to make an impact on emissions, for example, you need to find a way to stay alive, like you said, right? And it may not be the prettiest option, but it's an option, right? Let's see. So now it's been roughly what? A little over a month since you guys had this event. What have you seen as some of the core things that stuck and some of the things that didn't stick with the people you've had and the conversations you've had post?

post this event. think overwhelmingly, the CVC thread is the one that comes up the most. That may just be a function of our portfolio. It may be a function of just new rounds that are getting done, but I just think overall, there's a lot more discussion about how to think about CVC, when to have &A discussions. I think the secondary market is a little bit invisible. You know what mean? I think they are, I would say,

Folks that have grown up in capital markets and finance are really excited about that because it's kind of conceptually, know, blow the lines between public and private and there's lots of good things that can happen, but it's kind of an esoteric corner of the discussion, right? It really depends on who you're talking with. So CVC, I think is the big, the biggest thread. I think PE just, it really just depends. I think like a lot of our peers, let's say, are more worried about.

first of a kind and how you thread the needle. is not doing any of that as far as can tell. It's like, know, TBG rise. There's a few exceptions, but it tends to be like the climate carve out. It's not core PE. So yeah, CBC is probably the biggest thread. You know, whether people are positive or negative, I mean, I think...

I think a lot of the generalist investors appreciate the sort of more reality check. And that's what I appreciate from the generalist investors in terms of when we think about who we want to co-invest with is they're pretty ruthless about, is this going to survive? Is it going to check all? Like they basically force you to make sure you can clear the basic investment hurdles and then you can come back and have an impact discussion. Often we flip them, right? We really want to see the impact and then we skip the harder asset underwriting.

What are some of the, there's one piece that was mentioned in the discussions after the presentation around how to actually make these &A opportunities happen. So if you're going through an acquisition, like what are the things that really matter? I think you've had a few bullet points you prepared here, but like what are the core things that matter in order to actually get over the line? I mean, I think a lot of the sort of silly sounding answer, but I think is reality is you really just have to build a great business.

So then I think it's really, it's worth revisiting. What does great mean? And I think for a little while, great meant you got to do fundraising and announcement, I think without revenue in a lot of cases, it's not so great. Right. Like thinking about, you know, if, if, if, if an acquiring company is going to buy and they have a choice between a company that's basically break even and growing in an area that they care about or.

has raised $100 million and may need a couple of hundred million dollars to prove something out. The second thing just doesn't, it's much harder to do. Going to your board and selling that to your board as a public company is, you'd really have to have super high conviction. The first one is just easier, if you made a mistake, the thing's paying for itself. Yeah. Yeah, I think you guys had at the beginning of the presentation something like, you know, the new unicorns now with revenue. that's the joke. Like this year, you know, like...

You know, the unicorn definition was very funny because it was sort of it was always enterprise value And then this year there was this sort of like hey, just remember this value requires this much revenue And so those numbers are really sobering. I mean in the software world It's hard to get to a hundred million dollars in the hardware world. You have to get to like probably half a billion, right just because You know software margins are 80 to 90 percent Hardware margins of 40 to 50 percent again

lots of, there's lots of very hand wavy things going on there. But, yeah, non-recurring revenue from physical things is worth 2X. And so like, how do you get, you know, a business to that scale? having a lot of those discussions in our portfolio. And the answer very often is you have one successful product, you have a second successful product and you buy a third one. Like that's the minimum that you have to do. That's a lot.

Right. It's not just like, I built a successful software company and I keep adding features and off you go. Yeah. You have to, you have to kind of think beyond the first product. That's, that's something that hasn't actually come up too frequently on the podcast because so many people are still in that first product cycle, if you will. And it's noticeable that people have ideas for a potential new market center or whatnot. But it's not, again, the most common thing we've heard yet because people are still so early. So I guess with the, with the last few minutes we have here.

What would you just kind of offer as your ultimate takeaways, the do's and don'ts for founders and perhaps as well VCs in the next, let's say, year or so? I mean, I think founders generally have got the memo that the most valuable thing you can do is grow efficiently, right? Which translated is be in a position where you don't need money when you go and fundraise. It's a little bit like getting a loan.

Like if your credit score is super high, you probably didn't need the loan in the first place, but the same thing is true, conversely, with founders. how do you quickly get to that position? How do you make, as opposed to, I think there's folks who are like, if I just do this thing, there will be enough investors who will fund the next thing and revenues over a mountain of $100 million that you have to raise.

There are people who will figure that out. They're definitely founders who can do it, but those are super unusual founders. So I think like efficient growth, I think if you want to have a shot at impact, that's a really big deal. You know, I think the, I think the VCs, you know, that we talk with are generally pretty well aligned. think the earlier stage ones are pretty well aligned. think growth stage is having a bit of a crisis, you know, harder to talk about that if you're fundraising. So I don't think we'll hear a lot about that, but it's not.

I think they spend a lot of time selling money to startups that they may not. It's not that they didn't need it at all. They probably didn't need quite as much. What are you selling now? If you can't sell quite as much money, like what's the pitch? Or is it just a much smaller universe of startups, which frankly just doesn't support as many funds. so, know, VC's are interesting. think the other groups, I think in terms of like the CVCs.

are, you know, I think the flywheel, the selfish position, I think if I was running CorpDev would be to try and get in early and then sort of manage the growth. I don't know how many success stories they are. I think there's a certain amount that the company has to get built out so it can live somewhat independent of the mothership. And I think the best CBCs sort of know how to find that balance. And when you do that, actually everyone does well. The founders and the investors are going to do well.

the acquiring company is going to get something that without a lot of work will continue to do well. One other thing I want to ask you, which I didn't necessarily plan to, is I talked to somebody yesterday actually who explained that for all their pilot projects, had somebody else, they had a partner pay for them. They didn't use their balance sheet to pay for the projects. This is a hardware company. But the caveat was they had to wait longer in order to build that pilot because they couldn't just go and they didn't want to spend their money. So they waited to find the right person who would pay for it.

Have you seen like more of that happening? it better to, if you can just like survive longer or have those conversations early to find the person who has the right motivations to actually pay for the pilot so that they can grow efficiently, i.e. not use their equity?

I mean, I think it depends, but I think in general, yeah, I think you wait to find the right partner. And there's a few reasons, right? Like I think if there's money changing hands in a pilot, I think you've cleared a certain threshold. And so I think that's what we push for is, you know, don't do free pilots. So I think there has to be money changing hands just because you want the customer signal. You want to know that you actually built something. So someone should be willing to pay.

There's variations on that, right? Like we have, we have a company called FroNo that just announced a grant application with one of their partners. So again, it's a similar idea. Their partner values wants to buy, wants to be first, wants to do all these things, but will it help to subsidize with $20 million from DOE? Absolutely. So why not apply for it? So there's, think the, the sort of joint venture part of

of climate is interesting. Like if you think about first of a kind through a, need to go and raise money to do first of a kind, it looks really different if you have to go and find the right partner who's going to make most of that investment and potentially own most of the assets. actually it's just that the second thing has happened a lot and it's very doable. can take a while and it can go at a different pace.

But from a probability of success perspective, it's far higher, far, far higher. Right. Like if you, if you think about just in terms of case studies, how many case studies can you find of the startup that found a partner to jointly develop a thing where the partner funded a lot of that thing. There are a lot more of those than they are. I went and got an offtake agreement and I used that to go and get financing. second thing that has been done, but usually not without a joint venture partner.

Yeah, because there needs to be some credibility attached to it. Yeah. Yeah. Very good. Well, any, final thoughts you would offer? I think we're out of time today. any, any last things you want to, you want to share? No, I just, mean, I think, you know, the sort of went around it, but like the, the past impact is, you know, got to build real companies that, that have the option to raise and go faster, but default, you know, hopefully you don't need that much money.

Default alive I think is sex says or something like that. But anyways, man This is this would be great if anybody has not again seen the other episodes video that you want I highly recommend checking those out Thanks so much for coming out again