Tag: Investing

The a16z for Climate Tech

Jason Jacobs, host of the excellent new podcast My Climate Journey, wondered aloud on Twitter this weekend what the Climate Tech version of an a16z or First Round would look like. Two caveats before I give my answer

  • Existing climate investors are playing this role today because they have no other choice.
  • There is certainly room for a $10B firm to put even more resources behind this.

What’s so special about a16z?

Startup investing today is so much more than just writing a check. Every firm pitches founders on the value they’ll add. (There are even twitter parodies calling into question how serious those offers to help are.) There’s a reason for this focus on value-add. There are three ways a VC can be successful (let’s ignore luck for a second):

  • See more good companies (deal flow)
  • Pick more good companies (selection)
  • Help companies succeed (value-add)

** for more on this see the academic research like “How Do Venture Capitalists Make Decisions” by Gompers and others.

But Andreessen Horowitz made its mark by defining what a “value-add” investor is. The firm’s founders understood that many of the next greatest tech companies were going to be built by product and technology people - founders who understood technology and markets, but maybe weren’t expert storytellers, didn’t yet have media and PR experience, and didn’t have the network that Marc and Ben had. They understood that they could accelerate those new companies by providing bench strength - partners at a16z that could be called on to help recruit a great head of sales, or someone who could get the company featured on the front page of the New York Times. In short, in addition to providing sound advice from their board seat, a16z would put people to work every day solving their portfolio companies’ problems. Today, all firms understand that the bar has moved and they can’t just provide a check and some occasional advice.

What are the current Climate Tech funders doing?

Jason’s question wasn’t really “why isn’t there an a16z today” but rather, if what software companies need is better PR or better access to recruiting than they could get on their own, what could an analog in climate tech provide?

One answer is that each and every of the active climate funders are doing this every day. [The following list will not be comprehensive, so please let me know what I’ve missed!]

At Clean Energy Trust, we take an active role with the 31 companies we’ve invested in. We work with our companies to hire their next set of leaders, we work with them to find their next early market, we connect them to grant and funding programs, we spend tons of time helping them craft their pitches for the next funding round, connecting them with other investors, and finding pilot opportunities for them. Activate/Cyclotron Road has built excellent free content libraries (http://playbooks.cyclotronroad.org). Greentown Labs and the Los Angeles Cleantech Incubator regularly bring in experts to mentor their companies and connect them with early customers. Elemental Excelerator pairs great companies with test and demonstration opportunities. On the fund side, just to name a few, Breakthrough Energy Ventures, Energy Impact Partners, and Energize Ventures have dedicated staff to match portfolio companies with relevant customers.

Photo by Sebastian Unrau on Unsplash

So, what could we do with $10B?

Today a16z manages around $10B. If you assumed a standard 2% management fee, that would mean the firm has $200m per year to spend on people to support portfolio companies. If we had those resources (or even a fraction) applied to climate tech, here’s what my wishlist would be:

  1. Turbocharged industrial marketing support. So many companies in the space have a great technology that could be used in hundreds of different applications, but haven’t found the perfect fit. Unfortunately, this process takes a combination of experience and luck. By pairing companies with experienced industry experts, we could accelerate their time to first revenue and prove that the company is an attractive follow-on investment. To cover the broad range of industries within Climate Tech, you’d need to have a relatively deep bench.
  2. Top recruiting. Finding the next perfect team member to add sales, marketing, or manufacturing experience to the founding team is expensive. Unlike the market for experienced software talent in Silicon Valley, there isn’t a deep pool of these people and they’re spread all around the country. For the kinds of companies we’re talking about, hiring a recruiter could cost several months of runway. A fund that could bring this in house would put companies on the fast track.
  3. Policy, regulatory, and lobbying help. All startups need to “eat their policy vegetables” and this is especially true in climate tech. Imagine offering what Tusk Ventures does for its highly regulated startups like Uber. And while many entrepreneurs might feel uncomfortable with lobbying, the reality is your competitors (incumbents and other startups) are doing it. (As my colleague Paul says “If you’re not at the table, you’re on the menu.”) One example - a solar company discovered that one of their competitors was on the verge of changing state building codes to require all panels to be a certain size, a move that would have completely blocked the company from any new sales.
  4. Grant writers. Jason’s suggestion of a grant writer or two would be hugely helpful. Like with the industrial marketing experts, you need a broad pool of talent here. Instead of having these writers on staff, the fund could provide access to a network of expert grant writers with expertise across energy, materials, agriculture, water, etc.
  5. PR and advertising. This one feels like a cop-out, because of course this isn’t unique to climate tech. But, many of the companies we’re thinking about aren’t selling to consumers or giving away free software. And those that sell into the enterprise often aren’t general-purpose technologies that can be used across industries. Specialized PR and ad firms who can find out which trade publications and which conferences truly matter for each industry.
  6. IP strategy. This role (different from a company’s patent counsel who files the patents) would focus more broadly on the company’s long-term strategy for developing new IP and protecting what it invents. There’s often more that can be patented than founding teams realize and companies at the earliest stages likely don’t have anyone on their team dedicated to this important role.
  7. Manufacturing & Scale Up. Access to experts who understand design for manufacturing, who have worked with contract manufacturers in the US and abroad, and who have taken a hardware product from concept to full scale would help startups avoid the kinds of costly mistakes that have doomed many a company.

The cynic’s view on why there isn’t already a16z in Climate Tech

By disrupting the VC industry and staffing up in each of these areas, a16z was able to offer startups something they couldn’t get anywhere else. They showed companies an unfakeable signal that they were going to help them succeed. In turn, they knew, this would lead the best founders to look to them for investment.
In climate tech, I’m sorry to say, we’re not at the point where we have such cutthroat competition for deal flow. The amazing (but growing!) funding in this space can’t keep up with the number of great ideas, so VC firms don’t yet have to compete with added services.

Founders and funders: what else would you add to the list? What would you tell the people building a $10B climate fund?

Impact Capitalism on “The Pitch”

At CET, we love listening to the podcast “The Pitch”. It’s always exciting to hear about new businesses and to hear how other investors think. This week, the episode featured Jonathan Kumar, the founder of Samaritan. Kumar’s company wants to provide a better way for cities and non-profits to take care of homeless people. This post isn’t so much about the business itself, but rather about the way the investors on the show think about “Impact Investing.”

But to give some context, it may help to understand how Samaritan works. In brief, when a homeless person enrolls in the program (typically through a city or a non-profit) they get a bluetooth-enabled beacon and a digital wallet. People who want to help the homeless download the Samaritan app and get notified whenever they’re near someone with a beacon. The app tells them a little bit about the person and gives them the chance to donate through the app. When the homeless person checks in at their local non profit (like a Red Cross, shelter, etc.) they can cash out their wallet or they can spend against the account at participating local stores.

The Ethics of Making Money off a big Social Problem

Some of the investors in the room didn’t invest because they couldn’t see Samaritan turning into a big enough business to garner the financial returns required by the VC model. That’s totally understandable and not what we’re talking about today.

What I’m more interested in something investor Michael Hyatt said: “I don’t know if I want to capitalize on this.”

Michael explained what he was thinking:

“I had a real moral struggle with what this was. Think about me saying ‘Hey, I’m making a ton of money off of this app that is built to make money for the homeless.’ I don’t feel comfortable with that. And it didn’t make any sense to me. At the end of the day, I don’t really want to be in the business of profiting off of people’s difficulties. Isn’t the profit off this — shouldn’t that be going to those people? I don’t need that money, they should [get it]. I can’t reconcile that in my head. Just step back and think about it. You’re looking for a 3–5x your number [as a financial return on your invested capital]. I don’t see any VC wanting to say to their investors that they made all this money off of this type of program. I don’t see it.”

I suspect we all feel some understanding for what Michael is saying. There’s something unsettling about feeling like we’re making money off of someone else’s misfortune. There’s a feeling that the business requires suffering in order to keep making money. After all, if Samaritan really worked, there would be no more homeless people and—therefore—no more profits for investors.

But while this feeling is understandable, I don’t think it makes sense. Think about the alternative. A VC invests money in, say, a dating app instead. This delivers the 3–5x returns the investors asked for but no homeless people were helped along the way. Is Michael donating all of his financial returns to the homeless? Doesn’t he still think they need the money more than he does? If that’s his metric, shouldn’t he think it is strictly better to deliver returns while helping people? It is really interesting to see how the moral discomfort leads him to make a socially sub-optimal decision.

On the other side was Gillian Manus, who, before becoming an investor was homeless for a time. She did invest in Samaritan through her angel fund and didn’t see any ethical issues with it.

Gillian’s view was that “we’re making money helping people get off the street [which is one of the biggest problems in cities] and this is a solution. Aren’t we investing in solutions? Isn’t elevating society the end game? Isn’t this one of the most dynamic returns that we could get—to help families living in their cars, to help provide a roof over people’s heads? What, we should be ashamed that we’re making a profit off of that? The profit goes back into society. Isn’t that what we’re all doing with every company?”

Impact Investing in the Future

I expect that we’ll see the continued growth of impact investing across social causes, education, healthcare, and the environment. As we do, I think discussions like these will become increasingly common. The question will be whether perceptions of immorality around profiting from social causes will change in the future.

Jonathan, the founder of Samaritan, was steadfast in his view that VC can and should be used to support double-bottom-line businesses. “If we’re able to scale quicker because we took this VC money, and if that helps us get people off the streets in 5 years instead of 10, and the result is that we returned a lot of money to these investors to use on their yachts or their vacations, I am glad about getting to people in 5 years instead of 10.”

Ample: A Better Better Place?

Ample: A Better Better Place?

August is supposed to be the doldrums in VC land, a time when everyone goes on vacation and companies shouldn’t expect to see any new term sheets. So it was a welcome surprise to see a cleantech funding round announced — and a big one at that: Ample raised a $31m Series A round. That’s a lot of money! Wait. Who are they? What do they do?

According to Fortune’s Term Sheet, they make “a platform that delivers a full charge to electric cars.” Neat! A full charge is way better than not-a-full-charge. Axios’s Pro Rata says they are “solving the energy delivery challenge for electric cars.” What are we talking about here: supercapacitors? ultracapacitors? ultra-fast charging? wireless charging? ultrasonic charging? The suspense is killing me!

Off to their website: a picture of a cold day in Chicago (hey, I live in Chicago, cool!) and a simple tag line: “Electric Cars for Everyone.”

Lots of non-electric taxis in the picture! (From Ample’s website and originally from Molly Porter on Unsplash)

To get some real answers, we need to head to the press release. The company offers an “alternative to traditional charging” using proprietary “autonomous robotics.”

If you’re using robots, delivering a full charge all at once, and calling it an alternative to traditional charging, in my mind there’s only one thing this could be: battery swapping. Drive your EV up to the station and a robot pops out the dead battery, switches it for a fresh one. In a few minutes you’re off to the races again.

That might sound familiar.

Back in 2013, Tesla built a battery swapping station before shuttering the program in 2016. Tesla’s pilot implementation was a little kludgy — it was designed as a temporary fix where car owners were required to come back and get their original battery back later (and pay $80 for the privilege).

Well before that, Shai Agassi launched Better Place in 2005 to build a network of swapping stations in Israel before expanding world-wide. There’s little question that the technology works. Here it is in action:

Battery swapping in action

Better Place has gotten plenty of ink through the years, both as it was growing, as it imploded, and in a recent book “Totaled: The Billion-Dollar Crash of the Startup that Took on Big Auto” by Brian Blum. Brian was recently a featured guest on Greentech Media’s Energy Gang Podcast where he recounted his own experience as the owner of a Better Place-compatible Renault. Regular listeners of the podcast know that Stephen, Katherine, and Jigar don’t pull punches, so it’s interesting to go back and listen to that episode with fresh ears.

Can this be a business? Can Ample succeed where Tesla and Better Place stumbled?

First, let’s take a look at the backers. This round was led by Shell Ventures and Moore Strategic Ventures, with Repsol Energy Ventures, Hemi Ventures, and TRIREC also participating.

Shell has a long history of making investments in cleantech and transportation deals and has lots of experience making early-stage venture investments. It’s easy to imagine Shell seeing battery swapping stations as the natural future of the filling station.

The other corporate strategic investor, perhaps not as well known here in the US is Repsol, a major Spanish oil and gas company. Repsol has increased its VC activity over the last few years. This is their second electric mobility investment this summer, following Silence, an electric scooter company.

Moore Strategic Ventures is an arm of Moore Capital Management, a Hedge Fund that makes some direct early-stage investments, including several in energy, electricity, and agriculture.

Hemi Ventures, a relatively new firm, has been very active in early stage deals across robotics, artificial intelligence, and automation.

Trirec is a relatively new cleantech-focused firm based in Singapore that doesn’t shy away from infrastructure-heavy deals.

What about the founding team?

Ample founders John de Souza and Khaled Hassounah are experienced executives, and both have undergraduate degrees in Electrical Engineering. According to their LinkedIn profiles, they founded and led MedHelp, an online portal and community for medical advice. The details here aren’t exactly clear: MedHelp was founded in 1994, long before the duo joined, and sometime around 2006, de Souza became CEO and led the company to an acquisition by a unit of Merck in 2014.

Back to the business at hand — the business

First, we can’t ignore the similarities. Better Place founder Shai Agassi made a fortune when he sold his previous company, and decided to enter the electric vehicles space. (And, for what it’s worth, that sounds a lot like Elon Musk too.) The initial pitch for Better Place was “an inexpensive car that anyone could buy.” It would be so cheap, it might even be free. (Of course, not actually free, but at least zero-money-down and a monthly subscription after that.) When Better Place was conceived, the best technology in the market was a Nissan Leaf that could get roughly 70 miles before recharging, so you couldn’t take a long road trip.

Better Place’s Stumbling Blocks

Better Place had huge issues with its swapping stations — it couldn’t co-locate them with service stations in Israel, they ended up being way more expensive ($3m each) than originally planned, required huge cooling infrastructure to charge the batteries without degrading them. The company also grew much more quickly than any revenues could support — they had around 1000 customers but were burning $1m per day on salaries.

At the very least, with Shell and Repsol on board, Ample should be able to secure locations at filling stations.

Better Place also had a hard time getting manufacturing partners on board. Renault joined because they didn’t have any plans for a Hybrid vehicle and saw this as their path towards an EV.

This excerpt from the podcast says it all:

Brian Blum:

“When he [Agassi] went to GM and tried to convince them to make a battery-swappable version of the Chevy Volt and they said ‘No, we’re not doing that, we’ve already got our version of the vehicle and we’re well along the way, but we would be interested if Better Place would be the infrastructure provider for the electricity [presumably referring to the traditional charging infrastructure] here in the United States and then we’ll see what happens.’”
 “Maybe if there was more money, and the company hadn’t spent so much, and the company hadn’t gone out of business, maybe other manufacturers would have come on board.”

Jigar:

“But they would have never come on board. This is what people don’t understand, even today, no one has used Tesla’s charging infrastructure and protocol. Car companies don’t work together, and the reason they don’t work together is because they believe they’re the smartest people in their industry. Every one of them believes they’re in the hardware industry. They don’t wanna all make the same thing. They don’t wanna follow a standard. They love being different from everyone else. Right, so the fact that everyone would have adopted the same battery swapping technology was ludicrous, so for him to think otherwise was equally ludicrous.”

Is Jigar right here? If he is, Ample must be doing something else—they must have a business model that doesn’t require signing up a bunch of manufacturers to conform to a new swapping standard.

What does the future for battery swapping hold?

Brian Blum has certainly made up his mind:

“[Switching] big batteries, you know consumers switching them out in expensive infrastructure, that’s not going to happen, we’re not going to see that again.”

And my guess is Ample won’t be getting project finance from Jigar for a Better Place clone any time soon:

“The thing that I always found so fascinating is how awful [Shai and team] were as entrepreneurs. The thing I want to make sure people understand is that these things are entirely avoidable through due diligence. Like, it’s not a foregone conclusion that people have to make these ridiculous mistakes. I want to make sure that its clear that like as we try to change the world and the infrastructure that powers us because we want to decarbonize the world, there are good ideas and bad ideas, and this was a really bad idea.”

Is this the next cleantech success story?

Of course, only time will tell and with limited information on a stealth-mode startup, it’s hard to predict what will happen.

We don’t know what the proprietary technology is, but Ample definitely isn’t building its own EV. Frankly it wouldn’t surprise me if they’ve licensed the Better Place patent portfolio, which is now largely owned by Renault.

I hope I’m safe in saying that Shell and Repsol wouldn’t invest in a new Better Place. If they wanted to do that, they could have bought the assets back in 2014 at fire-sale prices.

So, maybe it’s the business model that’s different. Is Ample promising individually owned cars on a monthly payment plan? Or are they offering a battery-swapped electric taxi fleet? Busses? Or an on-demand, electric car network like Car2Go?

We don’t see $30m Series A rounds in this space all that often, so there’s reason to be excited. Until they come out of stealth, here’s hoping Ample has figured out a better way to make the Better Place dream of cheap electric cars for everyone come true.

ARPA-E: Commercializing Energy Innovation

Commercializing Energy Innovation

Last week the energy innovation community gathered outside Washington, D.C. for the eighth ARPA-E Summit. The event brings research and commercialization together in a way that few other events do. ARPA-E staff pitch their ideas for the future of energy, transportation, cities, and food. Leading scientists explain how they push the frontier of innovation in energy and materials. The technology showcase lets ARPA-E awardees highlight the progress they’ve made over the course of their 3-year grants.

But the Summit doesn’t just spout techno-optimism. The conference balances technical sessions with panel discussions, keynote speeches, and fire-side chats that offered practical advice on how to commercialize those innovations. It was fascinating to understand how these experts think about building and scaling cleantech companies.

I had the honor of moderating a panel featuring some of the smartest people in the field:

  • Ira Ehrenpreis of DBL Partners, a Director on the board of Tesla and one of its first investors;
  • Mike Biddle of Evok Innovations, who built one of the world’s leading advanced recycling companies and now is an early-stage investor; and
  • Michael Horwitz of Greentech Capital Advisors, an expert on mergers and acquisitions in the cleantech sector.

The discussion was lively and featured plenty of tales from the trenches. The summit also featured an excellent discussion with Ajay Royan of Mithril Capital Management, which he co-founded with Peter Thiel and has $1.5B under management, and a panel on alternative capital solutions that featured Jeffrey Sirr of Munich Re, one of the world’s largest re-insurance companies.

Throughout these sessions, the conversation kept returning to the importance of Risk, Markets, and Team. Of course, startups in any sector have to think about these factors but the investors explained why the nature of energy and cleantech has a multiplying effect on these challenges. As Ajay put it: You have to focus on quality of market, then product, then founder. It doesn’t work in the reverse order. The biggest problem in commercializing hard tech is the friction cost associated with entering the market. He calls this “artificial friction” and emphasizes that this makes it more challenging.

What follows are some of the most interesting things I heard at the Summit — things I think anyone in the sector should keep in mind as they build and grow their business.

On Markets and Market Adoption

Ajay channeled Warren Buffett in his focus on the market first: If you put a brilliant team up against a tough market, the market always wins. He emphasized repeatedly that energy is so tough because it’s a commodity. It’s difficult to price a premium product. In any industry, he said, new products hit a barrier of market access. Even if it’s a great product and it works well, no one adopts it. Energy startups need to think about how they will break that wall, even on day one. How will they ease that friction? According to Ajay, the only way to do that is through product. He offered a particular challenge to energy startups: If you have a great innovation that then needs a whole support mechanism and consulting firm to work with customers to get it adopted, it’s not likely to work. This really matters because even though you can show — analytically and through pilots or demonstrations — that this product works, you end up spending all your capital on adoption friction costs. So then you need to raise another $100 million just to get the product in the customers’ hands. So what’s the result? New innovations aren’t being adopted as fast as they’re being created.

Perhaps Ajay would be interested in the solution proposed by Jeffrey Sirr of Munich Re who has been exploring new ways to insure against the risk of adopting new technologies. For instance, suppose an energy storage startup had a new flow battery technology and found a customer who was interested in the improved technology, but was unwilling to take the risk that the batteries didn’t live up to expectations. Munich Re would do their technical due diligence and underwrite the performance of the batteries. If the batteries failed, the insurance policy would pay out and make the customer whole again. This approach seems like it would assuage at least some of the fears of technology risk. Of course, insurance adds cost, but Jeffrey maintains that the insurance underwriting can also help secure less expensive debt to finance the project which may make up for the additional cost. A general overview of these types of mechanisms can be found at the Climate Policy Initiative. This is an exciting space to watch and it will be interesting to see if the model is sustainable for earlier stage smaller deployments.

On Team

Ira, Mike, and Michael acknowledged the realities of the cleantech markets, but for them this means the team is even more important. When they evaluate an investment, they ask themselves whether this team can “stare death in the face and survive.” Each shared a story where the company would have gone under but for the extreme resilience of the founding team.

For founders, the message is clear: you have to be fully committed to the business. As Ira said “This company can’t be the second or third most important thing in your life. If you want to make it, the company has to come first.” Building a business, especially in this sector, requires complete dedication and investors need to see that commitment.

On the Sector and Investment Theses

Based on his evaluation of the Market, Ajay shaped a contrary investment thesis at Mithril. “Cleantech was being talked about as religion. But most people in the world were still going to use oil and gas, and 20% of power was nuclear. This is where we started spending time.” He went on to emphasize that it is key that the underlying product is “long on technology” — meaning that as technology improves in the future, the product gets more competitive, not less. He used solar as an example — emerging technologies like thin-film solar were “short” innovation. As Chinese manufacturers glutted the market and costs came down the learning curve, the new technologies couldn’t compete. He likened this to companies in the IT sector: Cisco would be hurt by foreign innovations in router technology, while Facebook, Apple, Netflix, and Google can all take advantage of it.

On Long Technology Development Cycles

Mithril isn’t afraid of long development cycles — they have invested in nuclear fusion startup Helion Energy. When asked how they can make decisions about a company that has such a long road ahead, Ajay said you have to do all the underwriting up front. He says they treat diligence meetings as board meetings that will happen in the future. He asks the founders “What is it that you would talk about at a board meeting next week?” What challenges are you facing right now? What are the strategic decisions you need to make in the next 6 months? He emphasized that this is good for founders too, because “capital is marriage and you want to be with investors who you can talk to about the really thorny issues.”

As for the long time-horizon, Mithril has the added advantage of being structured as a 12-year fund (as opposed to the more common 10-year fund). Here, he channeled Buffett again: “Time horizon arbitrage is avail to all of us. If you can operate rationally on a five-year horizon, you are in an elite category.” It is certainly an open question whether a 12-year fund is long enough for breakthrough energy technologies that still have 5+ years of R&D before they’re commercially ready. If 12 years isn’t enough, those companies must find other ways to fund their development in the interim.

On Exits

Venture capital is a high-risk, high-reward business. At the end of the long road of technology commercialization, a startup turns into a successful business selling product and delighting customers. But, for companies backed by outside investors, that reward can only be realized when the startup goes public or gets acquired. One of the biggest problems facing cleantech companies and their VC investors in the last decade was the lack of acquirers. It looks like things may be changing. According to Michael Horwitz, there has never been more activity in cleantech M&A than there is today — this is great news. The pathways to IPO, unfortunately, may not be looking any brighter. As Ajay put it “you have to be the last company that matters in your market before you can go public” and contrasted this with the go-go market in the mid-1990s: “Go read S1 filings from ‘95.”

I’m very grateful to Danny Cunningham at ARPA-E for the invitation to moderate the panel and to the rest of the ARPA-E staff who made the event a success.