Description

In this panel discussion from SOSV's 2024 EarthDay+ sessions (Apr 22-26, 2024) moderated by Tim De Chant, Senior Climate Reporter at TechCrunch, panelists Christina Karapataki from Breakthrough Energy Ventures, Shuo Yang from Lowercarbon Capital, and Duncan Turner from HAX and SOSV discussed the current state and future of climate tech venture capital.

• The challenges and opportunities in the sector, noting a decrease in deal counts but robust fundraising, with venture capital and private equity firms holding significant "dry powder."

• The scrutiny in Series B and C funding rounds, the faster pace of seed and pre-seed investments, and the impact of recent economic uncertainties on investor behavior.

• The importance of building large, profitable companies to combat climate change.

• The role of technology in bridging the commercialization gap.

• The need for new investment structures to support CapEx-heavy projects.

• The global scope of climate tech, emphasizing the need for local partnerships in emerging markets and the potential influence of U.S. elections on the investment climate.

The video of this episode and more can be found online at sosvclimatetech.com.

Speakers

• Christina Karapataki, General Partner, Breakthrough Energy

• Duncan Turner, Managing Director, HAX; General Partner, SOSV

• Shuo Yang, General Partner, Lowercarbon Capital

Moderator

• Tim de Chant, Senior Climate Reporter, TechCrunch

Credits

• Producer: Ben Joffe 

• Podcast Summary: Written by gpt-4-turbo, edited by Ben Joffe

• Intro Voice: Cloned voice of Ben Joffe by ElevenLabs 

• Intro Music: EL Waili

• Keywords: #deeptech #venturecapital #climatetech #vc #robotics #lifesciences #biology #hardware #startups #innovation #technology #frontiertech #hardtech #energy #decarbonization

Hosted by Ausha. See ausha.co/privacy-policy for more information.

Transcription

• Speaker #0

  Welcome to the SOSV Climate Tech Summit podcast series. I am the AI voice of Ben Joff, a partner at SOSV and co-curator of the Climate Tech Summit. In a panel moderated by Tim DeChant, Senior Climate Reporter at TechCrunch, panelists Christina Karapataki from Breakthrough Energy Ventures, Shuo Yang from Lower Carbon Capital, and Duncan Turner from HACS and SOSV discussed the current state and future of climate tech venture capital. The conversation highlighted the challenges and opportunities in the sector, noting a decrease in deal counts but robust fundraising, with venture capital and private equity firms holding significant dry powder. The panelists explored the scrutiny in Series B and C funding rounds, the faster pace of seed and pre-seed investments, and the impact of recent economic uncertainties on investor behavior. They also discussed the importance of building large profitable companies to combat climate change, the role of technology in bridging the commercialization gap, and the need for new investment structures to support capex-heavy projects. The discussion also touched on the global scope of climate tech, emphasizing the need for local partnerships in emerging markets and the potential influence of U.S. elections on the investment climate.

• Speaker #1

  Great. Hello, everyone. My name is Ned Desmond. I'm an operating partner here at SOSV. I'm just here to welcome our speakers and especially our moderator, Tim Deschant. Tim is a senior climate reporter at TechCrunch. He's going to run the conversation today. SOSV, if you don't know us, is a multi-stage venture capital investor. We run the HACS and IndieBio programs. We just recently raised a $306 million fund five, which will be focused principally on climate and health. Today, the way we're going to run the show is Tim's going to go for about 30 minutes, lots of good questions for our speakers, and then he's going to start to look at the Q&A. So please line up your Q&A over in the Q&A section of the Zoom, drop your questions in there as they occur to you, and Tim will do his best to look at them. So without further ado, I'm going to hand it over to Tim. Thank you, Tim.

• Speaker #2

  Thank you, Ned. So today we're going to be talking about after the tumble in 2024, will Climate VC go up, down or sideways? Joining me today is Christina Karpataki, partner at Breakthrough Energy Ventures, Xiao Yang, partner at Lower Carbon, and Duncan Turner, Managing Director of HACS and General Partner at SOSV. Now, depending on who you are in climate tech, things are looking good or not so good. For founders, it can be pretty tough out there. Deal counts are definitely down. But for investors, fundraising has been pretty good. Last quarter, venture capital and private equity raised nearly $30 billion, and they're sitting on almost $40 billion in dry powder. So, Christina, why would investors be sitting on that much?

• Speaker #3

  Hi Tim. Well, first of all, thank you so much for having me and thank you to SOSV for having this great webinar, especially on Earth Week. So you're right, there is definitely a lot of investable dry powder. I think reading Sideline Capital recently, it was more than $40 billion. But that sits across not just venture, but PE, infrastructure funds, corporate funds, it sits across the funnel. And something that we're seeing recently is a lot more scrutiny, especially for Series B and Series C vans. Those are definitely taking longer. The entrepreneurs are out there fundraising for significantly longer than they have been in 2021 and 2022. And I think that the scrutiny and the reason the capital is being deployed less quickly has to do with commercial traction and commercial milestones. There's a lot more attention that's being paid on how many of those targets have been met, especially for Series B and Series C companies. And did they get to commercial validated commercial traction, not just MLUs and LOIs? And going through that late stage diligence just takes longer. And we're definitely feeling the pain alongside our entrepreneurs. On the flip side of the coin, I think seed and pre-seed companies are moving a lot faster, especially because there is a lot of capital sitting at the sidelines. But it's difficult to deploy it on $2 million checks at a time. But I think there's momentum there and those rounds are actually moving a lot faster than last year.

• Speaker #2

  So when you say that the startups are moving faster, you're talking about the rounds.

• Speaker #3

  I'm talking about the seed and the pre-seed rounds.

• Speaker #2

  Yeah. Xiao, Duncan, are you seeing similar trends from where you sit?

• Speaker #4

  Yeah, absolutely. I think Christina's being very humble. It's very nice to be in this crowd because I think the three of us represent venture capitalists who actually know what we're doing. But I think the sad reality is most people in this field don't. And when you have events like COVID and all the upheaval and uncertainty over the last couple of years, the natural human reaction is to be fearful. And when people are fearful, they don't deploy capital. And that's why you see a lot of people sitting on stuff, right? The challenge of doing this game well is to overcome those kind of emotions and still find the good opportunities and put capital out there. And especially in a field like climate, where it's important that we continue to move fast and underwrite the risks that we need to, I think we just need to push ourselves harder to actually do that and find the good opportunities.

• Speaker #5

  Yeah, for sure. And as Christina mentioned, it's like the sheer number of seed rounds that are happening, it's probably partly influenced by the number of seed funds that are coming online, some of them first time fund managers, and many of the companies that were traditionally investing at a later stage coming earlier and earlier. And that's driving up, I think, the actual deal count 23 versus 22 was not too dissimilar, but the amount of money going into the companies dramatically lower. And that's really just... an indicator of what's happening at the later stages, which is ultimately going to affect the early stages at some point, but it doesn't seem to have done yet.

• Speaker #4

  Not yet. Not yet.

• Speaker #2

  Yeah. Duncan, do you think the pandemic bubble scarred investors in some way that they're kind of hesitant to deploy?

• Speaker #5

  I don't know if scarring is the right word. Definitely, there's definitely some lessons there. I mean, just think about at that time, initially, we thought the whole world was collapsing. Then suddenly, there was a whole load of free money there. We were at a point where it was effectively negative real interest rates. And we had a whole lot of stimulus coming in. We also had SPACs and IPOs going now, which was creating a huge amount of confidence. in the VC circles and therefore a lot of late stage capital has been deployed and then all of the early stage people are deploying as well just to kind of catch up for that for that later stage. As we've seen fiscal tightening that Later stage, the IPOs and this kind of waterfall effect all the way down has just kind of like constricted all of the rounds. And that's been very much a trend that a lot of the investors are becoming very aware of, because we've got to make sure that our companies get to the next round, no matter how early on you need to think about the next round for the success of the company. That combined with, you know, interest rates are bad for CapEx heavy companies. A lot of the really exciting climate tech stuff requires. capex financing and therefore that becomes a burden so rather than thinking about just free money being available the whole time and that's what a lot of vcs were able to do they're now thinking okay how can we get this company to real unit economics that are positive in the foreseeable future with the amount of money that we've gotten so that's a lesson i think a lot of investors very quickly learn or actually a lot of them knew it before they've just had to apply that lesson back to a time at which we're in kind of you know less favorable economic terms.

• Speaker #2

  Christina, did you have anything you wanted to add there?

• Speaker #3

  Yeah, I mean, to add to that, because of the fiscal tightening, because of the high interest rates, it's also how can startups finance their own first of a kind or their own pilot, right? So we're seeing a lot of startups now that they used to have some options for debt or equipment leasing, given the high interest rates, having less of those options or having more scrutiny in the technical risk. So they need to be financing that first of a kind. Well, there's different definitions of what first of the kind means. So let's say that they're piped, right? The point where the technology risk is diminished enough for others to be able to jump in, and they need to be financing a lot of that from equity. And that's another adjustment that definitely had to be made with companies that raised over the last couple of years and now needs to make that capital last longer.

• Speaker #2

  Shao, are you seeing any other adjustments?

• Speaker #4

  I mean, I think we've been focusing on some of the externalities that make things hard. I think we shouldn't lose sight of the fact that it also brings opportunities. And I would go stronger on that to say that that's our job, right? Like bad shit's going to happen in the world, like struggles are going to happen, like that's the world we chose to live in. And you can either choose to bow down and crumble in the face of those external struggles, or you have to find the opportunities in the moment and do a really, really good job. I'm very blessed. I'm co-investors with both these wonderful people. on the panel. And we've really done that over the last couple of years, right? You know, Duncan has been masterful with a company that we work on together called Unspun, using the pandemic as a way to say, hey, wait a minute, our whole human civilization and supply chain is so fragile. Right, like let's invest in domestic production and robots and other things that can really strengthen our ability to do that stuff. And you're turning weakness into strength, right? You know, with Christina, we support a company called Antora that's building wonderful long-duration energy storage. And that's going to make our whole entire energy grid a lot more resilient and enable us to do domestic manufacturing in a lot of better ways, right? And that's the job, right? Like, I'm not opposed to sitting here and, like, you know, debating up, down, and sideways and things like that. But, like, we can't lose sight of the fact that we're being asked to do something extremely hard and special. When founders come to us, we're making a commitment to them that regardless of what the experience is,

• Speaker #2

  for now these look like we have their back and we're going to fight for them and we're going to find the opportunities wherever they come so shao along those lines there have been a lot of startups um you know in the last few years especially with the kind of the flood of money that happened during the pandemic um and they were all early stage at that point do you feel like they're going to have enough capital to ride out the tightening market right now and get to the point where they're ready to grow

• Speaker #4

  No, of course not. The numbers say that, right? Like this is a bait to get me to say that. Listen, the interesting thing about these times and why if you look back at 07, 08, 09 and some of the great companies that came out of those vintages is that amazing founders will take this and adapt storytelling, fiscal management, blah, blah, blah, blah, blah, whatever, right? You know, it's no different than the lungfish coming out of the dried mud and being like, holy shit, I can't depend on my gills anymore. I gotta breathe some oxygen. Right, like this is, this is this is the battle we're on, and the people that can do that get to shift our human civilization forward in dramatic and interesting ways and we got to help them figure that out. And it's both the technology side and the management side but also this kind of human storytelling right what are the stories now in a post pandemic world that really motivate people to do irrational things because that's what we're talking about every single day we have to convince people to do irrational things, believe in irrational hopefulness, and that's how we actually end up solving. problems.

• Speaker #2

  So, I mean, I guess to be a little bit of a devil's advocate here, back in 07-08, a lot of those companies did go bust and the founders did move on to bigger and better things. So is it a question of following the right founders or following the right companies?

• Speaker #4

  Is there a difference?

• Speaker #2

  I think it's not always a difference, but if you think about it, like I said, there were some very promising companies that stumbled in some way or another. They learned their lesson, but it wasn't always those companies that moved on. It was the founders that went and started something else.

• Speaker #4

  Yeah. These things are kind of like vehicles for us to learn things. I mean, I'm blessed to be mostly an early stage investor. And that means I explicitly do not think of these things as companies. I'm not here to invest in anyone's company. I'm here to support people. I'm here to support founders. And that's why it's hard for me to kind of separate. those things out. And I think it's understanding at a macro level, right? I never think about success and failure as the company going IPO or anything like that. Maybe my LPs want me to think about it that way, and I shouldn't say this out loud, but we're all in this larger funnel. To be in the funnel is to win. Because if we can maintain this funnel as a human civilization, great stuff comes from the other side. And to your point exactly, Tim, that doesn't necessarily mean specific companies themselves, but the people. people and the experiences, whether they're founders or employees, it adds to this larger human fabric that we're building, right? Like we're learning at the end of the day, how to solve critical, large scale civilization scale problem, right? That's, that's the end goal here.

• Speaker #2

  Yeah. And Chris, sorry, go ahead.

• Speaker #5

  So yeah, I say just, oh, Christina, go.

• Speaker #3

  Go ahead, Duncan. I'll go.

• Speaker #5

  So thinking back to 07-08 and everybody likes to kind of always reflect on, hey, we're going through another one of those cycles. That really was just confined to the energy sector, mostly anyway, that whole movement. And if you look at what climate tech is for us now, it encompasses a whole range of different areas. Interestingly, if you then separate those out and look at where some of the decline was, energy was, I think, single digits last year down, like 8% or 7%, something like that. circular economy and industries up. So it's really just actually a shift that you're seeing within climate tech of changes of preference of investors, not necessarily any kind of decline in climate tech as a whole. And then if you benchmark that to the rest of venture, it's actually looking very good indeed, with the exception of AI.

• Speaker #3

  I wanted to add to that, besides the fact that it's now climate, not energy. So the investments and the people that we're seeing in the spectrum is not just wind and solar, but is looking across the spectrum of long duration energy storage, geothermal, food manufacturing. And also the companies that we're seeing are no longer only focused on technology development, which is absolutely critical. But at least the approach that we are seeing that is significantly different is also the focus on products. Because at the end of the day, we're going to need to build large plants and large projects. If you are in the energy or the climate industry, you need to be focused on that. And that means bringing partners early on, whether those are financiers or EPC companies or the corporates. And let's not forget the policy tailwinds that we have as well right now supporting all those projects. So I think there is a different ecosystem that's being built on how do we grow these climate opportunities that is significantly different than what we were dealing with in 07-08.

• Speaker #2

  Yeah. And Xiao, you mentioned broadening the funnel to bring in more founders into the story. As you think about broadening the funnel, how do you bring more people in to be founders? And then how do you encourage investors to support them? Are you seeing, because obviously there's a large pile of dry powder that investors are sitting on. So is it a question then of not enough founders or not enough opportunities to invest in? And if that's the case, how do we broaden that?

• Speaker #4

  It's a good question. This is just me speaking and guessing wildly, but yeah, there's probably... more money out there than really, really good companies, which is why we've seen kind of like the round valuations increase. I mean, it's supply and demand. And so there always is that kind of challenge of like, how do we do both, right? The investor side is hard. I think we just haven't evolved to do venture capital very well, right? Like 10,000 years ago, if you heard like rustling in the bushes while you're foraging for berries, you'd be like, holy shit, I'm running back home, right? Like. Whether it's a saber-toothed tiger or a cute little bunny rabbit, it does not behoove you to stay and figure out what it actually is. And thankfully, my ancestors made that choice, which is why I'm here. But the three of us, we have to go out there all day, hear the rustling in the bushes and be like, you know what, I'm going to actually stick around and see what the hell is actually there. And sometimes you get bit by the saber-toothed tiger and occasionally you get a really, really cute bunny rabbit that you get to pet and bring home and feed carrots for a long time. That's. That's just hard. And I think to do that well, we're talking about systemic changes in early childhood development and human development. How do you actually get comfortable with yourself? So I can't change that. But on the founder side, I think it is really, really good that we live in this moment where it is very attractive to be a founder, and it is more appealing than ever to do great mission-driven things. And I think it comes from specifically events like this, leading with this message of hope. We're talking about climate. We're talking about Earth. We're talking about this broader thing. but we're also talking about optimism at the end of the day, right? No more of this doomerism like, oh my God, it's scarcity. And like, no one hears that shit and be like, saddle up, let's go. It's just not how human beings work. It's rather by saying like, hey, listen, you want to work with the best people in the world. You want to do meaningful stuff and you want to get paid good money. There's no better time in human history to be able to do all three. you don't have to sit in a dead-end job for 30 years like your parents, like join us on the front lines of the most critical fight and fight for the future of the species, right? That's wonderful. And that's going to bring more people into this.

• Speaker #2

  Well, and Christina and Duncan, your organizations each have ways of tackling this, right? Christina, we can start with you and then we'll move on to Duncan.

• Speaker #3

  Yeah, we look across the value chain, right? We try and be across all three of discovery, development, deployment is how we call it. So within Breakthrough Energy broadly, we have a program called Breakthrough Energy Fellows that works with the best innovators out there and the best ideas to help them mature those ideas and get them to a point where they're a company and they would appeal to the venture industry of the world and the entire rest of the venture partners. And then... development, right? We work with the companies within the venture group and we focus on company building. That's part of our DNA. And then deployment, which is what the group called Breakthrough Energy Catalyst is called, which is very focused on investing on first of the kind plants or first of the kind projects. So to us, we're building all the different tools and vehicles that are needed to be able to help the energy and climate companies go across that journey from the very, very early stage of steps to getting a large scale plant built and deployed.

• Speaker #2

  And Duncan, what are you all doing at SOSV?

• Speaker #5

  Yeah, it's quite the burden for us because if you think about just Hacks and IndieBio together, that represents over 70 new companies per year that we've got to go and find. So that is a sourcing problem. And I would say on the plus side, there's just a huge number of people that are definitely mission driven in what they want to do. You don't have the kind of the sort of, oh, I was SaaS, then I went and did crypto, now I'm doing AI type of migration. You have people saying, I want to go into. Climate tech, because I believe that that is the most important thing for me to work on. That is fantastic and that kind of north star will help a lot of them to navigate some of the uncertainties that are going to be thrown up in front of them. I'm also a technop-optimist. I believe that we have the technology to get us out of this hole. My fear is that a lot of it is stuck in academia. That's one of the biggest challenges. And so, you know, some of the best technology is in academia and we just need to get it out. And one of the ways that we do that is we just embed ourselves in with the fellow program, where we will go and just, you know, give grants to PhDs to say, hey, we know that this is half baked or not even anywhere near the oven yet. We'll just give you some money to go and figure out if we can get this into something which is investable, or we'll say to a bunch of PhDs, Hey, we are interested in this one thematic area. We're not going to denote a technology there. We're just interested in the area. You go and find the really interesting technologies within your university that could potentially unlock that. And let's see if we can create some companies out of that. That really is kind of one of the most important parts of what we do, because. Otherwise, we just sit there and wait for companies to come to us based on our ability to market and then the chances of us getting that perfect technology to really make a difference is low.

• Speaker #2

  Yeah,

• Speaker #4

  so one thing more of that, it's so special. I think Duncan's being too, you know, too humble again. Duncan is world class and converting world class scientists and engineers into amazing CTOs and CEOs and I've benefited from his ability to do that, right? Like, if you're in computer science, you have YC and companies like that. But if you're in hard tech, thank God for SOSV and thank God for Hacks and Nebi and all the other groups.

• Speaker #3

  I want to add my call to action, my fear, because I also think technology is incredibly fundamental in solving climate change. And we started investing back in 2018 with Breakthrough. But we're now seeing a lot of those projects and a lot of climate companies getting to the point where they have pilots in the field, technology de-risked, fundamentals proven. In my... my focus is how do you get those pilots out into real projects? And the call to action is there's so much talent out there from a variety of industries, whether you're working in an EPC company or whether you're someone that has worked in wind and solar for the last 20 years. How do you do project development, project construction, project deployment is becoming a fundamental need within all of those startups that are currently in this space. And that's the part that we're trying to kind of fill the missing middle, if you like.

• Speaker #2

  Yeah, Christina, that's a great segue. One thing I wanted to touch on is this missing middle where early stage companies have trouble finding capital, resources, expertise. What can be done or what are you all doing to help them bridge that gap to the point where they can get ready for infrastructure and later stage capital? Christina, we can start with you.

• Speaker #4

  I'll do it first.

• Speaker #3

  Yeah. Yeah. So what we're trying to stress with the companies that we're working with is how do they focus on building their pipe, right? Build the muscle early when you're making your pilot project to get all the expertise you need. Treat it as the first commercial project, even though it is not the first commercial project, right? Get the engineering people that you need to think about the project schedule. Think about how you make timelines. How are you going to control? costs that are always going to run higher than you expected in the beginning. So use that pilot to prove to the next stage investors that you're able to deliver on project execution. That is a great platform for you to do it. Don't consider this as just a pilot that can overrun on cost and it just needs to prove the technology. Just treat it as a first commercial project, even though it isn't. And then the other part is to focus on three things. One is feedstock, offtake, project execution. Typically, people focus on uptake, and that's the only one they're focusing on. And of course, it's important. The project execution I just touched on with how to deal with your pilot, and the other one is your feedstock. That controls a lot of the costs. And at the end of the day, a lot of our companies are in the commodity markets. So how do you look at that holistically so that when you're talking to the next stage of investor beyond venture, the private equity, the infrastructure funds, the project financing groups, you can prove that you have the chops and the skill sets to. to actually deliver it to them.

• Speaker #5

  I think for us, because we come in so early, what we really try and do here is just embed the culture of being capital efficient in technology development. We have a team of 25 people that help the companies we're investing in. It really is a village from our side. It's like full stack design engineering sites that can kind of help the teams to derisk bits of the technology, but then constantly think about how that applies to scalability of that technology. But there's no point in just like Christine is saying, like, there's no point in having a pilot is just to prove our pilot, you want to think about how that pilot is helping the next the next stage of development of the technology that you're working on. Another thing that's critical for us to get as a result of that prototype is a robust TEA. So, something that shows a technical economic analysis which can really be poked at by as many investors as possible and has been proven at certain smaller scales, but then can also show how those learnings can be applied to the next scale.

• Speaker #2

  And Shao, do you have anything you want to add here?

• Speaker #4

  I mean, nothing that impressive. They took all the good stuff. I primarily see this business through the lens of people. And I think in what we're talking about, it's the kind of same thing, right? To go back to your earlier point, Tim, there's a lot of money clearly out there. It's not a matter of not having enough capital on the table. But somehow, people don't want to write the checks. And so I think... partially what has happened over the last two years as the goalposts have changed. And it's oftentimes difficult to get into that secure space where you can share, especially on an emotional level, why people don't want to write checks. Investors very rarely tell the full-throated truth to founders when they say the no. And so I think what I've been trying to focus on over this last six months is just really understanding how do you actually get a Series B or Series C investor? to actually write the check. Like, what are they actually looking for? And it's perfectly fine to have the conversation started with, like, maybe there's just nothing out there. Maybe the things that people have been trying to build towards and these offtake agreements that Christina mentioned, it's just not enough. And that's a hard thing to say to a founder. But if you start there, then maybe you can start to feel out what actually companies need to do. And if I can get to that kind of core truth, then I can better prepare my founders to actually create something that is fundable at that stage.

• Speaker #2

  Yeah. And Xiao, as you look forward to the remainder of 2024, what are you advising your portfolio companies?

• Speaker #4

  You know, sorry, this is going to be a very unsatisfying answer. I think most generalized answers to questions like that are just like not satisfying. kind of horseshit. So I don't have anything good to say to that, right? Like the art of doing this job really, really well is I should know something really, really specific about my founders. And I should give them something really, really specific that pertains to who they are as people and what their situation is. Generally, I don't know. Like, what can I say generally to my founders? I'd say take care of themselves, right? Like this, this is a hard, hard thing to do. And it's no one's here to do like a two year, you know, B2B SaaS flip. right? And so if you're preparing for the marathon, and if you believe that the human element is so important, then we have to take care of this too, right? Like what's the small thing you can do to be compassionate to yourself so that you're ready to fight this for another six to eight years, right? What's the thing that you can do to make sure that you don't burn out? That's probably the most general thing I could say.

• Speaker #2

  Yeah. Duncan, do you have any advice you're giving your companies?

• Speaker #5

  I very much share Charles'response to that. I mean, don't die. It's like a critical piece of advice at the moment. There's so many expectations of a founder around valuation and upticks and a lot of that at the moment just needs to be tempered and need to be seen as it's flat for now and let's hope for the best in the future. I think One other important point is that companies are no longer just always relying on venture capital to get their next part of the project done. And so at every board meeting that I'm in and every catch up, there's always a part around, okay, who's looking to potentially plant finance this? What are some of the venture debt options that we have? It's expensive, but you know we don't have that many options at this point. grants grants have been coming in very nicely for a lot of our companies and are really transformative through some of these periods and something which a lot of a lot of the um the founders are taking very seriously indeed because as long as they align well with what you're trying to do um they can be very powerful indeed there are risks you don't want to be a grant entrepreneur it doesn't necessarily mean you're a great entrepreneur if you're a great entrepreneur but if you can get a grant to align with what your business needs to do fantastic

• Speaker #2

  Yeah. And Christina, any final thoughts on that matter before we turn to questions?

• Speaker #3

  Yeah. I mean, I would say that I agree with everything that was mentioned about this is a really tough business and we are in a really tough part of the cycle in terms of fundraisings and how long they are taking. So I think the key message to everyone out there fundraising right now is that you're not alone. There are a lot of companies that are facing similar challenges.

• Speaker #0

  In terms of kind of practical advice is look at all options of financing well beyond just venture. That could be equipment leasing for certain people. It could be the venture debt. It could be the grants. And look at those. It could be corporate NRE, non-recurring engineering. So expand a little bit the funnel of what can be capitalizing within your projects and within your company, depending on the stage that you're at.

• Speaker #1

  One other thing to add to that, I guess, is think less about the growth mindset right now and more about the value mindset. Think just a little bit less about, I'm going to expand at whatever cost and think more about how do I get to those positive union economics within a realistic timeframe? That's what investors are much more likely to back at the latest stage because we still don't know when the IPO market is going to return. They'd rather be investing in a profitable business than one that's going to require more and more money every two years.

• Speaker #2

  Yeah, excellent. Well, I think we'll turn to questions. Just a reminder to everyone, please type your questions in the Q&A. And we'll start with one from Veronica Wu. She's wondering if there's been a change that you've seen in the quality of deals in the seed round. Are these companies that would have maybe been raising an A or a larger round now, but are now raising smaller, earlier stage rounds?

• Speaker #1

  I can take that one. Yes, definitely. Definitely. So we had our busiest year last year that we've had in a very long time. Some fantastic investments. We just saw the expectations that had been kind of previously inflated a bit in 2021-2022 come right back down, but still some really quality founders with some great technology. And we're seeing the same sort of dynamic this year, I have to say, as well. That's definitely true that that's happening. I don't know if others see that, but I'm sure I see that.

• Speaker #0

  We've seen also companies achieving a lot more with a smaller seed check. It was mentioned earlier about capital efficiency and focus. We have seen that across the board on companies that we're evaluating, which is excellent to see, and it also helps build the value within the companies.

• Speaker #2

  Steve Chaston has one. How strongly do you weight the pathways to profitability for the companies that you invest in?

• Speaker #3

  A big weight, I think. It's a big weight. At the end of the day, I work backwards. We're here to save the world. And one of the premises is one of the best ways to do it within the capitalistic frame is to create massive, successful companies. And that profitability directly matters. And if we could do that well for just even like a generation, then larger pools of capital start flowing into the space because whether they care about the climate or not, they understand that these are the businesses. they're going to give you what human beings have always wanted for, you know, tens of thousands of years as well as then it's power. And if we can mix those two things that I think we have a real good shot to really change the world in a fast way. So yeah, it's important. Profitability is important.

• Speaker #0

  And if we're going to be successful in what we're doing, we need to build large, profitable companies. If we're going to actually address climate change at a large scale, that's what we need to be doing. Now, the road to get there is challenging. And how do you reduce the green premium is important. And what are the steps that you're taking to get there? And I can see this as kind of the insurmountable mountain if you're at the seed stage level, right? Looking into it, how am I going to steal my plant? from one ton per day to 100,000 tons per day to get to those economics that they need. So especially if you're investing a seed, you're looking at the team, you're looking at the skills, you're looking if they know what they need to be putting in place to get to that point. So we're very focused on the team at that stage. But the goal is always the same. How do we build large, profitable companies?

• Speaker #1

  Yeah, exactly. It's absolutely critical. I think the challenge from, because I'm at this one stage earlier than everyone, is that there's so many unknowns at that time. And often, you know, we're investing into companies where there's not even a pathway yet for regulation, because regulators need to see the technology in place to be able to regulate. So there is a little bit of unknown. We have to take a little bit of a step into that unknown. But. as we continue to be involved with those companies throughout their lifetime, we'll constantly be pushing on where we can get to profitability. At what point can we get to profitability?

• Speaker #2

  So I guess a related question there is when you're looking at teams so early, how do you determine that? Or is it something where the focus on profitability kind of evolves and gets added over time?

• Speaker #1

  Yeah. I mean, we're investing in people.

• Speaker #3

  Yeah, exactly.

• Speaker #1

  Yeah. It's a people business. Have they got the North Star within the company that they can align a team around? Can they execute? and then is it the right market timing for this particular technology? That's the bit that's very hard.

• Speaker #3

  Yeah, you can oftentimes sense this kind of commercial mindset in founders and it doesn't have to be perfect, obviously. It could be very nascent, but I think that's one thing that we're all really good at supporting, right? drawing that out of people and making sure they can embrace it and do it well. But that commercial mindset is super, super important. I love talking to the founders and they talk about like selling lemonade when they're like three years old, they always had this intent to use, you know, the capitalistic system to actually get something beneficial out of it.

• Speaker #2

  And a related question here is how do you think about skill sets of founders, especially within climate tech? You know, oftentimes they are very technically minded, but how do you support and develop them or maybe even think about adding or replacing members of the team as the company develops?

• Speaker #3

  Replacing, I hate that word. I think the skill set's the same. Maybe I have an overly simplistic view of the world, but like we're out there looking for. who's going to be like the Marie Curie or Alexander the Great of this generation. And I think about all the great leaders in human history and why they were able to do the things that they do. And for me, it goes down to a single thing. Can you convince people to do irrational shit? Hey, you make like 300K at Google. Nah, quit that job. Work for me for 50K and a couple of slips of paper. Or like, hey, this guy has $300 million. Give me five of those millions of dollars. That's just weird shit to ask. And I think that the good people have a wave. the energy or the charisma to convince people to join them on this like unholy crusade to do the great things. And then that's what all the great founders have. And you wrap that into different rappers and manifest different ways. But at the core, that's what I'm always looking for.

• Speaker #0

  I think I have a slightly different view, but at the end of the day, the person leading the company or the team that's leading the company, they're in sales. They're either selling an investor to give them money or they're selling a customer to buy their product, or they're selling employees who are in different places with secure jobs to come join their startup. Right. And they need to have that passion and that paranoid optimist. And that they're going to drive towards their North star. And that there's. they're going to be able to get there. And I also see that, I want to see that they're able to adapt and take advantage of different opportunities at different times. Because if you're looking at a seed company, it's going to change. By the time you get to the next round, the only thing I can guarantee you is that most assumptions are wrong and they're going to have to adapt and they're going to have to change. So those are some of the things that I look for. But having said that, it doesn't mean that the founding team or the inventors that started with their baby in the lab and they built this technology up is the right team or the right people to build the first plant or the right team, the right group to take the company public. The same way that the technology and the business model evolves, the team also evolves. So we're trying to make sure that we're supplementing the team, that we're adding. right? If you have a very, very strong technical founder that loves to be in the lab, that person might be very miserable looking at the P&L and going to funders and top investors. They might want to be in the lab. So I just, I do really focus on what really drives that person and what's going to make them the happiest. And sometimes being fixated to like the CEO job title or role could be bad for you if that's not truly what makes you happy.

• Speaker #1

  Yeah. Yeah, totally. I think sometimes when they start, maybe they're fixated on it, but then normally the right founder will realize very quickly, like you say, actually, I don't want to be doing this at all. Please help me find a replacement CEO.

• Speaker #2

  So a real quick one here that we can go kind of around the horn here. We'll start with you, Duncan. What is the size of seed rounds that you're seeing these days?

• Speaker #1

  The size of seed rounds? After us? That's around 4 million.

• Speaker #2

  What are you seeing? Oh, sorry, Christina, same?

• Speaker #0

  As low as two or three, but I've also seen companies still call it the seed and go up to like seven, eight, nine. But I think that's pushing the definition.

• Speaker #3

  Yeah, sorry, you said fast, but I'm going to say like, it just, it really varies, especially in climate, right? You have a climate software company, and then they're raising like a 2 million seed. And it makes sense. You have a company building boats, they want to raise like 20. And it also makes sense, right? Like, this whole fixation that VCs have on round size, I believe is horribly wrong. It's all about does it match the milestones, right? The right amount of money for the right milestones, I think is clearly the right answer.

• Speaker #2

  Well, that was still pretty short. So thank you. So, another one that maybe we can expand upon a little bit here is, what do you all think is the next frontier in climate tech VC in terms of a technology?

• Speaker #3

  Tough one. I mean, this is a very unsatisfying answer to you, but I explicitly try not to think that way. Right. Like all the great things that come out of venture. It's not like some dude was sitting around one day. It was like, you know what? We need social media. That's going to be the next big thing. And it came along like to do the job well. It's more like that absolute openness and willingness to accept things that you might have never thought about before. Right. Like I wake up in the morning, I take my psilocybin and I tell myself in the mirror, hey, you're not that smart. Right. be open to new things that you might write off. And that's, if I can go into every single meeting with that open mindset, then I think I do my job.

• Speaker #2

  Well, surely there are places you're at least thinking about or maybe looking a little more actively.

• Speaker #3

  not really, maybe people or like groups of people, but I try to distance myself from thinking about it in terms of domains.

• Speaker #2

  Yeah. Yeah. Christina, how about you?

• Speaker #0

  So yeah, we're technology driven and thesis driven, right? So we spend actually quite a bit of time within like the five sectors that we're investing in electricity, transportation, buildings, manufacturing, and food and ag. to try and think, okay, what's coming next, right? What should we be investing next, right? So that's constant in our mind. And we have kind of specialists that spend time in that direction. So if you worked with us, you're probably gonna have seen it. But some, and the... it's always a double-edged sword to share some of those because people say, oh, no, you only invest in category B, not category B. And that puts you in a bit of a tough spot. But so, yeah, also an unsatisfying answer. And unfortunately, and I think it's driven by different partners, but personally, I've been spending a lot of time on battery value chain and different critical minerals and materials that expand far beyond. lithium, nickel, and copper cobbled and go into things like probably on nickel, lithium and cobbled and go into things like copper, for example, for transmission. So I'm personally spending a lot of time in that space. But I think when you talk to different partners within BEV, you're going to get a slightly different answer depending on what they're focusing on that particular point in time.

• Speaker #1

  Yeah, totally. I don't want to turn this political, but I'm going to give a slightly political answer to that question. So like we are... going into a slightly unknown phase and I think where you can invest into climate technologies where you can have like bipartisan agreement on the larger funding that comes to those technologies I think is going to be a safe place to be investing at the moment critical minerals is a huge part of that and battery supply chain exactly what Christina just said but then some a little further out there because I think you wanted something exciting so I mean like geologic hydrogen great like that there's a thing that like a lot of people are getting behind, then that could be a very exciting area to be investing. And you could see that you'd get, you know, a lot of support, really just around making sure, similar to what was happening with the energy security back, you know, in the 70s, early 80s, you're going to sort of see something similar or you are already seeing something similar happening in the US. And so if you can kind of invest in technologies that are enabling that for climate tech, I think that's where you're not going to see any. pullbacks in capital deployment.

• Speaker #2

  Yeah. So this is something that we kind of touched on a little bit earlier, but I think it bears covering again. So as we think about that missing middle, you know, bridging the commercial valley of death. There's a question here about, you know, VCs aren't necessarily set up to fund these large kind of CapEx heavy projects. But do you see the industry adjusting in any way to kind of fill in that gap? Is it smaller funds moving, smaller earlier stage funds moving up? Is it PE and other ones maybe moving down? Or is it an entirely new structure that's kind of popping up in the middle?

• Speaker #3

  I think the good funds have to adapt, right? Like fundamentally, we should not let what VC has meant in the last 10, 15 years define what VC means in the future, right? Clearly, you need a very different ecosystem to support climate companies versus software. And to your point exactly, this is why the good funds know how to pull in unfair advantages with relationships with project financiers or government sources or policy. And so many of the things that Duncan and Christina mentioned, they've built into their funds. It's exactly the kind of thing that I think what it means to be like a top tier fund to actually support them. We're all in the business of bringing unfair advantages to the table, right? We got to identify them and actually manifest them for our founders.

• Speaker #0

  I think you're seeing both sides trying to go a little bit closer together, right? So you're seeing venture funds raise continuity funds or later stage growth funds, right? Where they're able to, they're not able to invest in projects, but they're able to invest in topcosm later on so that some of that money can be used within the project, right? So you're seeing a little bit of shift there. And then you're also seeing a shift from the other side, from some of the groups that traditionally are private equity or infrastructure. be willing to take some first-of-a-kind risk. I don't think we're there yet. I definitely think there's a gap. But there's definitely an intention and a recognition of the problem. Brakes and Energy Catalyst has been designed exactly to address part of that problem with their first-of-a-kind financing. But we need far more players into that space. We need more movement, both for understanding how each other works and what their limitations are. in order to unlock that capital. In my mind, it's not unlocked yet.

• Speaker #1

  I think some other recent changes, like some of the companies that are a little bit further along with their technology, they're at a point where they're just about to produce at commercial scale. They've realized that they've got something, they've got social capital, or they've got something that's incredibly valuable to their customers, and they're able to take a prepayment for it, which is super interesting. There's also, you know, where you've got a large EPC involved, you can often ask them to be a part of the initial financing of the first plan on the recognition that they would then get access to future contracts, engineering contracts. That is quite beneficial for the companies. And, you know, I just see a range of other kind of... I guess, just like fusing of the kind of the end customer with the startup, which helps them to cross over a lot of those bridges.

• Speaker #2

  Yeah, so there was another question here. A lot of times, climate tech, we tend to think about the U.S. It's a large economy, a large polluter. But of course, a lot of pollution comes from other economies that may not have the economic resources that the U.S. does. So how do you think about investing in companies that either address or are founded in emerging economies? Is there licensing? building or direct investment and how are you approaching that?

• Speaker #1

  I'd say there's two very different things, either a company from another country looking to go into the US versus one that's for another country. The former is very easy to invest into, the latter very difficult, because the US just does have such incredible commitments to decarbonisation with the IRA. It's hard to ignore that as incentive and ultimately a framework by which you can then think about the investment. Obviously, Europe does have similar. things going on and they have a history of them in Europe of you know they like to regulate which are potentially good for climate tech startups so um that would be seen by us as similar um but anywhere outside where it's more emerging and we don't really know would be very difficult for us to uh for us to invest yeah you

• Speaker #0

  So we invest worldwide and we also have a different vehicle called Brakes Energy Ventures Europe, which is specifically a European focused fund. But we evaluate the companies with the same team, the same investment committee. And at the end of the day, is the technology unique? Is the team differentiated? And are they addressing a large challenge that can significantly reduce greenhouse gas emissions? and do they have something unique that's going to allow them to address that market? Specifically, when we go to emerging markets and we look at investments there, we look at syndicates that usually includes local partners, includes local investment groups. And that helps us both have partners that understand the ecosystem and can help support the company in ways that we may not be able to support them. So that has been an important factor in those decision making discussions.

• Speaker #3

  Yeah, similar. We have a global mandate, but it's challenging, right? To go back to what I said about unfair advantages, we may have less in other countries, right? If you're doing something really, really cool in southern India, I have to fight really hard to make sure that I can actually bring something other than commodity capital to the table. And to me, that's the exciting part, right? Obviously, because of what my face looks like, I care about especially places like East Asia, but we have to earn the right to go there and to partner with the best founders.

• Speaker #2

  Yeah. So along the lines in terms of geography, maybe thinking a little bit more locally within the U.S. How do you weight companies that are not necessarily from one of the typical startup capitals, whether that be San Francisco or Boston or LA? Does that change your perception of the company or how you evaluate them in due diligence?

• Speaker #0

  So I'll go first. Not at all. That's where I see opportunity, right? Because not as many people are looking. So we have been very active across the US, including the middle of the US, where sometimes it becomes an issue as talent, like people, right? Are they able to attract people to relocate to wherever they are? That might become an issue. but there's also opportunities in terms of like the cost of building manufacturing in the middle of the u.s is significantly cheaper than the coast um so it comes with the positive and negatives across and i guess a personal anecdote i have had zero geography filters on my investment so i ended up with boards in israel vancouver and everywhere in between uh but to me it's just driven by but where are the the opportunities and the great technologies and great teams

• Speaker #1

  Same, not at all. We actually find the Rust Belt area is probably one of the better areas for us to go and find investments just because it happens that there's a lot of universities that have technology that we're particularly excited about there. Canada is a great place. Europe is a great place. For us, as long as they're looking to do business in the US, it's going to be very interesting for us.

• Speaker #2

  Xiao, anything to add there?

• Speaker #3

  No, I think they said it all and they said it greatly.

• Speaker #2

  Excellent. Well, we are coming up on time here. I want to make sure we have time for some closing thoughts. I just want to end very generally. As you look to the rest of 2024, what are you keeping your eye out for in the coming months? It could be anything.

• Speaker #1

  Does anyone want to go first? Have a good answer.

• Speaker #0

  I mean, elephant in the room, right? Elections are happening in November. So how should companies be prepared, both in terms of potential effects on or changes in policy or staying in our funding groups going to be more hesitant deploying towards the end of the year in Q4? So should funding rounds happen earlier than that to avoid the October, November time period? But that's definitely front of mind.

• Speaker #1

  Probably spend too much time trying to decipher the Fed on interest rate cuts. Should probably stop doing that. But yeah, I definitely look at that. That's really important for us.

• Speaker #2

  Even at the early stage there?

• Speaker #1

  For sure. Yeah. I mean, we have a bunch of companies that are way beyond Pre-Seed, right? Series B. So yeah. And we allocate capital there as well. So we just need to make sure that we're making the best decisions possible.

• Speaker #3

  Yeah, I don't think I have anything smart to add to this. My youngest son is about to start school with my oldest son, and then they're finally going to go to the same school. So like I pretend to be a VC, but really I'm just a chauffeur for my kids. So once they go to the same school, I'll have like a fucking hour back in the day. I'm really looking forward to that.

• Speaker #2

  That is definitely a good thing to look forward to. Well, I want to thank you all for your time here. Ciao, Christina and Duncan. Appreciate it.

• Speaker #3

  Thank you so much for having us. This is great.

• Speaker #2

  Thanks,

• Speaker #3

  everyone.