Ryan Grant Little: 0:42

Welcome to Another Climate Tech Podcast interviews with the people trying to save us from ourselves. This episode is a bit longer than usual, and for good reason. I spoke with serial entrepreneur turn venture builder, Jeff Katz, an American living in Berlin. He shares some of my worries about Europe keeping up the pace of investment and innovation in fighting climate change. He provides some of the best insights I've heard in a while about how we need to think about financing climate tech, which is a very different animal than software, which is where lots of today's climate tech VCs cut their teeth. This is a must listen for anyone who is investing or seeking funding in climate tech. I'm Ryan Grant Little. Thanks for joining, Jeff. Welcome to the podcast.

Jeff Katz: 1:26

I'm always happy to take time and sit down and talk shop.

Ryan Grant Little: 1:29

We're early on in the podcast. We're only in the second month, so we're not exactly the Mark Maron show yet in a household name, but we're working on it here, and by we I mean me. So you're a founder and a technologist turned and I'm going to put this in air quotes VC, because I know you're not a traditional VC and you'll want to talk about this. But can you talk a little bit about the companies that you've started in the past and how you made the decision to move to the other side of the table as an investor?

Jeff Katz: 1:58

Absolutely so. I think the first company that I started if you don't count lemonade stands and things like that would have to be a company when I was living in the United States. It was an IT services company. So, hey, we'll build a website for you. And I know a lot of people got their start sort of building websites or fixing computers and things like that. The next company that I founded was a game studio actually, and then I co-founded a hedge fund information platform. It's a little bit of FinTech in there. I actually moved to Germany 11 years ago to be one of the co-founders of an access control startup, so IOT and stuff like that.

Jeff Katz: 2:39

Generally, I would say it's always been about technology, data and sort of. Over the course of my career it's been more clearly defined as the value chain around data and the value chain around data going from okay, we have something in the physical world so hardware, electronics that either receives information and then you can do stuff with it. You can build a service, you can build a platform, or there is a service and platform which needs to do something in the real world and for that then again you need something physical that's also interacting with the digital. Now I went from that to doing what I'm doing now is pretty straightforward. There's basically two kinds of founders. You have naive people and completely insane people, and most of the time you can't tell which is which. The only kinds of people that you can really tell are insane 100% for sure are the serial entrepreneurs the people who go out there and do whatever they're going to do, get punched in the face, get knocked down, stand back up knowing full well what they're in for and going for it again and again and again. And so I did that a couple of times. I did it enough times to know that I'm one of these completely insane people cannot be helped.

Jeff Katz: 4:03

No amount of therapy is going to fix me and make me a productive member of society some other way, but at the same time, as a person developed through your career.

Jeff Katz: 4:11

Almost everyone starts out as an individual contributor and then, depending on how things go, you end up maybe as a team lead or a manager, and as you go along that path, that journey, you see maybe the individual people that you're managing on your team depending on how big the team is that aren't as capable or they have different strengths than you do, but in order to achieve really big things past a certain size. You can never accomplish that by yourself, and I see the moving from doing the startup, which is already kind of a weird turn of phrase, but doing a startup to helping other people do startups is a furtherance of that journey where the challenge that we're facing, what's sitting in front of us as a civilization and humanity, is such a big thing that the overall effort that I can put in at any one startup is much smaller than the impact I can have by helping a whole bunch of people do a bunch of really amazing things.

Ryan Grant Little: 5:16

Were you ever an individual contributor? Because I'm imagining a lot of serial entrepreneurs were starting out as the founder and CEO of the lemonade stand and never deviated from that path.

Jeff Katz: 5:30

I definitely had some normal positions, I would say I was my first job. I dropped out of college the first time and I took a job with a defense contractor as an individual contributor and at some point I said, wow, I don't like this, I need to finish my degree so I can do something other than this with my life. I did eventually then go and finish my university degree, my bachelor, and the first job after my bachelor was then also kind of individual contributor, at which point I figured out that it's not the employer or the thing, it's just this kind of it doesn't work for me, and so you've had this series of startups that you've led.

Ryan Grant Little: 6:10

Maybe you've had some exits along the way and now sort of it sounds like the thesis is, you feel like you can do more by supporting a number of startups at once rather than just having your own individual startup, and you're kind of putting this under the shingle of 1.5 degree ventures. I wonder if you could talk a little bit about that, what kind of organization it is. Is it somewhere between a VC and a venture studio, your own kind of investment umbrella? And a little bit about the stuff that you're doing, your investment thesis, the kinds of deals, themes, stages and geographies that you're looking at Absolutely.

Jeff Katz: 6:48

There's this withering fortune, cookie fortune, and it's one that will stick with me forever and it says sometimes your life exists as a warning to others. And I think that is this short, snarky version of why or what I bring to 1.5 degrees. So 1.5 degrees, it is a venture studio, which actually doesn't provide any clarification, because venture studio is a term, could be so many different things that it almost doesn't have a meaning. What we believe, so what 1.5 Ventures claims to be, is a lean climate tech venture studio, and lean in this case meaning we don't have a fund, we don't have a giant aluminum and steel building with 100 million assets under management, that we do a bunch of performative but ultimately not useful things.

Jeff Katz: 7:47

So the challenge that we see is that in order to really have a big impact on climate change, we need to reduce very rapidly the amount of emissions that society is putting out into the world and, at the same time, we need to further along the energy transition from fossil fuel sources to renewables and non-carbon sources of electricity. In order to do that, you have to look at the degrees of freedom within the different actors in society, so governments can induce demand, but they can't really do much more than that. So you have government grants, you have regulations, but the government isn't going to say, okay, all the fossil fuel companies are closed and everybody has to figure it out. They can try, but then the economy collapses and that's not really good. So existing big businesses aren't really known for disrupting themselves, and the nicest thing you can say about existing big businesses is that they are fast followers. I think that is maybe the biggest lie that they tell themselves in their strategy meetings. Big businesses are slow, especially when their existence depends on not understanding the thing that needs to be understood, which means that, from the perspective of impact, the biggest lever that we see are fast growing startups and not just small companies that eventually will be what the Germans say KMU, so the small and medium-sized businesses, but things which very quickly, so in the course of a few years, get to a billion dollars or more.

Jeff Katz: 9:27

And so these kind of fast growing companies, there's certain restrictions on them. You can't build a fast growing company if you're dependent on regulations or government handouts, in short, sort of the green premium. You need to make money, at least within the capitalistic system, in order to have a chance of growth and at the same time, you need to find something that's hyperscalable if you want to get to this size of company in the short amount of time. And it's not that the climate tech by itself doesn't lend itself to small and medium-sized businesses, it's just really, if you want to hit the moon, you should aim for the stars. And what we saw as a we being, myself and my partners, tobias and Julian, is that all of this all well and true, the venture capital landscape is pretty well understood what exactly it means to be a hyperscalable company, but there weren't nearly enough climate tech companies. And if you look at the attrition rates of startups, right, 90% fail in the first year and more than 75% eventually die. In order to get to those companies that are these billion-dollar companies that have these massive impacts on climate, you would need to see 60, 70, 100 companies every quarter being founded and getting their early stage stuff through, and what we were seeing was 12 or 13.

Jeff Katz: 10:55

And then, if you say OK, companies which have to tie it back to what I said before, something physical in the world. Co2 is a physical thing. In order to affect it, you need some sort of physical thing is maybe half of that. So five or six companies and five or six companies a quarter coming out from all of Dach. So Germany, switzerland and Austria, all over Europe, maybe 20. That means that in 10 years there's less than half of a company that's going to be in the sort of billion euro scale and that's just frankly unacceptable.

Jeff Katz: 11:29

And what we said is okay. What are the structural reasons that are prohibiting this from happening? There's all these wonderful things, there's regulation, there's money coming seemingly from every direction at once private sector, public sector. You have amazing technologies being researched in public universities and private universities being paid for with taxpayer money and grants, but companies aren't coming out of it, and so some of it is cultural and, without generalizing a culture across the whole continent of Europe. Every country in Europe has certain aspects of their culture which aren't as conducive to starting a moonshot climate tech company as maybe if you were in Boston or San Francisco.

Jeff Katz: 12:13

But also it's the kinds of people that you need, the kinds of skills and experience that you need to build a CDR company which is capable of scaling up to that size is completely different than the kinds of people that you need to build a V2B, saas or something like that. And, what's more, the kinds of people, the chemical engineers, the process engineers. Their first, second, third, fourth, fifth and sixth thought is not I'm going to start a company, it's, I'm going to go work for one of the big industrials. I'm going to keep researching my PhD. It's 98% better, but what if we could do 98.1? And then the business competencies that you need to set up these quite complicated things with not only physical infrastructure but complex financing and offtake agreements, on-ramp agreements. That also isn't really falling out of the trees.

Jeff Katz: 13:23

And so getting the right people together, which have the competencies to execute on one of these things, and then enabling them not just as individuals to grow into this concept of okay, we're going to build a billion-dollar company, but also together as a team. What does it mean? That I'm going to build a billion-dollar company with you and then to find investors who have the presence of mind to invest outside of the group of people who went to Stanford or Yale is you start drawing this sort of Venn diagram and you find that the overlapping part where real interesting things happen is really, really small. And so, at 1.5 degrees ventures, we said, okay, we think this is where the place to play is. So we're going to start with the climate opportunity, whether you look at the IPCC reports or the European Commission's reports, where the biggest opportunities are, where the biggest support is coming from, where the biggest scientific effort has been put into to show this is what needs to happen.

Jeff Katz: 14:30

And then, through our networks of universities, research institutions, personal networks, finding the technical founders that are working on solutions in those areas. Pairing those technical founders together with a business case which can hyperscale and founders which are required to make that case work is what we do. And if you had told me three years ago when we started that we would be able to bring such really great founders and teams companies into life, I probably wouldn't have believed you. I knew, and we as three partners knew that it was necessary and this was the thing to do, but we had no idea sort of the outpouring of people hey, I want to work in climate tech, can you help me? Or I'm not sure exactly what to do. How can we bring this technology from my university lab and really roll it out as quickly as possible? It's, quite frankly, the one thing that keeps me waking up in the morning and not being horribly depressed about everything.

Ryan Grant Little: 16:29

I want to draw on a few things that you said there. One is about you talked about B2B SaaS, and if we treat sort of the golden era of B2B SaaS, VC investing, as kind of 2010 to 2020, I mean it's still going on now, but a lot of people made a lot of money and created a lot of playbooks. Basically that worked there, and these are a lot of these people we're now seeing kind of in the VC, the climate tech VC space, but the dynamics are very different for a few reasons. Right. One SaaS scales differently. It costs a lot less to kind of set up and then the margins are, at a certain point, basically 100%. So there's a lot of money to be made there. But, importantly also, nobody's going to die if there isn't a new accounting platform out there, right? So there's no end goal for this. There are no scientists saying that at a certain point, if we don't hit this, the earth will be uninhabitable, right, as it applies to B2B SaaS. But this does apply to climate tech and we know what these numbers are, and you talked already a little bit about that and kind of just doing the math.

Ryan Grant Little: 17:36

And I think of an Ezra Klein New York Times opinion podcast episode where he talks about the largest solar energy plant in the US right now is 580 megawatts. In order to hit the goals that are set I can't remember which one specifically, but like a decarbonization goal set as part of the Green New Deal you would need to have to roll out to 400 megawatt plants per week for the next 30 years. Right, and I mean there's lots, of, a lot of asterisks there and you know it's centrist paravist, not not accounting for other things. But it's kind of important, as you've done, to reverse engineer the numbers here, right, Because it's not about just finding one cool deal and finding the you know the decarbonization play that's really interesting and makes the headlines Because we're on the clock here and we have we really need this capacity that we can actually calculate in a lot of ways, and we're nowhere near it.

Jeff Katz: 18:36

Yeah, I think I'm going to ignore the bait for a moment to talk about zero interest rate and the class of idiots that grew up without being able to make a bad decision for 10 years and focus on the timeline, because that's exactly it right. Why are we pushing for hyperscalable climate tech solutions instead of normal growth? And what actually is the issue with allowing this industry to develop kind of naturally, like the other startupy kind of things too? And I think to examine that you have to look a little into how, like a startup cluster gets established right. So you have one really successful company, which the founders then become fabulously wealthy, the investors get fabulously wealthy and the first 10,000 employees also managed to have a really nice exit. Those then go on and start the second generation of companies, and then you have sort of the third generation of companies.

Jeff Katz: 19:32

Looking at it from an individual point of view, most people don't succeed wildly with their first startup. In fact, usually it fails miserably. Second one, the same Third one may be a mild success, and then maybe the fourth or fifth try. They knock something out of the park and do something really amazing. Right, for every Mark Zuckerberg who fell out of the sky with a billion dollar company. There's a lot of people who, ah, you know, I founded this and then I founded this, and then this one took off.

Jeff Katz: 19:58

With climate, we don't have the time for founders to develop and fail two or three or four times before really taking off. Every ton of CO2 emitted today is so much worse than a ton of CO2 emitted tomorrow, right, and so part of why we believe that this venture studio concept works for climate, when it doesn't work for something like a beta BSAS, is because what we're doing fundamentally is we're dropping the rate of failure for those initial shots, right, if you look at big statistics, which there really isn't a big enough population size. But if you look at the big statistics, companies that go through a venture builder don't fail at a 90% rate within the first year, and in fact it's closer to 50%. So already you're increasing the chances that the company is going to be successful, that you're going to have this cascade effect of successful founders and employees.

Jeff Katz: 21:04

But the other thing, of course, is you have investors who are running and understanding a playbook which just simply doesn't apply, and that, I think, is probably the most frustrating thing about my everyday, and I'm not even the one who's dealing directly with the investors. Right, the companies in our portfolio have founders. They're their company, they're the ones who are pitching and talking to investors. As we see it, there's sort of six major groups of investors who could potentially invest in climate tech startups, and the first and most important thing in advance is that generally, vc as structured today is not very good at investing into climate, and there is a really simple explanation for that the standard VC fund model of 10-year lifetime with a two-year extension maybe another two-year extension?

Jeff Katz: 22:00

maybe another two-year extension. It doesn't really work when you have a potential return that takes 10 years. So even if the fund invests in a climate tech company on day zero, that company may not be ready for their liquidity event for eight or nine years, which is so close to the fund maturity that most VCs wouldn't be comfortable going into it. And so, even though the business models are exponential and they're making money from day one and all this other stuff, they're still structurally not able to invest. And that doesn't really matter if it's a deep tech fund or if it's a climate tech fund or if it's any fund with this 10 plus two structure is going to have difficulties there. But if the fund is set up in a way like most funds are, where there isn't a particular goal for the fund other than a particular IRR or return on investment for the LPs, then as an investor, as a partner, you have two deals on your table. One of them is a carbon accounting SaaS. It has three employees. They have done SaaS stuff in the past, they had a reasonable exit and now they want to help SMEs decarbonize their supply chain by making a platform. Next to here's a company that has created a new catalyst for a decomposing methane into water and electricity. Based on their own internal guidelines, based on the fund lifetime, based on their experience in being able to evaluate founders and people, they're structurally obligated to invest in the company that has the worst climate potential. We see that again and again. We see it especially with first-time climate funds which don't have scientific staff.

Jeff Katz: 24:01

Something that I've heard very often is look, this sounds really great. We don't know anyone who can do the technical due diligence on this. We're going to have to pass From a building a company's perspective. That's extremely frustrating because there's all of this money and people announce and they go to the press hey look, we're investing in climate and all this great stuff. It's 100 million more of climate, 200 million more of climate. Then you look into the portfolios what eventually gets built up and the total amount of carbon that's being prevented or reduced is homeopathic. The thing about that is that a simple measure of euros per ton of CO2, right, if I'm 100 million fund and I make my investments and I'm able to reduce a megaton of CO2, that's actually not a great use of funds. You could go out and bury coal in your backyard and have sequestered more CO2 than that for that amount of money.

Jeff Katz: 25:06

The investors that are really stepping up are, well, they're the industry VCs. They're the building industry VCs, they're the oil and gas industry VCs. They're the people who are closest to the problems that are being solved. Of course, one framing of this is ooh, we have a climate problem, we need to make carbon tax, we need to have a green premium on top of everything. Honestly, we're going to be out of fossil fuels by 2080, with or without the climate crisis.

Jeff Katz: 25:40

If you frame it instead as look, we're in the last energy transition of humanity before we take to the stars and build Dyson spheres and all this really cool stuff, this is a trillion dollar opportunity. The climate change is rather an energy transition, and the energy transition is about building things. When you talk to these industry VCs, they say look, I don't care that this is green and I really don't care that this is good for the environment. What I do care about is that this is 10 times more energy efficient. It costs 10 times less. It is going to make my business scale 10 times easier. When you frame it from that perspective, it makes sense why those are the investors that are able to make these investments. Unfortunately, it also shows you why there's so few startups that are getting funding from these kinds of investors. Because everybody is doing this VC kabuki dance with the climate tech people Six months later. Sorry, we can't invest. We invested in green coin crypto nonsense instead of something that's actually doing impact.

Ryan Grant Little: 26:53

It's these larger industry players that are used to investing in bricks and mortar or, maybe more aptly here, stainless steel, that are being able to bring the big money to bear, but they're not popping up as much in the LinkedIn feed or in the headlines.

Jeff Katz: 27:06

Exactly If Saudi Aramco, the world's largest company, invests in a green hydrogen startup, that's not something that's going to be front page news. That's their everyday business, which makes sense. But at the same time, come on, don't those companies have enough of the economy? Can we somehow tie the energy transition also to democratization of energy and power? That's maybe a little bit of wishful thinking.

Ryan Grant Little: 27:34

In a lot of cases, it's the biggest polluters now who are facilitating the switchover. As you say, they see it as an infrastructure investment opportunity, while still leaving some of the big ones behind. You can see the split between the ones who are making these investments and then others, like Exxon and Shell, which are going the opposite way, are staying basically where they are, or Total.

Jeff Katz: 27:54

Total, for example, yeah, which actually was doing a lot of investment, and then they said our strategy changed, they just killed their fund. Yeah, Exactly, I think. I like to look at this through an industry lens. In our portfolio, we have two synthetic fuel companies. They have different advances in how they are making the fuel, different processes. They, by and large, aren't competing with each other, except for chemical engineers and that sort of thing. One of them is focused on the airline industry and the other one is focused on shipping, and the big difference between the two of them is that the shipping industry has said look, we need to decarbonize, we need to move away from what we're doing. We're not going to bet on any one horse, we're going to bet on the race. We're going to take the huge amount of money that we've built up over time and we're going to make sure that we have a supply chain, that we have the engines, that we have everything that we need to be fully decarbonized by, whatever our goal is. So you have the huge leading companies there who are actively going out and ensuring that the seeds are planted so that, when the time comes to take advantage, there is a crop of technologies that they can choose from.

Jeff Katz: 29:09

The airline industry is much more fragmented and there's, let's say, primarily American Airlines.

Jeff Katz: 29:17

So whether we're talking about actually American Airlines or JetBlue or United or those sort of companies, have established funds for a synthetic, or rather sustainable, aviation fuel.

Jeff Katz: 30:10

In Europe, the picture is much more bleak.

Jeff Katz: 30:13

Where the discussion is well, talk to us when you reach price parity with kerosene.

Jeff Katz: 30:19

Or talk to us when you've already built a huge fuel facility, and just the attitude of the industry that you're selling into has so big of an influence on also the investor appetite, the ability to attract and retain skills, and, combined with the regulatory things like the Inflation Reduction Act in the United States, versus whatever the EU Parliament put through, what we see is that in an industry by industry basis, people are going elsewhere because the motivation to do the climate stuff is not going away. And if you have one environment on the other side of the Atlantic which is very conducive to making a big company and having a big impact, and one in your own backyard, where maybe you have a better network, but the winds are blowing in your face the entire time, it's pretty clear why people would do that, and so the end result of that is, that not only are there not enough startups being founded here, but a lot of the talent in specific industries that's going to be required to successfully manage this energy transition are going elsewhere.

Ryan Grant Little: 31:35

Yeah, it's a real issue. I mean, you're in Berlin, I'm in Vienna, we're both from North America. In an hour and a half I'll have dinner with an Investee of mine who's interested in moving the entire operation from Europe to North America, to Silicon Valley, because the reception they get there is so much greater, the interest is so much more, and I think here in Europe we're not doing a good job of supporting the winners, right? I mean, let alone the ones that are struggling, but once the winners kind of hit a certain point, there's nowhere for them to grow, right? There are very few moon shots here.

Ryan Grant Little: 32:07

I picked up on your LinkedIn a while ago that you were mentioning that, while in the US and the UK we're recording this in August, in the US and the UK VCs are hustling out term sheets right now, whereas in Europe the VCs have a bit of a see you in September approach, and indeed we're getting that on a lot of autoresponder emails. What do you think is happening here? Is this ever going to change? What do you think is going to lose in Europe some of these great startups? To places like Israel, to the US, where there's a bit more innovation happening?

Jeff Katz: 32:37

It's a multifaceted question and a multifaceted environment. I don't think there's a simple answer. Definitely, several times in recent weeks I've heard people ask the question what does this mean for Europe? Or phrase slightly differently if this continues, then Europe is in trouble, which I would tend to agree with. I think that Europe is quite a bit more robust than most people give it credit for.

Jeff Katz: 33:03

The issue of the investment environment between continental Europe, the UK, which is a different world, and then Israel and the United States, comes down to ability to take risks, which is not just, let's say, the venture capitalists themselves or the tradition or culture around venture capital, but also who their LPs are. It's a huge part of it. The investors in the United States have different LPs, they have a different risk profile, they have a completely different freedom to operate than a lot of investors in Europe. But then also the overall professionality of the investors is much more highly developed in North America than in Europe, where you have investors pulling things in Europe that would get you essentially blacklisted in the United States because the overall funding environment isn't so well developed. Those actors can continue getting away with nonsense. The result right. One of my world pet peeves is people who don't think past the first order effects of a decision or a change or an action. The first order effect is people go to the United States or, as soon as they can, usually they'll take a seed round in Europe and then for series A, they do the Delaware flip, they jump over the ocean, they go to San Francisco and that's how it goes. But the second order effects of that are you fail to build these startup ecosystems, and the third order effects of those is that the existing startup ecosystems, where you have this more mature investor base, continue to grow stronger and so the disparity between them only gets bigger. And of course there's fourth and fifth and six order consequences.

Jeff Katz: 34:58

But for a while it seemed like every European municipality wanted to have their own Silicon Valley, and so in Berlin it was Silicon Valley, and I'm sure in Paris there was rude is it a cone? And you know, everybody wanted to have this sort of high tech stuff, but they were sort of pantomime in San Francisco, without understanding what actually makes that work. And what makes that work isn't, you know, a fun event and pizza and grinding or any of this kind of nonsense. What makes it work is successful founders that are able to successfully raise funds, not just in the first phase, but also series a, series B, series C.

Jeff Katz: 35:40

Add a reasonable valuation right. It doesn't have to be the best possible one, but it needs to be one that enables them to continue to raise money, either to their exit or IPO. And you need to have an environment where people can put the maximum amount of their energy towards hyper scaling their business and not dealing with Investors making trouble, regulators making trouble. Not that regulations are bad, don't get me wrong. There's a reason. I'm living in Europe and not in the United.

Jeff Katz: 36:08

States and the regulatory system is a big part of that. But there's always opportunities for improvement. But what I'm getting at. So the main idea here is that you're not going to get a Silicon Valley in Europe so long as it's difficult to raise funds past a certain stage. It's difficult to find capable C level staff for a company past a certain stage.

Jeff Katz: 36:33

Imagine you have a thousand employees, you just raised your series C and your goal now is to expand to 40 more countries. How many people, from an operations perspective, living in Europe that you could convince to come work for your company do you think that there are, versus how many of them are in metropolitan Boston, in metropolitan San Francisco, la, seattle, new York it starts to be a limiting factor just the people that you can get a hold of. So there's a huge amount of people in Europe that have brought their startup to a series A or series B and then it was clear that they weren't really the right ones to do it from there. So they jumped off or they took an exit or they did something else. But there's not that many companies that have gone all the way CDEF, ipo or what have you where those people are just sitting around looking for new things to do.

Ryan Grant Little: 37:26

I want to come back just quickly to the topic of hardware versus software. This is, I think, you recently published, together with Extantia and I should say that Carlotta Ochoa Nevin Dumont was on the podcast earlier you co-authored a financing guide for hardware climate tech entrepreneurs. So maybe trying to short circuit some of this, the funding issue, around the bigger numbers, right? So just the fact that that building pressure vessels, companies with with huge pressure vessels is more expensive than building companies with a team of outsourced developers and stuff like that early on. Can you talk a little bit about this? So probably there are a couple of people listening right now who are running one of these companies and these types of companies and are struggling with exactly this financing issue. What did you find? Maybe what was the impetus to do this, to publish this report in the first place, how did it come together and what were some of the findings?

Jeff Katz: 38:22

One of the most famous venture studios in Europe was Rocket Internet, and one of the things that Rocket Internet did very, very well is that they incubated e-commerce ideas and put them together with a development team and e-commerce platform and an execution team and spread as quickly as possible to as many geographies as possible. The reason that worked is because all their e-commerce things could use the same platform. You could use the same developers. You have a big shared resource value that you can bring to your companies. Us is one point five, because we don't have this sort of industry focus. Climate tech is not an industry right. What possible shared resources can we make available to our teams? That applies to a synthetic fuels company, that applies to a construction company, that applies to whatever else shows up building renovation, battery storage and the answer is well you know, if we're talking about bits versus atoms, c02 is definitely a physical thing. The stuff that creates CO2 or releases it into the atmosphere are physical things. We firmly believe that in order to get to the scale of impact of 100 megatons of emission reductions per year, you're going to need to do something physical. So, looking at that, all of these companies have financing issues, and I don't mean getting funding from the seas which is like operative financing. What I mean is, as you said, we need to build our first of a kind plant. The chemistry doesn't make sense if we build anything smaller than 500 kilowatts. So we're looking at 10 to 12 million, maybe 15 million euro. Great, the company hasn't existed for even a year and even though we have a government grant, we have a bank loan which we as the founders agreed to take a 30% liability and all these other things. Even with all of that, this is such a financial complexity which doesn't usually hit software startups until far, far later. Right, if you're a software as a service company, eventually you might get into factoring where you take some of the payment for your subscribers up front, and you might get into mezzanine financing, all this kind of crazy stuff. But at that point you're big enough where it makes sense to have a professional CFO or somebody join the team as a founding team of two or three, a couple of engineers and a business person. You don't necessarily have that cfo experience behind you.

Jeff Katz: 41:02

And as much as I don't like donald rumsfeld, he said something once upon a time which was really smart, which is you know, you have your known knowns, the thing that you know. You have your known unknowns, the things that you don't know. But the really dangerous things, these are the unknown unknowns, the things that you don't know, that you don't know, and there's so much in the financing world that are for so many founders, especially the ones that are suited to do a climate company, that are just completely unknown. And so this financing guide that we, we all, together with extents, yeah and I should mention that extents, yeah, is the asterisk every time that I complain about climate tech vcs who don't have scientific people on staff guess what they do? Yeah, they're incredible who invest in nonsense. Guess what they don't. They are, let's say, the exception to the rule, and the point there was okay, what are all of those unknown unknowns?

Jeff Katz: 41:58

When it comes to financing, what options are there for capex financing? Factoring is the thing that you can do with subscriptions, but what can you do with a physical piece of equipment you know and then you get into okay, is it fixed or is it movable? So it very often makes a huge difference from a financing perspective if you can put this thing in a shipping container and move it around or if it needs to be built in place, which means that the sort of financing peculiarities start to have direct impacts on the product development and also the technology. So for the moment, let's assume that you can move it around. Okay, is this something where you are going to own an operated or you going to sell it to a customer? Can you do lease back kind of operations where you sell it to a company and lease it back with a certain financing rate, which is, by the way, how a lot of the cell phone carriers actually work? They don't own their towers anymore and it's just a bunch of financial engineering stuff which is necessary to get those kind of projects off of the ground. And then there's off, take agreements and pre financing and bank loans and mesonene financing and all these sorts of things.

Jeff Katz: 43:15

But the ultimate goal is how can we get this thing built when we can demonstrate not only does the technology work but we have customers who are willing to pay for it? And, by the way, this is a 500 kilowatt plant, but the next one is five megawatts and the next one after that 50 megawatts, and now it's going to be tied to a solar farm and a wind farm and maybe some hydroelectric or some geothermal, and so the sizes of these projects Are not small, they're not trivial, but at the same time you can't be a project business, because if you're a project business, guess what? You're not hyper scaling. So what are you doing? Are you selling the technology? Are you licensing it to someone else? Are you building a daughter company for each one of these sites that you're building up? Are you charging a licensing fee for the technology?

Jeff Katz: 44:07

But to yourself, in a sort of like reverse Irish sandwich kind of situation? And just figuring out the monetary requirements of executing a hyper scaling business model Causes requirements to go into the engineering, into the business, into the operational financing. What investors can you take that allow you to get this sort of capex financing? And what we found is that every company we were talking to, not just the ones in our portfolio, had a list of questions a mile long. And it made sense to help everybody basically to dig into this, at least at the first and maybe even the second level, saying hey, look, there's a whole world of financing out there that you need to look into because ultimately, every startup is about setting an impossible goal and then cutting it into pieces small enough that eventually becomes possible. Alright, we need to build this 500 megawatt plant in 2030. What are the steps between now and then and how do we get there? How can we get creative? The easy answer is it's not possible, but the hard answer is no, it's possible. We just need to be creative.

Ryan Grant Little: 45:22

I wish we had that guide when it was me and two other co-founders sitting in a room in 2006. Going from zero to three megawatt biogas plant that cost 30 million dollars and trying to figure out how to fund that and yeah, I mean, it was about Debt, leases, equity, all of this kind of thing. And then there's the whole kind of considerations of who's first in line, who second in line, what are these payment waterfalls look like? And it becomes as if the technology itself wasn't challenging enough. The financial engineering is just it's mind blowing and it's really hard for one person to really have the overall picture of this right. There's so many moving parts. So I really feel for the companies out there that are doing this right now right now and hope that they'll stick to it because it's difficult and it's probably not what they signed up for when they got their PhD and you know molecular Science of one kind or another that you know and then all of a sudden they're basically doing hedge fund manager complexity level financial engineering.

Jeff Katz: 46:23

One of our founders has his PhD in nuclear physics and he was working on fusion reactors and he said look, this is completely ridiculous and ultimately right that it is. It is completely ridiculous. But you have to do kind of unscalable things in order to do scalable ones. And especially when it comes to, like a gas plant, a 30 million biogas plant, how do you get that financed if you don't have any examples right? There's no template, there's no. This is how you build a climate company or this is how you start disrupting the oil and gas industry. It's not. You go to Khan Academy and learn how to program python and then you can build something to change the world. It's quite a bit more complicated.

Jeff Katz: 47:08

The one model that for sure works is the one of Vargas in Sweden. So the billion dollar hedge fund behind each green steel and there's a battery company and all these other things that they're doing, and it's very easy. They said look, we want this company to exist, we have a billion under management, we're gonna build it. They're not gonna go to the open market until they need money to scale, but we can take them all the way through a traditional series be your series C and great, great that that works, but that's also not something that you can reliably replicate anywhere else. So there has to be some way for this to work right. And working together with Like minded VCs and I must want to sort of slander them with the title VC, like like extents, yeah, and others is about figuring out not just how do you build the companies, but how do you build the ecosystem, how do you build the environment, how do you build the sort of foundation where those companies can not just survive but thrive and have multiple generations and Really actually move things forward?

Ryan Grant Little: 48:24

so a lot of sobering thoughts in this conversation. What are you excited about so, if you're looking at the next 12 months, what gets you to bed in the morning?

Jeff Katz: 48:32

I'll say all the stuff around the potential superconductor is super interesting to read. I think it's fantastic that we're doing fundamental science and sometimes in people's bedrooms and things like that. But from a climate perspective, what makes me excited? We have all the technologies. As a society, we have all the technologies we need already today to completely transition our economy to one that is not carbon intensive. We don't need to invent new technology. We have everything that we need. What we don't have is a clear path for how to bring those technologies into the market, into society, with a speed and with an effectiveness to transition quickly enough. You mentioned already that the United States would need to build to 400 megawatts solar plants a week for 30 years.

Jeff Katz: 49:27

In Germany, the German government set a goal for renovating old buildings. So most of the power use in buildings is heating, and if you renovate buildings you put insulation on them. All of a sudden, you need much less. 40% of the emissions from the building sector is just related to heating. The German government set a goal of renovating all the houses to a certain standard, and it's not the standard it's like. On a scale of a to f, it's D. In order to reach that goal, they would need to renovate 10 buildings a day, and currently they're doing one every couple of weeks while also shutting down the safest nuclear plants in the world and bringing back online brown coal plants?

Jeff Katz: 50:08

Right, but I mean just the scale of the stuff that we're doing is so big. But what's really exciting is to see that, rather than just getting depressed and disconnecting and going out and living in the forest like a hermit, there are so many people from all over society, whether you're talking about academics or business, people, finance people, people working at the plant, from like the lowest the highest. Everyone Understands at least that something is going on and many people are looking from the perspective what can I do? How can I do my part? And not in the there's a oil and gas industry way of how can I reduce my private carbon footprint, which is nonsense and bs? But you know, what can I do to actually change society? On the one hand, because it's necessary and people are seeing increasingly, hey, this isn't something for the next generation to deal with. We're not putting this off for another 20 years already we're starting to suffer the consequences of this. But also because, hey, this is an opportunity to do something really, really big. And sitting here working on my postdoc, pushing the A glamorated knowledge of humanity for by a little pinto thing, versus potentially being able to completely decarbonize an entire industry. That's an opportunity that doesn't come every year, every lifetime, every generation know. This isn't?

Jeff Katz: 51:45

People used to talk about generational problems? This isn't a generational one. This is maybe even the Fermi paradox, right? This is the thing that determines whether we as a species continue to ascend and eventually get to the stars or just sort of pitter around on this planet for the rest of existence. And people are stepping up and that's really exciting, and every time that I talk with Someone new about climate or what they're doing, I get really energized because so long as people are trying, so long as people are attempting and pushing and, you know, steering quixotically at a forest fire or a corporate purchaser or an empty field which could be something great one day, then we can still do this yeah it's a good moment to be swinging for the fences rather than trying to get on the first base in the show notes.

Ryan Grant Little: 52:44

Link to your financing guide for hardware climate tech entrepreneurs. What is the best place for people to find you online if they want to reach you?

Jeff Katz: 52:53

I think the easiest way to get a hold of me if you're on linkedin, just send me a message on linkedin, so I think I'm open, meaning you don't have to pay money to send me a message there. My email address is I assume you also put in the show notes. It's totally fine for anyone to send me an email. If your university student doing research about climate tech and venture studios, I would encourage you rather to look in the literature, just because I can't do a hundred university interviews in a month if they've listened to this, then they're already halfway there for sure.

Jeff Katz: 53:27

And also, I think, rather than doing a university project about venture studios and venture capital, finish your degree the quickest way possible and get out there and actually do something. But other than that, more than happy to engage basically across anything, the most wonderful thing about working in climate is that it's absolutely collaborative and not at all competitive. So there was a venture studio from south america who is sort of doing a little bit of a tour and they said, hey, can we talk? And I just sat with them for hours like here's our model, here's what works, here's what doesn't work, here's what we think. And at some point they said, hey, you know why are you sharing all of this with us?

Jeff Katz: 54:13

As it look, the primary goal is emissions reduction. If my bank account is happy at the end of the day, that's great. But even if my bank accounts not happy, if, for whatever reason, all of the successful companies are coming from you Great. We have companies that are successful, that have managed to reduce the emissions, and that means that I still get to live on a planet where society is mostly working. So it's really about how can we share and collaborate and push forward and figure out everything, especially when there are things that we don't have answers for as a group to really tackle this, and so, yeah, please send me an email, contact me on linkedin that's a great place to leave it.

Ryan Grant Little: 54:56

Jeff cats, thanks a lot for joining. Thanks so much. How cool. You made it all the way to the end. Why not go one step further and subscribe, rate and share this podcast? Get in touch anytime with tips and guest recommendations at hello at climate tech podcom. Find me Ryan Grant little on linkedin. I'll be back with another episode next week. Bye for now.