Episode 8 on the Future of Energy Transition and the Role of Impact Funds

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Transcript

Bryony Cooper:

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Jaysri Thangam:

I'm personally excited today because as an early stage investor, I'm really, really keen to know how growth investments work and how do they evaluate startups. So for this particular episode, I think I have the most interesting and the apt guest. We have lucille bonnet, MD, of alantra klima energy transition fund. And today we're going to speak about how can entrepreneurs be best prepared on their fundraising journey, her vision for energy transition in European Union and top trends, her mental models on how she's successful, and much more. To give me a bit of context, the Alantra Clema Fund is an European early growth fund that invests in technologies and ideas that accelerate energy transition. Klema fund was actually oversubscribed at €210,000,000, about their initial target of 150,000,000. And they have a partnership with Alantra, which is a financial partner, and Energas, which I think is one of the biggest energy companies in Spain. And to add on to that, Alantra Clema fund is also an Article Nine fund. Now, without much further ado, I want to say hi to Lucille. Hi, Lucille.

Lucille Bonnet:

How are you today? Hi. I'm very well. Thanks a lot for having me today. It's great pleasure to be here.

Jaysri Thangam:

The pleasure is all mine. Thank you so much for your time to get started. I'd love to know about your journey. How did you become an investor and how did you stay as an investor for such a long time and in your journey, if you can sort of tell us, what are the top three tips mental models that you use that kept you going, that kept you successful on top of your game? That'll be very interesting.

Lucille Bonnet:

How I came out to be an investor, I think, is well, I mean, I was always willing to kind of dedicate my career to somehow this climate change topic. So the environmental topics were, for me, from the very early age, very important. So I wanted, I think, to have an impact there. And then I was actually having a very generalist studies studies, economics and finance, math. And then I started to work for some reason in the banking world, also in the energy space, project finance, and I must say I didn't like that banking word too much because I was born and raised into a company, actually. So I think that overall corporate topic, working for a big bank was not really anything for me. And then I got to learn the VC space within my studies, actually. And I thought, okay, that could be kind of a good compromise between finance and entrepreneurship. And I basically searched for a position in a VC fund focused on Clintech, and that was back in 2009. I started to work for RW Energy. It basically was a fund of a utility, but we're a small team and it's really kind of remained kind of an entrepreneurial position. And I, from the beginning, really enjoyed working with entrepreneurs and people, building companies and really changing things from scratch. So I think that's why I started and I got really the chance to start to work in the VC space early on. I guess that's it. I think I've been loving this job for quite a while. So I guess I stayed in there too, therefore, and indeed kind of one of my targets back then was also to kind of set up an own fund and very happy that with Klima and actually with the Klima team and with Elantra and our sponsors, this has been possible. And in terms of mental models, to be frank, I had to check it out yesterday. But no, I think generally it would be fair to say that I recognize that we tend to overestimate what we can do in the short term, but also we very much underestimate what we can do in the long term. So I think I've tried to kind of focus a little bit on that right. On the latest. So what can you do in the next five to ten years and how can you get there? And then I must say, I'm also very much opportunistic. So I'm not only a strategist and a long term planner at all. I think it's also a lot about making Opportunistic overhaul. Right.

Jaysri Thangam:

Wow, that was very interesting. So the first thing is the long term on the short term perspective on how to sort of plan for a very long term. Because when we think about careers, it's not the next two years, it's not the next promotion, but it's over the next 30, 40 years based on when you start working. So wow, very interesting. Another interesting that you mentioned, Lucille, is you were passionate about energy back in 2009 when people didn't think global warming was real. People didn't think climate change was real. So is it something that inspired you from a very early age or based on what you see, what you saw in environment around you? What was that spark?

Lucille Bonnet:

Yeah, well, I guess indeed it's coming from the very early age. I think I grew up in the countryside. My brother is actually today one of the pioneer and biological natural champion. So that's kind of the family background, I would say. And the energy space, I always found it interesting because I thought it was kind of the basics for a whole economy and for all type of activities out there. So this is how I actually started to be interested in that banking space because I was looking at project finance and how actually do these big energy projects are getting funded. And this is where I started. So it was kind of more of, let's say, overhaul attraction for the energy sector as such. And then I actually got to know for that CVC fund which was actually part of a large utility and there I got to know or get to understand how much needs to change actually in the next decade. And I thought, yeah, there is just so much to do that I just decided for that.

Jaysri Thangam:

So the other question that I had is this is also much of a debated topic in the VC world is does a fund need to be an SFDR eight or nine article fund to invest in impact, to invest in technologies or in teams that have much better sustainable future for all of us. So what's your view on that?

Lucille Bonnet:

No, you don't have to be an Article Nine fund to do impact investment. And the reason is that there has been funds in the last decades that have been doing that and have not been Article Nine. I think the SFDR, by categorizing the different funds that you find today, not only funds but also other financial products, it's just trying to kind of bring in more transparency on what is really kind of the financial product about. Right? And it's an effort of course, of counteracting greenwashing. And so today I think it's more of an opportunity for a fund or for another financial product to categorize itself as an Article Nine because then if it does so and if it fulfills the requirement of doing so, it can really show that it has sustainable objectives as its core investment thesis. Right? So at Klima we accelerate the energy transition in making investments in early growth companies, in enabling tech for that sector. And so there is kind of a direct link and we always say we impact by nature, but it's not sufficient in a way of course, to kind of comply with being an Article Nine fund. You need to embed, of course, impact in your NESG, in your investment methodology. You need to do a more sophisticated reporting, be more transparent about many different KPIs as well. I mean there are like 14 principal adverse impact KPIs that you are reporting on per portfolio company. And to be frank, not all of them are really relevant to the portfolio companies. But what we look at much more is kind of quantifying the impact of each and every company we do all the reporting needs for being an Article Nine funds. But we also kind of tend to focus when it comes to broader ESG topics to the one that matters to the company because the companies we invest in are still startups and they are kind of still kind of embarking on this broader ESG journey and kind of understanding what that all means for. So I think it's better to focus on a few but relevant criteria for the company than kind of having a fully fledged broad ESG policy that in the end of the day does not end up being implemented. And so I mean an example would be we have building integration PV company called Sunroof in the portfolio and for them they are sourcing of course most of their solar panels from Asia and China and kind of one of the focus at the EAG level would be forced labor. And how do you source your panels? How do you make sure that they have been produced in a sustainable way? And this is not something that you would necessarily look at for a SaaS company, right? So for a SaaS company you would like a little bit more look at, I don't know what's the CO2 footprint of the servers that your software is actually running on, right? Or something like that. So it's trying to make kind of sense of what does it mean to do business in a sustainable way on the one hand and what is the impact of that technology on the other hand for the environment, for the fight against climate change. And this is our approach. But it's fair to say I think that being Article Nine fund is because it brings more transparency and more information, it also brings more access to capital, I think for the funds. So that's an important point and I think it's completely manageable also in the day to day business with the portfolio companies. So it's a process of course. And yes, there is reporting needs and things to look at but most of the time, 90% of the time this is actually highly welcome by the portfolio company because kind of they are all learning and progressing in that area. SFDR, the EU taxonomy and the whole ESG world is not as standardized as the financial world for example. So it's not IFRS right yet. So they are really highly welcoming input when it's kind of made in a practical way for them and this is what we're trying to do as well.

Jaysri Thangam:

Wow, very interesting. It's a lot more work but I guess it's the best way, one of the better ways to sort of avoid greenwashing and to sort of weed out the ones that the vision is not truly aligned for impact and sustainability in a better future. Thanks so much for that Lucille. The other question that I had is also an interesting one, especially for investment funds that invest in energy transition because only software is not going to help us get there. It's also going to be materials, deep tech hardware retrofit solutions. So do you think given this context, the current VC structure as we have is better suited for investing in hardware R and D materials? It's just slightly different growth cycles, different distributions and all of that. So how do you think VC funds can sort of adapt or change their model to better fit hardware innovations as well?

Lucille Bonnet:

So I would say that before reaching product market fit and during that whole early phase of development of the technology first of all and then kind of of a company later on, indeed I would say kind of the ten years lifetime of a VC fund might not be kind of the best structure to start with. I mean, as far as I know, these structures also have been kind of flexible when it was supposed to be the case. But also the question is when should VCA start to invest in companies? So prior product market fit, I would agree that you need to kind of make time and you need patient capital and there are funds that are being set up that are doing deep tech early stage so also hardware investment. And I think about for example friends of Keiko Ventures that have kind of said OK, this is an evergreen fund. Emerald also would be another example, this is more evergreen fund and it's really more patient capital. So there is kind of no stress to kind of get out and to exit in a certain period of time. But I think once you've reached product market fit and you're in a growth phase and this is, as you said, the positioning of Klima, I think it's not limiting very much anymore because also a growth investor like Clema is not a growth investor for the next step, I would say. Right? I mean it's a 210,000,000 euro fund and of course we can syndicate more funds with our LP, we can enable follow on rounds. But well, at some point there might be also other investors, either corporates or private equity funds or kind of others kind of taking over. This is kind of a whole chain, right? And you just have to make sure that this kind of function. But as soon as you've reached product market fit, I think it's not an issue anymore. We do hardware and software equally. The reason is that we are doing enabling technology in general for the energy transition and indeed we won't solve the climate change issues just with software. So I fully agree to that. And we actually think that today there is kind of the necessary capital for hardware intensive topic to be deployed. So you have two topics. I think one is more difficult than the other and that's the manufacturing topic. I think so far companies kind of put into the hardware case that really have to do with big manufacturing facilities still would have potentially more trouble to get the right financing. But just companies that have an infra close business model. I think these companies would not have an issue to get their asset funded by a different source of funding and not VC funding. So more cheaper source of funding that is just more suited to this kind of infra like asset financing. So this is definitely kind of place that we are looking at. We are looking at companies that have let's say innovative business model in rolling out new infrastructure. Most of the time decentralized, but new infrastructure. So we invested in mainspring for example, it's decentralized gas to power and their linear generator can handle decarbonized gas, hydrogen, biogas, natural gas as well. And the mix of all this and this is really decentralized gas to power generation for CNI segment and they do get the financing for the assets right. So there is a lot of appetite in the market for that because these are technologies that are working behind. You have customers offtake with a good credit worthiness and this is definitely something that can be funded. And again, I think we don't have fully the right tools in place in terms of ending is within the manufacturing mean. We see a lot of new battery manufacturing facilities for example starting up in Europe. So it seems to be there but maybe at a lower scale for startup in the early growth. And when you're not talking gigafactories but when you're talking, I don't know, first recycling plan for PV panels or second life battery, I don't know, something like this, then I would say it's potentially more tricky to get the funding but otherwise it's not. And therefore we're also very much interested into these kind of business models and companies that are kind of the new energy companies of the future.

Jaysri Thangam:

Absolutely, thank you so much for that. Okay, it's a great segue into the next question that I had, which is what are the top three trends that you see in energy transition and three trends that you and your fund is interested in especially? I also want to give you this caveat because since Chat GP three has been released over the last couple of weeks, there's been a flurry of new posts about how AI is going to be the next big thing in energy transition and climate resilience and all of that. I'd also love to know your thoughts on that as well.

Lucille Bonnet:

Well, I mean in terms of trends, there are a few trends actually a few things that needs to be changed in the energy ecosystem. But if I need to pick three, I think I would take energy efficiency in the first place at all level because it really reached all level. It's about all energy carriers and again all consumers. So we definitely think that the energy that is not consumed is the best one as well. So I would put that one on the top automation. And I think this is where AI would play a role as well is the second trend. And this again is let's say more of a transversal trend that you need in many, many parts of the energy value chain exactly from production to distribution and kind of further monetization you need it for flexibility. The more intermittent renewable energy you have into the network, the more flexible that network needs to work. So that means demand, response, et cetera. And so forecasting all that needs AI and making the whole system very much flexible needs both automation and AI. And so I would say kind of that would be the second trend I would think about. And of course automation on the production side, you decrease the levelized cost of energy produced for wind turbines. I don't know when you can repair them in an automatized way and make sure you produce more with the current assets. So you optimize really the current assets or the transmission lines and you really optimize the current infrastructure. And the third point or the third trend I would peak is storage. I think I was thinking also of another one and I can also name it afterwards if you don't mind. But I think storage of course will play a role increasingly and there I think there are a few bottlenecks that won't be solved by VC. First one would be supply chain, like really upstream supply chain. I think there needs to be other tools than potentially VC to solve that. But further down the road on how to monetize storage again at different level in front of the meter, behind the meter to make sure that you again have a very flexible and resilient energy system. So I think storage would be the third one. And actually I was thinking of kind of decarbonization. I was also willing to mention kind of decarbonization of oil and gas because it's still today 75% of the energy consumption. And of course you can electrify everything and actually everything that we mentioned earlier is going into how to electrify the system, right. Flexibility, automation, storage, you need all that. But is that going to be sufficient? We don't think so. And kind of therefore going into decarbonizing the gas and the fuels that are being used today in other ways probably is also kind of a very relevant sector and trend to be in.

Jaysri Thangam:

Wow, thank you so much for adding that. I feel like there's so much bad reputation on oil and gas, but you can't just drop everything that we get from oil and gas and completely electrify and go to greener sources of energy today. There needs to be a transition period and then we need that. Especially when Russian gas pipelines were shut, we all turned towards gas and without that it would be impossible. Yeah, thank you so much for bringing I think it's a very interesting fourth point. Okay, so you've mentioned a few topics now, what do you think is the biggest hindrance for these trends to sort of pick up, accelerate, change sooner?

Lucille Bonnet:

The first one would be regulatory framework because if you actually we had kind of a piece of land in France and we wanted to build up solar plant there and it was actually big enough and it was in South France and just the time to get to anywhere with the developer. The timelines are huge. It was two to three years. So until kind of all the studies, environmental studies, you need to do that. Of course all the permitting from the local, the semilocal, the regional and the national government were there. It was like two to three years. And then you need again the grid connection and this is also the scenario that needs to be automated and a few startups are working on that actually how to kind of automate the understanding of is there sufficient capacity and grid capacity to kind of put more asset online. So from an infra world point of view, I would say that from a startup and technology point of view, I would say the main bottleneck today potentially would be supply chain. So there is just a very strong demand, I think. And we are in a kind of historical shift I think, when it comes to demand and what type of products are being demanded and we believe it's here to stay. So it's not going to stop tomorrow even if the energy prices are going down. I think it's a real shift also in the mentalities. So I would say kind of making sure that you have a very resilient supply chain is a challenge for many companies. But there are solutions again for that. So we're positive. And then the third one I would say is just the fact that the energy system especially, I mean it depends on which part of the world, right? But in Western Europe for example, you have kind of very complex system already like dealing with the legacy of that, dealing with kind of big companies that need to reinvent themselves, old structures, old processes. And I think to be frank, like other countries that are building up from scratch now, their energy system almost from scratch now, they will have a huge advantage. They will have the possibility with technology and renewables potentially to kind of leapfrog us completely when it comes to the energy infrastructure. And so for Europe and the US and other parts of the world where this energy system is very much developed and complex, I think this is a hindrance actually. I mean you can't say that really to be frank, I need to reformulate. We still have having very resilient energy systems, right? So it's still very much of an advantage for our economies. Right, but kind of reinventing that is kind of a huge task, right?

Jaysri Thangam:

Yeah, it's a huge pain point. I mean even for a person like me, to sort of unlearn something and rewire my behavior or some concept. It's such a big task and for huge countries and governments and utility players, it's a huge work, huge task ahead of them, let's put it that way.

Lucille Bonnet:

Yeah, exactly. I would say so too. On the other hand, they have a lot of means to do that, right? If these means are used well, and by this I mean human capital, financial capital, access to customers. And if this is just being put at work in the right way, I think that would have also a very big impact. Also big companies just reinvent themselves in the right way. Okay, cool.

Jaysri Thangam:

Thank you so much for that. I'm going to shift gears a little bit and then this is going to be the last section of this podcast. So it's just a couple of questions that will really help our founders and other entrepreneurs listening to this. A couple of these questions will really help them out. So the first question that I have on this is a Deal Room report says only 30% of seed stage companies go on to raise Series A and then only 8% of these companies raise Series B. So the number sort of significantly drops. So in that case, and especially in the current market scenario, what can early stage founders do to risk proof their business and then go on to raise other bigger rounds and then scale and grow better?

Lucille Bonnet:

So at an early stage phase, and I've been working six years for one of the largest early stage investors in Germany called Heitekhnufon, part of their industrial tech team before joining Clema. And back then we made a study and it was clear that the reason for failing in the early stage was a lack of product market fit. Actually it was not teams not working together or technology not working. It was to a very high percentage and I think that was even 70%. But the studies online and high tech on the phone also published it, so you can check it out. It's lack of product market fit. So in the early stage, I think there should be just a strong focus on that and it's not sufficiently done in many, many cases. So I would say kind of even if you love your technology and even if you love what the target and the goal and the mission of the company is just try to focus on product market fit. And that really means building a product at the end that fulfills a need within a certain group of customer. And I think getting some quantification and deep dialysis on that really helps for actually the first rounds, right? So that helps to get a Series A, et cetera. And for the growth phase, and I'm a little bit kind of now again, pregnant fit, post product market fit. But for the growth phase, my tip would be to work on the company. So make sure that you build within the company, the team and the structures that enables the growth later on. Because actually the internal structure of a company are most of the time the bottlenecks. And currently, especially in the energy transition space and in the sectors we're investing in, the demand is not the bottleneck. It's not it this is great. It was not always the case, right back in 2009 when we did clean tech investment, that was not the case, to be frank. But today the demand is not the buttonneck. And so kind of work on the company to make sure that you build up again the right processes, the right structure, and that you have the right team on board at all level to make sure that you can play that opportunity and you can benefit from it. So that would be my tip for more late stage and let's say growth cases.

Jaysri Thangam:

I don't think anyone could have sort of said it better. I think it was perfect, especially because I've worked in a couple of startups myself before, so I completely understand the pain points. And not having processes sort of sometimes led us to not getting that project. And even after getting that project, we couldn't perform well, we couldn't scale that project because we didn't have the right processes internally. So, yeah, thank you so much for that amazing advice. Okay, this is the last question. Climate decarbonization, climate tech and energy transition is a topical, it's very, very topical these days. And we see as an early stage investor, we see so many founders that want to get in because it's an interesting topic to get in because they're opportunistic. So how do you sort of differentiate between founders that are extremely passionate, as in the founders that have the product market fit and the founders that don't have a product market fit but are opportunistic? Is one better than the other in terms of building a successful company? What would be your view on that?

Lucille Bonnet:

I tend to focus more on the results and the outcome more than on the means. Right. And if passion helps you to reach something, or if something else helps you to reach something, I have no problem with that. So if people are doing this because it's an opportunity and they want to put their skills at the game for decarbonizing the energy because they see an opportunity and a financial opportunity more than anything else, I would say I have no problem with that because my personal goal is just to achieve that in a way. And I think actually, if you ask me kind of which drivers bring the best results, I wouldn't say necessarily patient, to be frank, because it all depends on a mix of drivers and capabilities. And so I think a mix is good. I think most of the people are actually motivated by a mission and actually more by that than by the financial outcome. But it depends. And as long as everyone is working onto the same goal and having kind of the same targets and everyone is aligned on that, I think each and everyone has different drivers and the management needs to deal with that or the investors needs to deal with that when it's about the management. Right. But that's it. So I wouldn't say that there is a strong difference in reaching the outcome.

Jaysri Thangam:

Sure. Thank you so much. Thank you so much, Losil for your time. You've been extremely generous and open and candid and in creating this very exciting, very interesting episode, I'm sure that everyone that's going to be listening to this is going to have so much fun, as much as I had in having this conversation with you. So thank you so much for that.

Bryony Cooper:

Thank you for listening to the Future Builders Podcast by PT. One. We hope you enjoyed this week's interview on the future of the built world, and if you did so, don't forget to subscribe to our podcast and leave a five star rating to allow us to continue to give you more interesting insights on real estate innovation.