Capital Series: Ben Kortlang, G2 Venture Partners

Financial Services

Aug 16

This episode is part of our Capital Series hosted by MCJ partner, Jason Jacobs. This series explores a diverse range of capital sources and the individuals who drive them. From family offices and institutional LPs to private equity, government funding, and more, we take a deep dive into the world of capital and its critical role in driving innovation and progress.

Ben Kortlang is a partner at G2 Venture Partners, or G2VP. Ben, alongside his partners, Brook Porter, David Mount, and Daniel Oros founded G2 Venture Partners in 2016 while working together as senior partners at Kleiner Perkins Green Growth Fund.

Ben and Jason have a great discussion in this episode about Ben's path to venture capital and his path to climate investing, his thoughts on the Cleantech 1.0 wave and some of the lessons learned, the formation story of the firm, their investment approach, how that's evolved over time and what they look for when they make investments. They also discuss the broader investment landscape and the clean energy transition overall, some of the blockers and some changes that Ben thinks could unlock faster progress.

Get connected:
Ben Kortlang LinkedIn
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MCJ Podcast / Collective

*You can also reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.

Episode recorded on Jul 25, 2023 (published on Aug 16, 2023)

In this episode, we cover:

[02:13]: G2 Venture Partners’ origin story and overview
[04:10]: Ben's initial interest in alternative energy
[06:11]: Takeaways from his experience at VC firm Kleiner Perkens
[14:51]: G2VP’s 2016 spinout during the darkest hour of the "cleantech winter"
[18:13]: Key lessons from cleantech investing
[20:25]: Examples from Tesla's 20-year journey to success
[22:30]: Cleantech's hardware challenge, software vs. hardware dynamics
[24:34]: The need for resilience after Cleantech 1.0 skepticism
[26:54]: G2VP's fundraising process and "inflection point investing" strategy
[30:13]: Their fund structure and expansion across verticals
[33:27]: LP composition changes and other differences between Fund 1 and Fund 2
[35:22]: Geography, capital intensity, and regulatory risk considerations
[39:32]: Balance between thesis-driven and opportunistic investments
[40:48]: How the firm and their LPs approach impact
[46:23]: Importance of deep research to identifying winners in B2B contexts
[50:32]: Ben's thoughts on valuing companies and confidence in exits
[53:43]: Addressing the "capital gap" for first-of-a-kind projects
[55:38]: Climate's potential integration across sectors, similar to mobile tech
[57:08]: "Additionality" in climate investing
[59:24]: Ben's take on institutional capital's hesitance to invest in climate
[01:03:10]: His take on whether we'll solve the climate crisis and how the world has to change
[01:06:31]: Ben's messages to CIOs of university endowments, founders of successful companies, and independently wealthy people

Jason Jacobs (00:00:00):
Today on the MCJ Capital Series, our guest is Ben Kortlang, a partner at G2 Venture Partners, or G2VP. Ben, alongside his partners, Brook Porter, David Mount, and Daniel Oros founded G2 Venture Partners in 2016 while working together as senior partners at Kleiner Perkins Green Growth Fund. We have a great discussion in this episode about Ben's path to venture capital and his path to climate investing, his thoughts on the cleantech 1.0 wave and some of the lessons learned, the formation story of the firm, their investment approach, how that's evolved over time and what they look for when they make investments and we also have a great discussion about the broader investment landscape and the clean energy transition overall, some of the blockers and some changes that Ben thinks could unlock faster progress. But before we start-
Cody Simms (00:00:58):
I'm Cody Simms.
Yin Lu (00:01:00):
I'm Yin Lu.
Jason Jacobs (00:01:01):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu (00:01:07):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (00:01:13):
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
Jason Jacobs (00:01:26):
Okay, Ben Kortlang, welcome to the show.
Ben Kortlang (00:01:30):
Thanks for having me.
Jason Jacobs (00:01:30):
Thanks for coming. I have to tell you, I've been excited about this one for a while. There's a few of you who are running around out there who were deep into the venture world, into the cleantech investing venture world when cleantech had that big wave back in the day. And I mean, you were at one of the firms that was leading the charge and now you're still doing it all these years later. And so as someone who is almost five years in, or under five years in, I should say, so relatively early in my journey, gosh, I feel like I have a ton to learn from you and I think there's a lot of our listeners who are probably eager to hear your perspective as well. So thanks for making the time.
Ben Kortlang (00:02:10):
I'm happy to be here.
Jason Jacobs (00:02:11):
Well, we'll start easy. Maybe just talk a bit about G2VP, or G2 Ventures, what you do and maybe a bit on the origin story of the firm as well.
Ben Kortlang (00:02:21):
G2 Venture Partners is a venture capital firm based in Silicon Valley. We focus on investing in sustainable industrial tech businesses. These are technology businesses that are addressing energy, food and agriculture, transportation, logistics, industrial manufacturing to help them become more sustainable both economically and environmentally. The origin story, I'm going to take you way back to 2005 when my climate journey started, when I was at Goldman Sachs. I'd been there for five years at this point and was running a growth equity investing business and then we started to see a lot of opportunities in wind and solar. This is just as the Investment Tax Credit under the Bush administration had been bumped up from 10% to 30%, which moved the economics of wind and solar into the money for the first time in a significant way and so we started to see lots of investment opportunities.
(00:03:18):
I formed a group that did alternative energy investing there and ran that. We invested over the course of 2005 and 2006 in businesses that were leading wind development, like Horizon Wind Energy, that were building solar panels like First Solar, pre-IPO, that were innovating on the financing of solar like SunEdison. And that was a very successful run, from 2005 to 2007. I decided to devote the rest of my career to sustainability at that point, so came out here to Silicon Valley to Kleiner Perkins, who was very active in early stage cleantech and wanted to do a growth fund. So we built a billion dollar growth fund, which I led for eight years while we're investing that and then spun out with the team to form G2 Venture Partners in 2017.
Jason Jacobs (00:04:10):
So when you first started getting involved in alternative energy, what was the motivation at the time? How did you find yourself heading in that direction?
Ben Kortlang (00:04:20):
So it was initially economic. I always cared about the environment, so I don't want to portray myself as purely mercenary, but the initial motivations were economic. The world had a shortage of solar panels, if you can believe that, at the time. The panels themselves were $4 a watt and you couldn't get your hands on them and so we started to see opportunities to invest in companies that had technologies that could break the log jam in solar panel manufacturing like First Solar and Suntech from our Asian business unit.
(00:04:52):
And then on the development side, the wind development side, we saw economics that were very attractive. You could underwrite projects to unlevered IRRs in the 15% range and those were very attractive ways to deploy capital. So we saw these economic opportunities emerging, decided to devote some capital to them, and then the opportunity set expanded as the incentives improved and the cost curves improved as well. So we formalized a group to do that and accelerated our investments in the area.
Jason Jacobs (00:05:23):
So that was while you were still at Goldman?
Ben Kortlang (00:05:25):
That was while I was still at Goldman. Then after we sold those portfolio companies for fantastic returns in a fairly short period of time, that was when I realized that the economic opportunity wasn't just a fleeting opportunity to take advantage of some government incentives, but the megatrend of changing the way the world does business, bringing renewables into the energy space, bringing electrification into the transportation space, bringing efficiency into the industrial space, et cetera, was going to be a megatrend for my entire investment career, and so I decided to dedicate the rest of my investment career to that.
Jason Jacobs (00:06:03):
And so when you thought about how to do that, what were the criteria for where to hang a shingle and what was it about the Kleiner opportunity that spoke to you at the time? I know this is way in the way back machine, you probably haven't answered this question in a while.
Ben Kortlang (00:06:18):
The first thing is when you're at an investment bank, the focus is on doing deals. The focus is on deploying capital, making a great return for the risks that you are taking. So we invested in companies and then we sold them two years later or we invested in some instrument that we're able to monetize a couple of years later. What I really enjoyed about it was joining the boards of these companies and helping build them and helping them grow. That was the thing that got me excited. So when I came out here to Silicon Valley to meet the various venture capital firms that were working in the area, I still remember that first meeting I had with Kleiner Perkins. John Doerr was there and the passion with which he talked about building businesses and the company building that Kleiner did was very inspiring to me.
(00:07:07):
So when he called me and told me that they were going to build a green growth fund and they wanted me to come and help build it, I was very excited by that opportunity. They were also devoting something like a third of their early stage venture capital to cleantech at that time. And so the firm had a very strong commitment, they built an extremely strong team around it, they had a strong thesis around it. Al Gore had just joined as a partner shortly after releasing An Inconvenient Truth, and so that whole platform felt to me like the right one to join because there was a dedicated focus, there was a lot of energy and excitement and talent focused on solving these climate problems.
Jason Jacobs (00:07:49):
And was the thought at the time that there would be a dedicated team for growth and a dedicated team for early stage or was there meant to be crossover?
Ben Kortlang (00:07:59):
The initial thought was that there would be one team that worked on the entire green space, venture plus growth together and the cross-pollination of ideas and thinking and investment discipline would be beneficial to both. Eventually we ended up splitting it because the disciplines are actually quite different. The discipline of venture is more around, can this idea be big? Are these fantastic entrepreneurs with great track records and great technologies addressing big markets in important ways?
(00:08:31):
The discipline around growth is quite different. You're looking for businesses that are winning, that have great metrics, that have great unit economics, that you understand that their customers love them and are going to buy more. And while there's some overlap in thinking and knowledge and discipline, actually most of the investment decisions, the votes of the growth team shouldn't have really been counted for the ventures and the votes of the venture team shouldn't have really been counted for growth because what the two teams were looking for were different. So eventually in 2010 we ended up splitting the decision-making between the two. The teams still worked together and shared knowledge and information, but the decisions actually turned out to be quite different.
Jason Jacobs (00:09:13):
Were the funds distinct structurally?
Ben Kortlang (00:09:16):
Yes.
Jason Jacobs (00:09:17):
Was the LP base distinct or was there heavy overlap across?
Ben Kortlang (00:09:21):
Heavy overlap. They were separate LP bases and there were a few notable differences, but I'd say heavy overlap between the LP bases.
Jason Jacobs (00:09:30):
And how far along was the early stage green investing when Kleiner made the decision to bring a growth fund into the fold?
Ben Kortlang (00:09:38):
It was very far along. It was quite a mature activity. As I mentioned, in the year that I joined Kleiner, this is at the start of 2008, I would guess that maybe a third of their venture capital went into cleantech. It was a time of great hope for cleantech and a time of a lot of activity in cleantech and some very important companies were built out of that effort, but they were very dedicated to it at the time that I joined the firm.
Jason Jacobs (00:10:08):
Got it. And was the thought that the growth team would primarily be backing companies that came from the early stage investing first or was it open license to hunt anywhere and how'd it play out in practice?
Ben Kortlang (00:10:22):
So both of those things were true. The idea was that the growth fund would back the winners from Kleiner's early stage venture portfolio and from other venture firms portfolios, but the team would also have license to go and find other things. But the idea was that these companies would need a lot of time and capital to reach their maturity, and so in addition to early stage venture opportunities, there would be later stage growth opportunities.
(00:10:47):
How did it play out in practice? The follow-ons to venture backed deals that we did in that initial era, and I'll call this the 2008 to 2009 era, didn't go very well because most of what Silicon Valley was trying to do in cleantech didn't go very well. It was too much fundamental science risk, physics and chemistry and biology risk, meaning it takes a lot of time to figure out if the technology works and a lot of capital to figure out if the technology works and then a lot of time in capital to figure out if the business works.
(00:11:22):
These innovations like fuel cells and new solar panels and new battery technologies and biofuel reactors, they were big ideas, but they required a lot of capital to figure out if they worked and many of them obviously didn't. So even if you invest at what we originally called the growth stage then, there was still some fundamental risk to the business in terms of the technology, the commercialization pilot to commercial scale and then the business model in unit economics. So we figured that out fairly early in the life of the fund and we're able to adapt our strategy to investing in businesses that were already winning and this is what we've been doing ever since. It's still how we talk about it 13 years later. Our definition of winning is the technology works as evidenced by, the customers are buying it, the customers love it, and the unit economics are great.
(00:12:19):
If the customers tell us that this is solving big problems for them, they want to buy a lot more of it, if the unit economics tell us that this company is growing quickly and succeeding, not by selling dollar bills for 99 cents, but by doing something that is actually generating value for their customers and for the industry, that is a winning business. So we developed a framework that focused on investing in those businesses, and most of them actually weren't venture backed or we were first institutional capital and there was some family office or high net worth individual in there, but it wasn't really the mainstream stuff that had been happening on Sand Hill Road at the time. So we started hunting off the beaten path for these winning companies that met that criteria and that's where most of the rest of the fund came from, and that's where most of the returns ended up coming from in the fund.
Jason Jacobs (00:13:08):
Got it. And this was the first growth fund that was still part of Kleiner at the time?
Ben Kortlang (00:13:13):
Yes.
Jason Jacobs (00:13:14):
At what point was the decision made to spin the fund out and how and why did that come about? And by the way, I'm just asking because I'm curious, but anything you don't want to talk about don't talk, so feel free to steer us in a different direction.
Ben Kortlang (00:13:30):
It's fine, no problem. So in 2016 when we came to the end of investing that billion dollar fund, Kleiner had essentially stopped doing early stage cleantech at the time. They were generating strong returns and it built a team and practice focusing really on digital investing at that time, and so cleantech or Greentech wasn't an emphasis for them, they'd essentially stopped doing it at the early stage.
(00:13:55):
We had a team and approach and practice that was working very well, and so we talked to John Doerr and said, "What we're doing is working, it's important to the industry, it's generating good returns, and we have a team that works very well together, but it's no longer really relevant to Kleiner. So we want to spin out, from our own fund G2, we'll continue working on the remainder of the Green Growth Fund as well and make sure that those companies get to good outcomes." So we'd done that. John was happy, he's been tremendously supportive and a great supporter of G2, a real climate missionary as you know. So it was a smooth and friendly transition. We have great relationships at Kleiner. We continue to manage the rest of the Green Growth fund, but we're able to bring all of our knowledge, our practices, our team, and all of the investment criteria that we built over that time and use that to form G2 in 2017.
Jason Jacobs (00:14:51):
I don't know if you would use this terminology, but where did the spin out happen relative to the timing of the cleantech winter? I don't know if you would call it a cleantech winter? You were close to it, I wasn't. So maybe you would call it something different. I visualize an abandoned mining town or something where the mine goes under and then all the stores and the schools and everything that depended on the mine to exist were gone. That's what the cleantech winter feels like to me from the cheap seats. So what was it like to you and where did the spinout happen relative to that?
Ben Kortlang (00:15:23):
I would say the spinout was in the darkest hour of the cleantech winter. In 2016, so most of the venture firms exited cleantech in somewhere between 2012 and 2014. The LPs were still angry about it by 2016, no one was [inaudible 00:15:40]-
Jason Jacobs (00:15:40):
I can attest, they're still angry about it today in 2023.
Ben Kortlang (00:15:45):
No one was really doing cleantech at that time, and the returns that we ultimately generated were still coming. They were there. We knew they were there. We were on the verge of some really important exits. Companies like OSIsoft and Opower and Silver Spring Networks and Enphase, some really important and valuable companies were on the verge of some returns that were coming, but we hadn't done much of that yet. So still a lot of it was being banked.
(00:16:14):
So 2016, the darkest hour of the cleantech winter, but we knew what we were doing was working. We have a great team that was generating great returns. We could see it in the portfolio in the performance of the companies and the performance of the portfolio, we knew we were doing was working. So when we spun out, we were originally going to call ourselves Green Growth Venture Partners, because the Green Growth Fund at Kleiner, and so it was originally going to be Green Growth Venture Partners, another firm had the GG name already.
(00:16:43):
But we showed up at the first pitch to an institutional LP, like a blue blood institutional LP, and we walked in and we decided, we're not going to go with GG VP because someone else has already got that, we'll go with G2 VP, it's two Gs, Green Growth. We walked in, the first thing the chief investment officer said to us is, "What does the G stand for? It had better not be green or this meeting's over." And we're like, "oh, no, no, it's not green, it's growth." So anyway, that was the environment for raising our first fund and we were able to raise the fund successfully. We originally thought a $250 million fund was the right size for the opportunity set because we'd been investing something like a hundred million dollars a year. We were fortunate enough to end up raising 350 million despite that environment that I just described.
(00:17:38):
The first fund was not easy. We kissed a lot of frogs and had to meet with a lot of LPs. Institutional investors don't typically want to do the first fund because the GPs might discover they hate each other. Well, we'd already been working together for a long time, or the strategy might not work, we'd been doing that strategy for a long time and enough LPs, including some that we've made quite a bit of money for, saw the value in that, backed us in our first fund. The second fund was much easier because we already had some returns from the first one. But that 2016 to 2017 first fundraising, that was a dark hour for the industry.
Jason Jacobs (00:18:15):
Well, we're not done talking about that yet, but before we get too far, looking back at Kleiner's foray into green investing and green growth investing, and also just the broader industry and the wave that happened, what are the most acute learnings that stand out to you, that you take with you as you continued down the path?
Ben Kortlang (00:18:40):
The first thing is it takes a lot of time and capital to get these important hardware innovations working. And these are things that the world needs, these are things that need to happen to help us solve the climate crisis. But venture capital with our 10-year fund lives is not well suited to investing in things that take 15 or 20 years to get to conclusion. So that means you do one of two things. You do what Breakthrough is doing, which is have a different type of capital, a different type of fund life, a different profile, or you do what we do, which is wait, don't take that early fundamental risk, wait until the businesses are winning, back them when they're winning and help them grow. So that's the first thing.
(00:19:26):
The second thing is the winners will be exponential in this space. The venture industry is used to doing things in spaces like software where you back a bunch of companies, some of them with relatively little capital, you find out who the winners are. The winners emerge relatively quickly and they become very valuable very quickly, and there might be quite a few winners in the space. Take cybersecurity, there's probably 10 unicorns or decacorns in that space. You look at the spaces in cleantech and there might be one winner that's a $300 billion company and everyone else went bankrupt from that cohort of companies, or there might be two winners out of the 50 that started in the space. So it's important from our perspective to make sure that we are backing the winners, the companies that are already emerging as the winners, their technologies work, the customers love them. Our discipline of our firm is around finding those winners at their inflection points, backing them and helping them grow.
(00:20:25):
The story I love to tell to illustrate this point is about the biggest winner from cleantech 1.0. I have stories about the three biggest winners from cleantech 1.0, Tesla, Enphase and First Solar, two of which we invested in, one of which we didn't. The one we didn't was Tesla.
(00:20:42):
The story I love to tell about Tesla is the company's been around for 20 years. It was founded in 2003, we're now in 2023. It's been around for 20 years. The first 10 years of that was getting to the point of having a product. They released the Model S roughly almost 10 years into their lifespan, and the investors that came before that took existential risk, the company almost died a bunch of times along the way as a private company. They ended up making in aggregate 4.7 times their money. If you just bought the stock on the day the Model S was released or the first time you saw a Model S driving around your neighborhood and held it for 10 years, you made a hundred times your money. The money was made after the company already had an awesome product, after they were already a winner in the growth and scaling and making this the exponentially winning company in the space.
(00:21:32):
Similar stories are playing out in these other areas where Enphase emerged out of 11 module level power electronic companies, they were venture backed. First Solar emerged out of 22 venture backed thin film companies. Once the winners were identified, the value was actually created after that. And that lesson has been ingrained in our whole way of doing business. We've built our entire firm around finding these winners at their inflection points and investing in them and helping them grow and become valuable. This dynamic I just described is really tough if you have a 10-year fund life, you get into the series A of a massively valuable company like Tesla and then you have to exit before it becomes worth $300 billion. And the dumb investor who just saw the Model S and thought, "This is an awesome car," they ended up making a hundred times their money. That's very frustrating. But for us as investors, that's why we come in when the companies are already winning so we can help them grow and ride that value creation curve.
Jason Jacobs (00:22:30):
Now you made a comment before about how, unlike software... We were still talking about cleantech, we can talk about terminology in cleantech versus climate tech and what's different. But before we do that, in cleantech, you said it sounded like it was more like winner's take all. What is it about cleantech that you think fosters more of that dynamic?
Ben Kortlang (00:22:49):
The first thing is you need hardware to solve the climate crisis. A lot of investors will say, "Well, we only do software," and I look back at cleantech 1.0 and say, "Where were the software winners?" We were in Opower, a fantastic company, an amazing team, really dedicated to the space. They're a winner. They got sold for half a billion dollars roughly. There just isn't a huge cohort of software companies that are emerging to be huge winners in the space. There are some, and we do software as well and we're in some fantastic companies that we're very proud of, but you have to be able to do hardware and hardware has the dynamics that I was just describing of lots of time and capital to figure out if the tech works, lots of time and capital to figure out if the business works and a lot of discipline required to figure out the winner from the many.
(00:23:35):
That's just different than what you see in a lot of the other technology areas where there might be many winners. Everyone gets to win in their little segment or their little niche of the market. And when we went back and analyzed these spaces, we saw this, not winner takes all, but few exponential winners that took a long time to emerge happening in climate tech, whereas in regular tech you have more winners that didn't take that much time or capital to find them. And so the dynamic of what makes successful investments is quite different in those areas. You really want to be in series A in regular tech or in the seed. In climate tech, you've got to be more careful, you either need to do what we're doing, which is invest once they're already winners. You need to do what Breakthrough does, which is longer fund life, different type of capital. Or you need to do what MCJ does, which is using your information advantage to spread investments across many of the emerging winners and be there to ride them as they ride up the curve to the stages like ours.
Jason Jacobs (00:24:34):
Now going back to the whole fund one set to raise thing, you said that it was in the height of the darkness, if you will. What did your peers think when you guys left Kleiner and decided to stick with it? I'm sure you had friends at places like RockPort or Khosla or other firms that were active in the space at the time, many of which, or GC as another example. Many of these firms ran for the hills, but you guys not only kept at it, but kept at it hanging in new shingles starting from zero to go raise a new fund. Did they think you were crazy?
Ben Kortlang (00:25:08):
In a word, yes. The venture community had run screaming from cleantech and there was a lot of money made in other areas of tech as social media and apps and things were emerging that were creating tons of value in other areas. And the venture industry is like watching a six-year-old soccer match where everyone's chasing the ball. Wherever the ball goes, that's where the crowd of players is. We had realized that the things we were doing were working and the megatrends were only getting more powerful. The climate crisis wasn't going away. The problem was getting bigger, humanity's taking too long to solve it, so we're going to need to solve it in bigger ways.
(00:25:46):
And we built a practice and a discipline and a set of knowledge and LP relationships and industrial relationships that we thought we could continue to bring to bear on that area. The hardest part was, at that time, we hadn't generated really strong returns. It was in the year or two after that the returns really started to show up from the seeds we planted in the green growth fund. So it did take some conviction. Our team, we love working together. We have a great team, a great practice. We're all pulling in the same direction and when you find that, the people you want to work with for the rest of your career, you jump on that and this is what we all wanted to do together.
Jason Jacobs (00:26:26):
Well, that really resonates for me because, as you know, we have a core crew that we have strong conviction in an approach that we have strong conviction in, but it's a different kind of approach that I think a bunch of people, because it's new, they scratch their heads about. And we're going to grind it out for the same reasons that it sounds like you grinded it out for your fund. One, because we have a ton of conviction in it, and in the team, we'll be right or we'll be wrong, but this is where we want to place our bets, this is where we want to spend our time, this is who we want to spend our time with. Now, when you were in those shoes, I'd love to just kind of double click on that fundraising process, was there a lot of crossover between the LPs that backed to you when you were part of Kleiner to who backed G2's fund one? And what profile of LPs were the first to start coming in and providing that foundation to build upon for the raise?
Ben Kortlang (00:27:12):
So there wasn't a lot of overlap because most of the big money institutional investors, foundations, endowments that back Kleiner, A, don't back first time funds, and B, hated cleantech at that time. So we essentially had to start from scratch, or close to it. The most money ended up coming from people who we knew and had made money for in our previous career, mostly at Kleiner, but also some from earlier. And they were really in three categories. One is, high net worth and family office. Two is, institutional investors who still had an angle on climate or still cared a lot about climate. Then the third was strategics. These are strategics who are in the industries that we focus on, industrial and manufacturing and transportation. These are companies that cared about how technology was going to impact those industries. And in almost all of those cases, maybe all of those [inaudible 00:28:14] cases, they had backed other companies with us and seen the work we do to build these companies and help them become successful and made money with them as investors.
Jason Jacobs (00:28:23):
The approach of plowing money into the companies that are already working, it seems like that might be similar to a lot of growth funds, but I think, and correct me if I'm wrong, most growth funds, they hunt in companies that were backed by venture capital? And if I'm hearing right from you, one, there probably weren't a lot of companies left that were being backed at least with new venture capital at the time. And two, and I want to understand this part, I might've got it wrong, but it doesn't sound like you necessarily have conviction that VC-backed is the best farm system, if you will, to ultimately be a G2 investment?
Ben Kortlang (00:29:02):
Growth is probably not the right term to describe us. I think our strategy is unique, we call it inflection point investing. Growth usually connotes very strong momentum, fast growth. It's very obvious to everyone that it's a winning company. Actually most of the companies that we invest in at the time we invest is not obvious to everyone. We have to do a lot of work to figure out that they're emerging as the winner. And that work is what we build our whole firm around, how to do that and catch these winning companies at their inflection points.
(00:29:33):
Where do they come from? Some of them are VC-backed. Increasingly, now that VC has come back into the climate space, we're seeing more and more of them are VC backed. That in and of itself is not necessarily a signal on the quality of the company though, except of course if they're backed by MCJ, in which case it's a very strong signal. We are looking at the fundamentals of these businesses. Some of them VC backed, some of them family offices and angels, some of them are still an individual entrepreneur and we're willing to look in all of those places to find the winners, but it's not as simple as we look for the high quality early stage venture firms and then try to follow them in all the deals. It's much more fundamental than that.
Jason Jacobs (00:30:13):
I'm going to generalize just to stimulate discussion, cleantech, it seems like was very energy focused, whereas climate tech is everything focused. How do you think about sectors and types of companies? We talked about stage, but what about, stage aside, how do you think about sector or business model or how do you differentiate in terms of what's a fit taking stage out of the equation?
Ben Kortlang (00:30:39):
We started with energy in 2005. We opened up our lens to transportation maybe 2008, 2009. We opened up to industrials in 2009. We expanded to logistics in 2011, probably. Food nag in 2012. And so we're adding these verticals over time with the macro thesis being that, to solve the climate crisis, we don't just need to solve energy, we need to solve doing more with less, being more efficient in the entire industrial complex that's emitting CO2 and consuming hydrocarbons to turn them into value. So we're looking across that entire space, the entire what we generally call the industrial space, which is where the vast majority of the emissions come from, for opportunities to use technology to help them become more efficient. We take a portfolio approach to our sustainability and impact.
(00:31:33):
Every company is climate positive. Every company is having an impact. They have a thesis and they care. Some of them are center of the bullseye, renewable energy electric vehicles. Some of them are supply chain efficiency, dematerialization, more second order effects. We think it all needs to be done. So we're looking for great businesses addressing that whole area. We're also constantly looking for and opening up new verticals in areas that we think are promising for future investment opportunities. During COVID, we opened up a vertical around future of work. We call it something else, but it's essentially around future of work. However, is everyone going to drive to the office every day and have a builtin environment that consumes HVAC and energy, or is it going to be different in the future? And so we have some investments around that theme. We have some investments around e-commerce, not traditional e-commerce, it's more around recommerce, recycling, efficient delivery. So we're always looking for new verticals, ways that we can use technology to help the industrial complex become more sustainable.
Jason Jacobs (00:32:34):
Just from a practical standpoint, what fund are you investing out of now and how big is it?
Ben Kortlang (00:32:39):
We're coming to the end of fund two. So Fund one was $350 million, fund two, $500 million. We'll likely come to the end of investing this fund early next year, roughly, so early 2024 depending on the pace of the investment rollercoaster that we've been riding for the last couple of years. So yeah, it's a $500 million fund, and our typical investment is between 15 and $50 million and we'll normally lead a series B or C or D and take a board seat and help grow these companies. We don't actually care about the latter of the round, we care about the stage of the business, as I described it earlier, but that's our normal profile.
Jason Jacobs (00:33:19):
And from an LP composition standpoint, and from a strategy standpoint for that matter, what were the biggest differences, if any, from fund one to fund two?
Ben Kortlang (00:33:27):
So the LP composition is shifting more institutional over time. When we raised our first fund, as I mentioned, we met with a lot of institutional investors who in many cases after quite a few meetings told us they don't invest in first time funds, but were getting to know us and our plans and our practices and at a high level we've done what we said we were going to do. We've executed our plan, we've built a team, we've built our processes, we've exited most of our client green growth fund portfolio and responsibilities. So when we came around for the second fund, many of those investors said, "Great, this is an excellent team, an excellent strategy. It's working, you're doing what you said. So we'll come into the second fund," and I expect there'll be even more of that in the third fund. We have some nice returns that we've delivered already from fund one, and all of that helps. Just, you tell the story, people listen, and then you show them that you're actually doing it and then they'll want to join in.
Jason Jacobs (00:34:21):
And what about from the strategy standpoint, what was different about fund two from fund one? And maybe you can't say anything forward-looking, but just how are you thinking about the future?
Ben Kortlang (00:34:29):
More of the same. Fund one's strategy was essentially a continuation of what we've been doing in the green growth fund. The fund two strategy was the same as fund one. As I mentioned, we've expanded verticals a little bit. We've improved our processes a lot. We're an extremely process driven firm. Probably too boring for me to talk a lot about that, but we've improved our process a lot so we can execute on these industry deep dives on our investment process, on our company building process in a much better way than we ever could before. And then fund three will be more of the same, probably a little bit bigger, probably maybe slightly larger checks. We'll likely expand our verticals a little bit and add some conviction in some of the verticals that we've been investing in. Essentially that'll be the same team, same strategy, and the same approach.
Jason Jacobs (00:35:20):
How do you think about geography?
Ben Kortlang (00:35:22):
So most of our investments are in North America. There's a concentration in the US obviously, and a concentration even more so in California. Part of that is because that's where a lot of the innovation is still coming from, part of that is because we see everything in the US market. We're open to investing anywhere. We've done two investments in Europe, including our most recent investment in a company called 1Komma5, which is the fastest growing home electrification company in Europe. When we find great businesses, great technologies, great entrepreneurs, we can invest in them anywhere. It certainly helps if they're English speaking. The 1Komma5 board meetings are in English, so I can participate. We're open to investing anywhere. Most of our network and businesses we see are here in North America. And I should say, I'm 18 years into my investing journey and I'm still searching for that fantastic Australian business that gives me an excuse to fly home more often.
Jason Jacobs (00:36:21):
Oh, I didn't realize you were from there. Maybe we talked about it and I just forgot, but I actually studied there when I was in university many years ago for six months in Sydney. And I said, "I would be back soon. You can be sure of it." And that was in 1996 and I've never been back. But I loved it though, it was amazing.
Ben Kortlang (00:36:38):
Well, that's what I told my parents when I left to come to the US for business school. I said, "I'll be back soon," and they said, "Just promise me you're not going to meet an American girl and fall in love and end up staying," you know the rest of the story.
Jason Jacobs (00:36:50):
I mean, I'll just ask you the standard punch list, capital intensity, regulatory risk, science risk, how do you think about capital intensity and regulatory?
Ben Kortlang (00:36:59):
The capital intensity, we are open to businesses that consume and deploy a lot of capital so long as it is already productive, so long as the unit economics work. A great example that's in our mutual portfolio is Crusoe. Crusoe is aligning the future of climate. We invested in them, led our 350 million round with, in that case it was a $75 million check because they had fantastic unit economics using flared gas or stranded energy to power compute. And even though they needed a lot of capital and were planning to deploy a lot of capital, it was productive capital. What we won't do is invest in something that needs hundreds of millions of dollars to figure out if their tech works or to figure out if their business works. So capital intensity is okay if the unit economics already work.
(00:37:50):
Regulatory risk, we generally don't like to take it. We will assume that regulations don't change favorably. We'll assume that uneconomic regulatory incentives will go away over time, and the businesses need to be able to stand on their own two feet. What we will do is if a business is coming down a cost curve and there's some short-term incentive that helps them bridge that cost gap and get down the cost curve to a point where they don't need the incentive, great, we'll invest in that, as long as we can underwrite that curve. What we won't do is invest in a business that needs that regulatory incentive forever because then you are just betting on future government activity and who knows what's going to happen.
Yin Lu (00:38:32):
Hey everyone, I'm Yin a partner at MCJ Collective here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast.
(00:38:44):
We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change. Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done. Many early stage investments have been made, as well as ongoing events and programming, like monthly women in climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks and enjoy the rest of the show.
Jason Jacobs (00:39:32):
You mentioned that you're quite process heavy. How much of what you do is thesis driven, where you go out and deeply understand a market first and all the players and then you choose your horse versus more opportunistic where you see something interesting and then you roll up your sleeves and start figuring it out?
Ben Kortlang (00:39:50):
I'd say it's 90% thesis driven and 50% opportunistic. [inaudible 00:39:54] to a hundred. Everything we do, we try to have a thesis wrapped around it and a deep dive wrapped around it. So an exciting company comes and shows up on our doorstep, we don't invest in the first company we see in a space. We'll look at that and say, "Okay, great company." Now we've got to look at the whole space, we've got to understand everyone. Usually that means taking our time, talking to everyone, mining our network. It might be that first company that is the right one, but we really want to landscape the whole space and make sure that we understand everything before we invest in one of them. So every deal, every investment is still opportunistic and often it's an exciting entrepreneur with an exciting idea and an exciting business plan and business model that gets us excited about a space. We'll look at everything, form a thesis, come back and invest in that one or a different one if that happens to be the right one.
Jason Jacobs (00:40:42):
How do you think about impact and how do your LPs think about impact, if at all?
Ben Kortlang (00:40:48):
Our LPs think about it a lot. Not every LP, we have a mix. We have LPs who care a lot about climate and impact. We have LPs who only care about making money. Fortunately we do both, so we're able to accommodate both sets of LPs. We care about it. We think about it as every business we invest in has to be advancing the future of the climate. There are other areas of impact too that we think about, but everyone has to be environmentally positive. And as I mentioned, it's a portfolio approach. So every company we invest in doesn't have to be the most environmentally positive thing, sucking the most carbon out of the atmosphere, but they all need to be making a contribution. And the portfolio in aggregate has a very large impact.
(00:41:29):
We actually are just in the process of publishing our impact report for this year, which goes through every one of our companies. It talks about their metrics and their impact. When we underwrite the companies, we have a climate thesis around these companies and identify other ESG factors as well. And then we track them every year to how are they doing against that thesis and what are the metrics. They don't always necessarily add up cleanly into a CO2 number, but every company we are tracking and holding them to their commitments on climate improvement.
Jason Jacobs (00:42:01):
Switching gears for a moment, we talked about the dark years and then the last few years of course the activity has picked up quite a bit. Stepping outside of G2 Venture partners and just looking at the market, what's your assessment of what's been happening the last few years and where we sit at this moment?
Ben Kortlang (00:42:20):
I think we finally have an alignment of government, consumer and business focused on improving the way the world does business. The incentives, the IEA incentive in the US, the European equivalent, they're very exciting. There's that type of energy going behind innovation, technology improvement and adoption of climate technologies. It's exciting to see venture capital flowing back into the space. It's exciting to see entrepreneurs dedicating their efforts to the space. Entrepreneurs who have been successful in other areas, deciding they want to dedicate their time and effort to climate going forward. It's exciting to see some great companies being built around that. The environment, it feels more to me like 2007, 2008, but with a lot more fundamentals behind it. The technologies, the companies, the businesses and real momentum. I don't think the ecosystem is as fragile as it was back in that era. I think this wave will be much more productive and much more sustained.
Jason Jacobs (00:43:25):
So a couple recent discussions I had in private, not on the show, so I can't mention any names, although you definitely know these people, but one is a [inaudible 00:43:34] investor, and they said they're really proud of the portfolio they've amassed and the marks that they have, but they've got no DPI to show for it. And the second is more of a growth investor, although I get that there's a difference between growth investor or inflection, although it'd be fun to sort out those nuances sometime, but what they were saying is that there's just not a big pond for them to be hunting in because there's not that many companies that are actually big enough and successful enough that they would qualify as a real prospect. They're too immature. How do you react to each of those?
Ben Kortlang (00:44:02):
So the DPI one, we don't suffer from that problem because the stage of businesses and the quality of business we're investing in, that whole process I described earlier of identifying the winners with their inflection points means that we have winners emerging relatively early in our fund and we have a pretty strong DPI already from fund one, and are tracking to a very nice return.
(00:44:25):
I understand that that is a problem for earlier stage investors in the space. I think it's fundamental to the spaces, it does take longer. We did an analysis, for example, of, did it take a climate tech company from cleantech 1.0 to reach the point of being worth five billion dollars? And there weren't that many of them that ended up being worth 5 billion. It took on average 14 years from inception to being worth $5 billion. It took nine years for software companies in general tech, and so you'll have no DPI for quite a while as a climate tech investor and you don't have quite the same ecosystem that you do in some other spaces like in biotech where you can do drug discovery, phase one, phase two, and then the big drug companies will buy you for a good price. So I think that's fundamental to it, but the winners will be big. The DPI may take longer, but the winners will be exponential, and those early investors who are in those will hopefully still be in them and do very well.
(00:45:23):
The size of the pond that we're fishing and the number of great companies, it is hard. We see about 2,000 companies a year here. We ended up investing in five or six. That means kissing a lot of frogs, doing a lot of deep dives, meeting a lot of companies, understanding what we need to see happening at those companies to make them successful. Tracking, we have 50 on our high conviction watch list, maybe 150 in total on our watch list companies that we are watching that we think are really high quality companies. There's a lot of work. And to catch them at their inflection points, you've got to be engaged and understand what's going on in the industry and what's going on with these companies. Again, because the winners will be exponential. It's worth doing all that work. It's worth meeting the 2,000 companies to catch the five, but it is a lot more work, I think, than some other areas of tech investing, and that's why we've built the firm to be able to process many companies in these deep dives the way that we have.
Jason Jacobs (00:46:23):
What is it that makes for more work and what type of more work does it make for?
Ben Kortlang (00:46:28):
Figuring out which companies are winning in a B2B context, and most of these are B2B companies, not everyone, but largely in the climate tech space. Figuring out who's winning means, calling lots of customers and getting them to tell you the truth. If you do an AlphaSights call, or a GLG call, or a Tegus call, you'll get some insight into what's going on. You may or may not get the truth. You may or may not find the nuggets of insight.
(00:46:53):
When we were, for example... In late 2018, we're doing a deep dive into the LIDAR space for autonomous vehicles. We spent six months, we called 14 of the top 20 vehicle OEMs in the world. We called 40 different experts and people in space and startups to figure out what's going on, who's winning, who's buying what, what are the specs that they need, who meets those specs? And after 250 pages of call notes and endless debate inside our firm, six months of work, it became very clear that Luminar was going to be the winner in long range LIDAR. It wasn't clear to the market. The market hadn't done the work work we had.
(00:47:29):
A brilliant entrepreneur in Austin Russell. We had an amazing technology he was building. It was serving the needs of the industry in a way that no other technology was at the time. We were able to invest at a very reasonable valuation, made a lot of money very quickly backing what turned out to be the winner, and they've delivered on all their promises. And if you told me back then in 2019 that they were going to have a well over $3 billion order book and have won almost all of the major OEMs that have been awarded and be ushering in a future of autonomous driving, I'd say, "This is amazing. This is our thesis is coming true, and they've really delivered on it." It took six months of work and all those relationships and all those calls and all that internal debate to figure out that they were the winner when it wasn't obvious to the market. And again, we built our firm and our practice and our process and our network to do that repeatedly in all of these different areas.0
Jason Jacobs (00:48:24):
When you identify who you believe the winner will be, they may or may not be in a fundraising cycle at that time. Do you try to invest as soon as you get conviction as a firm on who the winner is regardless of where they are in their funding cycle? Or do you wait until there's a process? And similarly, how valuation sensitive are you given that, to your point earlier, in many of these categories, it may be winner take all.
Ben Kortlang (00:48:49):
As soon as we identify the winner, we try to invest. We usually, by the time we have identified the winner, have very strong conviction, have deep knowledge of the space, have a set of perspectives that the entrepreneurs actually find very interesting when we show up to them. I'll tell you an example about Crusoe. So go back to 2021, I was going home to visit my family in Australia. They had hotel quarantine at that time. I'm stuck in a hotel for two weeks with nothing to do, so I did a deep dive on this area of, what do you do with the problem of flared gas? Do you compress it? Do you liquefy it? Do you try to generate power and transmit it out? And we discovered Crusoe among 14 other companies in the space, did a whole bunch of work around the space and then identified that Crusoe was the winner.
(00:49:38):
We called Crusoe, they weren't raising at that time. We told them our thesis on the space and all the work that we'd done and why we thought they were the winner, and they said, "Wow, you are the firm that we want to partner with for our next phase. Here's the valuation." We negotiated a little bit, but ultimately paid the valuate or something in the zip code of the valuation that they wanted because it actually, while we like to get a reasonable deal and get paid for the knowledge and conviction and work that we've built, what ends up mattering is are you backing a business that is going to change that industry and become one of these super valuable decacorn type outcomes that I described earlier from cleantech 1.0 and we formed the conviction that Crusoe could be that, they were unique, differentiated, great unit economics, were solving a big problem that's hard to solve, and so we were willing to pay, and an amazing team, by the way, so we were willing to pay to get into that one.
Jason Jacobs (00:50:32):
How do you think about valuing these companies, especially maybe in some sectors that don't see traditional tech multiples? And similarly, because for whatever reason, I tend to ask my questions in twos, what gives you the confidence coming in these later rounds at fancy prices that the exits are going to happen given that in order to get the return, it needs to be an exit big enough, similar to the not stock pond of companies that could be prospects, who are the acquirers that can afford these multiples?
Ben Kortlang (00:51:00):
The answer to both of the questions comes down to fundamentals. When we look at companies, we don't look at multiples. We build a detailed driver based model using our knowledge and conviction of the space to understand what we think the outcome can be, discount that back. We look at what the reasonable exits might be in that case, and of course, you're doing some sort of a multiple analysis, but they're not fancy tech type multiples for the most part, running the businesses out to the point where they've reached business model maturity using more industrial type multiples. If the businesses can support a very high value at the end, then they can support a good value at the start, and we can still make a good multiple of money.
(00:51:43):
When it comes to growth rounds, you just asked the question of how do we get conviction that the buyers are going to be there, the exits are going to be there, the answer's the same, it comes down to the fundamentals. If I invest in a fantastic business at late stage, I'll use an example here, Locus Robotics, we invested in last year, just an amazing business, a fantastic team solving huge problems. If you invest in that business at a late stage and pay a billion plus dollar valuation because the fundamentals are so strong that in a normal market with reasonable multiples, they can be worth many billion in the future, then I don't care. I don't care if the moment we go into recession, there's no buyers next year. I don't care if the IPO market's closed for two years, that will be a really valuable business, and so we're prepared to pay to get into it.
(00:52:29):
And sometimes that's not easy. Sometimes it's really obvious because you have a winner emerging, and that's actually pretty easy from an investor standpoint, the whole growth investing industry has been identifying these winners that everyone can see that they're winners and paying any price to get into them. That's not really what we are doing. What we're trying to do is build conviction using our proprietary knowledge and dataset and relationships and industrial network around companies that maybe others haven't seen your winning businesses.
(00:52:55):
The best example of this in my career is Enphase. I've been on the board of Enphase since 2010, 13 years now, and there was a moment where their market cap was $60 million in 2016. I saw the fundamental value there. I believed in the company I helped orchestrate around that wasn't that big that ended up letting the company get through its cash shortfall. At that time, it had a delisting notice and a going concern issue, and now they're a $20 plus billion market company. Again, it comes down to the fundamentals of the company, the technology, are they addressing a huge problem? Do they have the right technology, the right unit economics, the right cost structure? And in that case they did, it's not always easy to see when you're in the fog of war.
Jason Jacobs (00:53:43):
One of the things that I've heard from portfolio founders quite a lot is that there's a capital gap. Maybe there's multiple, but there's one acute one that's specific to first of a kind that might be earlier than you might come in, but are you seeing that in the market? How do you think about that as a firm and is there potential that there's collateral damage there where it's not just the people directly affected by it, but that if it doesn't get addressed, it could pull the whole ecosystem down with it?
Ben Kortlang (00:54:12):
We certainly saw this manifest in cleantech 1.0. We don't address that capital gap, as I described earlier, but it is an issue if you have first of the kind or you need to build your first commercial scale plant and it's hundreds of millions of dollars, no one really wants to provide that capital. And that's where I think government capital is important. That's where I hope that the IRA dollars help bridge some of those gaps. And that's where, again, funds like what Breakthrough is doing at the early stage, they're willing to take those risks. They may not be a great bet for a venture capital, a normal venture capital firm, but the way Breakthrough has framed its timeframe and its capital base, they can help address those risks too.
(00:54:57):
So I do think it's a problem. I do think that the government has a role to play in solving that gap. It's a tough one for the private market for venture capital firms to solve, but we're also seeing increasingly venture firms willing to make those types of bets to usher these businesses into their commercial phase. It's not our stage, we don't focus on it.
Jason Jacobs (00:55:21):
This is kind of a weird one, but at one point I think Kleiner had an iPhone that was only focused on iPhone applications and stuff, and mobile is just a part of every business. And so it'd be kind of weird to have a dedicated mobile fund because, what isn't mobile? And I kind of feel like climate's similar. So I guess the question there is directionally if you look a decade out or two decades out, will there even be climate funds or will climate just be woven into the fabric of lots of sector specific stuff as if without its own dedicated perch?
Ben Kortlang (00:55:55):
I hope it becomes woven into the fabric of everything. From an investment standpoint, the discipline that we apply could be applied to any B2B inflection point stage industrial businesses. We choose to apply it to climate because we think there will be massive tailwinds. We choose to look for companies that are contributing to solving climate crisis because we think they'll have these tailwinds, but ultimately I do think it will just become part of the entire investing ecosystem. I hope that means you see more big capital flowing into the space because it touches areas that they otherwise invest in. We will continue to be dedicated to it, but I hope and expect the entire venture ecosystem or investing ecosystem will move in this direction.
Jason Jacobs (00:56:43):
My next question I actually don't agree with, and I hate this question, but I'm going to ask it anyways just because I'm curious how you would answer it since it's like... People ask me this kind of stuff all the time, and so, how do you think about additionality if you're strictly chasing returns, couldn't non-climate capital just chase those same returns that come from the sector versus the climate focus? And are you really helping with the transition or are you just profiting from it?
Ben Kortlang (00:57:08):
We think that we're helping in some very important ways, and this is why when we joined the board of these companies, we have a whole toolkit around helping inflection point stage companies grow and grow successfully. We think we are contributing in important ways. I'll tell you a story, which is an example of this. I already told you the Enphase story where if that round hadn't come together, who knows what would've happened if the company would exist today in the case of ProducePay in our fund one, they're a financing platform, or they were at the time, a financing platform for fresh produce growers in Latin America. So you would look at that and say, "Okay, well what's the climate angle there?" Well, they had a vision. The founder, Pablo Schwarzbeck had vision around a single step supply chain where growers could transact directly with the end retailers and cut out a bunch of middlemen in that value chain, eliminating transportation, eliminating waste, eliminating a lot of costs in that system.
(00:58:07):
So we invest in early 2021. Pablo, a tremendous entrepreneur realized along the way that he wasn't the guy to actually build that side of the business. So he's moved uped the chairman, introduced a fantastic CEO, Pat McCullough, who I'd worked with all the way back to 2009. And Pat is unlocking the value that was latent in that business of allowing that single step supply chain to happen. The result of that is the right stuff is getting harvested, it's going directly to the buyers, cutting out a lot of waste, a lot of costs. When it arrives at the buyer, there's an 80% reduction in the scrap rate because the buyer is communicating all the way back to the grower on what they want and what the specs are and having it transported directly to them. And value is being created.
(00:58:55):
If we hadn't invested, and I'm not taking all of the credit, but other venture investors hadn't invested, and put our energy behind giving the right team, the right idea and the right capital behind this important approach to single step supply chain, it likely wouldn't have happened. It would likely still be a, just especially financing business and now it's growing spectacularly, going to generate a fantastic return for us. We have a role to play in allowing these businesses to realize those dreams.
Jason Jacobs (00:59:24):
A number of climate firms out there are saying that the institutional capital is still largely on the sidelines and that they're kicking the tires and feel like they should do something here, but I don't know if it's scar tissue from history or unfamiliarity or maybe the tricky macro is making people flight to safety. No one ever got fired for buying IBM. I'm curious your take on that because it seems like you might've encountered some of that as a first fund, but it was more as a first fund than as a climate fund. And now that you're onto your second and presumably at some point a third and beyond, I know that the institutions are taking up a bigger and bigger percentage of the LP base.
(01:00:05):
What is your perspective of just generally, G2 Venture Partners aside, on the state of the state with the institutional capital investing in the area. And directionally what needs to happen to unlock more of it faster? If you believe that it should get unlocked faster, because you might say, "Well, good stuff gets funded. If you're not getting funded, you're crap," which is an answer.
Ben Kortlang (01:00:25):
So in general, the institutional markets follow returns and the answer to the question of how do I get these institutional investors to invest in my platform is, have a great team, a great approach, a clear and differentiated thesis, execute it, deliver returns, and distribute the returns to your LPs. I know it's stupid simple, but that is the equation. And the institutional investors will want to back managers that are doing great things, making great investments and delivering on their promises. When we raised our first fund, it was hard because we had a track record as a team, but this was out the first time we were doing it as our own platform. Now after most of the way through our second fund, we've demonstrated that, we're delivering returns, we're delivering DPI and the institutional investors will come in. So that's my answer to the question.
(01:01:16):
I don't know that we need massive amounts of additional capital into the space. I think there's a limited opportunity set that we need to go after in a very targeted way. That's what we will continue to do. I think an influx of capital can help get capital behind those winners and help them grow into the exponential winners that I described earlier. What we don't need is for lots of capital to be sprinkled around every company in the space. So I think that institutional capital will be applied to quality. The managers that get it will be focusing on those winning companies.
Jason Jacobs (01:01:51):
What do we need?
Ben Kortlang (01:01:53):
What do you mean?
Jason Jacobs (01:01:53):
Well, you said what we don't need is necessarily big influx of capital. So what would actually be helpful, and I'm not necessarily talking about for you and your firm, but just for the space generally in terms of accelerating the transition.
Ben Kortlang (01:02:05):
So I think the government incentives that are being put in place now will be a help. I think generally demand-based incentives are a bigger help than subsidies for uneconomic early stage supply. We need winners to emerge in the business and be valued by the public markets, not as short-term, we're going to value this like every other company, but as long-term prospects that can transform the world. So when this cohort of great companies goes public, I hope the public markets look at them and say, "These companies are going to be really important companies in 2050 because they're changing the way the world does business, and so we're going to give them a premium multiple as a result of that." The financial markets may or may not view it that way, but as those winners emerge, it will cascade all the way back down through the space because it'll give growth stage investors more conviction, inflection point stage investors more conviction, early stage investors more conviction and allow more capital to flow to those companies that are addressing these problems.
Jason Jacobs (01:03:09):
I know you're a professional capital allocator and builder and a capitalist and a founder whisperer or whatever, because I'm putting all kinds of words in your mouth, but you're not a scientist and I think that's why I'm asking the question I'm about to ask, which is how do you think about the problem of climate change? Do you see this transition happening in terms of one foot in front of the other over time and we're going to get it and we're going to carry on and we're going to thrive, or is it actually something that you worry about meaningfully from an existential standpoint?
Ben Kortlang (01:03:38):
I do worry about it. I think humanity will solve the climate crisis and we'll solve it later than we should. We need to do everything that's on the menu from reduction of energy consumption to shifting it to be cleaner to more efficient processes to everything, and we won't have the conviction to do it until it really becomes a substantial problem.
(01:04:02):
When we see climate disasters, when we see heat waves, when we see floods and hurricanes, those things people can touch and feel and understand, they can't understand parts per million of CO2 in the air, and those are the things that will cause people to act. Unfortunately, I think the urgency will come later than it should, and as a result, we will have to suffer some of the significant consequences of climate change. Our job is to make sure that the companies that are positioning themselves to address this, the companies that are doing all those little things that are on the menu of helping the world become better, faster, cleaner, more efficient, getting capital, building their companies will be in a position once the world has the urgency to really adopt these things to thrive and help solve the problems.
Jason Jacobs (01:04:49):
And when you think about the future, post the problem being addressed, and I know it's not like it's addressed and done for good, come out of this bumpy period and get that we're, I don't want to say just entering, but the symptoms are, our consciousness is growing, et cetera. At some point we'll be on the other side where it's like we're mostly decarbonized and we're doing things in a more sustainable way, et cetera. When we're there, do you think that we operate largely in the way we do today just with cleaner materials and more efficient supply chains, stuff like that, or is our whole way of life going to change drastically?
Ben Kortlang (01:05:23):
I think the magnitude of the change required to get there will be a fundamental change in our way of life. We'll still be doing a lot of the same stuff. We'll still be working, and eating and transporting, but the work will be different. The food probably being grown differently and transported differently, and it may be all organic and low carbon. The transportation will be different, the buildings will be different. So I think everything, the whole fabric will have changed a lot. It'll all be the same stuff, but everything will be much more efficient and low carbon and less resource intensive.
Jason Jacobs (01:06:02):
Usually I say, is there anyone you want to hear from or something generic? I'm going to try a little something different. I just made this up, I'm feeling crazy today, but maybe there's three different imaginary people I want you to speak to for a moment. The first is, just call it a CIO of a big university endowment that is strictly returns driven, that hasn't done much in climate and feels like it's an emerging area, but is held back by lack of familiarity and terrible stories from the past. What message do you have for that person?
Ben Kortlang (01:06:31):
Climate is the best investing opportunity that we will have for the next decades. It's going to be a massive megatrend. Technology is the only way to address it, and we have a track record of identifying and building these companies that are addressing the climate crisis and earning great returns as a result of it. If you think about the investing opportunity coming from transformation, from business transformation, industrial transformation, there is no greater opportunity than climate for the next decades and you want to invest in the tech wave.
Jason Jacobs (01:07:05):
This next one is a little tougher because I think that what you would say would be so specific to this specific company, and I'm making it up so I'm not going to paint the picture of a real specific company, but let's say it's a founder of a company that is knocking the cover off the wall from an execution standpoint with a great team and the customers are biting and they want to buy more and it's great unit economics and they're kind of in the sweet spot for your investment profile and even if their head's down and not thinking about it because hey got tons of time or they've got four term sheets, what message do you have for that founder for why they should work with G2? We
Ben Kortlang (01:07:38):
We know your industry better than anyone. We have all the right experience and toolkit for building companies at your stage, which at a high level is from 10 million to hundreds of millions and exit and making the right decisions along the way. It's not about top ticking the valuation or having the biggest name brand on your cap table, it's about who's going to provide you the help, the advice, the support and the network that you need to make your company extremely successful.
Jason Jacobs (01:08:08):
And the last one, call it someone that was super early in ad tech and they rode the wave as part of a monster company and left from a key executive role and never have to work ever again, as do many generations after them in their family if they aren't irresponsible, but they're still young, let's say their early 40s and they've got lots of ambition and want to pour it into something more purposeful, they're super concerned about climate, but they really don't know much about it. I'm sure you get a ton of people that look like that reaching out to you for advice. Maybe talk to that person for a moment, what would you tell them?
Ben Kortlang (01:08:42):
The first thing I say is, when you get to the end of your career or the end of your life, other than having made a lot of money, what do you want to say you've done? What do you want to say you've accomplished? What do you want to say you've built? And in most of the cases that you just described, they have an answer like, "I want to have made a contribution to the climate crisis. I want to leave the world a better place for my kids." And then I say, "All right, well how do you bring your skillset where you helped people buy stuff or you served ads to people, how do you bring your skillset to have an impact on that?"
(01:09:14):
And that's where we're trying to match these fantastic entrepreneurs with the opportunity set that's in front of them. And there's a role for computer scientists, there's a role for AI people, there's a role for machine learning people, there's a role for digital ad people, there's a role for marketing people in solving this climate crisis, and it might not be the most obvious thing. It might not be the most obvious company. And so we're trying to... First, I try to convince them that they should be joining the climate journey with you and me, but second, try to find the right match where their skillset can actually make a big contribution in the most important things that these companies are doing that are addressing the climate space.
Jason Jacobs (01:09:54):
Amazing. Well, thanks so much for humoring me. Anything I didn't ask that I should have or any parting words for listeners?
Ben Kortlang (01:10:01):
No, thank you for taking the time. I admire the work that you are doing rallying the community around the climate space. So thank you for doing that and bringing more attention to it. Thrilled to have been on the podcast.
Jason Jacobs (01:10:15):
Well, thanks for coming on and I learned a ton, so I know that means that listeners will as well. So thank you, Ben. Looking forward to doing more with you and the rest of your team and...
Ben Kortlang (01:10:25):
Thanks a lot, have a good one.
Jason Jacobs (01:10:27):
Thanks again for joining us on the My Climate Journey podcast.
Cody Simms (01:10:31):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (01:10:41):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter @MCJpod
Yin Lu (01:10:54):
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Cody Simms (01:11:03):
Thanks, and see you next episode.