Capital Series: Fabian Heilemann, AENU
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.
Fabian Heilemann is the founder and CEO of AENU. Fabian is a long-time entrepreneur, and after several successful exits, he became very concerned about climate. He started with his personal carbon footprint and then evolved to looking at what he could do internally when he was a traditional, financially-oriented venture capitalist. He looked at the footprints of the portfolio companies of that firm and then ultimately came to realize that he wanted to build a new kind of investment firm that puts impact front and center without being concessionary in any way from a return standpoint.
Jason and Fabian have a great discussion about his journey to starting AENU, some of the core principles the firm stands for and how they go about it, where they are on that journey, how they got going, and where Fabian sees AENU going in the future. And of course how that fits into his thoughts on the broader transition and what we can do collectively to accelerate progress.
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Episode recorded on Sept 6, 2023 (Published on Sept 20, 2023)
In this episode, we cover:
[4:21] An overview of AENU
[5:59] Fabian's decision to work on climate
[12:58] His firm's early structure and evolution
[19:26] AENU's initial vision and its current strategy
[28:50] The relationship between new technologies, sustainability, and their impact on established industries, corporations, and policymakers
[39:10] Fabian's experience trying to start a climate sleeve in traditional VC
[50:07] AENU's check size, portfolio construction, and the firm's scope
[54:23] Fabian's thoughts on the need for collaboration
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Jason Jacobs (00:00):
Today on the MCJ Capital Series, our guest is Fabian Heilemann, founder and CEO of AENU. I was excited for this one because AENU is a new kind of venture firm. And similar to my journey, Fabian is a long time entrepreneur. And after several successful exits, he was very concerned about climate, and it was just kind of a slippery slope. He started with his personal carbon footprint and then evolved to looking at what he could do internally when he was a traditional, financially-oriented venture capitalist and then looked at the footprints of the portfolio companies of that firm and then ultimately came to realize that he wanted to build a new kind of firm that's an investment firm that puts impact front and center without being concessionary in any way from a return standpoint.
(00:54):
We have a great discussion in this episode about Fabian's journey to starting AENU, some of the core principles that AENU stands for, tactically, how they go about it, where they are on that journey, how they got going, and where Fabian sees AENU going in the future. And of course how that fits in to his thoughts on the broader transition and what we can do collectively to accelerate progress. But before we start.
Cody Simms (01:22):
I'm Cody Simms.
Yin Lu (01:22):
I'm Yin Lu.
Jason Jacobs (01:24):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu (01:30):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (01:36):
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 (01:49):
And with that, Fabian Heilemann, welcome to the show.
Fabian Heilemann (01:53):
Thanks, Jason, for having me.
Jason Jacobs (01:54):
Well, I can't believe this is the first time we are ever speaking. We share many portfolio companies, and I've known your brother for quite a while and just have been a big fan from a distance. And we also have similar stories in terms of being entrepreneurs in more traditional tech and then pivoting to focusing on climate and impact with the difference that I'm building an institutional fund after never being a VC, and you spent six and a half years in between actually being a real VC. So I feel like I've got a lot to learn from you in this episode and otherwise.
Fabian Heilemann (02:27):
Let's say every journey has its pros, and cons and certainly there's quite some learnings that I can transfer from the time of being a general partner at Earlybird of Pan-European large early stage VC platform into what we're building today at AENU. But sometimes maybe it's also the freshness, and so to say, the greenfield approach that you're taking that has its benefits.
Jason Jacobs (02:48):
Like anything else, there's never a right time and never a wrong time, but every time you pick has trade-offs, and no one can answer which are the right trade-offs other than you. And you might get it wrong, which is okay, as long as you dust yourself off and fix it.
Fabian Heilemann (03:01):
You get up one more time. Then you've knocked down. It's all going to be fine in the end. And also, I mean, building a climate-impact VC, for me, is also not that much different from the five, six companies that my brother and I founded and built operationally in the last 22 years. So I don't even treat it really as a financial institution, but really take more entrepreneurial approach to it and thinking about product market fit, pivoting if needed, adjusting dynamically to the market environment. So in that respect, for me, this is, so to say, an impact entrepreneurial endeavor in the financial industry.
Jason Jacobs (03:37):
Yeah, it's funny you say that. I'll make one other comment, and then we'll get into some context to frame the discussion, which we usually do upfront, but that's okay. And institutional P, who we're in process with, somewhere in the process, who knows with these big murky institutional piece? But they asked one of my partners, just Jason, consider himself a VC or becoming a VC. And the answer is, to what you were saying, I'm a builder. I don't consider myself a professional capital allocator. Our business model is venture, but on any given day, I feel much more like a founder. And so in that respect, even though it's a new sport, it's quite familiar, but take it from the top. Maybe before we get into your journey, just tell me a bit about AENU and what you do as a firm.
Fabian Heilemann (04:21):
So with AENU and indeed phonetically here, a new era of impact venture capitalism to which our team is seeking to contribute in the grander scheme of things. At AENU, we're basically a climate-technology-focused, early-stage firm that is headquartered in Berlin, Germany, but investing let's say 80% of the portfolio across Northern Europe, including the Nordic countries, Scandinavia, UK, and then the German-speaking, home markets including Switzerland or Austria and Germany. And in doing that, we are basically, say, capitalizing on the three different pillars of our 20 plus years, entrepreneurial and investor and then also later climate journey. We'll get to that in a second. And basically distilling the best of the DNA, the experience, the patterns, frameworks, the sparring into how we add value to the portfolio.
Jason Jacobs (05:20):
It sounds like just from the little bit of research that I've done that it was kind of a slippery slope, where as you and your brother had an awakening about the gravity of the problem, you started with your personal footprints. And then it was kind of one step at a time, and then it was as a firm, and then it was the portfolio companies of the firm, and then it was like, "Well, what's next?" And then you came to put it front and center. Can you just talk a little bit about the decision to put climate front and center in your work and also how you got to building AENU and whether that was a linear process or had some twist and turns to it?
Fabian Heilemann (05:58):
First of all, I think it's important to know we were in our, my brother late 30s, me early 40s. Already when we were in our late 20s, we were in that, say, fortunate position of having a first larger-scale entrepreneurial success with the B2C marketplace, not climate or impact related at all, called DailyDeal, which was backed by Insight. And we sold that to Google in 2011, and that put us in a situation of certain, let's say, independence in our lives.
Jason Jacobs (06:26):
And then bought it back, I read, but I'm sure we could spend a whole episode just on that.
Fabian Heilemann (06:30):
Yeah. I mean, we were then in this, say, golden cage being employed managers in the large and massive Google organization, including the famous Google Matrix that was put over us, and we were as being entrepreneurs at heart, we learned a lot, but we also suffered a lot. And then later the opportunity to buy that business back from Google, after that had been a strategic shift within Google's product strategy in the Google offers and payment space to which we were associated, we indeed we bought it back loss-making, restructured it to break even, sold it a second time in late 2015 to an e-commerce holding from Germany. That's an whole different conversation. But going back to this point, early independence and back in those days, 2011, 2012, we were still defining success basically in a, say, traditional financial capitalist way. So success as basically the maximization of a mix of shareholder value and personal wealth and revenues, employees, yes, also paying taxes and contributing to public infrastructure.
(07:39):
But that was a very, let's say, traditional definition, how we thought about success in our lives as entrepreneurs. And we continued on that route for another two, three years. Started more companies, the latest of which is Forto. We started late 2015, which is today a unicorn logistics technology backed by Softbank in which my brother has also been leading as a CEO up until about two years ago. And around that time 2016, we as citizens started plunging, so to say, into the subject matter of the climate crisis and the books and movies of Al Gore. And then 10 Billion, certainly also let's say a pivotal book for us or catching our attention. And we said to ourselves, so if the scientific consensus back in the day already is if we take it as a given, then we are just in a super difficult trajectory as humanity globally, and the global south even more so suffering the consequences and the global north, but ultimately it'll affect everyone in a dramatic way. And so our immediate response by not changing, so to say, our business setup and everyday business focus overnight.
Jason Jacobs (08:46):
You were a regular VC, and Ferry was running Forto at the time. Yes?
Fabian Heilemann (08:51):
Exactly. We were running the traditional, hardcore, financial, capitalist profit-central companies, one on the operational side backed by generalist VC and the other one, being Earlybird, being a generalist VC, 2 billion assets under management, Pan-European, fintech, enterprise software, whatnot. And that's what we were doing at the time, and we even continued doing that for several years as our, so say, day jobs. But from those points where we came to realize, so to say, how bad the crisis actually is and how daunting the trajectory looks like globally. We took these first steps immediately of changing our lifestyles, and I was a avid pilot to lots of my European business trips on my own plane and loved it and ultimately sunsetted it. Tried to get sustainable aviation fuel, which wasn't possible at the time. Still today, it's tough in small scales if you're not a major airline. Stopped flying, adopted a fully vegetarian diet, drastically reduced long-distance flying, sat only one long-distance flight a year. Avoid domestic flights as much as possible, used rail infrastructure and put renewable electricity to our private homes. So that was kind of the first step.
(10:01):
And then also becoming members at Founders Pledge, David Goldberg, where we're still today the ambassadors for the German tech ecosystem, pledging a few percent of our proceeds to high-impact charity. That's kind of where we started 2016, 2017. And then having quantified all of that and tens of tons that we had, so to say, brought home of carbon equivalents, we were thinking about what are the bigger levers that we can pull to make a more meaningful contribution and not just like a drop in the ocean? And this is how we then on a self-taught way from 2018, started looking into company carbon footprinting for tech businesses. And Forto, but also of course the Earlybird portfolio was kind of our sandbox. And then at some point we realized in 2019 that we wanted to share the insights that we had gained, frameworks, toolkits, et cetera, more broadly with the ecosystem, and why keep it to ourselves? And try if we can see if we can make an indirect impact in our circle of influence, not beyond our circle of direct control.
(11:05):
And this is then how Leaders for Climate Action came about that we founded as basically NGO or nonprofit organization based in Berlin with a handful of fellow climate-conscious entrepreneurs. And today it's six, seven people full-time and 1,700 companies that adopted the pledges and use all of the collective insight that has been accumulated there to decarbonize their operations in terms of measuring, reducing and then offsetting on an annual basis and reporting against those pledges. And it's just great to see how, at least in our industry, many people think progressively and are also willing to reflect on their own policies and how they run their companies and how they can contribute effectively and in a measurable way. And so Leaders for Climate Action was basically still on the nonprofit side. Was our first, so to say, meaningful step.
(11:58):
And then my brother, he gave a TED Talk, wrote a book on climate action for entrepreneurs, climate action guide, which spread out throughout the European tech ecosystem. And then I initiated at Earlybird the climate tech practice, which was the first step to unify this desire to make a climate impact with the for-profit core business angles that we still had 10, 12 hours a day. And that was up until let's say 2020. And then at some point we realized that it will be tough to fully, so to say, live up to the impact aspirations that we both continue to develop within Forto, the Earlybird, so within, so to say, these established organizations that were not set up to be impact-centered or not set up to be climate-impact organizations per se. And that would need to undergo mass transformation at the core encompassing or incorporating the buy-in of all of the major stakeholders if you really wanted to take it far.
(12:58):
And that realization basically brought us to the point where we said, "Let's try take some of our private wealths, and let's try if we can pilot in the evenings and weekends a investment strategy. Basically in European terms, that is Article 9 SFDR, even Article 9 plus. And that is located exactly at this intersection of measurable, interlocked, additional meaningful climate impact and still top quartile market rate returns. This was, so to say, the hypothesis. And we did that for two years basically 2020, 2021, on the evenings and weekends, and this, what we call-
Jason Jacobs (13:41):
Single LP or LLP, you and your brother?
Fabian Heilemann (13:43):
Yeah, well it's one entity from which we jointly... We act always from the same entities even though we are two individuals. But the thing is that our point of view on the world and also the role that technology can or should play and on regulatory, on policy and all these matters, our point of view is, let's say, 99% identical. That makes it easy for us to also always bundle our resources and be more powerful than if we were acting, so to say, each on our own accounts. So that was indeed basically two people, but a single LP structure today that this pilot is at 2.3 X and whatever, 30-something gross IRR. And we took that basically as a proof point for us to really take that basically bold step of leaving firms that were doing so well and are so established in such a good trajectory as Earlybird and Forto.
(14:40):
And really at that age, with collectively the two of us have five children right now, really take that effort and start again six times, so to say, in 22 years, start again from scratch and build a new into an institutional grade climate impact fund. And that's what we commenced early 2022, and that's where we are today with a team of 11 people, 10 European, Spanish, Scottish, German, 70% female by the way also on senior level. That's where we are today, two people on the in-house impact team. And our predominant focus areas are energy transition and carbon removal when you look at it from a thematic focus areas within the portfolio and also the thesis and the in-house research that we are doing.
Jason Jacobs (15:24):
So before we get into AENU specifically, one question that comes to mind just listening to that story is if these Article 9 funds or Article 9 plus I think you said are setting out to be top quartile return funds, then you mentioned it was difficult to achieve the impact you wanted to have in the context of a more traditional firm. If you truly can deliver top quartile returns or make a compelling case that you have the chance to, then where's the issue in terms of doing it with the traditional structure?
Fabian Heilemann (15:59):
Well, let's separate the structure, the legal structures and maybe even the LP structures. Let's separate that from the DNA of the firm. And when there is a firm and you pick any, is it Accel, Index, Bollard, and Earlybird, Lakestar, [inaudible 00:16:13] Capital, Nomea? But all these firms have in common that they are 20 to 25 years old. Basically, they have their mold for success, and that mold is anything but values or impact driven. And in order to execute an Article 9 or even, as we like to say, Article 9 plus strategy that incorporates lifecycle assessments and impact modeling, so that has high bars on the impact side, you are basically completely crushing the DNA and all the decision-making heuristics, the way the investment committee works, the way it makes decisions, the way it thinks even, I mean, and we are honest, even the way they think about success.
(16:55):
What we are doing today with AENU follows a different idea of what success is, a different definition even of success, not in a communist, socialist, anarchist way, but in an augmented way so that we basically started or coming from this legacy of, say, traditional, liberal, financial, capitalist definition of success and then augmented it with the planetary or climate component and also with the social or societal component. And therefore, measure our success, so to say, in a threefold way, where all of these established firms are used to measuring it in one, so to say, in a singular, in a siloed way. And prove me wrong, but I haven't seen a single of the top 10 or top 20 European firms in VC that have credibly transitioned really as a firm, not just with a pocket where they throw a ticket here and there, an LP, say, "Well, it's nice that you also did a climate tech deal for almost political correctness." I'm not talking about that. That's happening in the market.
(17:56):
There is, so to say, some pressure also from the institutional LP side to be more, say, in the first place impact and then partially also a little bit of impact minded. But I haven't seen a single firm that has successfully transformed itself at this very core from a purely IRR, TVPI, financial KPIs within legal business envelope frame into an actual scientific-methodology-driven, climate-impact firm. And that's why ultimately we came to the conclusion this needs to be done basically in a greenfield approach, where you ensure also across every be it five or 20 or a 100 people on the team at some point, whatever, but where you also ensure a 100% mission alignment across the team. And everybody is in for mobilizing capital to contribute to addressing the climate crisis.
(18:50):
And also everybody is in for contributing to the systemic transition in alternative assets in PE and then VC, so as a subset to contribute to that transition and to inspire others and to open source methodology and educate. And that is just such a different game we're playing with so different stakeholders. Also, when I think of the DNA of the entrepreneurs that we back, it's such a different game. I wouldn't say it's a different asset class in generalist, you see, but certainly, basically it's like a sister or so. It's not a subset. It's sort of subcategory of traditional VC.
Jason Jacobs (19:26):
When your brother and you were sitting around the table either physically or virtually talking about how you saw this gap and how there are constraints with the existing institutions to be able to really have the biggest impact that you could and build the type of firm that you envision from the ground up, maybe talk a bit about just what the initial vision was for AENU and then what some of the key steps were from that initial vision to now. And those could be steps or milestones, but also evolutions, twists and turns, mistakes, lessons learned, kind of take it wherever you want, but it'd be great to just get some color on how you got going.
Fabian Heilemann (20:10):
Our thinking around the questions, so to say, what's going wrong systemically? What are the systemic flaws of the asset class of venture capital? That was basically really the starting point and the lack of impact or the lack of specifically climate impact. I mean impact, so to say, also here is a higher order that could also include social impact or other impact aspects, but climate impact for us, so to say being the impact problem that we feel closest to and that we decided to devote ourselves to with some satellite interest also in biodiversity, water, et cetera. But climate is for us at the core. That has certainly always been the focal point and not only in terms of how can we unlock more capital towards specifically climate technology, but also how can we drive scientifically-sound impact methodology behind that to avoid greenwashing? And truly, so to say, get to a point where ultimately we can compare impact returns, apples for apples in a way horizontally not only across different managers or receivers, but even across different asset classes at some point, even on a dollar or euro weighted basis.
(21:18):
How can we get to that point so that impact becomes, so to say, as much benchmarkable for any financial product as the financial returns today in IRR and TVPI and DPI and whatnot are already today? This has been another [inaudible 00:21:33] for us. And beyond that, we have been looking into, let's call it, the liquidity problem in VC as not much of secondary markets or tradable shares. Basically the LP is locked up for 10, 12, often 14 years when you look at the extensions that are not the exception, but rule. Would better liquidity options allot more capital for climate tech? Maybe, yes, yeah. But we've been also looking into accessibility. And the question especially in Europe with the AIFMD regulation is basically prohibiting, let's say, middle class people from investing in the asset class per se. So in Europe, this asset class is confined to the ultra wealthy and the institutional investor and therefore, so to say, exclusive, but I mean exclusive in a negative way, in an exclusionary way.
(22:22):
So also the lack of accessibility is something that concerns us. And ultimately the fourth aspect is the question around how can you increase the alignment of interest across the core stakeholders in venture capital being first and foremost the founders, the manager and the limited partner, and then planet, society and others, academia, NGOs around it. And we believe that the traditional 10-year fund model will increasingly even now be challenged in the climate tech sector, where there's a lot of hardware, deep tech frontier that sometimes needs years just for product development. And it's often not ready to be exited, be it trade sale or IPO, within this traditional timeframe that has been more designed, let's say, for software type of businesses, e-commerce, fintech that generate revenues in months three, months six and are typically earlier ready to exit.
(23:22):
So the 10-year fund model and also questions around compensation, how can you increase alignment of interest also with regard to the carried interest model? All of these aspects, so lack of impact, lack of liquidity, lack of accessibility, lack of alignment, this is kind of what define what concerns us and what has been defining our thinking. And without getting too academic or theoretical about it, we initially came up with a fund model that is basically that you could categorize as an evergreen with an infinite term that could also go much more powerful multi-stage and have a much more long-term alignment even to post IPO and crossover, et cetera with the entrepreneur, some elements that you would know from TCV. Now also, then later a fundamental switch at Sequoia happened, which we were excited to see, truly innovative of course in the institutional VC world, yet with a lot of scrutiny from the LP side.
(24:21):
What we got, many were actually opposing and just consented because they wanted to retain access to the manager of Sequoia, not because they were actually supportive of the model that they came forward with, the evergreen structure and the redemption schemes and whatnot. And this is how we set sales. And we raised the first double-digit million Euro amounts from our closer network of mostly other entrepreneurs and single-family offices from Germany, a bit through Switzerland, also some UK people from our past, for whom we had made money before. We've had, let's say, a successful past track record with them. And that's how we got started. And they loved the structure that we set up because it was tackling or delivering solutions to these problems that I've just mentioned.
(25:10):
Then later, after the first nine, 12 months when we started going into the traditional institutional LP market, which in some soundings and let's say in some informal consultations also always, so to say, sent supportive signals and excitement for the structure we had built. But when we then re-went into that market, typically after a second or third meeting with all of the big European names that come to mind when you think of the European institutional P landscape, many, many said to us, "Great, maybe the most inspirational structure and strategy we've seen in a long, long time. Exciting, but it's not market standard what you're doing. And with that structure, we've never done anything like that before. And it's just very unlikely we'll be able to get it through IC despite great team, great track record, convincing investment strategy, et cetera."
(26:08):
And that basically put us in a position where we later were faced with the challenge of either, so to say, sticking to it for our convictions, but excluding also a significant part of the relevant institutional players from our LP base for the infinite future basically, or adapting our structure in certain ways to a more, let's say, market standard DNA, which we ended up doing. But today I'm not yet in a position to share those details. But this gives you, I think, a background on how we came about and how also conviction and, let's say, systemic thinking and problem centricity has informed our structure and strategy and how that then, so to say, partially, I would even say clashed into the reality of a very conservative institutional LP market and how we then found, so to say, the consensus that allowed us still to address those players and thrive. And we'll make more detailed announcements on that when the time comes.
Jason Jacobs (27:08):
You've hit on such an important conundrum in the sense that, I mean, it's not just venture as an asset class. It's our entire global economy that was built without factoring in the externalities of the pollution that we're dumping into the sky and otherwise. So we need to find a way to live more in harmony with the planet that we rely on to sustain us and other life forms, but our systems are deeply entrenched. Is it better to increment and iterate on the existing system or start from scratch? And each approach has big trade-offs. The increment approach is like, "Well, but we're really just kind of doing it the existing way, but a little different. We're not changing hard enough or bold enough or fast enough, and we're never going to get there." But if you start from scratch, it's like, "Well, but all the leverage that comes from the big players and the big wallets and the big might is so entrenched that it's going to be too different and too scary and too unknown, and so they're going to sit on the sidelines."
(28:12):
I don't know what the question is in there, but that's a tension that I'm living every day and I think that a lot of people that work in climate are living every day. And I can't wait to hear the details of where you ended up because, for us, for example, we went out of the chute with a 10-year fund. And it isn't necessarily because we think that that's what's best. It's because we're already an emerging manager. We already have non-traditional portfolio construction and strategy. We already have a non-traditional team. How much non-traditional can there be? Now we're going to also go out with a non-traditional structure? We need to keep something familiar. I really empathize with what you're talking about here.
Fabian Heilemann (28:50):
That's exactly the point. You can only, so to say, succeed while changing this and that many components or parameters in the equation at a time. And I think this is also my answer to the curveball, so to say, that you are throwing on the question. How does the development of new technologies and different ways, more sustainable ways, of rendering products and services to existing demands, so to say, how does that interrelate to the transformation of the incumbent patterns, industries, products, corporates, policymakers? And for us, our concept when we talk about what we call impact capitalism as, so to say, the desired state evolving from the traditional, liberal, financial capitalism with its narrow definition of success measured purely in GDP and in private wealth that people are accumulating and blended maybe with a bit of power and a bit of fame, but that's it. And transitioning from there to this augmented broader definition of success that always encompasses the planetary and the social net positive or negative outcomes of your entrepreneurial actions, your investment decisions, et cetera.
(30:02):
When we speak about impact capitalism as this desired date for our society, to which we would like to contribute on micro level by allocating capital into highly-impactful climate technology development, but also on a macro level with the policy interaction, the regulatory agenda, feeding back our practitioners' knowhow into policymakers in Berlin, but also partially on European level. When we talk about this impact capitalism, for us it's basically three elements to it. And first one is the realization it is not going to work without the contribution of regulation and policy. And in Europe, especially also still five, 10 years ago, there was this widespread idea amongst entrepreneurs that said, "Oh, let's keep our heads down. Let's keep making money. Let's not take a political stance. It is only going to be to our detriment, and let's not get involved. And policymaking is slow, it's consensus seeking. I can't stand it. I'm the king in my castle and let's just keep going."
(31:06):
And I think also in VC and private equity, this has been basically the mainstream mindset. And today we know how important it is to shift the goalposts in order to accelerate the desperately needed transition. And shifting the goalposts means, for example, putting a price tag on externalities as that is completely changing the competitive landscape in a given industry, where an incumbent player may have in all terms attractive product, but it may be heavily polluting. And a product with maybe less features, maybe even at a higher price point from a sustainable newcomer is overnight at price parity or even cheaper by putting a carbon tax into play by moving the goalposts. And in that respect, we are glad that things have gotten going with the European Union Green New Deal, also the IRA. This is all helpful.
(32:00):
It is of course also risky for investors. I think one of the key learnings also from the 2000 cleantech bubble was that many businesses got funded, who were not in a position to ever in, say, eight, 10, 15 years timeframe get to a economically or financially sustainable operating model without all these subsidies, especially on the renewable energy side back in the days. So a lot of the money that has been lost in Europe and in the US in the wake of this first cleantech bubble has been lost because investors did not do a look through to the financial viability of the technologies they were seeking to fund and develop and scale in the absence of the subsidiaries or of the government aid. Therefore, it's good that it's in place, the IRA the EU Green New Deal, et cetera.
(32:52):
But as an investor, we always must take this look through approach and say, "It's nice if the government program accelerates the development and the rollout. It's good for everyone, not just for the company, also for society and our planet, our climate. But we must make sure we're not funding businesses that cannot ever survive without the subsidy." So regulation and policy is an important building block. We need it and we also need it because reality shows that neither, let's say, average Joe as the consumer, 80%, 90% so to say, of the majority of our Western societies, nor many of the few percent of its leaders and elites and be it in policy, corporate, finance, entrepreneurs, academia, whatnot, are actually willing to fundamentally change the way they behave in their leadership roles or in their consumer roles just based on the insight of understanding, "Oh, we're basically climate-wise."
(33:49):
This is what reality shows us, say, in people. There's a few of course progressive small group, who would sacrifice some of their consumption habits and their lifestyle and their long-distance, first-class travel and whatnot, and their Kobe beef eating and their muscle cars, who would sacrifice because they gain this insight and they realize it's just not the right thing to do right now. "And maybe when I have sustainable fuel, when my car is electrified and I put a 100% renewable electricity into my battery, then I can hit the gas again. But right now it's not the right thing to do." This is a tiny, tiny minority. The base majority needs this reframing in order to change behavior. They're not doing it on their own. Insight alone is not going to make them change enough and fast enough to save us all.
(34:36):
And that basically goes to the second aspect, behavioral change. We see the behavioral change as the second important pillar of the transition to impact capitalism really across all these stakeholders that I mentioned from, so to say, the broad population, all the way to elites. And this behavioral change, we should see that we frame it in a positive way. We give it purpose, and we give it context rather than just working with prohibitions or punitive taxations because then what you see happening is what Emmanuel Macron suffers in France with the [foreign language 00:35:07], the yellow vests or these protests. It's important, so to say, to frame the nudges in a positive way, where people understand the context of why it's so important and relevant also to themselves and maybe their children and grandchildren to actually embark on the cumbersome journey of changing your habits.
(35:24):
And then the third aspect is the mobilization of retail and also institutional capital towards climate impact investing. That's on the one-hand side contributing to the further ubiquity or to the further rollout of existing, proven technologies such as in renewable energy. We have it all there. The ingredients are there on the table. Now go bake the cake at a global scale. And on the other hand, and that's where we come into play and other venture capital and growth equity players, developing additional technologies that can become as globally relevant and impactful as, for example, the [inaudible 00:36:06] or the wind power industry, which hasn't been around 20 years ago. And today it's technologically mature, everywhere accessible and where even especially here in Europe in terms of price parity or feature parities, maybe not an applicable concept on electricity, but where we have achieved price parity. And today solar power is the cheapest kilowatt-hour that you can get even compared to coal, gas, nuclear.
(36:33):
So everything comes together and such a perfect example for the intersection. After some, it takes years, maybe even a decade or two, but where the second, third, fourth technological generation and the mass market adoption ultimately gets a new technology that seems cumbersome and too expensive and maybe doesn't have feature parity on day one, where ultimately the ecologically reasonable and right thing to do intersects with the economically or financially most attractive thing to do. And then we reach this point where it all comes together and where nothing is going to stop the mass market adoption. And this we are maybe on the brink of getting there with e-mobility in some areas, infrastructure charging and whatnot, in some areas or countries faster than in others. But I think this is going to happen. And then micro mobility and long distance and different types, but I think it's going to happen.
(37:26):
We also need to get there when it comes to nutrition, the mass market adoption of alternative proteins, be it plant-based, be it some point lab-based. Again, regulation is a big showstopper or a big hurdle for especially the lab-based. Essentially we need industry by industry and, let's say, emissions cluster by emissions cluster, we need to undergo this fundamental transition. We believe will always be driven by these elements of creating the right regulatory policy environment, nudging behavioral change through insight and through creating understanding, or also education comes into play or where education intersects with climate almost and of course climate technology development and its underlying finance.
Yin Lu (38:10):
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. 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.
(38:37):
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 and 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 (39:10):
I have a bunch of just practical questions I want to ask you about fund strategy and check size, and do you lead, and what sectors and what types of entrepreneurs do you want to hear from? We need to make sure to cover that. That's housekeeping, but here's the real question. After what we've talked about so far, in almost 45 minutes that we've been talking, you worked at a traditional VC. And in that experience working at a traditional VC, you try to start a climate sleeve within the traditional VC and ultimately realize that it wasn't big enough to kind of have the impact, and it wasn't disruptive enough and that you needed to leave the nest and have a fresh start. I know from the experience out raising our first institutional, our second fund, our first time, including institutional piece over the last whatever since the beginning of the year. And now we're well over halfway, and we have several institutional commits and stuff, so we're still in the thick of it, but we're not nowhere. We've turned a corner, and we're going to get it done.
(40:03):
But I know from doing that that there's a bunch of people that are the equivalent of what you were at Earlybird in traditional institutional LPs that are trying to push them to do more in climate because of some of the reasons that you're articulating that are banging their head against the wall. And even the ones that have dedicated climate sleeves, I would imagine that some of those are going to feel like you felt when they're sitting in the institutional LPs like, "Hey, it's better than if we did nothing," but it's not nearly big enough. It's not nearly comprehensive enough. We need to play a much bigger role and do a lot more. So here's my question for you. You left to start AENU. What does the equivalent look like as an institutional LP who's banging their head against the wall within an existing firm? If they set out to build something from scratch, what should it look like?
Fabian Heilemann (40:45):
Great question, great idea. The context is not [inaudible 00:40:49]-
Jason Jacobs (40:49):
You need to change your structure now. You need to change your structure now to pander to the existing system that's holding back your structure. What does the system need to look like to not hold back your structure? See what I'm getting at?
Fabian Heilemann (40:59):
No, I totally get it. It's a great idea that I think some individuals, so to say, may have asked or may have pounded their head about it, but at least in Europe there's not been much happening so far at least that's visible in the market, and I wish it were. And essentially what you are asking is basically how does, so to say, the upstream counterpart on the financial-
Jason Jacobs (41:20):
Yeah, because shit rolls downhill. So until they change, we can't change, right?
Fabian Heilemann (41:23):
Absolutely, yeah. What does it look like? If I were an institutional asset manager, I believe there absolutely is a market opportunity to build, so to say, a pension fund 2.0. There's some fund of funds going into that direction, most of which however are coming, so to say, from the established platforms. It's more that sleeve that's still sitting in the same governance and whatnot. So there's some movement, but there's no radical innovation in the LP ecosystem, absolutely right. And that radical innovation, if it were to happen, then I think authenticity in terms of climate impact is key and adopting super rigorous methodology is key because that's exactly the Achilles heel of the traditional landscape out there. There's so much greenwashing. They're just under the hood basically trying to preserve their existing process, legacy, their decision-making criteria while at the same time feeling the urge to tick boxes, put some logos or some labels on their products.
(42:25):
That's the Achilles heel. That's the dirty little secret of the financial industry or the asset management industry, including the LP industry and alternatives. And I wish there were a handful of bold and yet experienced enough. They have to come with track record. I mean, the institutional financial landscape is probably equally conservative to say you want to build a water grid or an electricity grid or the railway grid. This is basically in the same... This is about the slowest industries to evolve and the most conservative mindsets that you can find anywhere. And overcoming that is certainly not going to be a walk in the park. But I think it could be done, and maybe it could be done also, let's say, in a horizontal way where you would not only, so to say, service the traditional clients of the large institutional managers, but where you would maybe even coming back to the aspect of accessibility and democratization where you would even find ways.
(43:23):
And there also regulatory comes into play in structuring is complex. It's cutting edge where you would find a way of allowing young professionals and younger generations smaller checks, access into our asset class while still maintaining a high-quality bar and a high-quality hurdle in order to avoid all of the pitfalls that we have seen in the very democratized industry of crypto and DeFi, where there's no quality gates and so many retail people are losing so much money because they're not in a position to, so to say, in an institutional way assess the quality of the investment opportunities that are presented to them. This is, so to say, the other extreme, like the radical democratization without quality gates. It doesn't work, and the current way of the institutional landscape also doesn't work because it's completely exclusionary. So where do you find that middle ground? And that's the innovation opportunity in institutional finance that may be tackled, hopefully will be tackled. I would be all for it. So if anyone's listening here and wants to step down from Cambridge Associates or Aberdeen Standard or Adam Smith, then go for it. Please give me a call.
Jason Jacobs (44:31):
I'll tell you that's one thing I'm getting out of this process in addition to slowly assembling the capital so that we can run our business is I'm assembling a collection of frustrated people on the inside that are banging their heads against the wall. So who knows? And I know some of them listen to the show too, so maybe you'll inspire some people. But similar question, and I might make some enemies for this one, but similar to how there's people banging their head against the wall within the existing institutions and the existing institutions' deeply entrenched culture and things like that. I don't know how you feel, but I kind of feel that way about the Impact investing world as well, where there's a lot of good effort. There's been people that have been doing it for a long time, but for example, we are motivated by impact.
(45:14):
We are out there trying to have the biggest impact that we can. It's Our North Star. It's why we do what we do. But if we talk to, let's say, an impact capital allocator, we'll get a questionnaire, and it's a long questionnaire. And I feel like a lot of the questions are stuff that you can't do as a startup fund because you need a whole team of people. It's bureaucracy. It's red tape. I just wonder if there's people banging their head against the wall in there, and they're going to set out and start fresh. It's kind of the same question as I just asked about the traditional glass-eating capitalist capital allocators. What about from the impact side? How do you feel about that, and what should that look like if someone were going to start from scratch?
Fabian Heilemann (45:57):
The fundamental problem looking at the impact side of things, institutional capital allocation, is that the vast majority of players also that we have in our data room, et cetera, at least they do not differentiate sufficiently between what can be, so to say, in a realistic way, what data sets are realistically available also on the underlying asset base in the portfolio. They do not sufficiently differentiate between what can early-stage climate VC deliver versus a growth-stage or a late-stage investor with a huge asset and chief impact officers and five people on the impact team that are doing nothing but data gathering, compliance reporting.
Jason Jacobs (46:40):
Or even venture on fund five or fund 10 versus fund one, right?
Fabian Heilemann (46:44):
Even fund 10, yeah. And then even horizontally. I mean, we see that even sometimes the questions that are asked are even the same across asset classes. So there's too little differentiating spirit, so to say, checking reality and theoretical catalogs of questions that have been, so to say, compiled in a more academic way. This is, I think, the single biggest problem. And that's actually even backfiring in a way that we see here and there managers that would be motivated to step up into Article 9 by European terms, but are actually holding back because they fear that they will not be able to comply with the reporting requirements that the LPs that are also then actively investing for will have that substantially exceed the regulatory requirements. It's really just their internal standards. So it's even holding back, so to say, the flow of capital into higher-impact product categories. And that's a pity and it's still early days on the other hand side. I mean, it's good that the European Union has stepped forward and put this regulation in place to create market segmentation, Article 6, Article 8, Article 9 at all.
(47:50):
I mean, when you look into other jurisdictions, there is no such distinction. Managers are just putting some claims forward or they are just, so to say, judging in their own case what they are, how they qualify. So it's a good first step to create distinct categories, but the devil is in the detail, and a lot of, let's say, the practicability is not yet there. Again, yes, it is policy that's set within the institutional LP landscape on impact. It's playing into it and their willingness, so to say, to adapt and differentiate across different products and what they can ask realistically. But it's also an interplay again then with the regulatory landscape, and that's also why it's so important that us, as practitioners, are trying and taking the time and making the effort of feeding back input to the policy makers in the end of the day. Only if these are two-way roads and only if these communication channels are established, then we can jointly make the most effective and most rapid contribution to this desperately needed transition.
Jason Jacobs (48:52):
I don't want to ask any questions that are going to get you in trouble from a compliance standpoint. So if I am, just don't answer it. But what I'm trying to get at is are you open for business, and what percentage of your fund is raised? And if you can't answer that, the reason I'm asking it is that I'm trying to gauge. And it's another thing that we're working through as well is if you look at our portfolio construction and our check size and things like that, it's all based on a fund at target. And while we're confident we're going to get to target, we've still got a decent amount to go. And so how do you balance sticking to your strategy with not knowing for sure what your final fund size will be?
(49:29):
And after getting that out of the way, then I just want to talk through just the housekeeping of, "Well, what's your strategy? Do you lead and what stage? And who do you want to hear from all that?" It is helpful to have that context as well of just where you are in the process. If you're just starting out, everyone has a strategy until they're punched in the face. We've heard from several LPs that they backed three funds in the last 12 months, and two out of the three stalled out in their fundraising and didn't even get to halfway, and now they're stuck. That's why I ask.
Fabian Heilemann (49:58):
So the reality is that we have already raised a substantial amount, a new one which is 140 million fund. And already first closing actually was-
Jason Jacobs (50:06):
That was what you called the MVP?
Fabian Heilemann (50:07):
No, the MVP was a couple of million, the pilot phase 2021. That was only our private capital technically. I mean, we were also my brother and I, and also alongside our partners, [inaudible 00:50:18], we are also substantially LPs in our own fund. So we have a way above average GP commitment, but we are not in a position to put hundred 140 million fund as a single LP. And we've raised a substantial amount of that. And already we were fortunate basically to already have a first closing that was north of half of that fund size and are starting to gear up for a final closing still. And already today we're building a-
Jason Jacobs (50:42):
So we're in similar spots. We are tracking. Anyways, we can talk more offline, but our journeys are very similar.
Fabian Heilemann (50:48):
So we are seeking in that first institutional fund generation, after the pilot, as you'd say, we're seeking to build a portfolio of 30 to 35 logos, seed and series A. Sometimes we do a pre-seed bet typically if there's a strong serial entrepreneurial background, often people that we know already or have established trust bases from previous stints. But the core focus is seed and smaller series A, so we typically don't touch rounds that are larger than 10 million. And our initial checks are typically between 1.5 and 4 million. We like to co-lead. Sometimes we also might take a strong follower role next to tier A generalists. It has happened. Minimum, for example, in UK where NEA then came in. We also invested alongside [inaudible 00:51:33], Energize, et cetera, at Monta, for example, in EV charging infra software in Denmark. We have many co-investments with Lowercarbon Capital with breaks for energy.
(51:44):
And they also, of course here with the MCJ fund, some of the carbon removal companies like Charm, Heirloom, Running Tide. UNDO in UK is doing really well. We've already built up more than half of the logos from a portfolio construction standpoint, but we'll continue to invest for the next 18 or so months from this first vintage. Energy transition, carbon removal, probably our two strongest verticals, also in terms of the associated, the assigned internal practice groups. Every deal is done by domain expertise and by competence within our team, not by relationship or who saw it first. Besides that, we have an interest in the decarbonization of several heavy industries. We also have a pocket for ecosystems, some activity or some deals here on biodiversity MRV, for example. This is basically our scope and focus on Western and Northern Europe, series A.
(52:40):
Anyone in that scope, please reach out and happy to talk. And really when you think of what's in for you as an entrepreneur, our edge, our value add is typically defined along four dimensions. And the first one is the entrepreneurial sparring, the experience that three of our partners have from five six of their own businesses, including failures, but also including unicorns and trade sales to Google and whatnot. For entrepreneurial experience, it's the impact knowhow, Harvard, Yale graduates on our team, LCAs, impact modeling, reporting, measurement governance, impact workshops, pre, post investment. It's B2B market access, especially on the continental European enterprise landscape. We are quite good at it for UK also, sometimes for US-based companies coming into Europe. And the fourth one is capital formation where we've just looking back at the 15 years of having raised from Insight, from SoftBank ourselves and worked from NEA, KPCB, General Catalyst, Temasek, even Index X, so you name it.
(53:41):
So there's almost no, but also then as I said into the Article 9 or impact landscape, anyone up to TPG or Generation IM or Lightrock. So there's almost no relevant series B, C round investors where we wouldn't have had touch points in the past 15 years with. And these four angles, entrepreneurial experience, impact knowhow, B2B market access, capital information, these are basically defining our edge to the entrepreneur. And we're also actually asking ourselves every opportunity we look at, would we be a value additive shareholder for this company? Or even if the opportunity might be attractive to us, is someone else in a better position to do that deal?
Jason Jacobs (54:23):
Great. Well, we could easily spend another hour here, but I know we've got a wrap. Well, I guess two final questions, one is who do you want to hear from, and what's the best way to reach out for anyone that's inspired by your work and firm and wants to get in touch with you? And the second question is just anything I didn't ask that I should have or any parting words for listeners?
Fabian Heilemann (54:42):
Who do you want to hear from? Well, I think when I look across the audience or let's say the people that you're featuring on the MCJ podcast, I would be curious... And I once had the chance to meet and ask him a few questions, but I would be curious for you to interview Sir Ronald Cohen, the founder of Apax, the large PE buyout firm, who's been in my point of view, basically the thought leader on the overall, not just climate impact, but overall impact movement in Europe across technology, financial industry, but also into policy and government and really hear what's his take on how we have come about. He's into this since 20, 30 years more than any of us. That attitude not just in terms of, "Oh, I'm going to get on a train," but really he's been into it for decades, and I think a very inspiring person to interview.
(55:33):
And then lastly, what you could have asked, I mean, we're all working in this very high-pace, very competitive environment, but sometimes also odd that on the one-hand side, we're all trying to optimize for impact while still staying competitive, also on the financial part of what we do. Otherwise, it's charity, different asset class. And at the same time, of course, we also frenemies or partially competing, partially collaborating. And these lines often blur. And personally at AENU, we try to take a very collaborative approach of also open source, almost the entirety of our impact methodology for the benefit of other practitioners and also across other NGO, academia, corporate, chief sustainability officers, et cetera. So we try to not create secret sauce, but the more the merrier and try to be influential beyond our circle of control. And this is a message I would like to get across, and I wish, so to say, for our industry to preserve this idea of collaboration for the greater cause and the idea that one plus one is more often three than it's 1.5 in some.
(56:39):
And I hope that in our industry we can build a culture that is less elbows driven and that is less cutthroat also when it comes to sustainability in the workplace and allowing access to people to capital, but also access into working, in impact. We see that may have not have that access with their CVs or their paper forms in the traditional, let's say, cutthroat generalist VC world. And I hope we can maintain that and build a different culture, a culture that's more sustainable really in the inner sense. Not only eco sustainable, but climate sustainable, but also socially sustainable for everyone involved, build a new culture in impact we see that is dramatically different from the one that we've seen in the legacy industry.
Jason Jacobs (57:21):
Well, some of the best episodes are ones that not only answer questions, but raise additional ones. And this episode was certainly that. All of my pistons are firing. Fabian, thank you so much for making the time to come on the show. Really fascinating and intellectually stimulating discussion and looking forward to following your progress with AENU and also finding more ways to collaborate as well. Thank you for your work.
Fabian Heilemann (57:42):
Pleasure was mine, Jason. Thanks for having me, and we certainly keep in touch.
Cody Simms (57:46):
Thanks again for joining us on My Climate Journey podcast. At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem-solving capacity. 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 (58:12):
For weekly climate op-eds, jobs, community events, and investment announcements from our MCJ venture funds, be sure to subscribe to our newsletter on our website.
Cody Simms (58:22):
Thanks and see you next episode.
