Capital Series: Mark Robinson, WAVE
This episode is part of our new Capital Series hosted by MCJ partner, Jason Jacobs. This series will explore 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'll take a deep dive into the world of capital and its critical role in driving innovation and progress.
Today’s guest is Mark Robinson, Founder and Managing Director at WAVE Equity Partners, an impact investing firm that seeks to maximize returns for investors, growth for portfolio companies, and impact for all. WAVE achieves this goal by investing in sustainability innovators that tackle our greatest environmental challenges on a global scale.
Jason and Mark discuss the origins of WAVE, the timing of its launch, and some of the key lessons that Mark learned from Clean Tech 1.0. They also delve into why WAVE took a contrarian bet when it started and how its approach differs from other firms. Mark explains the company's investment stage, check size, sector focus, diligence process, and value-add post-investment. The episode also covers the industrial market landscape, where WAVE spends a lot of time. Jason and Mark explore various topics such as the ecosystem of founders, the regulatory and policy landscape, and the current capital environment.
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Mark Robinson / WAVE Equity Partners
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Episode recorded on March 7, 2023.
In this episode, we cover:
An overview of WAVE Equity Partners
The firm's origin story and path to focusing on clean energy, food, water, waste and recycling
Early fundraising challenges for industrial solutions
Key lessons from Clean Tech 1.0
Changes in the ecosystem since WAVE got started and how the firm addressed them
What gets Mark up every day and the underlying decision to start the firm
The firm's investor makeup and LP shifts over time
WAVE's fund structure
Non-starters and the types of risk WAVE is comfortable taking
The balance of fundraising vs domain expertise when building a company
The role of the regulatory landscape and government funding when making investment decisions
WAVE's 6-month or longer diligence process
The firm's approach to defining and measuring impact
Mark's thoughts on doing things cleaner vs. reforming entire systems
The role of government support
Mark's wishlist for the future of the industrials market
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Jason Jacobs:
Today on the My Climate Journey Capital Series, our guest is Mark Robinson, founder and managing director at WAVE Equity Partners. WAVE Equity Partners is an impact investing firm. Their mission is to maximize returns for investors, growth for portfolio companies, and impact for all. They achieve this by investing in sustainability innovators that solve our greatest environmental challenges on a global scale. We cover a lot in this episode, including the origin story of WAVE, the timing for when they launched, some of the key learnings that Mark had from Clean Tech 1.0 and why they had conviction to start WAVE with what at the time, was a contrarian bet. And also, how WAVE's approach is different, their stage, their check size, the sector they focus on, their diligence process, their value add post-investment.
And we have a great discussion about the landscape in the industrials market, where they spend a lot of time, what's going on with the strategics? What's going on with the ecosystem of founders? What's going on with the regulatory and policy landscape and of course, what's going on with capital? Before we start ...
Cody Simms:
I'm Cody Sims.
Yin Lu:
I'm Yin Lu.
Jason Jacobs:
And I'm Jason Jacobs, and welcome to My Climate Journey.
Yin Lu:
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms:
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:
And with that, Mark Robinson, welcome to the show.
Mark Robinson:
Hey, really nice to be here. Thank you for having me.
Jason Jacobs:
Thanks for coming, and as I was telling you before we started recording. This show is a milestone for a few reasons. One, I've been busy raising our own fund, so passed off hosting duties to my partners, Yin and Cody. So this is my first time actually back behind the mic in a couple of months, so that's one. The other is, it's our very first episode of our new capital series, so who knows how that's going to go. Then, the last piece is just that you and I met many years ago or I guess decades at this point, when I was an MBA student and did a consulting project for your venture firm at the time, which is crazy that that was 19 years. Yeah, 2004, I think.
Mark Robinson:
Well, I am so glad that we came back together here. It's really exciting and I'm so glad that you're putting your efforts into this climate change as well.
Jason Jacobs:
Yeah, well, it's been almost five years, so I'm still a newbie, but it's been really exciting and fulfilling and intellectually stimulating, and we chatted before recording, a good way to align purpose and profit. So it feels like it's a category that hopefully will keep me busy for the rest of my career.
Mark Robinson:
Yeah, absolutely.
Jason Jacobs:
Jumping in, so tell me about WAVE Equity Partners. What is it and how did it come about?
Mark Robinson:
WAVE is a early growth equity firm and we focus on finding companies with strong protected intellectual property that is already in the market with customers where we can find out why the customers bought it, where they're saving money on their income statement and balance sheet. Also, that they intend to buy a lot more. Then, we look to help them grow once we get involved and bring in operating team members to help fortify the organization, develop the business processes, because these are younger companies that need to have the team to scale. We focus on the areas of clean energy, food, water, waste, recycling. Today, we've had two funds, managed about 325 million dollars capital. We are in the process of raising a new fund and we are very pleased with our contributions, both from a profit point of view, but as to climate change as well.
Jason Jacobs:
And it'd be great to understand a little bit of the origin story, and I'll ask this two different ways. One is just your path to becoming a venture capitalist and then also, your path to focusing on sectors that you do and how those ultimately converged.
Mark Robinson:
I started off in finance and accounting, but I ended up liking, getting my fingers dirty, I like to say, in manufacturing. So I went into manufacturing and I always had an attitude towards, we can do this better, more efficiently. I think if you think about the roots of a venture capital, it's about bringing to market products and services that are more efficient than whatever's there today. At least, that's when I got into venture about two and a half decades ago, where we were looking at better, cheaper, faster enterprise hardware and software talent communications and software and hardware. The whole point was can you develop something that would lower the cost and be more efficient than what was existing today? And that was a great business.
We did very early stage seed investing and it went on a good number of years, and then, the industry started to morph. Software became really cheap to create, and the industry started focusing more on social media and software for consumers, which I think is great. You had a business in that, that was very successful, but I'd say it wasn't the DNA of my makeup having been a production manager and hydraulic pumps and CNC machines and things like that. So Clean Tech 1.0 came along, didn't really work for the industry, but we watched as there was terrific opportunities to find companies that had been spurned in that period of time or started in that period of time. There wasn't a lot of capital out there, particularly, in the second decade of 2000. So 2012 to 2020 was really a dry period of time for capital sourcing for industrial innovation, and that's where we focus.
So my partners, Praveen Sahay and Haskell Crocker and I, who are also backgrounds in industry. Praveen is a nuclear physicists and geophysicists and has worked in petrochemical plants, power plants and things like that. We decided that we would focus on these hard tech innovations in the industrial sector, had a better, cheaper, faster solution, which is following our original roots, but doing it at a slightly later stage where the product already was there, so we weren't taking the technology development or product development risk, but really the execution risk, and that's what we focus on today.
Jason Jacobs:
And you said that 2012 through 2020 was a dry time in this industrial sector. When was WAVE Equity Partners fund one, just so I can contrast that with that timeline?
Mark Robinson:
Yeah. Well, we actually went out and started raising in 2013 and we closed the fund in '16, so it was extremely difficult fundraising, and this was on the heels of front page news like Solyndra and other companies that had really not done well. So we didn't actually use the phrase Clean Tech or Impact or any of that. We were just looking for industrial solutions that were less expensive, not dependent on government subsidies. So then we raised that fund, closed it in '16 and then, we raised our second fund and closed that in 2020.
Jason Jacobs:
Got it, and when you headed out to raise that first fund, and it sounds like it was a difficult process, it's not a surprise to me that it was a difficult process because so many people lost their shirts in Clean Tech 1.0. As you looked at that landscape, what were the key lessons that you took away from that first wave and what gave you the conviction that plowing forward with what was essentially a very contrarian bet at the time was the right thing to do?
Mark Robinson:
Good question. Really, we were looking at how people were funding companies, and it seemed to be companies that were a little less mature, so the product was not ... and the technology wasn't fully developed. It was a promise of that technology working out. Kind of like where a lot of the investing in the venture capital community has gone, where particularly in the software, you can have a bow wave of marketing in front of you and you fill in behind with the products capabilities. So you can enter the market with something that works 40% of the time or delivers 40% of the solution, and you keep on incrementing and incrementing and learning and you can send out updates. In the hard tech universe, if you're replacing a hydraulic pump on planes for the landing gear to operate the wings, you can't work 40% of the time.
It's got to have 100% of the functionality, got to be back tested, more reliable, and you got to get it right. If you're less than right, you're going to fall in the marketplace. And I think the first generation had a lot of solutions out there that were less than fully baked in terms of their product market fit. That tripped up a lot of companies that got way ahead of themselves on the marketing, but the physical innovation and productization took much longer. There was some degrees of difficulty in the dives that were just beyond the horizon. In fact, there's other people today that are investing on that, ideas of investing on things that might take 25 years to come to fruition, though it really didn't fit the 10-year investing model or five years of investment horizon in a 10-year fund.
Jason Jacobs:
And looking through the lens of a postmortem, why do you think that was and what was it about the process or the system or the people or the types of capital or anything else for that matter, needed to be tuned to address that?
Mark Robinson:
Well, there's a few things. One, you didn't have an ecosystem of entrepreneurs. You didn't in software on the coast and such. And you had serial entrepreneurs, serial entrepreneurial CFOs, bis dev, marketing, finance, all the functions. There was multi-generation of those types of people, but focused on software where you don't have hard assets and you're selling mostly either to consumer or you're selling to business and you're selling software. So that was a big difference that in the industrial sector, you didn't have that talent pool of entrepreneurs that had done it before, so that was one. Two, the corporations really hadn't come to the table yet, and I mean the industrial corporations, Chevron or CEMEX, the cement industry, steel industry, think of all those industries, the hard delivered products.
They were really not there in the early decades with thinking about sustainability, thinking about how to incorporate innovation, and certainly, I sometimes use the analogy of traditional drug development. The internal development capabilities of those firms were focused on chemical drug manufacturer or development, and in the case of biotech coming up, the industry didn't have the internal capabilities so much to do it, to go explore all those things. So that industry itself has now got an ecosystem, biotech industry sprung up. That kind of to me is the analogy of what we have going on in the industrial sector today. Innovation engine, there's just not enough of it internal to the corporations.
They do great incremental innovation on the technology platforms that they have, but orthogonal or innovation that comes from a different corner of the earth generally isn't going to come out of there. So they're really learning and have learned in the last, I'd say five years, both from a top down, meaning sustainability and impact is on the agenda to the stakeholders, from shareholders to boards to management teams, and that's grown up around us in terms of popular and ever present conversation. So those corporations now are looking hard outside their organizations to find innovation that is going to help them be better, cheaper, faster or more appropriately better, more cost-effective, faster and also, sustainable. So I think that's something that wasn't there in the early days, but is really coming into shape right now.
Jason Jacobs:
So as you were setting out, it sounds like your assessment at the time, and correct me if I'm getting my timing confused, but was that, the industrials hadn't benefited from the depth of ecosystem of people with the pattern recognition that had seen the movie before and helped build the movie, if you will, and the second piece was that the corporations who are largely on the sidelines then versus when you were setting out, were more self-aware of their gaps and more motivated to solve them externally?
Mark Robinson:
I would say actually the opposite. They were not aware and they were just solving their internal problems, so looking at technology from the increment and what technology they had, rather than looking extra internally. So if we look at the partnering that's going on in the younger, earlier stage businesses between the large scale corporations and smaller younger companies, to compare that today to 15 years ago, there was very little of that. The corporate development teams didn't have the DNA or the boards and the investment decisions. They had a hard time dealing with younger companies. I think today, there's an embracing both from a race for profit, but also to profit with things that are going to be more sustainable and environmentally friendly. That's different than before. Before, you didn't have the corporations focused on that, now you do.
Jason Jacobs:
And what was different about the ecosystem when you set out, or I guess how did you address that issue that you flagged or was it just timing?
Mark Robinson:
Well, it's a little bit of what we've learned about how to run our business, that that ecosystem of entrepreneurship is still imperative basis to say the business software, telecommunications software, social media and things like that. The ecosystem for those, there's abundant people that have succeeded and done it again and again and again. In the industrial side, that's still weak. It's still developing. We don't have a deep bench, so to speak, of players. So how we address that is through our business. We have created a operations team, which is really a functional group. We call them operating ...
... Jason's team, which is really a functional group. We call them operating partners. These operating partners are functional experts in the various disciplines of your business. Sales, marketing, supply chain, contracting, manufacturing. And the goal is that usually these young, early growth businesses don't have a full complement of executives in those functional areas, and they also don't have the business processes that are requisite for scaling your business.
So our desire in what we do with our team, is to help those companies jumpstart that process. So, initially go in and help them. We do this in the due diligence process. We're lucky enough to have always had about six months of due diligence time for each of the investments, so we get to know our companies well in advance of making a decision to invest. And they get to know us, and they get to learn how each of these functional experts interviews and talks to them about what they're doing in that functional area, and see the gaps.
And then we share with them a document that outlines how we want to help them post-investment. And that gives us the guides for our next 180 days together. And the goal is to assist them in finding the talent and then building the right business processes to accelerate the growth of the business in the marketplace.
PART 1 OF 4 ENDS [00:15:04]
Jason Jacobs:
You mentioned when you set out to raise the fund that you didn't talk about clean tech, you didn't talk about clean energy. You just talked about industrials at your core, in terms of what gets you up every day and your decision to start this firm in the first place. Are you a greedy capitalist? Are you a bleeding heart? How do you self-identify?
Mark Robinson:
Oh. Better, cheaper, faster with impact. And what we always did say, we called it impact without sacrifice. Or impact for alpha, is probably the better term now. But originally, it was impact without sacrifice. And the way and the reason we thought of that, is if you're bringing a physical innovation to market... A new tankless water heater, a new battery platform, a new way to capture carbon... Point capture of carbon dioxide, that is less expensive than whatever's prevailing by say up to 50%, the only way you can get there is to use less inputs in creating that product and or in the use of that product.
So think of a company we have, Intellihot. They have gas tankless water heaters for industrial and commercial settings, like a hotel or a stadium or a industrial site. And for the same volume and loads of hot water, it can deliver that for 50% less fuel being used. It's a no-brainer, but it's very different than anything that's been delivered before. And that's what we look for.
And so for us, why was that important? Well, we're delivering something that saves money. So, there's the economic buy-in proposition. So I'd say that first and foremost, we're profit driven. But it's a natural byproduct that each of these industrial hard tech solutions reduces the use of inputs, whether that's energy or other materials. And therefore, it's better from an impact point of view.
Jason Jacobs:
If it's impact without sacrifice, then is it necessary to talk about impact at all?
Mark Robinson:
Absolutely, because it's just one more piece of value you're delivering. Corporations all day long are looking to reduce their carbon footprint. And the more you can share with somebody, not only is this going to save you money, but it's going to reduce your carbon footprint. If you don't mention it, if you don't talk about it, they're not going to necessarily take advantage of it.
I think it's very important to the whole scheme of how you market your product and separate yourself from the competition.
Jason Jacobs:
When you first headed out... I guess this is kind of a two-prong question, because on the one hand I would imagine as you go on to get more of a track record and raise multiple funds, that the profile of LPs that you attract would evolve, but also there's some market timing as well. So I'm curious, I guess from both perspectives. One, just how your LP makeup has shifted over time, and the types of LPs you target and how that's evolved over time. But same question about just LPs that are interested in the space generally... To parrot your words, the space of impact for alpha.
Mark Robinson:
Well, there's been ebbs and flows here, but there's a tremendous number of family offices that really are mission-driven or have an additional element and aren't constrained by policy. If you get to larger institutions, there's often policies in place. There was an article the other day about incorporating ESG for government funds, that was turned down.
And so the family offices are more agile, and they also are able to be more opportunistic. So, they've always been a great LP base for us. Over time, that's also evolved. Where we have other institutions, foundations, pensions, endowments that also have the desire to have an opportunity, or at least to have some allocation to this part of the market for the purpose of return. Most of them. Then, the other part is return with impact.
So I'd say that some of our investors purely see this as a return-driven opportunity, and some of our investors see this as a return-driven opportunity and doing good at the same time.
Jason Jacobs:
And when you thought about fund structure, I would imagine that some of these businesses... Especially due to their capital intensity and just the amount of physical stuff that needs to get built and proven out, that it can take quite a while. Have you always had the standard fund duration or have you ever wrestled with longer timelines, as an example?
Mark Robinson:
We have, but for a different reason. So we're very comfortable with the standard 10-year fund, and we think that we can be out of these investments well within that period. Some obviously will take a little bit longer than others. But we did consider and occasionally think that we might do a permanent fund. The reason for that is not because of the long gestation period of the initial investment, but more the opportunity to have assets keep on giving.
And what I mean by that, is most of these companies are platform technologies for multiple markets, and you need to focus on one or two markets and get the value out within the life of a limited life partnership. Some of these technology platforms actually have multiple markets that aren't even getting valued by the acquirers. So you are selling an asset, a platform asset, that probably has more to give. And if you had it in a longer term, say permanent vehicle, then you'd be able to keep on monetizing it. And every time you monetize it, it's just one more success story in that platform's execution. So, it becomes a little bit easier as you go.
Jason Jacobs:
When you make an investment, what types of risk are you comfortable with and what types of risk are non-starters for you?
Mark Robinson:
So non-starters for us, is if the product doesn't work and the customers can't already use it, then we're not there. So we can't have something that is an idea or we think this is going to work, we need the customers to be able to tell us, "Wow, this works. This is where I'm saving money. This is how it performs. I'm going to buy a lot more of that."
So, that's the defining line. In general that would have us, say minimally having revenue between a half million dollar run rate to 2 million dollars. So the companies are clearly EBITDA negative, but you're not questioning whether there's a market. It's customers. There's lots of them. It's mostly substitution market. So there's not a lot of rocket science and defining whether there's going to be a market for it.
And so, it really becomes an execution play on how to go to market and adoption cycles. And that's where we spend most of our time after we've gotten comfortable that the gross margin will pencil out at scale.
Jason Jacobs:
What about capital intensity? What types of capital intensity are okay, and what type of capital intensity gives you heartburn, if any?
Mark Robinson:
So many of these companies don't have a huge CapEx, measured in tens of millions of dollars. And then several of them may have CapEx measured in hundreds of millions of dollars, or occasionally you need to build a gigafactory in the battery space. It's sort of like a sliding scale.
You need to understand what the partnership structures are, what the pole in the marketplace is. So for instance, in carbon capture, in decarbonization of cement, and lithium ion batteries, most of that is going to come together in strong partnership with the current corporate ecosystem. There needs to be a demand there that allows their capital and equity base, or their capital cloud and credit, to support that CapEx that you're going to be putting out. Because it doesn't make sense to have private equity spending a billion dollars on factory.
Jason Jacobs:
Is it frequent, for example, to involve project finance?
Mark Robinson:
Occasionally. I wouldn't say frequent. But for those companies that are seeking a hundred million or more, and for [inaudible 00:25:20] factory, that does come into play. For other companies which are selling smaller widgets, say products that are a few thousand dollars that don't have a hundred million dollar manufacturing facility to do that, then you don't need to go down that route.
We've been able to get some grants, we've been able to get some government funding for those facilities. A lot of these companies are located in rural areas of the US and elsewhere, where you can find some government employment grants and low cost loans.
Jason Jacobs:
I want to go back to... We had talked before about the density of the ecosystem, and how you addressed that by having this kind of fleet of operating partners that have seen the movie before, that you can deploy in part-time or advisory or in some capacity on behalf of the portfolio post-investment to help fill in the gaps in their teams and expertise. You also mentioned that the software ecosystem is much more robust. I'm curious, how do you think about someone who's seen the movie before, but let's say in software or in an unrelated space... Coming into this space, who understands capital raising and team building but doesn't have a lot of domain expertise, versus someone who has tons of domain expertise but comes out of academia... For example, and hasn't done much in any commercial world, let alone in hiring, fundraising, and the unique needs of a startup?
Mark Robinson:
Well, we've seen it before where there have been very successful hard tech innovation companies be sponsored or headed by software or not really industry oriented players, and it can work. I think it's really like anything, balance. If you have one and not the other, you're done. You can't succeed.
So, it's around having the right mix of players at the table. Sometimes having a very experienced software-oriented... It doesn't have to be software itself, but telecommunications, enterprise software, or even any other company where it's gone through the phases of capital development... Hopefully has a bit of hardware or widget experience rather than printing it on the internet vis-a-vis software, that coupled with somebody that has the domain experience and can talk to the industrial corporate heads, can really work out well.
I don't think it's one-size-fits-all. And I would encourage people to find a balance between those people that have experience in the growth of a early stage business coupled with those people that have the domain expertise, to know what works and what doesn't in the industrial setting.
Yin Lu:
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.
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:
One thing you mentioned was government funding, and another thing that I haven't heard you mention yet is policy. How much time do you spend as a firm building tentacles into the government, and how do you think about the regulatory landscape when you make an investment?
Mark Robinson:
Sort of the initial is, does this make sense without any government help? Does it stand on its own? Because policy can change inside of the timeframe, and it ebbs and flows. So kind of risky business in a sense, to be banking on policy hitting at the right time and working its way through the government legislature, and then getting turned into available dollars. I think it'd be pretty hard to say that the IRA was known five years ago. That part, I'd say... We stay away from making bets on that, on the initial going in. But whenever we can take advantage of it in a profitable way and leverage government funding, we are certainly ready to do so.
... [inaudible 00:30:00] government funding, we are certainly ready to do so. And we have advisors and there's specialists in the marketplace, usually sector by sector, that can help navigate through the various pockets of money that are available to well and deserving companies.
PART 2 OF 4 ENDS [00:30:04]
Jason Jacobs:
I mean, I've certainly been seeing more heads of policy internally as a function at these scaling companies. How much of that is about understanding what's happening versus trying to influence it? And what stage would you recommend, how do you know as an entrepreneur when it's time to make that higher?
Mark Robinson:
I'd say you'd have to be ready to deploy the capital. There's always small dollars to do things, but if you're thinking about building a factory, you got to make sure you're aligned to the programs. And you can do a lot of reading and learn that prior to hiring somebody. You can either do that on a part-time basis yourself or your CFO can. But you can learn a lot without having to hire a dedicated person. I think the time to hire somebody is when those programs have turned to or are about to turn to written proposals or solicitation.
And then you need to have not only somebody stick handling it at your firm, but you also need to make sure you're connected to the right people in the halls. And be ready to walk the halls to tell your story, to explain why it makes sense to do this. But you need to know that you're going after specific programs, otherwise you're probably not ready. Or it's not all things, all people or it's not every company will be a right fit for each of these government programs.
Jason Jacobs:
Switching gears a bit, you mentioned that you typically spend six months with these companies. I'd love to just get a better understanding of what happens during that six months, what your diligence process looks like. And also just how market pressures have squeezed that process, if at all, as presumably things have gotten more competitive out there, if they have. Would love your take on what's happening out there as well.
Mark Robinson:
To date, things have not changed. We didn't have a run-up in pre-money values, and commensurately, we didn't have a rundown in the last 12 months. And due diligence cycles still remain six months to a year or longer.
And I think, why is that? I think it's a couple of reasons. One is, it's still hard for people to get comfortable with a hard tech investment, an industrial innovation and that's pointed at a big amorphous industry that most people don't understand. So fortunately, we don't think there's a tremendous number of investors there.
We've also been told that we don't really come in at the time of when it's popular thematic investing. Most of the businesses that we've come involved in, we were involved in them before they became topical. So at the time of our initial investment, there wasn't a lot of people looking. That's really been why I think we've remained in a sort of low money going in pricing, long due diligence cycle.
And what do we do? We're doing what most people do. You're trying to understand, what's the differentiated value, and how protectable is that? What does that mean from a gross margin? What does it cost to build this today at a limited scale, and then as you go through stages of scale? Where are the economies of scale and how tight are those bands? And if they're not tight, meaning that, well the cost could be one or two X. Well, that's not good. So, trying to get a sense of gross margin.
And you're also working with the customers to really dig into, why is this there, why did they make this decision? And then bring in a couple of new customers so you can watch their experience and how they approach it. And then try to develop, "Well, this is how the customers think about this. This is the level of risk."
Some things are trying to replace the hydraulic pump on the landing gear with a new, better, cheaper, faster, less material input. Hydraulic pump, that's a pretty tall order to make that shift. So even if you had something that was 50% less, it's probably not going to actually work because of all the regulation. So you're looking at, what are the speed bumps or the barriers to adoption in that particular industry? And getting comfortable that that's something that can be addressed within the three to five-year timeframe, and bring the company to 50 or a hundred million or more in revenue.
Jason Jacobs:
I was a bit surprised to hear that you were shielded as much as you have in the industrials category from the frothiness that's pervaded in the broader general tech landscape and climate tech landscape. When I think about most of the generalist VCs that I know, they are greedy capitalists. And so to the extent that they smell opportunity, they're coming in. And it sounds like they largely have stayed away.
Mark Robinson:
No, there's been some barriers where they've come in, but they've come in after the market has become a thematic investing area. So carbon capture is soup de jour, it's a very hot topic. It's a theme that every single impact investor has to be thinking about. Hydrogen is another one. So, there's a lot of investment that's going in there, and some of it will be successful and some not.
Well, take another company that I don't think anybody's really cares about yet, and that's called, Intelligent Fluids. And they make a material or a combination of non-toxic liquids that clean like solvents. But instead of dissolving grease, you can take a bicycle chain or the hood of a kitchen at Charlie's Kitchen down in Souths End and you can clean it. And you're really not using a chemical-based toxic solvent that's petrochemical-based. These are liquids that have a very high tension of between oils and between waters. And they literally lift off whatever that material is that's on the surface and pull it away. So, it's not dissolving it.
Nobody's thinking about that. Or very few I'd say from the investment community. Never say never, but I don't think that's a theme that investors are looking at right now. And we found a company that was doing two and a half million dollars and have great customers. And those customers look like a lot of other customers that they should be going after. And they just didn't have the right sales and marketing and capital. So, that's a company that we spent almost a year with and just closed it. So, it's amazing what you find out there if you're just looking for fundamentals, something that will surprise us. But generally, we're coming from bottoms up approach rather than the top down approach.
Jason Jacobs:
So less ceases-driven and more opportunistic, but just pulse on and tenticles into what's happening in the broader market and specifically just focused on industrials so that you really get to know it deeply over time.
Mark Robinson:
Yeah. And that's really what's happened is, we see so much just coming in inbound on industrial tech companies. In fact, that was a company that heard about a closing that we did with Carbon Clean and said, "Hey, you did that company, maybe you should know about this company." That word of mouth has gotten out.
Jason Jacobs:
The words, clean and dirty, get thrown around. And what I'm finding... I mean I'd love to get your take. But whatever decision we make, whether it's an energy source or a means of transportation or a place to live or things like that, it's not that binary. Everything has, everything has unattended consequences. It's like when you actually look at the full picture, it's inevitably a more nuanced story. So given that, how do you know if something that you're investing in clears your impact hurdle or not? And what is the impact hurdle as you define it as a firm?
Mark Robinson:
We look for the impact to be something that is measurable and does not have to be gigaton. We don't have thresholds like that. It's pretty hard to do. But what we're looking for is replacing an existing system, whether that's cold chain packaging as a service, which is 70% less environmentally impactful than the current traditional systems. Or the carbon capture, which reduces the cost of capture down from about a hundred dollars a ton to $30 a ton. Those are things that as long as it is delivering a good impact that is measurable, has an importance to the customer, meaning it will be impactful to the customer, then it's going to be fine. We don't have to search for the highest impact item.
And you think about this, we're trying to solve a massive problem that's bigger than everybody in the world right now. Nobody has the answer. There was an article about dimming the sun yesterday, or at least those that are coming to the popular press at this point.
But there's going to be needs every point and every piece of the chain in our society. Everything we do needs to be rethought. And whenever you can find a way to reduce the cost and reduce the impact, that's beneficial. And we try to find these companies that are in the industrial sector that have a meaningful... that are important. So just like in any investment, if you're solving something that is number 27 on the agenda for the executive team, it's probably not going to happen. But if you're solving number 1, 2, 3 or 4, you have a shot at being successful at winning that customer. And so for us, if you're having that type of economic value proposition, there's usually, in these industrial hard techs, going to be a commensurate impact that's valued of the environmental benefit.
Jason Jacobs:
Any examples you can share of situations where something cleared your impact hurdle but didn't hold muster from a, is this a good venture investment standpoint? And then same question in the reverse. Are there things that were great venture investments, but just if you looked at yourself in the mirror, couldn't a good conscience say would help contribute in a positive way to the kind of impact that you're hoping to have as a firm?
Mark Robinson:
Yeah. Well, I'm sure there's all sorts of things that you need. Firearms or indoor farming for cannabis, there's one. We're not sure... We chose not to an investment that came to us that was better, cheaper, faster growing of cannabis. And we felt that that was not in line with the types of impacts we want to have. That would be one.
It's hard to find one that if it has the industrial impact, doesn't have a cost impact. Now we do walk away from businesses that they clearly have a positive impact in terms of environment, safety, social, safety of workers. I'm thinking of one investment that there's no question that it was safer, is better, going to have less downtime. You could translate that less downtime into savings of money, but materials and also process improvement.
However, we felt that the adoption of that business model and those hard tech items wasn't going to be at the top of the customer's purchase stack. And there was a lot of stakeholders that would have to be involved. And we didn't feel that that was in the top for the decision makers. So while it had a good impact, we didn't feel that there was enough a way for the business to grow fast enough.
Jason Jacobs:
And this is more of a general worldview type of question, more than specific to venture investing. But when you think about just how we live more in harmony with the planet that we rely on to support us and other life forms, I'm saying, showing a bit of my worldview, maybe this doesn't align with yours, but we need to rewire everything sector by sector, industry by industry-
Mark Robinson:
Exactly.
Jason Jacobs:
... geography by geography. I'm curious, how much of that do you think is doing things the way we've been doing them, but cleaner versus actually reforming things at the systems level and putting a different system in place?
Mark Robinson:
I think both, but let's take cement. Are you going to change cement in the next 10 years from how it's being made today, or in the next 25 years, in whole? Like, "Can everybody stop? We're going to redo this." It can't happen. With economic growth, population, it's just can't happen.
So yes, we should have solutions that are looking to wholesale replace something like that. But we also should be looking at the same time for steps that you could call interim, but they're 25-year interims. Those are very valid too. And there's certain investors that are looking for the 25 to infinity cures or kind of like cancer. And then there's those people that are looking at, what's going to be purchased today? And it's sort of a self-fulfilling prophecy. If it becomes a good investment, it managed to have a good impact today.
Is it the best one? It's the one that the market was willing to take. And if the market's willing to take it and it reduces the carbon footprint, and it didn't crowd out something that was four times better and could have been taken in the same timeframe, I think that's a good thing to do.
So again, just like you said, we got to do everything to everything. We've got wired headsets. Well, now we got a piece of wire that's got to go into a plug, and all that metal and all that e-waste. We got to stop doing that. So at every step you need to change, but you can't do it all in one move. You can't get rid of headphones and just not have them. But in 30 years, 40 years, maybe we don't need them.
Jason Jacobs:
Well, what about government? How much of a role do you hope that government plays? And then realistically, how much of a role do you think they will play? And what I'm specifically getting at is the tension between unbridled capitalism, better, faster, cheaper versus mandates, subsidies, carrot sticks, like Big Brother steering the course.
Mark Robinson:
Yeah, there's always an ebb and flow here, I think. I think it's very difficult for the government and government agencies to be able to figure out what to do. There's lots of people...
... to be able to figure out what to do. There's lots of people who believe in what they're doing, and yet there's not necessarily all the underpinnings for that to be successful going after government capital. And so we have the risk of spending money, and we've seen this in prior administrations, Republic and Democrats, so it's nonpartisan, but how do you have capital that is going to be additive and to to the right technology platforms?
And it's never going to be right, there's going to be, best job done. Sometimes that gets a little ahead of it, but I think if you can make a competitive process and have some really smart people that are doing the analysis, there's good decisions that can be made and allocating capital that, for instance, in this current generation, some major big projects, batteries, for instance, where those are expensive plants to build. So you're going to see some support from the government. They should stay in the swim lane, ideally, of not the leading edge but accepted, but needs to scale. So that's where I think they come in. Plus they can be at the very beginning, NIH work, where they're doing fundamental research and those are the two points that I think they're really good at. And I think the private capital markets do a pretty good job in between, and public markets do a good job at the end as well.
PART 3 OF 4 ENDS [00:45:04]
Jason Jacobs:
You mentioned before that the generals VCs have been active in the space, but that typically they don't come in until it's a trend. I'm curious, how does that compare to the generalist institutional LPs that are strictly financial capital allocators? Do they also not come in until it's a trend? And I'm asking less on a wave equity specific basis and more just broader what's happening in the industrial's venture market with LPs?
Mark Robinson:
I'm smiling because I think a generalization gets me in trouble. There's really smart, very dedicated, deep-seated investors out there. So it's not like thematic investing is a bad idea, it actually can be really profitable if you're nimble. And so there's nothing wrong with that. It's just different.
So from the LP perspective, particularly when you get to the institutional level, as I mentioned before, you have policy. And so the policy generally has nothing to do. And this is one evolution we're in, I think this too, where everything about impact, sustainability and measurement of it, quantification of it is still in an evolution. And so if you have somebody who's responsible to invest somebody else's capital, whether that's a pension fund, a foundation, a family office, you've got to think how you're going to measure that and what is the benchmarks for that. And right now that's written as a return on your investment and that return on your investments measured in dollars only. Now, there are people and organizations, institutions where the boards said, we want to allocate some capital and put that in a different bucket that has an impact. They're creating policy that is new and different from the overall policy. And I think that's going to continue to evolve as well, but that's enabling more and more capital to flow into the marketplace.
Jason Jacobs:
When you look at the state of the industrials market overall, do you have a wishlist? And that wishlist could either be technologies or companies that you'd like to see built, but it could also just be policy changes or changes in what's going on in the boardrooms of publicly traded... I don't want to put words in your mouth here, I'm trying to not ask a leading question, but when you have the state of the state, what's your wish list for the future, maybe things that you don't control within the realm of your team and WAVE equity?
Mark Robinson:
Well, it's on the continuation, I think when we started there was shareholder activism that was putting pressure on board members. That was going back and forth, but that was almost insulated between those two groups and executive management. And then it became a conversation between the board and executive management, and now it's moved from the board and executive management to the leadership team. But it hasn't continued yet down to a means of being able to quantify it for decision making at the purchase level in general. So what I'd like to see is the continuation of being able to quantify value of sustainability, and that's going to take a long time.
And we have millennials of learning how to account with dollars or with currency, and then having audits and all that verified. We have less than a decade of that in the environmental side. So how do we measure that? How do we quantify it? How do we verify that that actually happened? How can we then put that into a bonus program for people that are making purchasing decisions that is quick and easy, like an ROI for dollars or currency, have an ROI for comparative and somehow merge those two. And then making it part of the bonus program in the sense. And what I mean by that is that most companies, they've got to make an economic value proposition that doesn't fully incorporate the carbon footprint impact, let's say, or the environmental impact. And the more we can tie that together and make that equal or comparable, the better we will be at creating better decisions for all of us.
Jason Jacobs:
Why will it take a long time? What are biggest blind spots or difficult things that need to be solved to enable us to get there?
Mark Robinson:
Comparative accounting, how does one measure it? Getting to that data, think IoT and time and data analytics and all that is going to help continue to allow us to do it. But how do you measure a jet engine flight for its total carbon footprint? Oh, by the way, it's maintenance, it's life longevity, even your industrial plant. One of the things we've found is that many of the executives at these large corporations, they don't know their carbon footprint. Well, if you don't know it, you can't measure it. And if you can't measure it, then you can't improve it. So we're still in the data gathering stage as a society to get this information, get it accurately, get it in a form in timeline that you can react to it so that it's not something that takes you a year to develop and then you measure it again the next year later. One of the reasons is the businesses need to get to an accounting of their carbon footprint in a way that's real time, just like dollars.
Jason Jacobs:
In terms of, I guess flipping it around, our audience is really diverse in terms of industries, seniority levels, geographies, functions. For anyone listening out there, who do you want to hear from and/or how can the MCJ community be helpful to you and your firm?
Mark Robinson:
Yeah, well, we're always looking for network connections. So people that are in the industries that we're involved in, I would love to hear from them. Anybody that is in the created a product or a solution for the industrial sector, even if they haven't gotten revenue yet, we always like to hear about them. We love to point them in good directions where they might have capital, but if they're also ready for our stage, we'd love to engage there. And companies are always growing, so increasing employment base, so we're happy to direct them to companies for job opportunities too.
Jason Jacobs:
Great. And my last question is a selfish one, but when you think about the climate capital stack, what are the perspectives that would be most informative/surprising/productive for our listeners to cover? And that could be sectors, that could be specific firms or even people that you think we should have on the show to have a similar discussion.
Mark Robinson:
Well, you're already on the show, so that makes it a little difficult to interview yourself. I think it'd be interesting if you could think about that capital stack. I think finding people that are the players in the government that are influencing what dollars, and how does that even work? Geez, we all sort of talk about it, but how does it actually get done? Where does it start? How does that sausage get made? And then, where does it come out? So I think that's an area that could be really interesting to hear about.
Another area that's part of that is project financing, and a lot of these industrial, at least from my perspective, these industrial things need to have different layers of capital. So having people that can simplify the discussion about what types of capital there are, that could be a topic as well. There's so many different ways to have an impact, and so investing is just one, but social impact, natural-based solutions for impact. Maybe it'd be interesting to have a topic that's more about what people are doing in the nonprofit world to advance different areas, because as we said before, it's going to take everybody to do this, and so it's just not one capitalistic perspective. There's things that don't make sense from an investment point of view that should be done too.
Jason Jacobs:
Yeah, I'm a big proponent of that as well. I get frustrated sometimes when I hear people say, "Well, I saw one tweet recently that was crapping on climate investors that prefer software that only do software." And it's like, "Climate investing takes a lot more than just software." But if a firm has a particular expertise in software and they want to point at climate, that's a good thing.
Mark Robinson:
Absolutely.
Jason Jacobs:
Yeah. It's kind of like saying, "Well, if you just work in venture capital, you can't call yourself climate because venture capital's just one little piece of the puzzle." It's like, "Yeah, it's one little piece of the puzzle, but it's an important one-
Mark Robinson:
It's important, yeah.
Jason Jacobs:
... just like your piece is important too." We need both, we need all, but we don't need everyone to play every position.
Mark Robinson:
No. And everybody's got to recognize that it takes all of us, and it takes many, many different solutions and types of solutions, and so it's all additive.
Jason Jacobs:
And focus matters and expertise matters. And if your expertise is a little bit everywhere, then you're not actually an expert anywhere. So anyways.
Mark Robinson:
Yeah. Yeah. I agree. I agree.
Jason Jacobs:
Mark, thanks so much for coming on the show. Anything I didn't ask that I should have or any parting words for listeners?
Mark Robinson:
No, no. Thank you very much for having me, I enjoyed this and looking forward to listening to more podcasts.
Jason Jacobs:
Okay, sounds great. Thanks again.
Mark Robinson:
All right, take care.
Jason Jacobs:
Thanks again for joining us on the My Climate Journey podcast.
Cody Simms:
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:
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:
Thanks, and see you next episode.
PART 4 OF 4 ENDS [00:56:45]
