Capital Series: Melissa Cheong, Blackhorn Ventures
This episode is part of our new 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.
Melissa Cheong is the managing partner of Blackhorn Ventures.
Blackhorn Ventures funds companies that are using technology to create unprecedented resource productivity in areas like construction, manufacturing, healthcare, agriculture, transportation, water, and energy.
In this episode, Melissa discusses her journey from being an LP in a private family office to a general partner in a venture firm. We also talk about her sustainability journey, how, and why, and when she came to care about this problem, and when that intersected with her professional pursuits.
Get connected:
Jason Jacobs
Melissa Cheong LinkedIn
MCJ Podcast / Collective
*You can also reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded on June 5, 2023.
In this episode, we cover:
[01:49]: Origins and overview of Blackhorn Ventures
[08:31]: How Melissa thinks about climate and climate equity
[12:58]: Joining Blackhorn as a GP after being an LP
[18:29]: How Blackhorn evaluates opportunities: IMP Framework, ESG and DEI policies
[21:12]: How the LP base has diversified over time
[26:15]: Blackhorn's four primary verticals: transportation, built environment, energy, and supply chain logistics
[28:36]: Considering impact in parallel to the commercial thesis
[30:40]: Frustration with the market and institutional capital allocation
[32:09]: Optimism about new market entrants, particularly from Europe and Asia
[33:28]: How traditional investors evaluate climate opportunities
[36:14]: Melissa's views on, and experience with, placement agents
[39:27]: AI and other areas Melissa is particularly excited about right now
[41:14]: Melissa's parting advice to LPs and companies
-
Jason Jacobs (00:00):
Today on the MCJ Capital Series, our guest is Melissa Cheong, managing partner of Blackhorn Ventures. Blackhorn Ventures funds companies that are using technology to create unprecedented resource productivity in areas like construction, manufacturing, healthcare, agriculture, transportation, water, and energy. We have a great discussion in this episode about Melissa's journey from being an LP in a private family office to now a general partner in a venture firm. We also talk about her sustainability journey, how, and why, and when she came to care about this problem, and when that intersected with her professional pursuits. But before we start...
Cody Simms (00:45):
I'm Cody Simms.
Yin Lu (00:46):
I'm Yin Liu.
Jason Jacobs (00:47):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu (00:54):
This show is a growing body of knowledge focused on climate change, and potential solutions.
Cody Simms (00:59):
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 (01:12):
And with that, Melissa Cheong, welcome to the show.
Melissa Cheong (01:15):
Thanks, Jason.
Jason Jacobs (01:16):
Well, I'm so interested to talk to you. I have heard about Blackhorn from a distance, and I think we're on at least a handful of the same cap tables together. And you've also got an interesting story just in the sense that you used to be more on the family office, and LP side, and now you have moved over to the venture capital side. And just hearing more about your journey, and how you've decided to make the transitions that you have, and your theory of change, and stuff, it's such fertile ground, and I'm really excited for the discussion we're going to have today. So, thank you for coming on.
Melissa Cheong (01:46):
Yeah, thanks for having us. Excited to be here.
Jason Jacobs (01:49):
Well, for starters, maybe just give an overview of Blackhorn Ventures, and what you do as a firm, origin story, stuff like that.
Melissa Cheong (01:54):
Yeah, for sure. So, Blackhorn is an early stage venture capital firm. We're a seed and series A focused investor that invests in early stage companies that are really tackling resource efficiency challenges by leveraging digital infrastructure. We believe that some of the most compelling opportunities really exist at the intersection of industries like energy, transportation, supply chain, the built environment, and that there's a really unique opportunity given this moment in time to leverage digital infrastructure to unlock value, and to drive massive amounts of greenhouse gas emissions reductions, but while also improving outcomes for industrial customers right now who are all given the current market, and operating environment, looking for ways to increase their bottom line. So, an LP actually put it to me this way recently, and that there are a lot of climate funds right now where climate is more of an input, and for us, climate is kind of an output that's inherently kind of baked into our thematically focused, targeted thesis driven approach to investing a seed, and series A investors.
Jason Jacobs (02:58):
Got it. And how, and when did the firm come about?
Melissa Cheong (03:00):
The firm was started in 2017. I actually came to meet the firm initially as an LP. So, as part of my own climate journey, which I know we're going to talk about too, for me it really came, I had been an allocator, and had been investing in a series of early stage venture firms, all focused on energy efficiency, or energy transition opportunities, really. And Blackhorn was one of them. So, the first seed fund was raised in 2017. That fund was invested into 45 seed stage businesses. And then I joined into 2019, and we raised our first, call it's institutional flagship strategy where we raised $100 million dollars, and invested that into 20 series A entry points within those target sectors that I had just referenced.
Jason Jacobs (03:47):
Got it. And maybe talk a bit about your journey, maybe the key highlights of your professional career, and then what led you to the work that you're doing today?
Melissa Cheong (03:54):
I came to Venture, and being a GP in a little bit of a roundabout way, initially I started my career as an investment banker, both in New York, and in London, financing large scale financial sponsor leveraged buyouts, so very non-impact oriented work. I then went on to work for special situations hedge fund, which I found to be really interesting but very unfulfilling. And for me, personally, it ended up being very value extraction focused, and not value creation focused. And so there was a point in my life where I had my own aha moment, and made a very intentional, and deliberate commitment to shift, and transitioned into doing something which was just more personally rewarding for me. And I ended up working with an advisory group called Imprint Capital, which at the time was working with foundations, and family offices to create customized impact investment portfolios, really across all asset classes, and issue areas.
(04:48):
And so I myself was an impact generalist but was responsible for overseeing the firm's private credit, and direct investment platforms. And in the course of that, got to work with some really interesting super smart people at foundations both here, and abroad who were looking at ways to leverage philanthropic capital to really address certain impact opportunities, and objectives like climate as being one of them, for example. The mission related investing started to become much more in vogue, and interesting for foundations at scale where rather than making these smaller, almost grant like program related investments, they started making mission related investments out of the corpus, or their endowments. And so that's where we as investors, and advisors started working again with more not only just private market opportunities that were more catalytic from an outcome standpoint, but also looked at opportunities that today would be described as being to be more ESG oriented, or thematic with relation to public equities.
(05:46):
So, really interesting experience in that when I started, we were sort of a quirky asset consultant out of the west coast really that was looking to work with these foundations to build PRI programs. But then as we started to unlock, and tap into these larger pools of capital, that also really coincided with just the mainstreaming of ESG, and impact. So, we'd gone from socially responsible investing to sustainable investing to ESG focused opportunities, and so forth. And I had the opportunity to work with a whole host of clients who were looking to do this at scale, and to mainstream it, and make these kinds of opportunities more accessible to even retail investors. And so ended up advising one of the big investment banks whose name I probably shouldn't share, and helping them white label their private markets opportunity.
Jason Jacobs (06:39):
This is while you were at Imprint?
Melissa Cheong (06:40):
This is while I was at Imprint. Yeah, that's correct. So, we worked with groups like that to help them launch their new sustainable investment platforms, and then I think also continue to work with families, and other organizations that were looking to launch new strategies, and so forth. So, it was a mix between consulting around the development, and establishment of different programs based on the mission objectives of an organization, and then actually reviewing funds, and deals, and then matching clients with different opportunities that we knew were in market, and were looking to raise capital. So, did that for a bit. And then I ended up going to work with one of those clients in-house as their chief investment officer. It was a really interesting opportunity. There was a family that wanted to invest their capital into in all climate led strategy, and at scale, and worked with them to do that in New York City, and then was hired by another family here in Denver to do the same thing.
(07:36):
So, I've had multiple opportunities to work with just really smart, committed people, or families who have really deep, and thoughtful sets of outcomes that they were trying to drive through the investment of their capital. Did that with those two family offices. And then through the course of what I was doing within my last role with the family, I ended up coming on, and joining Blackhorn after meeting the team as an LP, I made a funny transition from being an LP to a GP, which is I think a little bit unusual, but it's just sort of funny. I started as a banker as an advisor, and then went to being a buy-side investor on the traditional side, and then went to being an advisor there with relation to impact. And then I seemingly have gone from being in that LP as an allocator back to being a GP. So, my path has been a little bit roundabout, but I wouldn't change any of it, or anything.
Jason Jacobs (08:30):
And so in parallel, especially given how financially oriented your career has been, where has climate fit into this, in terms of being a motivator for you? Could you have pointed in impact at lots of different categories, and climate just happens to be one that you care about of many? Or I guess how big a role does climate play in your decision process professionally?
Melissa Cheong (08:49):
Yeah, that's a really good question. It's interesting, I think the reality is, is I've worked with clients, and with managers, and with founders across multiple impact verticals, right? Workforce development, climate, healthcare, a lot of financial inclusion. And the reality is, is there was a moment in time when it was really clear to me that everything we were looking at from an impact perspective, social, and environmental, really had to tie back to climate, particularly in emerging markets. And so for me, again, there was a moment where there was a realization that if I really wanted to think about where I wanted to put the rest of my time, professionally, and commit to trying to move the needle anywhere, it was really in relation to climate, because I personally believe that climate change has these deep profound effects on any of those areas that I've just referenced.
(09:40):
If you think about, I'm particularly interested in just looking at the climate equity piece of things, and certain populations in not only the US, and other more developed economies, but in emerging markets, those are communities, and populations that disproportionately suffer from externalities tied to climate that they really, in an emerging markets cases almost always have had nothing to do with. They're not responsible for the damage that's been done that's causing now these terrible things to happen to them, and their homes, and to their families, and so forth. So, climate is a hard one, because it's sometimes hard to feel like you're ever moving the needle.
(10:16):
.
Jason Jacobs (10:49):
And what was appealing to you about switching from the family office side, and the capital allocator side, or the LP side, I should say, into investing in startups directly?
Melissa Cheong (11:01):
I think for me, being an allocator is fascinating. In some ways, meeting managers, and allocating capital to managers, you meet really smart, talented people, and general partners at different firms, and they're all very different. So, for me, I actually really like fund evaluation work that kind of comes with being in an allocator seat, because you have to tease out what's actually on paper, and what a data room tells you, but then you also have to really understand how does the team work, and from a leadership standpoint, how do these partners work together, and do they have certain skills, and talents that are uniquely predispose them to being better at their jobs than someone else might do? So, I have to say I really enjoy it, and I still get to do a bit of that through an investment committee role that I have with what used to be partners groups impact fund, but is now called Blue Earth Capital.
(11:52):
So, I'm an external IC member there, so I still get to do a bit of that, which is a nice way to scratch that itch. I will say that I started to miss being so far away from actual founders, and then it's one thing to read about a company through a funds annual report, or even their impact report, and they're going through the data room, and reading their investment memos, but working with early stage founders on a one-on-one basis, and beyond their boards, and having more direct contact with them, to me that's like a totally different experience. I find it to be really interesting.
(12:26):
You are constantly learning, and finding ways in the way that we work as a firm, especially to leverage these different resources we have as a GP to help to create value for those founders. And often you can do that in a way which is pretty light touch, but you can have a high impact. And so I find I like that part of the work that we do as investors now directly into companies. I just think it's exciting for me, and it's higher impact in some ways on a day-to-day basis to be able to work with founders, and to find ways to create value alongside them.
Jason Jacobs (12:58):
And so if I heard right, you were an LP in Blackhorn before you made the decision to join full-time, correct?
Melissa Cheong (13:05):
That's correct.
Jason Jacobs (13:06):
So, when you made the initial decision to invest as an LP, what was the stage of Blackhorn at that time, and what was it about them that made you believe that they warranted one of the precious LP slots?
Melissa Cheong (13:20):
I personally find that, that kind of seed to series a entry point stage as being particularly, again, high impact. I think there's so much that can happen with relation to improving, or shifting the trajectory of a company, and the outcome that they're really geared up for, or targeting at that stage. And so, again, to the point around, so as an investor, or somebody who has access to relationships, and knowledge, and potential customers, and things that companies just do a lack of access really need access to, that, to me, feels super high impact. So, I think for me it was one, the stage, I think two, the whole resource efficiency thesis to me also, I like the idea that, again, climate is not necessarily like the target input, but it's an output. The reduction in core resource, or the reduction in energy consumption is really part of the thesis that allows for companies to improve outcomes, and to on a colinear basis, generate climate outcomes in parallel to that.
(14:29):
I liked that idea, right? Because I think the thing that I saw as a family office investor previously, or if someone who had been in an advisor working with foundations is that a lot of that super catalytic really sexy stuff, which is more deep tech oriented, tends to just take a long time. And there's a lot that can go wrong, and it's really hard to be on the other side of the table when you see something not be successful in spite of the fact that you have these really talented differentiated scientific experts in a certain field really creating something which you know has value, but it's hard to actually find a way to monetize it. So, for me, I think I had gotten to a point where I was ready to focus on things that were more timely, and some might criticize that. I get pushed on that a lot too, and that some of the stuff we do, people might label as being more transitional.
(15:23):
And I think we would argue that you kind of need it all. We were all investing in these moonshot opportunities that are really exciting, and were really just focused on advancing these deep tech advances. Then there'd be a lot of capital being deployed, and we'd have to wait a long time to see if anything was really going to happen. And so I think in order to improve the probability of any of those opportunities really being successful, particularly on the hardware side, there needs to be an investment into all of the digital infrastructure which is needed in order to support that, because you need the intelligence, you need the ability to leverage AI, and machine learning, and to look at resource optimization as a piece of all of that. So, the second part is really around timeliness. I think, for me, it was more around stage timeliness of the investment thesis. And then the third part would probably be impact. I really believe on a per dollar basis right now, we can actually have some really tremendous impact with this particular investment thesis that we'll be able to point to on a near term way.
Jason Jacobs (16:23):
Every category has resources, and you can affect resources in many different ways from materials to supply chain to more efficient marketplaces to connect folks, et cetera. Do you have a take as a firm on that? Am I hearing that digital plays a big role in the investment criteria?
Melissa Cheong (16:40):
Yeah. So, for us, everything we do is focused on this industry 4.0 idea that there is a new industrial data revolution, which is just presenting these really new, unique, and just massive opportunities to disrupt the economy through digital transformation. And we believe that there are certain sectors in the economy like transportation, the built environment, and energy which have just been slow to adopt technology. And so from a digitization standpoint have lagged behind other sectors. And due to the confluence of processing power, and the ability to access machine learning, and leverage AI, there are all of these new pools of data which are now available, and these different insights that can be applied to these industries to generate, again, these massive savings. I wouldn't say we are exclusively focused on B2B SaaS, but we do a lot of B2B SaaS. We don't do a ton of hardware.
(17:39):
We have a ton of regard for people who do do that, and frequently look to partner with others who have a real set of expertise, and strengths within that area if there's a hardware component to a business model we're looking at. But our preference is really, if you look at the 80, we've got 80 plus portfolio companies within our four funds. And while they're all making a material impact on these large, and really carbonate heavy, or dense industrial sectors, most of them are either enterprise SaaS companies, or they are almost like a hardware enabled SaaS business model where there's a hardware component of it. It's hardware which is off the shelf, or we're not taking novel tech risk per se. And then that's providing access to data, or information where there can be a software, or recurring revenue business model like layered on top of that.
Jason Jacobs (18:29):
And when you're screening opportunities, is there any type of impact screen, or is it purely a financial decision?
Melissa Cheong (18:35):
We use the IMP framework for members of the Impact Capital Managers group. And so the IMP is really embedded through our whole investment process from sourcing to our actual funnel where we evaluate, and we have a rubric that we use to bring companies at that stage, a pipeline. And then at diligence we spend time really understanding that, too. And we often decline opportunities, particularly things that are more kind of FinTech related because we don't think that there is enough of a climate set of outcomes that can really be pointed to. And we want to make sure we're not having to squint really hard at something. We want to make sure something stands on its own, and we feel great about it, and we really feel like there are specific KPIs that we can use to assess, and track progress to hold ourselves accountable.
(19:21):
And we also embed all of that within our term sheets, and then in our deal docs too. So, that's a new thing for this fund where, upon signing a term sheet with us, even at the seed stage, which is I think a little bit unusual, needs to agree to work with us to implement a stage appropriate ESG, and impact policy. And we also ask them to agree to do that with relation to DEI, because it's just become really important to our team. And if they don't have one, or if they don't know how to do that, which is frequently the case, given the stage, and size of companies at that stage, we will work with them to develop a stage appropriate set of policies for them. So, I think, for us it's more about being an early stage partner for those companies, but we think it's important. It's referenced in the term sheet, and then in deal docs, just so everyone knows that we're serious about it, and there's real commitment to making sure we maintain that standard.
Yin Lu (20:12):
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.
(20:41):
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 (21:12):
Now that you are four funds in, how have you thought about LP composition along the way? And I guess that's two part one is what kind of LPs you seek, but the other is what kind of LPs you have access to since many larger traditional institutional LPs for example, don't do fund ones as an example. Want to see more progress, more time of the team working together, et cetera. So, how did you think about LP composition early on, and how has that shifted over time?
Melissa Cheong (21:39):
Yeah, I think the LP base has transitioned, and diversified over time. I think the first fund was a lot of family offices, families that were not just necessarily angels but families who might have had an existing legacy, or current footprint in industrial sectors. And so the thesis really resonated with them. And then when we went out, and raised the industrial impact fund one in 2019, which is, think of that as technically our second fund, but it was our first flagship fund. And so a lot of allocators thought of it as, and you, and I have talked about this, it's like people want to put you in the fund one box for kind of a long time. So, it's not really clear when you stop being an emerging manager sometimes. But in that case, we went to market, we launched an $100 million dollar series A vehicle focused on 20 series A investments, and couple things happened. One, we were approved, and put on platform with some of the really well known gatekeepers.
Jason Jacobs (22:36):
I saw, aren't you like a top 50 impact assets fund? Is that one of the gatekeepers you're thinking of?
Melissa Cheong (22:41):
That's a new thing. We made the Impact Assets 50 list this year while we're raising fund to the International Impact Fund II, but we did with the first fund in 2019, we were approved, and rated, and put on platform by Cambridge Associates for example. And so that was a big change for us. That opened a lot of doors, because once that happened then we actually were able to procure capital from set of public investors too on the endowment side of things. And we invested in, and became almost ILPA compliant from a reporting standpoint. So, there was a significant investment in all of the back office, and the investment ops stuff that people super unsexy, part of being a GP, no one really appreciates but sort of expects on the reporting, and all of the compliance, and reporting stuff that needs to be [inaudible 00:23:29] So, that happened.
(23:30):
So, we brought in people like the Tennessee Valley Authority, largest public utility in America. They're a great partner for us, and they've come into multiple funds. Then we also had some religious organizations, bunch of foundations across a range of impact interests, or program areas, and families, too. So, families continue to be a really nice loyal part of our existing LP base, and they're now kind of family offices versus angels per se. The other very discreet clear bucket that I can point to is strategic investors. So, we have a bunch of publicly traded corporations in the industrial sector that have come in, and this is a strategic opportunity for them to gain access to US venture opportunities within the industrial sector. For them, it's all about looking for potential acquisition targets as they look to build up their own systems, and so forth. They're also looking to develop partnerships with some of those companies, and they kind of just want to be on the bleeding edge of what's happening at the market from a digital innovation standpoint.
(24:34):
So, that has ended up being a real nice differentiator for us, I would say, not just in that first fund, the Industrial Impact Fund I, but now as we're raising the Industrial Impact Fund II, strategics continue to show a strong level of demand, and interest in the fund, and what we're doing. They view it as a way to extend the reach of their teams, and some of them want access to deal flow, and just want us to print out pipeline, and show them the things that we've looked at, even the stuff we've declined.
(25:03):
So, they can just use it as a way to understand who is out there raising capital in the market. And then some of them want to come to the annual meeting, and really just be able to have a beer with the founders who are within the existing portfolios within our funds, and hear from people on the policy, and regulatory side as it pertains to energy specifically, for example, things like that. So, they're all kind of looking for different things, but strategics have ended up being a really nice source of potential LP funnel fillers for us as well.
Jason Jacobs (25:31):
I hear you talk about industrials, and industrials is a sector, there's a set of expertise that goes along with it. There's a set of strategics that go along with it. It's well-defined. I think one challenge with climate is that climate is not a sector, and it's not well-defined. It's like every sector, and no sector. I've heard you say industrial several times, but I've also heard you say that your impact driven, there's impact capital out there, but impact is not a sector, right? Impact could stretch across every sector. So, how have you thought about sector versus impact when it comes to fundraising, and LP selection, especially given where you've come from on the family office side, what do you think of, and imprint actually, what do you think of impact capital in general, and the state of the market there?
Melissa Cheong (26:15):
Yeah, I would say I use the industrial label broadly, but in reality we focus on four primary verticals, four industries, really, that are all part of this broader industrial sector, or that could be labeled as industrial sectors. So, for us it's transportation, the built environment, energy, and supply chain logistics. We've just added supply chain, and logistics as a separate standalone fourth vertical. With this new fund, we used to think of it as almost like a transportation adjacent set of opportunities, but in reality there was so much we were seeing that the team was excited about, and we've decided to landscape it on a totally separate basis. So, each of those industries, we have a research, and insights team that helps us to define our strategy, and then helps us, we all come together annually at the beginning of the year, and we determine what our priorities across each of those sectors should be.
(27:06):
We will map out each of those industrial sectors. We'll look at themes that we think are interesting from a macro standpoint, and then we'll talk about the timeliness of each of those, and why we think they're positioned to be successful, or not. And we're not going to always get it right. There are things that we're going to miss, and we totally go in eyes wide open knowing that. But I think the goal is for us to be less reactive. There's a lot of exciting stuff happening right now in that broader industrial sector, or within climate, and you'd love to be able to do everything, and sometimes you want to make yourself squint a little bit harder to be able to get your head around something, because you just love the founder, or the company. It's just that cool. The tech is that interesting. But we want to maintain discipline focus.
(27:49):
Our team always uses these sports analogies. I don't really know why because no one actually played hockey, that's when refers to, but we always use the term skate to the puck. Our goal is to try to, in each of those verticals, skate to the puck, and to be out there looking, and searching for certain things that we think tie back to these themes that we've identified from a strategy, and insights standpoint. So, as you think about impact that second part of your question, I think as we do those landscapes, and as we actually create a market map within, for example EV charging was one we did this year with the Inflation Reduction Act, and all of the capital that's coming tied to that, we've had some nice exits in that space. And so it's just feels like a space we should continue to pay close attention to, and be smart in, and around.
(28:36):
We think about, and identify the impact piece of it. And in most cases, the impact piece of it as it ties to our resource efficiency thesis actually ends up being part of what makes it interesting from a TAM standpoint. This is the first time that I think I've ever been a climate focused early stage investor where you've seen the public sector, and the private sector moving in lockstep. I think in the past with Cleantech 1.0, you had technology, and founders, and everyone else so far ahead of where the market actually was. I think now you actually have public stimulus, and smart direction of different resources that's supporting all of these net-zero goals at the corporate level that are being made with the greater levels of urgency. So, that makes us excited, and makes us stop, and say something is different this time than the last go round for sure.
(29:32):
But I really believe that the impact piece of it has to be looked at in parallel to that, and to the commercial thesis for us, because of the way that our thesis is structured. There are opportunities for more concessionary capital, or impact capital, more patient capital so to speak. Its so hard, because what one group might call patient capital could be really different than what other group does. But I talked a little bit about the climate equity interest. There are businesses that we invested on the FinTech side of things where I know those founders would be much more interested in looking at scaling, and deploying their technologies, or their opportunities, particularly for example in the energy efficiency retrofit area to zones that were LMI, or where the underlying beneficiaries were lower income, but they just need a little bit of extra support to offset risk, or to make it more interesting for them.
(30:23):
So, they're not having to compromise from a margin standpoint. So, can you find a foundation, or some sort of a guarantee facility for example, that could be brought in to actually encourage them to look at places that might not necessarily be on their business development team's radar, otherwise, things like that. So, I do think there's a place for impact capital to play, but unfortunately the market is just super inefficient in that way, because I know I'm a trustee, and an investment community member for a couple of foundations here in Colorado, and they all would like to do things that were more like that. But for them it's more about pipeline. How do they find identify, and diligence opportunities that are really programmatically aligned with their particular missions as a foundation, and then how do they source all those deals? It's just that part is often really challenging.
Jason Jacobs (31:08):
And I know there's a large chunk of traditional institutional capital allocators that they hear about climate tech for example, and they're still largely on the sidelines. Does that mirror your experience as well? And if so, why do you think that is, and what do you think it will take to get those walls to loosen up in the direction of climate, and the clean energy transition the way it has in so many other areas outside of alternatives, the climate sleeve of the alternative asset bucket?
Melissa Cheong (31:37):
So, the biggest frustration for me, I actually find that the biggest pools of capital that could be the most high impact, and transformative have often been totally off limits because their minimum check size is $200 million, and they don't want to be more than x percent, 10% of the funds total LPE base. So, for them, that screens out all of the early stage managers. I don't want to ever have to go to market raising a fund that's much bigger than what I think is appropriate for our strategy just because I want to be able to raise capital from groups like that. That, I think, is changing. Recently, just from being out on the market, and raising this new fund that we're raising, we are meeting groups that I think traditionally probably would not have been able to allocate capital to a fund like ours.
(32:19):
We're raising a $200 million dollar target fund right now, or at least stage seed, and series A focused. And for a lot of them, they would never have been able to look at us just because we're too small. They're all launching programs now that are climate specific, impact specific, but mostly climate specific that'll allow them to write smaller checks. I'm hopeful. The time when the private markets, and the fundraising environment is actually really challenging, what I am optimistic about right now is the fact that I think there are so many new market entrants that I'm meeting every day, particularly in Europe, and in China. I met a bunch of people in Asia. Families, for example in Singapore, and Malaysia that are really interested.
(33:00):
It's all next gen stuff that's kind of coming to the US, and looking for access to North American deal flow, or in Europe, large institutional investors, pensions, family offices. We're seeing a lot of interest from the Nordics in particular, for example. So, that to me, I'm encouraged by. I think there's new sources of capital which are doing the hard work that's required in order to allow them to actually become higher impact in the way that they think about climate investing.
Jason Jacobs (33:28):
For a purely financial investor who has a fiduciary responsibility on behalf of whoever their capital sources are, the pensions, or endowments, or things like that. If you want to see climate tech as a sector that is worthy of capital allocation, how do you think about it? Are there sub-sectors, and certain sub-sectors are better than others? The word climate tech gets thrown around, but fusion, and carbon markets, and insurance, and materials, and personal watercrafts, that's all climate tech, but they all have such different profiles from each other. So, how do you parse that, and what advice do you have for institutional allocators that maybe aren't climate investors per se, on how to think about climate tech, and also what words to use?
Melissa Cheong (34:15):
For the kind of traditional allocators, all of them have allocated to more generalist managers, really, where they lead with team, they lead with the ability to source deals that are unique, and proprietary, and alongside really strong, and so forth. Or they've invested in thematic specialized managers that really focus on a given sector, or subset of sectors, and so forth. So, I don't think it's that different. Climate tech, to me, is a broad umbrella of people who are all focused on generating a similar set of outcomes, and how they go about it, it can be very different if you have generalist strategies that are multi-stage. You have generalist strategies that are just early stage. You have single sector strategies that are either multi-stage, or that are early stage vice versa. It's kind of like what's your preference? Kind of depends on the portfolios.
(35:02):
We have a bunch of LPs that came to us with more of a real assets mindset because in their minds, although we were an early stage venture strategy, because of the underlying sectors we were targeting, it was a way for them to diversify, or hedge against potential market risk with their current real assets portfolios, which were more basic industries in nature. What I've learned from being someone who's like out meeting different kinds of LPs, and learning more about their allocation strategies, and their preferences, it's like they all have different goals. Some of them are explicitly looking for exposure to a certain sector.
(35:37):
Some of them really only want to invest, will say, I will only invest in first, and second time funds. Fascinating, because there's a group of investors that believe that only first, and second, sometimes third vintages will actually perform well. And after that they think that GP's get lazy. And then there's a bunch that you, and I know will say, we won't invest until you've got an established track record, and you're like three funds deep. There isn't consistent feedback. I mean, there's a reason why placement agents exist. They will help investors, and their specific goals, and objectives identify, and find groups like you, and me, who are good at different things, and have different things that they can bring to the table for those different LPs.
Jason Jacobs (36:14):
Speaking of placement agents, so I mean, do you think there's an optics problem in a similar way to, I don't know about you, but if I get a pitch from an early stage company, and it comes from a banker, then it's kind of an immediate flag similar to if it came from an investor relations manager instead of the founder, and CEO, is there a similar optics problem if an LP gets an introduction from a placement agent versus from the principles?
Melissa Cheong (36:36):
I used to think that was the case, but I actually have changed my thinking on that. And I have started to become much more open-minded to intros that are made by bankers, and so forth than I had been in the past. Just because I think it's a sign of the market maturing, and becoming more competitive, which is good. I think the fact that there are more people out there fighting for dollars is a good thing at the end of the day, because it makes us all better, and stronger. It may hurt at certain moments in time when you're actually looking for techs from LPs, but in the end I think it's a good thing. I mean, the whole point of having an advisor, or a placement agent is to address the fact that there's an inefficient market. There's something about the way a market is operating where the search process is not efficient, and you know there's a match out there, you just can't find them.
(37:22):
And so I don't think that's the case anymore. I think they're not all created equal by any means. And so I think any manager who's thinking about hiring a placement agent should do a ton of diligence to understand the quality, and depth of those relationships that the placement agent is purporting to have. But I've seen a lot of those relationships work really well. And if you're really creative about it too, you can find ways to do it so that it doesn't actually end up being a burden from a cost standpoint at the end of the day.
Jason Jacobs (37:47):
So, have you worked with one at Blackhorn?
Melissa Cheong (37:49):
We have. We've worked with a couple different groups in different instances. In some cases an exclusive relationship, and in some cases in a non-exclusive relationship. In some cases we've been broad. In some cases we've been really targeted about it, and we've said, "Bring us a list of the groups that you think are the best for us, and then we'll go out, and we'll make sure that we work together." And in some cases I found we may have had a dialogue in play, or had an established contact at a certain organization, but they can come in, and actually provide us with more information there, and make that a process more efficient for us. And so when you have a partner at the table with you who's really there to advocate, and provide you with just greater transparency that can make that whole process just be more effective.
Jason Jacobs (38:34):
It's good food for thought. I don't know a lot about that world. Maybe I should get some of them, some of those placement agents to come on the show, and talk about their work, because it's an area, I mean even talking to other GPs, I think it's another kind of black box where people worry about amateurs, or predatory, or car salesman types, but then similar to recruiting, right? There's a lot of crappy recruiters, but then a good recruiter's work, they're weight gold, right? Well, if you placement agents are the same, but how do you tell the difference With an untrained eye?
Melissa Cheong (39:01):
It's like anything. It's like all about relationships. And this business is just so heavily reliant, and dependent on relationships because at the end of the day, that generates trust. If you have somebody who's willing to go to bat for you, or put that relationship on the line, I think it says a lot on both sides.
Jason Jacobs (39:18):
And switching gears, so when it comes to investing, you mentioned generally that there's these four sectors within industrials that you're excited about, and that you're thesis driven. What areas are you particularly excited about today, and who do you want to hear from, if anybody, in terms of people listening to the show?
Melissa Cheong (39:33):
Yeah, I think we are super interested in looking at these industrial AI driven applications right now. It's a buzzword that everyone seems to be talking about, and the reality is, is that it's not like it's just arrived. We believe it's been here. All of us in climate tech are seeing it show up in different places in different business models in some way, shape, or form. But it's become a much more very out in front, and center theme that we're leading with. There's a couple of things we've done recently where we're looking at generative AI applications, and so forth, and one instance targeting circuit design. In another case, there's a company we invested in called Fair Labs, which is looking at reducing the carbon intensity, and factory floors for the most carbon intense industries, cement, chemicals, steel, for example. That's another example. They're using a white box AI model to help operators make decisions around how to operate existing shop equipment, but doing it using less energy, and improving, or optimizing outcomes on a day-to-day level.
(40:39):
So, those are the kinds of things that we're really excited about right now. Our team is actively looking for more opportunities, and we've actually just made a decision to actually create an AI score for every company that we look at right now, particularly, and if you assume that a large number, if not most of the companies we look at are in the enterprise SaaS space. For us, it becomes really important that we think about what are the different areas of the AI that each of those companies is touching, and then let's be really explicit about what we think the potential for this is, even if it's a seed stage company that has a lot of growth, and development to go as they mature.
Jason Jacobs (41:14):
Melissa, is there anything I didn't ask that I should have, or any parting words for listeners?
Melissa Cheong (41:18):
If you are an LP, do whatever you can to crowd in those around you, because we still have a lot of work to do, and there's a lot of additional capital that's needed in order to make this all happen. If you are a GP, I'd say there's a small group of us that do whatever we can to help each other, and our peers in the space, and a time like this one where fundraising is again, just less efficient, and more challenging. And if you're a company, there's so many different resources right now to help you articulate who the right fit for you is. Because I think one of the things that I've realized as an early stage investor, the relationship between seed, and series A stage founders, and their investors is I think very different than later stage opportunities in that things are more formative.
(42:02):
You need utility players that can be scrappy, and can help when you need to phone a friend for lots of different types of things. So, make sure you just are thoughtful, and smart about what you want as a partner, and use these different resources that we have, like Jason's podcast to help you with that search process, and just go in, and be more well-informed because I think that'll help us all just make sure we find these enduring long-lasting partnerships that generate a lot of value, and improve climate outcomes for all of us.
Jason Jacobs (42:30):
Great. Well, that's a great point to end on, and I'm so glad that you made the time to come on the show. I feel like I have a much better understanding of Blackhorn now, and looking forward to continuing to collaborate with you both formally, and informally, and wishing you, and the team every success.
Melissa Cheong (42:42):
Thanks, Jason. So, honored to be here. Thank you.
Jason Jacobs (42:46):
Thanks again for joining us on My Climate Journey podcast.
Cody Simms (42:50):
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@mcjcollective.com.
Jason Jacobs (43:06):
And if you have a guest suggestion, let us know that via Twitter @MCJpod
Yin Lu (43:12):
For weekly climate op-eds jobs, community events, and investment announcements from our CJ Venture funds, be sure to subscribe to our newsletter on our website.
Cody Simms (43:22):
Thanks, and see you next episode.
