Capital Series: Sebastian Heitmann, Extantia Capital
This episode is part of our Capital Series hosted by MCJ partner, Jason Jacobs. This series explores a diverse range of capital sources and the individuals who drive them. From family offices and institutional LPs to private equity, government funding, and more, we take a deep dive into the world of capital and its critical role in driving innovation and progress.
Sebastian Heitmann is a partner at Extantia Capital.
Extantia Capital is a platform to invest in breakthrough technology solutions that address the climate crisis via mitigation and adaptation. The 300 million euro platform includes Extantia Flagship, which backs scalable deep decarbonization companies; Extantia Allstars, which partners with mission aligned climate tech, venture capital fund managers; and Extantia Ignite, a sustainability hub, advancing knowledge and competence in climate innovation and ESG practices.
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Episode recorded on June 20, 2023 (published July 12, 2023)
In this episode, we cover:
[02:02]: An overview of the Extantia platform and its investment strategies
[03:03]: What Extantia looks for when evaluating opportunities
[05:14]: Sebastian's background and the origin of Extantia
[08:32]: The changing market and political environment that created opportunities for Extantia
[12:19]: The unique skillsets and expertise within the Extantia partnership
[16:10]: The evolution of Extantia, starting with a pilot fund
[18:06]: Extantia's extension projected impact calculation (EPIC) methodology for measuring impact
[19:43]: The current fund structure and status of fundraising for Extantia's Flagship fund
[20:18]: Extantia's focus on B2B tech solutions that address the "energy trilemma"
[22:25]: Investment opportunities in the hydrogen economy and breakthrough cooling tech
[25:29]: How Extantia thinks about returns and why Sebastian doesn't like the term "impact fund"
[27:44]: The kinds of LPs the firm targets, including pension funds, insurance companies, sovereign wealth funds, and corporates
[31:14]: The need for successful exits in the climate tech space
[33:00]: How current energy models underestimate the impact of innovation
[38:56]: Alignment between the US and Europe in climate tech innovation and investment
[43:43]: The types of clean energy tech Sebastian is most excited about
[45:54]: Advice for people seeking a career transition into the climate sector
[47:24]: Who Sebastian wants to hear from
Resources mentioned:
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Jason Jacobs (00:00):
Today on the MCJ Capital Series, our guest is Sebastian Heitmann, a partner at Extantia Capital. Extantia Capital is a platform to invest in breakthrough technology solutions that address the climate crisis via mitigation and adaptation. The 300 million euro platform includes Extantia Flagship, which backs scalable deep decarbonization companies; Extantia Allstars, which partners with mission aligned climate tech, venture capital fund managers; and Extantia Ignite, a sustainability hub, advancing knowledge and competence in climate innovation and ESG practices. But before we start...
Cody Simms (00:40):
I'm Cody Simms.
Yin Lu (00:41):
I'm Yin Lu.
Jason Jacobs (00:43):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu (00:49):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (00:54):
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 (01:07):
And with that, Sebastian Heitmann, welcome to the show.
Sebastian Heitmann (01:11):
Hi, Jason, nice to be in the show.
Jason Jacobs (01:14):
Nice to have you. I've been hearing the name Extantia for quite some time, and I've met one or two of your partners over the years, but you and I have not been connected. And no prep call either, so as they say, we're doing it live.
Sebastian Heitmann (01:28):
Yeah, jumping into the deep end, that's good.
Jason Jacobs (01:30):
But very excited about having you on and excited about the work that you're doing. And selfishly, also excited just to learn more about what's happening on the other side of the pond in climate tech. We've been active there some, but not as much as we have been here in the US. It's just such an important market, both financially but also in terms of addressing the problem. Thank you so much for making the time.
Sebastian Heitmann (01:55):
Yeah, you're welcome. Looking forward to it. On this side of the pond there's definitely quite a few stories as well, so we'll dig into those now.
Jason Jacobs (02:02):
Well, for starters, maybe just give an overview of Extantia and what you do.
Sebastian Heitmann (02:06):
We are a platform. We invest into, actually, two different investment strategies. We're investing through a fund of funds and other like-minded funds. Pretty much only climate tech funds. Some US funds in there too, actually. Not so much a product for us in terms of something we raise money for, anything like that. But it's a strategic partnerships and knowledge share and knowledge hub platform, really for us. And we started with our journey in 2018-19 roughly, so we're still quite lonely out there. And we felt that also we are lonely and we need more people, but we came up with that dual strategy. And the main focus is on our direct investment fund, this is a 200 million euro fund that investing early stage technologies all around climate. That's the very broad overview. On the direct investments we basically have also quite simple strategy in the day.
(03:03):
We are looking for two things essentially strategically, that's speed and scale. On the scale side we look for large topics, 100 megatons of CO2 abatement or removal potential per anum needs to be within reach, not within our lifetime but once at scale. That's a lot. Putting that to perspective, that's 20% of an industrialized country like the UK. The other topic is about speed. We believe in the concept that we call the time value of carbon. So a ton of CO2 that can be abated or removed today has a lot higher value that happens in the year 2040 or '50. In combination of these two things, you end up doing mostly hardware and molecules, the problems, not so much in bites. Can't blockchain CO2 away yet. That's one thing, so we're a lot of hardware investors. And on the time value of carbon perspective, it's a lot of retrofit. We do mostly retrofit technologies, stuff that leverages or utilize existing infrastructure.
(04:06):
Yeah, we do software as well. We do look at software deals. But they're hard for us to reach, these goals, there's not many softwares that can actually fit into our strategy. There will be some on the, I guess on the grid management side or building management side, I can definitely imagine. We've seen some as well, but not yet invested. We have one done one software investment in a carbon market side, but it's typically a lot of energy, and all the different shapes and form that energy can take. That entire value chain, to be honest, from energy generation to storage to transportation, to turning it into hydrocarbons again, utilizing these hydrocarbons. Obviously a circular hydrocarbons. That's the goal of the fund.
(04:47):
What we do, we are from the stage-wise with series A investor. Or, to be honest, in climate tech we have to be careful with the denominations of these rounds because it's all about TR level and you can see companies with very mature TR levels because they came out of some research or some NRL or something like this. Or similar institute but actually quite mature technology that could be still the first check-in. So TR level five to eight typically is our sweet spot.
Jason Jacobs (05:14):
Maybe talk a bit about the origin of the firm, how and why it came about. You already said when it came about, in 2018. And it'd be great to also understand just your journey to how this became the right next move for you professionally.
Sebastian Heitmann (05:30):
Yeah, that's a very good question. Personally, my journey in the sustainability space started quite a bit earlier with some investments in the back in the days clean tech 1.0 era. I've paid my tuition fee, but still couldn't be healed. And after Paris Agreement 2015, was definitely clear that there's a very interesting macroeconomic framework appearing. However, it still took time from some angel investment activities that we've done in this space, already back then what we learned is that there's a complete lack of capital in the market. That there's no fund that actually really were equipped correctly set up to do this. We saw BV appearing 2015, versus an energy breakthrough energy coalition, thought it was very interesting approach. We were convinced that if we want to make a dent on climate, we have to mobilize institutional capital. That's a clue.
(06:18):
It needs to be a asset class which is clearly out there where institutional money can invest for profit. And institutional money, I mean these pension funds and insurance companies where 80 to 90% of global capital sits, not so much on the corporate side or also not so much on the high net worth individual side. That was first really critical. Personally, I never wanted to create a financial product in my life, but I had to admit that is the one thing that we need right now. We need more capital in this space and we need to mobilize this institutional capital. With hindsight, we're happy that this is now happening, but this was really the why we started the firm. We just saw too many good engineers and too many good scientists disappear either in research or corporates. And on the US side it's always been a bit different, to be honest. The US side has always been more entrepreneurial.
(07:07):
On the European side, clearly if you graduate from a MIT type European, like Oxford or Cambridge or something, you'll end up at some corporate. And your innovative spirit that you may have had while you were there will soon be drowned in the corporate agenda. Why is that the case? Because there's no capital out there, it was too dangerous to take that step. It wasn't easy to find enough capital in space. However, this has also been changing a bit. We've seen quite a few grant programs over the last couple years, and ever the more. Now, anyhow with the super strong tailwinds than we have from both the European Fit for 55 program or the IRA in the US are amazing. Could not have dreamt of this only a few years ago. This will be such strong tailwinds.
(07:54):
This was the why, really, and then we came together. One of our partners here, he was working for and a family office who were an early investor into BV, or what's today known as BV. So we had to go the frontline and seeing what's happening there on the front. Again, what I think they did not do is mobilize this institutional capital. We thought this is something we need to do. And ta-da, four or five years later it's actually happening. We see more and more large institutional pockets in Europe is known as Article 8, or nine funds now, these classified funds that have to do some type of sustainable investing. And that's very positive to see.
(08:32):
The why we started it, today, like I said, we see it happening. Maybe a testament to this momentum is we recently had the SuperReturn here in Berlin, which is one of the largest financial market trade shows where a lot of the GPS and LPs come together. And in the past we bought some expensive tickets, but really most of the attendants at this fair did not want to know anything or hear anything about climate. We decided, okay, we got to do something else. We got to bring the people together in a room that want to hear or want to talk exchange about climate. Started three years ago with 30 people in the room. Fast-forward to today, we had just two weeks ago we had this event with over 200 people attending, over 100 LPs attending. We had about $4.5 trillion in a room. Serious money looking or wanting to exchange on climate, in investing into climate. Again, that's one testament that something has been going the right direction.
Jason Jacobs (09:29):
And you mentioned that the capital that was out there before Extantia came to be wasn't equipped to tackle this type of problem. What was missing in terms of the existing capital out there before Extantia came to be? And then, how did you set Extantia up such that it was able to address the problem, unlike the existing sources?
Sebastian Heitmann (09:58):
There has been always some deep tech funds out there, and there have been specifically in the US people like [inaudible 00:10:03], they have been doing. Or also [inaudible 00:10:06], there's quite a few that have been doing some stuff in the area. A lot of them got burned. I think the lessons that BV took from clean tech 1.0 were very good lessons actually. I don't think there was not nothing, but I think it could have just been a lot more. The majority of the venture capital money today was historically deployed in digital transformation, and it's mostly software models that are being financed through it. It seemed like this would be the most suitable product to meet this pace of venture capital, but that's something we thought actually is not necessarily true, and that's also why we running the fund on a standard 10 plus two fund. Like a standard fund, no extra timing. Some funds ask for longer periods. We said no, we want to do it basically on the rules of the capital markets as they are today without any extra.
(10:54):
But there are some legacy funds out there too who actually been early. So called impact funds often, that also the broader mandate with some social impact in it too. What has changed is the market and the political environment, and also of course the appreciation of the problem has changed over the last couple of years. And the fact that carbon has a price now. That actually all the corporates now understand that there is a price of not managing carbon helped us, of course. That's why the Paris Agreement, who set the framework for this. This was what was missing. And that actually got the exit market started, which are often the corporates. Because previously in clean tech 1.0 there may have been great technology but there was no exit market. Nobody was buying the stuff.
(11:33):
Apart from the fact it was mostly financing R&D back then, but even then there was not many exits. But that has changed once we put a price on carbon, we moved the climate problem out of the CSR department into the financial department. There's been market changes now that enabled it. And our conclusion was that now we need more funds that bring these nascent technologies to bankability, and there are actually quite a few.
Jason Jacobs (12:01):
What would stop a traditional software VC from just changing their sign to say now we're a climate tech investor? Is there anything structurally about the way that Extantia is set up that you believe enables it to deploy capital more effectively? And if so, what?
Sebastian Heitmann (12:19):
Of course there's quite a few have tried to change the label, and are doing it. Or have raised dedicated fund, like example USV would be the best example. However, of course the skillset set is a bit of a different one. We really look at more... First of all, one thing we [inaudible 00:12:32] so-called health science in the fund, she's a chemical PhD and she really first of all checks all the scientific groundwork of any investment we do. There's a lot of time going into understanding what research has been done in the area before, what are the industry trends, checking all the research, the publications, the research papers, just to understand the global frame of the market. She's also the person leading some of the deep dives when we look at the sector. That's something different from a software fund, for sure, that type of skillset.
(13:00):
On the other hand, that's more regulatory frame. We are of course have to also measure or impact report, or impact. We have specific peoples, our head of ESG who's taken care of that side. It's a bit different. And the investors, preferably with a very technical background, but there's also been quite a few in software that eventually used to start out as a chemist or physicist or something like that. That might not be the very unique factor. It's understanding hardware, it's understanding how you scale hardware, and we've done quite a bit of work on that. There is important points in the founder's journey. One of them is your first of a client plan, to structure that very well from day one onwards. And also how to build a hardware business, but ideally with a software type of acceleration curve.
(13:53):
We need to also convince the financial markets too that this is something that can accelerate. We've also done some work on that on how to scale also hardware. I don't think that traditional VC firms cannot play this game, I think they can if they decide to. And I invite them to, because we will actually need a lot more capital to be deployed in this market, and we are far away from being a competitive market yet. It's still an undeserved market.
Jason Jacobs (14:21):
And maybe talk a bit about how the partnership came together. Was it opportunistic, or did you seek out certain skillsets? And also just, what types of skillsets do you have in the partnership, and how do you divide and conquer?
Sebastian Heitmann (14:36):
Like I said, our mission is to help companies turn a great product and a great team into an excellent company. Basically, we're not the better scientists, we're not the better engineers. The product needs to be there before we come in. That's one more serious A type investor, not another a pre-seed fund or something like this. That's something where we really want to see once we come in. And that's also a bit of the background of the people. That's one of the founders, he has a quite strong energy background, worked for years in consulting energy at Oliver Wyman. Also partner there and at the energy practice, Yair's background, the other partner, is also quite technical electrical engineer, worked on the engineering side for 13 years in the Israeli military special units. There's some technical sense to it. The other partner, Torben, is the classic entrepreneur, had a unicorn exit to SAP with his company about a year ago.
(15:31):
It's scaling expertise that think we want to bring in and help the founders on their journey making the first steps right. And it definitely, from how it got together, it's very complimentary team. We don't have twice the same skillset, to be honest. We've got the energy with the technical guy, with the more the entrepreneur person. Of course we also need to do the investor relations, that's part of many things that I take care of in the firm. We also, the fifth partner maybe to mention as well is a classic CFO banking background, regulatory and all financial matters lie with him in the firm. That's a bit of a different role.
Jason Jacobs (16:10):
And from a practical standpoint, what fund are you investing out of now? What size is that fund? And also, it'd be great to just understand how you got to where you are today in terms of, I heard you at one point on another show talk about how there was a pilot fund. Was that your own capital as partners? Or just the origin story as it relates to having the resources to deploy?
Sebastian Heitmann (16:36):
Yeah, evolution. Exactly. We came together in 2018-19. And our deal was, again, to mobilize some capital, but we were not prepared to knock on the doors of the large institutionals in the beginning. And basically listen to them telling us, first time team, first time fund, unproven markets, whatever. We've been appease ourselves long enough to know how the game is played on the other side of the table. So we said, okay, what we want to do is want to start a pilot fund, we call the pledge fund, and we want to bring together like-minded people. There was also of course our capital in there too, but the idea was to bring like-minded people, individuals initially only together to prove three things. This is early days, we wanted to prove, A, is there any capital out there other than our own that's willing to invest into this? It wasn't even called climate tech back then. There was no name for it, it was still environmental tech or something. Or green tech or clean tech. That was point one.
(17:24):
Point two, is there any deals that fit a venture profile? Do we actually find companies that we can turn within the normal venture timeframe to become valuable? Is it possible at all? And number three is, how do we avoid greenwashing? We've seen that often the road to hell is paved with good attention, so you think you're doing the right thing but you're actually contributing to the problem, even making it worse. And so on that front we did also a bit of pioneering work. We established with a professor of Whole Life Carbon out of the UK, Francesco Pomponi, is also still our head of carbon math today. We established a fairly robust methodology on, how do we measure and calculate our projected impact?
(18:06):
Because we were saying LCA is nice, but LCA doesn't really tell the story of a startup because it's by nature obviously very small. We wanted to understand the projected impact of that technology in terms on the markets, and then also attach the stuff like impact carry to it as well. That's EPIC, as we call this methodology, which stands for extension projected impact calculation. It's a methodology you can download for free on our website. A lot of funds use it by now. It's something we definitely want to share with everybody. Those three things checked all off.
Jason Jacobs (18:39):
Did that initial pool of capital have a formal fund structure?
Sebastian Heitmann (18:43):
Yes, yes, it had a formal fund structure. Probably in the US similar to what AngelList is, but a bit more formal than that because we don't have that in Europe. But it was a proper regulated fund structure, which was also important. We had to show future LPs that we can work in this regulated environment. So we did that. We set up the funder funds as well and parallel, like I mentioned in the beginning, just basically sharing how fast. Building relationship with great fund managers. And now we are investing out of a also regulated fund structure, Article 9 fund, and that's a 200 million vehicle. We're not done fund fundraising yet, but we are getting to the end of it, 80% there now. And that fund is, like I said, that's a 22 vintage from which we are currently investing. We have executed six deals on this. Happy to go into bit more detail in the moment on some of these deals, but all of them would speak a very clear language on how do we transform large value chains in deep tech and energy space.
Jason Jacobs (19:43):
Is the funder funds a dedicated fund vehicle as well?
Sebastian Heitmann (19:47):
Yeah, yeah, it's its own standalone vehicle, yes. Yeah.
Jason Jacobs (19:49):
Got it. And that one you're also currently deploying out of?
Sebastian Heitmann (19:53):
Yes, yes, we are. We have 10 funds that we have selected so far. We're coming to the end of it too, frankly. Not sure how many more we'll do, maybe one or two something. And then we have to decide what to do with it, to be honest. Will there be next vintage, yes/no? We're not necessarily in the game to raise a funder fund, that's a different ballgame. The focus is on our flagship fund at the moment. But let's see, the funder fund actually seems like it's a nice performing fund, to be honest. Got some good funds in there.
Jason Jacobs (20:18):
Great. And when you look at the market, as you know, climate tech is not a sector, it spans across every sector. Since we need to decarbonize our entire global economy, how do you think about sector focus, if at all? And also, how do you think about thesis driven versus opportunistic when you're out looking for potential investments?
Sebastian Heitmann (20:43):
In this sense, we actually also get quite simple fund, to be honest. First of all, we do only B2B tech, we don't do any B2C, we don't do any type of investments that depend on consumer behavior changes. For example, will the consumer want to eat plant-based meat or meat from the lab or something? That's not us. Our companies, pretty much all of them solve the energy trilemma. And therefore, that's a proven market. Once they are successful with that, they will be addressing a gigantic market question. They will be successful. And actually, can they solve the trilemma? The trilemma for us is we need affordable energy, we need clean energy, and we need to have a resilient or secure system. Those three points. Any company who can address these three together, not one of them, you have to address all three at the same time, will address a giant market.
(21:31):
We don't ask ourselves much about the market size. Typically, any innovation that we invest to is gigantic. And of course climate is actually an energy problem, 70% comes from energy, some from agriculture. But even within the agricultural sector, a lot of it's actually down to energy too because it's all about ammonia. A lot of the emissions come from ammonia, which we use as a fertilizer. But the rest, it comes always down to energy. Any process, if it's steel or if it's cement, or if it's more mobility, in the end of the day the energy is the input. And in which shape or form. If we are talking about e-fuels, how do we create e-fuels? E-fuels are created from hydrogen and carbon, essentially. The hydrocarbon. The question is, how do I get green hydrogen at scale cheap, and how do I capture carbon efficiently and at scale? The actual technology putting them together into hydrocarbon, we also have investment in that space.
(22:25):
Disrupt synthesis is of course also something that needs to be done, but the cost and making this economically and ecologically viable depends on these two inputs, actually, more than anything else. Obviously what that means, we are looking in the hydrogen economy, of course we are looking everything upstream, midstream, downstream, investing into a generation of hydrogen. With an investment, for example, we have an H2Pro. We are an investment that... Also a US investment actually that creates turquoise hydrogen from methane paralysis with modern electron, just rebranded to modern hydrogen now. Huge benefactor of the IRA, by the way. Turquoise, as it can just scale much better. And then we just invested into a company, for example, that deals with liquefaction of hydrogen, also key enabler for the hydrogen economy. As we will not be able to produce a lot of our hydrogen domestically, we would need to produce it somewhere else and then need to come our way. And that typically requires liquefaction, a very energy intensive process.
(23:24):
We made an investment in a company that does two things. Actually, one thing we all like, cool drinks essentially. Or can also cool a bit more than drinks, which would be in this case hydrogen. Very breakthrough technology, real pioneer patent as well, which you don't see very often in the market. They revolutionize cooling completely. The first cooling technology that does not use any compression or F gases. It's based on magnets, so-called, many people have never heard about this, but so-called magnetocaloric effect of cooling. They leverage magnets, and that's an effect that was already discovered over 100 years ago. I believe it's Albert Einstein actually who did discover this effect, but it only took 100 years to commercialize. They actually use magnets to cool, and they've industrialized this now, they are selling their first customers, Coca-Cola of course, as somebody who owns the largest cooling fleet in the world. But like I said, that alone probably would not be a case. But since this technology can cool anything, then there's a lot of applications for this. Very breakthrough technology.
Yin Lu (24:28):
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.
(25:03):
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 tom mcjcollective.com and click on the members tab at the top. Thanks, and enjoy the rest of the show.
Jason Jacobs (25:29):
When you think about the fund relative to traditional venture that has historically, at least over the last few decades, been more software focused, as you said. How do you think about returns? How do you think about risk? How do you think about things like capital intensity or the regulatory landscape when you're making investment decisions, and when you're also thinking about return expectations internally and that you set with potential LPs?
Sebastian Heitmann (25:57):
We always say fixing the climate is good business. That's actually really paramount. We don't want to have any economic markdown, anything just because it's green. Everything we need to do at the end of the day needs to be cheaper than the current fossil solution. Like I said, then it addresses huge market, and then it's also going to be able to scale. I don't see any technology as good as it might be to be able to come to 100 megatons of CO2 emission abatement or removal without being extremely profitable. This is large scale. You can only do this if you're really very efficient and very good company. We see the potential of a company to remove 100 megatons as a direct proxy to its future valuation potential. We don't believe in any type of negative green premium or anything like that.
(26:43):
But of course therefore the technologies need to be competitive, otherwise they will go nowhere. We don't see that, a company who continuously depends on subsidies including carbon price will actually be long-term very successful. The company excluding all subsidies, carbon price whatever needs to be competitive. Otherwise, we don't see it. And that's also what we tell the LPs. We also don't like the term impact fund, to be honest. We invest not for impact, but with impact. The driver is, in the end, financial returns. Just not because we are being so super capitalistic. But I just don't see another way how to scale this. We need to go to gigantic scale. Go and visit an oil and gas refinery and just look at the scale at which these companies are operating. If you want to transform these value chains, this is not going to work any other way but the capitalistic way. If somebody has a better model, I'm happy to discuss that. But so far I have struggled to find this.
Jason Jacobs (27:44):
I know you mentioned that you're not fully through the fundraise with this existing vehicle, which sounds like the first institutional vehicle. Not the first fund, but the first institutional vehicle.
Sebastian Heitmann (27:55):
Yes, correct.
Jason Jacobs (27:55):
What types of LPs have you been targeting? How important is mission alignment? Where has the story been resonating the best? And also directionally, how would you like to see that LP base evolve over time as you look at not just the rest of this fund but the next several funds beyond?
Sebastian Heitmann (28:12):
Like I said, our mission was to mobilize institutional capital, and as such, we've been also targeting this type of capital. And we have of course a base of early believers, family office and people who've known us for some time, and super grateful of those. You need some backers in the beginning. You will not get your first check, typically not from an institutional. First close, it's typically something you have to do on your own, or at least not that simple. So we had this. In the future we will continue the diverse space, we also have two corporates in the fund. We have, you can name them, Anglo-American or Toyota, to very ambitious corporates, I must say. Great decarbonization agenda. And our always good sparings partner on certain technologies. The other, like pension funds, insurance companies, sovereign wealth funds, those three really are going to be dominating the cap table at the end. Plus some family offices.
(29:04):
And also even some private individuals who, even with small money, we are happy to bring in some mission aligned people. How important this mission alignment, it's critical. It's really critical that we work with LPs who want to work in the space, who understand the space, who also have of course a certain risk appetite. We are unproven market, that's for sure. However, like I said, most LPs have their pockets by now. They decided to go this way, that they want to invest into Article 8, 9 funds, or these type of regulated fund structures. That question is not longer that much out there, it is possible to raise money in this space right now.
Jason Jacobs (29:44):
What are some of the most frequent objections that you've been hearing? And along the same lines, what advice do you have for others in the space that are either heading out for their next vehicles or potentially their first vehicles?
Sebastian Heitmann (29:58):
You always have to be a bit lucky in the timing, that's for sure. If timing's not right, if they're not ready, then don't have a pocket to deploy or you are coming too late, they've already deployed it. That's what it is. And then I think the timing is something you have to be right for, but I can only encourage. Actually, it is possible to go out now in this sector. What I just learned from super return two, the one thing that LPs are looking for right now is climate. And of course they all have a bit of a headache from tech right now. And I think the general mood at this conference was pretty negative, to be honest, because there's no exits happening anywhere at the moment. Or very few at least. It's been rather negative consent except for climate.
(30:38):
Everybody's like, that's the exception. That's where we're deploying. In terms of advice to people going out now, I always think the more people do go out, the more the market also will go in that direction too. The LPs also, they see that this is a growing market and there's choice in the market. And it's much better to have a lot of funds out there than just a few. In the end, we are still far, far, far away of deploying anywhere near what we are supposed to deploy in order to reach any net-zero ambitions.
Jason Jacobs (31:09):
And I'm sure you've come across the objection that if you look at-
Sebastian Heitmann (31:13):
High objections, yeah. [inaudible 00:31:14].
Jason Jacobs (31:14):
If you look at clean tech or climate tech, that there's some companies that are breaking out, doing real revenue. That there's the regulatory and policy tailwinds and the consumer sentiment tailwinds, and the big net-zero commitments. And a bunch of things that might suggest that directionally there are favorable trends in the category, but there's not a lot of DPI, there's not a lot of exits to point out. How do you think about exits in terms of who buys, at what kind of multiples they buy, and when? And then, how does that tie back around to why it's an attractive time to raise a fund in the category today?
Sebastian Heitmann (31:52):
Of course, exits, yes. DPI, no. That's true that there's very few exits so far in the market. What we do see is pretty good follow on rounds. Actually, a lot of the companies now portfolio have been very successfully able to raise good valuations capital. We've seen 5X and more from round to round. That's the only encouraging sign we can show to investors. How that translates into exits, we'll see. I think corporates are willing buyers at the moment, there's quite a few that are willing to invest and later on potential buyers. Also, we do have quite a few late stage funds out by now, we also have some in our portfolio like Generation Management, Just Climate is one that we just took on. And there there's quite a few of those.
(32:33):
There's those guys. There's BeyondNetZero, there's TPG Rise. There are quite a few of these late stage funds. Actually, they need targets to deploy. At the moment there's not that many targets, but that's our job to bring these targets. There's multiple exigents. And also, I think you can see that even IPOs work in this environment right now, we've seen a few IPOs or SPACs or whatever, public listings in if anywhere then in climate right now. LanzaTech, for example, recently.
Jason Jacobs (33:00):
And if you take a step back and you look at the nature of the problem overall, how do you think about the role of technology, the role of innovation in the transition? I'll stop there.
Sebastian Heitmann (33:13):
First of all, I'm always being critical to these poor energy modelers, they create these scenarios that we can always read on the BCG and McKinsey reports. Tesla's massive plan, and so on. I think all of these scenarios that they create are underestimating the exponential effect of technology and innovation completely. And the one thing that's for sure not going to come is their model, that's statement on that. Because there's so many things I simply don't see today. To be fair to these people as well, it's not their job. They're not supposed to assess innovation, they're only creating a scenario what's doable with today's technology. But we see so many technologies that take an example in bio energy, so using bio energies that we have today. We've also invested in some technologies in this space which are completely game changing, which are utilizing the energy that we get out there with a factor, large multiple, more efficient than it used to be.
(34:08):
That's something that's nowhere modeled, but actually it's quite impactful. A country like the UK, for example, could probably produce a very significant percentage of its power from its own waste. From agricultural mostly somehow so too, but mostly agricultural waste. It's completely not on the radar of any model. Geothermal is another thing completely not on the radar. People don't see that new technology in geothermal will enable so many more places where it previously was not economically viable to do. It's also an investment that we have, company that just enables hard [inaudible 00:34:40] drilling, which is the major problem for geothermal. And these are just nowhere in the map, and that's why I'm of course hopeful as well that the innovation will come. About the overall role of technology, that's almost a whole evening discussion. If it's only technology is going to come and save us, the answer is pretty sure, no, there will be adaptation requirements.
(35:01):
Education is huge key. There are several levers here, and I recommend to look at the work from Nate Haggins or from Diana [inaudible 00:35:09], they actually are quite the thought leaders in this space on how society in general will have to adapt for this cultural transition that's coming. And like I said, that's a whole separate topic. But our role is to provide some technology. I always think we have really not done a great job in the transition so far. The energy transition, as we like to call it, for me is actually just an energy addition. We haven't really been transitioning anything yet because we are not really transitioning... With wind and solar you're not really transitioning coal fire power plants. It's an addition for more electricity demand that we of course are having. But this whole storage and distribution problems are completely unsolved, and potentially even unsolvable with only intermittent sources. We have to get to a transition, and that hasn't really happened yet.
(36:00):
At the moment we are just feeding Jevons paradox, just giving this organism more and more and more energy, which it will always happily consume. But we need to transition. We need that 70% climate problem is down to energy, like I said in the beginning. This is something we need to do and that I recommend everybody to look at the potentials. There's actually very few energy sources, I just mentioned the two of them, bio energies and geothermal, which have the same quality of electrons than we have today from fossils. There is potentially fusion and fission as well, specifically fusion. But fusion for us is at the moment not a venture case, that's too far out. We should definitely spend time and money on researching it.
(36:42):
But this is what we mean, fixing the planet is good business. I would be careful with the business angle of fusion, that's really a good returning investment. And can we, with the venture money, bring fusion to TRL 8? No, don't see it yet. But I don't want to disencourage any fusion founder. Go research. Go do it. It's a fantastic energy source. Maybe even burn LPs.
Jason Jacobs (37:06):
Great. Looking at both the early stage climate tech innovation landscape, but also just the broader perception of the problem and the path forwards. What are some of the differences that you're seeing between the US and Europe in that regard?
Sebastian Heitmann (37:23):
That's a good question. There are not that many differences, to be honest. I think the US and Europe are both trying to work on the energy supremacy, being leaders in this transformation. We don't see substantial different pathways, they're actually more or less aligned. And also if you look at these two different, the press likes to show them as opposing programs. The IRA and the Fit for 55 program, they're quite similar to be honest. There is not that many major differences. Where you say, oh, the US is really doing only whatever, turquoise hydrogen. Europe is somebody disregarding it. It's quite aligned actually if you look into the details. And also size-wise, actually not that different. They are both very attractive, very good programs. And again, few years ago it would've been unimaginable to have such a battle of subsidies. We don't see major differences.
(38:10):
Europe may be ahead in some legislation topics at the moment. We have these classified funds, Article 8 and 9. But I think US is all the SECs working on something at that front too. And let's do this together, not against each other. But a bit of competition is definitely not bad. And we see that, by the way. There's a good collaboration between, at least on the fund level, between the US and the European guys. What I'd like to see, more Asians too, to be honest. That's something we would love to see more coming in. Not that it doesn't exist, I'm sure there's some out there. We now, from our perspective, have a lot on our radar. But I do think that countries like Japan, Korea, Singapore, Malaysia, can actually bring up some relevant companies, some high-tech companies.
Jason Jacobs (38:53):
What about as it relates to institutional LPs? Any differences between the European LPs and the US?
Sebastian Heitmann (39:00):
Not really, to be honest. In most international, all the European LPs invest into all the US funds and vice versa. That these days we don't see any major differences there. No. In the US in general, LPs are way more accustomed and used to investing into VC category. The earlier stages, that's for sure. But we actually don't have any large US LPs onboard right now, it's mostly Europeans. But that's, again, or internationals, whatever. But it's just because we're not a local firm. I think the US firms have mostly US LPs on there, so that's just normal I think.
Jason Jacobs (39:36):
When I speak with some longtime investors in this space that have been around through multiple cycles, one worry that some of them have expressed to me is that as the flood of capital and attention comes to the space with fancy prices as it relates to valuations and lack of exits, that if a bunch of money gets lost, that it actually could be quite damaging to the space directionally. Is that a worry that you share? And how are you thinking about that generally when you see all this new capital coming in that didn't exist in 2018?
Sebastian Heitmann (40:19):
Of course it's a worry. Of course. And we have now the chance to prove that this is an asset class that can return. If we screw this up collectively, then this asset class will also disappear again. So we better give it the best shot. I don't think a single fund, something screws up will change that. That's always like this and I think investors know this. But yeah, we have to show results, also on the impact side, by the way, not just financially. We need to show that the stuff we'd invest in also actually has an impact, leads to a change. And on that front for sure. This is our probation period right now, we are to make sure to not waste it.
Jason Jacobs (40:55):
And when you think about the types of capital flowing in, definitely not asking for any firms by name, but are there characteristics of approaches that you've seen that are troubling to you, just generally?
Sebastian Heitmann (41:09):
I think about that. Don't think so. No, I don't think we have seen anything worrying yet. No. So far, at least the people we've been in touch with, are just mission alignment. With different types of people, a lot of the institutional capital, like the pension funds or the insurance companies, they're also the people who later on do all the debt and infrastructure finance. What they want is early exposure to these topics to see what is the next upcoming trend, and be early. And infrastructure to then be ready. We've seen banks with mandates like this who say, okay, we also large infrastructure financing institutions and we just wanted early exposure to the latest topics, and then they invest into some venture portfolios just to get early exposure. Worrying approaches? Not yet, no. To be honest, not. Maybe we've been lucky, but so far it's been just quite mission aligned. Some people more financially driven, others strategically driven. But, yeah.
Jason Jacobs (42:02):
Another thing that I've heard is just that there's an acute capital gap between equity and project finance that might not be the most promising place to get proper risk adjusted returns, but that needs to be solved for any asset class to make money. How real is that capital gap and how important is it that it gets addressed for the space overall?
Sebastian Heitmann (42:31):
I think this is the gap we're trying to close with venture capital. Like I said, we're trying to deploy this venture capital to bring these companies from TRL 5 to 8, to a state where they're bankable. This needs to be our goal, or where they can slowly become bankable. That's a role. That's exactly what I mentioned, that's the why we started the firm because we saw that gap is too big. This value of debt previously, you can't only grant finance it. That's exactly where venture capital is needed today.
Jason Jacobs (43:00):
When it comes to graduating from pilot phase and building that first commercial plant, and all the unknowns that come along with that, is the hope then that equity helps finance those early buildouts?
Sebastian Heitmann (43:15):
You always have to have. In first of a kind, there's always some equity. Ideally, our perfect formula is about 50% equity, reality is probably more about 70. But huge encourage also to of course find any non-dilutive sorts of capital funding which is definitely out there. And also see if you can get early on backing from some type of debt. That's also possible. In the first of a kind financing, there's a formula how to do this right. And it definitely should not be only equity, something would definitely not do.
Jason Jacobs (43:43):
If you weren't building Extantia and you could pick any lane you wanted, to both have the biggest impact and also the biggest opportunity in accelerating the transition and addressing the problem, do you know what you would be doing? Is there anything specific that comes to mind?
Sebastian Heitmann (43:58):
Of course, I'm exposed now to quite a few cool ideas. Sometimes you think about, this is pretty cool, this is pretty impactful. And to be honest, I would probably prefer to become an entrepreneur in this space. However, my background's not technical, unfortunately. As a successful entrepreneur in this space you have to be three things. You have to be great scientist coming up with a technological breakthrough, you have to be an amazing engineer who's able to scale this, and you have to be a great entrepreneur to finance it. It is very tough. It doesn't have to be in one person, but as a team of course those three skills are essential. Yeah, there's been always quite a few ideas where I thought this was super impactful. Like I mentioned earlier, some of these in the bio energy space, there's amazing opportunities.
(44:40):
Geothermal sounds also very exciting, but also other things. The whole carbon capture industry. I think there will be a lot of nice places to dedicate some time to that combined purpose with reward. There's many great technologies out there where I think it's worth spending time on, enable our society to continue to grow without necessarily reaching the planetary boundaries. And this is what it comes down to, we have to be able to grow in our planetary boundaries. I think we see more and more really cool companies, or technologies, or new industries or sectors that are appearing that will enable this. And so I would definitely like to continue to be in that space where I'm today. And maybe on the other side, on the entrepreneurial side.
Jason Jacobs (45:21):
And Sebastian, one thing that you and I share in common is that we have successfully transitioned from working on professional activities in other areas to putting climate and the energy transition front and center in our careers, as more people pick their heads up from wherever they happen to be working and want to do similar. I'm sure you've got a bunch of those types reaching out for advice. What do you tell them, and what advice do you have for anyone listening today who fits that profile?
Sebastian Heitmann (45:54):
In the end of the day, in order to understand the climate problem you can read a book or two. There's a couple of good books out there. Read John Doerr's book, or Bill Gates' book or something, they're pretty comprehensive on understanding the magnitude of the problem. Then the question is, okay, what your contributions to this? How can you contribute? Like I said, my answer, unfortunately, I could not technically come up with innovation myself. And by now I've seen some where I thought, I could have come up that myself too. But back in the days at least I didn't. I definitely encourage, and there's so many people with so many diverse skillsets, they're all needed in the transition. So pick it up. The problem is not hard to understand, the facts are pretty clear what's happening, what we need to do.
(46:35):
Like you said, it's multiple sectors, multiple industries. You can really start at very small level with yourself, your own house, whatever. But professionally, there's many, many different angles. And I encourage anybody to do this. Because at the end of the day, again, we are not making any differentiation between being only for impact, or it's always do this with impact. We will transition and be able to continue to grow. Again, it's a longer discussion, maybe it's not possible. We may have to adapt this or it's even likely that we have to adapt a society to things which are uncomfortable. Happy to talk to you about that on even another episode, that gets really the bigger topic. But for now, I think there's plenty of space and technologies where you can get involved in, and I encourage everybody to do it no matter what background you come from.
Jason Jacobs (47:24):
Great. And for anyone listening that's inspired by your work, who do you want to hear from, if anybody?
Sebastian Heitmann (47:31):
Of course, we all are happy to meet anyone who's like-minded, either you working on a solution, need funding, absolutely. Maybe even have a better idea on how to change our democracy and capitalistic system, happy to hear about that too. On the biggest talks, always keen to learn more. If you are an LP, well of course if you haven't heard from us or want to get involved, then we are happy to... Anyone who's like-minded, to be honest, without any further categorization. Happy to always meet like-minded people. Exchange.
Jason Jacobs (48:02):
And is there anything I didn't ask that I should have, or any parting words for listeners?
Sebastian Heitmann (48:06):
No, no. Other than thanks to you, Jason. I think also your work is very cool. I've been following your journey for quite some time, and it's really cool how you started off in being just intrigued in the topic. And that's really cool. I think it's been a real joy to be on, have a chat with you today. And I hope, like I said, we can continue one day. Maybe also in person. Whenever you come this side of the pond, let me know. And that we need more people like yourself who say, I'm going to try and understand this, I'm going to do this.
Jason Jacobs (48:34):
Well, one of my partners, Ty, will be at The Drop in case you'll be there in the fall.
Sebastian Heitmann (48:40):
Yeah, yeah. That's most likely be there, yeah. Very cool.
Jason Jacobs (48:45):
Great. Well, Sebastian, thanks again for coming on the show, and best of luck to you and the whole Extantia team.
Sebastian Heitmann (48:51):
Thank you very much, Jason. Have a great rest of your morning. It's afternoon here.
Jason Jacobs (48:56):
Thanks again for joining us on the My Climate Journey podcast.
Cody Simms (49:00):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (49:09):
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 (49:22):
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Jason Jacobs (49:32):
Thanks, and see you next episode.
