Our guest this week on CLIMB by VSC, is Raj Kapoor, a VC investor and founding partner of the venture capital firm Climactic. Prior to becoming a founding partner alongside Josh Felser, Raj has a depth of experience as both an operator - Raj as CSO at Lyft and previously CEO of Snapfish and Fitmob before that - in addition to his experience as an investor at Mayfield Fund.
Helping Enterprise Companies Achieve Net-Zero
Jay Kapoor: Roger, I feel like I can't do your entire background. I'm just gonna say thank you so much for joining us. Well, let's kick things off. Let's talk a little bit about that background that you have both as an investment operator and how that led you to found Climactic.
Raj Kapoor: Climate is the most pressing issue we are facing, so I thought, wow, why aren't I working on that? And so that was the kind of the genesis while I was a VC. And so I started investing at Mayfield looking at ways to harness what we learned from the internet like network effects and marketplaces. So in 2016, I had an idea around starting a fund that's focused around cities, and helping them decarbonize through smart technology investments. And I became Chief Strategy Officer at Lyft for four and a half years but we're still years away from true self driving, and in 2020 I realized that my talents could be best used if I went back to venture. A lot more capital efficiency, and real customers that wanted to buy products and generate revenue. And this was really climate tech. And so I partnered with a friend of mine, Josh Felder who I’ve known for over 20 years who's also been a repeat founder, also venture capitalist. And we joined forces and decided to start climactic at the end of 2020.
JK: Yeah. Fantastic to hear the trajectory, that journey I guess, what I'm interested in hearing, given that you sort of had one foot in the operating world, one foot in the investing world, and going back and forth so how has it changed the way that you look at the businesses that you invest in having operated sort of, in different decades around different technologies around different methods of customer acquisition? How does it change how you invest in it?
RK: Yeah, well, first of all, I think being an operator gives you a sense of humility, that you really don't have the answers to and so there's an ability to relate to the entrepreneur and a lot of the challenges that they're going through not just on a business level, but on a personal level. So that's super important. Lots of things change; every five years technology changes, platforms change, etc. Now what we're seeing is imperative to have the decarbonization of everything. And that opportunity is potentially even larger. And it's imperative to make sure that we have a planet that our children and grandchildren can enjoy.
JK: So when we think about climate thesis, or at least the primary thesis of helping enterprises you know, companies hit that zero emissions goal. What does that mean practically? And then where do the startups that you bass play into that?
RK: Yeah, so to take a step back, we looked at the problem of the decarbonization of everything. And we said there are three constituencies, there's consumers, there's governments and their enterprises, each of them have a role in decarbonisation. We look at government with “Okay, well, the government can solve it all through policy.” Clearly that hasn't happened. The reality is the enterprise is now pressured by investors, consumers, all and their leadership and their employees to decarbonize and most, in fact, 75% of worldwide GDP is now under that zero plan. And when we talk to a lot of these enterprises, we found that they have committed but they don't know how to get there. Innovation is key. We are really looking for businesses to create those products that consumers want that are negative or zero emission. Yeah.
JK: Let's talk about some of the companies that you've seen or that you've gotten excited by on, you know, as you've been building Climactic, what are the techniques or strategies that these companies have found most effective when trying to move enterprises towards that decarbonization that net zero result?
RK: You know, it's a lot like the digitization of everything where the first thing you have to do is measure. What we're seeing is a lot of exciting companies in the data and software space, which is unlike the clean tech where it was all about huge technology, deep tech like new solar Film, film or what have you. This is about blocking and tackling. And then there's a whole set of companies that can help you around the supply chain around manufacturing, and around creating new products for consumers that are lower carbon.
JK: So you mentioned in TechCrunch, when Climactic was announced that you believe that investing in startups that don't have to sacrifice value in the pursuit of environmental friendliness is important as a priority. What kind of businesses meet that criteria? You mentioned earlier to that consumers don't necessarily want to pay higher prices to do things that are green. So litres of material and you know what kind of deals have you worked on that?
RK: Yeah, so an example of that. Also, first of all, it's even more important right now in this recessionary environment that we're in because companies will delay if there's an extra cost around emission reduction. So it's really finding that sweet spot that provides them usually it's around efficiency. So if they use this, for example, there's a company that as I mentioned, on cyanide, where they basically they're coming in measuring emissions, also being able to look at what is the efficiency and take it to the supply chain, and notice where their supply chain problems are.
JK: So Raji mentioned in TechCrunch, that investing in startups that don't have to sacrifice value in the pursuit of environmental friendliness is a priority for what kind of businesses meet this criteria. Are there any deals that you've worked on that fit that model?
RK: Not sacrificing value is absolutely critical, especially now in a recessionary environment. Businesses are looking for solutions that not just lower emissions, but also lower costs. Usually it's through increased efficiency. Any company that is helping companies measure is usually also helping them with efficiency. So even though they're measuring carbon, they're also looking at how they can be more efficient in reducing the carbon of the operations as well.
JK: Now, that's fantastic. And I think he sort of said it, well, you cannot change what you cannot measure. And for so long, there hasn't been a standardized, agreed-upon set of metrics and I feel like now that companies are focused on this, you need to start establishing that as well. Are there any categories that you feel are overhyped or overfunded when it comes to climate technology?
RK: So at a macro level, there are some areas that for example, FinTech around solar, there are some really exciting companies, but now there are a ton of companies that are jumping into that space, where there's too many companies going into it and the question is, how big is the moat there? Can they all survive? Or is it just going to be a few and its train already left the station because there's already companies that have been created in that area. So that's one example. But I would say overall, we're underfunded.
JK: Yeah. greenwashing continues to be a term that comes up especially as you and I get pitched to companies that are slapping a climate label on top of whatever technology is already building. How do you make sure your portfolio companies don't fall into that trap of being labeled under greenwashing and what are criteria that you look for when you're evaluating deals to make sure that they are actually contributing to decarbonization, but that it's not sort of in a moment.
RK: When you do a venture capital investment memo, typically you look at the economics of it. There's lack of data that's there, but you do your best to see what is there. Now the founders of these companies are absolutely committed to climate change reduction. And so usually that's not an issue, their mission or their vision that people joined, are all about going after that.
JK: Maybe this is the cynic in me but my guess is there an independent audit of these companies when they make certain claims that says “Hey, you know, we're reducing X kilotons per year at scale.” Like, is that something that you're doing in diligence where you're saying, “Okay, well, we actually want to audit the work specifically” or is there an independent body or agency that actually qualifies this?
RK: There are several independent agencies that exist specifically exist in the area of carbon credits. So if a company or startup says, Hey, I'm reducing emissions, or I'm sequestering carbon from the environment, or trees or soil or what have you, there's third parties that will validate. Okay, how much whatever the methodology is? What's the true co2 tons that they're avoiding or sequestering? So there are a lot of people that are working on this, there aren't isn't one standard yet. It's an area that's frankly moving a little slow.
JK: Is there anything specific that you feel like you know, for the climate founders that are watching or listening to this, that they need to do differently as opposed to founders in genera.
RK: First of all there especially now, literally last few weeks, there's there's a huge amount of money that is available nondilutive as grants and loans depending on the stage of a company. So being able to navigate that landscape of government money, and even philanthropic money is something that climate check is unique in doing it. Secondly, the intersection with policy. We don't like to make bets where it relies on a policy change, but it can accelerate and augment a company. So being savvy around what policy exists or what policy is coming is another element. That's important.
JK: I happen to agree with you that we cannot rely on the government solely to be actually taking the action. You know, subsidies and dollars being available are certainly positive. How do you price in or consider government creating a negative impact on the companies that you're looking at? Are there certain categories that you stay away from, given the impact that government actions might have on that business model?
RK: So we do look at understanding where they're going to face headwinds in the future and are they aware that you can't follow the headwinds at the earliest stage, but if you have an entrepreneur that understands them, and that we can help them, build up a team and think through the strategy on it, that's really important as well.
JK: For hiring, what have you seen work? What's been productive when your founders are going out there and trying to recruit top tier talent to come work on climate?
RK: What we're seeing is that there's top tier talent who's raising their hand and saying, I want to work on something meaningful. And then in terms of recruiting, it really does come down to the mission, and what kind of legacy does that person want to leave, which is supercritical. And so it has not been a problem.
JK: And do you think from a fund construction standpoint, that changes how you think about, you know, timelines and time horizons? You know, we talked about clean tech, lots of heavy investment and maybe not the most capital-efficient category. When you think about climactic and how you build, does it change the time horizons that you have for your funding?
RK: So I think this is where there are different strategies that venture capital venture firms have in climate. So example again, Breakthrough Energy ventures, which is Bill Gates, this fund has deliberately created a fund that is 20 plus years, and it's important because to go after some of those massive big structural deep technology, opportunities like fusion, you need to have that long term viewpoint. For us. We're going after more of the here and now and less of a deep tech set.
JK: I like it. I think when I come back to the need to increase the number of founders that are actively building in the space, I come back to how much venture capital is flowing in, right, you talked about 40 billion in venture capital flowing into climate tech. Broadly, what is advice that you would have for founders that are just starting out in this space that are looking to access that capital? What do they need to be doing in order to get funded as a climate tech startup?
RK: I think we have a great little ecosystem that is growing fast, that can help them so whether it's people like us or accelerators that exist, there's Elemental Accelerator, there's Powerhouse Ventures, a number of different organizations that work with first time or even repeat founders from general tech that are jumping over to climate tech climate draft, as I mentioned. So there are a number of different ways that they can come up to speed on the industry. So whatever vertical you're in, there's a way to come in and jump on to climate tech as well.
JK: What surprised you the most coming from you know, general investing and spending time and wellness and other categories to now investing in climate? Is it anything about the founders or just the businesses themselves that surprised you the most?
RK: It's a good question. I find the founders to be very similar, except probably a bit more mission-oriented than the average tech company that's there. And we know that we have a journey ahead of us to 2050 to hit the goal for the planet. So that helps align everyone toward long-term thinking.
JK: So we like to close with a lot of our guests knowing what you know, now as an investor in climate tech companies, what is a piece of advice you would give your younger self?
RK: My first idea is, hey, you should have done this earlier. The other advice that I would give to my younger self is to keep learning and have an open and curious mind. I wish I would have spent more time looking at even a broader set of industries than I have. So my challenge is how can I learn as much as I possibly can to add value and to pick the best founder?
JK: Well, Raj, this is fantastic. I mean, I learned a ton today, especially about the fact that enterprises are starting to move forward and taking their net zero goals seriously. We've got to be holding them accountable. And the way to do that is to actually have real measurement. And then from that measurement, real insights that they can actually act on that are actionable. So that's sort of my biggest takeaway for today. Raj, where can people find you and Climactic if they want to work with you?
RK: A brand new exciting website: Climactic.vc. So check it out.
JK: Fantastic, Raj. Thank you so much for joining us on Climb and we are excited for all the success coming your way and Climactic. Thanks.
RK: Thank you so much
