Climb By VSC: Episode 23

Published April 5th, 2023

Tom Chi is the Founding Partner at At One Ventures based in San Francisco. At One Ventures focuses on backing early-stage startups that use deep technology to reduce planetary footprint. He's played a significant role in established projects with global reach (Microsoft Outlook, Yahoo Search, Google), and scaled new projects from conception to significance. Tom holds a Master's of Electrical Engineering from Cornell University and is currently utilizing his passion for climate to mentor social entrepreneurs and help the next generation of climate tech startups scale.

Price Parity Isn't The Best Metric For Climate Tech

Vijay Chattha: Hi everybody. Welcome back to another episode of Climb by VSC where we talk to company builders in the climate technology space today, really excited to have Tom Chi on board. He's a founding partner at At One Ventures, and they're focused on backing early stage startups that use technology to reduce our planetaries footprint. Tom has had a great career. He's worked at a variety of companies, sort of starting back in the day a fortune 500 companies from consultant to executive beyond, helped to grow Yahoo from zero to 90 million users. As Senior Director of Product and user experience, went on to work at Google X as head of product experience. His team developed Google Glass and Google's self-driving car. Tom also then went into the VC world and then stuck it out with his own fund. I've gotten to know Tom over the last two and a half years and I found him to be one of the smartest people in the space. So really excited to have you on board today. Tom, thanks for joining us. And yeah, tell us a little bit about your journey to At One Ventures.

Tom Chi: Yeah, so as mentioned, I had a pretty long career in technology as an inventor, as a designer, as an engineer, and then eventually as senior manager and executive. In the intro, that I helped to scale things like Yahoo Answers, Yahoo search a bunch of their social properties, so not all of Yahoo from zero to 90 million because it was past 90 million when I first joined, but it means I have a combination of invention experiences executive experiences, that helped to run a couple multibillion dollar businesses. Across 44 countries. I've named adventure on 77 patterns that span hardware, software, advanced algorithms, design, and some mechanical things. And relative to the journey to what I'm doing now, then, you know, my formal training is in physics and electrical engineering, and I spent a lot of my early career doing really advanced engineering research. So super high speed control systems with control base, you know, autonomous robots that fly, crawl and roll though. I'm now working on a robot to replant coral reefs. So that's like the first autonomous robot I'm working on that swims. You know, I worked on advanced sensor fusion for medical imaging that blended you know, CT, MRI and ultrasound data into kind of a combined sensor fused dataset. I worked on cache coherence, the bench multiprocessors for scaling out large, you know, computing systems. So, anyway, it just had a background in building really advanced things, and then kind of moved into the software world, the web world and was part of scaling up a bunch of properties at Yahoo. And that kind of led to learning a lot of that executive experience. In fact, the pertinent part of this is during that process, when I started making that executive salary in Silicon Valley. My wife suggested “Hey, let's go get a vacation. Home out in Hawaii.” And I was like, Sure, we got the money. Let's do it. So I got this place in Hawaii. That was a two minute walk from the front door to an astoundingly beautiful coral reef. And when you're that close to something that beautiful then every time was out there and spent a lot of time in the reef. And we had the place starting in 2006. And in 2011, I watched that reef go from every color of the rainbow and light coming out of every corner. And I watched it turn to gray and brown and no light in less than two months. And what I had witnessed was a mass bleaching and reef collapse event. And it kind of kicked off this whole journey of deeper understanding of how, you know, how close these climate changes were happening, how close these disruptions were going to be. That led to me understanding some really critical things about climate which are still not really being talked about. At large scale yet, which is, you know, my reef died. I went and talked with a bunch of coral scientists. Now in order to understand what happened. They told me that it was because of thermal stress, and the thermal stress was related to the overall planet warming. And that's great. I mean, it's not great at all. But at least I knew what the cause was. But then as I dug into the statistics, I'm warming up because I was like, Man, this is happening so much sooner than the IPCC kind of indicated. I started to realize something really important about the communication from the IPCC. So the IPCC from the methodology side, really great research, really solid data, all that sort of thing, but they have kind of centralized their communication into a single metric around average temperature rise by the year 2100. And we hear this all the time. Let's keep it under 1.5 degrees C. Here's the two degrees scenario. Here's the three scenarios. But there's all around a metric of average temperature rise. And when I realized after my coral reef died, I actually went back to a bunch of the raw data that kind of backs the IPCC reports. And I realized that there was another metric that was in the data that was moving quite substantially, and was probably more important than the averages, which is that the volatility of temperature was increasing way faster than the averages were increasing. And it's actually the volatility so like, what a half a degree increase in one spot on the planet might mean. It may practically mean five degrees hotter in the summer, four degrees colder in the winter. And truthfully, if nature just happened to be warmer every single day of the year, then most ecosystems would be fine. You know, if, if nature was one degree warmer every single day of the year, most ecosystems will be fine, but it's that big swing in the volatility, they're really high highs and really low lows, the really wet, wet, really dry dries, that are basically causing the disruption and is driving the extinction. So it's really the volatility that is the killing edge of climate. It is not the average temperature rise, and we should be tracking volatility as the core metric because it's the one that is way closer to what is going to lead to human and, and ecosystem negative effects. Anyway, with that realization, I was like, Okay, this looks very bad because if you follow the volatility curves for it, as opposed to the averages curves, and this was back in 2011 2012, was doing these calculations as following these these curves forward and I was like, man, you know, the volatility keeps increasing in this way. Within 10 years. We're going to be having massive, massive problems, right? We're going to be having major floods, major droughts, major fires, all that sort of thing. This was just like projecting forward models based on the volatility. And now that said, if you think back to 2011, I don't even know that people will remember that. But this is before the Paris climate accord was signed. This was you know, when people were still just talking about average temperature rise, sea level rise. Obviously, some people were talking urgently, but certainly nobody was talking about volatility. And when I looked into the volatility numbers, I was like, we got that story. But the most important story is volatility. Honestly, the average temperature rise increased by zero, but the volatility kept increasing like it was basically extinct. I know I'm getting a price now that said they do move in concert. So I'm not saying that you could separate them, but I will tell you that the volatility is the killing aspects of the averages are now yeah, that said, with that realization, I was like, Oh my gosh, well, if I really believe my own calculations, that within 10 years that these major negative events would be arriving, then what are you going to do about it? And you know, I was this person that had a lot of really good technical skills and, and some pretty good leadership skills. And I was like, Well, yeah, let's see. If I can do something productive for the climate. So, you know, I was an executive at the time. So I was one of the executives that helped to, you know, found and scale the Google X team. So I was the sixth person on the team as the head of product experience to help to scale it to 300 people creating the self-driving car, Gold Class, Project Loon, all that, that sort of thing. So given my executive background, my first thought was, well, let me just do it the way an executive would do, which is let me just go find some people to organize as opposed to do the work directly. And I kind of went around the world trying to go find the people that were doing the most compelling work. And I quickly started to rule out a number of folks that were at the forefront. And I don't mean this in a negative way, because I actually do think that these are earnest people that are smart, that are working hard, but I think they've been working hard on theories of change, which are not going to be the complete way that we solve this. Right. So, you know, back in 2011, 2012, when you talked about that there is a change. A lot of it was well, we just need to be politically organized and if we're marching in the streets, and if we put political pressure and we can get the right people into office and then we can force him to do those policies and then that's going to save the climate. And you know, we push pretty hard on that but what we saw is you know if Obama like did a number of improvements, you know, when when wanted to push to a more blended energy mix, including more renewables, you know, created the largest marine protected area ever created in history, like, you know, like protected a lot of our critical natural resources. And then Trump got into power and was reversed instantly about half of it. And it's like, well, is this a viable theory of change is this a viable theory of change if you need to spend years and years politically organizing in order to get something through just for the thing to be undone, and four years later, because that's not the level of, of continuity that we need to succeed at this task? Like we need to be like on a clear, aggressive plan for like 50 years. We can't necessarily be tossing back and forth every four years, every five years, depending on the political system. So I was like, Okay, well, a lot of energy is going to that theory of change that I didn't know if that's going to really make it. That seems incomplete. I'm not saying there aren't some places where policy can help, but it seems incomplete. Another theory of change that was out there was like, oh, launching those green businesses. And then I started looking into a lot of the green businesses at the time, and I would say easily 90% of them and that's probably still being generous as well. More than 90% of them were back in 2011-2012. Were folks that were just trying to do a little bit better for the planet and then charging a big green premium for it. So this is where you get like the T-shirts that have T recycled water bottles in them or the $100 yoga pants with you know eight recycled water bottles or the bamboo handle toothbrush or the straw that is made of paper. And you're like, Well, I generally get what you're trying to go after. But when you talk about the displacement that you're moving over to the greener side of things, it's quite trivial. And when you talk about charging a green premium for it, it sounds good on the business side of it, but because like oh, you're maybe making larger margins per unit sale, and all kinds of things, but in practice, you're never going to displace the entire market like that. You know, you're gonna get the 1% of people that are willing to pay a bit more in order to have their consciences settled a bit. But that's not the majority of the market. So, I don't say this to put people under the bus. I mean, for example, I know that the people have had a lot of these companies like Allbirds, for example. They are good people that want to do good work in the world, and they're trying their best in order to do it. But you look at the shoe, it's not a higher performance shoe. It's not a cheaper shoe. It's just a you know, it's a shoe that's made of somewhat more sustainable materials. And given that it requires a green premium, because there's obviously a bunch of shoes that are less expensive, that actually are higher performance relative to running or, you know, protection from the elements and all that sort of thing. Then like, you kind of think in the best case scenario, one to 2% Market share over 10 years. And that's over a time period where the global demand for shoes is probably going to grow by five to 7% just with population, and then you kind of look at that and you say like, well, that means we actually ended this decade with more shoe waste than what we started even though like these, you know, committed hardworking people are pushing on this for a decade. They actually end up with more wasted. So I'm not even trying to say that they aren't smart people, that they aren't hardworking, that the target that you choose matters a lot. And, you know, the kind of theories of change that were available back then were the political theory of change. The social business theory of change, largely built off of green premiums. And I was like, none of this stuff is gonna get us there. And I kind of, you know, I, those calculations actually led to me leaving Google and taking a sabbatical and going to all the places in the world where this ecological damage was happening. So I went to the places where you know, they were clearly cutting the Southeast Asian reinforced and putting up the Como plantations, the places in the Amazon where they don't even bother with the timber they just slash and burn in order to do soybean and cattle. You know, the places where the glaciers were having it 100 x rayed compared to just 20 years prior. And like by being close up with the actual damage, being close up with the situations that are helping to go drive that damage in the world, like in terms of like the local economic incentives around palm oil in or around production of various things that are having us destroy the planet than it just gave me a really intimate view of the kind of interconnections that if we could just, you know, nudge this here or change this here or move the target three degrees over there, then we could actually get a lot of things done. And there is, you know, for a person who's a designer and engineer and I know a bunch of your your audience is that then when you're fully surrounded by the totality of the problem, as opposed to the abstract numbers on the problem, then you can't help but start, you know, thinking of solutions. So, you know, if you have an abstract number, like 850 million people don't have access to clean water, which is about the right number then you honestly don't know what to do. But if you see why well projects are failing in Mali up close, or you see why actually there's plenty of water in Guatemala and the rainy season, but it's not all drinkable For these reasons, then like you will actually start to come up with ways that you might be able to make a difference there. As opposed to just thinking about it abstractly in a one big number. Now, of course, you need to be referenced to the big number because ultimately you want to move the big number, but like you will get the good solutions by being up close in the weeds around the specific ways that things are going around on the ground. Anyhow, I did that. I met a bunch of entrepreneurs and I met a lot of really compelling organizations that were doing work on the ground all around the world, for the betterment of the planet and for society. And I started angel investing as I can. So brought some capital there, helped to organize some rounds, started mentoring the teams and really got up to speed on the space. And at the time. I actually didn't realize I was doing venture capital. I had made up a fake title for myself as an odd lab director for the planet, because I was a former scientist, so that was a role that I understood as a lab director in science inside of a scientific lab. They know all the projects in the lab, they make sure that the projects that are most promising are well staffed, well funded, that the research is connected with industry or connected with publishing and really productive ways. And you know, if there's a bunch of work in the lab that is less useful or could be more useful as an input, then they provide that input. And my thought was like, Well, I just want to do a job like that. I want to do a lab director job, but where the scope is the totality of the planet, and the purpose is the health of the planet. And ergo the title lab director for the planet. And that led to me, meeting a bunch of these teams, helping them have, you know, bring on the right staff, getting them the right sort of financial resources, doing all the stuff that electric or does connecting them up so that their work is seeing the light of day on the other side of things. And I realized a couple years into that. It's like, oh, I'm basically doing venture capitals. And that led me to wanting to learn how to do venture capital forms. So I worked at crosslink capital and also hacked VC. And between the two, I learned a lot of what I needed to learn to go start my own firm which I then decided to do in 2018 and kicked off in 2018.

VC: Thank you for that understanding. Let's talk about the sort of your role now outlined. So let's talk about the investing framework.

TC: Yeah, so we're always looking for the triad which is a disruptive deep tech, which is ushering in radically better unit economics paradigms radically better environmental economics. And the better unit economics speaks to what I was saying before, like a green premium. Your best case scenario is to get a couple percent market share, you know, so that's just not going to change enough mass or energy to be interesting relative to changing how that industry works on the planet. So you definitely can't be more expensive, but you know what it parody be okay, because a lot of people that are in the green premium camp, they kind of say like, well, when we get to the world where this is just as expensive is that like, as soon as you know, this clean thing gets the same optics is this dirty thing we win. Now it's like no, you don't win, because we've been out in the factories. And I will tell you what actually happens in that situation is, let's say current industry has got an OP x of 100 blanks per, you know, widget they're making, and then you come with the clean green option which also has got op x of 100 per unit. Fantastic. Well, yeah, the clean thing. And it's got the same optics as the dirty thing. That's the Holy Grail, right? That's the crossover point where everybody's going to use clean things. No, if you go to the factory owner and you present them with that, they'll be like, Okay, so let me get this straight. I can go from my dirty stuff, which is 100 per unit. And I can move over to your clean stuff, which is 100 per unit. And all I need to do is get rid of $100 million for productive capex to get it and the conversation is over. Right now the fact that people even consider parody to be a spot that we should land at means that they're not spending enough time out in industry relative to the folks that are actually doing this work because the people will give you that answer in 30 seconds. And I think we need to be realistic that that's not even an interesting goal, right? Like parody is hardly even the starting point. Like I want to be nice and say parody is the starting point. And as you get cheaper than then, then the game really begins. But in practice, it's nowhere. Like you can almost do nothing with parity. The only situation where parody might be interesting is if it's an industry where most of the build out is Greenfield and you don't have much established industry yet. But if you have brownfield and you have a bunch of CapEx inertia where they need to upgrade equipment to get the clean offense then sorry, you need to beat the unit economics by a lot. You can't beat it by, you definitely can't get to parody and you also can't win by a nudge. Nudge to me might be 5% better. 10% better, and I see lots of deals. That is in that category as well as the bar is actually substantially higher, and it's roughly whatever the margin is in your industry. So let's say you're in one of these manufacturing industries with a 20% margin. We want to go find the deep tech that crashes the cost of production by more than 3x that margin. So you got a 20% margin in your industry when the cost of production crashed by 60%. And I will tell you that that level of optics when that level of unit economics then gets people out of their seats, and we're seeing that in terms of the speed and intensity of revenue traction that our companies are getting once we get them over the manufacturing hurdle. Like once you get them over that then you know things are taking off because people have been waiting for that type of unit economics for a long time. Now, what you want to do is you want those unit economics and the force that comes with that to be intimately paired inextricably paired with the environmental benefits. Right. So for example, one of the largest wastewater producing industries on the planet is textile dyeing. And in one of our investments, the disruptive deep Tech is a new machine that is able to go do textile dyeing in this compelling new way. The unit economics are two and a half to 3x better in terms of the op x so instead of costing 28 to 35 cents to go die. A length of fabric costs nine to 15 cents to go die that same way. Right so two and a half to 3x cheaper in terms of op X. You know the payback time on the machine is less than two years because of that, and then beyond that it's pure profit and these machines you know, last 15 years, you know, plus and, and the reason that we get all that OPIC savings is because we don't go and most of the most of the optics inside a textile dyeing is used to heat water. So we actually get rid of all the water from the system other than the minimal amount of water that's required to carry dye into a fabric which reduces our the load of water by more than a factor of a million and in that process, we actually get rid of all the heat that's required to go heat up all that water because we're dealing with a tiny fraction of the volume of water compared to traditional textile dyeing. So we saved all that up x, which is just to say that the unit economic wind is completely inextricable from the environmental economic wind, the reason we don't have wastewater from that system as we don't even use it in the first place. And the reason that we get the optics win is because we don't spend all that energy heating up water. Now, when you get that going in the triad, then you get so many nice advantages. The first thing I already mentioned is that you get those unit economics that drive me insane sales velocity, you know, excellent revenue growth, excellent market traction in a venture appropriate amount of time, especially in hardware businesses, people are concerned about that. I think we've cracked the code on that pretty well. If you look at the revenue traction of our companies, the other thing that you get is you don't need to, you know, worry about this triple bottom line, integrated bottom line kind of concept. We say, Well, we have our economic goals, and we have our ecological goals. We don't want to go too hard on the economy because it starts to trade off the ecological and so on and so forth. It's like no, no if, if the unit economic and ecological economics are that intertwined, then just a win economically is the same thing as winning ecologically. And that is so much easier in terms of the scaling of the business. Right, if at every juncture, we grew by 10x and we had to stop and be like, Oh, are we now you know, over emphasizing the economic role and now hurting the ecological looks? Now we have to retrench. Because, right, we're getting off track. If you have to do that, which a lot of businesses need to do because they don't have that intimate pairing of the two, then I don't know it's like an anchor around. Your neck. And, like, what you want to do is you want to have done the harder work up front. So those things are true. And then you can just go all out like roll up the sleeves and scale a compelling business and just know the impact is coming alongside with it.

VC: This is your number one framework right. So I'm assuming that in some ways 95 to 99% of companies that you talk to do not meet the trial.

TC: Oh, substantially less than 5%. Yeah. Now because the unit economics are really intense. Also our ecological our bar for Ecological Economics is also quite high. You know, a lot of change, like, oh, this avoids a million tons of emissions and for us was like, Nah, not that interesting. It's like, you know, at least hundreds of millions into the billions if we're talking about emissions reductions because you need to go talk about it relative to the real scale of the problem. And I think that's the other place where people are falling down a bit. You know, there's 50 billion tons of co2 E on a GDF GWP of 100. And, you know, when your best case scenario is to get a fraction of a billion after 30 years, then it's just not interesting. And beyond the net output, which is the 50 billion, then we have the kind of the overage that we've already accumulated up in the atmosphere in the oceans, which comes out to closer to like 1.6 to 1.7 trillion tons. So you need to think about what it would take to pay down 1.6 to 1.7 trillion tons and grow. Of course, like each year that we don't get a handle on emissions, and that tally grows even further. And the rate that we're going we're going to add at least another trillion tons of that tally before we actually round the corner and start, you know, paying down our debts in the atmosphere.

VC: So let's talk about your company. So I know it's like having kids, there's no favorites, but what are one or two examples of companies that you're really excited about right now?

TC: Yeah, I mean, if I use the business lens, I guess I can throw out some stats. So we in our fund one so we did 150 million fund one with 27 bets in it. We are five bets into our fun two and we are halfway through fund two fundraising as well because we did our first close and we have, you know, five and a half more months to finish raising. We raised to 15 out of 300 so far and fun to anyway, the stats on fun one in fun one, you know, we got it about 80% of our bets we got into pre revenue the other 20% had some revenue but has pretty low revenue, you know, like 50k 100k, you know, sort of revenue and circuit today with an average hold time of a little over 20 months. Then we have three quarters of our companies are now in revenue so moving up quite a bit from 20%. You know, of the ones that have the overall portfolio half of it is in the millions in revenue. Seven out of 27 are above 10 million in revenue and two out of 27 above 100 milli so that's a huge amount of attraction in a short amount of time for physical businesses and climate. Honestly, if this is software for a portfolio of 27 companies where you came in 80% pre revenue, that would be a huge amount of traction. But this is what I mean by getting this unit economics right. Because I'm not running into a bunch of other fund fund managers that are getting this much business traction with their climate bets. You know, like they might have similar stats in terms of percentage of companies that have gotten to some type of revenue, but definitely not in this level of scale. So I look at that and oh yes and just to answer your question directly well because it addresses it very cleanly because two are over 100 million, right? So we're just talking about those two. So one of them is actually Rome Electric, which is based in Nairobi, Kenya, and they're focused on electrification, the African continent and specifically building the vehicles that are appropriate for African roads and power infrastructure. So they basically have two contracts, one for 90,000,001 for 30 million that they're executing into right now. Those are big purchases, like b2b etc. And then the other one is ascending elements, which is the best optics, lithium battery recycling on the planet. So they're currently building the largest battery recycling plant in all of North America and are going to end this year with over 100 million in revenue and be fully profitable as a company. So I'm very excited about that level of traction after this much time. So I send elements was a pre revenue deal when we invested and, and Robolectric had, like, you know, 100k Couple 100k in revenue in its entire history when we invested

VC: What else did the founders rely on you for as their scaling if anything? So just, there's so many funds right now, especially climate, but the question a lot of founders will ask is sort of, you know, are there specific value as you provide or why don't why don't people keep coming? Back to that one?

TC: Yeah, so we lead or had the largest check in 80% of our first placements and fund one. So we both lead and follow but we are leading more often than following, especially in our first placements. In terms of the specific value ads then I would describe it as that there's three places where we get our alpha first is that we're an unusually technical team, which means we're good at identifying things that are going to work before other people recognize that they're going to work. Just in terms of understanding the tech before you already have the commercial traction or other already have all these other proof points that non technical people can wrap their heads around. But that same technical expertise also helps us in terms of getting through any remaining engineering de risk and getting over the manufacturing de risk. So that's one source Alpha likes your technical skills and drives that kind of thing. The second source of alpha is our very business fundamentals. So we're very used to helping folks build out the go to market you know, the realization of revenue, and we're quite good at helping our companies get to their first five to 10 million in revenue from some of the stats a second ago, like a bunch of companies well on that journey. The ones that are low millions, we're definitely going to get them up into high millions, you know, in the next year or so. And it's just kind of like a pipeline for us where we're quite good at helping folks Practicode on how to break into their market and remember if you have those kinds of unit economics, then people are wanting them anyhow. Right? So the whole thing where you need to knock on 1000 doors in order to close that first b2b sale. That's not our, that's not our world. And our world by the time a couple people actually understand the new unit economics and they can get over the level of comfort of the manufacturing maturity, then you're good to go. Things go quite fast at that point. Then the third source of alpha is a little bit unusual, but I call it entity janitorial. Because and maybe this will be less so going forward, but historically, a lot of deep tech and hardware deals have had you know fewer investors interested and therefore they've sometimes accepted funkiness where you know this, this angel has a 3x super pro rata that's built in and it's gonna like tank the next round for you know, this or, you know, they spun out of this university with this oppressive, you know, licensing term from the, from the university. And a lot of folks look at that. It's like, oh, look, there's this mess on the deal. Oh, they have these advisors, you know that they have these people that are really advisors, but they put them on the governance board. So the governance is a mess. So like a lot of people will kind of see these things and be like, yeah, it's a little too messy a deal. I gotta walk but the way that we look at it is it's extremely rare to go find the tech that can beat unit economics by that much. So that's rare. And what's not rare is lawyers. And if you can use some lawyers to go clean up, you know, if you can use the unfair thing to clean up the rare thing, then you can create a lot of value doing that. So a lot of folks will look at that deal and say, Oh, it's 25% Messy come back when they 've cleaned it up. It'll kind of tell him the team that but we'll look at that. It's like no, you guys have got the unit economics at the core. This is amazing. So let me you know, let us work together to clean up that 25% And then we'll get the deal done. Alright, so we'll put in those cycles ahead of getting the deal done as part of leading basically. So I think because of that then yeah, we also, we've only lost one term sheet that we've extended, we've won all the other ones. So our win ratio is like north of 95%. So I think for the most part entrepreneurs all recognize the kind of values that we're going to bring even just from the first couple conversations.

VC: So that's great. And let's talk about the process of helping them like what that looks like for once you find a company. Is it there like an onboarding period where they go through these things? Is it sort of whatever they need help with? Is there like a process to walk them through manufacturing and sales? How programmatic is it? Just, I think a lot of times they always ask for things like, Okay, that sounds great. Like how does it actually work in theory

TC: so it's actually pretty straightforward, which is that the partners have a lot of depth and in their historic backgrounds, and we can map the right partner onto the right deal. So Laurie has a huge amount of background in biology and chemistry. You know, she was heading up a North America venture for BASF before she joined us, and because of that we can, like, get her to be helping the companies that intersect with biology, chemistry or materials. And then I have got a background in electrical engineering, you know, software, including advanced algorithms and artificial intelligence. You know, because I built a lot of robots that I know a bit of mechanical engineering, like the mechatronic aspect of it. So if you like mechanical, electrical software or physics then you know, that's kind of my deal. And it's like some of it is mapping to the right partner, because that person just has a wealth of experience in the kind of the zone that you're operating in. But then secondarily, we actually are always trying to find out from our portfolio companies what they still need the most help with. So at the end of 2021, we put out our annual survey and we were the most helpful investor on the cap table for about two thirds of our company. So we were number two for the rest. And I was like, Well, how come? We're number two, and a third of these so you get our mindset a little bit. And what we found out is that the things that were missing is that they wanted a lot more support relative to hiring. Key folks for the team. They wanted more support in terms of being able to go to market and get their message out there in a clear way. And they also wanted more manufacturing support. So like, so we basically brought on hires for all three of those things. And at the end of 2022 like a year later then we're getting extremely high marks on all three of those things. So like it works in an extremely practical way, just like any design process, we are constantly getting feedback from our portfolio companies in terms of what's the what's the center of gravity of that. Just want to give them the most bang for the buck in terms of the hours that we're going to be together because, you know, sometimes people just throw more time at a thing and that is sometimes a good indication it's better than nothing, you know, in terms of how you're supporting a team, but we also think about efficacy per minute, right? So we are going to spend some time with you and obviously if there's more need we will spend more time with you. But for even the regular things, just the regular checkups that we do, how do we get the most efficiency per minute? And like what are the real challenges that are slowing you down? And we really kind of put the right people in place to address those challenges and with any given you know, you almost think about it like a toolkit that you can draw from because this particular company may not need manufacturing. Right now, they may need other help, maybe in hiring, so that we'll just send over the right resources related to that, and we'll focus on that with them. And then a different company is completely in the manufacturing, you know, push right now and they will be for the next eight months. And that's really all we're going to do with them during that time period. And of course, fundraising as a backdrop for all of this, like we're always helping folks fundraise the next round, and we also set aside one and a half x the initial placement and reserves of course, he's still got to earn it. But yeah,

VC: I appreciate that. That's a really good way to think about what sort of person needs the value and how to give it to them. Let's talk about hardware and software. So it's clear that you know you don't shy away from hardware outside of climate hardware, still a four letter word for most investors. So let's talk to talk to me about sort of, what is your breakdown between hardware and software investing? And I know we talked earlier, but generally like, what is your view also sort of software centric investing as well?

TC: Yeah, so as of this moment, we have 32 portfolio companies all together between fund one and fund two, that we have three and post term sheet diligence right now. So we're about to be up to 35 out of 35 investments. We have one software investment so that gives you the ratio. So 34 out of 35 are physical hardware. The reason to go do that is by my best understanding, fixing the main things that need to be fixed for the climate. These are all physical industries. And I'm not saying that none of these industries use software at all, but a lot of the industries use no software or minimal software. You know, like there are their steel plants and their cement plants where you know, there's not a line of code running on the premises. Like if you want to argue that like a little bit of microcontroller code and a PLC, you know, oh, that software, it's like, yeah, I mean, kind of, like some premises don't even have that. So like you look at things like well, that's where a lot of the emissions are coming from, you know, steel cement, chemical separations, and the petrochemical, you know, industry, aluminum, and, look, you know, these are not software problems, and it's actually pretty hard to imagine how software goes in there and changes the, the important part of the mass energy balance, right, because that basically comes down to just a physical process which is not affected no matter how many lines of code that you that you write. Now, that means if you want to go fix that you need to go and change the physical thing that's happening at the core. You can't just, you know, change a bunch of software around the margins. So I would estimate that maybe only 5% of the climate problem can be solved with software. And 95% of it is going to be physical hardware, these sorts of things. So the first answer to your question is we do it in this proportion because that is appropriate for the problem. Right? If you actually want to solve the problem, you gotta go meet it in the proportions that the problem is that but I think the the other reason that hardware is a four letter word and venture is that we kind of got infected with this like software and enterprise SAS disease and because of it, you know, everybody that does hardware is trying to enterprise classify it, right, like I got an inquiry from a entrepreneur that's like selling a device that like puffs up a pillow if it hears you snoring. And it's supposed to, like, prevent you from snoring at night. And, you know, my wife says I snore. So it's like, Oh, I'll take a look at this thing. You know, just as an investor, or maybe I'll just buy the product, right? Like, that's fine. I don't need to invest money. And when I went to talk with the folks they're like, Yeah, so it's like $300 up front, and $100 month suBSCription. I was like, hell. This is like a bladder with a little you know, a compressor and it's like, I could build this this weekend. What are you talking about? And like, what are you, what are you talking about? You're gonna charge me $100 a month for pepper 280 For this, this is insane. So like, you know, people are basically handicapping themselves. Like literally that doesn't make any sense. Like it doesn't make sense even prima fascia. The only way that it makes sense is if a bunch of investors pressured them into being like, but tell me about your recurring revenue. How come that's not big enough? And it's like, Guys, you're sinking the business. That's not what this thing is. Right? Let hardware be hardware. And if you forgot that people can make hardware and you have money in hardware, remember the place is called Silicon Valley. It's not called lines of code Valley. Right? Software is a pretty recent situation here. The first three and a half decades were all hardware. So we had a decade and a half of software. Congratulations. And I think we're maybe running out of that now because the software I'm seeing today is not the Cournot thing which is like we index all the world's information, or we make anything purchasable you know, from anywhere in the world. Like those are pretty big problems. Right? Like the software that's being pushed forward today is, honestly, a little bit trivial. And, and we see this like, in terms of when everybody one of the things is conventional wisdom like that everybody starts doing the same strategy and it stops becoming that lucrative strategy. And I'm not saying that you can't make any money in software anymore, but I will say that we've gotten terrible at software. And what I mean by that is like, you know, Google was venture backed as well. But Google raised less than $200 million in its entire history. And by the time it had raised that capital, it was growing off of retained earnings and growing like a rocket ship and, and ultimately, obviously, grossing hundreds of billions of dollars now, right? If you compare that to Airbnb, Airbnb raised $6 billion. Now, do you think Airbnb is 30 times harder to write about than Google? Of course not. Right? Airbnb is a listing site that is, you know, some hard user experience work, but it's not necessarily the same as indexing all the knowledge on the planet. So I would just say technically less hard, and yet they spent 30 times more and honestly, but Airbnb is nothing of the business that Google is in terms of profitability, margins, you know, intensity of growth, or even future prospects. So you kind of look at that and you're like, Wow, maybe we just got sucky at this. Well, everybody said that, you know, software's gonna eat the world and all, you know, venture needs from the software. Maybe that was basically the declaration that we're going to become undisciplined and kind of bad at it. And look, Airbnb is like middle of the road, right? That's like, still 10 years ago, when we would say we're still pretty good at software investing. And you fast forward to now I think we're actually actively worse than we were, you know, when we're doing Airbnb, which was actively worse than what we were doing or doing Google. So yeah, I mean, the valley can say what it wants outside. Great. Returns. But I'll tell you that the revenue traction in our portfolio outpaces almost every software portfolio I've met, have similar font size and vintage

VC: Do you worry about as an investor, the dilution that occurs with these hardware companies just need a lot of money to sort of get to the same level as so many software companies or you see it differently because they're enterprise Centric and the capex and all the other trials.

TC: So if you do this, right, you can play an extremely different playbook because that is also the other conventional wisdom. It's like if you get into the hardware business, you have to raise, you know, a billion dollars in equity, otherwise, you're not going to be able to see it through. And, you know, Rome electric, which is the, you know, one of our two businesses, that's over 100 million booked, right? They raised less than 15 million to get there. So I don't know, I mean, I can give you a bunch of proof points where the amount raised was quite small compared to the revenue and bookings logs so far. And this has a lot to do with those winning unit economics, right? Because if you can actually introduce winning in economics to the world, then you're instantly supply limited. And as soon as you're instantly supplied, amazing things can happen in terms of the growth of your business. It means that every single unit that you produce you will sell so you don't end up with a bunch of like, you know, cogs inventory inertia where you just got a bunch of money caught up in atoms or you have this kind of like, you know, forecasting issue where it's like, oh, we overproduced and everything's caught up in atoms or we under produced and we're leaving all this money on the table, literally everything that you make, you're going to sell. Right and when you have that kind of thing on your side, then they give you so many other options like our specific playbook is when we work with teams. By the time you know, they're done using the proceeds from their seed round. We want them to be logging real revenue from their real customers. This is why so many of our early stage companies are in revenue already, right? Because we're doing that playbook. By the end of the A proceeds. We want them to get to gross margin positive manufacturing, their core product or service. And we get that with most of them, you know, some of them, you know, spill into the B round as they're trying to get that going. But most of them are able to get that done by the end of the round. Now, if you're able to get both of those things done. That means that by the time you get to the big round, you can hybridize the finance tag between equity and debt. So instead of raising a big equity round, all that equity dollars go to every kind of thing. You can divide it so that the equity dollars go to things that can have equity level return, so really nonlinear returns. The debt dollars go to things that can only have debt level returns. So things like capital equipment facility build out, you know, cogs inventory, you know, a line of credit to go manage the cash as these things are moving about. Then those should all be debt financed. Now, in the B round you don't want to go overboard right? If you did all that in the B round, you might run into a situation where it doesn't hang and you end up with negative liquidation and the equity holders end up with nothing because debt has got preference over equity in liquidation. But if you do it in the right proportion, then you stay really safe. You know, in terms of how much debt you've raised versus equity, but you get a you basically have started the chain which dramatically reduces how much equity you're going to need to raise in the long run. Because in the B round it might be at 20 in the C round. It might be 5050. In the D round, you don't have an equity based round, because it's all dead at that point. And you know, that basically massively blends late stage dilution. It massively reduces how much capital needs to be raised for these companies to get to interesting revenue levels and you already heard a couple that are interesting revenue levels, actually given relatively small capital races. And it also helps the companies because if they ever are going to achieve their mission of really displacing the damaging industry or building a huge generative industry for the planets, then most of that scaling is gonna happen through debt. It's just the way that business works at global scale. So once a thing is making 5 billion 10 billion, you know, 50 billion a year, then most of the scaling of their facilities came through debt. It did not come through equity dollars. So yes, we're basically getting people to learn that skill in the be round, and it gets them set up way ahead of time, like the worst case is, and we've seen this from the valley too, which I think is bad behavior. You might as well feed your founders to the wolves, but they equity finance that thing all the way through some kind of SPAC and then they say Well, good for you now. You got these public dollars and go raise some debt dollars and figure out how to use debt from now on. There's no more equity rounds. And a lot of the people are like fish out of water at that point. They've never, you know, been used to managing passion in that style. Where there's cost of capital included, where there's different covenants, where there's things that you need to do to be good at debt. And our founders are learning this in the background, so that by the time they're going IPO then they're just well suited. They it's, it's just copy paste.

VC: Let's talk about sort of the founder out there right now. Thinking about how we use the word is a lot underfunded. But let's talk about another term out under founded, right. So if you're a capital allocator right now, company builder, what do you want founders, the next 10 to focus that pitch at one that you think are the most under funded opportunities?

TC: I mean, I think everybody naturally gravitates to the sexiest opportunities. And there is some logic to it. Like actually, if you look at the amount of dollars that are going into green tech, climate tech over the last couple years, there's a huge you know, uptick in 2020 2021. But if you decompose it by sector, a lot of that went into mobility. And it went into like, the sexiest things in mobility, which is like the vehicles and you look at that and you're like, okay, okay, you know, definitely there's some good business to be done there. But like, whenever you have that kind of overage where everybody's into a thing and nobody's into another thing, then that kind of imbalance basically says that there is opportunities that people are not you know, considering Well, now that said, if there is going to be a bunch of critical mass around around, you know, actual vehicles and mobility, fantastic. Like there is some wisdom and founding in that space, because it means that there's a bunch of investors that are actively looking or have recently deployed in that space. So they've indicated that they can go in that space, but I think we kind of overdid it, and there were way more critical problems. So one of our most recent investments is in a company called Rev. Terra, which basically solves the fast charging interconnect problem, because, you know, people talk about charging infrastructure and like, oh, yeah, charge points basically got it. They're installing a bunch of things or whatever, a couple of networks that basically got it. They're the biggest networks. But you look at charge point, it's almost all level two chargers. Right. And it's not because level three chargers that are in a level two charger, you might get 1520 miles of range in an hour. So you like to go shop for an hour and you come back with, you know, 20 miles of range. It's not that great a consumer experience. It's been a long time since I was able to get that charge. You know, fast charger, you might get three quarters of a tank or a full tank and you know, five to 10 minutes and it's like okay, well that's obviously way closer to what we would want you to know from our vehicles. So why in the world, you know, do we not have way more fast chargers? Well, it's not actually because of the capex expense, fast chargers are not insanely more expensive than then type two, level two chargers. It's actually because of the interconnect issues, which is fast chargers draw a lot of current and you can't cite them everywhere in the grid. And there's a lot of places on the grid. If you were just to set up a bunch of fast chargers, then it's if you imbalance the grid in a way that's going to damage the grid and damage your service level. So like you typically have fast chargers right now in the places where the grid is ready for it, not where consumers need it. And I was seeing very few companies that were trying to solve that problem intelligently compared to how many people were going into the vehicles. Now, of course, if you get the vehicles you're going to need the charging infrastructure as well. So like, you know, almost imagine there's a tip of the iceberg which is like the visible part of an industry that's really sexy and everybody wants to be in and then there's 90% of physical industries, which are the less sexy part where I know that also needs to be working and running. Now that said, on one hand, it needs to happen for big changes to happen on the planet. On the other hand, I understand why some entrepreneurs are scared to play there because they are not seeing enough investors deploying capital in that space. The same shiny object issue for the top of the iceberg for the entrepreneurs is true for the investors as well. But I will tell you that, you know, one could do a strategy, which is not unlike our own strategy, where it's like, well, let's start to make inroads because obviously lots of capital at the tip of the iceberg, but let's just move you know, three meters below the water because there's still a lot of iceberg there. Right? And let's talk about the things that are immediately adjacent to what is visible over the surface where it's obvious why you would need this in order to do that. And let's go invest in those sorts of things. Right, because our other company over 100 million isn't battery recycling. Well, battery recycling is related to mobility right? Because mobility is going to be the largest user of batteries as an industry, you know, in the foreseeable future. And given that they are going to be the ones that have the largest need for battery recycling. So that's actually, you know, been an extremely successful bet for us. It's immediately adjacent to the the money that was going into mobility, which meant that we were still able to attract enough investors to play but we also ended up you know, we're now building the largest battery recycling plant in North America, we are now meaningfully contributing to the ability for at least this continent to be able to go step up to the challenge. So that's where I'd encourage people to, you know, from the founding side to kind of expand their aperture and start looking like what's the what's the stuff that's adjacent to the sexy stuff, but is is less trodden, but it's obviously going to be needed for for things to work.

VC: It's amazing Tom, look every time I talk to you, I feel like I've taken a class and Climate Technology for a semester in an hour. So I really appreciate the time today. Everybody can find you at one venture online. Also on Twitter, Tom, you're on there, but I really want to thank you today for your time, and excited to see what the company and the firm and in you and your portfolio companies are moving forward. Very, very inspiring to all of us. Appreciate it.

TC: Thank you. Good to chat today. Well, that's all for this week's episode of Climb by VSC.

Thank you so much for reading our latest update from VSC Ventures Fund I. We're in the early days of our long and healthy partnership with all of you, so please reach out to us with additional questions on anything above. Thank you again for your support for our vision and our fund!

Vijay Chattha & Jay Kapoor

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