Published June 21st, 2023
Investors Need To Support Hardware with Software, Not Hardware vs Software
Jay Kapoor: Welcome to climb by VSC. My guest today is Sophie Purdom. She's the managing partner of Planeteer Capital which specializes in early-stage climate tech investments. So if you specialize in climate innovation, it is also expressed through the highly popular newsletter CTVC, Climate Tech VC, which if you're not reading, please, right now go subscribe because there's a community of 50,000 subscribers. CTVC is exploring cutting-edge advancements in climate tech and sustainable innovation. It's basically the newsletter that I read every week that every climate tech investor reads every week. So get on that, that her experiences have been diverse. She's launched an ESG fund, that strategy development at Bain and Company published a book which you know, so we got to talk about that and, and she's helped to start a successful agricultural tech company that's raised more than 65 million. So if you and I met almost two years ago through the operator program now called cool water, and I'm thrilled to finally have you join us on Climb Sophie, welcome to Climb.
Sophie Purdom: Jay. It's been a while.
JK: It ha! What most folks know as CTVC as the popular newsletter that basically as I said, every climate startup investor reads. So I'm grateful to have you on and maybe we'll kick it off with sharing the backstory of how your journey from the newsletter and content platform game two, starting a new early-stage venture fund Planeteer
SP: You know how it was the beginning of the pandemic, right, like, everyone was thinking about hobbies. Well, for us, the hobby was getting back into writing and using this frankly as a tool to synthesize all of that racing thoughts and data points that we had in our head around this new thing, which we dubbed climate tech VC. So it's a little on the nose. And somehow that you know, those four letters CTVC have evolved with us and we were right and kind of slapped that on the label, I think for the past three years of growth of the market. So a little bit of luck, a little bit of timing, and then frankly, as I'm sure you guys feel this intimately, it's just a lot of hustle. Right. So quality and consistency really matter. We were not the only people that were writing a climate tech venture capital newsletter back in March 2020. There were probably 10 to 15 others. I think we maybe don't remember all of those now and they were probably some of them were probably better than us. But we've just run them off the treadmills. And along the way, it's not just hustle, right? You have to build products and you'd have to build your flywheel. And for us that really became evident with the data tracking that we've been doing at the newsletter side. Where folks were opening the newsletter to see the deals of the week that had happened. And they really liked it when it was their deal, right their company as the founder or or their opportunity as the VC, but then they stuck around for more of the content. And so we got that flywheel going on folks. Wanting to send us information so that we would advertise it essentially to our specialized audience and from that the audience grows that wants to see the content, etc, etc. The trick has been growing with that to do more things with that data and have better ways of collecting that information such that we're applying, you know, filters and layers and tagging and additional information to this database, which now frankly looks a lot bigger than just the venture market. Although the venture market itself is over 100 billion of you know, many, many 1000s of deals and companies that we've tracked over that timeframe. Now we're looking at the broader climate capital stack, which is the next evolution of the market.
JK: I really appreciate you sharing that journey because I think we're in the early phases of sort of thinking about Yeah, what do people like to come to our content for what are they like to stay for, so to hear your experience with it is so wonderful, wasn't always obvious that there was going to be a capital stack at the end of this and the only reason I asked that is you know, even outside of climate. The newsletter to venture fund pipeline over the last like three years has become you know, so evident, it's so obvious now that I'm so curious, you know, going back to Sophie in 2020. What were you guys thinking?
SP: Yes, at the end of this, you know, rainbow is a product, there was no grand plan to start a climate tech VC despite the name on the newsletter, so, no. And perhaps that opportunity became apparent by doing the work, but we said no, to that opportunity, and frankly, too many other ways of commercializing the kernel of CTVC and I'm really glad that we stuck to our guns and went back to the quality and consistency and hustle aspect of it. Because now that's afforded us the opportunity to look beyond just the venture growth aspect of the market. And recognize that, you know, it may be used to be enough to just be bringing capital into the market, think clean tech 1.0 Then it became a little bit more specialized. Maybe you needed to focus on a stage or maybe even a sector or geography. Then it became around doing something else with that. So community or services, right. You could even layer in the kind of analysis, I suppose, that we were doing of the market and to enter that evolution stage. Now, I think it's, it's more it's it stacking, so it's all of the above, you need the finance, you need the specialization, and you need the kind of services and insight but there's another piece which is happening that I think is kind of bigger than all of the above. And then it's been said that innovation is the land of venture capital that you need 10 years to get this stuff out of the lab and to the point of deployment. And I think that there is a tightening of that I think that the companies that we're looking at at my new fund Planeteer are not companies that need to live another 10 years in the lab before they suddenly hit a threshold point of breakout into perfect product market fit, but rather, we've structured our fund such that we're able to bring those founders closer and closer to commercialization with a network around it and this real heavy emphasis on the climate capital stack, aiding them and getting there faster and with less dilution so that the founders themselves or you know, and the teams are more incentivized.
JK: Just from reading your newsletter. I think it's opened my eyes to just how vast the landscape of climate Tech really is. And you know, whether we talk about ag tech, ocean tech electrification, carbon credit markets, scandals and carbon credit markets and beyond, as you build planets here, and you sort of think about where you orient yourself within this market. Do you find yourself gravitating towards certain themes or categories of like, what makes something investable?
SP: Yes. Planeteer focuses on a few core verticals. Again, I really believe that climate is a theme, not an industry and that climate themes which are, you know, broadly kind of disruption or transition, apply more or less relevantly to different sectors and with different business models. So we spend a lot of time looking at they'll environment, carbon, heavy industries, certain aspects of ag like the supply chain. And this area called Climate intelligence, think like insurance applications and at any point in time, we have dozens of sub theses that we're interested in going after observations of we're very data informed, right? So where's all of the money flowing? Where's the talent going? Where are other investors positioned in the market and where's the non dilutive funding? I'm coming up with these sub theses and seeding them out in the market to see if anybody bites or has a reaction or a different opinion. And that's often how we wind up connecting with founders who might not even know that they're founders yet we invest it pre seed and seed so that's often pre incorporation of the business there might not be a pitch deck let alone many slides on commercial development or revenue traction. So this is very much thesis development land and it's important for us to be doing our jobs of not just being receivers of that or opportunistic, but being proactive with this prepared mind.
JK: Yeah, and I know you get asked this a lot. So allow me to tee you up with this. But with all this money that is now floating around climate tech venture, you know, even growth stage and late stage. I bet there are a lot of LPs. Hopefully, some of them are listening that ask the question, what is different this time? I'm sure you get asked that question a lot. So how is climate tech different from cleantech one Dotto? What have we learned?
SP: It's one of my favorite slides to present at conferences, I think and we tend to do it with a bunch of emojis you know on the page because that's our little way of communicating. But there are fundamental reasons why climate Tech is a fundamentally different trend, or combination of trends really, then the clean tech 1.0 fad. And so first and foremost, we could start with the technology and economics which is the cheapest new electrons right to bring onto the grid are clean electrons from mature clean tech 1.0 technologies like solar and wind, and we should thank clean tech 1.0 For that I think there's this false narrative that it was a failure, cheaper solar and wind. Electrons means cheap electricity to then go power usually, you know, energy intensive processes like bio reactors for hydrogen fuel cells and electrolysis, which are the next guard of climate tech, which is applying decarbonisation principles to broader sectoral applications, and also going beyond just mitigation. And being able to have the privilege really of looking at adaptation. You know, things like regeneration, monitoring and measurement rather than just energy generation. So, that's the first point, which is cheaper and cleaner thanks to the tech advances. Second is the sophistication of the climate capital stack looks entirely different than it did in clean tech 1.01. A vast majority, if not all of that capital was either public funding, so taxpayer dollars or venture capital money, which wasn't prepared or structured correctly for the time cycles for those hardware, clean tech 1.0 developments. That's a huge principle upon which we're building Planeteer. The fund is a partnership with those other layers of the climate capital stack. Third is, you know, phenomenal talent coming into this space in just a wave unlike anything that we've seen before. And that's one that really kind of makes me happy and keeps me up at night in a good way thinking about who are the folks that we can go partner with?
JK: Yeah, I'm glad you mentioned that last bit because I think that's been the most exciting thing for me to see as well as is just talent across the board, hardware and software, you know, engineering talent, but then also business development talent and product talent and design talent that that wants to dedicate themselves to this. The other thing that you mentioned and I think about like venture return analysis and portfolio construction and all the other fun stuff. That we used to, you know, gab about when it came to our operator program. I started to notice this bifurcation in VCs within climate and even not in climate specific funds, but, you know, folks inside of larger funds that cover climate, the kind of lean to Hey, venture capitalist for software and we're gonna look at software you know, first or software only solutions. And on the flip side, you see, you know, the lower carbons of the world but even other funds that say, climate is a you know, atoms not bits problem and you have to go with hard hardware problems and hard hardware solutions. As you think about your own portfolio construction, or just the companies that you gravitate towards, where do you lean on this narrative of the hardware versus software?
SP: Comparison or divide irks me to be sure there's no other way around it other than this is all of the above type of solution. And it's in the job of the folks the venture capitalists doing their due diligence homework to go figure out what business models apply to those different hardware approaches. You know, venture isn't just about investing in technology types. There's all sorts of other layers of risks that apply over that whether it's geographic or team construction or stage or business model or you regulatory insert the blank. It will be so simplistic just like hardware versus software. So Planeteer looks much more at these interstitial spaces between these false spectra. So to make that way less nerdy and academic and convoluted sounding. We like the messy middle. So we like things that aren't just built environment or carbon, maybe their carbon capture in the built environment, right. What do you call that? Or not just hardware or software, they're hardware enabled software businesses that think of a really low cost sensor that unlocks a bunch of data that you can sell a subscription mitigation service off of, right? So we like the messy stuff, because we're right there with founders in the beginning thinking about not where's the market today, but where it 's going to be in five years, so it's hard to apply backdated frameworks to future looking market spaces.
JK: Yeah, I'm glad you said that. I think VCs gravitate so much towards pattern matching. And I think what we realize is actually the breakouts in any industry, defy patterns. And so it's such an interesting framework where Yeah, ultimately you need to know the patterns to be able to break out of them. And I tend to find a lot of the investors, hopefully not our CO investors, a lot of the investors we come across, don't take that extra step. And they sort of say, You know what, I've made money in software before I'm going to invest in climate software. I'm glad that you're kind of bucking that bifurcation or dichotomy or whatever you want to call it. We haven't talked about value add yet, and it's something that I think CTVC has a very unique perspective on. As you know, it's something that VSC ventures focuses a lot on in terms of, you know, our reason for being our reason for why a founder wants to be on a cap table. So to talk to me a little bit about a success story or two from your portfolio. You don't have to name the names if you don't want to know where that Planeteers CTVC connection has been able to help a company further their goals. What does that value add look like?
SP: CTVC will remain a free newsletter and content platform think like a free strategy consultant for you to bring clarity to this complicated space, which now has a market intelligence data product which is paid for by big corporates and financial institutions, which my awesome team runs full time and has actually raised some of their own venture funding to hire engineers to scale out that subscription product. So CTVC sits and has its own flywheel cranking. I helped write some of that content. And oversee kind of at a board level some of the funds strategic level pieces, but my team does a lot of the work separately. Planeteer right is investing in theses that I've been exploring and that's really the connectivity between the two. Think of us as a consumer of that new data product. And so running with that, right like the insights that are split off from that from that data product. That allows us to identify some of these early whitespaces, maybe ahead of the pack or at least be crazy enough to start talking about them early. And that also allows us to do things like support our founders in building the optimized climate capital stack.
JK: Is there anything too early today in the climate? Is there anything that you're just kind of like? Yeah, you know, it's a science project. I'm just gonna hang on the timeline.
SP: There's all of these things that are too early for a CTVC. That's amazing, because we need it all. And there's like and there's likewise, the right funders for those science projects, like you said, so maybe I can tell a little little double click there, which is we're lucky at Planeteer to be anchor funded and joined as an advisor by an amazing executive named Mike Stratford. We call him strap and strap and has been the CTO of Mazda or Facebook for a long time, stepped away maybe 18 months ago or so at this point to, among other things, work on climate, and SRAP and I had been co investing together into a series of climate opportunities. We like some of the same stuff. And he's also got an appetite to go deeper tech and kind of more moonshot oriented just by virtue of the way that he's kind of earned and accrued his capital. Another gap that he saw in the market, which I thought was really astute, was that we were having a lot of these ocean carbon dioxide removal companies across our desks, and it was clear that this is super necessary, right? The ocean is a bigger carbon sink on orders of magnitude than the atmosphere which we think so much about, probably because we're not fish swimming around in the ocean and we're humans breathing in the air, the same but it was also evident that the science right and I choose that word carefully around ocean CDR was nowhere near ready commercial development, things around. How do you even measure it? How do you run experiments? What policies needed to be in place are the regulators and governments that need to be on board just literally there not being enough kind of like talent in that really niche area modeling etc. So strap separate from investing activities separate from other advisory work that he does has helped kickstart an organization which went live two weeks ago I believe called carbon to see which is explicitly funding research just into ocean alkalinity enhancement, which is one vertical of the ocean carbon space.
JK: Taking from what you're saying, even when an opportunity is too early for you, there are ways that you, through your team have been able to access it, if not directly as investable, but then you know, in a different kind of advancement, is that right?
SP: There are so many necessary ways to work on climate. And I feel like I'm in a lucky position because we play an information-sharing and kind of convening role in the market as well as getting to select 20 to 25 founders that we work hand in hand with. We are very, very aware of a lot of the opportunities that are going on at different stages of the capital stack.
JK: You mentioned you were seeing a lot of deals in one category. Let's flip it on its head. Is there a category of deals you wish you were seeing more of?
SP: Yeah, how long do we have? Let's see, um, one that I would love to see more on is, broadly speaking, insurance applied to climate risks, and climate opportunities of all sorts. So that's purposefully very broad, right? We could be talking about sure the classic climate peril like a flood or a fire and how do you better identify and anticipate those those risks and kind of price that into premiums, all sorts of challenges there around who takes on the capacity and wants to go to market but then on the flip side, you know, other insurance is Broadstreet. So things like ensuring offtake, right, of these new technologies that are risky, or, I don't know, even ensuring kind of the completion of some of these tax credit projects that are being funded and coming online. Yeah. My high-level perspective is that we get excited when there are languages that are important to climate challenge and opportunity areas that are not native or fluent in climate themselves and vice versa. And I perceive that there's a gap between the languages of insurance and climate kind of as we speak.
JK: Alright, so Sophie has very nicely decided to play along with a new segment we're trying out on climb, as fans have requested. We're calling it hype. So I'm gonna go with a couple of these. Think of it as a rapid fire round, you know, quick answers, one to two minute answers, but explain why you think something is hyper hopeful. So let's kick it off.
SP: Let's do it!
JK: Let's do it. So we're seeing a rising trend of the use of AI and machine learning and climate tech at least a lot. companies are pitching that they're using AI and machine learning. What is your take on this?
SP: AI and climate tech hype are hopeful. So many opportunities for the application right, and I think devils in the details in terms of what problems are we going after with this potentially expensive to train kind of and not always applicable kind of model to lots of datasets which don't exist today are really expensive to gather or are challenging from an enterprise kind of readiness distribution model. So keeping it high level there, but you'd imagine things like utility data would be bossed around fully valuable to optimize challenges often. How do you integrate from a security and kind of cyber compliance perspective with those types of complex industrial businesses?
JK: Yeah, I'm gonna put you down for leaning hopeful on that one Sophie.
SP: Meaning hopeful. Exactly.
JK: Alright, we'll go to the next one, then. This is a personal soapbox of mine. Carbon Capture and direct air capture, and storage technologies have been making a lot of news recently. Direct air capture and carbon capture. Hype or hopeful?
SP: Hopeful. We need it right. There are many different types of carbon removal technologies, and they are not all created equal, unfortunately. And so I think a lot about let's see bottlenecks to any inputs that are needed and those different processes, right. So whether that's salt or just straight-up energy, right? What's the limiting factor here that might make that capture technology? Carbon Positive? We're looking specifically at Point Source Capture opportunities that have been historically overlooked. Point Source carbon capture gets a bad rap because it's often been used in the oil and gas industry to do things like enhanced oil recovery, e.g. pump more oil back out of the ground, but that obviously isn't the only application. And so there are lots of places where it's really expensive to rip and replace and electrify expensive equipment, but it's still got a long depreciation life ahead of it. So what if you could plug in a bolt-on carbon removal filter, let's call it, and keep operating that equipment while making it way cheaper and carbon negative at the same time?
JK: I like it. We're gonna go hopeful. Carbon credit trading. Where do we think this technology is hyper-hopeful?
SP: Mostly hype if specifically in the voluntary carbon market. I don't see there being much if any utility to trading voluntary carbon removals because the point of them is that they are sunsetting their legacy and that they're used as opposed to trade for future use. In the compliance market, I would answer differently, which is yes, that's valid, so much so that there are large hedge funds out there that, you know, trade carbon credits, and, you know, there's arbitrage opportunities in that market. But those are two different beasts. And I encourage folks to not think of that carbon market as one thing but rather split it into the voluntary carbon market. Which is shifting more and more towards expensive removals, and corporates by those and then the compliance carbon market, which you can think of as governments and that's where a regulatory and therefore you can do things like set up hedge funds around it.
JK: Yeah. And there are issues around verification and whether these credits are even actually real these days, right?
SP: We didn't even get into all of that. So yeah, we can we can we can go all day talk about Yeah, verification. Verification. Yeah, additionality. We can talk about leakage. We can go on and on.
JK: Yeah. All right. So we'll close on one last one that in our hyper hopeful segment. Green hydrogen is being touted as the fuel of the future. Is it a viable source in the near term, hyper hopeful?
SP: Yes, for some very specific application types, right. So the key with my perception of hydrogen is that it is very unlikely to be a complete substitute for other fuels for simple physics reasons. It's hard to store transport, flammable, etc. It's also not always super easy to produce it, however, makes a lot of sense to use hydrogen as a replacement for some stranded industrial applications where you can produce hydrogen on site through electrolysis or otherwise kind of cheaper for some reason to store it and use it and that you can turn those those processes rip them off of off of hydrocarbons and make them green kind of overnight, but I would not expect to be purchasing a hydrogen car anytime soon. Let's put it that way.
JK: Fair enough. As you may know, where we like to close every conversation on climb, although you and I could probably chat for hours is this idea of positivity and optimism and you know, there's a lot of doom and gloom out there in terms of lack of climate action or climate action we hope would be happening. But let's close on something good. What is one thing that gives you a lot of hope? And optimism about this fight against climate change?
SP: Oh my gosh, I mean, this is why we write the newsletter, right? Like it's a little bit of a personal antidote by working on climate. I believe and I certainly feel that you feel less overwhelmed or like this is all kind of less catastrophic. So I certainly do it by kind of looking in the face and then getting your hands dirty, kind of like taking action, whether it's on the education side or the personal action side or playing venture with your career or all sorts of different things. I think, literally working on climate is probably the best way ironically, to feel less bad about everything that's happening.
JK: So the optimism is that there's a lot of work to do, but that you get to actually do it every day. Is that right?
SP: Maybe that says something about my personality type but yeah, that's my answer.
JK: You get excited about the challenges ahead. I dig it. Sophie. Hey, thank you so much for joining us on the climb today. Where can folks find more about you? CTVC, Planeteer please plug away.
SP: Thanks! At Planeteer capital.com, our new landing page. I'm on LinkedIn, I'm on Twitter for good or for bad of my screen time utilization. And folks can reach out to us with ways of potentially partnering together or questions or ideas or to pitch us at Hello@Planeteercapital.com.
JK: I dig it. Alright, Sophie, thank you very much for joining us and we'll hope to have you back sometime soon.
SP: Awesome. Thanks!
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Vijay Chattha & Jay Kapoor