Climb By VSC: Episode 15

Jay Kapoor: Hey everyone, welcome to climb by VSC. I am excited to have on today Stonly Blue, he was the founding partner of Third Sphere, where he's focused on addressing climate change through company creation and scale. A little bit about Stony, he has taught at University of Chicago's Booth School, as well as lectured at Harvard Business School and UC Berkeley. He was previously the founder of a video cloud solutions and enterprise software company, which was acquired a year after self funded growth. He's a serial entrepreneur having built five ventures spanning different sectors, from tech to real estate, international markets in Brazil and Canada. So that's a little bit about our guest. I'm excited to dig in with him about everything that third sphere is doing in climate investing. Thank you so much for joining me on Climb.

Stonly Baptiste Blue: Jay, thanks for having me.

JK: Amazing, so why don't we jump into you know, just a little bit about you and some background. You and your co founders started this fund as Urban Us has evolved into Third Sphere. Let's let's start with your journey. What motivated you to tackle first urban tech and now climate change and as an operator and entrepreneur? Why was starting a fund the right approach to address these issues? Yeah. About nine or 10 years ago now, I sold my last company, which was a software cloud hosting automation platform. That capped off roughly 10 years of random company building for lack of a better phrase of being an entrepreneur where, you know, there was some victories, some losses. But at the end of all of that, I realized that I didn't want to keep building companies just for profit seeking sake. I wanted to also have a mission and a big "why" as to what I was working on and climate was something I had a lot of angst about, but also realized that there was still a lot of lack of angst in the world about it and a lack of awareness and so I figured, as an entrepreneur, this might mean there's an opportunity. I had also moved to Miami at the time to help do some ecosystem building, volunteering as a sort of mentor for other entrepreneurs, teaching software engineering, while working on what to build next, and realizing that living in a city presented its own challenges where I also saw an opportunity as an entrepreneur. And so marrying those two "aha" moments together, I decided to work on building something to reduce traffic to reduce the emissions from traffic and to improve the quality of life of commuting. While working on that I met Shawn, my co-founder who had moved down from New York and had been having a similar epiphany of, you know, wanting to work on mission driven and realizing that there was a huge opportunity at the intersection of climate and cities. And we decided not to become investors together. At first we just wanted to see who else was thinking about this intersection. And we wanted to help in whatever way we could. More entrepreneurs come to this epiphany and work on climate solutions. We believe that a big chunk of the solutions to solve the climate challenge would come from entrepreneurs that come from startups. And early tech was a phrase, a concept that we actually came up with, to talk about urban innovation and smart city technology without saying either of those two things, and to also work on climate and talk about climate without having to take climate, which was still a contentious and debated sort of concept. And so as we developed how to define urban tech, we saw that urban innovation should focus on sustainability and climate adaptation and we built our first series of funds on that thesis. So everything climate that touches an urban system, and we built a really good portfolio on that. I think what we realized at the end of roughly seven years of an investing thesis all pre seed and seed with many companies who had gone on to raise, I think 80% went on to a subsequent rounding. A few handful had gone on to unicorn status and other handful had exited. So we felt good about our progress and what we've done in the urban tech thesis, also realize that solving the climate equation would require looking beyond the city. We started looking at natural systems and industrial systems as well. And so urban, didn't quite encapsulate everything we were doing and wanted to do. And so Third Sphere was an emergent sort of brand definition of who we were, what we were working on, he was in a way of coming out that we were always the Climate Fund, but now we were more unapologetic about it and open for business for everything, even if it's not just urban. Having said that, you know, we're still very, sort of go to market, ready to deploy, ready to scale focus. So we're not investing in things that might save us 20-30 years from now, we're investing in things that are ready to go within a year, ready to be deployed, ready to be adopted. There's customers now who want it and I guess in homage to our original approach, which was that we don't have to talk about climate to work on climate. We actually really like investments that are climate positive, planet positive, but the customers don't necessarily have to care about climate.

JK: What are two or three things that you've seen as a through line of the founders that work in and around government to build their companies that they do successfully? Or is there something about them as founders that you have found? They need to be or they need to have if they're going to tackle a problem that interfaces with government in such a way? Yeah, I mean, I think if you're selling to the government, you really do need to be a people person. And a great salesperson, I mean, there's no way around it. Right? You have to make an appeal to the people behind the rules. And and you also have to go a few layers in of building champions and relationships because the biggest challenge with working with government is, you know, offices, you know, people in office change, you know, strategies and motivations might change rules might change, and you want to be able to have continuity, you know, in the early years, where you're still building yourself as a sort of inevitable solution or just recurring vendor. And all of that requires understanding the government machine, understanding how to build relationships at multiple layers of you know, your customer and understanding the customer. And so part of that is understanding that government folks don't like for non government people to show up with the solution to all their problems without having spent any time truly understanding their problems. But it turns out that's true for a lot of customer categories. Enterprise sales can be the same way you have to understand the politics of the kinds of companies and you have to have multiple champions in case someone quits their job, whatever. So in a way government sales, some of the skills and traits that translate can translate from big enterprise sales to government sales, but maybe7 10x amount of skills again, not for the faint of heart, sort of the stars that we've seen, that it worked out, have either come from government themselves, and we're just like entrepreneurs that realize it later. Or they're really really good salespeople who are just good at picking a customer group building empathy, you know, sort of going on the ride alongs for enough time, learning how to speak the language, and then learning how to build an aggressive sales machine to capture market share.

JK: So we'll get off the government topic for a little bit. But one of the things that I found really interesting as I had been sort of tracking this industry, there were about 80 new venture funds focused on climate that were raised just in the last year, which on one hand is great. On the other hand, what I'm seeing is a lot of these funds lead with a software first business market innovation, first strategy, as opposed to, you know, the lower carbons of the world or some of these funds that are really focused on hard tech really talking about, you know, having new energy sources or new sort of, you know, grid innovation to really have a no transference of energy. And I guess what I'm trying to think about is like, we are talking about a problem in the real world, right? Atoms, not bits. Is it possible for us as venture investors to really move the needle forward, and drive good returns from our LPs If we are just focused on software? I'm curious for your thoughts on that, given that you've made investments both on, you know, hardware and hard tech, but then also had success with companies and software in this category.

SB: Yeah, I mean, I think venture has forgotten how well we've done as an industry on hardware, both in the early days and along the years. There's an attractive sort of appeal to a pure software opportunity where you can imagine the costs curving towards zero and sort of the infinite replicability. There are also constant reminders of the frequency of sort of transactions in the enterprise SaaS side of our industry. And so it seems like if you want to make "easy money" and venture you should be an enterprise SaaS investor. As it turns out, there are challenges to building enterprise SaaS and some of the growth and successes follow the trends of the macro environment. So there's no guarantee that you make money there either. But it also turns out that there are probably significantly bigger upside opportunities in hardware companies. And one good example is Google versus Apple. Google is one of the best investments someone could have made, in their life, of course, and it's just, you know, there were only a few investors in Google. And it's gone on to become a very successful and valuable company, as we all know. But when you look at a company like Apple or a company like Tesla, to have some of the most people Apple being the most valuable company in the world, and you look at who their stakeholders and investors were, over the their life of getting getting off the ground and getting to scale, it's a lot of debt. It's a lot of different investment stages. A lot of different kinds of investors, and that's because they had hardware. And so they had both the need to bring in more in different kinds of capital, but also the advantage of having different kinds of stakeholders aligned with seeing them succeed. And you know, again, the outcome being Apple is the most valuable company and if you look at the core of the most valuable companies in the world, they tend to have some hardware components. And so I think that there we need to move past this hardware versus software, sort of common ism and embrace the fact that you know, hardware might be quote, unquote, hard. But, you know, as we're seeing recently, Fintech is also very, very hard. Software generally is hard. Success is a hard period. But you know, it's like what battles you want to choose and you want to learn what game you want to choose and you want to learn the rules and to your point, as it turns out, climate is a physical world challenge. And yes, there are some pure software opportunities to help them in the climate battle and capture some of the opportunity, but some of the biggest opportunities will have some hardware component, either as the main thing or its software, enabling hardware.

JK: As our fund has invested both in hardware and software, I always want to come back to the adage that, you know, money in venture is made on outliers, right? The power law is the guiding principle of our business and therefore it's all about having ownership and outliers. And if everybody is under the sort of false belief that they can build venture scale outcomes focused on software, and everybody's sort of going in that direction, then as a new fund, especially, but I mean, you know, even for folks like you that have been at this for a decade, then the opportunity clearly lies where everybody else isn't looking. And so we've sort of applied that principle. You know, going forward, again, accepting some of those same challenges that yes, it is a long time to really hit scale or really hit market adoption. But once you get there, it makes for a really great repeatable motion.

SB: Yeah, exactly. And, and the more defensible, right, that all those sort of moats you had to build, to get to where you are, it's, someone's not gonna be able to turn around and do the same thing in a week, right? It might take them less time because you've just had you've created carpet path, but hardware, again, because of the natural frictions of it being physical, will always give you a running start once you've made once you've unlocked, whereas with software, you know, I'm nowhere near the best software developer in the world. And I don't see a piece of software anywhere that I'm like, Hey, if I had a weekend I can take a crack at that. You know what I mean? Like I see really great hardware I'm like, Yeah, can you keep doing your great work because I don't think I can replicate that at all. And the same thing goes with regulatory plays. I'm building this thing because regulations, once you unlock, once you lower that drawbridge, everyone else can also come to replicate and conquer territory that you've spent time and money trying to conquer which is which is another reason why we like post site science risk things, because it turns out, science of course, is hard. But even harder is building for adoption and scale, finding customers getting him to adopt his scaling that adoption, like company building is really hard and you've got a lot of new climate funds that think it's all about science and making the case for how much carbon emissions they're projecting that they're going to be able to capture or evade or whatever. But no one's stopping to think, well, can we actually know how to pick companies that are going to survive and grow and thrive? And scale? And especially even through a climate, you know, winter, for lack of a less funny concept, you know, because the current fervor and enthusiasm around climate won't, won't persist forever, like the problem isn't going away, but there'll be other problems that will distract people for periods of time.

JK: I am curious for your perspective on this, there are funds that we see that focus on specific gigaton reduction targets when they're making an investment in climate companies. And there are funds that are more of like a vibe check, right? Like is this a directionally positive move, but we're not going to hold you to any thresholds? Where do you sit on that spectrum? And how do you evaluate the companies that are pitching you as to their sort of net positive reduction?

SB: I actually think it's fine to have directional motivation, right? There's the Northstar, that's where we're heading towards. We're only going to invest in things that are climate or planet positive. And it's also fine to say we're we have a very specific numerical goal that we're trying to hit on in execution though, there's a spectrum of really doing the thing that you said you were going to do and not right and there's a lot of thesis drift in venture like hot deal, you know, really exciting co investors inviting us into the deal. We're going to make an exception and do this thing that has nothing to do with our thesis. That happens everyday in venture. It's something we avoid, and we've been able to successfully avoid. But it does happen. And so then, like, the more you're on the true north side of things of your intent, and then you're doing random stuff, it's like okay, you're not truly a thesis driven fund. You just want to have a brand around that thesis, but it's not what you actually invest in. And, you know, of course, the other side of the spectrum is really true. Belief in alpha upside alignment with your true north and a very specific numerical goal, right? And so I think on the numerical goal side, the challenge that arises there is that it does the opposite effect. You're almost too pigeonholed. Climate and the climate challenge and you know, the planetary challenge broadly is bigger than just GHG emissions or carbon emissions. Having a stated goal of a giga ton of GHG sounds great, and is a good goal to have, but you end up having to say no to a lot of other really great climate solutions, planet solutions that don't contribute to that goal, in particular, even right in the fairway of climate change. There's this entire area of climate adaptation that a lot of funds missed because it doesn't give them a notch on their belt around the GHG emission goals. Similar to finance, you go into every investment thinking "this is going to be the unicorn that's going to return my fund." Otherwise, you shouldn't make the investment because that's the name of this business. Right? And if you're an impact venture investor, then you should also say this is going to be the unicorn that gives me my gigaton, but similar to the finance side, you actually don't know which ones are going to be your unicorn on finance or any impact. And, in fact, there's generally going to be a correlation: the financially successful ones are going to also be the impact successful ones or the financial unicorns are also going to be the impact unicorns. But that's not necessarily true. You could have a modest outcome financially with a significant impact outcome or significant impact outcome or significant finance outcome and lower impact outcomes than you're expecting. So is your fund successful or not? An emerging trend is tying carry the way that we really earn our money in venture time carry to the impact output outcomes, and so it's going to be really tough over the next few decades when we started observing this lumpiness, right? You hit the financial goals, but you didn't hit the impact goal. So you don't you don't get what you earn on the finance side or you hit the impact goals, but your fund didn't really make that much money. So what did you really win? So it's gonna get a little messy with some of these like gigaton, goal oriented firms. Again, nothing against it, but some level of flexibility around what the various impact metrics are, are still being learned and absorbed. And frankly, it's really hard. The challenge with going beyond one true north numerical goal is then you're doing a bunch of companies that are targeting different kinds of impact. GHG, frankly, is just the easiest to roll up and quantify, but we struggle with that as well. Like how do you quantify water quality and safety? How do you qualify adaptations? How do you qualify air quality? You know, there's and then how do you love them up to a giga, whatever level of impressiveness right, and so there's still a lot of like, yeah, there's still a lot of path making that has to happen on the impact measurement side. I don't think anyone's doing it wrong in setting an intention. The only thing that sort of annoys me is when there's complete drift.

JK: Yeah, yeah. I think the intention setting is one piece of it. And I think that's generally positive. I think it's always tough when you have you know, it's primarily the limited partners right, who are who are responsible for wherever their source of money is better, better establishing some of these thresholds. And I think we as an industry don't necessarily know the impact of that on decision making for financial returns. I think you said it really well. You can do well but not have a great fund. You can have a great performing fund but not hit the targets that you wanted. And we just, you know, even you guys 10 years into this. We just don't have a good sense of what that looks like. But yeah, I would agree with you. I think generally we need to have that north star. Speaking of the things that you have seen your companies do, you gave us a really good anecdote or I guess adage earlier, which is you want to back founders that are building climate companies that customers would care about, even if they didn't care about climate. I really liked that, that framing. What are the other few things that you have found? Founders underestimate or maybe don't give enough credence to when they are building companies in this space, major pitfalls so to speak, that founders run up against when they are building climate companies.

SB: There's so many.

JK: Give us two or three.

SB: There's just so many pitfalls, so many near death experiences. You know, if anyone tells you they were an overnight success either they were sleeping the first decade or they're lying right the success that came quickly just hasn't seen its first major fall yet and sometimes that first major fall, if you had an immediate pop right out of the gate, can be can be deadly almost by guarantee. We see a lot of that in venture, not just in climate, but adventure over the last few years. Giants that came out of nowhere, from sort of super seed rounds and then super follow on rounds, immediate unicorn status that are now falling flat on their face. I mean, the nature of building anything successful is trials and tribulations and going through losses and pitfalls and blocks. So it shouldn't have to be said to an entrepreneur that a lot of your job is going to be facing a lot of failure and a lot of rejection. You know, that shouldn't be a surprise. So maybe it doesn't qualify as an answer to the question. I say but number two attempt to answer is how important the sort of early team that you choose is and that's not just your co-founding team, but also your investors who you're taking advice from. I think it's a personal truism and personal lesson I learned, like it doesn't matter how well you're doing on everything else. If you have the wrong people around, you have the wrong one person giving you bad advice that you're paying attention to, it can throw everything else off. So it can be tough. You have to come from somewhat of a place of privilege to be able to say, no, when you need resources and you need people working on stuff, but you really have to find it in yourself to say I'm willing to wait go a little bit slower for now to wait till the right person for that I'm working with the right people. And that can be especially tough when you're trying to raise capital, but as we've seen, taking capital from just anyone is just as bad as not having raised at all. It doesn't matter how much money you raised from that person right? You really should be doing your due diligence. It's never been a better time, an easier time to do diligence on VCs. There's so much public, sort of like testimonials and scoring that's done on VCs these days, whether it's CrunchBase ranking and NFX signal ranking, Founders choice rankings. You can do your homework and you should because you are literally marrying these people, even if you ultimately "divorce" them, it's more of a separation. They're still on your cap table. They can still band together and have influence that's detrimental to the company. So it's just like it's one of those things that people don't think about when all they're trying to think about is to bring in the first first resources. That is true and then I guess three is probably specific to some climate companies. It's that, you know, obviously, yes, engineering and scientific breakthroughs are important. But going back to what we said earlier in the conversation, nothing matters if there's no one who actually needs or wants your product. So getting out and talking to customers is one of the most important things you can do. It's also how you differentiate yourself when you're talking to investors because you'll be the smartest person in the room about your customers needs and wants. And, you know, I think that some founders, not all founders, but some founders would benefit from spending more time with customers before even before going out and raising money so that they understand they have a rock solid, bulletproof understanding of what it's going to take to actually sell and scale the offering. Often it might mean learning what we're the product needs to iterate even in its earliest stages. I mean, those are the three off the top of my head.

JK: No, I love that last one, especially because where we sit in helping our companies with their storytelling, their narrative building, their PR eventually that customer validation piece, if a founder has done that really spent time with their customer really has, you know, stellar references, obviously, you know, helps when we're going through our diligence process. But if they've done that customer validation, the storytelling and narrative building gets so much easier, right? Just something as simple as if you know who your ideal customer profile is. You've spoken to them and you understand who they are, then we can help you craft that narrative that finds 100 more of that customer or 1000 more depending on the kind of business you're in. And it is interesting to me, you know, in my career as an investor how many folks come with really great scientific engineering breakthroughs and haven't validated if this is what the customer needs, right? And I always hear this Henry Ford quote, "If I asked people what they wanted, they would have said a faster horse." It's one of those things that people hide behind. I love when somebody says I spoke to 100 people, yeah, three of them said a faster horse, but the rest of them have validated that the thing that I'm building, somebody's gonna pay for one thing.

SB: Yeah and asking people what they want is not necessarily the smartest question to ask, right? Ask someone you know who owns a horse, "What do you want"? They're gonna tell you a smarter horse but, you know, asking them what would you want to improve about your horse if you could? Well, it'd be nice if it stopped pooping everywhere. And if I didn't have to feed it all the time. You know, like there's a way to get around and break out of the dynamic. I think the biggest challenge of selling things or marketing things is you have to change people's framings and their perspective and their behavioral defaults. And that's not an easy job. That doesn't come from asking them simple questions that are going to generate the same answers that their current way of thinking is generating. So again, you asked what the hardest things are. Understanding customers is probably right up there as one of the hardest.

JK: Yeah, so I guess we'll wrap because we're coming up on time. You know, you've had a career as an operator, you've now been doing this for a while as an investor. We always love to leave folks with good advice that they can take with them. What's a piece of advice that has stuck with you throughout your career either as an operator or as an investor?

SB: Ah, well, I mean, I didn't get a lot of advice. As a weird self bootstrapped, entrant into venture. I did run into Ben Horowitz once who said "invest in people '', which I think is a half truth you have to invest in markets as well. But you know, it's the only advice any VC has ever really offered me. I'll give you that from Ben Horowitz “invest in people."

JK: Invest in people, fair enough. And then I guess we'll take it on the flip side. If you're feeling generous, what is the biggest career mistake that you felt you made and what have you learned from it? What has it taught you?

SB: Yeah, at one of my previous companies, I lost a bunch of customer data because I was sloppy about data migration and backup. It stung really, really hard that decades later, it's still my go to answer. Treat your customers, especially their data or the product with the trust that they've handed in you handed on to you, as the, you know, the second most valuable thing or third most valuable thing after your life and your family's life, right, like trust is such a hard thing to get. And it's so easy to lose. And it's almost impossible to recover. And, you know, I had to learn that lesson with a really geeky anecdote, but it translated to so many other things. It's like when someone trusts you with something, treat it like gold, and make sure that if somehow you have to break that trust, it's in a way that is recoverable with the backup. I don't know.

JK: No, no, it's you know, it's so interesting you mentioned that because your previous answer talking about customer validation, I think it's, it's all sort of one through line, right. I tend to find that the best founders that we work with, they go through the process of validation. They establish trust with the customer, they tell the customer what they're going to do, and then they go and do it. And it's this amazing thing that happens, that trust the customer puts in you, we can quantify it as customer retention as net dollar retention, but ultimately like there's financial value to that. It's as simple as understanding what they want, tell them what you're going to build, build it for them and maintain that trust. So I don't you know, yeah, geeky anecdote as it is, but I think it has a through line through a lot of our conversation today which is climate business or no, fundamentally build stuff that people want and and you know, when they give you their trust, treat it as sacrosanct, it's a big deal.

SB: And that is your brand, right? Like at the end of the day you peel everything else away. A brand is what people perceive you as relative to how much they trust you versus someone else they can go with. And you know, if the biggest pillar of your brand is not trust, then you really don't have a brand.

JK: Damn, that's bars. I guess we'll close with one question. I like to ask everybody as we close, you know, in the climate world, there is a lot of gloom and doom out there. So leaving us on a hopeful note, what is something that gives you a lot of optimism as it pertains to climate innovation and the fight against climate change?

SB: Yeah, I mean, one is that there's less gloom and doom than there was when we first started in venture and climate investing. I'd say the other is there's never been as much government and regulatory alignment and I'd say the third thing is that, you know, technology again, readiness has gotten to a state where you really just have to figure out distribution and finance and we might actually be able to at least buy some time on on addressing the climate climate change challenge. And that gives me hope, and you know, I think more than anything, we really quickly went through despair around climate when people were like, "Oh, this is real" and very quickly to hope that maybe we can fix this. And so that was very encouraging for me.

JK: Yeah, yeah. Well, I am so grateful that you decided to join us today. I'm excited to find some opportunities for us to work on together. My two takeaways from our conversation is one that really no matter what business you're building, the team and the people that you put in place early, have a massive impact on the trajectory and success of your business and even sort of one rotten apple can can ruin the batch and so advising founders to spend time and really think about who they have around them in the earliest days. And then the second is sort of the last bit of our conversation, which is that customer validation, that customer trust, really applicable to a lot of companies, but especially here where there's a lot of excitement around climate, there is interest from people around it. There's also going to be a lot of trust placed in you that you are going to say what you're doing. And so as a founder, if you're listening to this, treat that customer relationship that customer trust as paramount. So those are my two takeaways. Stony Blue, thank you so much for joining us today. We're excited to see more fromThird Sphere and you guys already have a decade of amazing success behind you. So here's to another decade ahead.