Climb By VSC: Episode 35

Jay Kapoor: We've all heard enough of the doom and gloom, cyber stories of purpose-driven innovation, and sustainable, positive change. As always, I'm so happy that you've decided to join us. Now let's climb. Hey folks, welcome to another episode of Climb by VSC. Today I am thrilled to have on the show VC investor Shawn Xu who is currently the Chief of Staff at lower carbon capital, a fund that many of our listeners are intimately familiar with or at least have heard of. Shawn believes in audacious founders and bold solutions to the climate crisis. So we wanted to have him on the climb because he's not just an investor, but he's also a community builder and helping to build lower carbon platforms and founder products. So a little bit of background on Shawn. He's partnered with over 50 companies to date, helping him build a wealth of knowledge from companies going from zero to one ideation to product market fit. And prior to this role, Shawn, what have you done, man, you were at OnDeck you were at first round you were at floodgate and you've also you know, where I became familiar with your work, Ron some fantastic newsletters, like the anchor list and the next-gen newsletter. Shawn, welcome. Thank you so much for joining us.

Shawn Xu: Hey, thanks for having me, man. I'm really excited to chat about the climate and talk a little bit. I nerd out a little bit about investing in the space of climate tech.

JK: That is what we do here. We'd love to nerd out on climate. So maybe just to cap your experiences a little bit because I gave a very, very quick download there. So talk to me about how those diverse experiences we didn't even talk about, you know, tech policy advisor to Gavin Newsom and some of your investing roles. How did that lead you to now focusing on climate focused startups as an investor?

SX: Yeah, that's a good question. I think a combination of things when I was an investor at floodgate, I was really trained by the partners there. Mike Maples and Amira, CO to think about investing in terms of inflections major change events in the world, right? And the most interesting change events that matter to me, are, you know, technology change events, regulatory change events, behavior, change events, and all the inflections oriented around climate tech we're becoming too obvious to ignore right a lot of the inflections around the energy transition becoming inevitable, right, a lot of the regulatory inflections with the IRA passage, as well as some of the regulatory frameworks that are emerging in Europe. Even before some of the stuff that we're seeing here in the US it had just become too interesting to just just just say, Hey, this is not going to happen, this space is not going to happen. The dollars are pouring in and the corporations are becoming voluntary buyers, and voluntarily committing to hitting certain targets with regards to sustainability and hitting that zero. And so I was really captivated by that. So at floodgate, I made the first investment in the first carbon removal investment at the fund. And so that really got me excited about that space. I started seeing a lot more founders interested in climate and so you know that that's also a signal for me to spend some time there. So I've been around the climate for a long time, and when I got introduced to Chris, you know, a lot of things came together. And it really forced me to really think about how to spend all my time thinking about investing in building climate tech companies rather than just spending, you know, a quarter my time or half my time, spending time there and so I think longer term is a really special place and Chris is a really special person to go work with and Google for and the confluence of all those things got me excited about spending my time at low carbon. That's a little bit of a long answer. But that's the truth.

JK: No, no, it's a very helpful context. And I know most of our listeners are familiar with lower carbon. Those that maybe are not yet you know, 800 plus million dollar fund focused on unpacking the planet, as Chris likes to say, maybe help us understand. You know, now it's been a couple of years since lower carbon was launched. Talk about your role within lower carbon. What are the responsibilities of the Chief of Staff? How do they differ from those that you've been doing? In the past as you know, sort of a pure investor?

SX: Yeah, to be honest, I don't think it's all that different. You know, when every chief of staff role is a little different depending on where you go, but how we worked it out with Chris and with Claremont, other managing partners. I want to say I spend anywhere between 50 to 75% of my time, still focused on investing right on, you know, being a generalist software investor for most of my investing career. And so I still look pretty closely at all the software companies that come through lower carbon, I ended up being particularly interested in energy transition. So that's where I get to spend my time. I work a lot with our companies focused on electrification and energy transition here in the US and Europe. And you know, also plugging in where I can be helpful around going to market and just understanding commercialization for a lot of the deep tech companies. I found this really a wonderful place to be able to spend time with folks who are two PhDs apiece and really understand the science and really understand the climate impact of some of these companies. For I was an investor I was working on international expansion and go to market for companies like square and so trying to take a lot of what I've learned there and from what I've seen working with a bunch of companies as an investor in the generalist firms and apply that to what we're seeing here at lower carbon, right. And so yeah, I plug in a lot on the commercialization stuff when it comes to deep tech and trying to work with vendors there. I call myself a little bit of a network Sherpa because I'm trying to connect the dots between people in, in Chris's network or in in clays network and our portfolio companies, right? That could be customers, that could be talent, that could be advisors. That's just what I like to spend my time on. That's what's on my plate today. And that's, that's how I've constructed kind of like, in my own head, like the sense of milestones I want to hit for myself and for fun.

JK: I guess when you sort of think about the vast landscape of climate you've sort of you know, you said energy transition is really interesting to you. Within the actual transition, like what are some characteristics of companies that you're drawn to? Or even maybe generalize the characteristics of boundaries in that space that you're drawn to? What do you say, hey, I want to spend time with this company or this founder?

SX: You know, build really used to say that product market fit looks like something where they're prying something out of someone's hands because they needed so desperately right in energy. Transition, there might be a regulatory forcing function. You know, there are companies out there where if you don't comply with a certain energy efficiency, or if you don't pass a certain energy efficiency bar right then you get fined or you are unable to do so from something. There's a company specifically that I'm thinking about in the UK where you know, they have to give certain energy efficiency benchmarks for being able to rent a home if it's a privately owned instance if it's an institutionally owned property right. I think it's like a 30,000 pound fine and they don't do that. That's pretty interesting to me. Right? I think that in general there are these types of inflections that you look forward to that they get excited about that create new points of new points of urgency or new points of demand for a particular product. As far as like what I look for in founders, that's the same thing that you would look for in founders in any other company setting right or any other venture setting you look for tenacity, you look for evidence of velocity and you look for folks who have a track record of execution and shipping and able to build a movement in some ways, right able to attract a team or customers in a way that you know, buying into a product or an idea that didn't exist before. Right? I think repeat founders are great folks to work with because they've already, you know, gone through the kinks of understanding what didn't work the first time they went around, right and so you can work with them and they know exactly how to go full steam ahead from day one. Rather than having to learn some of that throughout their lives, their early zero to one process. And I think that there is something to say about this reality distortion bubble that a lot of founders have that are able to just make people believe in the product that they're building or the breakthrough that they have identified is something that is commercializable and is able to be built around. Right. And I think that that's, that's the most expected. That's why I got involved in Metro for one of the main reasons. I think it will work with some of these extraordinary founders and help them build those companies out there. I think that is most exciting to me.

JK: Yeah. You know, one of the things I was listening for in your answer that I didn't didn't pick up on, maybe we can elaborate a little bit is market sizing. And I know, I'm sure a lot of founders that have listened to that pitch to VCs before, you know, they hear the answer, you know, hey, this is a great company, but we're not convinced on the TAM or we don't know if the market is there. When you think about the kind of companies that you look at, especially within you know, energy transition, but we can broaden it out. You know, some of these solutions are localized or they are sort of restricted to opportunities within the US because, you know, in Europe, there are different regulations and different sources of energy and how they're handled. You know, how do you think about market size and especially given the size of lower carbons fun? Is there a threshold of, you know, size and success that the company has to have for it to even make sense for you?

SX: Yeah, I mean, of course, market size matters. I think that although one of the great things about climate is that we're talking about energy, we're talking about the entire industrial economy, right? Like it's not these are not small terms that we're thinking about. You have to believe that there's a terminal valuation you can get to that, that can return to fun, right. It's an obvious statement. I think that for us, we have generally $300 million early stage funds. And so we do an analysis for every single company trying to understand what is the terminal valuation that this could get to and there's five scenarios that could potentially play out right, it could go to zero in this case, this is what it goes to zero. But then there's a you know, knock it out of the park scenario. What does that look like if everything went right based on what we understand about the TAM and the margins and multiples in the market that we can see and there's cause for optimism for the XYZ variable. Sometimes there's like 1020 variables that we look at. This is the potential valuation of a business that can get to and this is the ownership we would need to have to be able to believe that this can return the fund right at least 1x. It's more than a science, isn't it? It's really difficult to nail this at the first check stage of a company, if ultimately you need to own 20% market share for a business to be successful and get to a liquidity event that makes sense for us as a fund. That's really really difficult. I don't know that we would back that company, right. For the most part, we want to look at companies where if they owned, you know, single digit percent market share of a bit of a particular market, they could still return the fund and then some, right, if you look at our companies in our portfolio, like Sol Yogen, that is, you know, working on you know, decarbonize decarbonize. Chemicals, or we have companies that are working on decarbonize steel such as Elektra or decarbonized cement like Sublime, you know, steel and and cement our you know, if you can produce those products at lower cost or cost parity, you know, the market is established, do you understand how large that opportunity is? You don't, you know, a commodity input product as a commodity input product, you should just be able to tap into that market and you can, you can, you're off to the races for that with a particular opportunity. And so there are very well understood attempts by some of our deep tech companies that we're excited about too. Well, that answers your question.

JK: No, it does. And I think part of it, it's always relevant for us because I always think of the hunter walk quote that the best companies grow their own stamps. And so a lot of times, you know, you'll and you may or may not agree with that, but I sort of feel like there's a lot of times where you fall in love with a team, you have faith in the product, and you have questions about the TAM. And more often than not in my investing career. What I've found is, you know, the land and expand model or the company sort of solves a problem in one market, and it ends up opening a much larger market that you would not have foreseen earlier on. And ultimately, given how early I invest. I know you invest so much that she's relying upon the team, that it sort of like you can spin yourself in circles, trying to figure out if the TAM is large enough. And ultimately, you know, the company may pivot in or out of a market that seemed larger didn't seem large enough. So it does answer my question there. I guess, tied to that, a little bit of this idea of storytelling. And I know you've talked about this, as our listeners know, it's something that we discuss a lot, you know, at vSee ventures and on climb, talking about this idea of the importance of storytelling and climate tech, and especially for scientific founders, which is I think what I've heard you talk about before.

SX: In many cases, storytelling is critical to securing funding for the business. Right. And I think in a lot of companies that are you know, a lot of the climate tech companies that are in this category of deep tech and hardware are born in labs. Or out of PhD research in necessitates requires, you know, raising a decent amount of capital to go from bench scale to pilot scale from pilot scale to, you know, commercial viability. In some cases, you have to raise quite a bit of capital to realize that vision, right, and so it's a lot more about science risk or engineering risk than it is about market risk. It's actually more important for a lot of these deep tech companies than software companies to have an amazing ability to set a vision to describe that vision and then bring an audience particularly investors, right along for the journey to be able to show Hey, this is something that we can possibly get to this. These are the reasons why we can get to it if we if everything goes right, this is what the world will teach. This is how the world will be changed. I think a little bit about a fun story and about one of our portfolio companies carbon Crusher, which I'm pretty excited about their company that's they've developed these amazing machines that look a little bit like the Batmobile and they effectively are able to repave roads in a in a in a carbon negative way. Right? They're able to basically repave roads, it's like a 10th of the cost. And able to do this in a zero carbon or negative carbon way. They've been growing like crazy because they're able to go to these municipalities and across Europe and now parts of the United States and share. Not only are we able to provide the service to you that is a fraction of the cost of anything that you can find on the open market. But it also has this amazing externality that it gets us to not have to release a ton of carbon into the air for every single time you have to repave a road right? And it looks pretty incredible doing it. I mean, it's kind of like something out of the future, right? And think that they have this amazing way to tell that story that you kind of have to see to be able to really kind of grok it 100% But when you see it and you see this this machine that's that's actually cheaper, better faster, you know, for for all the dimensions that we just talked about. I mean that's that gets a lot of people excited, whether it's buyers or investors or or people who just want to support them on their journey.

JK: Yeah, I'm gonna double click on something you said there, Shawn, because I think it's so true that that didn't exist in general tech for me and you know, where I started my career in investing in software in general tech, to now when I look at climate tech, it is a very visual problem. And it sort of invites a lot of visual solutions and we are in this sort of era of visual communication. You know, you can extend that to TikTok and Instagram reels but even just sort of like how we communicate socially through memes or whatever. We are in an era of visual comps. And it's so valuable when we meet founders, especially the ones that come to us and say hey, you know, we want your support on PR We want your support on branding and marketing. That's where to get that in order to entice customers in order to excite future employees in order to get that next round of capital. We need to take our core strength which is showing a visual problem demonstrating a visual solution. And you know, doing it in ways that really sort of like actualize the problem for people in a way that like software, you know, can't do if you're building software for data centers. There's like so many diagrams that I can use and that at a certain point, like it's not a visual problem, but paving roads. Well guess what, you know, we can send a film crew out there, sure, actually see it in action. And it just, I think, gets a new generation of companies, you know, to sort of accelerate growth because of that.

SX: You're so I'm not 100% Correct. And in just the other week, for LA Tech Week, we went down and partnered up with climate draft, which is a great platform for folks who are curious you know, I describe it as a book face for climate tech folks. But if you're interested in getting a climate change job, go check out climate draft.org. And, you know, you'll be able to find opportunities to plug in there. But in any case, we did this great event, basically bringing together the aerospace community in LA and, you know, predominantly folks from the SpaceX mafia, and we got them in the room and basically pitch them on climate tech and said, Hey, you should be thinking about if you want to leave SpaceX, he should start thinking about starting a climate tech company. User super rocket science superpowers and help us off the planet help us build these climate tech companies or join a climate tech company because they all need amazing engineers who really understand hardware right? And the way that we approached it is we have a bunch of portfolio companies. I think most of the companies that pitched were portfolio companies and they did a showcase and basically did this pitch sharing a little bit more about how they thought about climate, how they thought about trying to solve that with their product, and you should have seen the folks in the room. I mean, their eyes lit up when they really tried to understand who they really were able to grok and see images and photos and videos of folks who are building companies that are, you know, trying to build direct air capture systems that are pretty compelling. companies that are able to utilize the power from waves in the ocean, and when you're able to see it. And you know, these are engineers who are chasing the most difficult engineering problems in the world who also if you if they're able to solve it, and they're actually able to build the thing, actually is able to create an enormous amount of impact and also a crazy financial outcome, you know, they were all super excited about that.

JK: You are preaching to the choir, my man. So as I told you we know we do the segment on ever. That would be a little bit of a rapid fire. I'll make a statement that will be hyper hopeful and I'd love your sort of brief thoughts on why you feel one way or the other. So, I will start as a turtle optimist though so I might, you know, what shall we do if we don't get enough conflict here, I'll just jump in and we have debated why not. Let's start with the IRA Washington, you know, government as a catalyst for climate innovation.

SX: Yeah, hype is hopeful. Yeah, for the most part I think, you know, we just made investments in companies that would not have been possible without the IRA. The caveat here, I would say is that just because the dollars exist, it's amazing that the dollars exist to be able to catalyze and subsidize a lot of the core climate milestones that we need to hit right, particularly in energy transition. But just because the dollars exist doesn't mean it actually gets deployed and implemented correctly. Right. And so, you know, we made investments in companies like Crux that's building a marketplace for tax credits for renewable energy developers to be able to get liquidity and instant access to dollars in a way that it couldn't have done before, right. And so a lot that benefits a lot of that, I think, medium and long tail. We invested in a company called Eli that is building an incentives API that is able to make sense of the dollars out there and very easily help end users access those dollars, kind of like how you would use TurboTax right. And so, you know, I think that the dollars existing will accelerate a lot of the climate impact that we're hoping for, and companies are now coming up to meet that challenge, right to enable that as frictionlessly as possible.

JK: I'm pretty excited about that. Everybody is looking at the current economic environment, recessionary economic environment. There's a recession making climate investing efforts harder. It's weird to ask this hyper hopeful so we will say agree or disagree.

SX: The recession makes climate investing efforts harder by nuanced answer is that early stage tech, early stage investing doesn't really change all that much for me. I think, you know, there might be fewer founders building but you know, the tourist founders will leave and the folks who are very serious and this is like their life's work tech founders, those people will always stay and they see the opportunity and the folks who would decide to go build after an opportunity and chase an opportunity during recession. Those are folks you want to go spend time with anyway, right? Like they just see that the inflection is too obvious to ignore. The opportunity is too obvious to ignore, and they believe and have so much conviction on a particular product, and they go and go and decide to go build it. I mean, I want to go meet all those founders and so it makes my job in some ways easier because there's just less noise in terms of folks who are building in space. And in some ways, I think, you know, valuations are coming down to reality, which makes my job a little bit easier. I think in terms of just trying to help founders think through how do we get to reasonable milestones that match reasonable valuations again, right? I think that's actually a healthy thing for the ecosystem.

JK: Yeah, you weren't kidding about being an optimist Shawn. I was expecting fire and brimstone but no, I listen, I largely agree with you. I think. So much of what we do as seed investors is also you know, just look for sort of the long term, you know, the terminal exit value, but also think about, hey, 18 to 24 months from now, does this company have a tangible path to a series a or if it's a Series A doesn't have a tangible path to a series B? There's a lot of uncertainty there. And it, I think, makes a lot of folks that are on their hands, which, you know, could be good in some ways. If you're an active investor, there's probably more deals out there for you to go get. But on the other hand, yeah, can create that uncertainty with your dollars.

SX: You got to be in a position to say that, you know, and the same at the same token, these are the investment categories in climate are I mean, Lower carbon, we spent a lot of time thinking about getting to net zero, recovering, removal, and adaptation. And in all three of those categories. There's a lot of non-dilutive dollars that are still coming online regardless of whether there's a recession going on or not, that is going on the market. You know, just recently, we, the department of energy released a huge block of capital of non dilutive capital for fusion companies, of which I think, you know, a bunch of our companies in our fusion fund, were able to take advantage I think 70% of those dollars, but it was double digit millions of, of non dilutive dollars going towards r&d for fusion. And I think that when it comes to these deep tech companies that aren't necessarily contingent on some sort of like consumer consumer budget or something like that, right, it's really we're still talking about fundamental r&d For a lot of these products that are too important to fail in the eyes of some folks in in policy, I would say right there, they're getting the dollars to kind of get them to a point where they can launch a product into it. So to actually get to a viable product, right.

JK: And so I think that that's also a cause for optimism for me. Yeah, you're jumping ahead to my third and final topic. We're hopeful so let's do it now. Fusion energy's ability to have a near term impact. Let's let's say within the next decade. Hype or Hopeful?

SX: We're hopeful I would say that I'm pretty much a hopeful on this, right. Just because I think it will happen a lot sooner than people realize, right? I mean, I think that people have been chasing fusion for decades, right? For the better part of the century. And some, some might say there's a lot of inflections that get us excited, and this is the basis for why we raised a fusion fund. That is exciting for us. One one area that I think could be an interesting variable here is the ability to leverage AI and simulation to be able to accelerate the r&d cycle for a lot of deep tech categories, whether it's fusion or synthetic biology or others, right? And so I think that the pace of innovation and r&d in areas like fusion are, as I understand it, much more sophisticated, much faster than what people tend to believe. And so will we get to a point where we can create some sort of liquidity event for a fusion company in the next decade? The answer for me is probably yes. Will it get to a point where we have commercial viable fusion that's connected to the grid that connects everybody? I think that's probably a question better left up to Fusion founders and, you know, some of our partners who are spending a lot more time there. The answer I can give you is that I think it'll happen a lot faster than people will ever anticipate.

JK: Showing you the injection of optimism I needed on a Friday morning, man, this is fantastic. So let's close, where we'd like to close with a lot of our guests. You know, it feels like the climate world. There's a lot of doom and gloom and you know, sort of challenges in terms of lack of action. But since you are our eternal optimist on the show, give us the biggest thing that gives you hope or optimism in this broader fight against climate change.

SX: Oh, great question, man. So I'll end with a very quick short story, which is I've been going and touring college campuses, and basically meeting with student founders. Right and I think at the beginning of the show, I mentioned we had mentioned that, you know, I was working with first rounds Gorman Fund, which, you know, got my start and that's where I got my start in venture and found founders who were, you know, building unicorn companies when they're 17 and 20 years old and stuff, right. And I think it's, it's pretty remarkable that age is just not a number. It's just I mean, it is just a number. It's actually not a thing that should affect whether or not people can build great companies. And the punchline here is, I think, four or five years ago, if you asked to convene all the student founders or student engineers and builders who are excited about climate and get them in a room, undergrad, graduate Ph.D., you probably couldn't fill the room with more than like, 10 people, we probably could write a lot of policy folks, a lot of folks who are intellectually interested in it, but seriously building in the space, like probably not that type of activity right? We did an event at Penn, maybe just a few months ago, and we packed the largest Auditorium on campus. There must be like 100 builders in the room, all of them actually serious builders. And we had dinner with some of them afterward, right and the number of smart people who are believing that the default path to success is to build a climate company, and the proportion of brilliant smart young people who are excited about building climate and, and they have a belief that there is a path to go do it. It's not some crazy thing to go chase after a deep tech idea or to find a co-founder who can help them build a deep tech hardware product. If they're more nontechnical. It is just mind-boggling. There are just some of the smartest people working on this right? And so when you find that trendline right, I think that's, that's where you got to procure up a little bit. And that's where I'm excited. I think that trendline will only continue to go up. So in any case, I think that's the part that the number of smart founders that are coming into climate is what I'm really excited about it.

JK: Yeah, that's a fantastic place for us to leave our conversations on. I could talk to you for hours, I'm so grateful to finally get to talk to you in person after learning from your content for so many years. So just want to say thank you so much for joining us on Climb for sharing your insights or and for all the awesome work you're doing at lower carbon. We hope to continue following along and hopefully find some more investments together.

SX: You bet. Hey, thanks so much, Jay.