The Climate Venture Adventure - Ep135: Kim Zou

Michael Liebreich  So, Kim, welcome to Cleaning Up.

Kim ZouThanks, Michael. Excited to be on here.

ML  So, let's start where we always start. Can you describe what it is that you do, in your own words? I've done an intro, I've probably got it wrong, so who are you, what do you do?

KZ  Awesome. So, I'm Kim, I'm the CEO and co-founder of CTVC, which stands for Climate Tech VC. Started off as newsletter tracking what was happening in the climate tech space with over 50,000 subscribers. And now we're building out and expanding into a market intelligence platform on climate tech. So, our mission really is to accelerate the deployment of climate tech, and we do that by providing clarity on what's actually happening in this space.

ML  So, tracking the flows of money?

KZ  Tracking the flows of money. Also, curating perspectives from leading founders, investors, thought leaders in this space. So, we've had on the newsletter folks like Jigar Shah, Rob from Monolith Materials. And then do a lot of deep dive reporting ourselves. So, we've covered topics from battery recycling, to sustainable seafood to carbon removal markets.

ML  So, this really resonated - and I've been tracking what you've been up to for a few years - but it resonated because, if you go back in time, 2003, I was becoming more and more interested in, at the time it was hydrogen and fuel cells, were going through one of their periodic sort of moments in the spotlight. And there was no good data, there was no good information. And so, I started some spreadsheets with my co-founder, and kind of the rest is history. So, I understand a lot of what you're doing in the background, and I thought it was kind of fun to revisit that. The spur for this was actually... You are the co-founder, who are your other co-founders? Who's your other co-founder, or co-founders?

KZ  Yes, it's a good story. We've told this a couple times. I started CTVC as newsletter back at the beginning of 2020. And similar to you, this was because it felt like there was going to be this second, or third, whatever you want to call it, 2.0, 3.0 wave of clean tech, climate tech. It was also around the time of the pandemic, right? So, everyone was at home, people were recognizing that there is a potential for a global crisis, that that could happen. And I personally was really kind of always a climate person, but wanted to look at this from more of an innovation technology perspective than just a crisis one. So, I started this newsletter. Two weeks, three weeks later, I ended up meeting this woman, Sophie Purdom, who I started the newsletter with, essentially. So, her and I connected through this wonderful professor, Cary Krosinksy, who's a professor of sustainable finance. He's been a real thought leader in this space, and the two of us... I was coming at it more from an energy perspective, Sophie was coming at it more from a food and ag perspective, since she had helped start a company called Kula Bio. And both of us started this newsletter, 2020. We dedicated our... we turned this into a very passionate side hustle, where the two of us, with a cohort of interns, were basically running and building this newsletter on the side for three and a half years. We put out an issue every Monday, tracking the deals, the news that happened in the week, and then we put out a deep dive every Friday. And we've been doing that for three and a half years on the side. And then about a year ago - and I'll go more into how this all came about, but - about a year ago, we were reaching, you know, 40,000+ subscribers on the newsletter, and all of a sudden, it wasn't just a newsletter anymore. We had corporates reading this, we had investors reading this, they were emailing us asking, can I double click behind the report you just put out? And I thought hmm, there's more here than just putting out a free newsletter. And also, it was taking a good chunk of time to put it out. Coincidentally, I ended up meeting Mark Taylor, whom you know from BNEF days, and I think he had just left BNEF at the time - we started talking over zoom, I was in San Francisco, he was in London - and we just immediately hit it off. I think he saw the opportunity for this new wave of climate tech, of the climate transition, and how do we better provide more data, more clarity into what's happening in this space beyond the newsletter sort of platform. So, the two of us have been working together as co-founders now, building out this side of the business. Sophie continues to stay on and is active with the newsletter, and she had some exciting news recently about launching her own independent venture fund.

ML  So, there are just so many points of similarity between what I was doing back in 2002, 3, 4, even to the point where you said, a bunch of interns. So, New Energy Finance was almost entirely intern-powered. Mark, I don't know if he joined as an intern... He may well have, because he's got this incredible background in biochemistry certainly something like that, he's got a PhD. I don't know if he joined as an intern, but we were... I was training interns to hammer deals into a database back in 2003, 2004 certainly. So, a very similar... And of course, these things take over and you kind of want to do a better and better job and you want to slice and dice more accurately and build a taxonomy, so that you can actually spot some trends and so on. And then it kind of takes over your life, doesn't it?

KZ  It all started pretty organically too, you know. The intention here was never to build a massive database of companies. It was really, what's happening in the climate tech space, let's start tracking it. At the time, there was no taxonomy, right? There's clean energy, there's renewables, there's EVs, but there was no way of coalescing that all together into what we now call climate tech. And so really, at the start of 2020, what we had to do was define it, we had to define what the taxonomy was. It's more than just solar and wind, it's more than just Tesla, EVs, it's energy, transportation, built environment, industrial. We're really thinking of it as a theme, and not just an industry. So, we built a whole framework for how we think about that.

ML  So, I brought you a gift. So, a lot of people will be listening on the podcast, so they won't be able to see this, but those who are watching on YouTube might be able to see. This is New Energy Finance Global Renewable Energy and Energy Technology Survey. It's a survey of VCs - of VC deals, VC-backed companies, VCs - and it's Q4 2004. It is October 2004.2004. And, you know, it was all about trying to get across, what is the whole space? What is... At this point, it was renewables and energy technology, but now you're taking this broader lens. So, your taxonomy would include things like carbon removal that we'd never heard of. And on the food and ag side of things, we absolutely didn't go there. But we were doing the exact same thing. That's a copy for you of a historic document. But the spur for this conversation was that Mark, Mark Taylor - who's now, you refer to him as a co-founder, a kind of later co-founder - he reached out to me and said that you have just released your first half 2023 figures, and that they're interesting, and that we should talk about that, as not just a window into you building a business in climate tech tracking, but also as what is actually happening out there in the real economy. So, what did you find for the first half of this year?

KZ  Yeah. I mean, I think this first half of 2023, it was a big marquee report. We've been putting these out every single year since we started, but this was kind of the first sign of the climate change venture market slowing down. So, readers of the newsletter will know that 2021, beginning of 2022, we saw a real peak in funding: $40 billion of capital into climate tech venture, both in 2021 and 2022.

ML  Can I interrupt just to get you to define venture? Because there's venture, there's private equity going into growth companies, there's private equity going into platforms, portfolios of projects. Certainly, going back to 2000 - I've got the proof - 2003, 2004, we were slicing and dicing and making sure that we weren't sort of creating one bucket for everything, and I think you're doing some of that as well.

KZ  So, that's a great question, and I think the line... We battled with this a few times, right? Because the line between growth and private equity all starts to get pretty blurry. So, this report specifically encapsulates venture capital and growth equity. And we define that as private market funding towards companies; towards early stage startups, late stage startups, but primarily, it's towards the corporate as opposed to towards the project. So, it's corporate-level funding, driven by venture, private market investments.

ML  Before we come back to the first half of 2023, I think it's worth unpacking this. Because the audience, some of them are, of course, venture capitalists, they'll know all this and they can go off and make a cup of tea at this point. But some, you know, we've got civic society folks, we've got policymakers, we've got people that are not that familiar. So, the venture capital... What's the difference between venture capital and growth? Yeah, where do you draw the line? So, venture is the earliest stuff. There might be some technology risks, those sorts of things. And then growth is you've got some revenues, the company is off to the races, but it still needs capital. Is that how you think of it?

KZ  Yeah, so we actually wrote an overview on this newsletter called The Climate Capital Stack. And of course, this is not just specific to climate, but we tailored it towards climate. So, we think of venture capital, really, at that early stage of a company's lifecycle, right? Helping to kind of lift them off the ground. And we categorize in an alphabet soup, right? So, you start with your seed, maybe pre-seed, then you have your Series A, B, C, and the list goes on, hopefully, until you get to an exit - acquisition or IPO. And so, we defined, in the report, venture capital being that seed to Series C seed stage. Of course, these definitions are evolving. But that's really the point in time when you're either a founder with an idea, you're figuring out product market fit, that's your seed stage; Series A hopefully you've hit some milestones, and tried to show traction and proof; and the Series B is where you start to hopefully get that inflection point, or you should be able to hit that inflection point, and that's how you raise a Series B. And that's... Especially in climate tech, especially when we're talking about hard tech, right - building electrolyzers, or new solar or battery technology - that's when you start to see those first of a kind projects, or technologies actually being built into the real world. So, we'll definitely talk about that. But that's where we start to see a bit of a shift from early stage funding to needing that growth-level funding to build your first plant or project.

ML  Now, can we add a link into the show notes to the Capital Stack piece that you mentioned. If that's free to air, then we will do that, because I think that's a very, very useful... People need to understand that capital comes in different flavours, and we need all the different flavors, or we need the orchestra of different instruments to play nicely together. And I think a lot of different people who've come through a policy environment, they don't necessarily understand that there's a big difference between VC and then even project finance or construction finance... These are all very, very nuanced pools of money.

KZ  Definitely, and we talk about it in the Climate Capital Stack feature. But also, we're starting to expand, you know, climate tech venture, climate tech VC, it's in our name, but we're really starting to expand our coverage and focus of capital. And what we like to say is, venture capital can be the loudest in the room, they're on Twitter, they're on LinkedIn. But in reality, we need... I think McKinsey's figure is like $1 trillion of financing for the Clean Energy Transition each year. And at the very peak, climate tech venture capital is $40 billion. And so, what are the other types of capital we need? A big component of that is project finance, finance to build this infrastructure. So, we've started putting out a lot of research on that as well.

ML  Going back to when I was literally also training interns, or doing quality control on what was in the database, what we were talking about is total investment in, at that time, it was a more defined sector, it was around clean energy... Climate tech didn't have all this kind of extra... Even vehicles hadn't really taken off. And we were talking about figures like $150 billion, $200 billion that was going into... And that was everything: project financings, IPOs, the whole thing. And the VC bid was $5 billion - not $40 billion, but $5 billion. And that was regarded as an enormously good year. And that was Clean Tech 1.0 was probably only... When it sort of zoomed up to $15 billion and then crashed again. So, those are the sorts of, we're talking about those earlier pools. What do you do with larger private equity? So, if somebody injects money into a business, maybe spins it out, puts in a few billion with some debt, do you cover that? Or is that then, that's not really growth equity, so you kind of ignore it?

KZ  That's not covered in this specific report we just released; we really kept the boundaries to venture capital and growth. But we are tracking those big deals. So, folks who read the newsletter, in the deal section, we have venture funding, but we're also tracking... For now, we've put it in other fundings or other deals. So now we're seeing, if a large private equity investor like Brookfield acquires a portfolio of renewable energy projects, we'll want to track that as well. But for now, that hasn't been encapsulated in this specific report.

ML  That's gonna get really, really interesting. If you're starting to put Brookfield buying a portfolio of projects, you're getting into project finance, and I can, I mean... Possibly, we should talk separately about whether you even want to go there, because I ended up very quickly... I mean, the reason why New Energy Finance went from me and Bozkurt in 2004 to 150 people at the time I sold to Bloomberg in 2009, was that we tried to track everything that you're talking about.

KZ  Yeah, that's a good point. And I think actually, I should clarify, because I think where we feel like there's really a lot of maturity, there's a lot of existing activity, is tracking things like solar and wind, right? Those are definitely within climate tech, but relatively mature over the kind of venture curve. And so, we're trying to track these other sets of funding projects, but also commercial agreements, earlier stage than solar and wind, but kind of coming up the curve. So, things like green steel, or battery recycling... Things that haven't yet quite reached that maturity adoption level, but will be hopefully, these new sets of solar and wind coming up the curve. 

ML  The problem there is you get the first couple of deals and you think, oh, well, we'll create a new... we'll change the taxonomy, we put them in, this is all great. And then suddenly, it's like, oh, six more deals, 60, more deals, 600 more deals...

KZ  And it's an ever-growing database, 100%. We started off with zero, and now we're at thousands of companies and deals.

ML  I have walked miles in those shoes, trust me, trust me. But let's come back to the first half, because what you found, as you started to explain, this was the first time in modern history - so, since 2020, and it may resonate with those who saw previous cycles like myself - but it was the first time that you actually saw the numbers heading down, not up. So, what was driving that?

KZ  Yeah. I mean, there's probably three main things we talked about in the report. The obvious one is macro slowdown, right? So, it's not just climate tech venture funding that's dropped - overall venture market has dropped. And in a lot of ways, climate tech venture funding was relatively insulated from the larger drop. So, I think PitchBook tracked over 50% decline; we tracked a 40% decline in this first half of 2023, relative to the prior year. So, H1 2022. So, less of a drop. Still a big drop, but less of a drop. So, overall market for venture capital and growth equity has slowed down. The second reason is a lot of that drop, that 40% decline, most of it came from growth levels of financing.

ML  These are the bigger deals, the bigger and later deals.

KZ  Exactly, which intuitively makes sense, since that's the largest share of funding. So, we found that growth funding dropped 63% relative to the prior year's period. And there's a lot of reasons for that we can talk about as well.

ML  You're trying to do this without using the word SPAC aren't you?

KZ  I was about to get there. I was gonna say the exits market has closed up. And you know, we actually did an exits analysis for climate tech in December of 2022. Because I think that's been the big question, too. But yeah, we tracked... 37% of exits we tracked were SPACs.

ML  So, the SPAC, just for the audience, that's the Special Purpose Acquisition Vehicle. It's a kind of fast track way of doing an IPO, regarded in some circles as being a bit dodgy but was enormously popular in 2020, 2021; suddenly became the flavour of the moment and then sort of suddenly became not the flavour of the moment. And it had quite a depressing effect across the board on venture and tech, right?

KZ  Yeah, and I think that was really the period of exuberance, right? And that was kind of the peak culmination of this exuberance, where you see a third of the companies we tracked that were SPACing were pre-revenue - pre-revenue. And they were going public...

ML  And that means they probably couldn't have done an IPO. But they were able to sort of slip through this particular window. So, that... I don't want to call it a collapse, but the SPAC trend petering out, coming back down the other side of its boom-bust cycle... What's really interesting is it also drives down the fundraisings; it's not just the exits that get depressed by that, but it's also the fundraisings.

KZ  Right? Yeah, I mean, I think you can think of fundraising almost like a race, right, or journey, maybe - a marathon, let's call it. So, the end of the race is an exit. And I think if that exit, if that finish line becomes further and further and further away, it's really hard to have the energy or funding to kind of get across that finish line.

ML  Shouldn't that mean that a company needs to raise more money if the finish line is further away?

KZ  From the company side, yes. From the investor side... because it's a two-sided marketplace, funding. And so, from the investor side, they have their... Taking a step back, how do venture investors think, or how do private markets, private equity investors think: they raise a fund, they go out to LPs, limited partners; can be, large asset managers can be wealthy individuals, family offices, exactly; and they go out to them with a thesis saying, I will make you a return, 20% ideally, plus IRR. And I will do this on a five to seven-year period, usually. And so, that's their incentive coming into this. When they fund companies, they're thinking, we need to make this return in a five to seven-year period. And so, I think what's been historically challenging with climate tech, especially companies like the ones we saw that SPACed, it takes more than five to seven years to get to a level where you can go through the traditional IPO route. And so, in a way, some SPACs were seen as a good thing - some really good companies SPACed. LanzaTech went public through a SPAC, and they're doing really well. And so, it's not to say that all SPACs necessarily meant they weren't good companies, it was just a much easier route for these companies that have longer timelines to go public without having to go through the traditional IPO process. Of course, then you kind of see the pendulum swing to the other side, and you see a lot of maybe not so good companies that should have gone public.

ML  My own involvement... I had to two companies, two touch points with SPACs. One was, I was a Series D investor in ChargePoint, and ABCD, I think it went to about H, and then they SPACed - great company still, on the pathway to profitability, but they used the SPAC well, and are out there as a healthy company in the ecosystem. The other one was a company called Swivel, which was a mobility company, SPACed at a valuation of one and a half billion dollars, and is now worth $6 million. And they tried to acquire a company that I chair, and luckily, luckily, luckily, the deal fell through before it was completed, or we would have been completely... So, the SPAC thing was very disruptive. It really kind of threw a huge rock into the pool, didn't it?

KZ  Yeah, yeah. And I think it was an easier vehicle to go public, and so then you see a lot of that late stage funding pulling into the market. I mean, we tracked this 40% decline, but I think the underlying, no, go ahead. I was gonna say the underlying theme of it isn't necessarily, oh, it's a 40% decline from the prior year, you know, market is in a steep drop decline. One perspective is 2021 period, that 2021, 2022 period was actually an anomaly, right? Where we saw this $40 billion peak. In reality, the levels we're at right now, the $13 billion in the first half of 2023, parallel the levels before the peak at the end of 2020. So yeah, one could say it's a decline, but it's also the bubble kind of deflating a little bit.

ML  You've chosen a tough year to start your datasets around 2020. Because, of course, I have grey hairs and I go back to 2004. And in fact, we went all the way back to 2000. And so, it sort of bounced around, and it was literally, one or $2 billion; it was, what are, in fact, in the grand scheme of things, quite tiny numbers. And then you had Clean Tech 1.0 bubble, where it went up to probably $15 billion. And then it came back down to a couple of billion and it sat there for a long time. So, when you use numbers like $13 billion, and that being normal, that that was already, you know, 2010, 11, 12, 13, 14, 15, there was just very low levels of activity. And so, I guess the question it raises is, what will it go back down to now? Will it continue to sort of collapse back to $5 and $10 billion a year, or will it sit at $20 billion, which can sustain the ecosystem, people like yourselves and so on?

KZ  Yeah, I mean, I think that's a really good point. So, in the report, we put out a cumulative chart. I think that's a really important story, too. It's not just the last few quarters of funding have declined. Since 2020, we've tracked $117 billion of cumulative - over the last three and a half years - capital coming into the climate tech sector. And so, that's an important story too, right? It's not just that the last two quarters have declined, it's that there's overall been a lot of funding coming into the market. I think, to your question on where will this go in the future: Q3 and Q4 will really be the tell-tale quarters. A lot of this data is noisy, right? Because you can attribute it to the larger macro market that's slowing down. If anything, climate tech is slowing down less than the macro market; we're still hearing a lot of investors doing active deals. So, there definitely is still interest in the sector. Q3 and Q4 have historically been the peak, they've historically been the largest quarters.

ML  People come back from their summer holiday, and they want to get it done by Christmas.

KZ  Exactly. And founders, you want to get it done before the end of the year. So, I think those will be the tell-tale quarters. I mean, one of the additional tailwinds we're tracking for climate tech that I think is differentiated from other sectors is the fact that there's a bunch of... there's kind of these larger public sector tailwinds. Obviously, we talk a lot about the Inflation Reduction Act and how that's driving all this geopolitical competition to be the first to be the best in decarbonisation and net zero. And that's driving, from the demand side that's driving a lot of interest in these new emerging climate tech, clean technology sectors. Then there's also the private sector, and I think that's a big factor, maybe we didn't see as much of an in Clean Tech 1.0, where you have all these net-zero commitments that are coming out, three fourths of the Fortune 500 that have made these commitments. And it sounds like a marketing play sometimes, but at the same time, there's that demand pull from the corporates.

ML  There is nothing new in the world. What it was called back then was... they called it carbon neutrality. All the corporates were saying we're gonna go carbon neutral, we're gonna go carbon neutral. It was the marketing departments, it's very interesting. The possible difference now is that it's the CEO and the CFO actually involved in the process, whereas before, it was just the marketing department

KZ  And it's at the board level now. Obviously, this is not in every single scenario, but it's at the board level.

ML  But will it survive a recession, is a very important question. Because last time it didn't; when we got through to the financial crisis, there were lots of companies that declared they would be carbon neutral, and it just kind of whoops, just disappeared.

KZ  Yeah. I mean, I think the biggest tailwind we're talking about now is just the climate crisis itself. I think we're in a different place relative to 10, 15, 20 years ago. It's no longer... You know, 20 years ago, you could make the argument... There was still a bit of a question, right? Is climate change even real? And now we're seeing record-setting wildfires, and heat waves and flooding.

ML  In a different conversation, I could do the tailwind case, and somebody else could do the headwind case, but here, you're doing tailwinds. I could argue that the biggest headwinds are actually the interest rate. And in fact, that you see things like, you know, Shell and BP now, being essentially told by their investors just to generate yield and returns and not to do all this net-zero stuff. So, there are headwinds as well. I suppose time will tell, as you say, and we'll have a lot more information certainly by this time next year. There's also a big unknown in the energy markets, what happens with the Russian invasion of Ukraine, that could dramatically change energy prices. And that brings me actually to sectors: do you track energy efficiency? Because in a world of tight corporate budgets and high energy prices, are you seeing energy efficiency deals coming through? How is it playing out in a sectoral sense? Because we saw, even by 2003/4 wind was already big corporates, it was heavy engineering. But there was solar, and then that kind of fell away, and we saw smart grid. And then we saw we all saw the EV kind of wave of investments and that's now regarded as basically big corporates - there's no small startup car companies that are going to get venture funded anymore. What's are on the up in terms of sectors?

KZ  Yeah, that's a great question. I think the two big bright spots we saw in this H1 were industrials - industry, we call it - and built environment. And that's where you see energy efficiency play out. So, there's industrial energy efficiency at the factory level, there's residential energy efficiency at the building level. I think built environment was a really interesting story where we actually saw funding for that increase 6% over the prior year. A lot of that was driven by the new interest in heat pumps, right? And it's heat pumps as a technology, but it's also how do we deploy heat pumps? So, we saw initially in that prior period, we saw funding for heat pumps go from $6 million to $200 million, that we tracked this time around. So, all of a sudden, I think the

ML  I'm slightly... I don't know, to blame or to credit for that, because I helped, through EcoPragma Capital, which is my advisory boutique, consulting-advisory boutique, we helped Kenza heat pumps to raise... They did a £70 million-pound round. And that's a low temperature, ground source heat pumps, but for dense housing, and for tower blocks, which is very, very interesting, it's a really cool solution - or warm solution. But there's also Gradient - Gradient was another big heat pump deal. In fact, I think heat pumps... I see a lot of really interesting innovation around heat pumps, and I'm very excited about that. So, there's some great companies coming through for the future quarters, I think.

KZ  Today, we're about to put out a big Q&A feature with AtmosZero, which is doing industrial heat pumps.

ML  AtmosZero is quite early, isn't it? I mean, they're still getting ARPA grants to do their very first prototype. So, I mean, I think there's some other companies - I can't say too much that are... But what's very interesting is, the industrial high temperature heat pumps. Everybody is starting to understand heat pumps for space heating, but I have written that I think that electrification of heat, including industry, is the next sort of half a trillion-dollar annual market. And we're going to see, heat pumps and other electrical heating technologies right across the board. So, I'm very excited about that.

KZ  We have a taxonomy sector called industrial heat. So, we'll be tracking that one closely and keep you updated.

ML  Very good. I would certainly love to do a deep dive into that. Other things, you're also tracking food innovation? How do you define that? I've just done an incredible episode with Jim Mellon looking at things like precision fermentation and artificial meat, or cell-cultured meat. Do you track all of that as well?

ML  What about adaptation? Because that fits in a lot of these things. You talked about restoration of agriculture, mangrove swamp restoration - not really a classic VC sector. But adaptation is going to be very, very important. And there are technological, there are VC-able opportunities within adaptation. Or are there?

KZ  Yeah. So, we have... Maybe if I just take a step back to talk a bit about our taxonomy, because I think that this can help explain what exactly we're calling climate tech. So, we look across seven broad verticals. And that's the usual suspects, right? Energy, transportation built environment, industry. We also look at food and land use, carbon and this category called climate management, which is more about monitoring, remote sensing, how do you understand what's happening. And then for food, specifically, we break that out into a couple of different sectors. So, under those seven verticals, we look at around 65 sectors that that breaks out into, and then beneath that, 250 technologies. So, food, we're looking at alternative protein, within that we'll look at plant-based, fermentation. And then we also look at more so ag kind of sectors, so we'll look at regenerative agriculture, look at sustainable fertilizers. So, that starts to kind of break out into a lot of different sectors.

KZ  Yeah, that's a good question. So, we initially built our taxonomy based off this mental model, which I like to use. And so, the first one of that, which I talked a bit about with climate management, we call it monitoring. And that's basically, how do we collect all this data on what's happening, right, with our environment. You have satellite intelligence companies like Planet that could fall into that category, the ESG, or carbon accounting companies that are tracking this at the emissions level. Then we have mitigation, and that's the big piece of the pie we're still, hopefully, trying to figure out. So, that's energy, transportation, built environment, industry kind of fall into that. And then finally, we have this third bucket of okay, now we need to deal with it, right? It's no longer mitigation and understanding it, we have to deal with it. And within that, we'll look at adaptation and removal solutions. So, carbon removal, like direct air capture and things like that as well. Within adaptation specifically, we haven't seen too many direct venture plays funding adaptation, but we've seen a lot in climate risk or insurance. And that is a form of adaptation in a lot of ways, right? That's financial adaptation. Now we're seeing all these risks that are happening in our ecosystem, how do we better quantify those risks and mitigate those risks through climate risk and insurance.

ML  Yes, I think there's probably lots of things around early warnings, spotting wildfires using satellite technology, those sorts of things, they're definitely adaptation plays. And, I mean, it brings me to some of the challenges because sometimes, you know... I'm listening to you, and I'm feeling excited because I love this stuff, that's how I started New Energy Finance. But it is hard. And so, there's part of me that goes, hmm, I wonder how... So, for instance, how do you decide what is a climate deal? We used to get people saying, oh, we are gasifying coal underground, it's a fantastic climate deal. I'm like, no, it's not, you're finding a way of extracting basically... You may be turning the coal into methane underground and extracting that instead of the actual coal, but it's not a climate deal. And so, we had to kind of fight constantly for what actually is... Public transit, or, you know, video conferencing or advanced mobility -scooters! There you go, fantastic, micro-mobility is a climate solution, there you go. And so how do you deal with it? You've got your team, and presumably, they are all hammering in deals all day, every day. How do you tell them to distinguish between a climate-related and a not climate-related?

KZ  And I'm not gonna lie to you, this is a battle we do week to week, right? We're putting out these deals of the week, and then we're putting it out publicly so people can see what we're tracking, it's all transparent. I've two kind of responses to this. One is, we have a pretty rigid taxonomy. And so, we wouldn't go and track a company in a sector that that isn't in our taxonomy. So, every sector we have in our taxonomy has been qualified by our team as saying there is some sort of mitigation or monitoring or adaptation, climate impact here. And then the second one is less of an answer, more of a response to how the space has evolved, right? So initially, it might be, are they actually mitigating? Is natural gas a climate solution? Now, it's a bit more... does indirect count as climate tech as well? So, if we're looking at... I think the other day, we saw this company that was helping media companies better track their emissions, and they're positioning themselves as climate and sustainability. They're not even directly doing mitigation, it's more about helping media companies. And so, then it starts to get a bit in the indirect land, and that starts to get hard too.

ML  I remember how we dealt with this actually - I've had a flashback while you were speaking - which is that it was essentially like a dartboard. In the middle, there's stuff that's just like, obviously, climate-related. On the outside, there's stuff that just obviously isn't. And then there's a kind of grey area where they had to come and talk to me.

KZ  Okay, well, it's a great call to action. If you think you're climate tech, come and talk to me.

ML  Exactly. But we are also, perhaps, coming down the back end of a bubble, or a surge of excitement about ESG and tracking. And there's a kind of view out there that it is possible to answer these questions using some kind of methodology, some kind of ESG methodology; if we give enough money to EY, Deloitte, DNV, and we also sit in enough workshops on the environmental sustainability... whatever it's called the E... Not FASB, but the equivalent... The TCFD... If we can just grind through enough data, then the answer of what is a climate deal, or a climate technology will sort of drop out. And I personally don't believe that. So, are you doing any sort of ESG metrics around these companies? Or is it, in the end, we've got a taxonomy, we understand it, we're just gonna tell you yes or no.

KZ  Yeah, that's a great question. I think ESG measurement and climate impacts starts to get into pretty hairy waters. Organizations and people have dedicated their lives to tracking this stuff. I think for us; we stick to our climate tech taxonomy... Because oftentimes, it's indirect. You can't say... you'd have to forecast really far in advance, like, what are all these assumptions, what types of companies are they working with, how much can they help them mitigate?

ML  I'll give you a great example of that, talking to a battery company. And they've got batteries focused on a particular sector - I'm not going to say which one - and they're going to decarbonize it and it's absolutely fantastic, and it's a climate deal, absolutely, right? Except that what they then discovered was that the second use of that battery was enormous value to the oil and gas industry, for... I don't know whether it was submersible tracking. But basically, they are now enabling more oil and gas to be extracted - that's the actual impact. So, they would have gone through any screening as a climate deal, but actually, they are probably damaging the climate.

KZ  I want to touch on this enabling piece a bit more, actually, because I think that's another big trend we saw in the report, which is more climate tech deals getting funded that weren't the obvious one, the direct decarbonizers. Like Rivian, great, they're electrifying vehicles, easy climate tech deal. Now we're seeing a lot of these enabling technologies, technologies in mining, mining efficiency. Is mining climate tech, right? Mining is a very emissions-intensive industry. Now there's a lot of venture interest in how do we enable the energy transition, which is really a metals transition, by ensuring lithium and all these things get extracted at larger scale. But then it starts to, again, get into hairy waters, where you're like okay, is increasing mining necessarily climate tech?

ML  This is... we are now kind of over the target, and we'll be getting flack in the comments on social media, no doubt. Because that is incredibly challenging. I've just made an investment in Magrathea, which takes magnesium out of salts and seawater. And it's a light metal, it's a light structural metal, it should be improving fuel efficiency for all sorts of things. Fantastic, but it is also an extractive business. And is it climate? I think it is; I think that if something's extracting and refining lithium, yes. But what about if it's making steel more efficient? Well, we use steel for solar farms, for wind farms. So, we need lots of steel, we need lots of copper. Are copper mines climate investments?

KZ  Yeah. I think we're starting to see this play out in real time. So, we put out actually a deep dive on steel in December. We're doing more research on that now, especially because green steel is all of a sudden, sort of a topic du jour, especially in industrial steel and cement being the two big emitters. And we're starting to see a lot of these digital optimization plays in steel and cement, too. Is that climate tech? How do you optimize these processes so you use less energy? And yeah, then you feel like you're tracking the whole world.

ML  One thing that I'm sure of is that, if you look at technologies that increase the extraction of oil, gas, and coal, those definitely aren't. And so, efficiency on the fossil fuel extraction side, or refining side, to my mind should not be in there, right? And that's controversial, because they say, well, but hang on, we're using this stuff, surely it's better if it's more efficiently processed. To which my answer is the more efficiently you process it, extract it or process it, the longer you preserve the life of the asset, of the extractive asset, and therefore the worse for the climate.

KZ  Yeah, yeah. And then what about companies that are doing methane leakage. They're oil and gas companies, but they're also directly reducing emissions...

ML  This is just really hard...

KZ  We're gonna get into climate philosophy land now.

ML  Right, because I had to work out... So, I think capturing methane, removing methane leaks, satellites, tracking, that is climate attack. But then I had to work out whether that negates the previous answer... it's very hard. The other thing that's really hard is geography. Because you've got the US, where effectively every deal pops up sooner or later, in fact, generally sooner, and you even get a lot of information about the size of the deal, the pre-money valuation sometimes, maybe not always. But go to... Some of this stuff happens in Malaysia, Indonesia, China, India now coming through as a big generator of technology. There's technology coming out of Africa, Latin America. You're global, but is your information equally good everywhere?

KZ  Yeah, that's a good question. And we'll be candid about this, about 80% of the funding we've tracked comes from North America and Europe. And that's not to say there isn't a lot happening globally. It's just that there is this information divide. I think a couple points on that, we'll get to China in a second. I think we're seeing actually a lot of activity coming out of places like India, and Israel, even Singapore. And this is hopefully a future we'll put out soon. I think it's about the funding dollars there, but it's also about the types of sectors and technologies that we're seeing in those areas and how climate tech is kind of similar, but also different. So, we're seeing a lot of plays in electric two and three wheelers in India and battery swapping networks that you don't see in the US or Europe. In Singapore, we're seeing a lot of activity in alternative proteins and food because their equivalent of the USDA essentially allows for cultivated meat. In Indonesia and Africa, we're seeing a lot more truly distributed and decentralized energy networks being built, because they're not kind of beholden to a massive, centralized grid. So, it's interesting to see these pockets of climate tech that we don't traditionally classify in the Western markets.

ML  But you know, clearly, Israel and Singapore look quite kind of US-like, European-like, in the venture industry. But some of those other countries, what you've got a lot more of is the big industrial families doing things which does not hit the press, that the lawyers never talk about it. So, I think it's fair to say we missed, and I suspect you miss, an enormous amount of activity in those economies, because it just doesn't cross the radar screens.

KZ  To kind of push that forward a bit more, I think China has always been an area, we want to get better clarity on. A lot of that funding comes less in the form of traditional venture, private equity deals, more in state-owned enterprises; Zeekr was a big deal that spun out of Geely, which is a large EV company. So, it's less traditional...

ML  I noticed that that was the biggest deal in the first half, and it's just Geely, it's just a big car company. So, you know, if Daimler just invest, builds an extension to some battery factory and spends 2 billion euros, you wouldn't put that in, but why do you put the Chinese Geely investment?

KZ  Yeah, I mean, that one we tracked was, I think there's a similar equivalent to that... Polestar, Volvo. And we tracked that as well, and so they're individual...

ML  But it's not really venture or growth or anything like that. I mean, these are just corporate investments.

KZ  Yeah, I mean, see, this is where the this is where the lines are blurred, for sure.

ML  And I suppose the other thing with China, particularly difficult is, it's very hard to track the state money, you get these kinds of entrepreneurs that pop up with huge, hundreds of millions, even billions, and nobody knows where the money comes from. Some of them are on the world stage, and they kind of go mainstream, and you still never know where the money came from.

KZ  Well, it's funny, because... So, I'm Chinese. I'm American-born, but Chinese, and you know, when you talk to Chinese people, for them, it's actually the opposite. They're like, we know where all the money is in China, it's hard for us to understand what's happening in the US, and in the western markets. So, I think it's almost like... Even though we're in a very global society, these markets are still relatively insulated. So, funding in China doesn't come through from a TechCrunch or a PR Newswire, but it's on WeChat. And so, I'm on all these WeChat groups; I'm still figuring out how to decipher it, but that's where a lot of the funding is coming through. So, instead of a Climate Tech VC newsletter, there's a WeChat group that's tracking.

ML  So, you can tell your Chinese clients, you can say, well, it's very simple, it all comes from the Princeton endowment, and if you're on LinkedIn, then you can just read all about it, and then WeChat coming the other direction. Okay. One criticism of these figures is the peril of the average. Because these are all, they're actually fractal distributions, they're not they're not normal distributions. If you've got one Zeekr, which was what, $500 million, $750 million, you can spend all day, or your interns can spend all day logging hundreds of $1 million, $3 million, $5 million seeds, Series A, and so on. And then you say, the average investment is down or up, because it's $35 million instead of $40 million, whatever, but it's all distorted by this one deal. So, how do you deal with that? I know how we dealt with it, but I'm interested in how you're dealing with the peril of the average just actually being meaningless.

KZ  Yeah. Are you talking about average round-size?

ML  If you average a round-size... Yes, so the average round size, yeah.

KZ  Yeah. I mean, this stuff happens, right, that's why we're taking the average. It's more of a directional figure than it is a ground-truth figure. But we're tracking these big deals at every quarter, in every year. So, I think the fact that these big rounds can happen is also a tell-tale sign of where we are with the market. So, if your data is one to one to one, throughout all these years, and these big deals start declining, I think that's a tell-tale sign that that part of the market is declining, and then you see that play out in average round sizes. So, in the H1 report we tracked, we tracked a 40% decline in funding. We tracked a slight increase in deal activity. And so, what that tells you is that most of the funding decline has come from that decline in those big rounds.

ML  So, as I say, I know how we dealt with it, which is keep the information about the distribution, and actually sort of look at what proportion comes from... We had these deals called gorillas, which was anything over a certain size, $100 million or something. And don't over-interpret averages, and trends in averages, and always ask, well, if this deal wasn't in there, what does it do to... would it change the report. If it changes the report entirely... Because you could say that Zeekr, if it's just Geely, maybe it shouldn't be in at all, and then, does it become a catastrophic quarter, or not? Does it change very much? But it's really difficult, because these are non-normal distributions, and so you kind of have to. The information comes in the richness, not in the headline figures.

KZ  Definitely. We also look at it from a deal-activity standpoint, too, because I think you're seeing a lot more early stage activity now, even more than the prior year, and it's the late stage and growth activity that's declined from a deal standpoint.

ML  Okay, so this is all great, and I love what you're doing, and I'm really looking forward to particularly that electric heating, the industrialization report, and so on; and I can see the value that you get, as once you get smart about all the deals, then you get into the trends, so fantastic. But venture is supposed to be about returns. At the end of the day, it's about either IRRs or Cash to Cash returns. How is this group of investors doing?

KZ  Yeah, I think that's a question yet to be determined. So, if we start the clock at 2019 or 2020, right, where we're four-ish, three and a half years into this; we put out an exits report at the end of 2022. Because that was a question we're trying to answer, too. There's this big MIT study after Clean Tech 1.0 that said only 10% of Clean Tech 1.0 investments actually returned the initial cash invested. And it wasn't even a return, it was just they returned the initial cash invested. So, I think that's a big question, especially for new investors coming into this space. What we have seen though, in that 2020 report, we tracked 300 exits since 2020. So, it's not like...

ML  Mainly SPACs, right?

KZ  37% were SPACs. I think was like 50/60% were acquisitions, and the remaining less than 10% were direct IPOs. I think the challenge with evaluating the return at this point in time is we're kind of halfway through, right? So, if you look at the median time to exit for the 300 exits we tracked, it was nine years. And if we say the start is around 2020, or 2019 - and that's where the majority of these climate tech companies have been funded - it's bit too early to tell in their lifetimes, will they have a successful return or not.

ML  So, what's funny about the venture capital industry - and I count myself, I'm an angel investor, but I've been a VC and I've been a kind of fellow traveller of the VCs in the data sense. The funny thing about the venture industry is if you took the average group of venture capitalists, and asked what is the key characteristic of the industry, they would say it's full of really smart people, and they are; they're really good at analyzing this business, this sector, this company, this management team. But of course, the real overwhelming characteristic of the sector is cyclicality. It's amazing, you have this group of very smart people who do not understand that the number one characteristic of their own sector is, it's cyclical. Is that fair?

KZ  Yeah. I mean, you can see it in the in the charts, right? It's always very, very choppy. And you see these in two or three year cycles, I think we've been in a very big cycle for the last five or six years in venture, driven by these low interest rates. And I think we're starting to see that that come down a bit more. It is cyclical, and there's definitely... I think venture investors tend to have... I don't want to call it a herd mentality, but sometimes a herd mentality, right? You see a deal, you see your favourite investor who you really highly regard, they're in that deal, and you're like, oh, I didn't get in that deal. And you don't even necessarily sometimes worry about the revenue or the margins. And you're just like, oh, they did that deal - we got to get in the next round.

ML  The next round, or a similar company, a company that kind of looks like a clone.

KZ  Exactly. And so, then you see - these every year, every quarter - we see the kind of like, new darling, right, emerge? I think in 2022 the darling was carbon; the darling was carbon removal, director air capture, Stripe and Frontier and all these organizations. But then you look at the voluntary carbon markets and it's like total addressable market, everyone says, is £1 billion - and that's total addressable market for voluntary carbon markets, not even carbon removal specifically. Majority of which hasn't even, technology-wise, hasn't even evolved. So yeah, every year you kind of see that darling, and you see a lot of interest pour into that one sector or that one technology. I think, this time around, there were a few darlings. I think heat pumps was kind of the darling this time in H1. But yeah, that definitely...

ML  So, if you go back to the previous supercycle - so, 2008/9/10 - I was actually invited by the European climate venture community... They opened their books, and they gave access to data on returns. So, I actually got data, and I know exactly what happened, and it was pretty ugly. So, we got - this is 2010 - the average return minus -6% IRR, and this was at a time when Cambridge Associates Private Equity, the returns were around 22%, and venture overall was six and a half percent. And climate, clean energy, was doing negative numbers. And cutting it a different way, the best venture investors in climate actually were returning, there were positive returns - that's the good news. So, the top quartile was producing about a 6% IRR - this is back in 2010. And the second quartile was neither creating value nor destroying it, I suppose that also is regarded as good news. The third quartile was destroying value, and the fourth quarter was obliterating value. And I guess I just look at it, and I see people investing in stuff that they frankly don't understand. A lot of the carbon removal stuff, we have people investing in it who haven't got the first idea about the thermodynamics of pulling co2 out of the air at 400 parts per million; they don't understand the work required; they don't understand how much air you have to move to do that; they don't understand the structure of the industry that then has the pipelines to go off and put that somewhere, or do something with it. And I just see this kind of... Not just in direct carbon removal, but in a lot of the investment on the hydrogen front, I just see it as being buzzword investing by hundreds and hundreds of investors who really should not be allowed out alone.

KZ  Yeah, I mean, I think... I don't disagree with that. I think that was kind of what we saw on Clean Tech 1.0 Two, a lot of tourist investors coming into this space, who hadn't previously been in energy, understood how this hard infrastructure stuff works. The slight change we're seeing this time around is I do think a lot of these tourist investors - and not all of them, but a lot of them - are hesitant to come into what they deem as climate hard tech or hardware because they've seen what happened in Clean Tech 1.0, they've seen the long lifetimes of these companies.

ML  But then what they do... So, they don't want to do... I love the word, the tourist investor. I mean, I'm thinking, of course, the most famous one was John Doerr, back in 2007, with his famous TED Talk and crying about the climate and so on, does he qualify? But if they're not going to do hard tech, then they all chase the same digital tech; they're all trying to do, how do you do machine learning in climate? And they're all going to do, how do you do data and sensors and satellite tracking and ESG and risk software and insurance products, and so on. So, they're all going to chase the same deals, they're going to overpay or they have already overpaid for them, and then we'll go through some years where there'll be lots of sort of zombie businesses, and then a whole series of horrible exits. And isn't that what the future looks like?

KZ  I think the key here is less so bifurcating between pure play software and pure play deep tech, which has historically felt like where there's been a lot of... Not conflict, but there's been a lot of, are you only hardware, or you only software? I feel like the sweet spot here is a hybrid. And so, when you think about climate tech, it doesn't just have to be super long duration energy storage, it doesn't just have to be you know, all these novel electrolyzers. It can be, solar panels are commercial now, how do we get them deployed in as many houses as possible and as many continents as possible? And that's a hybrid approach where it's not pure play software, it's not just go out and use my design optimization software. It's, you need installers, you need a business that can acquire and install these panels. But then you need software to enable it. So, I think that will be where we see a lot of successful climate tech companies. When you look at Sunrun, and some of these big clean tech exits too, and that's where they've had success.

ML  Yes, and I suppose, what was interesting coming out of the last cycle... And I do think there's a lot of parallels with where we are today with that kind of 2010 period, in terms of the cyclicality of the venture space. But what we also saw was some extraordinarily, extraordinarily good companies built - Tesla, prime example. And it was kind of software, plus manufacturing, plus battery plus putting everything together - an integration play in many ways. And so, we definitely saw that, and we saw that actually also coming out of .com boom-bust where suddenly there's Google, and there's Facebook. So, there is definitely an opportunity. Not everything will be catastrophic, but I do think quite a bit of it will be.

KZ  And I think that's... One more thing I want to pull on, which we talk a lot about is yes, you know, there's definitely parallels to Clean Tech 1.0. I think one of the key differences is, it feels like Climate Tech is very broad now, and we're seeing a lot of talent come in, that's no longer you know...

ML  100%. 100%. Your average clean tech entrepreneur or climate tech entrepreneurs a world more sophisticated and able to lead a business than back in 2006,7,8,9,10. No question, absolutely, no question.

KZ  Yeah. And it's founder talent, it's people who have built really successful businesses in Silicon Valley and things like that, but it's also engineering talent. You go to any business school now, 90% of them all want to work in climate tech. And so, you're seeing all different types of talent who want to build in climate tech, who want to build both in hybrid and software and hard tech.

ML  And I want to just open up a final topic, which is, if you go back to previous episodes of Cleaning Up, this question of venture and tech, we've had quite a few episodes: so, we had Episode 18, quite early on, which would have been about 2020, Nancy Pfund, who was one of the earliest investors in Tesla; Beverly Gower-Jones, that's the Clean Growth Fund in the UK, raised over £100 million for investment in the space; Gina Domanig out of Zurich, Episode 47, Emerald Technology Ventures, now got over a billion euros under management; Emily Kirsch, Episode 127, which was quite recent, with Powerhouse; and yourself. The audience would be forgiven for believing that only women get to be climate tech...

KZ  You've just done a great job on getting great woman on your podcast...

ML  What's the reality out there?

KZ  I mean, if you look at broader venture capital, it's not great, right? I think the stat is 2% or 3%, maybe it's up to 4% now, of there being female partners at venture firms. I don't know if anyone has done a good... I mean, maybe this is our next thing, I don't think anyone's done a great job of tracking female VCs in climate tech specifically. But I can say, anecdotally, going to conferences going to these events, a lot of these networking events, at least I see a lot more were more women in this space, both from the venture perspective, but also from the founder perspective. And I think... A lot of hypothesis on why that might be, but I think climate specifically, you do tend to see a stronger kind of presence of women; it's still the minority, but it feels more like a 10% to 20%.

ML  Right, so the numbers in venture overall in the US are something like... I've got it here... Women-only founded teams, 7.2% of deals, 1.9% of capital, which is terrible. And in terms of the venture industry itself, 8.6% of all venture capitalists, only 5% of venture firms have got a woman partner or a woman on the executive committee, it's just terrible. So, you're saying it feels like 20% in climate so better - you don't feel quite as lonely as that?

KZ  I mean, I can give a couple of really good examples of woman GPs in climate tech. So, my co-founder Sophie, she just launched a climate tech fund called Planeteer Capital, it's her and this other amazing woman Hannah that's running it. Obviously, Emily Kirsch at Powerhouse, Dawn Lippert, who's an angel investor in in us, CTVC, at Elemental Accelerator now, spinning out a venture fund called Earthshot. Sierra and Sarah, who run Voyager Ventures with Nat Bullard from BNEF days. So, there's a lot of really good examples I think of women GPs.

ML  And the women founders are not just doing sort of services or... They are actually getting really stuck into the deep tech... is actually also reasonably diverse, right?

KZ  Yeah, definitely. So, I mean, a couple off the top of my head: Leah Ellis, Sublime Systems, they're creating a novel segment, which is definitely deep tech.

ML  We had Jennifer Holmgren from LanzaTech, absolutely one of the original gangster women deep tech entrepreneurs.

KZ  Original gangster women, OGs, exactly. So definitely, definitely seeing a lot.

ML  So, that's a positive development and obviously, this is something that we need to keep... I need to keep raising it on these podcasts, and we need to keep pushing it because we just need so many... we need the role models, and we need to keep progress. And diversity not just around gender, but also on the other underrepresented groups, it's quite clear.

KZ  Definitely, definitely.

ML  Thank you so much. It's been a real pleasure talking to you, I've had all sorts of flashbacks to the sorts of challenges I was dealing with nearly 20 years ago.

KZ  Awesome. Well, thank you so much for having me on, Michael, super excited. And, yeah, really excited to see what you're doing with Cleaning Up.

ML  And good luck with the second half tracking all those deals.

KZ  We'll keep you updated. Very good.

ML  I look forward to it.