Entrepreneurs for Impact (EFI) Podcast: Transcripts
#98:
$500M for New Climate Tech Investments in the $326T Real Estate — Greg Smithies, Partner at Fifth Wall
Chris Wedding:
Greg Smithies, Partner and Co-lead of climate tech at Fifth Wall, welcome to the pod.
Greg Smithies:
Yeah, thanks very much for having me, excited.
Chris Wedding:
Yeah, well, speaking of excitement, I think many listeners probably will also know about you-all’s tantalizing headline from, I think July, this summer sometime. So, let's get right to it. What was this headline and why now, Greg?
Greg Smithies:
Well, I think the headline you're talking about is we announced the close of our $500 million first climate fund. So, always nice to hit a nice round number like that, half a billion dollars. From inside seeing how the sausage is made, we actually originally started trying to raise $150 million, so it's always great when you blow through all of your goals. But I think also tantalizing the exciting because Fifth Wall's model is that we bring the industry along with us.
So, we're the largest venture fund that focuses on the built environment, think of that as real estate, construction, infrastructure, a little bit of energy. What's very exciting about that $500 million is round about half of it actually comes from a large consortium of corporates in the space. So, people who own and operate and develop buildings and real estate and infrastructure. The reason why that's exciting is, I think historically, people raising money for climate, for philanthropic reasons is the number one thing that's been happening, but seeing some very frankly, middle of the road type companies having this come to Jesus’ moment and actually putting their money where their mouth is into a climate tech fund is very exciting for me. Seeing that, okay, it actually looks like corporations are coming along for the ride now. They're getting onto this ride in a way that they didn't even do in climate tech 1.0, so that's the really exciting part from my side.
Chris Wedding:
Well, you're right. Half a billion is not only a nice round number, but it starts with a B as well.
Greg Smithies:
Yeah, we're not quite in a Tres Comas club, but we'll get there.
Chris Wedding:
That’s pretty amazing to be oversubscribed, that much demand to, not really force, that's really the wrong verb here, invite you to raise the cap on your fund. What do you think led to such oversubscription, such excess demand for you-all's strategy or maybe the role of strategic or maybe it's PropTech, real estate tech just hasn't seen the kind of innovation it should have around climate solutions?
Greg Smithies:
Yeah. I don't think there's any one particular smoking gun here. There's a lot of things going on, but in simplest terms, real estate was the largest asset class. There's $326 trillion of buildings out there. In any country, it's like 10-20% of the GDP and the US, it's like 13%, but in other countries, it might be higher. It's also the industry that consumes 40% of all of the energy out there. Like the energy crisis we're seeing in Europe right now around natural gas, that's predominantly driven by people needing to heat their buildings. 70% of the world's natural gas in some way, shape or form is going into powering buildings.
06:39
Long story short, because this is such a monstrous asset class, so much money involved, you would think that lots and lots of climate spend had gone into it. But when you actually look at the total dollars from venture capital and growth equity that have gone into climate around the built environment, it's 6% of the dollars have gone into built environment climate tech. But it's 40% of the problem and it's 60-ish percent of the total assets out there.
So, it's clearly very heavily under-invested from a climate perspective and the numbers are astounding. Any percentage of 326 trillion is going to be a large number, but the real estate industry, just in the US is going to have to spend around about $18 trillion to decarbonize itself over the next 20 years. To put that in perspective, that's like, call it a trillion-ish dollars per year, every year for the next 20 years.
The entire internet where everybody's made their venture capital returns in the last 20 years, Google, Facebook, all of those, the whole internet is only around about a $1 trillion market. So, just climate tech, just in real estate, just in the US, you're talking an internet every year.
So, I think when we started laying this out, not just for our strategic corporate partners, but for the pure financially driven pensions and sovereign wealth funds who are just looking for a financial return, when we started laying out the numbers like that, they started to realize like, “This is actually a monstrous opportunity. This isn't just a philanthropic exercise anymore.”
Chris Wedding:
I'm vigorously taking notes here as you're speaking. There are a lot of very shocking numbers there. I think one thing you said, I say a lot, which is, any percentage of a large number is a large number. One of the beautiful things about real estate and finance, you can get small numbers, but together it’s still big numbers. Just to make sure I heard you, were you saying 6% of all climate focused VC dollars goes to some sort of real estate, PropTech, yet real estate is 40% of the problem in terms of carbon emissions?
Greg Smithies:
Yep, exactly. So, it's 40% of the problem, but only getting 6% of the dollars. Also, if you think of it in terms of opportunity, it's way more than 40% of the opportunity because it's going to cost us so much money to retrofit all of these buildings. The opportunity is probably larger than that 40% of the problem that it is, but either way, the simplest way to think about it, 40% of the problem is only getting 6% of the dollars. It's like all of the dollars are chasing your next electric vehicle startup, where transportation is only 20 or 25% of the total problem.
Chris Wedding:
Okay. So, I think some listeners will hear the massive $18 trillion just to decarbonize US real estate and think, “Well, the idea of just even increasing energy efficiency for the built environment seems so easy, but it doesn't take place.”
09:33
I mean, I remember way back when I was in private equity, we got to know Amory Lovins in RMI. Amory was in town once, came to our office and was talking about just how many people, professionals in real estate need to say yes in order for some of these things to take place. Can you just unpack why it's so freaking hard to do low hanging fruit around even energy efficiency retrofits?
Greg Smithies:
Yeah, so there are probably three big issues and some of them are surmountable, others are a little bit more difficult, but probably the most straightforward one is real estate is a long tail industry. If you look at the internet, you've got Facebook, Google, Amazon, and they account for, I don't know what percentage, but it's a significant percentage of the total assets or total market cap in the internet. Real estate is not like that.
We've got 110 of the world's largest owners and operators of real estate and we haven't done this, bottoms up, but as a percentage of the total real estate market, maybe we're scratching 1% penetration. So, it's just very complicated to sell because in most other big industries, like if you're doing enterprise sales, you can get a quota carrying rep who can pound some pavements and they can go and sell to 20 big name accounts and you're a multi-hundred-million-dollar software business. It is not like that in real estate because it's just very bifurcated, lots of long tails of small owners.
The second issue is that inside those buildings, you've got an incentive misalignment. Typically, tenants pay energy bills and building owners don't, but the building owners are responsible for CapEx. So, any retrofit has to be paid for by the building owner, but he doesn't see any of the benefits of that building being more energy efficient because he doesn't pay the energy bills. So, that's just, how did we get ourselves into this sort of a situation?
Then the final piece is that a significant portion of the real estate assets out there are held by things like REITs, real estate investment trusts, which do not have long-term hold periods. So, they're not looking to buy and own a building for 50 years. Many of them, their investment strategies are really short-term flips. And so, they don't necessarily think of themselves as wanting to make this building better for the long haul.
Now, those are all reasons why selling anything into the real estate industry typically is quite difficult. What we have seen on the climate side is, I think 10 years ago, many of these clean green technologies didn't make economic sense. So, you could only really sell them to the bleeding, leading edge people who were buying them for ethical reasons.
At the time solar power was roughly five to 10 times more expensive than coal power. So, it's very difficult to justify that to your CFO at a REIT, so why are we putting solar panels on this building, right? However, today, let's juxtapose it, that solar power is probably the cheapest electricity humanity has ever seen. The tenants inside the building might be a Google or an Amazon or a Facebook who have signed their own climate pledge. So, they don't want to be in a building, they refuse to be in a building, they can't be in a building that isn't clean and green. They have to be in there. They have to be procuring that clean energy, so the tenant incentive is there.
12:47
Then you've got all of these regulations. There are things like Local Law 97 in Manhattan, which is going to cost landlords there about $10 billion per year in fines if they don't clean up their buildings. If you're a real estate person, you can put a cap rate on $10 billion per year and figure out how much CapEx that actually means they should be spending. It's a lot, even at our, quote unquote, “high interest rate environment” that we're in right now. It's hundreds of billions of dollars just in Manhattan.
Then you've got other things like the Inflation Reduction Act we just saw come out, which is pumping $370 billion into energy efficiency and electrification. A significant portion of those dollars are earmarked for things around buildings because it's such a significant portion of the problem. So, that's a very long way, and I apologize because it's a very long answer of saying, for all of the things that used to be a significant problem in this market, now we haven't solved all of them, but slowly but surely, the pieces are clicking into place here where this industry is actually able to start buying these technologies and doing it rapidly at scale.
Chris Wedding:
Well, I know that was the perfect length, Greg, because the problem is so poorly understood. I mean, joked is the wrong verb, but we talked before pressing record that, that's a really important point to make right now, that these things make economic sense.
You don't just need to be doing it for the right ethical reasons, but even I'm sure as you flashback or as I flashback to being in real estate, private equity or getting a PhD in green building 15 plus years ago, it's just then making the case, the business case. It was a little harder. Today, making the case is a whole lot easier, but there's still an educational uphill battle to be fought given the long tail you described.
Greg Smithies:
Yeah, there is and so we actually see critical to many of these technologies or if you're a startup in this space, you have to have your technology that nails it and typically that's difficult. But you also have to be incredibly good at branding and getting your message out there because of the market education thing that you need to do.
Now, certain things you don't really need to educate the market anymore to a certain extent. Like if you're in Europe, you don't have to tell people what a heat pump is anymore. Putin fixed that for us. Everybody knows what a heat pump is now, that one's solved. But a high efficiency electric motor going in, being a drop-in replacement into your commercial air conditioning system on the roof, a lot of people don't even know you can replace the electric motor inside that thing.
However, and obviously I'm going to flag my portfolio companies here, we've got a company called Turntide in the portfolio. Their electric motors are 30-60% more efficient in the real world and to put that in numbers, roughly a $5,000 electric motor in your air conditioning system depending on your duty cycle and local electricity, but roughly that $5,000 motor, it saves you about $3,000 of electricity per year. Then it sits there in your building for 10, 15, 20 years, just quietly saving money every single year. Pays for itself in 18 months, returns stuff to you for 20 years. That is about as close to a no brainer as you can get. You can give that to an active climate change denying CFO and they're probably still going to want to buy it.
16:07
Case in point, not to say the CFO at AutoZone is a climate denier. They're not, but I wouldn't think you would look at a company like AutoZone and say, “Hey, these people are bastions of climate change and being ethical leaders in the space. They have a lot of vested interest in gasoline internal combustion engine cars, but AutoZone are Turntide's largest customer. They're rolling out electric motors to, I think they've got 3,000 locations across America.
That only really happens when clearly the economics make sense on a technology like this, but that's again, a long way of saying that, yes, there's education involved. But if you've got a piece of technology that is an economic no-brainer, like a Turntide, that does a lot of the work for you, you just need to get in front of the right people.
Chris Wedding:
Well, you said this, but just to put a finer point on it, often I'm selling climate solutions, doesn't need to involve the word climate.
Greg Smithies:
Yep.
Chris Wedding:
In fact, many times it probably shouldn't involve the word climate to reach the largest potential audience. It sounds sad a little bit to say, but it’s practical.
Greg Smithies:
It's pragmatic.
Chris Wedding:
Yeah.
Greg Smithies:
Yeah, it's pragmatic and practical. Exactly. I come out of the Elon Musk School of Sustainability. I reported directly to Elon at The Boring Company and at Neuralink. But the Elon Musk School of Sustainability says that you shouldn't actually have to sell anything with a climate angle to it. It basically says, it doesn't matter how good for the planet your product is if no one wants to buy your product.
So, if we look at the Tesla case study, and by the way, I was also previously at BMW doing climate investing for them, so I had a front row seat for this. The reason why BMW wakes up one morning and says, “We're going to put $17.5 billion into decarbonizing our supply chain and making electric vehicles,” and all of this stuff, isn't because of a tax incentive in California or some government regulation. No, the board there wakes up and says, “We're going to put $17.5 billion to work,” because Tesla Model 3 start outselling BMW 3 Series. Then everybody on the board at BMW goes, “Oh crap.” That's the sort of situation we're in with many of these technologies.
Like the last person I know who bought a Tesla probably didn't do it for climate ethical reasons. They did it because it accelerates like a bat out of hell. It's got a sexy as hell UI inside the car. It's like the iPhone of cars. It's fun to drive. Cheaper to own and operate. I think that the list of where climate's importance is on this hierarchy of people buying these things is probably not top five for the vast majority of people buying that. It just happens to be good for the planet.
18:54
I think getting out of this mindset of, you can sell high-minded, highfalutin ethical leadership in products to a small leading, bleeding edge of the market. But if you really want, and we need, by the way, the whole fat middle of the market to start buying clean green technologies, they are only going to do it if those products are just better products.
Chris Wedding:
Well, it's good timing that you mentioned the Tesla business case. We're in the market for new cars and we test drove a Tesla Model 3 this weekend with a friend. Yeah, the acceleration is quite insane. I think to hear that you're thrown against the back of the seat as it accelerates, not speeding, just accelerating, sounds nice to say, but when you feel it, it's like, wow, I'm not sure the words do justice to what's happening in this city stoplight, this intersection essentially.
Greg Smithies:
Yep, and I mean, this is why I'm also heartened by say the F-150 electric, the lightening because that on paper, other than something like towing capacity or towing distance, other than that, if you have any other use case for a pickup truck, be it hauling things, be it just driving around to the mall, which a lot of pickup trucks are just used for, be it actually doing work, powering all of your tools, things like that, the F-150 electric is actually just a fundamentally better vehicle than its internal combustion brother.
We're getting to that point with many product categories where people are realizing, not only is the clean green thing good for the planet, it also actually is just a better product.
Chris Wedding:
Right. Okay. Let's go back to Fifth Wall. First remind us why the name Fifth Wall.
Greg Smithies:
Fifth Wall really started out with this realization that, as I said earlier, real estate, around about 13% of US GDP, $326 trillion was colliding with technology. So, the same way, Andreessen has the saying that software is eating the world, that out of all of the industries out there, real estate was the final one to get moving and it was starting to get moving. And so, that was around about six years ago, started out with that thesis.
In real estate, typically people refer to the four walls, that is the building. A little bit of tongue in cheek play on words, the Fifth Wall in our mind was the technology that was going to ultimately enable higher asset valuations, higher efficiency buildings, blah, blah, blah, all of that stuff. Then that really turned into us now being the largest venture capital fund in the PropTech space. We're around about six times larger than the next largest PropTech venture capital fund, but then that also made us realize, “Hey, there are entire other categories of technology going into the real estate industry that aren't PropTech.”
If you think of PropTech as marketplaces and software that goes into buildings and how do I buy and sell buildings much better, that does not encompass batteries on buildings or replacing your gas furnace with heat pumps. But when it comes to the actual total dollars at play, there are probably far larger dollars at play on all of those other things like the equipment in the buildings than on software to sell the building a little bit faster potentially.
Chris Wedding:
Yeah, right on. Let’s get a little more granular on what you all like to invest in, so maybe that's sample companies for sure. Maybe why the choice to invest and maybe just practicalities, stage of company, amount of capital you like to invest, et cetera.
22:32
Greg Smithies:
So overarchingly, the mission on the climate side of the house is, how do we decarbonize the built environment? That sounds somewhat simple and if you come from the transportation industry, decarbonizing transportation is conceptually simple, but maybe tactically difficult. So, it’s conceptually simple because it's just like electrify the cars, you're done, good to go. Now actually doing it, maybe there's some details there, but it's conceptually simple.
Decarbonizing the built environment is way more complicated because there's no one big smoking gun thing that if you solve that, you've solved it all. So, we end up having to look across what we think of as the life cycle of a building. This is from the raw materials going in, so I think the construction materials, concrete, steel, glass.
The construction industry uses about 40% of the world's raw materials. A great example here is cement or concrete, that is the second most used material on the planet after water. But the cement industry, if it was a country, would be the third largest emitter of CO2 on the planet. So, it'd go like China, the US, and then cement, which is kind of nuts, right?
Chris Wedding:
Yeah.
Greg Smithies:
Yeah, so we're looking at a bunch of very hard tech material science things like clean cement, clean steel, better glass. Then we look at how you put up buildings better. So, construction tech to say, put up buildings faster, cheaper, tighter envelopes, better insulated, all of those sorts of things so I think prefab, modular, 3D printing. Here we're investors in companies like Veev and Assembly OSM who are modular and prefab. We're investing in ICON, the 3D printing company, they 3D print houses.
Then we look at operating stage. This is that big fat amount of $326 trillion of existing buildings out there that on an efficiency metric, I think the technical term for the average building is, it's crap. And so, this is lots of frankly boring things, better windows, better doors, spray-on insulation, external cladding, all of these sorts of things that can take the existing stock and make it more efficient. As well as how do we feed clean green power into these things, so solar, wind, batteries, all of those sorts of things, EV charging in the parking lots.
Everybody talks about the electrification of vehicles, but they don't realize that in order to charge all of these vehicles, all of those cars are going to charge in either your garage at home, your garage at your apartment building, or in your office car park, the vast majority of the time. Everybody else went after in stage one.
The charge points of the world thought we were going to charge electric cars like you go to a gas station, fast charging away from home. Turns out that, if you actually own an electric car, that you almost never do that and guess who owns all of the parking lots in the apartment buildings and in the office buildings? It's the real estate industry. So, really the real estate industry is this big unlock to electrification of vehicles that no one's even really thought about properly. That's the operating stage.
25:22
Then we do also cover end of life, so think waste. A round about 60% of the world's waste is going through the buildings, so how do we recycle it? Can we turn it into energy on site? Can we turn it into building materials, things like that? Here, we also cover things like water. So, with climate change happening, many parts of the world are just getting hotter and drier.
I'm here on the West Coast. I'm on a farm, my well was dry all of last summer. I had to truck water in, the whole town of Mendocino just North of me, the whole town was trucking water in. Cape Town a few years ago almost ran out of water. The Middle East, well, they've always got water problems, but especially bad ones. Europe this past summer was either underwater or without water.
Long story short, water is actually one of these big climate things that is going to end up being probably a larger opportunity than most people think. So, that's it. We covered that full life cycle. End up doing, about 70% of our dollars go into hardware or things with atoms and about 30-ish percent going into software marketplaces, fintech-y type things.
Chris Wedding:
Great and how about stage of company or check size, what's ideal for you all?
Greg Smithies:
Our early-stage fund does As, Bs and Cs, so think of that as anywhere from a five to a 30-ish million-dollar check. We can do later stage deals as well and there also we work with a bunch of our corporate partners and LPs to do those larger checks. So, we will look at Cs, Ds and pre-IPOs as well. We can flex up to call it, a hundred million-ish dollar checks on those latest stage deals, but it means we're relatively stage agnostic. Probably the only thing we don't do is seed and then anywhere from five to a hundred-ish million dollars.
Chris Wedding:
And when you say you bring in some of your LPs, would those be some of the real estate strategics or more of the financial investors, if you will?
Greg Smithies:
It's both. Typically, the real estate strategics -- For example, we're investors in a company called SOURCE Water. They've got these hydropanels. They look like a solar panel, but instead of spitting out electrons, they spit out water. You can put them like in the middle of the desert, in the middle of Saudi Arabia, and they're going to spit out perfectly potable drinking water. It's great and all they need is sun shining on them.
We have in our portfolio without naming names, some of the largest hotel owners and operators. Actually, I think I can name names because these are being announced. So, we've got Hilton and MGM amongst others. It turns out that many of these companies might be the largest users of single use water bottles in their entire estate.
You go and take a bunch of source water panels, put them on the roof of your hotel, bottle that water on site, run a little mini bottling plant where you just wash and refill those bottles, that actually has a meaningful climate impact. So, in a situation like that, we as the fund might go and invest in source, but then also bring alongside us some of these strategic partners who might be negotiating very large offtake contracts with them to also invest in the company with us.
Chris Wedding:
Perfect. I mean, not to mention the idea of a hotel producing its own water through panels on its roof is, how do you say, cool as shit and great branding as well.
28:32
Greg Smithies:
Yep, exactly.
Chris Wedding:
How about another example or two of your strategic investors, like some of the ones listed on your website, and how else they can add value to the companies you invest in?
Greg Smithies:
Many people do just think of us as only having real estate investors. However, given that the real estate industry also consumes about 40% of the world's power, and that's not just electricity, it's electricity plus natural gas plus a bunch of other things. It's actually way more if you also include all of the energy, say, going into making the steel and the concrete, but we won't get greedy and take account of that too.
But call it 40-ish percent of the power means that even there are these adjacent industries like the energy industry who have a vested interest in looking at these technologies too. So, like down in Brazil, one of our corporate partners there is a company called Cosan. Cosan, if you were in Brazil, you would know this company, they're like a mega conglomerate. They have everything from gas distribution into houses to bioethanol production and they run railways and everything in between.
They invested in the fund and then also came in alongside us in our investment into a company called Electric Hydrogen. So, Electric Hydrogen have the world's best and most efficient hydrogen electrolyzers. The dirty secret of hydrogen is that I think we use 90 million kilograms of hydrogen per year, the vast majority of that is actually made from fossil fuels. So, they take methane, CH4, and they do a process called steam cracking it and you basically end up with hydrogen coming off and CO2 coming off. That's great.
Chris Wedding:
Perfect.
Greg Smithies:
Perfect, but hydrogen is very useful. We could actually blend it into natural gas pipelines up to about 20% and you should see no difference in like your heating, in cooking with it. You don't have to replace any of the pipes, any of the appliances, and 20% of the natural gas out there, that's a significant climate impact you could have. Now, what Electric hydrogen does is they've got electrolyzers that make that stuff out of water. You plug it into clean solar power, put some water in, and they create clean hydrogen, not dirty hydrogen.
Now, a company like Cosan invested alongside us in that because they would ultimately like to start blending that clean hydrogen into their gas distribution network, but that is very non-obvious. If you're just a real estate company, on your list of things you think you can control the gas coming into the building isn't necessarily something you think is in your purview. But through the consortium that we're building here, trying to reach out that extra layer to people like the energy suppliers and bring them on board with the submission is also pretty critical to us.
Chris Wedding:
Let's go a different angle. Tell us how companies don't get your capital. What is it about certain companies that seek out your capital where you say, “Look, you're not the right fit because of dot, dot, dot,”?
31:25
Greg Smithies:
Yeah, it's a little depressing. Probably the number one reason why we pass on things is because they just frankly aren't climate-y enough and they look a little bit green washy. So, without naming names, green walls, it doesn't matter how big your green wall is inside a building, it probably has no climate impact for that building. Now, it might have some mental health impact for the people inside it, but all the science says it doesn't actually clean the air inside. It doesn't really have a meaningful CO2 impact, but it looks really great.
And so, when you see on the front of people's ESG reports, like, “Hey, we're all clean and green,” there's almost always a photo of their building with a green wall in it, but this is almost like the definition of green washing. It is literally a green thing inside a building that looks clean and green, but has very little climate impact. So, when we're looking at companies, we really are trying to hold them to a higher standard of actual true CO2 impact of whatever their technology happens to be.
Frankly, just because we are not technically early-stage investors, we see a lot of seed stage companies where the answer is just, “Hey, not yet, we'll come back at an A.” And that's predominantly because we are just not set up to give companies the support that they need at a series seed stage. The value that we bring is our corporate partner network who ultimately will be the very largest buyers potentially of your product. And it turns out you actually need a product in order for us to be useful to you.
So, effectively, there are way better investors out there to support companies at the seed stage where you've got different problems. It's like figuring out product market fit, it's hiring your first engineering team, all of that sort of stuff, where they can be much more useful than us. But once you have a product and you are ready to push it out to market, we can turn on the corporate partner network and really put that on steroids.
Chris Wedding:
Yeah, I mean, pretty much zero tech risk, it sounds like a consideration for you all.
Greg Smithies:
Yeah. Well, let's actually double click on that because I think tech is a pretty broad term. We would not take science risk, so your PhDs need to prove that they are not breaking the laws of physics. However, we will take what I would call engineering risk. So, if your physics are good, but you haven't yet built, maybe you've built one or two things that are making grams of whatever it is you're trying to make, but ultimately you need to make thousands of tons, we would still be potentially interested in getting involved there.
We've got a clean concrete company called Brimstone. When we invested, they were at that stage. We know that the science works here. We know we're not breaking the laws of physics. The chemistry checks out, but really what we need to do is prove that we can build a bigger machine to do this. We are very comfortable with that sort of engineering risk, but not comfortable with science risk.
Chris Wedding:
That's a really helpful distinction, which I've not heard before. Let's go to the CEOs you work with, either now or perhaps in your past at BMW as well. What are a couple of potholes, let's say, common mistakes you see that are somewhat easily avoidable that these CEOs could avoid and stay in their role growing these companies?
34:47
Greg Smithies:
By the way, we're talking about the startup CEOs because we also work with strategic corporate CEOs. But the startup CEOs, the sets of challenges probably fall into two buckets, well, maybe three by the types of companies. I broadly think of the types of companies we invest in as sci-fi. These might be like early-stage science-y, hard tech type companies. So, there's sci-fi hardware.
Then there's what I like to call boring hardware, where you're not trying to break the laws of physics. It's just like assemble proven technologies together, would be boring hardware and then we do software and tech and fintech, and just think of that bucket as like bits as opposed to atoms.
For each of these categories, you typically have a different set of foibles that the CEOs bump into. For the sci-fi ones, typically those founders are hardcore academic PhD people who have come up with some new way of, say, making concrete or sucking CO2 out of the air or something like that in the lab. They are very good at the science, but not necessarily good at the scale up and go to market side of things.
For companies like that, we generally focus very strongly on bringing in a strong XA, Dow Chemical type person who has built factories before, who understands how to project finance these things. Typically, though, those companies, they don't need product market fit because they're selling into commodity industries. It's like if you can make better concrete, it's just concrete and there's a market for that. So, you don't have to worry too much about going and scaling a massive sales team or things like that. The real issue there is, how do I go and build dozens of very large industrial scale factories? So, they're trying to get in heavy operational COO type of expertise next to them, it is good.
For the boring hardware folks, think of this almost like a Turntide motors one where electric motors are electric motors. It's a given market. Here it is much more, typically these technologies have to be retrofitted into buildings, so there's very complicated installation networks that you have to run. Millions of buildings out there around the globe, different building codes and things basically you need boots on the ground, like everywhere on the planet. You've got to go through channel to go and get that, and a channel go-to market is one of the most difficult things you can do. So typically, in those companies, we're putting in a head of revenue who understands the channel sales motion. That involves channel sales plus installation, which is very difficult to do.
Then the software ones, this is boring, but it's what the vast majority of the rest of the venture capital world are really good at. It's just ruthless focus on your CAC versus your LTV, making sure that the fundamental unit economics of the business actually makes sense. That when you're putting another dollar into your marketing funnel, X number of dollars of ARR or whatever it happens to be are falling at the bottom, but just ruthlessly focusing on that.
Chris Wedding:
Ruthless is a great word in this context. I also like to use that descriptor in terms of scheduling or time management, where I feel like a lot of us could probably get a lot more accomplished if we were ruthless about what we allowed on our calendars for sure.
38:07
Greg Smithies:
Yep. Like I definitely shouldn't have allowed this on my calendar.
Chris Wedding:
Seriously, what are you doing here? Way more important things to do.
Greg Smithies:
Yeah.
Chris Wedding:
Let's switch over from Fifth Wall to Greg Smithies, so some questions as you reflect here a little bit. If you could chat with your younger self, what kind of tips might you give for him to be faster, more effective, happier, et cetera?
Greg Smithies:
It's probably a bit of a cop out to say I wouldn't tell myself to do it any different way. So, just for the education of--
Chris Wedding:
Yes, that's a cop out.
Greg Smithies:
Yeah, that is a cop out, but let me dig into why I'm saying that. So, just for the edification of folks, my background here, been running climate tech at Fifth Wall for about two years. Prior to that, I did climate tech investing at BMW. Before that was Musk World at The Boring Company at Neuralink, had a finance [inaudible – 00:39:00] both of those and before that was a fund called Battery Ventures where I mainly spent my time doing industrial tech. So, construction, energy, manufacturing, things with atoms. Then started out in banking as all the boring people do and got an undergrad in finance and computer science.
Now, going backwards or forwards, that is a very meandering path. From a 10,000-foot view, it doesn't necessarily look like there's an overall theme there and I think that's kind of the point. Which is, when I went to Battery Ventures, I was coming out of banking and did have a computer science background so I thought I was going to end up being an investor in enterprise software. I actually did a bunch of those sorts of things. I did companies like Nutanix and AppDynamics which are about as hardcore enterprise software, one's a storage and compute company. The other one's basically developer tools.
Now, I accidentally head over heels fell into the industrial tech side there, just because it turned out that at the time, I was one of the only people at the firm who could build an LBO model. The industrial tech deals we were looking at involved some private equity aspects to them and building factories and things. And so, I got into this hardware world almost by accident, but then that was a foray into Elon world and then once you've got that finance acumen plus actual operating shops in the space with atoms, then my mind started coalescing around, okay, well, what is the category of investing that for the next 20 years, I'll have a superpower in doing? And this is as much timing and luck as anything else that my mind very rapidly came to climate, that I think this is going to end up being the largest mobilization of capital in any of our lifetimes.
40:48
I mean, touch wood, let's hope it is because if we've got a bigger problem than this, we've got a real problem. But that this is probably the largest mobilization of capital and that the vast majority of the venture capital world out there today has spent the last 20 years investing in software and doesn't understand hardware, doesn't understand companies that are building factories. And oh, look, just by happenstance, I have been working with companies that need to build factories and do things with atoms and all of those things for a significant portion of my career by accident.
And so, that's a long way of saying that I couldn't have predicted actually getting here myself when I began. So, I don't think there was a better way than the meandering way that I got there. But maybe the takeaway for folks listening who are trying to figure out their careers is a little bit of meandering isn't the end of the world because you never know. There's a trade-off between having a straight shot to what you think is the goal, but then you miss actually what your true calling might've been along the way. If you just meandered it a little bit, you rule out the serendipity angle of these things.
Chris Wedding:
I like the answer. Okay, you did a good job. I thought it'd be a cop out, but it wasn't. I think the other thing too, Greg, is when you start out building a career, you think you know what the end goal is, but you have such little experience in what the possible end goals could be which is why you have to be open to the accidents, to the meandering as you describe.
Yeah, I just recall being so uptight in undergrad, like let's crush economics, we can do anything and then thinking, “But wait, what if I don't find the perfect next first job? It's over.” I didn't verbalize it that way. Of course, it was far from over. First job was not ideal for sure. Yeah, I think that could put a lot of folks’ minds at ease.
Greg Smithies:
100-hour weeks building LBO models at a private equity firm wasn't your ideal, makes your heart sing?
Chris Wedding:
No, actually it was more interesting. Straight out of undergrad, so just crushed my environmental science classes, biology, chemistry classes. I had such little career advice that what I considered to be a good job was to graduate and then help out my professor in his on the side environmental consulting for businesses like OSHA, EPA compliance.
Greg Smithies:
Sure. Yep.
Chris Wedding:
I look back, I'm like, “How? What?” Then I come back from studying in Spain the last semester, I'm ready to get going. I got a lease. He's like, “Oh, I changed my mind. I'm not going to do any more consulting.” I'm like, “Okay, sweet.” So, here I am in this small town, Kentucky, what the F am I going to do right now? Anyway, we could go on, but this is a podcast about you, not about me. Let's go to the next one here. What are some habits or routines that keep you healthy, sane and focused, Greg?
Greg Smithies:
Oh man, this is a tough one because I will say the demands of a venture capital job is that unfortunately you can always do more stuff. Like there are certain jobs where you can turn off at some level, but in venture capital, you can always meet another company, you can always read another research paper. There's always something else you can do. If you wanted to fill out 24 hours a day, every single day, you would have things to do.
44:03
So, probably the number one thing is actually scheduling in. I literally have it on my calendar, things like go to the gym and making sure that they are like sacrosancts and not letting the rest of life intrude on them to the extent possible. Obviously, work trips come up and travel comes up and all of those things, but maybe it even starts a step back, which is just the realization that if you had a Formula One car that you owned, it doesn't drive at full speed all the time. It spends a significant portion of its life actually in the shop getting tuned up and rebuilding the engine and all of those things.
Your brain is like that. It needs time to sleep. It needs time to rebuild itself. So, maybe just starting out with that one realization that actually some me time makes you better at your job in the times when you are working is critical. Then figuring out what that me time looks like for you and then protecting it ruthlessly.
Chris Wedding:
There we go. What it sounds a little bit like is, Naval Ravikant has this expression of, we should work more like lions, not like cows. Hunt, rest, don't graze the whole fricking time. Cannot be productive the whole time, unless you need four stomachs to digest fibers. How about any recommendations on books, podcasts, tools, et cetera, you think folks could check out?
Greg Smithies:
Yeah, so coming back to just the venture capital job, this is a very pattern match-y sort of business. It's about trying to figure out the pattern match between different CEOs who are good at certain things, bad at certain things, business models that work, that don't. And it's this cross-transference, things that maybe works in one geography that might work in others, or in one business domain that might work in others.
It’s maybe a little bit less relevant in climate because a lot of what we're doing really is just like go and figure out the science of the problem. It's like, if you build it, they will come. If you solve the science problem, you're good. But I do still think the other softer aspects of venture capital have a lot to do with, how do I recognize that this CEO is someone who can execute or this team is a good team to be able to do it? That's all pattern-match-y stuff.
And so, with that in mind, I think it's very important for us to be students of history. In venture capital, probably the best thing to be a student of history in venture capital is a podcast called Acquired. I think they've been going for like eight or nine seasons at this point. They go through history of big acquisitions in the past, what worked, what didn't work, IPO's, company histories from Tesla to Apple acquiring NeXT. I'm listening to one on the Sonos IPO right now.
These are good two, two and a half-ish hour episodes where they're going into the founding team, the foibles they had along the way, all of these sorts of things. Fascinating history lessons in how the startup world works. If you're not in venture capital, just picking the next startup you want to work for, having this level of background and history really helps out with that pattern match.
Chris Wedding:
Now, if only, Greg, we could all learn from history instead of just reading or knowing history, wouldn't we be better off?
47:26
Greg Smithies:
Yep.
Chris Wedding:
Speaking of which startups that someone may want to work for, this is outside of climate per se, but I think it's interesting. There's a podcast called My First Million, and the name, not the name that the guys actually like anymore, but it's a great podcast and lots of business brainstorming. They have this list called Sara's List, I think Sara's the wife of one of the serialized monies on here. They pick decently well-funded startups where if you go to work there, you're likely going to get a certain amount of options and you're likely going to become a millionaire working there for years because those options become worth something.
Anyway, they did a retrospective recently on their last set of Sara’s list companies versus what their new ones are. Not climate, but a fun exercise nonetheless. Okay, final words here, Greg, as we wrap up. Any call to action, message to other, perhaps entrepreneurs out there listening in the climate space?
Greg Smithies:
Well, first off, actually, maybe this is the wrong audience, but it's people who are sitting on the sidelines, actually. Maybe they're sitting at a Google or a Facebook or some other company and they're working on, how to say this, not a pejorative way, but they're wasting their IQ points on ad click-through optimization. And really just thinking, “Hey, we are at a golden opportunity in time where the stars have aligned that you can work on something important that is actually going to save the planet and probably make a shitload of money doing it.” I don't think there's actually ever been a time in history where that is true.
In the past, you had to make this decision, I'm either going into philanthropy and maybe go and work for like the Bill and Melinda Gates Foundation, but I'm probably not going to become a millionaire doing that. Or, I can go and work on ad click-through optimization and hate my job every day, but make tons of money. We are in a very fantastic, I think, situation now where many of these climate-y technologies are economically viable, as we said at the beginning of the conversation. That the amount of money coming at them, the IRA just put out $370 billion of stimulus money into this market. We've got hundreds of billions of dollars of capital flowing into it and these are large markets. As we said, $18 trillion just in real estate climate tech.
The point is, this is one of those few times where if you have been loose in your seat thinking, “What is the next thing that I should be doing?” but you've been worried as to whether or not you have to make this decision between doing something good versus making money, that we're in a fantastic situation where actually that dichotomy has gone away. You can have it all. You can have your cake and eat it too.
Chris Wedding:
Yeah. One of the members of our Climate CEO peer group at Entrepreneurs for Impact said it well. He said, “We don't do TGIF. We do TGIM, Thank God it's Monday.” His company's World Tree, “We get to come back at work and do this awesome work.” I hear you loud and clear. Hey, look, on those positive notes, Greg, awesome to chat. We're rooting for you-all’s success and the portfolio companies at Fifth Wall.
50:46
Greg Smithies:
Yeah, thank you so much. This was great.
Chris Wedding:
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