(Bloomberg) — For Episode 2 of the Zero podcast, Bloomberg Green reporter Akshat Rathi interviewed venture capitalist Gabriel Kra about VC’s role in the climate fight: Is it a force for innovation, a facilitator of bad business models, or a little of both? Listen to the full episode below, learn more about the podcast here, and subscribe on Apple, Spotify, Google and Stitcher to stay on top of new episodes.
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Akshat Rathi 00:00
Welcome to Zero. I am Akshat Rathi. This week: getting arrested, getting lucky, and finally getting a climate bill.
This summer, I went to the US and spent three weeks visiting climate startups and talking to investors who give those startups money. One of those conversations spoke particularly well to the role that venture capital plays in funding climate tech.
Akshat Rathi
The model of venture capital is to make many bets.
Gabriel Kra
Yes.
Akshat Rathi
Early on.
Gabriel Kra
Yes.
Akshat Rathi
Risky bets.
Gabriel Kra
Yes.
Akshat Rathi
Very few will succeed.
Gabriel Kra
Yes.
Akshat Rathi
What succeeds… how much of that is luck?
Gabriel Kra
[Long breath] That’s an interesting question. I don’t think it is luck. I don’t think that’s the right word.
Akshat Rathi
Chance.
Gabriel Kra
No, no, no. It’s almost like it’s not the right concept.
Akshat Rathi 01:05
That’s Gabriel Kra, a co-founder of the venture capital firm Prelude. Now, venture capital is both loved and hated. Some say it’s the only way to fund companies that change the world. Others say it is unaccountable, it can game markets, and it can launder reputations.
That’s the black-and-white version of the narrative. And you’d be surprised how many smart people buy into it.
Gabriel is someone who is comfortable in the gray zone. He started his career in the 90s as a Greenpeace activist, even getting arrested on the steps of the Washington Monument as part of a climate protest. Two decades later, he co-founded Prelude with members of the Simons family. Their wealth comes from hedge funds, and they have been active in climate investment for decades. Prelude has invested in more than 60 startups so far, everything from batteries and hydrogen to solar and fertilizers.
Venture capital is nothing new. Many of the services that you use today, maybe even the software you’re listening to this podcast on, were made possible because some venture capitalists gave some entrepreneur lots of money to try some crazy idea.
Venture capital for climate startups, though, is a little different. It’s not just about the entrepreneurs. The physics must make sense. The chemistry must be sound. And the engineering must be scalable so that you can build physical things – what many call “hardtech.” Even if you get all those things right though, there is a chance of falling into what’s called the valley of death, a desert landscape filled with the skeletons of startups.
This is where venture capitalists can help. The experience of building companies that some of these investors bring, alongside their money, can help climate startups escape the valley of death and grow big enough to cut a meaningful amount of emissions.
When I went to the US this summer, I got a taste of what Gabriel sees every day. And I’m excited to share it with you in future episodes. For this conversation, we met up in Gabriel’s office in San Francisco to understand how he makes a difference to the companies he invests in, the ways in which the US climate bill boosts cleantech startups, and what makes the current climate tech boom so much better than the first one.
Akshat Rathi 03:30
Gabriel, welcome to the show.
Gabriel Kra 03:32
It’s great to be here. Thanks for having me, Akshat.
Akshat Rathi 03:34
So let’s start with your story. You’ve taken sort of an unusual route to being a VC. Where did it start for you?
Gabriel Kra 03:41
Well, maybe not so typical compared to many other folks who are VCs. I was an East Coast kid, grew up on Long Island, went to school in New York at Columbia. And the summer of my junior year, I drove cross country. And instead of getting all the way out to Palo Alto where my sister was in grad school, I ended up working for a summer in Yellowstone Park as a waiter so that I could spend my weekends hiking and discovering the mountains and the beauty of that park. That’s where my journey as an environmentalist, a climate person started. That’s my motivation. I wanted to get involved and protect these beautiful places. In 1991 or 1992, I moved to DC. And I got a job with Greenpeace. It wasn’t a glamorous job. I was going door to door canvassing for Greenpeace, but eventually I did some internships and I worked in the national office. Greenpeace back then, and still, was a practitioner of nonviolent civil disobedience. I was actually arrested in front of the Washington Monument, and I think it must have been 1992 protesting the failure of the United States government to participate fully in the Rio Earth Summit. That was me back then.
Then I went to school to get a master’s degree in atmospheric chemistry. I wanted to better understand the science and the processes behind what I was so passionate and talking about. I realized in that process that I didn’t want to be an academic, I didn’t want to spend the extra years getting my PhD – no offense to those in this room who have one. I respect you all the more for my failure to have the discipline to stick with it. To fast forward to 2009, [by then I’d worked at] three different startups, some moderately successful, some gloriously unsuccessful. A couple of hard tech startups and one engineering. [In 2009] I was working in solar and semiconductor banking at Deutsche Bank, and I met with the folks who would become the Prelude limited partners. I went out for lunch with Nat Simons and his wife, Laura Baxter-Simons who were already active in climate. We started working through and thinking through what kind of investment platform we could build within their family office. It took a while but by 2013, we had what was Prelude Ventures.
Akshat Rathi
What is the vision?
Gabriel Kra
The vision is that by focusing your efforts on companies that can impact carbon dioxide or CO2 equivalents in the atmosphere, [if] that’s what you look for, then you can focus on the same sorts of things that people focus on when they’re looking at traditional venture capital: great teams going after hard to solve problems with big market opportunities if they’re successful. So if you think about our theory of change, [it’s] something along the lines of — by investing in companies who, when they are massive, have a huge positive climate impact.
Akshat Rathi 07:13
Have any of your startups actually reduced emissions so far?
Gabriel Kra
Yes. Absolutely.
Akshat Rathi
An example?
Gabriel Kra 07:20
Well, I’m not the sort of person who recalls numbers off the top of my head. [But] we have a company called Renew Financial, which was one of the first companies we invested in in 2013 or 2014. It finances energy efficiency and solar projects in people’s homes. Several years ago, it was the equivalent of…God, like I said, terrible with numbers… a million car miles not driven, that kind of number. Another example is Pivot Bio. I don’t know the acres under management. But for every acre that Pivot has its fertilizer substitute, which is a microbe, that’s [an acre of] fertilizer that’s avoided. And the Haber-Bosch derived fertilizer accounts for what? Five to seven percent of global greenhouse gas emissions? We have some battery companies that are now starting to deploy, we have some solar companies that also have avoided emissions. So there’s a decent, solid number that are coming. Many of them are at that inflection point where [in the next few years] we can point to emissions avoidances or reductions and [that] will continue to grow.
Akshat Rathi 08:35
The model of venture capital is to make many bets.
Gabriel Kra
Yes.
Akshat Rathi
Early on.
Gabriel Kra
Yes.
Akshat Rathi
Risky bets.
Gabriel Kra
Yes.
Akshat Rathi
Very few will succeed. And some of those that succeed wildly will pay for the many, many failures that were funded.
Gabriel Kra
Yes.
Akshat Rathi
What succeeds? How much of that is luck?
Gabriel Kra 08:54
That’s an interesting question. I don’t think it is luck. I don’t think that’s the right word.
Akshat Rathi
Chance.
Gabriel Kra
No, it’s almost like it’s not the right concept. I’m having trouble with the word luck. And I’m wondering, why am I having trouble with it? Because in the simplest formulation, luck does matter. It plays a role, but I’m thinking of some specific companies that I’ve had the privilege to be involved with. And you could say, “Oh, they got lucky there.” But what I really did was I chose the right set of entrepreneurs.
There’s a company that’s public now in our portfolio called QuantumScape led by Jagdeep Singh. And I think QuantumScape is his third or fourth successful venture, at least by financial metrics. QuantumScape still has a ways to go. But the original chemistry, the original idea for the battery was nothing [like] what they are bringing to market now. It was a completely different set of physics principles that they were investigating. And even the earliest iterations of the electrochemical battery that they started on were very different from what they ended up with.
So was it luck that they made those discoveries? Or was it an incredible team, backed by supportive venture capitalists, who saw that this was a team that was solving problems and pivoting and making changes that succeeded? Was it luck? Or was it a great team?
Akshat Rathi 10:27
Another way to ask that question is: Would the company have succeeded, regardless of whether Prelude bet on it? The fundamentals of the company and the people and the ideas and the grit and the combination and the pivots would have happened, regardless of where the money came from? Whether [the money] came from Prelude or somebody else?
Gabriel Kra 10:47
I think there’s some entrepreneurs who are going to succeed for whom the money is just a source of fuel. I think there’s a small segment of those. I think there’s a much larger middle range that probably would have succeeded with whomever backed them. But [their] investors did something to help them out. I’m not going to use names on these kinds of descriptions. I held hands through six or nine months with the CEO. We were on the phone multiple times per week, trying to sort out what was going on in the company. I wasn’t helping with the tech, let’s be clear. I had no helpful insights into that in the least. But I was working super closely with the CEO, and the founding team to solve the problems on the business side and on the investor side. And one of the most rewarding things of my career is when the technical founder, not just the CEO said to me, after we had an exit, he said, “we sat back and had identified a number of single points of failure, and you were one of them. Had you not been there, this company would have failed.” So there’s also circumstances like that.
A mentor told me early in my career, you spend most of your time with your problem children. You spend a lot of your time as a VC helping the ones who need the help, rather than the ones who are just crushing it, who just call you when they need some advice. The most gratifying part is when you find somebody or a team that needs the help not out of distress, but because you know something, or have a set of experience that they do not have. And that’s the real joy and fun part of investing in seed and A round companies, because I’ve been there and seen it a bunch of times. And I can say, “let’s put that down. Let’s not focus on that now.” So that’s at least for me, what’s really fun about the job, when I find those circumstances where I can add expertise.
Akshat Rathi 12:59
Right. In a way when a company succeeds, the kind of people who get credit for that success is the people who run the company most of the time – the CEO or the Chief Technology Officer. If what you’re saying is true, which is that venture capital investors like you are involved in their success then why do we not hear those names?
Gabriel Kra 13:23
Meh. Cause credit is being apportioned where it is due. Let’s be honest, I’ll say it here. I’ll say it whenever anybody asks: My job is so much easier than theirs. Which metric do you want to look at? They’re solving hard technical, hard business, hard fundraising, hard HR, hard corporate development problems. They are all in on it. They’ve pushed their chips to the center of the table on this company. And sure, Silicon Valley has a culture of celebrating, or at least valuing failure. But you know, there’s nothing fun about working hard on something for two, three, five, seven years and then having it not produce value or having it produce value for somebody else. That is a hard thing. That sucks. And I have a portfolio. So if I get to be on the stage, when they ring the bell on the NASDAQ or the New York Stock Exchange, but I’m the guy in the back corner as the CEO and her team are celebrating, and I get to go to that dinner that night and somebody says, “Oh, was that fun Gabriel?” and I get to go “yeah, that was great.” Like, that’s about the right proportion of… that’s probably more credit than I deserve at that moment.
Akshat Rathi 14:45
Okay, so the next thing [Gabriel and I] talked about requires some context. US investments in climate startups can be quite neatly split into two eras. The first one, clean tech 1.0 started around the mid 2000s. Investors plowed a bunch of money into startups and then didn’t make much in return. A lot of the technology didn’t work or couldn’t scale. Then came clean tech 2.0. That started in 2012. And we are still in it. I asked Gabriel: What changed between the two eras of investing and what lessons we learned?
Gabriel Kra 15:20
I think a lot of things have changed and some things fundamentally may have not changed. If you think about cleantech 1.0, it really launched in 2005. And it reached its heyday just before the financial crisis hit. There were a lot of things that were more poorly understood back then. So if you think about what it takes to scale solar, the venture dollars that went into solar, we didn’t quite understand what it took to make a really big business, and what were the risks of scaling those businesses. So those were some mistakes. And the volume of the capital that would be required and where it was going to come from, really, a lot of that money just came from the Chinese government.
Akshat Rathi 16:31
This is the story of so many cleantech industries. The technology is perfected in the US with its labs, and its scientists and talent coming from all over the world. But then the tragedy for the inventors is that there is no way to get to the next stage, the bigger stage. Remember the valley of death? That’s where these companies end up.
China, on the other hand, has a planned economy. And that means if they decide that they want to dominate the clean energy market, they can do it. Its government pours money in at a scale that no other country matches. This is what happened with solar. It’s what happened with batteries. And it’s what’s happening now with hydrogen. It might mean disappointing returns for American venture capitalists, but for the world, it is a net good. Now back to Gabriel.
Gabriel Kra 17:20
Fast forward to today, we now have the cheapest form of electricity on the planet. Most everywhere you look is either solar, wind, or some combination thereof. A lot of money went into batteries, both electric and others, starting in 2007, or 2008. And a lot of those companies just flat out failed. The electrochemistry didn’t work, the scaling didn’t work. But some of them are succeeding. And some of the lithium-ion bulk manufacturing of those batteries that wasn’t even venture-backed came down the cost curve. So now we have lithium-ion batteries that serve one purpose – electric vehicles. Those things came hugely down the cost curve.
[There’s also] the advances in machine learning and in cloud computing and the capabilities that you can now bring to bear to solve hard problems. Between when that first wave started [in 2005] and 2015 when the second wave started, [that] enables companies to do lots of things that they couldn’t do in that first wave.
And then the last thing that’s different [is], if you recall, the climate bill debate and the climate urgency. In 2008 or 2009, there was not the urgency and the fierce understanding back then that we have now. I went to all the early ARPA-E conferences, and –
Akshat Rathi 18:54
– the Advanced Energy bet from the Department of Energy.
Gabriel Kra 18:58
That’s right. And from 2009 to the early parts of the next decade, that conference was where everybody gathered who were worrying about [and] thinking about clean tech and climate tech. All of those conferences and others had this sense of urgency.
But now, I firmly believe that people, corporations, and governments all understand. And obviously our government has some barriers. But by and large, [it] is a far different environment. And it has flowed through to the capital markets. And I’m saying capital markets from venture early-stage to late-stage growth to projects, et cetera. There is capital available for great entrepreneurs – and good entrepreneurs – to tackle really hard problems in a way that wasn’t available in that first wave. So I think the core technologies have changed, the participants have changed, the capital availability has changed, the building blocks have changed, and that is what is leading to this second, more successful wave of innovation. And it’s not just on the venture side, I firmly believe this is a systems problem. I love venture capital. It’s what I do. I wake up every day thinking about how to invest in great entrepreneurs solving really hard problems. Venture capital is not going to solve this problem alone. It’s a structural problem of the economy. It’s that we didn’t realize for 200 years that we were creating this really massive problem. And it’s going to take structural systemic change to solve it.
Akshat Rathi 20:37
After the break, I talked to Gabriel about the US climate bill and an unforgettable conference we attended last year. And if you were wondering about the companies Gabriel invested in and the emissions they avoided over their lifetime so far, Gabriel did follow up with the numbers.
One of his solar companies, Renew Financial avoided about 1.5 million tonnes. That’s equivalent to 300,000 cars taken off the road for one year. And the fertilizer company Pivot Bio has avoided about half a million tonnes of emissions. We’ll be back after the break.
Akshat Rathi 21:32
So the US has passed its largest climate bill, funnily named the Inflation Reduction Act. It’s going to do a lot of climate things. Is it going to help startups?
Gabriel Kra 21:45
Yes. If we ended this conversation right now, the answer is, yes. If you are a battery manufacturer for long duration storage, or for I think it’s also for electrical storage, but I’ve been focused on the long duration storage, there are a number of ways that it helps. First, if you manufacture domestically [there is a] production tax credit, direct pay production tax credit. That makes it economic for us to manufacture and sell from day zero, right?
Akshat Rathi 22:20
Right. Right? If you’re wondering how these tax credits can help, let’s take an example. Say you’re a young company with a breakthrough idea for carbon capture. Congrats. Now, you need money to buy supplies, hire people and build factories. And that’s where tax credits come in. Prior to the Inflation Reduction Act, the US government wanted to grow a domestic carbon capture industry, but it wouldn’t give you cash. Instead, it would give you a tax credit – money you can get back on your income tax. Of course, you barely have an income. And this tax credit might seem useless. Unless you can find someone who does have a lot of taxable income, like a bank. They buy your tax credit from you, usually not at 100% face value, but at least now you have some cash.
That’s a long process, and you didn’t get all the benefits. In the new climate bill, there is a shortcut for some, and it’s called direct pay. You can cash tax credits directly from the US government. Something that Gabriel is a fan of.
Gabriel Kra 23:30
So that has all sorts of phenomenal impacts. One, it’s great for the company. It also enables us to go faster and to bring down our cost faster, because now we’re saying, let’s just manufacture as much as we can and sell these batteries. And we can do that faster and get down those cost curves faster. It also brings that manufacturer unequivocally onshore. If there was a doubt, this keeps it onshore. There’s similar provisions in the supply chain for electric vehicle batteries. In particular, I already know of a bunch of startups that [were] not certain where they were going to manufacture, they now know where they’re going to manufacture.
I also know a bunch of bigger companies are thinking through “how do we get those materials, get those raw materials, get that supply chain onshore?” Because they’re going to have some of the credits, they’ll probably go through a period of time where they can’t quite take advantage of all the onshore credits, and then they’re going to be able to bring them onshore. That’s on the production side. On the demand side, I’ll stick with batteries, there is a standalone storage investment tax credit and that creates the demand for the company. So whereas before, we knew our progression, and we had a pretty robust and strong progression. Now people are beating down our doors because they know that they can afford the batteries. Before there was a limited number of use cases where people really knew it and believed it and we believed we were going to grow that over time. That market size has just increased.
Akshat Rathi 24:59
Since you got arrested, there have been plenty of environmental protests. If anything, they have grown in number. And there are a lot more people getting arrested because emissions haven’t started declining and the level of CO2 in the atmosphere keeps going up. Would you get arrested again?
Gabriel Kra 25:23
Never say never. But we were together at the TED conference in Edinburgh on climate, Akshat, and Lauren MacDonald had the most powerful moment that I’ve witnessed in a very long time on climate where she walked off the stage that she was sharing with Ben van Beurden, the CEO of Shell.
Archival Tape: Lauren MacDonald 25:44
Disproportionately in the Global South, so many people are already dying due to issues related to the climate crisis, such as pollution, extreme heat, and weather related disasters. This is not an abstract issue and you are directly responsible for those deaths.
Gabriel Kra 26:04
There was a staged protest and some other members from her group came in and they had a banner and they were trying to shut down an offshore oil project off the coast of Scotland. And the protesters asked everybody in the audience to walk out with them. And I sat there wondering, where did I belong? Did I belong in the audience? Because I thought it was a really interesting conversation. It was Ben van Beurden, Christiana Figueres and the hedge fund activist. So I thought that was a really interesting conversation. And then after sitting there for an extra minute, I said, I want to be outside. So I walked out to join the protesters, after sitting there really confused for a couple of minutes, where did I belong? What did I want to do? And I didn’t quite join them chanting slogans and waving my fist. But I also stayed out there for quite a while and only went back inside and watch the remainder of the session on video in the lobby. I wanted to respect their action and not walk back into the theater.
That action sparked a lot of conversation both at the conference and in the weeks after: was she right? Should she have stayed? Should she have engaged in dialogue? Could she have had a better outcome? And I thought, and I still think, no. She did really well. I don’t think she could have done better with that stage at that point in time. Because here I am, almost a year later, we’re still talking about it.
Archival Tape: Lauren MacDonald
We will never forget what you have done, and what Shell has done. I hope you know that as the climate crisis gets more and more deadly, you will be to blame and I will not be sharing this podium with you any longer.
Archival Tape: Christiana Figueres
Lauren.
Archival Tape: Ben van Beurden 27:53
That’s a shame. And I’m really sorry.
Akshat Rathi
Thank you for reminding me, because we had such a great conversation after that. The entire conference was just talking about that.
Gabriel Kra
Yeah.
Akshat Rathi
Suddenly, you had this three-day, four-day gala turn into one five-minute window.
Gabriel Kra
Right.
Akshat Rathi
And most people were not on your side?
Gabriel Kra
I think that’s right. Yeah.
Akshat Rathi
Most people were like, well, there’s the CEO of Shell sitting on a stage at a climate conference, willing to get in a conversation with you, the climate activist, and what do you do? You get up, you call him names, you say you have failed to engage with us, we don’t think you will engage now. And we’re going to walk out. So why do you think that is still the right thing to have done?
Gabriel Kra 28:44
Because of who she is. And who he is. And what are their respective roles? When I was on that side of that interaction, I knew that I was not necessarily going to convince that other person that they were wrong and I was right. But that’s not the goal. The goal is to draw attention to the problem, the goal is to shine a light on something. And the goal is to get lots of other people thinking about it and talking about it. Ben van Beurden is paid a whole heck of a lot of money to run a very large company. And it’s his job to be up there. And to take that heat. That is actually one of the biggest things he’s paid to do. And he’s probably really good at it. He wasn’t gonna give up anything up there on stage, but she created a situation or everybody knew about this problem that she was trying to stop and I believe that offshore field eventually got pulled.
Akshat Rathi 29:51
Yes, the protest was for stopping the Cambo oil field that Shell was trying to get permission for in the North Sea in the UK. And the Cambo oil field did not get its permissions. Except now it’s back on the table because of where we are with oil and gas prices.
Gabriel Kra 30:10
Well, that’s the nature of being an activist. This is not around climate, but I can remember a good friend of mine, when I was still working for Greenpeace, Fred. When the Japanese announced that they were going to resume whaling in certain regions. And this is 1991, Fred was like, “Why? Didn’t didn’t we win on that back in the early 80s? Why are we fighting that again?!” But that’s the nature of the beast.
This crisis in Europe, the global crisis precipitated by Putin invading Ukraine for his own reasons that have nothing to do with climate, has created circumstances where a lot of entities, governments, companies, individuals have some really hard choices to make. And those choices have to balance long-term climate impact with some real short-term pain that people are going to feel. This winter and next winter, there are very likely to be not shortages, but absences of natural gas for heating in Europe, and people will be cold, and maybe also without electricity. And the solution to that of importing more LNG to Europe, means other countries who don’t have the economic resources that the developed European nations have are going to have to pay more for their LNG or go without. So this is going to ripple across from the most advantaged to the least advantaged communities both within Europe and globally. And [there are] short term answers of building more LNG facilities [but those facilities] don’t necessarily come online fast enough to have an impact, but have 30-year implications on climate. So you’re always fighting the same battles over and over again, and we just have to keep working on it.
Akshat Rathi 32:22
That was a great conversation. Thank you for taking all the hard questions.
Gabriel Kra 32:26
I appreciate the opportunity to have this conversation. And I think we’re at an inflection point. It’s a wonderful opportunity to reflect back on the last 10 or 15 years and gaze a little bit into the future.
Akshat Rathi 32:52
Let’s gaze into that future a little more, because currently, there is a lot of noise about a recession. If that happens, you might assume that it will doom investments in clean technologies. It happened the last time. But all the venture capitalists I spoke to on my trip left me thinking that this time is different. The cleantech boom with the backing of this new climate bill may even be recession-proof.
As for Lauren MacDonald, in addition to the Cambo oil field, which is back on the table because of the energy crisis, she is now campaigning against a new gas field called Jackdaw, another Shell project.
Thanks for listening to Zero. If you like the show, please rate review and subscribe.
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