AI, the noise and the silence

 Undoubtedly, the output from LLMs, and the output from AI image generation software, appears like magic.  There are a handful of "magical" moments I've seen with computing over the years.  These include seeing real-time rendering and shading on a SUN station, seeing a rocket launched from one desktop appear on another player's screen in DOOM, and realizing that I was chatting with a real person on the other side of the world in some early internet chat room.  Now these events are lost in time, and are as mundane as watching a jet engine spin and an airplane fly, which were magical in their own right in their time.

So, AI is the new technological sorcerer, and a flood of "AI companies" have now all replaced a flood of "blockchain" companies from merely 4 years ago.  And with that, there will be new unicorns, decacorns, and companies so valuable we'll need to dig into the Pokedex to find a good name.  However, those will be the exceptions.  There will also be...thousands...of companies that embrace AI where it simply offers no value, or the company itself will provide nothing unique.  Because of this, there's actually a risk that good data analytics companies get drowned out in the noise.

And I use that phrase intentionally.  The vast majority of companies in Thin Line's portfolio are big data analytics companies.  Get access to a large pool of data and use it to provide insights or predictive analytics that wouldn't otherwise be available.  Then use this to target various climate verticals, such as the rise of renewable energy, the growth of EVs, the decarbonization of industry, or the increasing threats of climate change.  That thesis has been consistent since the firm's creation in 2017.  Very few of my companies are ones that I would want to be associated with the AI-hype, but that's simply because once you enter that storm of hype and noise, it can be very hard to stand out.

So, to all entrepreneurs pitching an "AI" company, please be clear up front what value you offer.  Be proud of what you have built and don't hesitate to showcase it.  Explain where you get your data, the improvements that come from your analytics, and the value you can bring to an industry.  Those metrics have stayed consistent across hype cycles, and they will let investors and customers really appreciate what you've built.  And what magic you've created.

Carbon Breakeven Point for an EV is 2 Years in the US

 This shouldn't be an unusual point. EVs require a lot more minerals to produce (lithium, copper, etc), and the total embodied carbon of an EV is greater than that of an ICE (internal combustion engine) vehicle *on day 1*. However, moving forward, the ICE will burn gasoline or diesel, and the EV will "burn" the blended carbon intensity of the grid. If that is entirely renewables, then the carbon intensity is zero. If it is a mix of coal/gas/hydro/renewables (as the grid is), then there will be some associated emissions.

BloombergNEF (New Energy Finance) published, in March, some really interesting analysis looking at the breakeven points and determined that the number is 2 years in the US, today, and will be between 1-4 years for most markets in 2030, by projecting future energy mix. In all cases, as the electricity grid decarbonizes, then EVs get cleaner.

I say this because I just returned from a wonderful dinner in Houston with senior people at traditional energy companies, and the comment came up that EVs have a negative carbon value - ie, they use more carbon at the beginning, and *never* breakeven. This is a popular distortion of reality, and I told the group that the breakeven was 4 years, when in actuality, it is less.

https://about.bnef.com/blog/no-doubt-about-it-evs-really-are-cleaner-than-gas-cars/

Thin Line Capital closes Fund II - Looking Back as a Long-Time Climate Investor/Entrepreneur

 

December was an incredibly busy month, culminating in the completion of two significant milestones for the firm.  We made the final investment for Thin Line Capital Fund I, completing its portfolio.  We also successfully completed fundraising for Thin Line Capital Fund II, reaching its final close.

The final investment in the Fund I portfolio is a company called XGS Energy.  I have been following geothermal energy since 2007 when I was living in Australia.  Geothermal, I believe, will be the next exciting boom in renewable energy production, following the explosive growth we’ve seen in wind, solar, and energy storage.  Geothermal has the potential to provide firmed (or dispatchable) carbon free energy, solving the variability problems that wind and solar have.  Both wind and solar have gone from a few gigawatts of global capacity, to being around a terawatt, each, of global installed capacity.  Geothermal today is around 20 GW, which is where solar was in 2008 (only 16 years ago!).  I fully expect a similar rise in geothermal production, and I expect XGS to be a significant player in that.

I’ve always positioned Thin Line Capital as a firm with long-standing roots in the clean energy and sustainability industry.  I started my cleantech career in 1994, when I published “Recovery of Thermomechanical Exergy from Cryofuels”, originally at the World Hydrogen Energy Conference when I was an undergrad with IESVic at the University of Victoria.  My career led through hybrid electric vehicle development, fuel cell development, to MIT, which ultimately led me to Southern California, to the home of the initial EV1 development.  As the first cleantech boom was ignited I was with a concentrated PV company when we raised our first capital (thank you Nth Power and Rockport); I joined an Australian VC firm and invested alongside KPCB and Khosla into Ausra, a concentrated solar company.  With the collapse of the cleantech boom, I returned to Pasadena and joined the XPRIZE Foundation to help launch an Energy XPRIZE.

Following this, for a period of over twelve years, I was able to start several companies at Idealab, including Energy Cache, Energy Vault, and Heliogen.  I was the CEO of two of these, and had terrific support from Idealab, Bill Gates, Claremont Creek, and a number of other investors.  Finally, around 2017 (see my logo), I first started talking to people about the resurgence of cleantech (thank you Howard Morgan!).  Overcoming the stigma from the 2006-2008 industry failures, then getting a final close of Fund I in the middle of Covid was a real challenge.  And, while raising a first fund is difficult, continuing to raise funds, demonstrating the viability of the investment thesis, and the long term viability of the firm, is the real name of the game.  With this success, I thought that this was a good time to look back on lessons learned through the execution of Fund I.

Lessons Learned

While putting a lot of money into a company that fails isn’t great, putting too little money into a company that takes off is arguably worse.  Discipline matters, and sticking to an investment thesis is key.  Randomly approaching different opportunities in an ad hoc manner, with no consideration of stage, check size, or valuation, is a terrible way to hedge risk and develop a structured portfolio.

Investing in picks and shovels – into companies with a low capex solution supporting a fast growing vertical – is a strong strategy for returns.  
A frustrating gap of many clean energy companies is the need to use venture dollars, or rely on government grants, to build “first of a kind” projects.  Given our investment capacity, companies managing market risk rather than technology risk have been a much better fit for Thin Line Capital’s seed-stage funds.  Of course, remaining flexible for the occasional exciting exception is important.

Seed entrepreneurs can provide disproportionate outcomes if given the right mentorship and support.  Seed stage companies all have “holes” – they wouldn’t be seed-stage without them.  However, by recognizing which holes are fixable, and which are catastrophic, makes all the difference.  Investing in those companies where I can provide specific expertise to help fill those holes provides me with an enormous advantage.

Who you invest with can matter almost as much as who you invest in.  Partnerships matter, and we’ve striven to nurture those with world-class coinvestors.  I’m pleased to say that we’ve partnered with certain investors multiple times, validating our confidence in them, and their confidence in Thin Line.

Being a startup founder is difficult, stressful, uncertain, and lonely. One of the strengths of Thin Line Capital that I try to emphasize is my own experience as a repeat founder and CEO.  A founder is limited in who they can speak with on the challenges of a company, and I think the founders I work with would agree that the greatest strength we bring is our ability to help them plan a path forward.

However, given that, it’s important to remember:

The founder is driving the company; the investor is supporting. Even though many of my companies have navigated through multiple crises and successes (in just the last year!), we must never lose sight of the fact that they are in driver’s seat, with all of the responsibilities which come from sitting in that chair.  At best, as the investor, I’m in the passenger seat holding the map.  It’s critical to empower founders with the responsibility and resources to make the right calls.

I have been incredibly privileged to work with the companies that formed the portfolio for Fund I.  I am greatly appreciative of the LPs who have chosen to back Thin Line Capital (both Fund I and Fund II).  I am now setting my sights to finding extraordinary founders building extraordinary companies for Fund II, and I look forward to whoever I may partner with along the way!

Aaron Fyke, Founder and Managing Partner

Thin Line Capital

 

The momentum of climate change

 I was thinking of this quote from "Red Dwarf: Infinity Welcomes Careful Drivers":

It didn't make sense. Holly reprogrammed the Drive computer to slow down. Which the Drive computer did. But because they were accelerating so fast, slowing down merely meant they were accelerating slightly less quickly than they were before. However, they were still accelerating. So they were slowing down, but still going faster. That didn't make much sense to Holly either. The only thing that was clear was that by the time they'd slowed down enough to be actually slowing down, in the sense of going slower - rather than the kind of slowing down that meant they were actually getting faster, albeit faster more slowly - they would already have broken the light barrier. Which was impossible. 

At times, everything that is happening with carbon emissions feels like this.  We're putting in more renewables, we're adopting EVs, per capita emissions are leveling off (but population is still rising), per GDP emissions are leveling off (but GDP is still rising).  So, when are we going to start seeing our emissions peak, and then decline (and then get to zero).  By the time we slow down enough to be actually slowing down, rather than slowing down meaning we're still going faster, but more slowly, how does this all play out?

It's important to recognize that a lot of progress is being made.  And things can seem to happen slowly, and then all at once.  Five years ago, there was one EV on my street.  Now a dozen homes around me all have EVs.  Heat pumps have been known to be extremely efficient for decades, but now people are actually buying them in a meaningful way.  Renewable penetration, both in North America and Europe, but also in India and China, is increasing in a material way, because renewable energy is significantly cheaper, and continues to get that way.  It takes a long time to move a ship, but we are getting it done.
 

Ethics in Tech

I want to take a moment to talk about ethics. Today there are two big tech stories. The first is that an infamous entrepreneur was sentenced to over 11 years in prison, effectively for fraudulent behavior hurting investors, employees, and risking customers’ health. The second is about how fraud and theft evaporated billions of customers’ holdings in the cryptocurrency space.

One thing that I’ve learned as an entrepreneur/VC for the last 16 years is that this is an industry that runs on trust. Investing in a company is not like buying a house. A house is a zero-sum game. The reproducibility of selling a single family home is such that it can happen millions of times a year with standard legal docs. However, when VCs invest in a company, or when an entrepreneur chooses to partner with an investor, a long-term bond is formed. This exists for the next several years, where everybody is pulling for a successful outcome. We can pay lawyers all day long to try to paper every edge case and contingency, but the fact is, the startup community relies on relationships, reputations, and honest dealing to operate. Investors and entrepreneurs want to work with other investors and entrepreneurs that they know and trust. This is why trusted introductions are so important, and this is why it can be so difficult to break into the scene as an outsider - the very way that the community does business relies on this.

Having unimpeachable ethics and integrity is something I’ve always taken pride in. I have my parents to thank for that. It’s how I operated as an engineer. It’s how I operated as a founder. It’s how I operate now as a VC. I know that a number of my investors have specifically mentioned to me that my moral code was a key part of their decision to back me. I signed my first “code of ethics” oath when I became a Professional Engineer early in my career. Engineering is a demanding profession, and if shortcuts are taken, then people die. I’ve never forgotten those lessons. And now, as a VC, I recently posted my commitment to the code of ethics proposed by VC Lab. I make many gut-wrenching decisions a week, clouded in uncertainty - that’s how the startup game works - and I cannot imagine not having a strong moral compass as my guiding light.

I’m also proud to say that the importance of strong ethics applies to the entrepreneurs that I have worked with. Over my long career, I have worked with entrepreneurs with rock-solid integrity; and I have, unfortunately, worked with a few entrepreneurs (and VCs) whose lack of integrity was disgraceful. However, the latter have always been in the small minority, and do not shape my view of the community as a whole. When I invest in a company, I take an extremely active role, working closely with the founders to do everything I can to help out, as part of the company itself. I’m extremely proud to partner with those entrepreneurs who have to make tough decisions often, always considering what the right path is, to meet their duty of care to their employees, customers, and investors. There is no higher calling than service to others, and I have the utmost respect for entrepreneurs who recognize their responsibilities and take them seriously.

So, what does this have to do with today’s announcements? Too often, the media celebrates billionaire founders who have a complete lack of integrity. And, the sad truth is that you can abuse others, lie, cheat, steal, and make it to the three-comma club. But that’s not how I operate. And that’s not how most entrepreneurs I know operate. And that not how the vast majority of the venture/startup scene operates. There is no more powerful force, as a force of good, than the world-changing nature of startups, and we need to shun those who would act otherwise, because their actions don’t represent the majority, but instead, can hurt everyone. 

Emissions Impact of Inflation Reduction Act

"The Inflation Reduction Act does about two-thirds of the remaining work needed to close the gap between current policy and the nation's 2030 climate goal".  

This was the quote from the group at the REPEAT Project, who have put together a terrific analysis of the effects of the bill. 

The nation's 2030 goal is 50% below 2005 levels.  So this is really encouraging, but this shows that we are both making a terrific step with this Act, but also have steps to go, on the same order as this one, to hit our targets. 

Senate Democrats have enough votes to pass the Inflation Reduction Act (https://www.nytimes.com/2022/08/04/us/politics/sinema-inflation-reduction-act.html).  As reported by the New York Times, "Senator Kyrsten Sinema, Democrat of Arizona, announced on Thursday evening that she would support moving forward with her party’s climate, tax and health care package, clearing the way for a major piece of President Biden’s domestic agenda to move through the Senate in the coming days."

This opens the door for $369B of investment in to clean energy infrastructure at all levels, which is an amazing market signal for pulling our economy into a zero carbon future.  The effects of that investment is shown below.  The full report is here, but I'm just going to talk about one of the slides today - slide 7.

 

 

What do you do? Who is it for? Why do they care?

 When I was involved with iCorps, several years back, one of the senior leaders, Viktor, would always ask teams: What do you do?  Who is it for?  Why do they care?

I thought that this was brilliant.  In three questions, a company can explain their innovation, their market, and their value.  I see so many pitches that talk about the need to solve climate change, and their commitment to the world, and the value of the team, and it takes until page five until I see the company is pursuing an energy storage technology.

One of the first things an investor does is try to see if a company is even a fit (sector, stage, etc) with a fund.  Answering these three questions right upfront is helpful.