Author: John Tough

Midyear reviews at a VC firm

Midyear reviews at a VC firm

We kicked off our midyear review process here at Energize last week and I held my 1:1s with my team this week.

Every year we have a robust planning and strategy session for the firm’s top 5 goals. Then every individual (investor, platform) identifies how they will contribute towards those efforts through individual and team-oriented metrics. As a team we have truly embraced the structure and it is one of my happier implementations here at Energize.

Investing can become a single player game. Almost all of our development efforts are around enforcing a team approach where we feel success in the firm’s collaborative advancement. I kick off every review with a 2-3 page summary of my sentiment towards the firm’s current status. VC funds tend to define success in longer (5-10 year) increments that match the development of the portfolio. Investment firms can have an even longer horizon as talent and multiple portfolios develop. Balancing the short term quarterly progress with the long-term horizon can be hard. In my midyear review I talked about that trade-off and wanted to share it here:

In many ways I judge our near-term success by constantly asking myself these three questions

  1. Are we making long-term investments, and avoiding short-term thinking?
  2. Are the correct teammates in positions where their strengths can be maximized?
  3. Are we responding to our stakeholders (entrepreneurs, LPs, co-investors) and iterating to stay sharp on near-term execution?

These questions stirred some good internal conversations. I will post some of the takeaways over the coming weeks.

New: Private Equity buying renewables developers

New: Private Equity buying renewables developers

I worked at UBS right after undergrad. It was the mid-to-late 2000s and there was an abundance of press (and hysteria) around two key items: Private Equity, and Oil & Gas prices.

Blackstone, as the face of mega-PE, went public to a heap of fanfare in 2007. Oil and gas peaked in June 2008 at $170/ barrel. Both topics covered CNBC for months. Due almost entirely to the financial collapse, the subsequent 3-4 years were quite dismal for both themes.

PE began bouncing back in the early 2010s and oil-related commodity prices have stayed depressed over the past decade. While there has been some recent resurgence on oil prices, the O&G private equity firms that dominated the markets in the 2000s are far less influential than their earlier vintages. Some of those oil & gas firms are pivoting to renewables.

One of the most traditional O&G names that is attempting a renewables pivot is EnCap. Long a carbon-based investor (and still has exposure there) the firm is beginning to invest a fair amount into renewable efforts. One of those examples is Jupiter Power, a battery developer, where a number of great contacts I met through Energize’s LP base are now working.

Another pillar of the the traditional infrastructure PE world is EQT. They used to invest in more carbon-based firms, but now are moving to next-generation infrastructure, including renewables. They had previously founded O2 Power, a utility-scale renewables-focused developer JV with with Temasek.

EQT announced another interesting deal today, with the acquisition of renewable energy developer Cypress Creek Renewables. Cypress has developed over 11 GW of power and currently operates nearly 2 GW of assets. My suspicion is that EQT is not investing here just for the asset in its’ current form, or even the current trajectory. I suspect that EQT is also going to be adding a lot of capital to EQT’s balance sheet to help Cypress grow to meet the major demand for community solar and utility scale projects in the US. Net while this is a full buyout, I expect there to be a “growth equity” looking incremental capitalization to the company.

This may seem like a more standard deal, but this buyout + growth capitalization deal is specifically new to the energy transition. Most of these transactions to-date have been exclusively project finance or growth equity. The shift for EQT to control ownership shows a desire to be a larger player in the space, and also shows greater conviction on renewables as an asset class. Given EQT’s brand presence, I predict that more large PE players will be entering the renewables arena.

PV Tech also covered the deal here:

Industrial Tech M&A: Thoma Bravo takes QAD private for $2 billion

Industrial Tech M&A: Thoma Bravo takes QAD private for $2 billion

Thoma Bravo agreed to acquire QAD Inc. (Nasdaq: QADA), a Santa Barbara, Calif.-based provider of manufacturing and supply chain solutions in the cloud, for about $2 billion. QAD is a leading provider of next-generation manufacturing and supply chain solutions in the cloud. Thoma Bravo is one of the premier technology-focused private equity firms with particular expertise on the software and technology-enabled services sector.

The company has $317M of trailing twelve month revenue, 60% gross margins and $14M of operating income. Growth at the company has been flat-to-down for the past 3 years. The digitization of manufacturing and supply chain is currently experiencing meaningful growth so with QAD’s growth stagnating it means the firm is losing market share, perhaps to earlier stage companies.

So why is Thoma Bravo interested?

Thoma Bravo is known for bolting on acquisitions to their platform portfolio companies. Bolt-ons work well when a central, trusted platform/brand can add new products and immediately offer that technology to their existing customers through sales channels. QAD is exactly that trusted brand in the manufacturing and supply chain market. I expect Thoma Bravo will help QAD acquire some newer products and technologies and add these products into QAD’s existing sales channels.

The Metrics

6.4x trailing twelve month revenue, very low end of revenue multiples, but consistent with a no-growth industrial technology company. These new bolt-on products will drive growth and immediately expand the revenue multiple of the business. If QAD can move to even 15% annual growth, there would likely drive a nearly 50% increase in QAD’s valuation revenue revenue multiple. (10x TTM revenue). Be on the lookout for bolt-on acquisitions in the space in the coming quarters…

Industrial Tech M&A: Rockwell acquires Plex for $2.2bn

Industrial Tech M&A: Rockwell acquires Plex for $2.2bn

Last winter I covered the industrial firms that best use M&A to infuse digital applications within their growth framework.

One of those companies I highlighted was Rockwell. That original deep dive can be found here: Rockwell Automation: Ready, Set, Go. In that post I wrote the following:

“Very few firms provide such context on their intent and area of focus for inorganic growth. Rockwell makes it pretty clear: acquiring at least $250M of revenue derived mostly from industrial software businesses over the next 3-4 years. The business units are simplified and the areas of focus for growth are well-defined. I expect Rockwell to be an active player in industrial technology M&A over the coming years. High growth start-ups in the space should develop relationships accordingly…”

They also shared their targets:

With all of that background, if I were to have a second title of this article it would be: “right on queue“.

Rockwell is acquiring Plex for $2.2 billion. Plex is an industrial cloud operator that helps manage more than 8 billion indsutrial cloud data points every day. If industrial operations are getting digitized, Plex plays an important role in capturing and storing that data. The company has more than 700 customers and nearly $160M in revenue in 2020.

If you look at the chart above, Plex fits very well within “Information Solutions” and “Connected Services” for where Rockwell was targeting inorganic growth. And with $150M+ in revenue, Rockwell is ~2/3rds of the way to their annual goal of their annual $250M inorganic revenue addition goal.

Metrics

Plex was acquired for 14x their trailing twelve month revenue figure. The median figure on the Bessemer Cloud Index is 17x TTM revenue and 30% growth rate. Bottom quartile growth rate is 19% and that earns a SaaS company a 10x multiple. Assuming some M&A premium, I would venture that Plex was growing around 15-20% annually. This is a great scale (meaningfully large) and growth rate for Rockwell. As always, they continue to execute on M&A.

Consultancy partnerships & Startups

Consultancy partnerships & Startups

Earlier this week one of our portfolio companies, Jupiter Intelligence, announced a strategic relationship with Guidehouse. Guidehouse and Jupiter created a strategic alliance to help utilities quantify climate risk and build resilience. As the energy transition intensifies, energy providers must create and implement integrated plans to address climate resilience. Guidehouse (formerly PWC’s public sector consultancy) is a leading global provider of consulting services to the public and commercial markets, with broad capabilities in management, technology, and risk consulting.

Many technology companies actively avoid working with consultants to deliver commercial traction. It implies a few negative traits to the sale:

1- Indirect access to the end customer

2- Implied lengthy integration or sales cycle

While there is no universal rule, I tend to believe that consultancies, like Guidehouse, can be a very important part of a start-ups journey. I see 4 main reasons:

1- Validation and trust: Big corporates have been burned by committing to a startup, only to see that NewCo go out of business…or worse, be adopted or acquired by a competitor! Consultants vet the startups and will maintain the technology relationship, and find an alternative, should the startup go down hill.

2- Corporates require white glove service: if you are an early stage startup, you are likely going to get overwhelmed with corporate demands. The consultancy helps manage those requests (and bills hourly, accordingly!).

3- Finding budget: If your technology is new, or solves a new problem in the organization, consultants can work wonders in helping you find the internal champion, and budget. Their presentations will prove RoI and then also identify the best groups in the organization that will benefit from the new technology.

4- Reference and Distribution: Consultants make money on advisory services and integration services. With a new technology start-up, the consultant makes $ from both opportunities. With a proven ability to help a client, a consultant can quickly replicate the offering for the other, large customers. The start-up is essentially a medium for the consultant to grow a relationship with a corporate. But, all three sides win: more tech sold & adopted, more digital corporate, well-paid consultant.

Guidehouse checks a lot of these boxes for Jupiter and I am excited for them to help address the energy and industrial verticals within the Fortune 2000.

Hiring at Energize- Principal, Growth Equity

Hiring at Energize- Principal, Growth Equity

Earlier this year, Energize announced the hiring of Kevin Stevens. Kevin joined us to get our Growth Fund efforts off the ground. To say he has been busy is an understatement. Today we announce the first of a number of hires dedicated to the effort. The job post can be found here.

Also, Kevin wrote this about the firm and role over on his website:

I had a hunch I was joining something special when I joined to Energize almost 6 months ago. My experience has surpassed even my highest expectations.

Now it’s your chance to become part our growing team. We’re hiring a Principal for our growth equity platform. The position will start Q4 of this year and will be based in Chicago.

With the semantics out of the way, it’s worth me explaining why Energize and what I think are a few of the best parts about this potential role. Here’s a sense of how we think and work internally:

  • Quality is contagious. The little things matter and attention to the craft of investing are valued here. You have to enjoy being accountable to others.
  • We do things our own way. We choose to be original and find creative solutions.
  • We favor long-term thinking. The environment is fast-paced, and we execute with urgency, but always with the long-term in mind.

This role is an investing role on a potential partner track, but we’re also entrepreneurial at heart. As we look to build out our platform, we’ll expect you to think creatively in all aspects of our firm.

Electronics as a % of Total Car Cost

Electronics as a % of Total Car Cost

Kevin Stevens tweeted the below about how cars are going digital – and posits how a more digital mean of transport requires investment into more traditional IT themes: data analytics, cybersecurity, etc. Check out the graph below. It will surprise you.

NextGen is Already Here: Team and Acquirors

NextGen is Already Here: Team and Acquirors

Everything about the current state of the energy transition is better. We have better people working on the companies, and making investments. We have better market conditions. We have better acquirors. I am seeing this “better” / next level improvement in our people and market conditions on a weekly basis now. Here are a few examples, with more to come.

Case 1- The Energize Team: I was fortunate to draft the first real investment memos at Energize back in 2017 with SparkCognition and Nozomi. And I am pleased to say that our process of identification and evaluation improved with each passing year. I taught that investment approach to Juan and Tyler and Katie and this past week I was walking by a conference room and I saw Tyler trading notes with Mark and Eileen and developing an investment memo that took some of the original strengths but expanded in certain areas. The company and analysis is world class and our system is working. I didn’t pop in, just smiled and thought: “the next generation is better… And already here” and was very happy about the arrival.

Case 2- The Energy Transition Acquirors: Last week a recently IPO’d energy transition company (NOT an Energize company!) was trying to acquire a Series B start-up within our investment pipeline. After a split moment of annoyance I was as incredibly pleased (and similarly happy as my earlier team stepping-up observation). Why? Our best energy transition companies of the most recent wave are graduating from start-ups to platforms that will implement strategic M&A. Unlike most of the industrial buyers over the past decade, this new wave of energy companies understand the value of growth and is willing to pay growth multiples for start-ups that align to the energy transition.

This exit option has NEVER existed before for start-ups or investors specific to the energy transition. I’ve witnessed this type of exit pathway strength within traditional IT and wished for that to come to the energy transition / sustainability. That M&A exit opportunity is now here.

With growing investors and more exit options, the next generation of the energy and sustainability transition is already upon us – and is about to get far more exciting.

My first pre-seed investment

My first pre-seed investment

A few years ago someone wrote a post along these lines:

“every VC thinks the investors investing earlier than them is a gambler, and everyone after them is a quant, sleepy investor”

The statement gained attention as early stage investors claimed rigor and the later stage investors claimed excitement. I know my sweetspot- investing post technology risk and at the inflection of commercial adoption. It is where I can gain a competitive advantage and the stage where my “CRO” mindset can help out the most. This is also where Energize Ventures naturally invests: late Series A to Series C.

For a host of different reasons, I made my first SUPER early stage investment yesterday. The entrepreneur was a spin-out from one of our portfolio companies and a number of his colleagues (and our portfolio company CEO!) also invested. The product is surprisingly commercially advanced but definitely way earlier than the Energize risk profile. I don’t intend to make these early stage investments often and I don’t have a pattern for consistent evaluation yet. What I do know is that ultimately I made the investment almost exclusively due to the entrepreneur and seeing his product skills at our portfolio company and his scrappiness with the new endeavor. Maybe that is the framework at this stage: entrepreneur 90%, big market 10%. I will keep you posted. And yeah, it is a little crazy.

The Limiting Reagent

The Limiting Reagent

I got my undergraduate degree from Duke in biology and chemistry. While I occasionally use those lessons in my present day role, many of the concepts show up in new forms.

One chemistry term that finds a way into my investing framework is the limiting reagent. In a chemical reaction, the limiting reagent is the ingredient / reactant that is completely consumed first. The amount of final product formed is therefore limited by when this ingredient runs out as the reactions stop.

When I am looking at a company I am trying to figure out the most important limiting reagent. What is the resource that is limiting a company from growth? Is it market size? Product value? Team?

Once we have a grasp on the limiting reagent then it is important to understand if the company is actively addressing that issue. So often we will see a company putting resources towards an issue that isn’t the blocker. I’ve heard this somewhere else: “growth is removing barriers” and it feels so spot on and simple. In the energy and industrial markets there are many companies that build out incredible …. but ancillary… features and channels. Only the best companies that focus on the evolving limiting reagent truly succeed.