I first learned about venture in 2009 and quickly became consumed with the idea of integrating my interests between innovation and finance. I would start my day back then like many still do… by opening up avc.com and reading Fred Wilson’s daily post.

His candid and “bring-along’ approach to investing ran counter to my early investment banking experience. I reached out to Fred back then… and for some reason he would always respond with just a small note. He was building the entire venture ecosystem.

Today Union Square Ventures officially threw their hat into a world that I know well: the climate theme. Here is a link to the post and a summary of the theme from Brad:

The USV Climate Fund invests in companies and projects that provide mitigation for or adaptation to the climate crisis. And here is an incredibly succinct summary of what mitigation and adaptation mean to them:

Here is my take: We are ALL so fortunate that some of the absolute best investors AND community builders are bringing their focus to the climate arena.

At Energize we know that you can generate great financial and social returns addressing the climate crisis. And I know that we are all in a better spot by having Brad and USV show up with their Climate Fund. I can’t wait to see the upside they generate for the entire ecosystem. Hopefully we get to work with them 🙂

The transaction is unique in that Teledyne expects the acquisition to be immediately accretive to results – an incredibly rare M&A feat in the industrial technology products world. This accretive expectation shows that the firms serve complementary markets and can leverage a consolidated back office.

The Executive Chairman of Teledyne summarized the complementary nature well:

At the core of both our companies is proprietary sensor technologies. Our business models are also similar: we each provide sensors, cameras and sensor systems to our customers. However, our technologies and products are uniquely complementary with minimal overlap, having imaging sensors based on different semiconductor technologies for different wavelengths. For two decades, Teledyne has demonstrated its ability to compound earnings and cash flow consistently and predictably. Together with FLIR and an optimized capital structure, I am confident we shall continue delivering superior returns to our stockholders.”

Robert Mehrabian, Executive Chairman of Teledyne

Here is a summary of the complementary product suite

On the financial side:

Teledyne acquired FLIR for ~4x 2020 revenue. FLIR also had ~20% operating margin and a dividend. Net, the company had a strong profile within the industrial technology industry. However, growth was neutral to slightly up. Given the growing demands for industrial (and defense) sensors, I suspect the Teledyne – FLIR combination is well-positioned to capture market share while sharing backing central services and R&D resources.

Valuation: Growth /Margin Trade-offs

As a venture investor, the moderate revenue multiple for a low-growth/higher margin company is a reminder that growth is currently rewarded with greater multiples in the public markets than margin. For example, if FLIR was growing at >10% with a slightly lower operating margin, I would imagine FLIR would have received a higher M&A offer. I have to admit that this remains an anomaly to me as I see the FLIR profile as a strong brand in a consistent market that has customers committed to the FLIR product line.

They NEVER mention software…??

Finally, none of these companies talk about software in their press release about the transaction. That is crazy. I believe there will be many very valuable software companies in the computer vision/ digital imagery sphere that operate within the industrial and built environment. If you know of any in this area, please let me know.

Lots of predictions out there these days. At Energize we get to see potential future outcomes… and I have to admit that it is hard to make a high-probability prediction.

I’ve read predictions about a COVID resurgence, cloud’s continued dominance, hyper-inflation, remote work, Miami, accelerated industrial and workplace transformation, digital healthcare, digital currency… the list goes on.

The dispersion of outcomes and how they will affect our team, the portfolio, and the broader economic economic environment is a bit overwhelming.

My response to this unknown is two-fold:

1- Know your Circle of Competence

This helps define parameters for focus. Knowing my area of influence and competence makes it clear where I can be a well-positioned expert on a topic. When something distant comes up, knowing when not to swing or even get involved in a topic can be incredibly freeing.

2- Invest in what you can Control: People. Process.

People and process are the two fundamental assets for an investment firm. Everything else is extra.

At Energize we make pretty substantial investments in our team’s growth, communication channels, and feedback structures. Every team member has access to a professional coach for 2-3x per month meetings. Every team member receives feedback from their manager 2x / year with a full 360 review process at year end. We ask co-investors, entrepreneurs, portfolio companies, and LPs for feedback. And one of the most unique trends we established was a 9:30am daily meeting… and I think we only missed it 3 times from mid-March through the end of the year. Showing up for the team and building trust together is a muscle we are developing.

We evaluate what procedures are working and what is no longer a positive contributor at our stage. Flexibility in process development and learning as we grow is an area of budding strength here at Energize.

I hope you have a great 2021. Stay grounded, flexible, and invest in your people/process.

A green bond is when a company raises debt and promises to use the proceeds to fund for climate, environmental, or resilience projects. These financing vehicles have been around for a while…. but the issuers and banks are just starting to get creative. 2020 saw the first hints of this creativity… and two of these transactions caught my attention this year:

Schneider Electric’s 0% “Sustainability-Linked Bonds”

Schneider Electric is leaning into the energy transition. They provide energy and digital solutions for efficiency and sustainability. Led by Jean-Pascal Tricoire, the company is moving from incumbent to innovator and is now the de-facto leader of the digital energy transition. the company has now taken their progressive stance to the financing markets:

Schneider launched the first ever sustainability-linked convertible bonds. Sustainability-linked bonds (SLBs) are bond instruments that embed environmental, social and governance (ESG)-related indicators that issuers commit to achieve. If they fall short, bondholders receive additional payments. Several SLBs have already been issued (by companies like Enel), but this is the first sustainability-linked convertible bond (SLCB).

Schneider Electric is tracking three indicators, and the metrics will be verified by EY.

1. Deliver 800 megatons of saved and avoided CO₂ emission for customers by 2025
2. Increase gender diversity: 50% of hires to be women, 40% women among front-line managers, 30% women in leadership teams by 2025
3. Train 1 million underprivileged people in energy management by 2025

If the company fails to achieve a minimum sustainability performance measured by a combination of these KPIs, it must make a premium payment on the loans. Incentives at work… and setting the bar high for others!

Hannon Armstrong’s 0% Convertible Green Bond

Hannon Armstrong raised $500M+ in a green bond, with $125M of that at a 0% convertible note.

Hannon Armstrong is the first U.S. public company solely dedicated to investments in climate change solutions, providing capital to leading companies in energy efficiency, renewable energy, and other sustainable infrastructure markets. With more than $6 billion in managed assets as of June 30, 2020, Hannon Armstrong’s core purpose is to make climate-positive investments with superior risk-adjusted return.

With this focus on climate and financing, Hannon Armstrong is pioneering new approaches to lowering the cost of capital for climate-oriented investments. The 0% convertible note is only the second of its’ kind: a slightly larger firm (Microsoft) did this a few years ago. With a lower cost of capital for their own investments, Hannon Armstrong can now relay those savings along to the projects they are financing in-market.

Summary

The energy markets are undergoing change. Now the most innovative firms pioneering that change are also implementing new financing structures to enable and incentivize the transition.

This innovation will drive down the cost of new infrastructure projects for the entire ecosystem. Greater innovation and competition in the financing vertical means the project owners win.

I suspect 2021+ we will see many more 0% convertible green bonds and sustainable-linked bonds throughout the entire energy ecosystem: from startups to Fortune 100.

I am going to be writing a few 2020 summary notes / awards. Today is “the winning themes!”

Theme 1: Infrastructure Development

Hard assets get a bad reputation in VC. This negative reputation is self-inflicted by the early stage venture community: investing in infrastructure and expecting venture returns. The fact is that there are better financing sources for the infrastructure layer. And in 20200, renewable infrastructure went into overdrive. Here are just a few of the headlines.

Invenergy announced a 1.3 GW utility scale solar project in Texas, the largest utility-scale solar farm in North America.

Orsted and others are building the first sizable, offshore wind farm in the US. The site outside of New Jersey, is targeting 2.4 GW and the winning bidder will build a $250M+ manufacturing facility in the state.

Hawaiian Electric announced 460 MW of solar and 3 GWh of energy storage with a number of winners: AES, Longroad Energy, Onyx, Hanwha Energy…

Theme 2: Hardware

Installed wind, solar and batteries are expected to increase by >10x over the next decade. TLDR: A lot of hardware and components are going to be installed. The last generation of energy had dominant energy brands. This generation’s brands are being established now:

Array Technologies became the first publicly traded solar tracker and received incredible interest with record-breaking follow-on issuances.

Enphase Energy shattered the “inverters are commoditized” notion, gained market share and margin as the #1 systems hardware firm supporting utility scale solar’s undeniable growth.

GE re-establishing dominance in wind and is building a stunningly effective and iterative new Haliade-X turbine platform with recent indications of a 13 MW unit.

NextEra dethroned Exxon in terms of public market value and captured national attention with potential take-overs.

Tesla’s dominance in the electric vehicle and infrastructure market has gained market appreciation.

ChargePoint went public and revealed a path to $150M in revenue through hardware, services and software products. The firm’s trajectory makes it clear they are going to be the pillar of electrification of mobility for the next generation.

Theme 3: Cost Curves

Over the past decade experts made bold claims about how scientific advancements and engineering accomplishments will drive the cost of new energy products to decline. At times we take this stunning progress for granted. It is worth pausing and recognizing just how far we have come…

The cost for utility scale battery packs are in free-fall: lithium-ion battery pack prices, which were above $1,100 per kilowatt-hour in 2010, have fallen 90% to $137/kWh in 2020. BNEF projects the average price will be closer to $100/kWh by 2023.

Utility scale solar costs dropped by another 5-10% since 2019 and have dropped a cumulative 75% since 2010.

Utility scale wind continues to drop by about 5% a year and has dropped 71% since 2010.

Honorable Mention

JOBS: I actually do not believe the jobs topic gained enough coverage in 2020. The reason? No political party can take credit. The jobs created in industry are primarily due to corporate conviction and bottom-line decisions. Climate, renewables and the energy transition are being incorporated into P&L decisions. This is great for the industry but may mean the more easily trackable climate/energy transition jobs are less direct/trackable.

POLICY: We should have more insights into our congressional composition by February. I suspect policy will have a big impact in 2021.

In Summary …

We are still at the stage of market where the infrastructure layer has major runway. The dollars and assets going to the development and hardware space are going to reshape our energy landscape for the next 50 years. VC investors all want to run to software, but there is still tremendous growth and (near-term) margin in the infrastructure and hardware layer.