Our team has been tracking the carbon markets and what voluntary and regulated structures may grow into over the coming years.

Like with any growing asset class or trade-able security, there are several parameters around measuring and quality that need to be confirmed. A recent McKinsey report highlighted the market size opportunity and the key details for the voluntary carbon markets. That report can be found here and we thought it was a good summary of the structural improvements required to create a more scalable carbon market.

Building on other recent work aimed at developing the voluntary carbon market, in particular that of the Task Force on Scaling Voluntary Carbon Markets (TSVCM), the paper proposes six steps to address these deficiencies:

1. Define net-zero and corporate claims: Agreement is needed on NCS standards and certification under one commonly accepted international-standards body. This would provide a more solid foundation for companies to make and validate claims concerning targets for carbon reduction and compensation, and to show precisely how they intend to attain net-zero emissions.
2. Highlight good practice for supply: To address public concerns about the validity of NCS in achieving real and permanent carbon reductions, practitioners need to publicize recent progress in establishing good practices—for example, more rigorous measurement and verification methods and advances in sustainable land-use policies.
3. Send a demand signal: Carbon emitters should agree to prioritize high-quality NCS credits with large co-benefits: this would send a powerful demand signal to build confidence and solidify pricing across carbon markets, and it would encourage policy makers and credit originators to increase the project pipeline.
4. Improve market architecture: Standards, infrastructure, and financing need to be developed to support the growth of NCS producing tradable credits, as set out in the recent TSVCM report. Necessary steps include the creation of carbon reference contracts that allow prices to reflect co-benefits of NCS, a radical improvement in the availability of quality market data, and the development of centralized carbon exchanges.
5. Create regulatory clarity: Policy makers must focus on turning national and corporate carbon-reduction targets into actionable plans, underpinned by binding regulation. Clarity is also needed around how NCS projects can be accounted for within national carbon-reduction goals, how to integrate voluntary and compliance carbon markets, and how to organize the international transfer of carbon credits.
6. Build trust: There is a need for greater collaboration among stakeholders in order to address the perceived credibility issues of NCS. A coalition of high-level champions can help amplify the call for high-quality, high-ambition NCS.

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As I wrote to my team, the banks showing up are a proxy for the readiness of the market. The scale of the carbon markets will create many banking & fee opportunities for the investment banks. And when they show up, they will bring institutional process, credibility, and capital to help address a number of deficiencies labeled above.

There are a few notable firms in the venture landscape that have emerged with a bang over the past 5 years. One of those firms, Lux Capital, is led by Josh Wolfe and Peter Hebert. While the Lux Capital name is now well-know, the firm’s journey really is a “20 year overnight success”.

Lux Capital was founded nearly two decades before deeptech was a common term. At the time of their founding, most of venture capital was moving away from hardtech and towards internet businesses. The firm has managed the cycles and is now symbolic with meaningful innovation.

The Lux Capital team has been a friend to Energize since our earliest days. I first met Bilal Zuberi (Partner at Lux) when Energize invested in Nozomi Network’s Series B in 2017. Bilal had co-led the Series A and has been a tremendous thought partner on that investment over the years. In 2019, we co-led a Series A into ZEDEDA… where Juan and Bilal took board seats. Over the years we have also become closer with Brandon Reeves. Last year, when Energize was growing both Peter Hebert and Josh offered me and our team great advice. Peter even met with a few of our teammates in the Bay area a few months ago to provide advice on the next stage of growth for Energize.

The net here is that the Lux Capital team are great people with great ethics and drive. We are fortunate to have them in our ecosystem. I suspect we will do more together over the coming years…

Earlier this month, Peter Hebert sat down with Samir Kaji on the “Venture Unlocked” podcast. I strongly recommend you listen.

Lux Capital’s co-founder Peter Hebert on the firm’s 20 year journey, creating multi-generational success, and the changing dynamics in VC 

In the podcast you will hear about how to build a great investment firm, how to support great talent, what traits to optimize for in a hew hire, and how to keep a world-class culture. Check it out.

The past 2 years have seen great volatility in the software (and broader) markets. As shown below, COVID unknowns, digital adoption accelerating, and then a hype bubble popping have caused troughs and peaks in valuation multiples for software companies.

Looking at the following charts below from Goldman Sachs and you can see that we are still near all-time highs for these software multiples. There are a few narratives going around to be bearish on software stocks over the coming year, that could drag these multiples down even more:

1- interest rate increases. Software stocks tend to be about long-term investments with distant payoffs. Interest rate increases increase discount rates on those future earnings, lowering present valuations.

2- uncertainty in budget direction. Are we going back to the office? Hybrid? What IT systems should corporates invest it today? This uncertainty may hurt purchases for enterprise-scale software purchases.

3- distraction of outliers in growth rates. Some large software companies (Snowflake, for example) have re-accelerated sales above the $500M revenue level. This is a rare feat. These companies get major multiples (40x+ run-rate revenue) and become a beacon for other firms… and receive a lot of coverage in the press. However, most firms below 60% do ultimately fall in the 8-12x revenue multiple range.

My takeaway here is that we still may see more multiple contraction in the coming year(s). But, as the pandemic proved, software businesses are the most resilient to system shocks, and therefore have the staying power to live and grow through cycles.

A mentor frequently tells me “time is a natural form of diversification” – meaning to invest at a consistent cadence regardless of current position in the cycle. At Energize, we are maintaining our cadence, but continue to model out-year exit outcomes at historical multiple averages so that there is no multiple appreciation required to hit our targets.

Yesterday I wrote a post for Forbes about the current activity – and types of deals – being done in the sustainability market. You can see the article here.

I’ve also posted it below, for convenience..

2021 was a monumental year for the sustainability-focused capital markets. Almost every type of financing vehicle related to climate tech and renewable energy hit all-time highs: SPACs, IPOs, M&A, Growth Equity, Venture Capital. While I am partial to the venture capital and growth equity stages, there has been a fascinating trend in the M&A markets that warrants a review.

The reason M&A is so exciting is because there is now a clear strategy delineation between firms inventing the new energy economy, adapting to this new framework, or trying to adjust exposure to catch minor tailwinds with the theme. But first, what is the new energy economy?

The new energy economy is the framework for our evolving energy supply and changing energy consumption habits. On the supply side, we have a growing interplay between renewables like wind and solar, alongside baseline fuels like natural gas and resilience structures like batteries. On the consumption side we have mobility going electric, energy efficiency products taking over residential and commercial avenues and new products like carbon credits gaining interest. Influencing these moving parts is the unknown of climate change and how our infrastructure can handle new perils like extreme flood, fire, and wind. Holding this jigsaw of interwoven parts together are new digital tools that are designing, balancing, and maintaining the whole structure. Artificial intelligence based design systems and predictive analytics are the pillars to the digital backbone of our new energy economy.

With that background, let’s review the 3 types of M&A events occurring now and what each event says about the participants.

#1 Building a New Energy Firm for the New Energy Economy

These acquirors are new company platforms, usually started in the past decade, that are purpose built for the new energy economy. These firms are digital-first and deliver real value by combining subject matter experts with next-generation digital tools. The acquirors in this case are already large, and are looking to bolt on other, energy-forward companies to complement product skill sets or geographic footprints.

Aurora acquires Helioscope: Aurora is the number one platform to design residential and commercial rooftop solar. The company is digitally aligned to help simplify the deployment of solar across the world and represents the best of the new energy economy. Aurora’s leadership was looking to add greater product strength in large scale commercial solar design and acquired Helioscope. This deal cements Aurora’s leadership and allows the firm to be a one-stop shop for any installer. They are built and growing exclusively focused on the new energy economy.

STEM acquires Also Energy: STEM, a recently public company, is the global leader in AI-enabled energy storage. The firm works with their customers to customize and manage batteries and energy loads across all usage profiles. Battery storage is very complementary to solar energy’s intermittent production characteristics. Also Energy, a technology platform for solar operations and maintenance, was therefore the opportune target for STEM to acquire as they look to bolster their brand from battery storage to a broader leader in energy operations and maintenance. These two combined companies now well-positioned for decades to come and will be synonymous with solar and battery pairing. Another similar transaction here is Vista Equity buying Power Factors.

SparkCognition acquires Ensemble Energy: SparkCognition is an AI-enabled data platform that helps Fortune 500 customers in nearly every vertical better optimize their business. The company’s solutions work very well in traditional energy and SparkCognition wanted to gain market share in renewables. Earlier this year the firm acquired Ensemble Energy to provide instant access to the high growth renewables market. Now SparkCognition’s core technology can access and improve our renewable energy infrastructure.

#2 Traditional Energy Firms Integrating New Energy Products

This group of acquirors have existing business lines in traditional energy but are thinking ahead. These older firms have a business that, if managed successfully, can navigate the energy transition and are businesses with strong brands, active distribution channels, and employee bases that see the new energy economy as an opportunity. These firms are deliberately looking to incorporate new digital tools to better bring their own customers into the energy transition- an admirable and likely profitable endeavor.

Generac acquires Enbala: the maker of diesel or natural gas generators is now focusing on electric battery resilience solutions within the office or residence. But batteries are new to Generac so they wisely sought out a technology partner to help them incorporate the new product suite. Enter Enbala, the firm that now gives Generac its’ own microgrid software management platform. The two firms together now enable Generac to compete with the new generation of battery-first energy service providers.

EON acquires Envelio: EON is one of the largest utilities and energy providers worldwide. They are also forward thinking about renewables. The growth of renewables is causing a big backlog in interconnection requests. Interconnection requests are created when a developer or asset owner is looking to add an asset (wind farm, rooftop solar, EV charger) to the energy grid. To keep up with the tidal wave of interconnection requests coming to EON they knew they needed a better technology system. Envelio is a European-based platform that provides exactly that service and now EON should be better positioned to bring new energy assets onto their energy grids. EON could have tried to manage the growth internally but was smart to bolster on new capabilities to ride the renewable wave.

#3 Private Equity or Traditional Service Providers looking for Climate-related Growth, and Retentive Customers

The acquirors in this space are either more traditional, low-growth technology providers, or private equity firms. Both types of buyers like this segment for two key characteristics: higher growth in climate change related products, and very retentive customer relationships in the critical infrastructure world. Climate change tailwinds are driving demand for technology products that provide resilience to our infrastructure or helps accelerate the deployment of climate-ready assets.

Bentley acquires Power Line Systems: Bentley is a premier infrastructure engineering software company with customers throughout the energy ecosystem. The firm is growing about 15-20% per year and looking for even faster growing segments. The increased perils affecting our energy grid are causing utilities to need to model and improve predictive analytics around power line maintenance and tree-trimming, to avoid fires and increase uptime. These changing conditions therefore drive demand for the technology that Power Line Systems offers. With the acquisition, Bentley staples on a climate change aligned business to their core energy technology business and this addition should further strengthen their baseline growth.

Blackstone acquires Irth Solutions: Irth is a software services platform that provides predictive analytics and damage prevention for the energy industry. Energy firms tend to be slow to acquire as customers, but these energy targets are highly retentive once onboarded as customers. Irth and other firms in the space may not grow 20%+, but the customer repetitiveness provides high certainty of cash flow for private equity buyers. Additionally, these platforms may provide a private equity buyer, like Blackstone, the ability to staple one or two other M&A add-on products that can be sold through the existing Irth distribution channels. While steadier companies, these are the types of deals that are less likely to adapt to the new energy economy.

In Summary

The new energy economy market is continuing to heat up. As the recent cohort of public companies and the industry incumbents look to stake claims in this space, there be an active M&A markets in making. I believe that each of these acquisition types will be successful. As an early-stage investor, however, I do expect that the new energy platforms that are purpose-built for the next generation of energy and sustainability will ultimately capture the most market share.  Either way, this will be fun to watch over the coming years! If there are other types of acquisitions you are seeing, please reach out to me.

My belief is that a key team member receives a promotion only once they have already consistently acted at the new/target title. Last week the Energize team made a number of exciting promotions as each of these team members stepped up in 2021.

Tyler Lancaster joined us as an Associate in 2018 and has been a pillar for our Energize Ventures platform. He learned the “deep dive” research structure that Juan and I created and made it better. He also then relayed that methodology onto our next hires. Since he joined he has led investments into some great companies, including Aurora Solar, TWAICE, and Urbint. Tyler is promoted to Partner, and will be a key investment leader at our firm for years to come.

Eileen Waris joined us in early 2021 after getting dual graduate degrees from Stanford. When we hired Eileen we were looking for a team member that would bring an added focus for us on corporate sustainability. In her short 12 months with us, Eileen beat every expectation – and the targets were high. One of her areas of interest this year was in the carbon management space. After a year of looking for the best investment opportunity, we believe she has found that company and Eileen will have more to share in early 2022. Eileen moves into a Principal role with us, meaning she is on a path to Partner. She already has a few Board Observer seats and I expect she will have her first board seat in the next 12-18 months.

Mark Tomasovic joined Energize in mid-2020 after getting his MBA from HBS. He is our first (and likely not last!) hire from the traditional energy markets. Mark is an engineer’s engineer and is always looking to deconstruct a vertical to understand the key levers and likeliest areas where technology and market positioning will earn value. Mark has been a key ingredient in a number of our most recent investments, while also supporting a lot of our firm operations. He is a tremendously hard worker and he is a shining example of a younger oil & gas employee making the move to a more sustainable part of the industry. Mark is now officially a Principal with Energize and similarly, is on a path to Partner.

Kelly Lassing has been at Energize since 2019 and manages almost all external communications, marketing and events. If we are engaging with the outside world (or preparing to engage!) she makes it happen. At Energize we are frequently told by our LPs about the quality of our LP and network communications. Kelly is at the heart of that framework. We have high ambitions for the next stage of our platform, and Kelly is going to play a pivotal role in helping us deliver that message and expand our brand. For that reason she is formally our Head of Marketing & Communications.

Steven Kirnbauer joined Energize in 2018. He began his career with Energize as an Executive Assistant and expanded into Operations. Steven has kept the trains on time at Energize ever since he arrived. As our team has grown he naturally expanded to take over many of our Human Resource related items… all while managing larger operational efforts like our office move and structural IT and systems changes. Personally he has been a major help for me over the past 3 years – including helping me manage priorities and making my role as Managing Partner less stressful. Going forward Steven will be our Head of Operations & HR and we will be hiring to support his efforts in 2022.

Kevin Stevens joined Energize in January 2021. We hired Kevin to help stand-up our Growth operations – and he did just that. We have launched and closed Energize Growth I and have made 4… about to be 5 investments from the growth platform. Kevin is an ongoing student and is now a leader at the growth equity stage for software and sustainability. Kevin had the skillset to be a Partner when we hired him, and this promotion is as much about ensuring EQ-alignment with the firm… and the appropriate cultural promotion for recognizing how selfless he was in 2021 to do whatever it took for the team to succeed. Kevin moves to Chicago in a week… and has the Partner title to go with the new addres.

Each of these professionals has made Energize better. Each individual brought a new strength to our team and advanced our cumulative goals to deliver great financial returns, and accelerate impact. I can’t wait to see what else they can accomplish in the years to come…

The chart above shows expected battery additions to the Texas energy grid in the upcoming years.

Based on regulatory structure, ERCOT is usually the most innovative / welcoming ISO here in America. For that reason, ERCOT is usually the playing ground for energy developers and the zone provides a glimpse into what new energy products are coming to the rest of the US energy markets in 5-8 years. Based on this chart, grid-connected batteries are going to be everywhere in the not-too distant future.

Change means opportunity and I am excited how this battery growth will alter the industry.

Earlier this month Mark Tomasovic recorded a podcast with the Collosus content platform. Colossus engages business experts to cover key themes and companies. In this episode, released today, Mark covers the utility and renewable energy leader, NextEra Energy.

You can find the podcast on any of your podcast applications, or the online link right here.

Here are the questions that Mark answers during the podcast:

Show Notes

[00:03:16] – [First question] – Mark’s background and how he thinks about the energy markets 

[00:03:46] – A broad overview of the electricity market and how it’s structured

[00:05:22] – The value chain and production line of energy from facility to customer

[00:06:59] – What informs how much an energy company is allowed to earn

[00:09:16] – Unregulated versus regulated markets and the risks and benefits of both

[00:11:29] – How the retail electric market looks today and alternative production methods

[00:12:40] – NextEra’s business fundamentals and their current scope and scale

[00:14:45] – The two business arms of NextEra

[00:16:00] – Inputs and costs of the low cost regulated utility side of NextEra

[00:18:33] – NEER being the world’s largest generator of wind and solar

[00:19:43] – How they’re able to get contracts and how they work 

[00:20:03] – Comparison of revenue generated between their different branches

[00:21:26] – How the regulated and unregulated arms work together for NextEra vs its competitors

[00:22:30] – What their most important benchmark is and thoughts on gross margin and profits 

[00:24:33] – Natural cost of capital advantage given the growing focus on  ESG 

[00:25:33] – How COVID impacted the energy space, specifically in electricity 

[00:28:20] – Conventional energy production becoming more expensive in the near future 

[00:30:10] – How reliant NextEra is on government subsidies  

[00:31;20] – Where they spend all their revenue, the price of projects, and ROI

[00:33:01] – How they evaluate projects 

[00:34:19] – Structural differences in renewable  energy business models today

[00:36:18] – What could happen that could negatively impact NextEra’s growth

[00:38:22] – Considering risks when underwriting turbines 

[00:39:15] – Is nuclear power a potential tail risk?

[00:40:05] – Being forward-leaning when adopting digital technology and innovation

[00:41:23] – Lessons that can be learned from NextEra for builders and investors

Want to see a sign of the current state of the energy transition? First Solar is one of the largest solar panel manufacturers in the world. Check out this headline from them a week ago:

That’s right – the largest order of solar modules in history is going to bp. Yes, that bp.

Times are changing.

Yesterday I talked about how Energize is looking to hire a Head of Legal. We are growing our team to complement our existing strengths. We began that more broad evaluation of our human capital investments earlier this year with two important hires. Those details are below:

Energize is excited to officially announce Shariq Syed and Vishnu Amble as the two newest members of our team!

Shariq, our Chief Financial Officer, brings experience in both traditional finance and investing as well as operational expertise, having led finance and operations for a number of growing tech companies. As CFO, he will have an active role in fundraising, IR, due diligence, and portfolio support.

Vishnu is our new Head of IR & Capital Markets. With two decades of experience managing capital market activities at the intersection of infrastructure, energy, technology, and sustainability, Vishnu brings a wealth of industry knowledge and an institutional investor mindset to our team. He will add value to our growing portfolio in need of capital as they scale.

Both men have already been incredibly helpful in providing value and insights to our team, our portfolio, and our LPs.