Last week there was another $1 billion + Industrial Technology deal. To most people, it won’t look too much like an “Industrial Tech” exit, but it sure is. To the naked eye, the company will look like tradition telecom equipment. Heck, even the buyer is Ericsson, one of the largest telecom firms in the world. But the fact is that the telecom industry will be one of the most active players in the IoT / industrial technology landscape. Every digital factory or distributed asset is now 5G or wirelessly connected: factories, EV chargers, automobiles, solar arrays, municipal fleets.. industrial assets are connected and the telecom firms are the information highway to our digital industrial world.

The company for today’s exit evaluation is CradlePoint, and they have a combination of routers and endpoint adapters that help corporations harness “LTE and 5G to wirelessly connect fixed and temporary sites, vehicles, field forces, and IoT devices, anywhere.” I first came across CradlePoint when our portfolio company, Volta Charging, was evaluating how to manage 5G connectivity for their chargers. Distributed assets like EV chargers now run a suite of software applications and need access to wireless solutions. Everything is now a computer. And computers need network connection to communicate and update.

As seen on CradlePoint’s site, their hardware/software solutions are used in a number of industrial verticals, including: transportation, digital signage, smart cities/buildings, industrial sites, and retail.

The History

The company was founded in 2006 by Pat Sewall and is headquartered in Boise, Idaho. The first well-documented investment round was the 2010 Series B, where a $11.5M investment at a $51M pre-valuation bought OVP Venture Partners and Highway 12 Partners 18% of the company.

In 2011, George Mulhern became CEO and has held the title ever since.

Over the years the company raised an additional $150M, including an $89M round from TCV in Q4 2016. That investment earned TCV ~25% of the business, meaning that the last notable private market valuation for CradlePoint was a $356M valuation. At the time industry reports show CradlePoint’s revenue around $100M.

The Exit

Last week that Ericsson announced that they are going to pay $1.1 billion for CradlePoint. And in the release the financials were revealed: “Cradlepoint’s revenues: $150 million in 2019 and are expected to grow to $200 million.” This means that Ericsson is paying approximately 6x current revenues for CradlePoint’s business. This is a premium for a primarily HW business. My expectation is that Ericsson sees extra value in being the network provider for the high growth, increasingly digital and distributed asset layer.

All early shareholders and investors are likely to be quite pleased here, including TCV who likely earns >30% IRR and turns $89M into ~$260M within 4 years. The Series B investors likely converted their $11.5M investment into ~$200M at exit.

On timing: CradlePoint took 14 years from launch to exit; and 10 years from their first institutional investment round. Both of these time data points are slightly longer than other exits in the industrial tech vertical. The company has great metrics in terms of cash efficiency and providing sizable returns for the early and growth stage investors.

I have now updated the “Industrial Tech Exits” Google Doc with this deal. Found here

In June 2007 John Doerr took stage for a Ted talk and got emotional talking about climate change. The battle was on and cleantech 1.0 momentum was in early innings.

I now look back to speeches like this one, press highlights, old investment memorandums, etc. and almost EVERY message was based on price. So many investments were a hop/skip/jump away to being able to compete on price with traditional energy sources. The reason for this messaging was because commodity prices were going UP and meeting renewable alternatives at the higher cost tiers. Here is an Index chart from the IMF on global commodity prices over the past few decades.

As you can see here, cleantech 1.0 was a false front because new energy investors and operators were gaining confidence in a battle that was taking place outside of normal bounds. Therefore, when energy prices fell in the early 2010s, the near-term goalposts for many capital intensive renewable companies moved further into the distance…. bankrupting most. But these cleantech 1.0 investments did ultimately help.

Since the peak of late 2000s and early 2010s, commodity prices have plummeted and (driven by those early investments) renewable prices have chased them down even faster.

This framework us one I use to evaluate an industry’s readiness for change:

Is a new technology viable due to temporarily high incumbent costs or is the new technology sufficiently developed to chase the incumbent solution WAY down the cost curve? (to use a sports analogy: are we competing on a level playing field, or is our opponent handicapped? Don’t celebrate too much if the conditions are non-standard to your benefit!)

What makes now an exciting time for renewables is that nobody is really talking about price competition with traditional fuels anymore. We are way down the price curve: fuel prices are low and renewables are OK competing at those levels. And if there is a discussion around price, it is usually between different types of renewables.

This time is (probably) different.

News outlets have recently indicated that ChargePoint is going public via a Reverse Merger (SPAC) call Switchback Energy Acquisition. (SBE)

Why is ChargePoint a good SPAC target? Right now there are about 90,000 public chargers in North America and ChargePoint represents about 30-40% of that network. If you believe that mobility is moving from hydrocarbon fuels to electrons, then ChargePoint is a key lever in that transition. And should be a household name in the future.

Neither party has yet to release public financials, so I will not comment there. However, the SBE SPAC is a $300M vehicle and the average SPAC attains 10-20% of the target company through the capital investment. Using this framework, it appears that ChargePoint will aim to enter the market somewhere between a $1.5BN to $3BN valuation. The company has raised $700M to date and was valued around $1.2 billion in a financing round announced in Q1. So some of these valuation levels will provide for a nice return to early shareholders.

Some of the earliest investors on the cap table have been involved for over a decade. While the IRR may not be great, these investors saw the opportunity to be the largest EV charging network in the US. And that early conviction should be rewarded as ChargePoint has persevered through the years. I hope they succeed in the public markets.

One of my favorite books of 2020 is a classic, Complexity Theory. The book covers how ideas converge at the edge of chaos. And specifically how technologies come together in unique combinations at almost required points in time to drive forward industry.

Near the end of the book there is a segment on climate change, that I believe is very relevant for our current market status. Right now there are ongoing debates between different fuel types and their pros/cons and various proponents are staking out their positions and getting entrenched. My favorite paragraphs from the book show how we should be approaching climate adaptation by embracing many different technologies. By enabling a suite of differing technologies, we retain optionality to optimize for the long term maxima, as opposed to being stuck in an intermediate peak.

“When you are part of the cycle, as in climate change, it is not a duality of us vs them. It is integration. Accommodation and coadaptation so you optimize for the right peaks and not a local maxima that could extinct you.”

“And so how to maneuver in a world like that: the answer is to keep as many options open as possible. You go for viability, something that’s workable, rather than what’s optimal. A lot of people then say: aren’t you accepting second best? No, you’re not, because optimization isn’t well-defined anymore. What you are trying to do is maximize robustness, or survivalists, in the face of an ill-defined future. And that, in turn, puts a premium on becoming aware of non-linear relationships and causal pathways as best we can. You observe the world very carefully and you don’t expect the circumstances to last.”

Capital allocation is a critical lifeline for the oil & gas industry. The industry is incredibly capital intensive: pipelines, refineries, rigs, fracking sites… are all multi-billion dollar efforts.

Given the capital intensity to build and maintain these carbon-emitting assets, when the money talks, the executives listen. And the money is beginning to talk:

Last year, Larry Fink at BlackRock wrote an impactful note to his fellow CEOs on climate change.

Climate Risk is Investment Risk: In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.

The proclamation was bold, but not specifically targeting any asset or company. But now the allocators are calling out companies and climate negative firms.

That is a big change in communications and I expect we will see this level of climate-related activism grow. And the firms will listen.

Earlier today the CEO of Uber announced the following:

It’s our responsibility as the world’s leading mobility platform to more aggressively tackle climate change. That's why @Uber is committing to move 100% of rides to EVs in US, Canadian, and EU cities by 2030, and to become a fully zero-emission platform by 2040 (1/6)

— dara khosrowshahi (@dkhos) September 8, 2020

Awesome announcement and i wanted to do a back of the envelopment analysis of Uber impact for their US footprint:

5 billion trips per year 6 miles per trip is ~ 30 billion miles per year. At 20 miles/ gallon gas that means just in the US alone that Uber is removing 1.5 billion gallons of fuel. REMOVED. At $3 a gallon, Uber is removing $4.5 billion in fuels revenue to the oil & gas industry.

~ 1 kWh takes an EV ~4 miles. In order to power all of the Uber trips with electric power, the US needs to add annual production of 7 billion kWh. A large wind turbine generates ~6 million kWh of energy per year, meaning that to power all of those Uber rides we need to add ~1,200 wind turbines. There are already over 50,000 wind turbines operating in the US and another 10,000+ in development.

At 10 cents per kWh, the cost to the Uber drivers for their energy source is now a total of $700M, a savings of over $3 billion to drivers.

These outcomes, where obvious unit economics drive change, are going to continue to make press releases.

There are many winners in this outcome. Here are a few:

+ Consumers for improved air quality and less local emissions

+ Utilities as mobility moves to being powered by electrons: rate base new renewable generation and local EV infrastructure

+ Energy management firms who upgrade local power distribution: Schneider, Honeywell, Rockwell, ABB. The grid needs to be able to manage increased power flow

+ EV charging networks are now increasingly important

+ Uber drivers who now spend less on fuel

Decarbonization. Decentralization. Digitization.

I didn’t think we needed to explicitly state “reliability” as a pillar because no-one expected a decline in quality with our next generation structures. But, given the increasing climate-based fluctuations, as well as the intermittent nature of current renewables, we likely need to adjust our 3-pronged approach to specifically include resilience.

I, perhaps incorrectly, thought that we had addressed base-load and resilience issues through better digital controls and more voluminous, decentralized generation. There is an increasingly unchallenged assumption that growth of intermittent renewables will eventually be paired with the cost-decline of batteries. And while I still believe that batteries will be the eventual/ critical complementary power source, there are many ways batteries will engage with the grid… + even the definition of a battery may change to include modular nuclear.

As stated in a past post, Energize is investing in the transition, not the outcome: “Rather than attempting to monetize a self-selected outcome (clean energy) we now focus our process on enabling the energy and industrial transition.” Energize remains focused on the software applications enabled by this transition.

Investing in a Transition, Not the Outcome

Over the coming months I will be expanding my scope to better understand how and why we can better directly address resilience in supply. There are a number of jump-off points to revisit to see if the technology is ready for prime time:

– vehicle to grid (V2G) software (resi, fleets)

– next generation inverters and home / commercial control systems (and biz model)

– broader co-generation opportunities, including small modular nuclear reactors, modular batteries (readiness, policy)

All of these technologies still assume increased generation and distribution at the edge. I see smaller-scale generation’s ability to grow and iterate more quickly as a key component to the energy transition.

Who should we be speaking to making advancements in this space?