Decarbonizing Venture Capital

January 15, 2020
December 2019

Ion is the Managing Partner at Capricorn Investment Group. Ion is one of the original “Impact Investors,” beginning his sustainable technology investment career in 2004. Following early investments in Tesla, SpaceX and QuantumScape among others, Ion details Capricorn’s mission of focusing capital on technologies and solutions that can solve the world’s leading challenges.

Where does your interest in sustainability come from?

I’m one of those people who couldn’t sleep when I was 10 years old because I would think of how we are wrecking the planet. I think there are certain human beings that have those feelings and there are others that don’t. Education makes some difference, but I do think some of this is how you’re wired, whether you care or not. It’s always bothered me to see the loss of a beautiful forest or the pollution coming into some pristine ocean, so for me those feelings are really, really strong. Now as it comes to investing, the 2005 documentary An Inconvenient Truth had a big impact. We had created Capricorn Investment Group with Jeff Skoll, who produced the film. He had formed a company, Participant Media, to pursue his life passion of using media to tell great stories with the thesis that society functions thanks to great stories told in film and books. He wrote a $1.3 million check to produce the Gore presentations into a film and I had the privilege to witness its production; and in between filming, Al Gore came to me and put his face close to mine and told me we had 10 years to solve the climate crisis. We had been given $5 billion and a blank sheet of paper to make money but, to do it in a way that was meaningful, so these ideas and experiences came together and eventually developed into an investment thesis at Capricorn. It’s one of those things where the same day it happened it had no effect, a week later, maybe it had some effect, but only two or three years later you think back, why did I do all these things? And I am absolutely certain that [the film] had a very big effect. That’s why, when the sequel came out two years ago, I said we need to get the thousand or so people who control the $200 trillion of investable securities in the world to sit in front of this sequel and even if they’re bored or they have no reaction, a year later they’ll do something they wouldn’t have done because they sat through the movie for two hours. And so we took it on and did screen-ings in major capitals around the world inviting only senior executives that control large amounts of capital and I think we had some representation of about a third of all investable capital - literally trillions of dollars. My ambition in doing Capricorn was always, wow, we could do something special and the huge opportunity of decarbonizing energy, transportation, agriculture became such a big focus because of the intensity of this experience.

What are you working on now that you’re excited about at Capricorn?

Too many things! Fast forward to now in 2019, nearly fifteen years after An Inconvenient Truth and as you know emissions have continued to climb in the world, so there has been no success-ful application of energy policy or transportation policy that has made a big enough dent to even slow emissions down. It’s really quite depressing and I can’t say that we’ve moved on to new themes; we’re still attempting to scale like crazy the things that can make a difference. I’m a product of the Bay Area, of science and technology and innovation. It’s the one place in the world where all wealth is made through innovation, something like a trillion [of wealth] is created every 10 years and there’s no other place like the West Coast of America in the world. So that’s what I grew up around and so we look for technology that is potentially so scalable and so large that it can make a real difference. Obviously one of our biggest successes was being a key investor in Tesla, before it even had designed its first car. I was a Teaching Assistant in an honors physics program and one of the many brilliant students there was a fellow named J.B. Straubel and he was not only smart but a pragmatic thinker and realized the problem and the opportunity of Moore’s Law would have in power electronics and batteries and how these would enable a big revolution in transportation. So we wrote a check and the investment snowballed into a whole bunch of work that continues today and we’re just getting started. First of all, to electrify transportation, there’s way more work left to electrify trucks and cars. Although this is becoming quite obvious, in California, Tesla still only represents around 2% of all cars on the road, and this is off the charts related to every-where else. Therefore, this space continues to offer opportunity. We have also had to wait more than a decade but electrifying aviation is something that we’re heavily into now and out of the 100 or so start-ups we found in aviation, we funded a company called Joby Aviation. You know in the Tesla days we couldn’t admit to funding the company because people would laugh and say that’s ridiculous; but because of the success of Elon Musk, in a good way people are not laughing about electrifying aviation. The downside to this for a venture guy like me is that there are a hundred startups, as opposed to a few only in the early Tesla days. So it’s good for the world, but a little tougher for venture capitalists.

How far away are we from commercial electric aviation?

There are things you can do very soon with still somewhat experimental planes, operating under waivers and things like that. We could have properly tested and certified vertical takeoff and landing (VTOL) aircrafts in as soon as two years from now. For broader application, it’s probably five years when, as long as you live in the right place and you’re a bit curious and want the experience, it will be possible and available. In 10 years, I think it will have grown to be very, very big.

How do you go about qualifying some of these investments as fitting your original thesis to make the world a better place?

We do a lot of things that have various impacts that are good, but for us, climate is the major focus, and it’s one where the metrics are most obvious. You know, we might be eating sandwiches for lunch and we could debate for months whether the sandwich we ate was healthy or not. There’s no single metric for food and lots of perspectives, right? Not with climate. It’s not that complicated unless you’re a crazy politician or CEO of an oil company. We know what the problem is and the metrics are quite obvious. For transportation and power generation, it’s all about electrification and there’s really no other way to fix the climate problem without decarbonizing these two pieces. Of course, there are other problems to tackle like steel and cement, the heating of buildings, etc, and then you have to address the big problem of agriculture. There’s enormous amounts of noise and disinformation in this area, like the idea that if we stop eating hamburgers, the problem is solved right? That is ridiculous, because if you stand in front of a coal mine you understand that there’s no way to get there without fixing power and transportation where the majority of the problem starts. I am all for solving the other problems but they are secondary in terms of impact versus dealing with the core issue of fossil fuels. So batteries have been a focus for 15 years and perhaps our most exciting company is called QuantumScape which develops solid state batteries. The speed of the trend towards cheaper and more efficient batteries is exploding so that’s super fun and exciting because they can really make a difference. At the same time we have 7 billion people that are expanding their consumption of transportation, energy, food and everything else and that growth is still outpacing the solutions. You can, for example, go from being non-existent to being a best-sell-ing carmaker in a few years and feel good about yourself, yet when you look at globally what is happening, transportation is emitting more this year than it ever has and next year we will emit more than we ever have, so it challenges your optimistic perspective. Our work is super exciting, scaling at a pace that you’ve never seen. I think we’ll manage to scale the impact of Joby Aviation several times faster than even Tesla, as crazy as that sounds because of the skill sets that are improving along with the urgency of the climate crisis and large amounts of capital that is available from people who want to make a difference. But we are still not winning versus the problem, right?

How are Venture Capitalists working with companies to meet new standards in ESG or supply chain sustainability? What role do you see others like yourself playing in face of climate change?

It’s a really odd thing, but for the past 15 years, nearly every dollar in venture capital has gone into a non-technology problem enabled by technology platforms, platforms like Transmission Control Protocol/Internet Protocol, Ethernet, Android and iOS, etc. Now, for the first time ever, a trillion-plus in wealth has been created by venture capital in the use of technology, not the technology itself. The prior trillion-dollar wealth creations were much heavier in engineering including the software cycles that led to the Oracles and the Microsofts and even Google, teams of hundreds of software engineers doing heavily technical work. So this is a striking shift that has happened. Venture capitalists have basically lost interest in engineering and science and ended up promoting people that were super bold and knew how to scale stuff and go crazy. Now the companies that move the fastest and get the best syndicate to fund them and spend the most money win and it doesn’t have a lot to do with understanding the technology better than someone else. The most valued skill sets have been non-technical, they’ve been unique to scaling digital models. We are at this point where most venture firms don’t even have any science or engineering talent left. However that is now mostly played out and we are beginning to see a lot of venture firms rebuild science and engineering skills, plus it’s not lost on them that we have a giant problem with climate, with other problems like plastics and many others that seem intractable. We are seeing a growing part of the population that wants to do work in a job that is meaningful and venture capitalists are absolutely not immune to that trend. On the other hand, most venture capitalists themselves still want to be known as the greatest venture capitalists, not as someone known for solving some big global problem, it’s about how their multiple looks on their last Series A and that won’t change overnight.

Question: Talk to us about the origins of Impact Investing and what the next phase looks like.

I was there at the start, when the word was invented. In 2007, we had a long weekend at the Bellagio Estate on Lake Como to talk about the intersection of making money, investing and doing some good. And after an intense weekend there was obviously no one answer, no silver bullet that emerged. A fellow named Anthony Bugg-Levine said we could instead start a movement and for that we need a sexy new word and he suggested “Impact Invest-ing.” And a few of us wrote small checks to put money behind that idea and a few months later Anthony got $40 million in grants from the Rocke-feller Foundation to launch it properly. That’s how impact investing started. Of course like many of these movements, it has become so big and now co-opted by all kinds of stakeholders and has I think lost some of its essence. The movement remains very exciting and successful but there are aspects that are so far a failure. What people want to do is they want to talk about these problems academically and define “what’s a good company? What’s a bad company? What’s a normal investment and what’s an impact investment? What’s the metric you use to decide all of that?” That is mostly nonsense in my view. The real issue is people in investment roles and why they make certain decisions. People make certain decisions because of selfish reasons: career reasons, ego reasons, comfort and so on, so for me, the impact movement was about understanding and changing the people part, not the academic part. When you’re looking at a certain person making investments for an established firm, what do they think about? When they show up for work every day, how do they make those decisions? What are their incentives? And how can we think about changing those things? So this whole thing on impact metrics for instance is useful but a bit of a red herring. When you’re eating a chicken sandwich to say: “this sand-wich rates 6.6 or 9.2” is a ridiculous thing because you haven’t defined the problem anywhere close to precisely enough to be able to use a metric. If you’re talking about climate you can use good metrics, because the problem is stated clearly, such as whether you’re using fossil fuels or not or if you’re emitting methane in agriculture, for instance.

So this idea that impact investing is entirely about creating an amazing nomenclature is wrong and it loses the main push of the concept. In fact metrics are being used to deflect from the real issue, which is that the finance industry is a big part of the problem. We have 200 trillion of investable capital globally, most of which is earning nothing, between 0 and 2% in investment grade bonds, the rest of which is compounding at best at 7-8% which is the track record of the American stock market, the only stock market that has survived a 100 year run and there are giant misallocations of capital and real needs are starved of capital. This is why impact investing is so important. Wall Street can’t make a product that doesn’t claim to return 15% and therefore warrant high fees and revenues to them. We need to do several trillion of reindustrialization of the transportation system, we also need to do several trillion of agricultural work. We need $20 trillion of solar wind and storage, yet we’re doing $300 billion a year most of which is being done by utilities, not by guys sitting on Wall Street or in London offices. So if you think there is $200 trillion in the world that means that 10% of everyone’s assets, most of which are in retirement systems and pension funds and insurance floats, needs to go into solar, wind and storage. There is almost no institution in the world that has a plan to do that. I don’t know one CIO of a pension fund that knows how he is going to end up with 10% of their portfolio in solar, wind and storage or who can admit that returns will be short of promises. To understand our venture capital work, you should consider that big investment risks used to be taken by companies. CEO are now mostly managers that don’t take big risks. So that has left a big gaping hole for venture capital to play the role of innovator – and it is high expertise, especially in areas like we pursue which is super heavy in engineering. It is not for everyone and relatively small amounts of money and you can make a lot of return and it’s different than the bulk of the $200 trillion in assets in the world that we need to allocate to fix global problems. Changing the system is what impact investing is about in my opinion and we need to

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