Q&A: Virescent Ventures director shares why ‘commercial impact is needed for climate impact’

The circular economy forms one component of Virescent's broader mission on climate goals, with portfolio companies including battery recycler Renewable Metals, cell-level battery control tech Relectrify, textile manufacturing tech Xefco, and infinite recycler Samsara Eco, to name a few. 

As part of an ongoing series on the circular economy that has so far covered trailblazers shaping the industry and enlightening research about pitfalls to avoid when marketing sustainability, Business News Australia caught up with Virescent Ventures director and co-founder Blair Pritchard to gauge what it takes for founders and their innovations to attract the capital necessary to scale.

On you website it says there's "no need to choose between emissions impact and commercial impact", with the implication being that many people see a trade-off between the two. What led you and your fellow co-founders Ben Gust and Kristin Vaughan to go against the grain and adopt this approach to investing? 

The reason we said that is because if you want to have a big climate impact, you have to have a big commercial impact. The way venture capital works is we're deploying relatively small amounts of money, typically single-digit millions of dollars or sometimes less than a million dollars. We’re not doing infrastructure projects that are in the tens of billions of dollars, so to go from a relatively small cheque size initially to having a global impact, it's through businesses that start to snowball - they get more customers, more investment, more deployment, and therefore more impact.

The reason that they get big is because it's investment and profit that fund that - not the original cheque size.

How you get your startup company to get future investment and profit is by picking a company where you have customer traction and healthy margins. If you do those things, then you have the potential for a snowball effect happening.

Conversely, if there was a product that reduced my emissions by 100 per cent to zero but I was was the only customer, then on a global scale that doesn’t have any impact. So really at the end of the day, climate impact and commercial impact are kind of the same thing.

You mentioned customer traction, but a lot of the startups in your portfolio have very strong R&D components and might not even have customers yet. What's the rationale there for assessing what the potential for gaining customers and scaling might be?

Probably at the later stage of where we operate would be to invest in a company that already has customers and be capable of looking at the sales growth and the monthly increase. But I suppose in the majority of cases we’re investing in companies that are pre-revenue, so in that case we look at what is the potential size of the market. What is the market you’re addressing? What’s the problem that you’re going to solve?

We do a desktop exercise - we talk to customers, talk to our industry contacts, talk to the Clean Energy Finance Corporation, and try to work out if this tech achieves the metrics that it’s targeting. Is there demand for this? And by demand, we're typically looking for markets that are in the billions of dollars, not in the millions of dollars. The company has to have the potential to get to about $100 million in sales to get to our metrics of both impact and commercial returns. So if it's a niche market, it may not be suitable for venture capital.

In many of those cases then, it really has to be an international proposition.

Yes. Most of our companies are thinking global from day one, and in most cases the Australian market alone is not big enough to give us the kind of growth that we would need to see. 

Pretty much all venture-backed companies are targeting a global strategy at some point. It may be that Australia is a great place for early-stage, particularly in terms of demonstrational pilot projects, for a few reasons. One is because the policy environment here is relatively supportive compared to the US.

We’re on the bleeding edge in terms of the changeover to renewables, so we have a relatively high penetration of wind and solar, and and that means that those sources of energy are fairly volatile, and that creates challenges. You’ve got to think about on the grid about how you respond to that kind of volatility. And so we're a bit of a test case for that. And so a lot of technologies – the actual burning demand – is right here in Australia.

Absolutely. And in terms of the companies that you assess, founders in these sorts of projects tend to be quite passionate about their causes. What's your take on on the necessary drive of the individual and what motivates them in climate-tech or circular economy companies?

You’ve got to be a very special person to be a successful founder. It’s not just about being smart or having technical skill, although both of those things are also important, but founders have the ability to sell. Even if you’re an introvert, you need to be someone who’s not afraid to kind of get on the phone and evangelise and sell your product, because in those early years founder-led selling is basically what happens; you can’t hire a salesperson to do it for you.

You have to be someone who ships. Some scientists love to be in a lab doing all the research and development, but at the end of the day, once you take venture capital you need to be shipping product quite regularly. Otherwise you’re just not going to be relevant. You can't base your business around raising capital every 18 months to do more R&D and never ship anything.

And you need to be good at scaling. You need to be aggressive about planning for the future – expanding, hiring, implementing your performance management framework, setting ambitious goals, perhaps scaling up manufacturing or figuring out how you can get a product manufactured. So that's very different from the purely academic mindset.

The final factor I would say is that great founders just have a habit of being able to over overcome obstacles. They’ll hit a brick wall that would cause a normal person to just give up, and then they'll tell you about it, and then you talk to them two weeks later and they’ve found a way around it.

They just have this unstoppable aspect to their personality which is almost a bit magical compared to the average person.

That could apply to founders in any number of industries. As it pertains to climate-tech though, is there an added element about the motivations or characteristics they might have?

One big difference between us and mainstream venture capital is if you’re looking at climate, it’s about the interaction. Climate is ultimately about molecules in the atmosphere, and so what we’re trying to do is change the mixture of the molecules that are in the atmosphere of the earth, so you can't avoid dealing with atoms and reality, which is a bit different from software.

In many of our businesses the laws of physics or the chemistry have a fundamental impact on whether the business is viable or not.

Whereas in software you have the famous Mark Zuckerberg quote of "move fast and break things". In your line of investing you can’t really afford to break as many things, as the consequences can be much graver.

Yes. If you think about the circular economy for example, the capital intensity of that space can be pretty high in terms of building a plant. You don’t get second chances in the same way that you do in software development. So if I ship my SaaS product on day one and it’s full of bugs, I can start patching those immediately, or within a few weeks potentially. Software companies can issue patches multiple times a day, but if you’ve got a $100 million recycling facility and it doesn’t work, it’s really hard to patch that on the fly – it can often take a year to get a specialised piece of equipment from Europe or Asia. Stuff that’s welded together and weighs thousands of tonnes isn’t easy to reconfigure on the fly.

It sounds as if you're setting yourself a much higher bar by operating in this space. Being someone who comes from a VC background, you could have chosen something that's a little bit easier. Why take on this challenge?

Myself and the other partners are very passionate about climate. We see this as being our life’s work, and it’s also a multi-decade task that isn’t going to be solved overnight.

If you look at the expected total global warming, the world has come down from over 4 degrees to now 2.7 degrees, which is a lot less catastrophic. We want to keep working to bring that down to hopefully 1.5-2 degrees which is much more manageable for the earth to get through.

Within your portfolio there are companies trying to achieve that in a variety of ways. Why is the future of the circular economy so important? And why are people turning their attention to it more and more?

We do live in a material world and humanity does use a lot of materials; in fact that’s actually going up quite a lot, not so much because of population growth because the population is flattening out, but there are billions of people who are joining the developed world in terms of their living standards.

They need a lot of stuff, will consume a lot of stuff, and that stuff has a lot of emissions associated with it at the time that it's formed. That could be plastic, it could be steel, it could be lithium, and food is another one – in terms of food waste, the climate impact is very material. You simply can’t solve climate change without addressing that waste aspect.

And are you engaged in any food waste circular economy companies at all?

We don’t have any food waste companies in the portfolio. We’ve looked at many investments in that space – we haven’t gone ahead with them yet. In terms of the circular economy, we've done other things.

I would say there are two things that are really tricky about the circular economy. The first one is aggregation - you need to actually aggregate enough feedstock to justify deploying a new technology. The more advanced the technology is, the larger the required scale of that technology is likely to be to justify the capital investment required.

It can be really hard, and it’s particularly true in Australia with our spread-out population.

The other aspect is that recycling in general can be a low-margin business. If you imagine the way recycling works, as a recycler you take the feedstock that costs a certain amount of money, you recycle it and turn it back into a new product, and then you sell that on. The question is then: What is the margin between what you can get the feedstock at and what you can sell? 

If you have no technological advantage, then it's likely that every other player can do exactly the same thing as you in favour of competing on price, and that just drives the margin down to the lowest possible level.

So that's not what we do as technology investors. We’re looking for people who have a really material advantage so that they can make a margin that’s several percentage points higher than the incumbents. You’ve got to look pretty hard to find those technologies.

When you're talking about food in particular, it's very likely that whatever you produce in your process is going to go back into the food system. So you have to be very careful about what is going through your system because it’s going to end up on somebody’s plate at some point, and that has regulatory implications.

And what about matters of field-level productivity or supply chain issues to reduce waste in that regard?

Yes, we definitely see people who are trying to deal with mid-stream food waste. That’s attractive compared to say, post-consumer waste which probably has the highest risk of being contaminated and having the most unpredictable mixture.

If you’re talking about a food manufacturer 

that has inputs and ingredients, and some of those are surplus and are wasted, then that’s going to be a relatively pristine and consistent waste stream. That’s often more advantageous to recycle.

That’s more attractive, but the challenge is then, can it be big enough? Can I create a multi-billion dollar business with over a $100 million of revenue, focusing on a particular specialised form of waste?

There are plenty of companies doing that. But let’s say you have a consumer-facing product that has some kind of waste incorporated into that is safe, and contracts secured with Woolworths or Coles. That’s not something you’d look into?

I don’t think so. I want to stress that we’re very open minded. But for anything that’s too specialised or too granular, is it suitable for venture capital where it’s a globalise-able technology play? Typically that means having some kind of unique, proprietary technology or some other competitive advantage.

Earlier you mentioned about the magical characteristics that founders tend to have. When it comes to the founders that you work with, how often are they first-time founders? Are they often scientifically minded, or are they business-minded people who identified a problem and found the scientists who can solve it?

Most of our founders are first-time founders. A lot of them have got prior business experience – maybe they’ve been in senior management at a corporate, or maybe they've worked for startups as an early employee but not a founder, and they understand how the venture funding cycle works.

And then you have another kind of person who is maybe straight out of uni, or is an inventor or a scientist. I think it may be a little bit shocking to people who are not from a VC background that someone who has had no prior commercial expertise can actually be a great founder, but I can assure you it does happen from time to time.

What we typically do is two things. One is, in terms of assessing the person early on before we put the money in, we’re really looking for that openness to feedback. If you’re from a scientific background but you also think you have all the answers and you’re very set in your ways of how to build the business, it’s probably not a person we’d want to back.

But if you have the mentality of ‘I’ve invented a new tech and I really believe that it can change the world, but I also want to have the best people around me that are good at marketing and intellectual property, law and finance and manufacturing’, that’s what we want to hear if we're going to think about backing those people.

Regarding the more stubborn founders you encounter, do these people often change? It could be that in their particular domain those traits have served them well and they just don’t know any better. Is there openness at your end and ongoing engagement with such founders to let them know why they didn’t get your investment?

I think people do change, some more than others. It’s quite hard to say at the outset if someone is going to change and develop a lot, but one thing I like is when people tell me about the mistakes they’ve made, the scars on their back and what they’ve learnt from that. I like that approach more so than someone who doesn’t really admit to mistakes and just wants to talk about how good they are.

I feel like most experienced VCs are a pretty good judge of like human character. You may not get it right every time, but you need to kind of get it right at least some of the time, or otherwise you’re not going to have very good returns.