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Software for the Energy Transition | Ernst Sack of Blue Bear Capital

"There will be a lot of exciting and feel good ways to lose money and more boring, but highly constructive ways of building profitable businesses."

In our second conversation on the Climate Cloud, we are joined by Ernst Sack co-founder and Partner at Blue Bear Capital (www.bluebearcap.com). Ernst helps us differentiate between "exciting and feel good ways to lose money and more boring, but highly constructive ways of building profitable businesses."


Transcript

Don Fornes (00:08):
Hello everyone. I'm Don Fornes with the climate cloud and I'm here today with Ernst Sack, who is a founder of Blue Bear Capital. Hello, Ernst.

Ernst Sack (00:23):
Hi, Don. Thanks for having me.

Don Fornes (00:25):
Yeah, it's good to see you again. Full disclosure, I'm a limited partner in Blue Bear. Very excited to be a part of their second fund and their thesis very much aligns with my thesis at Climate Club. And Ernst, maybe you could tell us a bit about Blue Bear, the fund and your focus and also your journey, how you came to found the fund.

Ernst Sack (00:58):
Yeah. Thanks Don. And appreciate your support. As you know, it's all about for us aligning ourselves with the smart money. So, we're honored to have supporters like you who know not just the climate industry, but a lot of the technology themes we'll be talking about intimately and I've seen seeing what works and what doesn't work. Again, give a very quick accelerated background of what led me to Blue Bear and, and then talk a bit about the, the firm's strategy if you like. So, my own start into the industry was really focused more on international development and policy. So, I was a foreign studies major spent time, especially in Russia and Eastern Europe, and was particularly motivated by the basically development economics of post-Soviet Eastern Europe and Eurasia. And the more time I spent in that region, the more I realized how central energy policy and energy infrastructure was to economic and really human welfare development.

Ernst Sack (02:05):
And that it was people like BP and Exxon mobile, who are calling a lot of the shots and deriving a lot of energy access and alleviation of fuel poverty and really geopolitical decisions more so than some think tanks or more mission-driven organizations. So long story short ended up making a conversion over time to the investment world and ultimately really focused on the energy investment world spent some time in energy M&A and then just under 10 years and energy focused private equity with the largest energy PE firm in the market Riverstone about 40 billion of AUM and was fortunate to be at board level of 13 companies across the whole supply chain. And two big, really, for me in my career, transformative things that happened there were, number one, Riverstone brought in a guy named Lord Brown, John Brown, the longtime chairman and CEO of BP, who actually was the individual leading a lot of those pipeline politics decisions in Eastern Europe.

Ernst Sack (03:08):
But more importantly was the first real champion for the conventional energy industry to push into wind and solar. So, getting to work for him directly, and especially in London for several years was important. And in my kind of thinking about the world and then also this philosophy of larger industrial scale assets and supply chains being the real bottleneck often for accelerating change through an industry. So not just building the plant, but all the different work streams, infrastructure services, equipment that go into how these are run and how they scale. And that's what we've tried to translate into Blue Bear, where we've taken a lot of those themes and, and focused them earlier stage, and especially where digital technologies are now, the prime mover,

Don Fornes (03:57):
How much of your focus is on what you'd say are the renewable energy and the supply chain related to that versus traditional energy sources.

Ernst Sack (04:08):
Yeah, it's, it's pretty much entirely renewable energy and sustainable energy supply chains, and then all the related infrastructure, equipment and services that they depend on for scale and deployment. So that could go into a logistics and transportation, pipelines, transmission, distribution, and a lot of field work or modernization of field work. So, there are a lot of, I think, less sexy and less obvious themes than just building more wind and solar and batteries. Although we love that too. We do really virtually nothing in the, in the hydrocarbon world, although the world will continue to be pretty linked to hydrocarbons, especially petrochemicals and plastics, production, and aviation and Marine transport, and have the industry for a while. So, there is a large gap to continue to bridge. As one of our partners says, it's the energy transition, not the energy magic trick. But we like to focus our growth resources, where, where they can have the most impact on a Friday metrics.

Don Fornes (05:14):
That reminds me of a kind of funnier quote in one of our recent conversations where you said you think there will be a lot of exciting and feel good ways to lose money and more boring, but highly constructive ways of building profitable businesses. Can you kind of pull that apart a bit and help us understand what you're thinking there?

Ernst Sack (05:40):
Sure. And I think there's a lot of baggage as, as you know, and you've discussed before in the clean tech 1.0 experience and reputation, arguably in retrospect, it actually has performed quite well, both when I was at Riverstone and some of the earliest renewable energy investments we were making in the six, seven, eight, nine timeframe have gone on to be massively valuable and successful public companies like in Viva biomass and Pattern and wind, and some other companies and solar and offshore wind supply chains, and then obviously Tesla, and their peers. But that was after a lot of heartache and took probably 10 years longer than most people at the time under wrote to take. So there's a new wave of enthusiasm. Now we all know, and clean tech 2.0 or climate tech, and we were just debating a little bit internally.

Ernst Sack (06:34):
Are there any comparisons to this, this new meme, stock bubble, this crowd trading phenomenon that's going on right now with GameStop and Robinhood in the news? And I think that term meme stock is, is actually a really good term. It's not just stocks that people make a lot of memes out of, which is what most people think of now when they hear that term. But the word meme derives from memetic medic complex and behavior. So basically copying each other, copying others, I think there is a component of that. That's come into the climate tech investment world where it's become so on trend again, and key differences. It's driven by all the best reasons and all the best objectives, right? People genuinely believe in saving the planet, and the clock is ticking. The body of sciences has grown pretty weighty.

But that does take focus off of investment fundamentals. And one of our core principles share others, share this as you can't have a sustainable impact if you're not building a sustainable business and company. So, I do worry, there are a lot of exciting ideas driven by a passion and funded by an element of group think arguably or just mission that just won't actually work. The unit economics aren't there, the markets aren't there, the competition's already either intense or incumbents are going to solve these problems just fine. And that's okay. It can be a really satisfying and well-intentioned way to lose money, but it will lose money. And I would hate to see that take wind out of the sails of a more prolonged and systematic climate tech boom.

Don Fornes (08:25):
Yeah. And I think slowly that applies to the current spec mania and, you know, the, these blank check companies are essentially a much easier way to get public and yet the more traditional IPO process and the exercises that companies have gone through for decades to get there, of operating as if they were a public company for 12 months before going public or just the agony and scrutiny of the IPO process under the ISCC and investment banks to kind of say, nah, you don't really need to do all that anymore, and quickly get public through a spec could be certainly lucrative for a lot of people involved, but it could be taking a lot of other otherwise good companies making them public. And then eventually maybe missing numbers or disclosing some information that the investors, the public market investors are not as happy about and really doing fundamental, doing reputational damage to a stock that maybe didn't need to go through that if they had gone through the more traditional process and scrutiny and matured over time.

Ernst Sack (09:48):
I think that's a fascinating discussion topic, now I'll agree with some and challenge other parts of it. And by the way, you don't have to put any dates on this, on this podcast or on this video, everybody will be able to timestamp it to Q1 2021, since we mentioned GameStop and specs in the first 10 minutes. But I agree on the obvious lack of probably discipline exhibited by some of the spec sponsor community is just sort of a feeding frenzy. And there are companies going public that really are not well served by having quarterly earnings reports to live up to. And that's fine for one or two quarters, but that's going to be a commitment basically forever until it's not for good or bad reasons like being taken out again or failing, but, and then having a very liquid share base or capital base has risks as well.

Ernst Sack (10:48):
Can talk a lot more about the obvious perils, and if you actually read the research reports and some of these very highly, very highly valued companies the sell side research, they're being valued on metrics on fundamental metrics. And, and I do believe maybe I'm old fashioned that the value of a company ultimately is the discounted value of its future cash flows. It's just discounted value. This is a very deep dark hole sometimes. So, if you look at the equity research on these multi-billion-dollar businesses with almost no revenue, they're valued at 10 X revenue with a 8% whack or something weighted average cost of capital, but the numbers being chosen to apply those to our 2025, 2026, 2027 revenue. So, there's a lot of speculation on market evolution and position, but people are trying to apply fundamental framework so that I think, lets investors take a look and say, okay, do I actually believe this or not? And then they're adults they're allowed to make a call. What I think is the most positive feature of this back mainstreaming, because it's been around for a while, as you know, is, as we look at the opportunity set for climate tag energy transition investing, we've looked at just over 3000 companies now and we find the most consistently exciting risk reward and value proposition is that, that Seed, Series A, maybe some Series B stage talk a lot more about why we're often challenged as a team at Blue Bear of people who have a lot of experience in the private equity world, in my case, or some of our advisory board members from KKR and Warburg, et cetera, or Caroline, who's spent a lot of her career at Siemens and advising the German energy agency. And then as a startup founder and Vaughn, who's been at a lot of later and medium-sized companies as well as startups.

Ernst Sack (12:48):
Why are we looking at this early side of the market, if a lot of our experiences with more mature companies? And the reason is the larger, higher valued companies. I think there's, there's not that same disconnect on current value versus future growth potential. So, to build a fund of 2030 plus businesses beyond Series B stage, they're just not that many of them out there yet because when solar, some of these other renewable energy supply chains are relatively early in their degree of specialization and supply chain professionalization. So, the great ideas are still younger and growing and the later ideas are pretty fully valued that said we do frequently see individual investments that you think would be phenomenal to make. There's just not enough of them to justify a full funds worth. And so a SPAC is a vehicle that lets the investor pick off those one or two rare birds and allow them to grow with a much more fully capitalized support base. So long-winded attempted to defense, but I do think there's a role for them to play as long as the sponsors maintain discipline.

Don Fornes (14:10):
And we are seeing more and more sophisticated sponsors and a lot of private equity firms sponsoring SPACs.

Ernst Sack (14:19):
And we'll see in 6, 12, 18 months as the six-month lockups roll off, do all the insiders sell out because they didn't really believe it in the first place and do the IPO investors redeem or support the deals that dispatched. So there'll be some much more objective signals coming

Don Fornes (14:38):
Well maybe that's a good transition to talk about some of the companies that, that you're investing in. Can you give us some examples of the kinds of companies that you're working with at Blue Bear?

Ernst Sack (14:53):
Yeah, sure. And just to frame it a little bit, we are extraordinarily excited about these two simultaneous changes and understatement, but really civilization level changes that we're living through right now. One in the energy transition, fundamentally changing how the world is powered the economy and individual people get their life, their mobility, power, and communications and all those things that is happening once in the history of human civilization at this scale. And towards sustainability, not just moving from one consumable fuel to another, or depletable fuel to another. And then the other simultaneous change, which is less central to maybe a climate, but really fundamental is changing the way that data, information, knowledge, even decision-making work, arguably the way thinking works. And that's powered by computing as you know, and, and AI as a catch phrase. So our real focus and drive at Blue Bear is to try to integrate the opportunities that those two changes present and drive them all towards really maximum improvement and human welfare and do that with no compromise on investment returns. There's no reason there's no justification, I think, to be investing in such transformative opportunities and not have all time high returns. So our job is to then actually deliver that high bar goal.

Don Fornes (16:32):
You also include remote work in that kind of confluence.

Ernst Sack (16:40):
Yes. And that's part of, I think the, the digital transformation tries to avoid the cliches, but if you're able to monitor and control is the big innovation, really monitors being around for a while, but monitor control. And to some extent, close the decision loop on any kind of activity, whether it's personal, like ordering a car or selecting a life partner in the dating world. But ended up in an industrial facility, optimizing the performance of a wind turbine or going to some of our portfolio companies, company examples, basically performing the industrial action that reduces CO2 output and reliable, affordable energy access without having to expose a lot of workers to a difficult unsafe, far away expensive environments, but be able to exercise a lot of their expertise whether it's engineering, procurement, construction, maintenance, financing, there's a lot of expertise that, that for a long time only humans will be able to own and direct, but do that without basically physical constraints is a huge value.

Don Fornes (17:57):
So, let's talk about some of those companies.

Ernst Sack (18:01):
Sure. So, a couple that come to mind and we really segment our, our investment strategies into two buckets. One is nailing a vertical. So, taking a value proposition that may be more narrowly defined in a more specific set of markets, but owning that category, defining and owning that category. And the second is more horizontal technologies that can apply to a lot of industries, but we think we can accelerate into, into the energy and climate industry. So on that vertical topic three quick examples, and this is across our fund one and our fund to one is transact. So really digitizing and automating all the environmental work that goes into developing energy projects and infrastructure. So understanding what are the endangered species aquifers, flood Plains, cultural heritage sites, community ordinances, all these really ecological environmental factors and not being dependent on a multi-week or month consultant led process when you're part way down the road to assessing and building a project, but actually being able to upfront in literally seconds, click a button and get an integrated report and assessment on what are all the risk factors or sensitivities in a plot of land, or in a certain community.

Ernst Sack (19:19):
And what steps do you have to take to address them prudently. And that lets not just the work be completed faster, but actually through a lot of our customer conversations, it allows developers to take on many more high quality projects sooner because they don't have this risk that they're going to be six months down the road and million or more dollars in and have to scrap a project because there's some migratory birds that they hadn't expected. So that really lends directly to the concept of additionality, which we often feature in our investments. Is this technology enabling more sustainable, affordable, reliable power to come online faster than if that technology didn't exist or weren't brought out into the market? And it's a phenomenally run company. Robin, the lady who co-founded and leads the business was an environmental consultant and engineer through much of her career.

Ernst Sack (20:14):
So she's lived the problem statements, something we often look for in Blue Bear is that founder market fit and, and they're growing quickly. We only invest post revenue. And this is another example of businesses that already had some traction we're able to now accelerate as best we can. A couple of other examples briefly shoreline in the offshore wind optimization world. Again, it's not a concept you think about, but if you're developing these multi-billion dollar, multi gigawatt, offshore wind installations, which are at scale, arguably cheapest source of sustainable zero carbon energy, you're needing to send out a lot of helicopters and boats and cruise and varying sea States and prevailing commodity price or supply chain environments, and being able to simulate and optimize what plan to propose to a state or a country when you're bidding on the right to build that wind farm and make it as affordable as possible.

And then when you're constructing and ultimately operating and maintaining and basically running this asset, day-to-day, it's an immediate value and it's no surprise that Shoreline's working with something like 60, 70% of the European offshore wind market, a handful of the fastest movers in Asia and now 75% of the offshore wind industry projects in the US are running their planning and simulation through shoreline software. And it's just relatively small head count company based in Norway, in Denmark that most USVCs have never heard of, but we believe deserves to be grown and accelerate its own industry. Another quick one I know you're familiar with is on masse, which is a business we're very excited about. That's effectively logistics and optimization software for the waste to value supply chain. So we can talk more about that, but in our past art acid investment experience, we've been part of a lot of waste gas or, or biomass projects. And the biggest pain point is always securing reliable feed stock at scale, and at consistency with low chemicals, that's going to be safe for the community. The plant is operating in and also keep waste to value facilities running consistently and profitably. And that's the kind of thing that absolutely should be unlocked with better software, data analytics and marketplace platforms. So, a company that's a combination of software developers and waste to value plant builders has created that.

Don Fornes (22:50):
For a founder who might come to you looking to raise money at some point, can you give us at a high level, the criteria you use to assess investments? If you had to boil it down to the top three to five criteria, what would they be?

Ernst Sack (23:09):
Sure. Well, we don't have a kind of a written list of you must be at these certain dollar values or percentages or market sizes. We believe in, and really being immersed in the end markets ourselves so that we can recognize the solution to a real problem statement. When we see it, we spend a lot of time and understanding, and we probably spend more time actually with energy asset operators and developers. So, when solar grid storage, et cetera, shipping enterprises than we do at say YC demo day and things like that, we obviously do that too. So that means that the actual thresholds can be flexible, but we do need to see some enterprise revenue. We only invest in B2B sale post revenue companies, so that we can take that solution and really proliferated across our network and Blue Bear's investor base includes a lot of the leaders of energy and industrial oriented, private equity firms, about a dozen of the biggest names in private equity.

Their founders’ CEOs MDs are our LPs and Blue Bear in some cases, institutional commitments from that community. And so those, those people sit on the boards of a lot of the actual operating companies who budget for SAS and AI and IOT and cybersecurity solutions. And we like to quote that 40% of upstream capital energy capital is spent by private equity owned businesses, not by kind of Exxon and Chevron and the famous names. So we look for demonstrated deployments that earn revenue so that we can go to that community and say, "Hey, your peers or your competitors are using this don't you also want to check it out," and that's the way we can also de-risk our diligence. And then the number two thing in no particular order is that founder market fit. So a founder team, a management team that really from first principles understands the market that they're working in, the problems they're solving and how valuable their solution should be. And then there's a lot of other nice to have elements. We don't overly focus on market size because we believe a successful vertical company might own 70, 80%. Plus, we love that philosophy investing in companies that can define and own a category, be a monopoly arguably, and serve an actual purpose, which is why they're making revenues.

Don Fornes (25:49):
Got it. And so just kind of, more for fun when you think about those criteria and all of the problems that you've seen or challenges across this industry and your private equity experience, what would you like to see next? What problems would you like to see entrepreneurs go solve? Can you give us some examples?

Ernst Sack (26:20):
Yeah, absolutely. And, it's a good cue. There are seven sort of lines that we have in our, in our intern strategy and focus area channeling and that's in addition to the deals, we've already done some fit into these categories. In some cases, these categories are new. That list includes what we call industrialization of renewable. So enabling giga scale, renewables, wind, and solar already work, right game over they've won. But how can we now get that to a maximum scale and reliability? And that's a lot of supply chain work. Another is as you've touched upon kind of digitization and modernization of labor and a field work, making it safer, more efficient facilitating knowledge transfer. So, the ability to take just great technology concepts that may be agnostic to industry and direct them towards energy and infrastructure markets is something we really actively look for.

Dash and Mirror are great examples of that. And we can talk about it if you like, compliance and security for infrastructure grid resilience, the industrial scale circular economy, those are all that kind of rounds out the list of five that we've always been very interested in. And then the two newest entrance are what we call the financialization of carbon. So you can imagine what that means. Happy to talk more. And lastly, the next wave energy themes and sources and how they can be deployed at larger scale. And what are the software, the operational AI solutions that can accelerate that. And by next wave, obviously some of these are ancient technologies, but next wave and real large scale like geothermal, new nuclear, and then not exactly an energy source, but an energy value chain component like green, hydrogen, and carbon capture utilization and storage. Those are four, maybe helium and others can make that list longer if we keep going, but where our digital solutions able to finally, debottleneck some of these things where the physics and the chemistry work, it's the commercial deployment and supply chain that have not been at sufficient scale or cost parity

Don Fornes (28:44):
So this transition is enormous and there are a lot of digital companies being founded and funded. It's going to be a lot of hiring, for me the need for a lot of new human capital. So where are you seeing that human capital coming from? Are you seeing them coming up from the energy industry, the renewables industry, or are you seeing people moving over from the more traditional SaaS markets and Silicon Valley labor pool coming over to this new focus on renewable energy and, and addressing climate change?

Ernst Sack (29:31):
Yeah, that's a fantastic question. And I think it speaks to the biggest challenge we see, is actually not what a lot of people assume to be the biggest challenge and, enterprise sales cycles, don't energy and infrastructure customers move way too slow. That's, that's being unlocked. We're seeing really short and contracting sales cycles across the board is climate. And so, become more, more urgent as solutions to these customers. But also, as the technology costs gets much lower and the fuel cost of wind and solar, for example, become much more competitive. The biggest challenge, however, is that that integration of different types of talent, there is a lot of engineering, procurement construction, large asset financing and underwriting talent from whether it's oil and gas or more industrial sectors. That's now waking up to renewables. When does the single, so Texas is the single largest wind generating state in the US for example, there are many other great examples.

The national coal miner’s museum in West Virginia is now powered at least partially by rooftop solar. So, I think the cultural resistance and then the economic resistance is eroding, but a lot of that community does not have enterprise software expertise. Meanwhile, there's a lot of enterprise software talent from Fang companies and others that is, has woken up to the opportunity and solving whether it's grid orchestration or energy storage software type solutions, but they don't necessarily have experience in the realities of the physics of the energy industry. And as importantly, the regulatory context and the market context, there's a lot you could do with solar plus storage, but people can go a long way into building their company before they learnt that net metering is not legal in most States. So the fragmentation of power regulations in the US and internationally is a big bottleneck on market sizing.

Ernst Sack (31:44):
So getting those talents together and in a company is hard enough in a forum. It would be nice to see more often and in any one of our portfolio companies, the biggest imperative right now is hiring more software engineers and data scientists who don't just have a passion for the energy industry but are interested to learn about it before building their model. And then industry maybe sales and marketing and strategic partnership type talent from industry that understands SaaS business model drivers, and the scalability of digital.

Don Fornes (32:32):
Great, well that's probably enough for today. Could talk a long time about this really exciting what you're doing at Blue Bear. And I appreciate you joining me here today and telling people more about your fund.

Ernst Sack (32:48):
Yeah. Thanks very much Don. And for anybody who's not read it. I think your, your recent blog post is a masterpiece covering so many critical elements of the energy transition and what people can individually or as companies do to contribute towards it. So I appreciate all your support for this world. Thank you.

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