Focus on climate tech
Managing Partner Toby Young caught up with Rob Trezona, Founding Partner of Kiko Ventures, IP Group’s dedicated climate tech platform which launched earlier this year to tackle the world’s most pressing challenge with an approach to venture that’s fit for purpose as well as profit. A cleantech investor for more than a decade, Rob has spent 22 years in clean energy, having started out as a hydrogen and fuel cell scientist.
Toby: Rob, we’ve known each other for a long time and a lot has changed from a climate change perspective, but we’re still having similar conversations to those we were having 10 years ago. Why has it taken so long?
Rob: That’s a really good question. It has taken a long time, but things are moving now, and I think there were 3 catalysts. The first, which is part of where we are today in terms of real action being taken around the climate, is the Paris Climate Change Conference in 2015.
Until then the whole UN COP process had been partial, and the big emitters were not really engaged. It wasn’t being taken seriously by those of us in the world of private enterprise until that Paris conference, where you had the US, China, India, and the rest of the world really, in agreement. Obama, Modi and Xi Jinping were all on stage and entered into an agreement on climate change. Previously, it was very hard to agree to action, if you were a mid-sized country, when China or the US hadn’t been part of the dialogue for example.
Going in to Paris, there’d been talk of a 2-degree temperature rise as an achievable limit. But on the last day of the conference, trying to add more ambition, it was agreed that the goal should be ‘below 2 degrees and as close to 1.5 degrees as possible’. And off the back of this, the UN said to the IPCC, ‘given that we’re nearly at 1.0 degrees of warming since pre-Industrial times, what would we need to do in order to only have 1.5 degrees of warming?’ The IPCC as ever involved hundreds of scientists in their report, it is an amazing organisation, and I was privileged to be there when they announced their conclusions in 2018 at Imperial College. They said in order to limit it to 1.5 degrees - which is a lot better than 2 degrees in terms of damage and hunger and natural disasters - you basically have to go to Net Zero in 2050.
Now, we’re all talking about the idea of Net Zero and it’s in politics and in business, and in finance. It didn’t exist before 2018. It was a consequence of Paris and then the IPCC report.
As soon as Net Zero became a thing, all these people who thought they were in the residual say 20% - you know, UK emissions target reduction was 80% so everyone thought steel, aviation, concrete, we’re not part of that – realised that this applied to them too. I think that was very powerful and various people took that idea and propagated it, like Mark Carney pushing forward TCFD in terms of financial disclosures.
So, there was the near global agreement that started in Paris, plus the concept of Net Zero as 2nd catalyst. For us the 3rd catalyst – and this was even before the invasion of Ukraine - is that wind and solar are now the cheapest form of energy in most countries. It didn’t have to be that way; there’s no law of physics that says the costs of wind and solar would become cheaper than gas and coal at this time, they could have still been twice the cost. But due to learning effects and scale up we have had to date, they are now cheaper.
So, these 3 things have come together and it’s now an investment case. The cost is around $5 trillion a year on average from now to 2050 to achieve Net Zero, but we like to talk about that as an investment rather than a cost, because there is now an investment case, and that deployment of capital will ultimately lower the cost of energy. Everything we do as an investor has been informed by the political landscape and the policy landscape, but also increasingly now by business and finance.
There’s a general agreement now in the rules-based part of the world, including China and India very importantly, that we have to get to Net Zero, and it’s become part of corporate strategy for the world’s largest companies, and the entire world of finance. It’s finally there.
And hats off to the French. They did an amazing job. I think that conference will go down in history as one of the most important in civilisation.
Toby: And those 3 things coming together, for you personally, has that resulted in the foundation of Kiko Ventures?
Rob: Yes, Kiko Ventures is basically us going from IP Group does cleantech, to IP Group has a dedicated platform that only does cleantech and is committed to cleantech, and that’s not going to change. And not only are we committed, there’s a big budget and we want to be very significant, very impactful. It was much easier to go and talk to our shareholders and our board in the new context now of Net Zero. When I first started investing in cleantech at IP Group the response was kind of ‘that’s interesting, maybe we should try that and if it works then we could do more’. Then with successes such as Ceres Power, we had the green light to invest more in the sector.
For Kiko, the need to get to Net Zero is one of the most predictable mega trends in history. We either do it or we’re looking at an existential threat to civilisation. The real question for me around Net Zero is when rather than if. And the sooner the better.
This is a mega trend we can 100% rely on and we have patient capital. We’re a 21 year old organisation now, we’ve got balance sheet evergreen capital, we can be patient, so now in the context of Net Zero and the UN agreements it’s a no-risk move for IP Group to commit to investing in this space. And we can have big impact.
Toby: And as a fund, are you focused on particular areas of climate tech? We see so many things badged as climate tech which in my eyes is just tech. Where are you focusing?
Rob: We’re broad but we’ll do multi deep dives in different areas, because of our style. We’re conviction investors, long term in areas that we really understand in terms of the underlying technologies and the market dynamics, and our investments have tended to be founded on those kinds of characteristics - people, network, knowledge, understanding. As a result we’ve invested in areas we fully understand - hydrogen fuel cells being an obvious case, or mobility being another. We can see additional areas coming through. And, for these we’ll make sure we fully understand the underlying technologies that might make a difference, as well as what’s really happening in the markets – Is there an existing market? Is this an entirely new thing? And crucially as always in climate tech – what’s the policy landscape?
One of the watchwords of Kiko is flexibility. There are people out there investing only in carbon, only food, only hydrogen. We’re not going to do that. I’ve been working in the space for 20 years, the partners all have at least 15 years’ experience. We’ve seen different areas of the broader climate technologies landscape come in and out of focus.
As a super long term investor, we know there’ll be important technologies emerging in other areas as things evolve, so we’re preparing to invest in new sectors as well as doubling down in spaces that we fully understand.
With Kiko we’re in a very different place from, say, an investor who has raised a conventional fund and worked in the space for a couple of years. I want to work on the technologies that really make a difference. That was solar technology for a while, but that industry has now gone beyond what venture capital needs to do. There’s a lot of good stuff on hydrogen now, but that will eventually become a mainstream thing and will not be venturable anymore. Batteries were also hot a while ago, but that’s now mostly been done in terms of venture. Of all the different aspects of the energy transition there’s never a single part that stays in focus for venture investing. I’ve been doing this for 20 years and I’m thinking about the next 20 and trying to work on the areas that we know we’re going to need by 2050 where we as Kiko can make a difference.
We’ll do the stuff that is massively important but not necessarily fashionable. We actually turn down a lot of deals, where we love the company, we think it’ll be super successful, but I know 5 other people who are going to fund it because it’s a good fit for conventional funds. We want to invest where we can be most impactful, where having super flexible balance sheet capital and a lot of experience and good policy connections can really help.
For instance, we’re interested in transmission technologies: hardware for the grid. Of that $5 trillion investment per year to reach Net Zero, it accounts for about $0.5 trillion, maybe up to about $800 bn. No one’s looking at that space as it’s complicated and regulatory driven and super capital intensive. But the grid has to scale rapidly to transmit and distribute far greater quantities of power, and this will need new technologies. But it needs an investor who’s not scared of hardware and thinks long term. So that’s an area where we’ve looked at a couple of deals. We know this upgrade to infrastructure is 100% necessary. We have 20th century transmission and distribution networks, and we need 21st century T&D. Some of that is virtualisation and virtual power plants and adding smartness, but some of it is thinking about the actual hardware.
Toby: We’re talking about revolutionary ideas here. Where do we find the people who can harness and execute these technologies and form businesses and products. Again, this is a subject we’ve spoken about a lot over the years. There’s going to have to be this transition of talent from, let’s say, traditional tech into climate tech.
Rob: We continue as an investor to work closely with the Universities. And that whole world has settled down. In the early days you’d have academics wanting to be the CEO, the next Bill Gates of climate tech. You tend to find that they don’t want to be the executive leader anymore and there’s now a more sophisticated career map for an academic with commercial ambitions, around being a non-exec, remaining involved but going and finding management talent to carry out the executive roles.
The big challenge, as you’ve alluded to, is the leadership in a company. Very occasionally that’s the academic but normally not. Sometimes it’s a talented postdoc, as with Tom Mason in Bramble. But we can’t rely on that, so we need talent from other places.
And I suppose coming back to fact that climate tech moved from a niche concern to “this is real” at national, government level, we’ve also then seen mainstream talent come into the sector. So, we’re now able to attract talent from big tech companies. Gavin Jackson at Oxbotica was a senior exec at both Microsoft and Amazon. People like that have been in companies that have grown to hundreds of billions, seen highly innovative, impactful organisations, and we’re now meeting in the middle because those people are now worried about the future and the world their children are going to grow up in, so that’s been a significant shift.
Previously when we tried to talk to execs from big tech companies, they weren’t interested. Now there’s a belief that they could get involved in one of our companies and it might be worth tens of billions in the future.
A lot of younger people are also coming into the climate tech space. We tend to need people who understand technology, so people who studied science or engineering. Back in the day, a lot of these people would go into consulting or banking as they’re numerate, but a lot of them now want to work in our space. So, there’s an encouraging pipeline from new sources, but that’s not to say there isn’t a shortage of people right now. And I know you’re experiencing this too.
Large corporates want these new technologies for green steel and cement and aviation and shipping and that’s real – there’s money coming in, there’s a pull. But, the talent pipeline is not pushing forward as fast as the demand for zero carbon tech is pulling.
And I think that’s something that we who are working in the space need to talk about more. There’s a gap in the talent pipeline, despite the fact that this is a great space to move into either starting a career or transitioning.
Toby: And the fundamental skillsets required to grow a successful business don’t change because it’s climate tech. We’re certainly seeing individuals coming to us saying we want to work in this domain. They don’t necessarily have the background, but they have the skills. We’ve seen that similarly from the Life Sciences perspective, but I think now climate tech is moving ahead of that in many respects.
One other question I’ve been thinking of, and it would be interesting to get your take. How do you see the wider investment community getting involved in climate tech? Like you say it’s hugely complex and there are certain domains where a lot of money is going and it’s an obvious area to invest in, such as batteries. But more mainstream investors have a real responsibility to deploy capital in this area. How do you see that panning out given its complexity?
Rob: It’s good and bad. It sounds obvious, but this area of entrepreneurship, of venture, is intrinsically collaborative. People who care about the climate tend to be quite nice people, whereas if you’re in crypto, for instance, that tends to be a bit more every person for themselves. So there’s always been, and continues to be, a lot of collaborative behaviour around the broader picture and that’s good. That’s not really being changed much by people arriving in from the mainstream world, and we’re happy to welcome them in. We’ve been talking to a lot of these new entities, big brands such as General Atlantic, Black Rock, Generation, M&G, Sequoia, with their partnership with Envision.
One thing that you learn from those conversations is that there are some super talented people in those organisations. They may not know as much yet or have the experience in the sector but they’re pretty impressive people because those are mega brands, and they attract great talent.
We’re grateful that it’s just a much broader and more diverse world than it used to be. It’s more competitive now. That’s what a growing industry should feel like and again we welcome that. It creates a great stimulus for us to keep upping our game because we’re finding real competition now for deals and that’s good for everybody.
You alluded earlier to light green investment and whether an investment was really climate tech. That was a thing, but the sector is moving away from that. We are seeing that with some of these mega funds, with £1bn dollars to invest here, £5bn there. They’re also doing this deep tech stuff that we’ve been doing for the last decade, but with a lot of enthusiasm and a lot of money burning a hole in their metaphorical pockets. 2021 was by far the biggest year ever for climate tech venture capital. Way bigger that the peak in 2007 - 4x as big. They’re all in their investment period now so they’ve got 4 years to spend all that money, to pick their assets. So, it’s a market that is leading to inflated prices in particular sectors.
After all these years of doing this & seeing a couple of different economic cycles go through, I guess we’ve got a good handle on the intrinsic value of companies. So, we’re now looking at deals where it’s a really exciting company, doing quite well, has some initial traction and the price of the round is 4x where we’d want to invest.
That’s happening a lot and that’s too much money chasing not just too few deals but too few deals in the spaces that are obvious if you’re coming new into this and want to deploy quickly.
The poster child for this is battery chemistry. Battery deals are great for the entrepreneurs, they’re raising money at very little dilution. But for us as an investor, we’re not buying at current prices. And that’s fine, good technology is getting funded, and we’re happy to stay out of those deals as there remains a broad range of technologies to look at in cleantech.
The sectoral issue is that there will be a correction. We were here before in the last boom from 2004 up to the financial crisis, where you had again mainstream investors, like Kleiner Perkins going into climate tech and that not working out. I think the difference between that cleantech crash in 2011-13 and the correction that we’re predicting is, back then with the Solyndras and Kiors, there wasn’t a real market for the technologies. They were still way too expensive, people weren’t going to pay a premium for a biofuel at that point, it was all subsidy driven. As well as the fact that the investors didn’t understand that building a bio refinery from scratch with equity capital just wasn’t a good idea.
So, this time I think what we’ll see is a correction rather than a crash, with people building cool tech still continuing to get funded, but it’ll just be down rounds. And we think this will happen, probably mid-way through this decade.
For us as a permanent capital investor we are anticipating an opportunity. There is a broader macroeconomic headwind and there’ll be a shakeout in a couple of years as all these big Series As and Bs start to struggle, and that’s where we can be both helpful and make returns. We’ll come in and back companies at that point, where we have always loved their tech, we still love their tech, and we can now talk about a real price. The investors who have backed companies at the wrong price then can’t follow on because they’ll have taken a massive write down, but where it is important tech, we’ll see how we can take it forward. We’ve done that before and I think there’ll be a need for us to do it again.
Toby: Ceres Power being a good example.
Yes. I’ve been involved in Ceres for a long time and the whole strategy in the 2000s was wrong and the price was wrong, and we knew that. We’d anticipated the problems they got themselves into before that happened, and we knew what to do when it did. There are a few companies now where we love the tech, we’re still talking to the founders and will pick up again in a few years’ time, but it’s not the same situation. Back in 2005, hardware start-up companies thought they’d be profitable in 3 years, or build a massive production facility in 6 months and we knew that was way off.
Today these estimates are not an order of magnitude out but they’re still out. Many are still too optimistic about the ability to scale these businesses rapidly, and where this manifests, people will confuse the failure to meet funding round milestones with some fundamental problem with the technology.
We’d back ourselves where we love a technology and think it’s critically important, to onshore wind or whatever it might be. We’d have a thesis that’s based on fundamentals rather than market sentiment. This allows us to maintain a grip on intrinsic pricing and therefore potentially pick up some good value opportunities. If there’s a set of parameters where we can make an investment case, we want to help these businesses succeed. That’s what we said to Ceres - not so much to the board but the actual engineers. We knew it wasn’t a quick flip. I think Mark Selby asked us when we first invested how long we were going to be in the company. We said at the time that we thought we needed to hold for at least 7 years and in the end, it was 8. We stuck through and built a great relationship with that team and we’re still working with Ceres today.
And I mentioned the Chinese earlier on and they did a very similar thing. They had this super long-term vision and they wanted to be really important for solar and batteries, so when the crash happened in the early 2010s, they went around acquiring really good technology like A123, the battery technology.
If you have this long-term perspective it’s kind of a super power. You wait and maintain the understanding of the market and the technologies and get involved at the right time.
Toby: As we speak, we’re waiting on price caps for businesses for the energy crisis. I don’t see this ending anytime soon, and this is obviously getting quite political, but there seems to be no obvious solution in the near future, so I wondered what your views are and where you see us this time next year or even in 2 years’ time.
Rob: This is not a good time in this country. There’s a great map of Europe that I tweeted earlier this week from Tado - it’s a really good illustration of the particular issue the UK has. It shows the temperature drop in an average house in winter after 5 hours if you turn your heating off. For a Scandinavian or German house it’s around 1 degree but for a UK house it’s 3 degrees. Because we have this block and brick construction that was designed with an expectation that cheap North Sea oil and gas would always be available. Gas was a really cheap way to heat a building like this in a pretty mild climate, that was all affordable. But, as a former engineer, it’s just criminally inefficient.
The elephant in the room in this country is we need a lot of gas to heat homes and other buildings and we’ve known for years that there was a really short payback opportunity to insulate homes, to insulate Britain, and to massively reduce our demand.
Ultimately by 2050 it’ll be all heat pumps and better homes, but in the short term, rather than borrowing £150bn or whatever it will need to be, it would be a tiny fraction of that to insulate every home in this country. It’s the obvious thing to do, that should be the first thing anyone in policy is talking about. I think in the current government there’s nobody who really understands energy at all. The gas prices are not coming down. The narrative that this is just about the acute issue – about the war in Ukraine – is madness. Please God for a quick resolution for peace in that country, but that could be a 10-year war, and even if it isn’t, gas prices are not coming down, so borrowing a bunch of money without actually reducing our demands is insanity. So, insulate homes.
We have a really good expert body in the Climate Change Commitee, which is part of law in this country under the Climate Change Act - it’s the independent advisor to government. Chris Stark has come out very clearly with policies for this country, which start with insulate homes. Let’s actually do it this time. Let’s do it properly, mandate it, make it happen, invest in the training to ensure the supply chain is there, invest in standards to make sure people can be assured if they have work done on their home it’s of good quality, have some insurance scheme if anything goes wrong.
There’s basic stuff that can be done. It’s not simple as it needs various elements – training and supply chain etc - but it’s not rocket science either. It could halve our demand.
Toby: And again, we were talking about this 10 years ago.
Rob: Yes, and people are now saying I can’t feed my kids. Even with the cap. Which is a unit price cap, there’s no guarantee that your bill will be no more than £2500 and that’s still a massive increase so there’s real hardship now that was avoidable.
Normally we’re not very political but this is such a failure of political leadership we need to call this out. What I hope is that voters should feel outraged that their government is not taking achievable action now. It doesn’t cost very much to make people’s lives better.
The government should be using its authority – rolling out, setting standards, training people. And that would make a massive difference, maybe not in a month’s time, but certainly by next summer, you could have done the whole thing and be ready for winter 2023. You can’t keep borrowing money to cap bills every year. We have got to look at the demand side. Demand is massive, we just waste all this energy - which is now so expensive to waste.
On the supply side, it’s blindingly obvious that we need more renewables. The intermittency problem is overstated, we’re nowhere near having an intermittency problem in this country, which is a long island with loads of wind.
Lift the ban on onshore wind. Lots of money would invest, and it’s the cheapest form of renewable energy. Surveys I see suggest it’s actually quite popular, certainly very popular in parts of the country that are windy, like the South West and Scotland.
Keep investing in offshore wind, but it’ll always be more expensive. And then solar, there’s a lot of rubbish talked about solar.
Solar farms take up way less land in this country than golf courses, it’s a fraction of one percent of our available land. All the current solar farms and all the planned farms account for 0.3 percent of land around the country.
Lots of famers have solar panels, lots of farmers have cheap grazing in amongst solar panels, they’re not permanent structures, they work well. And solar on buildings, where I live because it’s a conservation area it’s really difficult to get permission, get rid of all of that. Solar panels on homes would be a super popular thing. You make a couple of policy tweaks, unleash the industry.
You’d want a bit more storage. So, there’s a gigawatt now battery storage, fantastic assets to invest in. We probably ultimately require about 40 gigawatts, so that’s an industry that’s just starting, that employs people. So, grid storage is an obvious thing to have as a complement to renewables. And it doesn’t need subsidy, only smart policies to reduce barriers to investment.
We also shouldn’t talk about nuclear for the current crisis. We have invested in nuclear; we think nuclear is fine, but building an EPR at Sizewell is not going to help any time soon. If it’s operating in 2040 we’ll be lucky. Nuclear is not the solution in any of these politician’s electoral lives. None of these new nuclear plants will come on stream this decade and will certainly not help this winter or next winter.
So, this is the period of my career when in this country energy has become so important, and we’ve got the weakest government in terms of actually understanding what’s needed. It needs to be called out. Every single one of the Climate Change Committee's Priority Recommendations to Government is what we should do. There’s a 600-page document created by a 30-strong team of experts who are part of law in our country, that tells us what to do. Just do that. It would be pretty popular and borrowing tens of billions more just to put a sticking plaster on the problem is completely irresponsible.
And a final point - since I’ve become political – is do the windfall tax. This narrative that if we do the windfall tax it will kill investment. What investment? Because all the people I talk to – pension funds, insurance funds, family offices - they all want to invest in renewables, so a windfall tax on oil and gas isn’t going to deter them. And the oil and gas people, they’re not going to be the majority of the investment we need in clean energy. If you’re BP you’re not going to not invest in Britain because there’s a windfall tax on these excess profits. They have not innovated their business, not improved efficiencies, they’re just benefitting from global developments. We’ve done it before, and Europe’s obviously going to do it. There may be a big U-turn, I think it’s such an unpopular policy. Executives and shareholders of oil and gas companies are going to make out like bandits, whereas we as taxpayers are going to have to pay back this £150bn over the next 20 years, it’s just a terrible message.
So do the windfall tax. I think the caps are fine but the way we are currently proposing to pay for it, by going to the gilt markets is a terrible idea. The pound is now very low and I think it might end up at parity with the dollar. That would be an avoidable disaster. Devaluation of our currency makes inflation worse; the inflation predicted hasn’t factored in the devaluation that these policies are going to create. So, borrowing money to pay too much for energy demand that we could reduce, which may devalue our currency, when we could get it from a windfall tax is just insane.
Energy has become too important, and the choices are too important for people to sit on the fence. If you’ve got a voice, you should use it.