Peter Sopher’s Post

The Venture Mindset is the first book I've studied since grad school. And I have the small-print, hand-written, 1-page cheat sheet of notes as proof. Why dedicate this time? Venture capital is notorious for its opaque data. Even the most experienced VCs have only worked for 3-4 firms. The book's depth and breadth of purview into VC culture and mentality is the highest quality I've come across for a book that so directly addresses my profession. The quality is attributable to the authors. One co-author, Ilya Strebulaev, has built the world's highest quality dataset for VC research brick-by-brick via relationships and academic studies on both VC activity and the supporting behavioral science. Two themes especially stand out to me: (1) Failure: Humans are afraid of failure and are trained to avoid mistakes. Additional effort is needed to unwind this logic and acknowledge that high risk, including failure, is a natural side effect of high rewards. Even many of the most successful VCs have considered quitting after the first deal or two where they were primarily responsible for investing in a company that went to zero. Reasons why failures happen are important, and accountability matters. But, if decision rationale was sound, it takes a village to create a culture accepting (and often celebratory) of bold failures. In venture capital such culture extends beyond the firm to the the firm's investors, or LPs. (2) Empowerment: The VC world is full of stories where a single person saw something others didn't. Deals pushed by individuals do just as well, over large samples. Rebels are encouraged in VC, and are often empowered with anti-veto power. At Venrock, they don't have an Investment Committee. There are eight partners, and one brings a deal to the others and the partner who brings the deal ultimately makes the decision. At a16z, each partner has a budget, and if a deal is above their budget they then need to convince others. Getting political is the worst thing that can happen to a VC partnership. Specifically, a type of mock consensus that's a slippery slope is when one partner supports a deal led by their colleague while privately thinking it stinks, only because they hope the colleague will return the favor. Reed Hoffman at Greylock Partners actually prefers investments where half the team loves it and half hates it; unanimous decisions are generally less successful than those with dissent. Relatedly, deal teams are typically no larger than 4-5 people, as smaller teams outperform larger ones due to superior communication quality, reaction speed, and individual motivation. Ilya - Thanks for sending a complimentary copy and thoughtful note. Stanford MBA candidates taking Ilya's course - Feel free to use my one-page cheat sheet come exam time, if you're able to read the hand writing! #venturecapital #startups #innovation

Aepnus is cheaper and better. Nerdier description: Aepnus has the world's best electrolyzer for recycling waste chemicals like sodium and lithium sulfate into useful chemicals like sodium and lithium hydroxide. The electrolyzer doesn't need iridium, which is super expensive and a pain to source. Capex is reduced 60% relative to the current state of the art and opex 40%. Especially for the battery supply chain, they solve a snowballing problem. As gigafactories expand to parts of the world that care about ecosystem impact (i.e. outside of China), sodium sulfate waste processing is a reason they can't get built. Look no further than the BASF facility in Finland that failed permitting for this reason. Customer calls were extremely compelling during diligence. Those in-the-know know how big a problem Aepnus will solve. It's a pleasure to have you in our portfolio Lukas Hackl and Bilen Akuzum, Ph.D.!

Final Close of our $305M Fund II was last week. What we do: > Seed/Series A financings of clean energy startups with multi-gigaton-scale GHG mitigation potential between today and 2050. > Initial checks of $2-7M, budgeting $10-20M per portfolio company in total, including follow-on financings. > Lead or co-lead initial financings and actively participate on boards. > Support startups with clear sustainable competitive advantage (strong team and IP), step-change value prop improvements relative to the current state-of-the-art, and large markets with clear bottom-up-revenue scaling angles. So far, Fund II has announced investments in three portfolio companies: Noon Energy OXCCU TECH LTD NitroFix. More announcements are on the way…

Pain to wealthy people catalyzes change. Home insurance prices, as boring as they are, fascinate me right now because they're the tip of the (melting) iceberg for wealthy people to feel pain from climate change. Anecdotally, I know folks in Florida paying $50k+/year to insure their home against hurricanes/floods. I know folks in Colorado forced to pay $1M+ over the coming years to insure their home against wildfire damage. Meanwhile, Moody's data show home insurance companies in the US have been unprofitable over the past decade, paying out more in claims than they've received in premiums. As a result, the The New York Times reports, "insurance companies are raising premiums by as much as 50 percent or more, cutting back on coverage or leaving entire states altogether." This trend is only getting started. 2023 was by far the hottest year ever. Even if all emissions were to stop tomorrow, hotter, weirder weather is guaranteed. Greenhouse gas' atmospheric effects occur over time (100 years for CO2, 14 years for CH4, etc.), so we're locked into continued future effects from past pollution. Conclusions: (1) Whether it's in 5 years or 30 years, the widespread adoption of decarbonized solutions is inevitable. People of influence are beginning to feel pain that will only intensify, even if the current channel - home insurance - is super boring to most people. (2) Climate change mitigation and adaptation solutions will be equally relevant. Mitigation because every little bit counts - 3 degrees of warming is better than 4 degrees is better than 5 degrees, etc. Adaptation because people will not stop emitting greenhouse gases to the degree needed before the climate gets very, very weird. #EnergyTransition #CleanEnergy #Sustainability #ClimateChange

The University of Texas at Austin now has a graduate-level course where students create the foundation of a clean energy startup. It’s a course similar to those taught at MIT Sloan School of Management, Harvard Business School, Columbia Business School, and other elite graduate institutions. It’s inspiring that such courses are driven by student demand, and that this is what top talent truly wants to do. Thanks Molly Bales and Michael E. Webber for letting me play a small role in supporting your amazing course. Shout out to Dave Kirkpatrick and others driving such courses at other institutions.

AI as impetus for a dramatic increase in datacenters, and associated electricity demand, headlines almost every major energy event right now. Common framing: (a) Demand: Datacenters require massive amounts of electricity, owners prioritize reliability and are very price elastic, and the value of datacenters is accelerating due to the pivotal role data plays fueling AI. (b) Supply: Wires transmitting power are already stretched to their limits and take 3-5 years to permit and build, and stakeholders who spur such action are slow and bureaucratic. Scary scenario: Factoring (a) and (b) together, electricity prices could shoot up due to demand dramatically exceeding supply. In places where power is $0.08/kWh nowadays it could increase 5x to $0.40/kWh. Key factors more folks should understand: (a) Electricity rates are sector-specific (residential, commercial, industrial), and they often use tiered pricing. In the medium-term, if datacenters become outlier electricity consumers, they're likely to receive specialized, expensive electricity pricing from the grid than households. (b) Many but not all datacenter players are savvy about off-grid power procurement. Hyperscalers like Google, Microsoft, Amazon, Apple, and Meta Facebook have been building wind and solar plants to power their datacenters for over a decade. (c) Fossil-based backup generators ensure reliability. Just last week, a datacenter leader at Microsoft posted: "Gas is much cleaner and lower in cost than diesel... By pulling together the utility, our world-class Microsoft Energy Team, and gas generator manufacturers, we were able to collaborate and engineer a solution that has worked very well for many years and serves as a model for how datacenters can be an asset to the grid, not a liability." This was the first time in 10+ years I can remember Microsoft bragging about fossil fuel use and painting gas as "clean" just because it's not diesel. Winners from these dynamics: (1) Technologies that squeeze the most power possible out of existing power lines. Such technologies include line monitoring (ex. LineVision), virtual power plants, and demand response. (2) When grid power price is higher, economics become much more favorable for behind the meter generation at all scales (residential, commercial, and utility). Solutions from residential, community, commercial, and utility-scale solar to behind-the-meter wind farms should benefit. (3) In reality, fossil fuel (gas and diesel) backup generators will likely see very strong demand, considering even Microsoft, an admired stalwart in corporate sustainability, is apparently not embarrassed to greenwash natural gas as clean in this context. Ideally, though, decarbonized gensets like that from ClearFlame Engine Technologies will see massive adoption, and datacenters will become increasingly co-located with with decarbonized baseload power such as geothermal and nuclear. #CleanEnergy #RenewableEnergy #AI #Datacenters

I enjoyed speaking at Texas McCombs School of Business this evening on a climate innovation panel. Thanks, Liat Chobadi and Sean Voigt for bringing the Austin climate tech community together.

In my experience, there are 6 networks that really matter in venture capital in the following order: (1) LP Networks: LPs are investors in venture capital funds. Put simply, without developing and maintaining an LP network, you have no chance at raising a fund. LP relationships take years to cultivate for good reason; people want to know folks with whom they entrust millions of dollars. I know excellent VCs with strong track records who strike out at fundraising because they lack this network. (2) Sourcing Networks: A quality sourcing network is not challenging to build – all you do is reach out to appropriate incubators and funds that invest at earlier stages than you. But building a premium, proprietary pipeline where the most sought-after startups seek your dollars first is challenging and requires a well-earned, strong brand. (3) Co-Investor Networks: This network renders your companies front-of-mind to follow-on investors. These relationships also enable deeper-pocketed, better-branded co-investor syndicates, so that companies can survive tougher times more easily and shine entering the fundraising cycle. These networks are initiated through outreach and hustle, and they’re strengthened by history of past co-investments and 4-6-month check-ins. (4) Diligence Networks: When evaluating opportunities, VCs often contact 15-20 third-party experts on the startup’s ecosystem. When you lack your own network for such outreach, you rely heavily on: (i) the startup’s references, who are cherry-picked and often biased toward the startup getting funded; and (ii) consultants, whose quality is unreliable. (5) Operational Networks: Your firm needs quality accounting, legal, and other providers. They will reach out to you, and it’s easy to ask other VCs who they use. (6) Exit Networks: Some mature VC firms employ folks focused on C-suite-level relationship building at the most likely acquirers of their startups. Few firms have this capability because it’s such a difficult network to build. Firms that do usually date back to having invested in the likes of Google or Meta when they were startups. Or they have budgets to hire former investment bankers or incentivize Venture Partners who have deep and broad C-level relationships. Per fund of 20-25 companies, the goal of such a person is to affect 1-3 more portfolio company acquisitions than would have occurred without them; while a small proportion, it’s enough to make or break a fund’s performance. If you are a startup game planning which VCs to covet, I’d recommend rating firms on the quality of these 6 networks. #startups #venturecapital #vc

A trend from 2023 that I foresee becoming increasingly pronounced in 2024: A greater valuation gulf between companies with a viable chance of becoming 50-year companies and those without. To have a real chance at thriving for 50+ years requires serving a deep customer need, entrenching as impossible to live without once adopted, and having reason(s) why it's extremely challenging to replicate what you do. In public markets, two companies with potential-driven valuations that sustained and grew during the tougher, higher interest rate times of 2023 were Snowflake and Palantir, both of which fit the description from the prior paragraph. Snowflake has a $66B market cap on $2.6B 2023 revenue and (-33.4%) net margin. Palantir has a $38B market cap on $2.1B revenue and 7.2% net margin. This need for 50-year potential is rooted in first principles of valuation: discounted cash flows ("DCF"). While not fashionable, especially in private markets, revenue and EBITDA multiples must have a solid cash flow-based foundations to make sense. For potential-based companies, a DCF calculation justifying a 15x revenue multiple usually implies a 20+-year terminal value that's 80%+ the company's overall value (so 4x+ years 1-19 value). Such high terminal values imply phenomenal growth and usually in the ballpark of 50 years of life. An inefficiency of past years has been that companies not suited for 50 years of thriving have been valued like they are, especially in software. Technology is advancing faster than ever, meaning shorter company lifespans for incumbents. Generative AI is poised to change the game in many industries and expose solutions that aren't difficult to replicate. Questions I will prioritize when evaluating investments this year: (1) Why does this company have the value prop, stickiness, and sustainable competitive advantage to be a 50-year company? (2) If not suited to be a 50-year company, are there multiple potential acquirers who could leverage their distribution channels to grow this solution exponentially and would compete to acquire the company? If the answer is "no" to both, the company has an even steeper uphill battle as a fit for the venture model. #venturecapital #startups