Ep47: Gina Domanig 'Open to Innovation'

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Michael Liebreich: Before we start, if you're enjoying these conversations, please make sure that you like or subscribe to Cleaning Up, it really helps other people to find us. Cleaning Up is brought to you by the Liebreich Foundation and the Gilardini Foundation. Hello, I'm Michael Liebreich, and this is Cleaning Up. My guest today is Gina Domanig, the Managing Partner of Emerald Technology Ventures based in Zurich. She's got around €300 million under management and is one of the premier venture investors in industrial sustainability. Please welcome Gina Domanig to Cleaning Up. So, Gina, thank you very much for joining us here on Cleaning Up.

Gina Domanig: Thanks for the invitation. Michael, nice to see you again.

ML: It's a great pleasure. I was trying to work out how many years ago we started working together when you were building the event in Rüschlikon and, and I was building New Energy Finance, how long ago was that?

GD: We'll see that it probably like 20 years ago when you crashed the event?

ML: Yes, yes. It wasn't quite 20. That would have been probably 2006, 15  years ago. And the story of that. I mean, now you've now you've mentioned it, we're gonna have to explain it to the audience. But why don't why don't we come back to that, because tell us what the event is. Tell us what you do, and then tell us what the event is. Because those are not really the one on the same thing.

GD: So yeah, they're two different things. So, what I do, so I am the Managing Partner at Emerald Technology Ventures, we were probably the first venture capital fund in this space back in 2000. We actually called it sustainability, then nobody knew what sustainability was. So, we called it sustainable technologies, then clean tech was coined. We called it clean tech. Now I guess the world is starting to call it climate tech. But that's what we do. So, it's industrial technology. We invest in North America, Europe, Israel, and now also Asia, we opened up an office in Singapore last year. And really, you know, startup companies that are just at that point of commercialization. So, we like to have companies that are already in commercial revenues. Yeah, and the probably interesting thing is that all of our investors are major corporations. So, 35, large corporations that are looking to work with us, really for open innovation.

ML: That's great. So, it's up to 35 now, and let's come back to who they are, because you've got a very particular business model. But I hope that the viewers or the listeners to this podcast or YouTube channel, I hope they understand that you've been doing this for some decades, obviously, from the preamble, they'll know that it's around 20 years or more. And so you've really seen, and you've been pretty much one of the leading figures in European sustainability, clean climates, tech, venturing for some considerable time now. So, you've seen all the different waves, haven't you?

GD: Yeah, definitely. I mean, when we started, we were really alone. I mean, the big challenge back then was syndicating, we were active in North America. And, you know, I found it was quite easy to syndicate, although there weren't that many funds it was [inaudible] Rockport and then later came EnterTech. So there weren't that many of us, but at least there was a community that was, you know, ecosystem that was forming. In Europe, there was really nothing.

ML: And this was at the time, this was something called sustainable asset management, wasn't it, SAM?

GD: Yeah, exactly. So I started out, I started the venture capital business as within SAM, SAM had just launched the Dow Jones Sustainability Index a public equity fund. And I was I built up the venture capital part. And when SAM was sold through [inaudible] in 2006, we did a management buyout. And they just took the business with us and rebranded it.

ML: And that's what is now called Emerald Technology Ventures, right? Okay, very, very good. And so that time around 2006. That would be the time that I think we first met. And that brings us to the event which you've been running really as a as a way of helping to grow that whole European sustainability, venture capital space. Is that right?

GD: Exactly. You know, it was it was extremely difficult. There's a little it's difficult to find companies because old communication wasn't really working that well, you know, that's back when we received business plans by post right. So there really wasn't that much of interconnectivity if you like. And what was happening is that when we would find a deal in Europe, it was super difficult to syndicate it because the VCs, the few people that would have been interested in this space, didn't know each other. So one Sunday night, I just thought, you know, this is ridiculous. In the US, it's much easier, the problem in Europe is that, you know, we don't know each other, and we don’t trust each other. And so I'm going to launch this event, which we call it, we call it the European Energy Venture Fair for a long time that we dropped the energy because it's more than just that. But we started as a not for profit. And we basically said, look, we'll cover the, if it's a loss making, we'll cover it, but we want to be an event by the investors for the investors. So, we want it to be small enough where it feels intimate, and people get to know each other. And so, it's still it's still held the exact same place 20 years later, same moderator, same keynote speaker. And yeah, so it's going really well, I think everybody really appreciates event. And we're really looking forward to this being one of the first physical on site events on post COVID.

ML: And so the moderator is our great friend Susan Kish, who having met through the European Energy Venture Fair, as was then, I then brought her into New Energy Finance, she built the New Energy Finance Summit, which became the Bloomberg New Energy Finance Summit and actually did great work beyond New Energy Finance piece at Bloomberg after we sold. And she built a number of different properties for them. And a great friend of both of ours, and the keynote speaker that you refer to you there, you're very kind. I come along once a year, and try to sort of marshal the troops. And if they're, if they're too exuberant, I try and hose them down. And if they're looking a bit depressed, I try and build them back up. But the story of the crashing is quite, I think, is one I would like to share with the audience. So, what happened, you very kindly invited me because you do one day, which is only for the investors. And then one day where you have various companies that come along and present. And you asked me to help open the second day, but I had to turn up it's a beautiful conference center, the SwissRe Conference Centre in Rüschlikon just outside Zurich, and there are some, it's a wonderful place to stay. So the only perk I get out of speaking, but it's perfectly enough is to stay at the Rüschlikon Conference Centre nowadays, but I was the last person invited I don't know who had dropped out, probably somebody, and I was staying at the kind of Holiday Inn or the Days Inn about 10 to 15 kilometers away. And I arrived the night before. And I discovered there was no room service. I wasn't… you didn't invite me to the dinner. Because dinner was investor only and there was no room service. And I had to and I found out that there was a pizza place another 10 kilometres in the other direction. And I thought you know what, to hell with this. I got in a cab, and I went over to the conference center, I decided to play stupid, and pretend that I didn't know that I wasn't invited to the dinner. And then, when I arrived, Susan Kish, the moderator I just talked about, she was summoned. And she came rushing out to say, ‘well, you know, you're really not allowed and you've not been invited. And it's investor only.’ And I said, well, could you go and talk to Gina and see because you know, I've come all this way. And off she went. And what I do is I walked in amongst the tables, I just walked in and  ‘Hey, Michael, what do you do a come and join our table. And so on.’ And then became effectively impossible, I think for you to evict me, so that’s my side of the story, but you recall it though. So that event then has grown over the years and is now the, you know, the focal point event pretty much for the European sustainable technology venturing. But it's also gone through a few waves, the whole sector, not just in Europe. And around that time, that was the sort of clean tech 1.0 time and in fact, you entrusted me and New Energy Finance, with analysis of what returns people were getting from sustainable venturing. And for a few years, we did that. And then it became absolutely clear that people were getting killed. So we stopped doing the analysis. But why is it different this time? Why is it, what's the difference between then and now?

GD: You know, there's a lot of things that are different, right? First of all, our strategy has, you know, we also learned our lessons, right? We went back and we were so naive if you'd like right we were taking risks. We you know, we invested in not one but two wave energy device companies, right? Because punishing wasn't enough to just get it from one, right.

ML: Pelamis was one…

GD: Pelamis and the one in Australia. It was called OPT, ocean power technologies. Also [inaudible], right. So yeah, we were all convinced that we were, you know, we were going to ride this wave. And, you know, we thought that we were back then where we are pretty much today, or that we were going to be there very soon, right. And in what we were doing is we were taking quite early stage risk in fairly capital intensive companies. And to go back to what we said before, is there simply wasn't enough money, I don't want to say that these companies would not have been successful, maybe they would have been successful if they have had sufficient funding, but there just wasn't that kind of depth within our ecosystem in Europe at the time. So anyway, so we have changed, right? So, we have, you know, we don't do such capital intensive business models, we also tend to not invest in companies that are pre commercial revenue. But also, you know, the macros have just changed dramatically. Right? You see, you know, you see today, depends on which industry we're talking about, let's see, take energy, you know, is the easy one, right? You know, will the energy transformation happen? Yeah, come on. I mean, you know, it's already happened, there's all kinds of evidence of that. But there still are other industries, where if you think, you know, take the whole plastic waste problem, even probably three, four years ago, a lot of the big players within that value chain, were still hoping that the transformation was not going to happen. And you know… So it's really to kind of find, what are the trigger points where you see, okay, this is actually going to catch on, it's not that we didn't see really interesting companies. But if the market isn't there, and if the incumbents are not ready to actually drive the transformation, it's very, very difficult for a startup company to really thrive in that type of environment.

ML: To what extent do you think we're over tipping points? Because you talked about incumbents, and right now they're, frankly, running scared, right? There's so much momentum behind net zero and so much momentum around ESG and so on. But, can that go backwards? And I'm thinking of, you know, if you had a catalyst company, I mean, it was just the technology was fantastic. And the fact is, there was nobody that it could sell to that wanted to buy, they just didn't have to, you know, is that over? Or is it temporarily over?

GD: You know, it becomes over in certain sub segments, right, that you can really see that there's a long time where the incumbents are able to block innovation, right. But then something happens, where it tips, right, and then also the floodgates are open, and then the startups can come running in, right? Some of the startups can come then the large players, you know, you could see it sometimes on automotive. But, but in many other times, because of where they are in the value chain, they're still dependent in most of these companies are B2B, so they're still dependent on inserting themselves into very long standing relationships and there aren't that many business model disruptions within industrial attack, right, most of what we see is technology innovation, and hey, you know, if the if the incumbents are excited, like with this whole open innovation, and they want to adopt that technology, that's actually the easiest and often the fastest way for the startup to actually get commercial success, right? So, so to get back to the question, you know, I think that there are there are many sub segments where that, you know, we're already past that point. And then there are others were, you know, the incumbents are still able to block over time, you know, automatic catalysts, which, you know, I lost 10 million on that lesson. So I learned it.

ML: But you made you made it up elsewhere. Tell us if you can, okay, so what have been some of your great successful deals?

GD: Let’s see, recent ones are, you know, we invested in a company in the US that was doing high-definition mapping for… it ended up being you know, there are many different application areas, but the big hit was for the automotive industry. So they, we called and together with General Motors, and they have basically developed the high definition maps for autonomous driving, right.

ML: Can you name them just in case anybody…

GD: Ushr. We sold them so quickly that I didn't even, I was head of the company. I didn't even have time to implement the ESOP yet. It was a super-fast.

ML: That's trading, not investing.

GD: No, but we were we were invested in its predecessor. So, we spun the one company just to focus on that application area. So, it was GeoDigital, which still exists today but it's focused on transmission distribution lines. And then we spun out Ushr and then Ushr, like I said, was sold then very, very quickly, we've made a fantastic exit. Another recent one was in cybersecurity, security matters. That was a fantastic exit for us as well. And everything, you know, everything that's around electrification. So we say there was a really good exit for us, we've got this, this is going to be forever this is a year of exits. Because I think valuations are inflated, it's really difficult to invest on a lot of really interesting investments at decent valuations. So, we're taking advantage of the exuberance in this sector and the high valuations. And we're going to focus on exiting a lot of our portfolio companies this year.

ML: And of course, last year was the year of the SPAC this year is, we don't know what's gonna happen in the second half of the year, it could be the year of the SPAC hangover, who knows. But are you, are any of your companies? We should explain what a SPAC is.

GD: Yeah. Yes, I've got two of our companies right now that are very, very far down the process. We'll be announcing both of them very soon. But yeah, so SPACS, you know, which actually special purpose acquisition company, the structure has existed for a very, very long time, it just became popular recently. And it's a shell company. And I think, you know, the reason why it's a better exit for us than IPO is because in the IPO, you can't give forward looking protections and the SPAC, because it's actually a listed company that's acquiring your company, they can go ahead and give the forward looking. So, you've got companies that are, you know, the SPACS are putting valuations at, you know, one times 20, 25 revenues. Okay. And then you have to ask yourself, well, how long is the lock up, right?

ML: So one times 20, 25? Yes. So in other words, what you've got is a very small company with great big, big googly eyes about what they're going to build. And the valuation that you get is as though they have already done five more years of development successfully.

GD: Exactly so that's a problem. There are actually some companies I mean, the two that were that were going down that process are actually much more developed companies. Right. And I think that you know, that's because we're already kind of coming off the back of the SPAC hype right. What was going out in the second half of last year was a lot of these companies that have like no revenue. And you know, SPACS were coming in, of course,  economics for the SPACs are great, for the SPAC sponsors, and then the, you know, the PIPEs were coming in alongside the IPO. And now I think a lot of those type investors got burned, right. And they're realising that they, you know, that this is still a really interesting space. But you know what, let's put our money behind companies that already have a lot of traction.

ML: Right. And just to explain the pipe investors, what happens in this SPAC is that somebody creates this vehicle, it's quoted, puts it onto the quoted stock markets, public markets, with some cash in it. And it then does what I used to know as a reverse IPO, then acquires the company, so the company ends up being public. But at the same time, some other investors come in and they do what's called a PIPE, which is a private investment into public equities. So, they put more money in so that company gets not just the cash that's in the SPAC vehicle, but also gets some extra cash. So, they end up absolutely awash with cash, if that's what they need. And they are now on the public market. So, they can do things like make acquisitions, give options to management… do lots of and their investors, after some lockup period can then exit from their investments and recycle back into whatever else they do with money. So, I mean, in theory, it's a great mechanism, I must say, I just look at it. And I think there's nothing about that mechanism that suggests you should do it to a company, which should not have been a public company anyway.

GD: You know, in the end of the day, these are the exact same people who are going to have to be on quarterly earnings calls with the analysts. Right. So if they're uncomfortable with that idea, they should not go down, just like they wouldn't go into an IPO, they also should not become a public company, be a SPAC, right, that's also in the end of the day, you land at the same place, you are a public company, are you ready to do that? Can you really, you know, is your is your business so predictable, that you can give guidance and hit that guidance quarter after quarter. Right. And, and so that's why, you know, that a lot of the PIPE investors are getting concerned, but I believe in the US, there's going to be, you know, they're going to make it a little bit easier for these companies to go down the traditional IPO path and make it more difficult for companies to go about that for the company, but for the SPAC sponsors, basically to be going, pushing these vehicles on companies that actually are not prepared to be public.

ML: That's right, because in some ways, it's just it's just a classic example of how financial regulation produces unintended consequences. So you regulate IPOs up the wazoo so that you make it very difficult to actually get through an IPO for anything remotely early stage or remotely young company. So then they don't do IPOs. And then there's enormous, there’s still the desire to be out there on the public market. So then this, you know, the innovation comes along, and the SPACs and so on. But it is I think the key word you used is guidance. If you can't give guidance, if you don't have either some predictable revenues and profits, or at least line of sight to them, you really shouldn't be on the public markets, should you?

GD: No, exactly, in the end, it also the team, you know, you need the quality of the team, the CFO, the kind of, you know, reporting you need to do, that all has to be upgraded massively. Going from being a, you know, a venture backed company, to being a public company with that kind of scrutiny is quite a big jump. So, you know, there's a lot of homework, I think the VC should also not push their companies too hard if the companies aren't ready, because in the end of the day, we're all going to be locked up and management's gonna lose their shirt, if they you know, if they fail in the public market. So, I think it's interesting. You think back, you know, in the early 2000s, you know, when a market was really open for our types of companies you had in Germany, you had [inaudible], you know, in the US, the NASDAQ, was quite open. So, we were IPOing companies back then. And then after the financial crisis, we didn't IPO a company for years, right.

ML: You know, the very first research note that I wrote personally, when I was running New Energy Finance, and we're going to get away from news and data and start doing insight and forward looking and, you know, the more complicated stuff, the very first note, was an analysis of the returns if you were to put $1 into every aim floated clean energy business, clean tech business, what would you have ended up with? And this was back in 2007. And the answer was already less than $1, on average. They were very good businesses, it was great for management. And it was great for the, you know, for the liquidity for the venture investors. And it was fantastic for the nomads, the nominated advisor but it was absolutely horrible for anybody who came in and actually invested in those companies.

GD: Like the PIPE investors with the SPACs, it's great for the SPAC sponsors.

ML: So I was invited to, I was invited to speak to the limited partners of a great friend of ours [inaudible] in Vancouver. And after that, I went to a hotel in Blackcomb, which I knew well because I had competed there in skiing and I sat there and I wrote this research note. And I really thought, hmm, I'm not sure if this is, you know, going to generate the excitement that I wanted it to, because it proved that that the IPOs at that time were doing very badly. Yeah.

GD:

And again, it was also back then if you think some of the things that that were listed on AIM back then having also absolutely no reason for those companies. But it was the AIM market was so open to these companies, it literally there are companies where the VCs thought, Do we close them down because they're basically bankrupt? Or should we try to put them on the AIM… and I mean, I even seem interesting when we should have listed Pelamis we were very conservative [laugh].

ML: And this is what in a sense worries me that you know, if a Pelamis or OPT existed today, you might be tempted to SPAC it.

GD: But yeah, but right now, I think the also what's also happening even you mentioned before about so what's happening after the SPAC, right? So what's happening right now, and it's quite interesting is that these SPACs have gobbled up a lot of targets that would have been normal targets for the PE guys right? PE guys are getting super active now contacting all the VCs and trying to, you know, figure out if there's still some targets left for them. And the corporates are then realising holy cow, we can't just sit back and watch how this, you know, company XYZ develops and keep it on our radar screen. Because, you know, basically if the SPACs don’t get it the private equity guys will. And so now we're seeing a lot more proactive, really, you know, kind of preemptive bids happening or unsolicited approaches happening from corporates, to our portfolio companies, companies, which we as VCs thought, you know, let's grow with another two, three years, let's get more certain. Also, we're getting unsolicited. And we're having difficulty closing some investments, because during the process, the companies are also getting approached by corporates and getting bought.

ML: We know this in the UK real estate industry. It's called gazumping people accept an offer and then because the prices are going up, they then renege on it and take a better offer. So that's really interesting, because what you're saying is that the corporates, who usually would have been the exit route for most of your investments, and now getting worried that your portfolio companies are going to go off via SPAC onto the public markets, or maybe into private equity, so just raise more money and decide to grow and maybe ultimately compete with your corporate, you know, remain in competition rather than allow themselves to be gobbled up.

GD: Right, in a lot of these corporates realize that they're under pressure, right? That the pressure for them to innovate to, to, you know, come out as winners in the transitions in so many of these industries, which are, you know, requiring them to acquire skills, which were in the past, not core to their business, right? You think of the whole digitization stuff like that, right? Or look at the EV charging. So these are, these are completely different business areas. And they know they need to go down that path. Right. They know that that's the future for them. And in, you know, for some reason, some of them are sitting there on the sidelines, kind of just watching the targets and, I don't know, thinking about to which one they want to pick up on day and then also may see that overnight, these targets are just getting acquired. In corporates, though, I think one thing that is also a bit different is that there's a lot more corporate venturing going on, then, you know than ever before, right? Every single year the statistics come up more corporate venture. In Europe, there's in clean tech, there's more corporate venturing happening, that there is traditional venture happening, right? And so, you see that the corporates are now thinking, ‘Okay how do I get my foot in the door, so at least I know, you know, first of all, an ability to get closer to this startup. To understand their business more, and hopefully that I will also know before they actually get sold to somebody else, so they can at least participate in the process.’

ML: Right. So now you've used it a couple of terms there. Corporate venturing. And you've used the term open innovation near to the beginning of our conversation. So how do you define open innovation? And how does it work with corporate venturing? And this is a three parter. The third part is what's your business model? And how does it respond to those two sort of forces?

GD: So we, you know, we look at open innovation more at the corporate level, as far as their strategy, how do they want to innovate? Are they going to, you know, just build everything on their own? Are they going to just go through M&A and just acquire everything that they need? Or are they looking to have more of a collaborative model? Right. And so, I think, you know, most corporations today realize that they should be, you know, doing open innovation. So looking outside their company, for innovation. in corporate venture, that's just one tool, right? There's some corporates that we know that a very ambitious open innovation initiatives and goals, and they don't ever invest in startups, they're really looking at, you know, establishing collaborations, whether it's joint development agreements, you know, sales and marketing type of distribution agreements. So there's many, many different models in which they can collaborate with the startup corporate venture in let's say, one vehicle, that many corporates are using, which typically includes some amount of money that the corporate venture guys invest in funds, or directly into startup companies, or both, right? And this takes us now to our model, right. So at Emerald, you know, in the early years, we took money from just about anybody. And we, you know, we gave them the quarterly reports, because that's what we were, you know, legally obliged to do, what we do today is completely different, right, because we have 35, corporates, as investors in our fund. And they are really looking for this open innovation, we're looking for the collaboration, sometimes that includes making co-investments with us, sometimes that includes making direct investments, even if we as a VC say, we don't want to invest because valuation is too high, or whatever it might be. So, what we've had to do as a venture fund is really kind of pivot almost. And this is after the financial crisis, when all the institutional investors went, you know, running for the door and left venture, certainly left the clean tech sector. And so, we pivoted kind of back then and said, hey, look, you know, out of all these customers that we have, who do we create the most value for? Who is the, you know, the most sticky if you like to us, and then we'd said, ‘Hey, it's really the corporates.’ And so we evolved our business model to where today, you know, we get around 2000 deals a year, we do two page write ups on every single company, even if we think it's the last company in the world that we would invest in as a VC. And we put all this information into an IT platform, which allows them basically, the corporates to create profiles, to do matching, to then have discussions with us. So, our business model is really to bring the corporates and the startups together. What we're finding though now, and this is interesting, is that after many years of focusing on this, and bringing them together, you know, very often it's still the collaborations aren't working. So we're having to go down one step further, and actually do more business development type of, of services for the corporates, to help them to actually establish these collaborations with the startups, and also to coach the startups about how to work with corporates, right? So that's those all those things happen, you know, kind of are connected, right? You've got this trend of open innovation, you've got this rise in corporate venturing, which often includes making fund investments. And we're just kind of pivoting to if you'd like to, yeah, have an optimal business model based on that.

ML: So that's great. And I'm delighted to hear that the number is now 35 corporate partners, because I, I came to your spring meeting two years ago, essentially short before, the last one before the pandemic. And I think at that time, you had 23 or 24. And what's the typical ticket so they've given you about 5 or 10 million euros to and for that, then obviously you invest that and if they're lucky, they'll get back on if they're lucky, if you do your job well, which I'm sure you will, back with a multiple but along the way, they also get access to all of this information. You're almost doing venture capital, kind of without a net, in full view, or in full, I don't know what analogy to use, but you're showing them, you're showing them your workings, if they don't like your decision, then they can step in and take that investment themselves.

GD: Exactly. So and that's, you know that for the corporates, they get, you know, and I always say, look, in our sector, you should, people who are promising 25%-30% net, you know, I don't know what their strategy is, I haven't seen that in the past 20 years, I think if you consistently deliver 15 to 20% net returns in this space, you're doing a great job, right? So, if on top of that, we're delivering all of these kind of consulting services to them and we're having sprints, and we're having, you know, doing tech studies, doing scouting all this, that just comes to them if you'd like, for free on top of that, right. And so now, we also have an evergreen model, which doesn't force the corporates to re-up every five years, they can just simply stay in the fund, continue to reap these benefits, and we just recycle part of their funds so that we can continue to make investments for them.

ML: And that's a that's a great point for those in the audience who are not specialists on venture capital or private equity, most funds are closed-ended. In other words, kind of you, raise the money, you make some investments, then after 1,2,3,4,5,6,7 years, you sell them, and then you give back all of them proceeds less the bit that you that is the carry, which is the upside, you give that back to the investors, and then you go back to them and say, wasn't that great? Do you want to invest with us again?

GD: Yes, but it’s even worse. It's after five years, right? It's after five years, and if the investor came in, let's say 12 months into the fund, they have to pay retroactive fees for a year where they got no services, then they get services for four years. And after those four years, the fund comes and says, I'm going to cut you off, unless you read up in our new fund.

ML: Right. And then of course, it also, and then it also, it pushes you to exit from transactions potentially too early. Because you can only have those conversations with investors, if you've delivered your returns, and you might have a great investment, maybe it's gonna take eight years, or maybe it's gonna take nine years to get to be really, really valuable. And that's very common in this space. But you don't have the luxury of leaving the money to run and the business to grow.

GD: Even many years ago, I was at some conferences. I remember one of the big, big institutional fund of funds guys saying that, on average, a venture capital fund liquidates after 17 years. And everybody's selling it as a 10-year fund. Last company out the door, it's 17 years later.

ML: 17 years, and that would be when you get when you get the last distribution from the last company. So, you've just said, you just said don't fight that we're just going to build an evergreen structure. So that's a structure where if we want to hold something for 10, 12 years, five years, seven years, doesn't we just that we can do that?

GD: Theoretically, we could, right. But we want to recycle the funds because we want to continue to make new investments, right. And so, it's not the way we structure it's not that you know, by just by bringing in new a new investor, the fund has more money. So, each investors account is kept separate, right. So, the investors who are there for the beginning, they really need to have realizations within their portfolio, if you'd like, to free up some cash to for us to continue to make investments. So, it is a little bit of a juggling exercise if you'd like. But I think it's you know, the other thing that's really important, and this is probably one of the big sins of venture capital, right? When you go out in Europe, and you know, for sure, you're going to have to go and raise a new fund next year, right? I would say 24 months before you are going to raise a new fund. The last thing you want is a write off the last thing because every single analyst and every one of these institutional investors will stick their finger right in there and try to make it look like you have no idea what you're doing because you had a write off, right? The truth is, that's part of the skill of venture capital is to triage to get rid of you realize this company is going nowhere, write it off, write it off and move on don't put more money in. But what happens is that the VCs are so penalized for having write offs when they have to go out fundraising is that they would rather sometimes throw good money. You don't know that it's bad, but it's questionable, right? And just to, you know, kind of roll the dice again if you like because you don't want to have a write off. Whereas in our model, now we can you know, at any moment in time we can say, okay, we've seen enough. Write it off. Let's move on. Right.

ML: Right. And that's, that is so important. I'm not gonna say who it was. But I was talking to another European venture house and they, they had a company, I think they were said that it was doing a series H, still didn't have a million euros of revenues when they're doing a series H, and he said, I think, you know, at some point, let somebody else you know take your problems off your hands.

GD: Although I did have to say, I had one miracle exit at that I've done a series, at least H, and it was a phenomenal exit. But that was... You can't count on things like that happening.

ML: There are always stories about the some of the venture investors in Candy Crush got a very nice surprise as well, yes. Because something can always happen, unexpectedly good. But one thing about those 35 partners, they are global companies, they're from all around the world. Are they particularly interested in Europe? Or are they just interested in what you do? Because you've got Asian companies, Japanese water companies, US waste management companies and a load of global businesses, household names?

GD: Right, right. And I would say, you know, some of them have a strategy that they want to invest in a US fund in a European fund. So, they pick a US fund, and they pick us as a European Fund, which is a little bit funny, because half of our investments are done in North America anyway. Right. But I think the very first thing that's important, and if they don't say it, I will say it for them. It's the fit, right? Do we see enough deal flow? It doesn't matter, actually, what companies we're investing in, what matters is our deal flow. Are we receiving enough deal flow that is relevant to them to their strategy, so we always do kind of a deal flow overlap, to demonstrate to them, if they're really looking for something that's outside of our space will tell him, you know, what, yeah, we're getting 2000 deals a year, but there's only like, 20 that actually fit. So, I'm sure you'll find another fund out there. Because afterwards we have KPIs right with that. And if we know that we can't deliver, I don't want to start that relationship, right.

ML: In terms of if they are, if it's if it is a water business, they want to see businesses in water treatment, digital management of water assets, they're not interested in the fabulous alternative protein company that you're going to come up with.

GD: Well, that's why also the other thing that's quite interesting that I didn't mention before that we've also started in this past year. It’s interesting, so much has happened during this pandemic that I never would have thought would have been possible. But we made actually some very interesting moves. We started sector funds, right? So we exactly for water, you mentioned that we had some investors who said, look, we have, you know, we want to invest in the water space. But we don't like the fact that you're doing all these other things. We don't like the diversification over here, we want to, we want to be invested only in water. And that's fine. So, we launched a water fund. We did cap it, though, because the water sector is not that big. So, we kept it at $100 million. And we have that we also launched the Energy Fund, we had a first closing of that. And now we're launching this sustainable packaging.

ML: Gina, great to hear you say things like, Oh, we kept it at $100 million. When there are that I can remember years when you would have been very happy to do a first close of anything at $100 million.

GD: Exactly. No, that's a real luxury. You have to also be honest with yourself, right? I mean, I know that the investors, the investors that are in that fund, wanted that fund to be larger. And I know that there are other investors who are interested. And we said, you know, I mean, come on, we've been doing this for 20 years, there just simply isn't enough really good deal flow for us to honestly say that we can deploy this 100 million in five, six years and generate decent returns. Let's first do that. And then if, you know what, we find out that we were wrong, there actually are a lot more great companies great, they will deploy faster, [inaudible] next time.

ML: And this is because you're focusing now quite ruthlessly on the more asset light models not building the Pelamis steel, half a kilometre long of wave power generated. One question though, to what extent do you think that you've evolved into this direction because of the location in Switzerland within the European VC environment. Because it is Europe is very different from the US in terms of you know, far more of the technologies will be integrated into some kind of EU or national sort of technology strategies, we don't have the same volume of VC, it’s just it's just different. Right?

GD: So, you know, you'd ask you what are the corporates looking for a lot of the corporates, interesting, a lot of  the Asian corporates have a very, very high opinion about European technology, which I think is very correct. And they're really looking, they're very concerned about not having access to European technology. And, unfortunately, there's still a lot of US companies who don't know that your batch has any technology. But luckily we work with really, really large companies, and they're all, usually have presence all over the world anyway. And so you really do see that the corporates want to access Europe, we have you’re right, Europe is different, we have to be a little bit careful about how we invest in European companies, the depth of the venture market is still not that big in Europe, right? It's although, you know, we see we can see the exact same company, North America and Europe, both of them, we know have the potential to scale, if they have sufficient funding, and we will be more cautious on the European one, because we just can't count on that large of follow on rounds to happen. Right? So, we're thinking, Okay, you know, in worst case scenario, could we, with an existing syndicate, get the company to breakeven or to an exit, if you know, if they're not able to raise another large round? So, there's definitely that. But there's also to tell you the truth, a lot of the entrepreneurs in Europe or the seed angel investors, they don't want the dilution. It's absolutely crazy. Why don't you want a smaller piece of a much, much bigger pie? No, we'd rather own a  larger percentage.

GD: So I have just written off an investment that I made, you know, fantastic technology, a really good team, the CEO, the founder, was so averse to dilution, that he never raised enough money, and others with worse technology and worse momentum just raised more, and they, you know, they built the plane whilst flying it faster. And he eventually just ran out of track. And then COVID came along. And that's it. I just, I hope that that's not the typical kind of European… I hope that's changing, because that certainly, that dilution aversion and also the, I'm not sure it's chicken and egg, the inability to raise the bigger round, is it because the money isn't there? Or is the money not there because the typical European, you know, CEO, like myself, got the business to a certain point and then said, oh, you know, I've made some money. I can exit, I can buy a chalet in Switzerland. You know, I didn't stay around until New Energy Finance became a unicorn. And I was very happy to sell it. And you know, very nicely, I thought, but I do worry that if I had been American, maybe I would have said, this is just a start.

GD: Exactly. Let's go for it, you know, and that's it. That's, it's a really, really important that we co invest with very like-minded people like so we've got other VCs in Europe, you know the [inaudible], others I'm sure forgetting right now that, you know, that we've co invested with in the past, we know that they operate very similar that we do we know about, we know that they would definitely be willing to raise more money. For corporates, I think it's different because there's a lot of… there's typically a lot of turnover within corporates, you don't know if the same person still going to be there in five years. So, I really rely on the other independent VCs in a syndicate. And we're very often, you know, leading rounds, we don't have to lead, but very often we are leading, and we're always pushing the entrepreneurs and the existing investors to raise a larger amount of money, also so we can make room for more investors in the round. I mean, sometimes we even cut back our own allocation, just to make room for other people. Because we say, you know, we've seen this film before, right? For good reasons and for bad reasons. The company is going to need to raise money and I always have, I always have the same you know, before COVID we'd always have dinner with the entrepreneurs before we would invest would always go to the Italian restaurant across the street, and I would always have my, ‘shit’s gonna happen’ speech, right? She is going to happen. I can't tell you what should it's going to be, but it's going to happen, right? And I need you to be really honest with us that you need to raise more money because you never know when.. And there's never been an entrepreneur who's afterwards came and said that they regretted taking so much money Like we're talking about, let's raise, you know, 20 instead of 15, or let's raise 10 instead of three, right? And we're not forcing them to raise 100 million on a, you know, a low valuation right?

ML: Now, I actually had to raise an extra million. Well, actually, the story is different, I did raise an extra million pounds just after the financial crisis, because I was very worried I didn't want to lose the hold of New Energy Finance, just because of, you know, this kind of rupture in the markets. I never needed the money. I didn't need the money. And the reason was, all of senior management got on the phones, and we did debt collection. And because of that, we didn't need the money that we had raised. But I never regretted it. I never regretted I never said oh, that dilution. But I was able to sleep, you know, night, during that whole period, when, you know, Lehman was going bankrupt, and my investors were brilliant, they supported me, and it was just the right thing to do. And of course, when it came to the exit, I then had much more confidence in dealing and running the auction, because I knew I had a little bit more money in the bank than I perhaps needed. So just to finish off, we got a few more minutes. You’re a venture capitalist, a very successful venture capitalist, which means of course, you can see the future. And so, I'm going to take this opportunity to ask you, you know, if we were going to be speaking again, in, I'm going to say, three years, because five years is almost too long. I'm gonna say three years, what do you think of the kind of… where will we be? Where will the market be? Where will the activities, what innovations do you think will have sort of started to transform either the markets, your portfolio companies operating or your own business?

GD: Well, I think a lot of the topics that are today still really hot, will be you know, just like, you know, there was a time to make money in solar cell, you know, solar panels and stuff that's over right? So, in there, there's also, you know, spot you know things that kind of transition out of venture, right, the whole electrification, at least electrification of in passenger cars, maybe heavy-duty vehicles, marine and some other, you know, more challenging, I think that'll still be quite interesting. The whole aerospace area, I think will stay interesting for a number of years. I think what's also interesting is this whole agri tech is coming, I would say coming back, we find a lot more market pull to adopt new technologies on the outside, I'm not talking about precision irrigation, right, I'm really talking about, you know, novel food ingredients and stuff going all the way into food, agrifood tech, right. So, I think that that is definitely going to happen, hopefully, we will have made progress on the whole sustainable packaging, plastic waste, I still think there's huge amount of innovation. And there's still many actors within that value chain who are resisting the transition, once they get on board, I think there will, again be a huge pickup of new technology. So we're really excited about that area. I also think what's going to happen, and just like, you know, I was talking about earlier about how Europe was so different than North America 20 years ago, and I think we're going to see the Asian market, within our sector within this clean tech or climate tech, whatever people are calling it that these days, I think that we're gonna see the Asian eco system develop in and be more connected, if you'd like to the other, because you've got, although there are very few US funds that invest in Europe, and vice versa, the corporates do, right, the corporates, when they do investing, they're all over the place, right? And there's no reason why Asia, the whole Asian market won't, let's say if you'd like to catch up as far as building their ecosystem, and then connect, which is why we started our office in Singapore, because I think it's not that I think we're going to run out make 1000 investments next year. But I think it is time for us to be much more, let's say, purpose driven in our Asia strategy.

ML: And I think that it'll be fascinating to see the longer term implications of the pandemic and technologies like Zoom that we're using to film this interview, will we be seeing teams that have you know, that maybe have never met, where different founders will be in different parts of the world, or maybe they will have met, but they'll be operating as nomads or elsewhere, sorts of things that, you know, one could talk about, that didn't really happen before the pandemic but it could start happening now. And that of course, could also connect with different geographies. Australia, New Zealand, great places to start businesses, in some ways, but very remote before the pandemic they would have been considered very remote.

GD: Yeah, it's funny. It's funny that you mentioned that because we… now I'm much less, you know, inclined to ask the question, where is a company located? Right? Before we used to have a very prominent, you know what we would be talking about a company and they're, you know, location x, y, z, and it becomes actually less and less relevant. Now, the other thing that's interesting, you know, we actually raised money on our waterfront, from some investors that we had never met. All right, you know, said to so what have I said, Okay, here's proof about how good this team really is.

ML: Absolutely. Early in the pandemic, people said, Oh, well, you know, we're gonna wait until we can actually meet people and go to that Italian restaurant and do the ‘shit happens’ speech. But I just come off the phone today with a placement agent in the Gulf. And they say that they've, you know, they've essentially, they just do virtual roadshows, and you know, their business is continuing I wouldn't say as before, because they've changed it, but they are raising billions via this interface. Gina it's a fantastic pleasure to see you and to chat with you. We are out of time. So all I can do is thank you for your, your time for joining us for sharing your thoughts. And, you know, I hope that the next European Venture Fair which is due to be September in Rüschlikon outside Zurich, I'm tempted to promise to be there. But if I have to do 10 days quarantine in Switzerland to get there, and 10 days quarantine in the UK to get back and six PCR tests, which is the current situation, then I won't be there. And I'll have to address your audience virtually.

GD: We’ll fix it by then.

ML: Hopefully, between the farmer industries in Switzerland and the UK, we should have fixed it by then.

GD: Exactly, exactly. No, it's been wonderful. It's been great to catch up and hope to see you in person again soon.

ML: Thanks very much, Gina. Thank you. So that was Gina Domanig, Managing Partner of Emerald Technology Ventures, talking about the process of investing in sustainable technologies, and how it's changed since the early days of clean tech 1.0. My guest next week on Cleaning Up is Lord Nicholas Stern. He's a professor of economics and government at LSE, chair of the Grantham Research Institute, and of course, author of the famous Stern Review in 2006, which looked at the long term costs of climate change and the long term benefits of urgent and aggressive climate action. Please join me at this time next week for conversation with Professor Lord Nicholas Stern