Gina Domanig on investing in green technology.
In this episode of Cleaning Up, Michael Liebreich talks to Gina Domanig, Managing Partner of Emerald Technology Ventures.
Michael and Gina talk about the SPAC hype, momentum behind net zero, business model of Emerald and what makes investing in Europe different from the US.
This is an abridged transcript of the conversation, edited for clarity.
Michael Liebreich: Gina, thank you for joining us on Cleaning Up. You’ve been one of the leading figures in European sustainability, cleantech venturing for considerable time now - you've seen all the different waves. How is 2021 different from 2006? And since the last year was the year of the SPAC, could this one be the year of the SPAC hangover?
Gina Domanig: First of all, we learned our lessons. We were naïve, we were taking risks. we don't do such capital intensive business models, we also tend to not invest in companies that are pre commercial revenue. But the macros also have just changed dramatically. Will the energy transformation happen? Yeah, come on, it's already happened, there's all kinds of evidence of that. But there still are other industries – 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.
On the second part of your question: we're already coming off the back of the SPAC hype. What was going out in the second half of last year was a lot of companies that have no revenue and yet SPACs were coming in. Economics for the SPACs are great, for the SPAC sponsors, and but a lot of the PIPEs [ private investment in public equity,] investors got burned. Now they're realizing that this is still a really interesting space but they want to put their money behind companies that already have a lot of traction.
I’d like to stress that no matter if you do the IPO or SPAC you are going to have to be on quarterly earnings calls with the analysts. So if the people in the company are uncomfortable with that idea, there should be no IPO, no SPAC – because in the end of the day, you land at the same place, you are a public company. Are you ready to do that? Is your is your business so predictable, that you can give guidance and hit that guidance quarter after quarter?
ML: To what extent do you think we're over tipping points? There's so much momentum behind net zero and so much momentum around ESG, but can that go backwards?
GD: In certain sub segments you can see that there's a long time where the incumbents are able to block innovation. But then something happens, where it tips, and then the floodgates open, and the startups can come running in. But in other times, because of where they are in the value chain, they're still dependent.
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, most of what we see is technology innovation, and 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.
So, to get back to the question, I think that there are many sub segments where we're already past that point.
ML: You often talk about open innovation – what is it? And how does it work with corporate venturing? Finally, how do these two works as part of your business model?
GD: We look at open innovation more at the corporate level, as far as their strategy, and ask how they want to innovate? Are they going to 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? Most corporations today realize that they should be doing open innovation. So, looking outside their company for innovation in corporate venture.
There are some corporates that have ambitious open innovation initiatives and goals, and they don't ever invest in startups, they're really looking at establishing collaborations, whether it's joint development agreements, sales and marketing type of distribution agreements.
This takes us now to Emerald Technology Venture’s model. At Emerald, in the early years, we took money from just about anybody. But what we do today is completely different because we have 35 corporates as investors in our fund. And they are really looking for this open innovation, and we're looking for the collaboration, sometimes that includes making co investments with us, sometimes that includes making direct investments. So, what we've had to do as a venture fund is really kind a pivot. This is after the financial crisis, when all the institutional investors went running for the door and left venture, certainly left the clean tech sector. We pivoted back and said, ‘hey, look, out of all these customers that we have, who do we create the most value for? Who is the most sticky to us, and then we'd said, ‘Hey, it's really the corporates.’ And so we evolved our business model to where today 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. We put all this information into an IT platform, which allows the corporates to create profiles for matching to then have discussions with us. Our business model is really to bring the corporates and the startups together. I think if you consistently deliver 15 to 20% net returns in this space, you're doing a great job. And on top of that, we're delivering all of these kind of consulting services to them and we're having sprints, we're doing tech studies, doing scouting etc, that just comes to them for free.
ML: 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 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: 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: if we look at the exact same companies, one in North America and one in Europe, both of them have the potential to scale if they have sufficient funding - we will be more cautious on the European one, because we just can't count on that large of follow on rounds to happen. 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 they're not able to raise another large round? So, there's definitely that. But there's also another factor - 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?