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Climate venture investors riff on headwinds, hype, and wildcards of 2023

Despite a downturn in the climate tech sector, we may look back on 2023 as the “year of building” the green industrial economy.

The Carbon Copy

We now have a full picture of the year for climate tech venture investing in 2023. Fresh data from Sightline Climate shows a slight decline in deal counts, round sizes, and a drop-off in repeat investors. But the slowdown may not tell the full story, say two venture investors.

  • The top line: Sightline reported a 30% drop in total funding, with seed, Series A, and late-stage investments all declining. This mirrors a 29% drop in overall venture investing in 2023.
  • The market grounding: It was a year of rising interest rates, declining valuations, a bank collapse, and limited exits. However, companies with IRA funding started building commercial-scale facilities across batteries, long-duration storage, and direct-air capture. 
  • The current take: “If rates go up and IPO markets dry up, we all suffer from that just like everybody else does,” said Gabriel Kra, speaking on The Carbon Copy podcast. “But when we look back, we're going to realize, that's when products started rolling off the lines.”

Turbulent. Equilibrating. Those are the words that investors Gabriel Kra and Carly Anderson use to describe the last year for venture capital in climate tech. 

Kra, a managing director at Prelude Ventures, and Anderson, a principal at Prelude, joined The Carbon Copy this week to talk about the environment for climate tech fundraising, investment strategies, surprises, and the outlook for startups. (Note: Prelude is an investor in Latitude Media.)

“I think it was a year of looking around and figuring out, ‘hey, what's real and where is the ground?’ And I think we're at a pretty solid place now to go forward, “ said Anderson. “The first half of the year was all focusing on portfolio companies, getting them in a good place to get to 2025. Now there's new companies coming out to market…starting to be interesting seed deals and growth deals at valuations that seem fair, I think, to both sides, which is exciting.”

Although Kra believes there are still more difficulties to “shake out of the system,” he is bullish about many of the startups that are now constructing commercial facilities: “I can think of five factories being built that are going to come online in 2024. And each one of those factories is going to be working through the kinks and working through the yields and working through the efficiencies. This is a big deal.”

Also discussed in the episode: the hype around artificial intelligence, the trouble with sustainable aviation fuels, the outlook for direct-air capture and fusion, and fresh anxieties for 2024.

Sign up for Latitude Media’s Frontier Forum on January 31, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024.

Transcript

Stephen Lacey: Well, we now have a full picture of the year for climate tech venture investing in 2023, and it shows what we've seen quarter by quarter, that the broader decline in the venture space also played out for climate startups. Fresh reporting from Sightline Climate shows a decline in deal counts, round sizes, and a drop-off in repeat investors last year. So if you both had to describe the year of 2023 and climate tech venture investing, what word would you use?

Gabriel Kra: Oh my goodness, that was a surprise question, Stephen. What word would I use? Turbulent.

Carly Anderson: I was thinking more along the lines of, let's see, equilibrating.

Stephen Lacey: Gabriel Kra and Carly Anderson are climate tech VCs with Prelude Ventures. They're evaluating and putting money into everything from long duration storage to clean steel, to alternative meat. And in full transparency, Prelude was a lead investor in our company, Latitude Media, which often means that we get to riff with them on the market dynamics impacting the sector. In January of 2023, the New York Times ran a feature on the climate tech industry with the headline Recession Resilient, quoting many top investors and entrepreneurs who believe the policy and economic drivers behind the sector would mostly keep it immune from an economic downturn. It was a common belief at the start of last year.

Gabriel Kra: I never bought into that. If rates go up and IPO markets dry up and M&A goes away, we all suffer from that just like everybody else does.

Stephen Lacey: And that certainly happened. Valuations took a hit, both early and late stage rounds contracted, exits tanked, along with a bunch of other surprises.

Gabriel Kra: It just didn't turn out anything like we thought it was going to turn out. In March, there was the SVB collapse and that created a whole lot of noise and a whole lot of stress for a couple of weeks.

News clip: The sudden collapse of California's Silicon Valley Bank has thrown sand into the gears of the tech industry.

News clip: As fear set in, customers rushed to withdraw $42 billion in deposits.

Gabriel Kra: And in the end, it turned into more of a blip than anything dramatically fundamentally changing in our sector. Similarly, I didn't know in January of 2023 that AI was going to explode on the scene fully the way it did.

News clip: 2023 was when AI went from nerdy jargon to a daily part of politics, entertainment, even schoolwork. It has come at us very fast.

Gabriel Kra: It didn't again fundamentally change anything. At least in climate tech, I think it changed a lot. And then last, I knew it was going to be a hard fundraising year.

News clip: As economic conditions have changed and interest rates have risen, funding is harder to come by and many venture backed startups are running out of cash.

Gabriel Kra: And yet, oddly enough, for some companies, it turned out to be pretty smooth sailing. And then for others, it turned out to be way harder than I thought it was going to be.

Carly Anderson: It just took time for the effects of the market forces to work their way down the venture stack, for valuations to settle out from the highs of 2021. I think it was a year of looking around and figuring out, "Hey, what's real and where is the ground okay?" And I think we're at a pretty solid place now to go forward.

Gabriel Kra: You said equilibrating, do you think we've gotten there? Do you think there's still a lot more play to come out of the system, Carly?

Carly Anderson: Well, that's a dangerous question. I think we're getting there, right? This is one of those things where the water is sloshing back and forth and there's still some slosh, but I think maybe we're starting to see a new baseline. Do you agree?

Gabriel Kra: I'm not sure I do. I think there's a lot more to shake out of the system.

Stephen Lacey: This is The Carbon Copy. I'm Stephen Lacey. This week, perspectives from two investors on the mixed environment for fundraising, the impact on different sectors and why we may actually look back on 2023 as the year of building.

We've got new data and Sightline Climate just released its year in review, giving an overview of deal count, round size, total investment. We saw deal count was down slightly last year, but deal size fell considerably, almost 30%. We also saw a decline in later stage rounds and also in early seed in series A round. So it was down in a lot of different areas and it was a surprise that it was down in early stage investing. Can you reflect on this decline and how it impacted your investment strategy over the year, Gabriel?

Gabriel Kra: Yeah, I think of that in two ways. One, where did it and how did it affect me and us in our work with our portfolio companies? That's the first side of it. And then two, how did we think of it and affect us in how we were doing new deals in companies in which we had not yet invested? Very different processes that inform each other, but you have to think of them separately.

Most of the companies, not all, but many of the companies to most of the companies, we were working with them to expand runway, but very consciously not get through 2023 because 2024 is going to be better and we'll be able to fundraise. But if you had a large round that you'd raised in 2022 or early '23, what could you do to make it through 2025 or into 2025 or beyond if possible? What could you do to focus on profitability rather than just growth? What could you do to make your company attractive to investors once this cycle had worn out?

And Carly, going back to what we slightly disagreed with. I wanted my companies, if they could, if they were looking like they might be cashed out in June of '24, June of this year, I wanted them to get to Q1 or Q2 of 2025, because I thought that's when we would be maybe in some sort of more normal environment. Plenty of risk to that, but that's how I was thinking about it.

Also, different, some of our players, some of our bigger companies in which those companies were investing into and benefiting from the big decarbonization, macro tailwinds, the companies with IRA or other government support, they did big rounds. Companies in sectors like storage, hydrogen, steel, the big macro decarb plays of these hard to solve problems, a bunch of them went out and did just fine in 2023 in the fundraising environment.

In our portfolio and in the market generally, I think some of the plant-based meat replacement companies struggled pretty strongly. Consumer-facing companies struggled pretty strongly. Companies that were growth, but without obvious switch to profitability, where they were going to be able to flip that switch struggled. And those companies were different from the companies that really thrived even in a very difficult fundraising environment.

Stephen Lacey: Carly, does that resonate with you? What did you see reflected in some of these numbers?

Carly Anderson: So this was a great summary of the climate tech space and I think there's stuff to be slightly optimistic about. If you look at climate tech compared to the broader data coming out of PitchBook or Crunchbase, overall venture deployment decreased to a third of what it was in 2022. So instead of being down by 30%, down by 60%. Granted, this is still three to four times what venture deployment was 10 years ago, and it's still just above where it was about five years ago. And when I mentioned re-equilibration and coming back to a baseline from the total amount of venture dollars deployed, it looks similar to what you saw five years ago. You would expect it maybe to be a little bit higher, hence, maybe we have a little bit more sloshing to do. But from the broader ecosystem, it seems like we're starting to find a new normal.

Same with valuations. Like Gabriel said, the first half of the year was all focusing on portfolio companies, getting them in a good place to get to 2025. Maybe there's some other reasons we can get into later about why we want to get there instead of Q3 or Q4 of 2024, maybe people can guess. But from the last quarter or last two quarter standpoint, now there's new companies coming out to market, who it's not just insider rounds, they're starting to be interesting seed deals and growth deals at valuations that seem fair, I think, to both sides, which is exciting.

Gabriel Kra: Yeah, what is the new normal though? I got a chance to look at the data as to where 2023 came out. But if we're saying 2023 is where we were in 2020 for instance, I think that was still a pretty big historic year for venture climate and for venture. When we're looking at companies that are making a commodity product, I want to look back 10 or 15 years at the commodity price. I don't want to invest against a two-year spike in something. That's what a lot of people did in the polysilicon boom in 2010. I think that's what a lot of people did in the lithium boom of two or three years ago. I think you've got to look further back and on a longer time horizon.

So I'm not convinced that if we're where we were in 2021 or something like that, that we can think of that as the new normal. I think we have to look on a longer scale trend line. And yeah, climate tech is getting more attention and should because of all those tailwinds to it. I'm just not convinced we're at the new normal just yet.

Stephen Lacey: Well, we also saw that exits were down considerably by 50%. That was largely because of the decline of SPACs and it is been a difficult couple of years in the public markets generally, particularly for companies that went through public through SPACs. How severe was the market correction here in your opinion? And then how has it impacted exits over the last year?

Gabriel Kra: Oh, God. Do we really have to talk about SPACs again?

Stephen Lacey: It was the story. It was the COVID story.

Gabriel Kra: That's right.

Carly Anderson: Well, I was just going to ask, I can't think of a company that's SPACed that has a market cap of over what, $300 million or $400 million right now? There's so many examples of companies that just... They've come down by 3X.

Gabriel Kra: Look, the SPAC phenomenon was an oddball one. It took an always existing esoteric little financial instrument that got steady but very low use over the years and turned it into this huge inappropriate tool. But companies that did something specific with the money, meaning like in QuantumScape's case, and it's just one that I paid attention to, used the money to position itself to get to the point where it would be a big profitable company. Look at its cash balance sheet. It still has money to execute against its plan, and it wasn't just about getting public and providing liquidity to investors or whomever, but we had a bunch of other companies in our portfolio that performed just how they said they were going to perform and still got slaughtered in the public markets because once all the froth and hype ended, public markets, investors realized they didn't want to be in companies that were three years away from profitability still with risk.

And a lot of really good companies got mixed in with a lot of really bad companies or a lot of really not ready for the public markets companies to create a big disaster there. But I think the lack of liquidity in 2023 was more than just about the SPAC markets going away. M&A, there's a chilling effect on M&A from a bunch of federal trade rulings and challenging big acquisitions and mergers on one side. The IPO markets had a brief moment when two or three companies went out early in the fall but didn't pick up.

So that's going to reverberate in venture backed companies because for at least the last year, and nobody thinks they're heating up in 2024, there are not a lot of exits happening, but it's important to remember, cycles come and cycles go. The IPO markets will return, the M&A markets will return. You can look at the oil and gas majors and say, "Wow, there's a bunch of cash rich companies right there." You can look at the Magnificent Seven tech companies and think, "Wow, those guys have a lot of cash." So if a company makes sense for a strategic acquisition, it will happen at some point and you've just got to build your companies to become profitable, cash flowing or companies that are building a tech product or a product that somebody really, really wants to have to get to those exits.

Stephen Lacey: I've heard from you that the market is turbulent and then headed toward equilibrium. So a bit of a yin-yang there. But one thing that you both agreed on I think, is that when we look back, that 2023 will be a year of building when we reflect on the past year. So while a lot of people are focused on the decline of stock value and the decline in venture capital, you believe that we will reflect on 2023 a little bit differently down the road as this year of building. So what does that mean exactly? Explain?

Carly Anderson: We saw across quite a few sectors, a lot of very exciting new projects getting started. I feel like there were groundbreakings every other month, maybe every month, a month Heirloom down in Tracy, Forum broke ground in West Virginia. I know there's a number of plants going up in that area. We saw across hydrogen, we saw across various parts of carbon capture. Just a lot of new things getting built for the first time, and I think the repercussions of that going forward are going to be pretty exciting to watch.

Gabriel Kra: Yeah, I'll build on that.

Carly Anderson: Nice pun.

Gabriel Kra: Thank you. Some of my best work is done completely unintentionally. We have a lot of companies in our portfolio and there's a lot of companies out there similarly situated that raised a bunch of money when the raising was good. And we and lots of other investors and the entrepreneurs had the right instincts, we encouraged them to pile it on if they had a need, a use for that cash. So now these same companies are the ones that Carly mentioned. They're building factories, they're selling first products and first projects and they're delivering to first customers. Easiest to talk about what I see directly in our portfolio, but I think this is indicative of what you'd see across the landscape. I can think of five factories being built that are going to come online in 2024, five. And each one of those factories is going to be working through the kinks and working through the yields and working through the efficiencies, and they're going to have to scrap more product than they want and they're going to have false starts and they're going to be getting that flywheel turning.

But this is a big deal. I think people forget, they never knew. They just don't realize how hard it is to build stuff, to build, to make new factories. This is a fundamental difference between climate tech and software. So when we look at the end of 2024, we may not have had the biggest announcements on financial outcomes, on IPOs, on splashy product launches that grabbed the headlines. But when we look back in 2026 and 2027, and even in 2025, we're going to realize, "Oh, that's when products started rolling off the lines and those manufacturing lines were funded by the venture dollars and the debt dollars of 2023, '22 and '21 and by the IRA dollars, and they're going to be delivering, they're going to be delivering on the climate promise that all these companies have been funded against for the last five or 10 years.

Carly Anderson: We have the battery belt now. I think that term, I hadn't heard that term before 2023 maybe.

Stephen Lacey: All of that certainly feels true. There are also some other competing pressures though. Growth investment has dropped considerably. That could be a challenge for companies building commercial facilities. You have rising interest rates, supply chain weirdness and difficulty in getting equipment. How are those potentially hindering some of these companies that are starting to build these factories?

Carly Anderson: There's so many, like the interconnection wait times, the wait times for transformers. Gabriel, what's your favorite? "We couldn't hit our milestone because X."

Gabriel Kra: Look, let me come back to you on that one as I struggle to think of a really good example that doesn't throw somebody I love under the bus. These are all challenges and problems, but already the Fed has indicated that perhaps 2024 is going to start to signal... They've signaled that perhaps 2024 is going to see some interest rate reductions. The supply chain bottlenecks of 2022, where it was a real disaster, have already started to ease. These are headwinds that the companies have to face, but a minute ago, I was talking about all the tailwinds that these same companies have. There are still large dedicated buyers of most of the products that we're talking about, if not all of the products that we're talking about. There's still government support both in the United States and in the EU for these factories, for these products, and for getting them deployed.

So we can dive into any one or the other of those headwinds, but these are the things that entrepreneurs and companies, early stage, public, private, they all have to overcome them. I still think that when we look back in two or three years, we're going to say, "Yeah, there were some puts and takes. There were some pros and cons to the macro environment in 2024 and 2025." But remember, in Q4 of 2021 and Q1 of 2022, all of our economic pundits were saying, "We are in for a hard landing. Buckle up. It's going to be a terrible ride." And that didn't happen.

Carly Anderson: Totally agree that the supply chain issues are going to work themselves out. We're seeing that already. We're seeing people get creative about where they're sourcing materials from. We're seeing new manufacturing being set up in Canada and Mexico nearby, and we're seeing people just plan better. The lack of growth capital is a lot more concerning, and I think that has trickled into at least how I'm thinking about new investments. We're really thinking hard about what is the capital plan for this company? Have the founders thought through what that capital plan is and what the milestones need to be for not just the next round, but the round after that accordingly? So that definitely has had an impact and I think it'll continue having an impact in 2024.

Gabriel Kra: Yeah, I think that's a great point, Carly. There are companies that we liked many aspects of, but we declined to do a new investment into them, meaning a first investment into them because we didn't feel necessarily that the team had an understanding of where their next dollars were going to come from or even a good way of planning for that. Is that what you were thinking of Carly, without naming names?

Carly Anderson: Yeah. And even early seed stage companies, right? There's, like you said earlier, a bigger push for profitability near term and more of a... It has to be really special to be excited about starting a journey that is going to take a billion plus dollars to scale.

Stephen Lacey: Let's talk a little bit more about sectors that you were evaluating, pursuing in 2023. So let's start first with a sector that you think is overhyped. Carly, you go first on this one.

Carly Anderson: Oh, I'm going first on this one? Okay. I'm going to start with sustainable aviation fuels, and I get there are some reasons for people to be excited, right? There is a very large inventory of airplanes. We want them to carbonize fast. Just putting fuel in that is magically carbon-free is the easiest way to go from an airline perspective and from how many new airplanes do we have to build standpoint. That said, the input costs are still incredibly high. And every conversation we have, you can make these great slider bars where you can drag the cost of hydrogen to whatever you want and the cost of CO2 to whatever you want. And you have to drag those things to how many assumptions about policy and pipeline availability and to get to something that you can cross your eyes and believe gets within a stone's throw of fossil fuel costs.

So while it's easy, while there's been a lot of work on the policy side to get incentives in place, most of our staff for the next couple of years is going to be from soy, soybeans. Something like what, 40% of soy in this country goes towards renewable fuels? And that's a lot, right? We would like to think it's all waste fat soils and greases, but that's like 10% of the biofuels market. And I'm saying biofuels not staff because most of the renewable fuels made in this country are diesel that gets blended in.

So now that we finally have policy that tilts the economic scales towards producing sustainable aviation fuel in addition to diesel, thanks to some of the recent credits that came out, we're still looking at mostly hydrogenated oils. It's easy to take an oil and make that an oil. It's a lot easier to do that than to take a plant and turn that into oil or take CO2 and turn that into oil. We would like to take CO2 and turn that into oil, but the added cost of hydrogen and CO2 is still pretty darn high. Gabriel, I think I stole a lot of your thunder, but I know you have a couple of other things that you were thinking along those lines though.

Gabriel Kra: Well, I was going to say Steph too, Carly and I spent a lot of time looking at it together this year. Even if you have free electricity and free hydrogen, which you don't, and you still need CO2 at scale, and that cost alone plus some conversion cost kills you here. The only thing I would add to what Carly said is you've got to remember that for the sustainable aviation fuel to really be sustainable, to really be decarbonizing something, the CO2 molecule that you're burning in the jet actually has to come out of the air. Otherwise, you're just injecting a different source molecule into the atmosphere.

If it was going to end up in the ground some other way and then you made fuel out of it and burned it, that's not good. It's a simplistic way to put it, but one of our colleagues said, "Why would you ever make fuel from captured CO2? Why wouldn't you just burn fossil fuel and pay somebody else to capture the CO2? Why is that ever not cheaper?"

Carly Anderson: This is something that we disagreed on quite a bit in the office over the year, which was kind of fun because for me, if you're capturing it from a smokestack or you're capturing it 20 feet away from the smokestack, gosh darn it, just capture it at the smokestack.

Gabriel Kra: The smokestack's good. I agree with you on the smokestacks. Sorry, you've won that argument a long time ago.

Carly Anderson: Yeah, thank you. Gabriel.

Gabriel Kra: Just not with the EU. You just didn't win that argument with the EU.

Carly Anderson: Yeah, they're not answering my calls, but... Well, there's also the carbon intensity of refining oil, right? There's at least... I don't know the numbers here, but I believe it's 40% or 60% of the carbon intensity of a gallon of gasoline is the hydrogen used to hydrotreat it, to drive off the sulfur and to make it suitable to go in engines. So it's not a one-for-one like, "Oh, we can capture CO2, put it in the ground or capture CO2, turn it into a fuel or something else, some other product that we like." There's definitely some efficiency associated with that, but there's also inefficiencies associated with refining oil.

Stephen Lacey: Any other that you think are overhyped?

Gabriel Kra: I think AI was overhyped this year. Now, that is an obvious choice, and maybe I mean it a little differently than some folks would think about it. So what I'm talking about is AI in terms of the large language models, the big foundational models and the applications that are being built now and will be built over the next couple of years. I think that is a tech change akin to the graphic interface on a web browser. That's the thing that allowed all of us to use the World Wide Web instead of just hacking around on the old mosaic text-based.

The smartphone was another huge change that changed everything. The PC changed a lot for companies and for individuals. I think LLMs and foundational models are a tech foundational change, a fundamental change that is not really able to be overhyped. But in terms of the immediate impacts and how it might be used for climate, many people got very, very excited and thought it was going to be really huge really quickly, and it's going to take time.

The changes are rippling through our economy and our workforce in ways that are not always visible and not comprehensible at first, but those huge valuations that some of the companies got, they've already come down to earth, not for the industry leaders and not for the foundational companies, but for the next layer up the stack built on top of that. I looked for applications for AI, for the new generation of AI in climate, and right now, as far as I've seen thus far, companies are using it and they're doing good and interesting things with it, but is simply at this moment, another tool in the tech toolkit to work on climate. It is not a game changer yet. Very powerful tool for sure, but thus far, just another tool, and I can go into an example if you like, or I can pause right there.

Stephen Lacey: Yeah. Well, let's hear from Carly because you were at our transition AI event. Carly, you've been out there talking to companies as well. So riff on what Gabriel said.

Gabriel Kra: And I didn't mean it as a knock on you, Stephen. You know how much I love Latitude Media.

Stephen Lacey: No, we don't take it as such. We're covering this space as rationally as possible. Actually, we have a very similar take that you do. We haven't seen any particularly unique game-changing AI companies that are going to suddenly completely reinvent the space. It's going to be helpful for a lot of existing climate tech companies. It will make materials discovery better. It will help us accelerate manufacturing, identify problems in manufacturing. It will enable us to make better distributed energy management systems, but there's no single AI company that's somehow going to magically change the space. Carly, what's your take?

Carly Anderson: I'm excited for it to finally give us access to all the data that's been collected since the 1920s that isn't in digital form. Right? I think that's one of the uses of LLMs I'm most excited about is the ability to now ingest data in all kinds of formats and create that resource for companies to use and start working on. I totally agree with you both for climate, this is a tool. It's not a category. It will enable people to be more productive. Honestly, it's probably going to become a competitive necessity for a lot of folks. If your offering does not enable easy data input or rapid insights into future behavior, then you're going to lose out in the sales cycle.

What I think we're all really excited for is when we start getting to see AIs do things that humans can't, like run the grid, and that was one of my favorite parts of your event earlier this year, Stephen... Or actually, sorry, back in 2023, was that discussion around, hey, okay, what are utilities doing now with some of these tools? And there are some that are exploring and there are some that are testing the waters, but we're not at the point where we even understand what the grid looks like today, let alone be able to create a comprehensive model and predict what it'll do in the future. So maybe in the short-term, we're looking at ingesting data and building better models and building a picture of, hey, what systems and tools do we have today? But I'm excited for that moment in the future when something can operate a system that is just so far advanced in complexity that humans couldn't do things in real time, and we can be shifting between different types of loads and DERs and new power generation and batteries and everything else really efficiently.

Gabriel Kra: I think that's spot on, Carly. And then just as to the why it's not a thing of today, because that company that develops that perfect, awesome, incredible model still needs to sell it to a utility.

Stephen Lacey: That's exactly right.

Carly Anderson: That's hard.

Gabriel Kra: Exactly.

Carly Anderson: I also want an actual superconducting material at room temperature, like that LK-99 stuff was really fun this summer.

Gabriel Kra: Well, if you find that one, Carly, let's invest.

Carly Anderson: You're on.

Stephen Lacey: Okay. So what's a sector that you started off the year unsure about or you were learning more about and then you became more interested in over time?

Gabriel Kra: I'm going to actually go with the same answer. I still am really interested in AI, and if a credible source makes an introduction, I still take first meetings with those companies because I do believe that a slight play on what Carly said, it's going to become a necessity. I do believe that companies that are doing something that other companies are doing, but have figured out a way to use this tool to a competitive advantage, will have an advantage that yes, it's replicable, yes, somebody will get there, but can give you a really good head start. So I still keep looking there, and I started out 2023 relatively AI ignorant, especially for climate. So that's one for me.

Carly Anderson: I'll throw out a different one. Maybe I'm going to throw out maritime shipping, maybe maritime activities more broadly. And to keep it short, I think this is an area where it was ignored for a long time and people are starting to realize, "Hey, this is what, 3% of global emissions?" I think there's been better data collection. So there was a great report from the International Maritime Organization that came out two years ago on the impact of biofouling. There's been a lot of efforts around fleet and route optimization. There's been a lot of work done on not just new propulsion systems and different fuels, but terminaling and bunkering, like having those fuels available at ports and having those fuels available in a low carbon format. So for methanol, for instance, you want that to be low carbon methanol, not just fossil, although even fossil is a vast step up from bunker fuel. So maybe I'll pause there, but that isn't an area that we're watching, and I'm excited to learn more about.

Stephen Lacey: What about wildcards?

Gabriel Kra: One of the things that I thought of about this, and it was actually triggered by seeing what other people were saying, geologic hydrogen. That's the wildcard that came out that is going to get bigger in 2024 and into 2025.

Stephen Lacey: You're going to invest in a bunch of hydrogen wildcarders?

Gabriel Kra: We're not going to invest in that. It's not going to be hydrogen wildcarders. It's not like that. It's funny, we invested in not last year, the year before, in one of the companies, and it's amazing to see what is written about it and what is talked about it publicly versus what the reality is in the ground. Thank you for the pun. But this is real. It's real, it's accessible. There's still risks to it, but this could be something that is fundamentally changing of the energy landscape. I was about to compare it to the shale gas boom, so maybe that's a little bit of humorous right there, but it's the only source of hydrogen where it's a source of energy. Every other way of making hydrogen uses energy to make it.

If you have an electrolyzer and you need solar or wind, you're taking energy and you're using it, hydrogen becomes an energy carrier, and then maybe you do something else with the hydrogen. Maybe you use it to make chemicals or you make ammonia or you burn it or whatever. But geologic hydrogen, the hydrogen itself is a source of energy, and that is unique.

Carly Anderson: And riffing on what Gabriel said. This is one of the few things that actually unlocks really low-cost electric fuels in the near term without policy or other interventions because we all have electric fuels, and not just electric fuels, right? But reducing the carbon intensity of things overall. I would've said overhyped for hydrogen, but there's this geologic thing. And also, I think we've been hating on some of the hydrogen hype for a while, so that seemed unfair. But just the ability to have low-cost, low carbon hydrogen in the near term at large scales is incredibly exciting.

Stephen Lacey: Was that your wildcard too?

Carly Anderson: Oh, no, no, no. Wait, there's two. Let me start with one, and one is carbon capture because there were both good things and there were really frustrating things in carbon capture over the last year. So on the good side, carbon engineering had an exit. Congrats to that team. We saw Louisiana get primacy. We saw Class VI well permits granted not just in North Dakota, but also in Wyoming now. The DOE announced DAC Hubs, two large DAC Hubs, almost what, $2 billion in funding? Lots of DAC projects being built in addition to Heirloom. I know there's a couple other ones are going to come online this year.

On the other hand, we saw CO2 pipeline projects get canceled in the Midwest, voluntary carbon market challenges, which we don't know how that trickles into engineered carbon offset purchases as well, the Gorgon LNG project. There's a big CCS project down in Australia that struggled again, and there's political uncertainty on the horizon. So there's a lot of really exciting things in carbon capture, and there's a lot of things that could make it a tough year or two or a couple for that sector.

Gabriel Kra: That's a great one, Carly. I was thinking that carbon capture or DAC might be one of my overhyped categories for 2023 for a bunch of the reasons you met. And I was thinking that they could just, like you said, they could have some rougher times this year, because I think eventually investors are going to look at, "Do you have a credible path to getting to 100 bucks a ton of removal?" And I think there's a large number of players who don't have a credible pathway to getting there, even if you make big assumptions about the cost of electricity or the cost of heat or whatever are the key operational cost inputs to their process. So I agree that 2024 and 2025 could be some interesting rough sledding for some of those companies.

Carly Anderson: And what I'm hoping, I would love to see DAC costs below, honestly, 300 bucks a ton.

Stephen Lacey: I want to make sure we get to the last couple of questions, but Carly, you said you had two. So what's your other wildcard?

Carly Anderson: Oh, my other one is my favorite one, which Gabriel knows about, which is Fusion.

Gabriel Kra: Overhyped.

Carly Anderson: Disagree.

Stephen Lacey: Say more.

Carly Anderson: Yeah, so it's been a big couple of years, right? 2021, Commonwealth Fusion's raised $1.8 billion. It was one of the big rounds of 2021. 2022, even more exciting, we finally saw a net energy gain. So the National Ignition Facility at Lawrence Livermore National Lab shot a frozen ball of hydrogen with their giant lasers and got more energy out, which was a really big deal. And on the heels of that, the Commissioners at the NRC, so the Nuclear Regulatory Commission voted unanimously that fusion energy would be regulated under the same regime as X-ray sources, particle accelerators. So in this year, we've cleared the regulatory pathway. We've seen the DOE set up a milestone based program to fund fusion electron on the grid in 10 years. We've seen a maturing of the capital stack around fusion, and I'm pretty excited.

I think things to watch are obviously the big players in this space. So Commonwealth Fusion and Helium, both trying to do big experiments in the 2025, 2026 timeframe, what used to be just giant token maps, and we're seeing a diversification of different approaches. And back on the theme of building, a lot of them are starting to put together devices that could really do something. And there's maybe at least eight companies at this point that are on the road to building a net energy device. So it's a long road, and I don't think we're going to see any new headlines in 2024, but three, five, 10 years out, I think this is only going to get more exciting.

Gabriel Kra: Well, my objections are not pushing back on anything that Carly said. And Prelude has invested in some fusion companies, and I think they're incredibly exciting companies. I also don't know that fusion is even a 2035 climate solution. Other competition is going to get there, solar and wind and other renewables with batteries, geothermal, traditional nuclear, advanced small modular nuclear, thorium salt reactors. I think there's a lot of other tech pathways more technically viable than fusion and can have a much nearer term impact on emissions than fusion.

And so yeah, in 2035 and 2040, we're probably going to see somewhere in that range. We might see a first commercial reactor producing electrons onto the grid, but I think before that, it's all going to be, if we do well, it's going to be pilots and demonstrations.

Stephen Lacey: All right. So as we head into the year, barrel forward, a lot to be excited about, but plenty of anxieties out there. So what are your biggest anxieties as an investor at the moment? Gabriel?

Gabriel Kra: I have all the typical concerns of typical investors about anxieties, IPO and M&A, and will they return? And the answer is yes, but not right away. Or maybe, but not a full return this year. Will the fundraising cycle normalize? Sure, but not like it was in '21 or '22. These are all things we talked about earlier. Capital markets come and go, interest rates fluctuate. That's the price of doing business. That's the environment that we're choosing to work in if we're trying to be investors of any stripe, venture capital is not an exception. But I fear a serious setback for climate if the November elections go.

The thing that frightens me the most is if a bunch of climate antagonistic powers are in charge of the White House, the Senate and the House of Representatives in this country, and a bunch of progress that we've made over the last four years starts to be mitigated, eliminated, or even walked back. I'm an investor second, I'm a person first, a climate guy who cares about our planet and worries about my kids. That's the fear and anxiety that is front and foremost in my mind when I think about the long-term.

Carly Anderson: And I guess similar to what Gabriel said, my biggest fear is that these companies, a lot of the ones we just talked about, lose control of the messaging. We saw what happened beginning of the 2010s when Solyndra, right? People got in their heads that this was a bubble and it burst. And nobody would touch a lot of these sectors for many, many years, especially in things that are very policy dependent like hydrogen and carbon capture or sustainable aviation fuels. It's important that these sectors are viewed as creating opportunities, creating jobs, not being this massive welfare program that we're rolling tax dollars into.

And I firmly believe it's the former, right? I think that a lot of these things are just coming down the cost curve and create amazing opportunities for America to lead in innovation and creating markets that will be international in time. And I'm an engineer by training, right? Not a policy person and not a marketing or communications person. But we really need those people, I think, to lean in and help on making sure that we're telling this story well.

Stephen Lacey: Well, I enjoyed this conversation immensely. Dr. Carly Anderson, Principal at Prelude Ventures, thanks so much.

Carly Anderson: Thank you, Stephen.

Stephen Lacey: And Gabriel Kra, the co-founder and Managing Director of Prelude Ventures. Thank you.

Gabriel Kra: Thanks for having us on, Stephen.

Stephen Lacey: And that marks the end of the show. Thanks for listening. The Carbon Copy is a production of Latitude Media. It's produced and written by me. Sean Marquand is our Technical Director, who mixes the show and he wrote our theme song. For a deeper dive into the numbers that we talked about on this show, go listen to our companion podcast. That's Catalyst with Shayle Kann, and you can find it at latitudemedia.com or wherever you get your shows. And you can get all our stories, our print stories, our show notes for this show and Catalyst, and transcripts for all our new episodes at latitudemedia.com.

And please spread the word on LinkedIn, X or wherever you're active on these issues, and give us a rating and review too. We will catch you next week. Thanks for listening. I'm Stephen Lacey.

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