#174 Enrique Alvarado Hablutzel and Christin ter Braak-Forstinger, Chi Impact Capital

0:03Hi, and welcome back to the European VC, the go to podcast for everything European VC. If you love the show, share with your friends and join our newsletter at eu.vc. Today, we're happy to welcome Enrique and Christian, co-founders of Qi Impact Capital, the conscious impact investor that is creating strong financial returns by investing in core regenerative business models that advance the most burning sustainable development goals in Europe. Through the Burning Issues Impact Fund, Qi is scaling early growth stage companies through breakthrough technologies to transform the sectors they operate in.

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1:24Welcome to the European VC Podcast. Early in 2022, together with Uplink, a project by the World Economic Forum, we launched a challenge for innovative investment funds with a focus across at least one of eight key SDG areas, nature, ocean, plastics, climate action, circular economy, water, health, and education. This campaign, a partnership between Uplink, EUVC, Isomar Capital, and other great names, aimed to source and select innovative funds investing in purpose-driven startups around the world. Now, the European VC has always and will always be European-focused, but saving our planet is too much of an important topic for us to just stand idle.

2:01So today we're proud to present one of the 17 funds selected that is mobilizing capital for people on the planet. We are welcoming Enrique and Christine, co-founders of Cheat Impact Capital. Hi both of you, how's everything? Thanks so much for the nice invitation. We're great and super looking forward to having the conversation with you. Hi David, Andreas, nice pleasure. As I was saying, I really enjoyed to read your newsletter and I have a lot of fun with your memes. So it's a pleasure. We also have a lot of fun making. I think my favorite WhatsApp conversations is Andreas kind of sharing the silly ideas he comes up with and kind of testing them out.

2:41It's funny how you can end up being known for something as stupid as memes.

2:47I think it's about that, right? Like, so making things that are very serious, a bit silly so that we can adequate it to our regular life and then really relate it to something that is more simple as we are humans, right? As my sociology teacher back in university always said, the simplest argument wins. No matter how much you're right, the simplest argument will always win. On the topic of serious issues, I think part of the reason why we're featuring you is because we really believe in this mission that Upland kind of invited us very kindly to be part of, which is this topic of mobilizing capital for people on the planet.

3:26So I'd love to ask you both to give us a quick intro to who are you and how did you end up in this world of venture and investing? But also maybe even more importantly, as a follow up to that, is what is Qi Impact Capital and why do you exist? Yes, David Andreas. I'm super happy to introduce myself briefly and then give you an insight into Qi. My name is Christine, Christine Terbrack-Vorsinger. I am an Austrian by origin and by heart, although I'm living in wonderful Switzerland since 2005 already, which is quite a long time. I personally actually had a coincidence with impact investing. I come from the traditional finance field, started off in private equity and infrastructuring.

4:07And then in 2008, I had my first encounter with impact investing in the private bank where I was working back then. I actually came back from a private trip, a project that I've pulled off with three amazing ladies that I did not even know back then in Ghana, West Africa, came back to the bank and my boss said, well, Christine, actually we have a fund on the table that we need to structure. And they would actually like to structure to their fund a social return. That was for me something very new, you know, to combine the traditional financial know-how with a social angle and the fire ignited that never has left me.

4:42So this was my, let's say, kickoff in impact investing back in the days. And since then, I've always worked in sustainable investing and impact investing then. Yeah, and also very happy to briefly introduce Qi. So Qi is a positive life energy. The Qi particular stands for conscious, holistic and impactful investing. So we are pure play impact investing boutique, but really seeing things holistically, seeing things from a systemic perspective. Also, when choosing investments for the funds that we advise, the Burning Issues Impact Fund. Yeah, this is basically what we burn for, namely making the shift towards a regenerative economy, a reality with deep impact investments.

5:28Thank you very much, dear Christine. It's always good to hear the story from your side. And let me just quickly guide you through mine. So I'm Mexican-Swiss, born and raised in Mexico, but I have Swiss origins from Schaffhausen, so Swiss-German region that is actually very close to Germany. My inspiration is coming from that, like the mix between Latin America and Switzerland. I started my professional career in Latin America and I quickly found that I was not complete or I thought that there was something missing between the businesses I was involved. And this was what we call now impact, so social and environmental impact.

6:06I decided to come here to Switzerland 12 years ago to really challenge myself and see how international organizations, impact investors, and many other players can actually support each other to develop what we know now as impact, social and environmental impact investing. So I joined different groups. I worked with Seedstars a long time ago, developing entrepreneurs. I worked also with the Impact Hub Network, really developing acceleration programs, incubation programs. And then quickly I jumped to Bamboo Capital Partners with one of the teams leading what we call now the impact investing in emerging markets.

6:46and there Florian and Jean-Philippe we builded funds it was a lot of fun but I quickly get inspired by what Christine was starting it was Chi and by the time we tried to do it together in a different model kind of inside Bamboo but then we quickly decided like that it was better to do it in a different way and Christine really has been an inspiration in my end to follow her guidance on many different things and and I jumped quickly into the team and said like yes why not let's start this, even thought it was a real new challenge in my life. To give birth to a fund, you can imagine, is really a challenge, but also a lot of fun.

7:25And I would like to say that it's kind of roller coaster that you leave every day. On the whole topic of Uplink, what have you guys gotten out of being part of the Uplink Innovative Funds for Our Future challenge and also the overall network? Yes, I really think it's an amazing network that on one hand brings the players together, like really the innovative funds that were selected as the winners. And we have built wonderful collaborations also with the other funds, but also that brings together really super interesting deal flow pipeline companies, but also investors, right? Yeah, it's basically an ecosystem in itself that's extremely valuable and that just shows us how important collaboration actually is in the sector.

8:10It's also kind of a place to get inspired to do new things since the network is very rich. I mean, I always like to also point out the challenges, right? Like, so when we see each other and when we discuss together with the network is amazing because we have this momentum. When that finished, it's always a bit challenging to find the common points or the next steps that I think is normal, right? Like the platform works very well in that sense, but still, you know, in the day a day, sometimes we need to do an extra effort starting by myself, right? Like to get to connect again to the people that I speak to really put next step on stuff.

8:49I'm trying to put myself in the edge on this. I can improve that way of connection, but it's also very inspiring to see all the people that come to meet them in different places. Andreas and myself just came from beautiful Villar in Switzerland. We had the pleasure of, of course, meeting again a couple of places that we already know and love, but also meeting some of the funds that we hadn't had the pleasure to meet yet. And also some of the innovators, right? The entrepreneurs. And that was really, really amazing. And as Enrique, as you said, right? Quite inspiring as well. And we closed a deal there, plus have agreed on a partnership around content.

9:20So definitely it was a trip that on our side is getting us closer to the climate space as well, which we're only more excited about. Very cool. So I'm sure she came back and had tons of ideas that you had to tell her. Calm down, calm down. Let's prioritize. Anyway, before we move on, I think it would only be good to give our listeners right now a bit of a breakdown of what is Qi Impact Capital? What are you guys focusing on? You know, what should we know? Give us the rundown. Qi Impact Capital, basically, we are the advisor of the Burning Issues Impact Fund, a Luxembourg Article 9 SFDR fund. With the Burning Issues Impact Fund, basically, we invest into European-based companies that help solve the most burning issues of our time.

10:05This goes across sectors. And you look at the SDGs very carefully. We've based our research on a study of the Bertelsmann Foundation and the UN SDG Index and Dashboards Report. And you actually see that the burning topics are not only the climate topic, that is, of course, flagged red in the study that I've just mentioned. But also, you know, when you look at things holistically, you see that also the circular economy topic, you've mentioned it before, the food systems transformation topic, smart infratopic. Those are also topics that are flagged red that deserve immediate action in order when we want to reach the SDGs until 2030.

10:43this is actually where we focus with our funds the burning issues impact fund on so we invest into scalable impact tech pioneers that help solve those burning issues and i think the important message is to also share that we align really a deep impact and strong returns so this is basically 100 aligned i actually just realized there's one thing i mean never really clarified on this podcast i just had that realization and this topic has come up i'd venture and say 10 times or more on the podcast already, which is Article 9 SFDR fund. What the fuck does that mean? So I'd love to let you guys answer that.

11:19And obviously, this is something anyone can Google, but also maybe many of the emerging and aspiring managers that listen in, they don't really know what the process is to be that and the pros and cons. I'd love to hear your quick reflections on that topic. Enrique, briefly on that, because in our team, I'm heading that. I had a feeling. I had a feeling. That's why I asked it. honestly i tell you david andreas it's pardon my french it's a fucking burden and i'll tell you why i've actually studied law in harvard i did even with my phd summa cum laude so i think i know what i'm talking about when it comes to law and european regulations i also did my master in european law but you know that whole sfdr which is actually called sustainable financial disclosure regulation, I had actually the intention to prevent greenwashing.

12:07But you know, I'm not so sure if it really prevents greenwashing, because in the end, it's very easy. I mean, you could criticize me a lot for that, and probably I get some criticism for that. But I just want to be open and blunt. And I think it's important to discuss this very openly. So the intention was to prevent greenwashing. But for example, for a big bank, it's relatively easy, you know, to get the right advisors on board, I don't know, pay around 50k, some to say, well, make my fund, wrap it nicely in an Article 9, whatever layer. But, you know, the question is, which value adds does it really have for the investee companies?

12:47You know, and that you could challenge a lot, because we go into the depth of the matter with the questionnaires that we now have to kind of burden our investee companies with. Honestly, you know, the important message is it has nothing to do with the whole, let's say, impact measurement, which is key. Now, we can discuss this separately. This is key for an impact fund. If you claim to be an impact fund, of course, you have to measure your impact and report on it and be transparent about it and have a robust metrics. That's very clear. For example, in our case, we only invest anyway into core regenerative companies, into companies that have an utterly, deeply impactful business model in the core, if it's core product or core service.

13:27then you know i think the whole sfdr regulation was really designed for large listed corporations but not so much for the vc space and now the vc space has to suffer quite a bit and you can challenge what's the value at but that was a small excursion and i want to be frank so you can really challenge what is the value that we are compliant because we say okay some investors more institutional investors expect it. But yeah. I was just about to ask that. Do you think that you could have opted for not going for that registration? Honestly, I would say yes, Andreas, because, you know, we are an impact fund.

14:08We anyway measure the impact. We report on the impact and we take that utterly serious. But would the institutional LPs have come on board then? Or, you know, that's just a minimum requirement, even though they recognize all the things you say, which they're probably just as aware of as you are, they need it to be flagged as an Article 9 fund. Exactly. Exactly. That is exactly the crux. So they also have their whatever investment restrictions or boxes that they need to tick where they say, well, you know, it needs to be an Article 8 at least or ideally an Article 9 fund. So, I mean, we predominantly anyway have private investors in the fund, not so much institutional investors.

14:46It's also our first fund. But still, there are some more, let's say, institutional-like investors. So we thought, OK, let's go for that route. But you could honestly, seriously challenge that whole Article 9 status, I would say. I mean, in general, what the real value it is for the VC space. And I've talked to many other VC funds too. Some say, well, you know, it's actually a nice argument because we are so green. We are so Article 9. But I wouldn't see it like that because the impact fund anyway has to go beyond, right? And from that perspective, it's really the question, which value does it add to the investee companies that you could challenge?

15:26This debate about regulations and how to really comply to them, it's a real challenge when you are a fund that is starting first. And then second, when you start from impact, right? Like we leave our impact. We basically created this because we live our life like this. That is why we also tie our BII fund carry to 100 % to creation of positive impact outcome. And we're one of the only or the only fund that is doing this, right? Like in the market. Actually, when we discussed with the Uplink network, there were some of them surprised because we do this, right? Like, and we said, like, I mean, we are here because of the impact.

16:02How to create a sustainable, as Christine was saying, something that is more holistic in the way we are creating companies. I'm very interested to ask Christine another question. Christine, you have an interesting profile to ask this question, given your education and your past experience, which is a little teaser there, which is institutional LPs, at least Article 8, ideally Article 9. right into our listeners people that are more early in their VC journeys you know article 8 being a fund that promotes environmental and social characteristics and an article 9 fund being a fund that has sustainable investments as an objector of event fund so let me ask you you know in your own fund origin story in your own fundraising journey as well nothing would stop you from being a fund 8 and doing exactly what you're doing right most first funds do you know have family offices high networks whatever so how did you think about this right how did you make the decision how did you make the call and I'm asking because I think it is relevant for other GPs that might be listening in?

16:54I think the answer is very straightforward and very simple because when you know that whole regulation came up, honestly, I do not even remember exactly was like 12 months ago or a bit, I think it was even earlier. And then we said, of course, we are compliant because we are impact. But then over time, in particular, over the course of 2022, from a regulatory perspective, it got more granular, the whole regulation. And it was like from level one to level two and another level got implemented. And then we realized what it actually means, right, in detail that we have to comply with. And then we, of course, devoted a lot of work.

17:35And that's not the problem, right, the work. And, of course, it also costed us some money, which was not nice, but does not matter. I mean, when we say we want to be compliant and we also need to go that extra mile. But I think what really matters is when you then really look into all these questions that you have to kind of bother the investee companies with and also take their time. Those companies, as I mentioned before, they are already like deeply impactful from their core business. And you can really challenge what this status really adds in terms of value. And we were actually thinking, should we actually in a letter approach our LPs and tell them that from our perspective does not really have a value add and we actually maybe think of a downgrading to an article six very honestly there are three statuses right six i wonder why there's no seven it's six eight and nine you know i mean which is totally weird because in an article six you would say you are non-compliant basically to the whole sustainability whatever regulations but you an impact fund so it's you know and then we thought okay wow then we have to explain this all, but in the end, I think it would definitely be possible because, you know, I think maybe that's also important to share the whole SFDR did not change anything in the way we are working, right?

18:56Because we have our impact framework. This is what we have applied before SFDR and this is what we will apply beyond SFDR. So yeah, one could question it, honestly. I have another question, which is in one of the areas of your thesis, because I've been reading some, I wouldn't necessarily call it disturbing reports, but at least in the food tech space, we have many that are pushing back, especially on vertical farming. That's the space that is really taking a hitting these days. I'd be curious to hear where you see that vertical of yours going and where you're seeing the biggest opportunities these days.

19:37In terms of vertical farming, you would say, Andreas? Yeah, both vertical farming, but also the future of food in general. Well, I think the whole food systems transformation space is a burning issue. This is something where we really need many, many improvements, be it on the alternative protein side, be it on the food waste reduction side. So there are many, many interesting solutions out there, many interesting companies out there where you can make an interesting investment. Yes, of course, I think that's nothing new. The last few months have shown us that valuations have come down tremendously in that space, but not only in the food space, but also in other, I think, probably across the whole VC space.

20:20I mean, when it comes to vertical farming, I think what is really important is that vertical farms ideally have very circular business model, meaning what we all have seen, right, Over the last months also, and with the Ukrainian crisis and with the rising energy prices, was that more traditional vertical farms, they got into trouble, right? Because the heating got really, really expensive. The vertical farm where we, or via the Burning Issues Impact Fund, have invested here in Switzerland, is the largest vertical farm in Switzerland. It's a spin-off of the ETH, an amazing team, a young team. but what we really liked on their business model and i think this is the differentiator to traditional vertical farms is that their business model is deeply circular so for example they reuse heat let's say where they they heat the herbs they're growing herbs at the moment for heating their building for example actually that was quite cost intensive to pull this off But it was Philippe actually, a three co-founder.

21:31He's a tech expert and he set up that system. So this is also what we really liked at the beginning. So they were not so affected and so basically dependent on the rising energy prices through their special setup, through that circular approach in vertical farming. I think vertical farming, if you ask me, is still very much needed. This is something that can really disrupt the space. It's tremendously interesting for the cities of the future. Perhaps I take it from there, speaking about the future and the way we are building cities. Just imagine how the next neighborhoods would look like, right?

22:09Like with mobility and the way we are basically trying to do with vertical farming. Like if you think on a way in where a neighborhood has a vertical farm inserted or inside the entire buildings and they can reuse the energy, you reduce the logistic costs of managing goods drastically, right? Like so you can consume their own goods that are produced in the same neighborhood by using the same energy that is used in the buildings and the same water. And you basically eat your own food from the same place, right? One of the biggest challenges of our area and basically in Europe is the logistics of goods, right?

22:48So to manage food from one place to another. And then we have this challenge of always, you know, like one of the jokes that I have with some friends, you want strawberries in June, right? And you also want them in January. And so that kind of things you need to really decide and see if they are something that is needed. You really can consume the food that you can produce locally. And this is what's coming in the future with vertical farming, right? Like having a farm inside buildings that can produce food for your own consumption. In a normal VC business, you have very good margins, right? And that's what really allows the model to work in the end.

23:24Typically, farming is a very low margin business. It requires huge scale, consequently, right, to make a lot of money in that space. So I'm curious to ask you, how do you think about the whole business model of applying the VC model into something that is as, at least historically, low margin, huge capacity buildups needed. So what we are investing in is in technology, right? Like, so the technology of how to build a farm inside a whole space that reuses the whole energy. Let me break it into the way we see it. So you have the buildings, and then the buildings are consuming some energy, like, let's say, air conditioning or heating.

24:04And then from there, this kind of energy, since the farm is inside, can reuse it. And this is the way to make the whole building, the whole neighborhood, something that is more smart than before. It's also part of the business. Of course, the business, the core business is to produce the goods. So they produce the food in a vertical way. But it's also to reduce the amount of energy that you are using for the buildings and the water that you are using in the buildings and the whole systems that are interconnected to the farm. So what we are investing here is in the future of vertical farming, not just on the production of the plants that we're going to eat and the farming itself, but the future of the farming itself, like how the facilities will work.

24:48For example, in the case where we have invested, it's basically a super interesting business model. Like for this is that the plant models are now they have built a pilot vertical farm. But the business model basically is vertical farming as a service. Going back to your question, basically with the low margin on the goods, vertical farming as a service is a super interesting business model because there you basically have the tech and the scale combined. And I also think it really depends on the goods. So the margin question, basically, that you produce. I think for herbs, the margins are not so low.

25:24Also, for example, for whatever cosmetic plants, there's a huge potential to grow them in vertical farms. But I agree. So it becomes a bit difficult when you then go over to whatever salads or stuff where margins are probably very low. Fully agree. When you factor in the whole facility, as you said, and it's the connection to the buildings that are then around also because they're reusing the water and reusing the heat and everything. I can only imagine that's an incredibly complicated business model that is then contingent on the whole ecosystem around the plant to then also interacting or getting into bed with the farm.

26:03How do you think about that? I definitely get that VC is about betting on the future, right? It's something that's quite far from what we have today. And when you think you have a fun timeline of 10 years and many of the investments in effect, you really want to start getting out the door in seven and eight. How do you think about the timelines in this space? Is it really doable? Do you think so? Are we there yet? That's why we do impact, right? We try to look for those challenges and for those solutions that are going to be mainstream in the future. I would like to say that we are on the right time to start.

26:39And perhaps the next generation of those vertical farmers, all these models will be more embedded in the way we are consuming things. I would like to say that it's also a way to see the future, right? Like we don't have enough land to produce enough food for the 10 billion people that we need to feed in 2050, right? So what I'm trying to explain is what is coming in the future, honestly, is something I don't know. but we're trying to plan ahead and have solutions for that and see that these type of innovation, it's a solution for the future problem. Yeah, it's a complex space. Let's get into something that we understand better, which is carry dynamics in a venture fund.