E529 | Fabian Heilemann, AENU: A New Era of Climate Tech VC

0:00What happens when a serial entrepreneur who built unicorns realizes his success came at a cost he can no longer ignore I have children now, and it has completely changed my perspective on the world. I will overcompensate all the damage that I have caused. For years, Fabian Heilemann played by venture capital's only rule. As a generalist, essentially, you try to invest in any type of asset within the scope of your strategy that makes money. What if there was a different way? What if profit and planetary impact weren't opposing forces? We see the desire to build a large commercially successful company that is internal in its enterprise-day creation with its impact returns.

0:40The old playbook is breaking down. The smart money is waking up. My best tip is to generally stop thinking of impact as a trade-off to commercial goals. The climate crisis isn't just an environmental challenge. It's the biggest investment opportunity of our lifetime. Join this movement and start to gradually integrating impact conservators into their strategies. It will pay off. Discover how one founder's radical pivot is reshaping venture capital itself. This is the EUVC podcast, Impact Series, where making money and making impact become the same mission.

1:18Welcome to the Impact Highlight Series powered by EUVC, Impact VC and Impact supporters. I'm August Sogut, one of your co-hosts, and I'm the founder of Impact Supporters after having been a stint as an Impact VC in a fund. And I'm Dougie Sloan. I'm your other co-host. I'm an Impact Investing LP at Better Society Capital and also co-founder of the Impact VC community. Today, we're joined by Fabian from INU. He's a serial entrepreneur. He's been a generalist VC. He's now an Impact VC. So he brings a range of perspectives to questions that we'll put to him around experimenting with the structure of VC itself and engaging with the art of balancing impact and commercial return.

1:58Yeah, and Doug and I, we've just been sitting and chatting about what was really nice about this episode. I think we agreed that it was the honesty in sort of going real, being real, and really giving all the details in the episode. And I think I have two examples on that. And firstly, it was sort of how Fabian talked about challenges they've also had with reinventing the VC model at AANU, they tried to go evergreen, but went back on it as they sort of fought to get institutional LP capital into that evergreen model. I think that's super interesting when you sort of believe that it's the right way to go in reinventing the VC model, but you walk back on sort of your ideas in order to also fit with what LPs want.

2:39And then the second thing is Fabian talked about how they have a necessity of finding founders that believe in system change around climate and impact. And they can't just take sort of any founder. It needs to be the ones that believe in system change. And then Fajan really likes the serial entrepreneurs that have kids because they have actually realized sort of how important climate is for them and for our whole world. So hope you find this exciting. Let's jump right into the episode. Here's a few words from our beloved sponsor. Impact VC is a global community of VC's accelerating impact within venture.

3:15Their purpose is to cultivate a community and resources to unlock Venture Capital's ability to tackle the world's most pressing challenges. The community is made up of over 900 VCs, including both pioneers and newcomers, including generalist VCs and impact specialists. Visit impactvc.co to join the community and explore their resources, including the VC Impact Playbook, the founder Impact Playbook, And the Impact Investing for VCs online training, which is designed to help VCs integrate impact practices into their investment strategies. That's a lot of information to get in 30 seconds.

3:53Tear down this wall. It's more than just an ally. This is a union of values. Let's start acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Hello and welcome to the Impact Highlight Series. Super excited for today's episode. We have you with us today, Fabian. Welcome. Welcome, August. Thanks for having me. And then, yeah, I'm here, August, with one of your co-hosts. And then we have Dougie Sloan. Delighted to be speaking with you both today. I'm Dougie Sloan, an Impact Investing LP at Better Society. Capital and what are the co-founders at ImpactVC.

4:36Fabian, we'd love to sort of just start talking a little bit about who you are, how you came to where you are now, what your focus on impact is, and hear a little bit more about you. Cool, August. I grew up with my brother, Ferry, who's been my 25 years co-founder, co-entrepreneur, brother-in-arms also on all things climate investing these days. Grew up in a small village here in Hanover, and And we basically started out as teenage entrepreneurs with a food truck. And then went on lots, law school, business school, spent early time in Silicon Valley in the 2000 years. And then ended up in Berlin, really like headfirst into the ecosystem around relief and crisis.

5:20And we're first of all, just driven by this idea of becoming full-time entrepreneurs in what we call the internet, the internet world. and our first, after a few marginal attempts, our first bigger business was a company called Daily Deal, which was a B2C platform, basically lead generation, proponent platform lead generation for local businesses, where we raised from inside and sold to Google in 2011. It was a crazy story. Spent some time, two years with Google, learned a lot, on both sides of the Atlantic, and then later started a parallel on one-hand side angel investing. Some of these exit proceeds, this was, let's say, around in about 100 billion euro transaction, but also then started Forto with our two friends and co-founders, Eric and Mike, and Forto then later, Trade21 graduated Unicor, logistics tech, digital trade-forwarding business out of Berlin.

6:24So this is, let's say, the operational side, And then after these early attempts on angel investing and getting our hands dirty, making the beginners mistakes with our own money, we stepped up. And I spent almost seven years as partner and then also youngest fellow partner at Early Bird in the Berlin office, learning really in a general SPC strategy, learning the institutional other stage C business. And in parallel to those years, 2016 to 2022, Shelley, my brother, Therese, and my personal interest in the hybrid crisis started growing. first more as citizens really and mapping our personal like lifestyle carbon footprint and increasingly concerned about the growing scientific evidence about the scope etc which at the time was still let's say not mainstream or still neglected by many stakeholders out there and then became more mainstream maybe from 20, 20, 21 onwards and for us the next step was actually looking into company carbon footprint printing really in a self-taught way, Forto, also some early bird portfolio companies.

7:34And based on that, we co-founded a non-profit called Leaders for Private Action, a handful of friends from Berlin to basically make these frameworks and this know-how available to the European entrepreneurial community. And today, Leaders for Private Action is like 2 ,000 plus companies and five, six people full-time managing this community. and in parallel then in 2019 I also made the first attempt of integrating climate technology and climate related considerations into the investment strategy at early growth founding the climate tech investment practice and on the back of that was my brother then also in 2020 stepping up from the CEO role to the board to more fully commit himself to to climate technology and climate activism.

8:26On the back of that, we then ended up going all in on climate tech investing, pure play, clean slate, article nine strategy, in-house impact team and launched a new, like a new day, a new era in 2022 as an institutional grade early stage European climate tech fund, about 170 million euros on size. That is focused on three core areas today, which is energy transition, industrial decarbonization, and also increasingly climate adaptation, also the climate AI intersection. And that's all I do. I'm based out of Berlin, privately living, father of three in Hamburg. And yeah, we've been early members or contributors also to Impact DC, the community, our in-house Impact team with Elena, Michelle, also formerly Melina, have always been close.

9:20So it's an honor for me to be on the podcast today. Fantastic. And as you say, Fabian, you and your team have been supporters of Impact VC for some years. So great to be representing that on the podcast in this way. And if I may pick it up on a point around your journey. So you've been a generalist VC. You're now an impact VC. Having seen both of those perspectives, what are the differences that you see? What are your reflections on that pathway? What are your key learnings, particularly when it comes to impact from having taken those steps in that way? You know, as a generalist, essentially, you try to invest in any type of asset within the scope of your strategy that makes money and that generates hopefully superior financial rewards.

10:07With the only borderline for most out there being what is legal or illegal. And for some, in varying degrees, what is ethically, let's say, viable or what is still ethically acceptable. And I think there are many areas, gaming, gambling, many forms of social media that basically promote addictive behavior, fast commerce, certain type of travel companies where these lines are increasingly blurred. And of course, all of that is legal, but it's certainly not from an ethical or environmental and societal standpoint. It is nothing that we should wish for as a society for it to be successful at scale because the collateral damages, the money that is generated, the collateral damages are high.

11:01When we delineate that to Article 9 impact investing, and that could be on the social side, on the health side, on the educational side, on the environmental side, or within the environment, on the climate side, which is our specialization, then it's all about playing to generate attractive market rate returns in terms of TVPI, DPI, IRR, et cetera, that can compete with the generalist strategies out there But looking at the benefits on the chosen impact KPIs in our cases, megatons of carbon saved or removed that we measure on a bottom-up basis across the portfolio on an annual frequency. And so far, I can tell you for a new fund one, which is a 20 total to vintage, it's been 12 million tons or 12 megatons so far that we've been able to generate.

11:58and looking at these impact targets and also these impact returns pretty much on eye-to-eye level with the commercial viability or the commercial opportunity in each market segment, but then also on each individual target or each individual investment opportunity. And that is the major difference, and that is also reflected in the organizational design, in the decision-making processes, even in the value creation. When you look at our 40 people, two of which on the in-house impact team that are seamlessly integrated from thesis formation, in-house research through the investment process all the way into portfolio management and impact value at all, as we like to say, impact as a service, rendering things like theory of change, life cycle assessments, impact measurement, impact reporting, basically crafting entire impact methodologies for the companies that we invest in and in that are, despite strong intentions at the early stage, often from the craftsmanship, not yet able to do this in-house.

13:09And that is also one part of our value that we bring to the table beyond the money and also beyond the scope like B2B market access and whatnot introductions that you would typically expect from a generalist GCO. Well, hearing you talk it through, it sounds in a way like a layer you're adding on top of the traditional approach to venture capital, but actually also you're then aligning the whole firm's philosophy, organization, edge around that topic as well. So there's a spectrum, I suppose, in terms of how one could engage with it. Yeah, no, absolutely. I think the picture of an additional layer or an additional filter set is exactly right.

13:49And in turn, we are at times asked by limited partners, whether that means we're sacrificing returns or whether that makes it harder to generate equal returns when you basically put in additional, for example, on top of the addressable and therefore smaller and smaller addressable universe of opportunities. And I think the truth is that indeed our, like the number of addressable companies, let's say when we look into European venture deals getting done in a year, roughly let's say anything 7 ,000 to 10 ,000 or so, depending on ways that counting at angel or what institutional rounds, etc. Certainly, let's say 60, 70, 80 % of that is for us not addressable because it doesn't fulfill our impact criteria, even if it were commercially sufficiently attractive.

14:42So indeed, we do compete or have to choose from a smaller subset that actually makes these accumulated bars. And that is, in all honesty, that is, let's say, the art or the challenge behind scientifically sound impact investing is actually delivering these returns while not blurring the lines or while not, so to say, deviating from your impact methodology and ending up effectively in a greenwashed generalist strategy. And if you also then look at the founders, rather, or the startups that you're investing into, how would you say the founders of the impact unicorns of tomorrow look compared to the ones that the generalist VCs invest in?

15:25And then sort of are they the same profile as founders? Do they have different requirements in how to develop? Or what would you say are the differences? So typically, and we've actually thought about this a lot and it's also been reflected in our, what we call systemic impact framework, SIF, which is basically the core piece of the impact methodology at our firm, Nu. And it indeed, from the qualitative criteria, the first pillar, so to say, it always starts by analyzing evidence of the impact intentionality of the founder team and the top management. And typically, we see the desire to build a large commercially successful company that is interlocked in its enterprise-day creation with its impact returns, of She-Willow with its impact outcomes.

16:24That is typically what we see and what we're also actively looking for. So intentionality and then also interlock between commercial success and impact success so that impact is basically inherent in the way the product and the whole strategy is designed. That is really a fundamental part of additionality and impact logic, et cetera, other aspects before we even start mapping and modeling the implications to see whether this is like a one megatron opportunity or a gigatron opportunity, et cetera. And oftentimes we see that these power profiles also are rather progressive from a cultural standpoint and have higher diversity quota on their DNA, more, let's say, progressive parental policies and whatnot, and do not also care about the impact that their product makes, but also care about the way they operate the company in terms of travel policy, catering, electricity, paperless office, heating, cooling, like all of these elements that ultimately when you walk the talk, right, and where it's about practicing what you preach and showing, demonstrating that you're in an authentic way with integrity, sharing for impact while being a for-profit business not being shared and which is i think that's super interesting and would you say the profiles are also the same so if you said yourself right you've been a serial entrepreneur started with a food truck and then they went into the tech business and so on could you see the same profile succeed in the impact sphere today or or would you also look for it for other profiles well let's say we have a certain preference for serial entrepreneurs who at some point, and often this is catalyzed by them having children and taking a multi-generational view for the first time after having been driven by money, power, fame, like classical financial capitalist attributes or definition of success for many years.

18:32But similar to what the journey my brother and I went through, yeah, was the only difference that we started thinking specifically about the climate crisis even before we had children. But for many, you know, having Wolfsburg or having the next generation, you know, come to the world, it's a pivotal moment where they think about the implications of their own egg genes and how they utilize their lifetime, their energy, etc. trust in a way that they will also feel that it has been responsible and best use of their potential looking at not only the few years, but at decades or even centuries of the legacy that they are building.

19:13So, student entrepreneurs that have a strong, say, generalist entrepreneurial skill set and are then starting to apply it in climate impact technologies, this is something I personally love the DNA that I personally love to work with and we are seeing this actually quite frequently and most recently there was actually right now we are about to close a deal in the next two to three weeks or so with where the CEO built a hugely successful like profitable company couple hundred million revenue over a 10 year period that was actually let's say tied into fast callers etc. I don't want to share the name, but I can share that he, when we were first speaking, and I wanted to understand where he's coming from, what's his motivation to do what he's doing now in renewable energy.

20:08He said, I have children now, and it has completely changed my perspective on the world. And I essentially now, with this company, I swore to myself and to my little children that I will overcompensate all the damage that I have caused in the last 10 years, although I have accumulated wealth and whatnot and fame and power. But I realized what damage I've done. Now I want to use all my skillset to overcompensate. This was my new Planet Impact company for future generations. You spoke quite a bit about the importance of systems thinking and systems change in your own work. and also I think in the sorts of function to select what sort of business is you back.

20:53This is potentially a bit of sort of inside baseball of the question, but how do you select for systems thinkers that also bring the other attributes that you need to have that bias to action to achieve what you need to achieve on a venture timescale? When we started out 2022, we had a very strong emphasis on systemic change and even a lot about impact capitalism and the intersections or how also regulatory, behavioral change, mindset change are all intertwined with the development of novel technologies, impactful technologies as such, which you could say is our core business or is our own product, so to say.

21:35Funding and then accelerating or making sure these teams are more successful in building and rolling out these technologies with us on work and then without us, hopefully. always to be judged in hindsight, we came to realize over the years is that it is really difficult and focus as a DC, but also for the entrepreneurs, matters a lot. And while we still have a strong, let's say, convictions and opinions on the systemic change level, we have admittedly in the last two years or so spent much less time interacting with academia, policy makers, intellectuals, etc. Because we simply came to realize what we are doing is so competitive and the market, starting with the 2022 VC market downturn and then the whole anti-ESG, anti-walk movement on top of that, market environment is a really difficult one and it is not a walk in the park.

22:39to even make the core business successful with stakeholders. And it deserves or it needs a lot of focus. And to do that and to excel in our core business in an absolute adverse market environment, we actually sacrifice a lot of the initiatives that were more targeted at indirect impact and that were basically outside our core product, driven by our motivation and by our, let's say, philosophy. But still not very easy, palpable to our core stakeholders, which are the entrepreneurs as the customers of our business as a VC. And the LPs, let's think of them as the shareholders of our business. And so therefore, in the bottom line, while this is still an important part of the DNA of the new, we realized it is very hard as an emerging manager in an adverse market environment to at the same time achieve outcomes or take an approach that almost blends a little bit of a think tank into a VC.

23:45This you can do, I believe, from a position of being super established. Berkeley-Hathaway can do that. Sequoia can do that. BlackRock and Blackstone could do that and are unfortunately not leveraging the potential that they have there also to forge public opinions, although some of them tried at least for a while. But for an emerging manager, it's a really tough ask. and this is a saying for the companies we're back in in the first three to five years, they are most vulnerable and it's already statistically, the odds are always against you. When you look at multi-stakes, you know survival and success rate.

24:26So therefore today I have a bit of a different stance on how we should focus the scar resources of these only like 12, 15 people so that we have on the direct impact creation for our key stakeholders or we have direct influence, et cetera, versus the more indirect stakeholder ecosystem leadership, et cetera. But I hope at some point in a few years to come, we will arrive at the stage where this can take, again, more capacity in our day-to-day resource allocation. You've kind of challenged a little bit the classic VC model with trying to look at how to create system change. and as you say, sort of found out that it's maybe a little bit hard in the current position.

25:14You also started out as an Evergreen fund, but then changed away from that. So what are the things where you think, okay, here we can challenge the model and where you've sort of kept on challenging it in terms of longer holding periods or other things? And where the things, for example, Evergreen, why wasn't that possible in reality? Yeah, so this, I mean, is a case in point, We give you systemic change here, a systemic change to address the fundamental, what I believe is fundamental shores of venture capital as an asset class. And while the lack of impact of this asset class over a multi-decade evolution or context is what we are obviously still addressing today, even as a closed-ended fund with our own methodology, with a strategy that we deployed, etc., the impact we report and measure it.

26:05and so on and so forth. This is something that we were able to successfully retain and where we were able to also convince an entire set of reputable, with limited partners to come on board and trust us and forge a local relationship with us. However, the other parts, speaking again of the fundamental flaws of VC, like the lack of accessibility to the broader population, the young professional, the retailers, the people out there. Essentially, everyone who's not an institutional investor and who's not ultra-wealthy and qualifying semi-professional running his own family office, the lack of accessibility persists.

26:50And the lack of long-term interest alignment for really the full journey, which can take from inception to IPO, can also take 10, 12, 14, 16 years. but even those few companies that make it to IPO, from my perception, wish to have some of the early cornerstone investors and board members to even stay on and accompany them even beyond this exit transaction or this big milestone, if you will. And again, the traditional 10-year BC fund cycle is not really built for that and even less so when we're talking deep tech and hardware deep tech development where it can take years to first revenues, to commercialization, not comparable to, say, e-commerce platform or enterprise SaaS era, where we're talking six months, 12 months to commercialization and also faster time to maturity or to exit.

27:42Other aspects that we tackled with the average structure were even around the incentivization of management, working with carried interest that would work more in a sense of stock options making everyone from the management share within the fund as opposed to carried interest scheme that is more like hit and run. And working with lock-up periods, so almost more emulating stock options schemes for corporate C-suites rather than the hit and run carry scheme that you see in managed capital and private equity, this is the mainstream, to give you some background. This can be a multi-hour conversation, but essentially these aspects around accessibility, long-term, stakeholder alignment to the entrepreneur, but also to the LPs.

28:34And also the last bit, a lack of liquidity in the asset class, where third, you know, secondary market transactions happen here and there. but essentially one issue why DC is about unlocking more capital. So the asset task is also the 10 or 12 year illiquidity, the little control the LP has about its destiny and about the exact timing of distributions. We were also working where we actually had in place a gated redemption scheme where LPs, after an initial several years of the lockup period, can hand back at own discretion once a year on the NAV, the current base and the current AIE could hand back, a bit like in a mutual fund, you consider in a hedge fund, the surproportions of the shareholding.

29:19So therefore, I have more control over the digressment, not just the investment. But that's also, that's a lot of easy one to manage from a liquidity standpoint, when a lot of your underlying portfolio is essentially private markets or ill-liquid. So there's many, let's say there's many challenges to it, but these fundamental challenges of lack of accessibility, lack of liquidity, the lack of law, which is equal alignment, were the drivers for us to set up a truly groundbreaking innovation fund structure. And Riesenberg law that has been, where there's no role model for it, that has some elements of a Berkshire Hathaway, some elements of a hedge fund, some elements of a multi-stage fund, you could even say from a public VC or cross-order perspective.

30:06And apply that build a large and diversified portfolio of planet impact companies that would at some point even be from a diversification standpoint and risk profile even be a good fit for retail investors and for the democratization of the asset and this we did and we did succeed in structuring this and also in raising the first tens of millions but not hundreds mostly from family offices or high net worth individuals and then not only the market terms and the VC bear market started, but then also we found out after several meetings with tens of institutional investors from Europe that ultimately none of them would be really able to get an investment in such an innovative structure through their investor committee.

31:00They could like the T-WIG, like strategy, track record, all of that. But that was ultimately the realization. So we were at a point to either exclude a very meaningful part of the entire addressable LP reverse or to accept the message and adapt our fund structure. Not necessarily anything giving up on any of our impact-related methodology and climate tech strategy. That was fine. That's where they followed, so to say, that part of the innovation, but they did not. the institutional market was basically systemically reluctant to structural innovation. And that was the realization. And it gave me sleeper slides, you can imagine.

31:46And ultimately, for the sake of unlocking as much or meaningful amounts of capital into this strategy and being able to work with a larger number of companies and support them more meaningfully, then we could have potentially done a short midterm in the evergreen models. We then decided to listen to the message and adapted our fund structure and then very successfully like double, tripled our assets under management and attracted many institutional LPs that are today on our Outback. And so in hindsight, it was probably the right decision when you think of impact also as a function of how much money do you put to work and how much of a catalytic effect does your money also have?

32:35It is relevant not just for the inception but for the successful emergence of new impact technology first. Therefore, in hindsight, probably yes, it was the right decision, but still it was a bit hard pleading because we really were convinced, and I'm still convinced today, these fundamental flaws deserve a solution. And they can only be addressed with structural change or structural innovation. But the realization is it is very hard, again, to the point earlier on systemic change, it's very hard to do that as an emerging manager, especially if you do tough market environment. In a rule like people are more open for innovation or experiments, as you will, they're not so in the bear markets over protecting and not making mistakes and backing off on anything that's not fitting, so to say, your traditional scheme.

33:31So this type of strategy innovation, again, is easier to initiate from larger established platforms than from emerging managers. But certainly it is something that we keep on our agenda. And when the time is right, we will again see and test how the market, maybe in three, five, ten years' time, responds to the solutions that we have crafted to these systemic issues of the asset class. Pulling on the thread that you mentioned just a second ago about some of the business models here, I mean, you've backed climate tech from the early broad platform. You've built anew about this, around this theme of climate tech.