E617 | EUVC Live powered by Woven Capital at The Drop | Rokas Pečiulaitis, Contrarian Ventures: Why Today’s Tech Becomes Tomorrow’s Infrastructure

0:00At the moment, we're still going for that transition part where technology is important, but eventually, in all cases infrastructure becomes more important, more valuable. From what we've seen, you draw us all the way back to Rockefeller, but you're going to see it with Google as well. They've ended up becoming infrastructure for everything. And I was literally thinking about it. I think what is going to happen to these guys, they're going to get breaking apart. Like it's like Max 7 is just accumulating like the value power, the cash flow. That's exactly what happened to Rockefeller at some point.

0:25Like, dude, you're more like powerful than the government. So like you got to break this business apart.

0:33Mic check. Oh, welcome to EUVC Live at the Drop. Powered by Woven Capital.

0:48So now we're going to talk to Ruckus Peculiatis. Did I get that name somewhat correct? I'm not going to question you about that. It's fine. It's a tough surname. It is a very tough surname. On my phone, he's literally called Ruckus P-I-C dot dot dot, because I just gave up writing it. Ruckus, we're going to talk about why the future, the tech of today is the infra of tomorrow. Tell me and tell everyone here today, first and foremost, why is this the case? Firstly, thank you for inviting me and for doing this. I think a round of applause for every single thing that he's doing. Thank you. So I think that you clearly set the rules 10 minutes.

1:36That's going to be a tough one for me as well, I think. I think we chatted with Andreas and said, what's the interesting topic and what's controversial? It's nothing controversial. I think I get picked on having a firm called Contrarian Ventures, which is not that contrarian to invest in climate these days. So that is probably a question I get asked by entrepreneurs and also the LPs. But I think I thought about this topic that we discussed And I wanted to pick like one historical example. And there's a lot of like we talk about the future, but like we rarely talk about the past. And there's a very cool company that was built in 1870s, which is called Standard Oil by a fellow named kind of Rockefeller, I think.

2:12And it's a good example of like what actually like technology of today means and infrastructure of tomorrow, right? Because he actually, as a business, didn't build like an oil and gas business initially. He actually had a technology that was more efficient because it was more stable. He was producing at the time a commodity which was more stable. It was also cheaper. And then he figured out a way to sort of monetize it. So it didn't go to like the gold rush of extracting oil. He actually went to refining oil and then later sort of completely monopolized. So as people said, like competition is for suckers.

2:43You want to be a monopoly, right? And I think what's kind of relevant to this like thought of technology of today becomes the infrastructure of tomorrow is that business was valid on infrastructure that a bit, right? like for firemen upstream, downstream. But it became valuable and survived before the government sort of, I think, from 80s, 70s to 1910s. It got dissembled into many different oil and gas companies that we know, which were trying to, again, in this climate tech fight, trying to fight for a better alternative. It was running as a monopoly and is probably the most valuable company ever created by one of the more powerful gentlemen at that time.

3:21He won because he had a better technology, right? but he monetized on infrastructure and control of that infrastructure. So in a similar logic, what's happening today as we move from the last kind of 200 years of, like, okay, 150 years of fossil fuel to the kind of what's called energy transition into electron as a commodity of choice, primarily, as a greener alternative, as a more efficient alternative, we're sort of going through that transition that he went through. And at the moment, we're still going for that transition part where technology is important, but eventually, in all cases, infrastructure becomes more important, more valuable.

3:59And my thought in that was like that probably if we look at energy transition, what we invest as VCs, especially from a VCs standpoint, because you have the whole stack, right? You have like the early stage investors, the growth investors, the kind of project finance, then you have like infrastructure and you get more serious and more closer to the banks, right? Happens to me that Rockefeller best friend was JP Morgan, right? So also a very fine institution. So I think what's interesting then is that we're backing technology and sometimes the question to be asked where a lot of like VCs and climate tech said, is it technology easy to monetize?

4:30Sure, we look at software business, but there are so different companies in climate tech. Like software businesses, we all went vertical SaaS, right? Like we tried to rationalize it because it went to certain industries and serve it. Happens to be very small TAMs and hard to monetize, even though solar business is 200 billion, but like selling software and solar business is probably 1-2 billion TAMs. So my thought is like, I think probably 10 % of money, I mean, this is an approximation, I don't remember, but I'm trying to guess it probably as a maybe good Pareto, maybe it's 20, 80, but 80 % is going to go to infra.

5:01And I think what we're trying to do a lot of initiatives we do is trying to bridge that vocabulary gap between going from that technology to infrastructure and the kind of capital journey that goes along it. And that's kind of very important for making this work. So that's kind of why I think this is a very important topic, that technology of today becomes infrastructure tomorrow, because if it doesn't, then technology failed. So tell me, Rakes, how does it inform your investments? Is this a key model that you look for when you look at startups? You're saying, I want to invest in the startups that have a tech that has the potential to unlock an infrastructure of tomorrow?

5:40Yes, I think this is very much not 10 minutes discussion, and doing it 10 minutes is probably, I'm going to try to do my own full games on it. But I think what I maybe learned for the last eight years since 2000 and when I started investing is there's probably two things that I believe firmly that if you have, everyone talks about in the software business product market fit, right? So in climate tech, the problem was that everyone believed that there's a market and there's a product that you do risk or technology do risk and then you have this product market fit. The problem is the market was fake in some cases because there's a lot of green premiums and all different things that we believe that there is a market, but there wasn't one.

6:16So when you have two things where you take tech risk and market risk, like usually, as I joke, but one of my fellows sitting next to me is usually a cement tree that you end up. So sort of you want to take one or the other because if you take on both, it's like very hard, right? Like one itself, it's very hard. So what I started to believe, maybe I'm still trying to, investing in seven years is not a long time investing. I think you have to invest like Ray Dalio for 40 years to believe that you start to scratch surface of something. But one thing that I believe is climate tech is a vetch to something and the business model question becomes how you monetize it.

6:48So maybe let's go, we also discussed there. So you go into a supply chain business and then let's say I'm going to go and build a business serving pulp and paper industry. Like pulp and paper industry is very consolidated and concentrated like many other industries like food industry, like agriculture industry, like, you know, food, there's like a couple of companies that own everything. There's in agriculture, there's Cargill and there's Lewis Dreyfuss that own everything. Like most of these are commodity trading houses, by the way. A good book to read is actually Walder's First Sale. I think it's one of the best books to understand the transition, where it's starting and where we're kind of going, who kind of owns the market itself.

7:19It's about the commodity traders, which are still very powerful in organizations. But where I'm going with this is when you have a veg, so you create, there's a lot of chaos and complexity. I love the presentation that was done before. In that chaos, you go to solve a problem, and most likely you'll give away that solution for free. So you don't build a vertical SaaS company. You get a veg into it. So you start serving, for example, pull paper industry. It's very consolidated. There's like a company called Suzano and Clubin in Brazil, happens to be that they do 40 billion top line. Let's say you solve one problem there for them, and the trade that happens between all the clients that they serve is around 40 billion for them alone.

7:53What if you take a take rate on that payment business and insurance business, and suddenly you have like a very valuable business that has a moat, they serve it, they deeper integrates, and happens to be that they spend a lot of money on SAP and various other things that maybe they should not spend money on so that's a veg into a market that is underserved that is not efficient you solve a problem you give it away for free that's how your lock-in happens and then you monetize on the other one is probably like what a lot of like very successful businesses do you become fully integrated and vertically integrated and you kind of own the whole thing and then you make it as Rockefeller did cheaper better and more efficient and upsell then it's a great business like Amazon did it perfectly and there's other companies that can take like reinvent the bus how you ride a bus into your city or how you you know do do other things as a service as that is cheaper better and it's electric and green first so i think these two i believe the veg and the kind of fully vertical the rest is sort of it's going to be very choppy before you find that true product market unless you're serving the market that truly exists and you're serving a problem but then there's there has to be a real technological reason why you're better and that's where it starts with but then you need to scale and i think the the kind of There's many cool books written about speed and scale.

9:03That much matters. Speed is obviously, sometimes you reinforce it or not reinforce, but scale is what matters ultimately to build a big business. At least that is venture-like returns. So I think those are the two kind of business models, where I think business model being very important. And I think one takeaway is probably you don't want to take two of those risks, either product or market. I think what you're saying, Raka, is a great abstraction. From what we've seen, you draw us all the way back to Rockefeller, but you're going to see it with Google as well. They ended up becoming infrastructure for everything.

9:36And I was literally thinking about it. I think what is going to happen to these guys, they're going to get breaking apart. Like, it's like Mac 7 is just accumulating, like, the value power, the cash flow. That's exactly what happened to Rockefeller. At some point, he's like, dude, you're more, like, powerful than the government. So, like, you got to break this business apart, which we saw kind of... They were just about to, and then AI came. Google Chrome is still questionably, maybe not going to happen now, but yeah. Let me ask you one question in this connection. Let me just, and let me say one thing, because the reason why I ask this question is because what you're describing here as a thesis is very similar to what I thought when I listened to the A16Z podcast, where they covered their investment in Adam Neumann, where I realized that this investment in Adam Neumann's new company, Flow, was actually much, much, much, much, much more than a venture investment.

10:26They invested in some tech, But as you kind of said, that was the wedge. But they are also doing a bunch of real estate investments. They're spinning up new funds that they, of course, then have some type of economics on to build the huge buildings, real estate buildings in everywhere across the world. So it kind of made me think that A16SAT is doing a big play here because they're using their tech investment side to enable them to do a huge land grab in real estate. And I kind of go the same way here. So if you're Ruckus, Piccoliati something, sitting here and using Contrarian to come into a company that does whatever in climate tech, do you then also raise a much bigger fund to follow on and do the infrastructure investments?

11:20It's a good question. I think there's different flavors to play venture, right? I think there's people that choose geographies to play on their advantage. There's people that select sectors like we do to play on advantage. maybe knowledge, maybe access, maybe, I don't know, whatever makes you different. I do believe that there is a cyclicality investing, being a vertically focused fund, like we're kind of experiencing now, right? Like the AI, there's something always new in technology, like business overall. And I think, you know, climate tech was like a big running topic for the last couple of years.

11:55I think in that thesis, kind of where we started the discussion, the technology of today becomes infrastructure of tomorrow. When we start investing in technology in a novel beginning of cycle, which the previous cycle wasn't oil and gas, right? The previous cycle was solar and batteries and a lot of things that we de-risk, like wind. And that paved ways for other things that we can do now. There's a lot of software being sold in these businesses, but you need to deploy that infrastructure. A lot of people don't remember Solyndra, but that was a business that went to top, basically. And that was a business that basically was the kind of start of Americans dominating the solar industry, but never happened.

12:29And Chinese kind of took over that technology and made it scalable and cheaper and better. And so we deployed that infrastructure made by them. And they captured the most of the value, to be honest. And that's the reason why China is where it's today, right? They capture a lot of value by taking technology that was never monetized as a technology because it had to be produced and sold as a product. So I think from my standpoint, how I think about it, it makes absolute logical sense if I invest in a breakout technology that produces, for example, a sustainable aviation fuel, and I go through that really painful descaling process of making that technology successful or economically feasible or competitive or better, I should monetize and deploy that infrastructure and project finance for equity, because that's how really big asset managers were built.

13:19to your point of real estate, right? Like a lot of the big, and again, it's about incentives, right? So like bigger funds, they care to back a platform through which they can deploy billions of other dollars, right? Because that's your business, right? You want to enter something new, own it, guide it in a certain direction, deploy a lot of it and scale it. And that scaling usually comes not for technology, but for adoption and especially in the energy transition of implementation and deploying assets. So that totally makes sense. I think the bridge gap of where we are, especially we talk just about energy transition, is the traditional infrastructure funds would not touch technologies because we call them first of a kind.

13:59And there was a great speaker, Bill, yesterday. We said, like, you go to banks to finance infrastructure and you're called first of a kind. Are you crazy? Like, banks don't want to hear first. Like, they want, like, stable. Like, actually is going to work. Like, why do you invent this, like, crazy terminology where, like, you scare people off, you know? So I kind of, like, I was like, That's actually a good point. And so my point is there's this middle gap of a lot of people talk about growth being the middle gap. I don't believe there's a growth middle gap. I actually believe there's emerging infrastructure growth middle gap.

14:30Because growth, if it's a good business, generalists will invest. There's plenty of growth capital out there. The problem is a lot of them are not great businesses. And they're being funded by equity, which you shouldn't do. Because it's not the most cheapest capital you can acquire to scale a hardware business. So you want the project finance to work. You want the capital stack to work and that capital stack to evolve as you grow as a business or you scale it as a business or you de-risk it from a technological standpoint. And eventually, hopefully, the market evolves. So you go from that no product or technology risk and no market to eventually collide into that perfect equilibrium of call.

15:04Like where risk is your risk to a level and the market has evolved. And then there's the scaling journey where you have like the profits of macroeconomic curves colliding and the beauty happens. So I think that's important. And I think a lot of these technologies, I love Bill Gates saying, we overestimate five years, we overestimate 10 years. That's kind of exactly what's going on. Transition don't happen in five years. Let's be realistic. It took oil and gas industry 50 years to get to efficient drilling. I mean, what are we talking about? So it takes 20 years and 30 years. And I think that's cool about this industry is a lot of people are not doing it for the quick thing.

15:37I think the people that really do this, they do it for it because if you get it right, this is like really detrimental and impactful. And it changes like historically even the course of how like we operate as economies and human beings. Rokas, thank you so much. Thank you. Thanks for having me.