E653 | Elisabeth Schrey, Deep Tech & Climate Fonds (DTCF): DeepTech & Climate Fonds

0:00Welcome back everyone to another episode of the EAVC podcast, what I hope has gotten to be your gateway to the policy of European venture capital capital. Today we're joined by Dr. Elizabeth Srey, Managing Director of the Deep Tech and Climate Funds, also shortened as DTCF, which is a 1 billion euro investment vehicle co-funded by Germany's Future Fund and ERP Special Fund. DTCF is designed to bridge the growth stage funding gap for European deep tech and climate tech startups. In this episode, we'll delve into the critiques of DTCF, the role of government capital in growth stage investing, and of course, also strategies for navigating the evolving climate tech landscape, which I know there's a lot of you out there that are thinking about these days.

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3:06Tear 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. Let's get to the very first section of today's conversation, Elizabeth, the role of government in growth stage venture capital. First of all, tell me, there is a critique that many people put to anything that's public, which is, should we really have it? Tell me, Elizabeth, what puts you in the position to be able to deploy this money wisely? What makes DTCF be a meaningful player in the ecosystem?

3:58Yeah, thanks, Andreas. So when I took over the role of the managing director for DTCF two and a half years ago, I was motivated very much by the fund size in general because there are just very, very few funds with this volume. and secondly to focus on the early growth stage because I come from a seed investor perspective and I always saw that it's quite difficult to put together rounds that are above 20 million 50 million and many of the startups in Germany but in Europe in general really yeah they they should get the more funding and stay more focused on the development instead of trying to fundraise continuously.

4:45So yeah, I was looking forward to going into that financing gap. And now two and a half years later, we have signed 17 investments and we continue to have a super strong deal flow. So I believe that the fund is in the right stage. And some of our portfolio companies already have some follow on financing secured, which shows us that the selection process is right. But We will dive deeper, I think, into our criteria and also maybe the disadvantages that might come with public funding. So, yeah, looking forward to dive deeper. Let me ask you the first question that some people critique you for, which is the DTCF, of course, is a co-investment fund, which means that you require at least 30 percent of the capital coming from external sources.

5:32How do you address concerns that this structure limits TTCF's ability to lead rounds and meet founder expectations for SWIFT funding? Yeah, that's true. So we cannot offer term sheets on our own. We can co-lead rounds, though, and facilitate term sheets. And this is an advantage if we partner up with corporate venture capital funds or with family offices, because sometimes those players like to work together with us because they don't have like a large investment team, speaking of family offices. And we do a lot of work on managing the investment process. And then we come together to to agree on terms.

6:16And there we actually facilitate rounds. And on the other hand, with corporate venture capital funds, we can be a neutral buffer between the strategic interests that sometimes come along with those funds and a more independent development on the other side for the startup. But yeah, the negative aspect that we cannot lead rounds, it's there. But we also take the fund size quite, yeah, quite, we try to be very responsible with the fund size. So we don't want to decide super quickly and like quick decisions for our ticket size of five to 10 million initially in our suites. But I think it would be a bit irresponsible to be super quick and not do any due diligence and just put in the money without any other co-investors.

7:03So having a syndicate of other investors, also normal VC funds is reducing risk as well and spreading work. and also from a founder perspective can be quite beneficial when you have several perspectives later, for example, in the board. Very common argument against public actors or government-backed funds like the DTCF is that you might crowd out private investors. I actually come from a background of helping deploy capital on behalf of the Danish state, and that was definitely one thing that was heavily critiqued always. So this creation of market distortions, I'd love to ask you first and foremost, maybe steelman both sides of that argument that, yes, in these cases, it is right.

7:49And on the other hand, you can definitely also view it from this perspective. And then after that, we can maybe go into what you do to help ensure that you complement rather than compete private capital. Yeah, that's super important. And I mean, there is a contradiction itself if we want to have private capital in the round, but we don't want to crowd out public investors. There is a like a small part where it makes a lot of sense. And for us, it is a walk on a tightrope, if you can say that, because we want to be part of the promising deals, of course. And in those investment rounds where we see like large generalist funds placing their bets in the deep tech space, we want to be just a party who increases the total round size and we will just deliver one piece of the whole puzzle that's needed for investment heavy topics.

8:40but for example we don't focus on like SaaS companies where we have a lot of growth capital in the market already if we have a deal flow a deal in our deal flow that is looking good and also is in the SaaS space with good KPIs we could do the round but there yeah I think there is a lot of competition on the fund size and that we don't really step into our sweet spot is where the deals include a lot of hardware in the business model or have long development cycles or commercialization cycles. And then you have this big investment need and they're usually the large funds don't step in when there's still some tech risk in the company.

9:24Let me ask you, Elizabeth, let's say you have a round happening and you're interested in the investment and putting an investment on behalf of DTCF. and it turns out that there is competition for that 10 million piece that you were planning. Do you bag away or do you compete for that if there's a rival term sheet? So I have to think about the last processes that we were in. And I remember one case from last year, but there were several term sheets on the table and we were part of one syndicate and there was another syndicate without us. and we didn't play a super active role in getting this deal done.

10:11There were still some concerns from our side, but also from the other investor side. And we didn't do the deal in the end. So we didn't distort the market. It was also more on the seed side. So in the end, two seed investors did the investment and that was pretty fine for us. in other rounds um we are for example invited but not with our preferred ticket size so we prefer to put five to ten million initially to not get a too large portfolio because if you would place bets with one million um yeah then it just gets too big but sometimes for example in proxima the nuclear fusion company where we invested last year and there was a following round this year We put just a very small ticket initially because there was a lot of demand from the other investors.

11:04And then in the follow on round, we extended our shareholding because there we could deploy more. We were asked to do more. And we were actually quite happy to put a large piece in there because we really believe in the company. How do you balance it as the managing director and together with the board or whatever is the top governing body that you have when you make these decisions? Do you like when you're a VC, it's clean cut. Will this allow us to return more capital to our investors? In this type of situation, what is the guiding principle, the guiding factor that allows you to make that call when you don't know whether you should step aside or you should compete for an investment?

11:54we ask ourselves if we are needed as a fund so we do want to bring back nice returns to the government but also we have a carry program so we are incentivized on our own to to do economic investing and we we ask ourselves if we are needed in that round because the capital requirement is very large in the long run or if it's something that other investors could do as well and end up fighting for to do as well since we steer our deal flow from the beginning to focus on topics where it might be a little tricky to either have enough funding in the in the long run or find funding in the stage where the company is at for example before before industrialization on the production side where you just have very small revenue and don't know whether it's working out in a full scale production that's quite difficult for the companies to put together a round which is purely existing yeah which is purely counting on equity and we try to create an impact in facilitating those rounds which are a bit tricky if we would steer our deal flow and our team to look into the like the traditional enterprise SaaS companies and hunt for the best vast KPI, series A startups, then it would be quite tricky.

13:20It would be also more tricky to win the deals, I think. So I think there is a natural balance of where we are needed, the deal flow that comes to us. And those where we say we're not quite needed at the moment. Maybe another part of the answer is we believe that there where we can create an impact. We believe those companies have the potential to grow a lot on the valuation side as well, but it might take longer. So this is where we say it's okay to still take a bet, like a tech bet in the early stage, but deploy more capital. Yeah. So in other words, as you described it in the beginning, and this, of course, conversation explains it so clearly or show so clearly how you're walking a tightrope because in the end, you have a mandate that says you're only there to support the ecosystem or that's your primary role.

14:20But on the other hand, you also have a carry kicker to incentivize you as the management team so that you actually make good decision and you can attract the best talent. And this is obviously two dueling powers. And I think that there's not much reason to continue diving into it because in the end, it has to be a process of iterative feedback also from the ecosystem. At least that's what we could see in Denmark when I was part of the program here, which was, well, you had an actor that was not being maybe playing as much the role of solving on behalf of the ecosystem, which then meant that you ended up having pressure from the angel investors saying, this program is no longer a good solution for us.

15:08It is actually more someone who we are competing with. And thus it becomes more about that iterative feedback loop from the private actors that then come back to government and say, it's not functioning. Right now, it's become too much of a competitive private type player. It is what you described. We try to, I think in the early growth stage where we are looking at in round sizes above 10 million up to, let's say, 70, 80 million is very feel, very comfortable. there is a big demand for investors which are not met which is not met yet so we get quite positive feedback and and yeah we we have a very nice deal flow maybe this will change in in five years if a lot of multi-hundred million funds come into the private sector then maybe we're not needed for let's say a second fund time or we we will just purely act on on economic terms in a second fund generation.

16:09Let me hear what you said there. What did you say, Nian, with the second fund generation? Do you expect that you will evolve to become a purely financial player? Well, this is too early to tell. It's just that our investment period for initial investments goes five and a half more years. So in the end, if the investment period is done and we just focus on follow-on financing rounds, then we think about what will come next. And it will be maybe not enough to just focus on portfolio management, but to continue initial investments. And if we think about a second fund generation, we think how should it be structured and what is the dynamic of the market at that time?

16:51Is there enough growth capital for that field or is there still a demand from a government-backed vehicle? So this is what I'm just speaking into the crystal ball. Very exciting. Tell me, there's also the European Commission's recent initiative to launch the Scale-Up Europe Fund. It's, of course, also meant to address the late-stage funding gap. I'd love to ask you, how does the DTCF position itself up against this broader European effort? Yeah. So first of all, we are super welcoming to every larger growth fund. Maybe the difference is that a fund from the European level is not limited by the EU state aid and competition law, but it can just act all across Europe.

17:39And we focus on the German companies or those that have any kind of business activities in Germany. So this is one difference, but there are just very, very, very few funds that could place tickets of, let's say, 50 million and above, not in Germany and not on EU level, especially in those kind of companies where it's still in the development stage, the tech companies. So this is, I think it's needed and it's good to have that. Now, I want to ask you a completely different route of questioning here. This is about mapping a framework for growth stage investing in verticals under pressure. We obviously know all that climate and green tech is not a space that is completely unimpacted by what's happening in the States.

18:26And I don't want to ask you as much about just what's happening in the green tech and the clean tech and climate tech space, because those conversations we've had many times. But I would love to try and deduce from your learnings, from investing at the growth stage in a sector like climate where policy and tech pathways are so rapidly evolving. What are the foundational principles that guide your investment thesis? That is a tough one. So about the shifting, I think there are always waves in venture capital, right? You have several clean tech waves, you had enterprise SaaS, and now we have a strong deep tech defense deal flow.

19:06But the four verticals that are on our website, like climate, industry, computing, but also life science, industrial life science, they don't shift. They are consistent. Also, the climate vertical is consistent. And what is changing are the subcategories below that. So I think in an earlier version of our website, we still had crypto as one of the sectors, but we didn't do an investment yet. we're open but of course it faded away a little bit so this is not as prominent and there are some strategic tech sectors especially from a german angle that we know we need some solutions energy transition for example is one of those or germany is very strong in production tech and engineering automation this is something where we believe the whole economy needs to be transformed and we want to enable independent large new tech companies.

20:06So this is where one of those DecaCons might grow and there we want to place a few investments. And then there are some European sovereignty topics. I think new space is one of that, for example, or semiconductor because we don't have the autonomy in those areas. And there we also believe large companies can grow and this is a demand that will not go away in the future. I think on this very low level, it's shifting, but there are some topics that just remain there. And we don't jump on every, I don't know if you can say that in English, but if it's a new topic, we don't want to be the first investor in the first deal that comes there, but we monitor a little bit what companies are out there, what is the market dynamics, if it's the right time for us now, or we should wait a little bit.

20:59And one of those areas is, for example, sustainable aviation fuel, where we looked at a few deals, but in the end, we didn't decide positively for one. So maybe it was a bad decision from us. We didn't find the right deal as well from a structure perspective. But maybe it's also good because the sector still takes a while to show significant commercial attraction. I'd love to ask you because, of course, your capital is there to help scale companies. I'd love to be helped understand how you define that readiness for scale when it is companies that are in these uncertain verticals. where on the one hand, you have business model moving constantly, but you also have the regulation, which is still forming.

21:50And then add into it, as an example, the geopolitical movement's changing as well. So how do you go in and what are the exact way that you try and understand this? We are a little bit flexible with this requirement, readiness to scale, because when we look at the different sectors, some markets are there already. And some markets will just evolve in the next five to 10 years. For example, if you have any new way to generate electricity, the market is there, obviously. But for example, for quantum computing, it's not there yet. But with the technical development, the market will arise. And I think it's quite simple.

22:33We don't wait for readiness to scale in every technology sector that we look at. In some, we just take the tech risk, place our investment in a still early TRL level. But we believe those are the deep tech companies that can be category leaders and create a lot of impact and can become decacorns. And in other areas, we actually want to see the readiness of scale in terms of the product is ready, the market is ready. show us how you want to scale the production like what kind of like machinery do you need what do you expect as yield and utilization and what does it do to the material cost like this granular level of of plans but it is a very a very differentiated approach so in each tech sector our expectation is is different.

23:28Can I ask you to double click a bit on this topic of policy fragile businesses or policy fragile verticals? How do you think about those? If a business model is only working because of some subsidies, then it's not very resilient or then we don't want to do this. One example is in the recycling world where for a certain period of time, you might have recycling fees so that you don't pay for the input, but you actually get even money. You have negative material costs. But in those business models, we look at the unit economics, if it's also viable without the negative material costs. But what is like the sensitivity there?

24:17and I think yeah this takes away a little bit of the of the exposure to policy making but some developments I think you cannot really foresee so we might also be surprised so yeah we just try to yeah to not be too much dependent and there was a lot of there were a lot of articles about the green premium and how it has been buried this year basically because no one wants to calculate with that and i think it's the right development to look into real economically viable business models without too much of uh too much too much fantasy too much support i'd love to ask you specifically now because i've tried to keep it on the on the principle level but if we go to climate and and we look at what has happened there and we look at how people have been adjusting we just put out a podcast the other day with hamper stakers from pale blue dot which which you know is one side of it where he's coming down on the side where he's saying, let's just not be dumb and actually invest in the things that will save our planet.

25:23And we right now are producing in so many ways that are not sustainable and not smart in any way. So let's all just not be dumb. And then there are others that have models that seem seemingly more tied to the regulatory environment and the opportunities that arise from that. Where do you fall on that? How do you think about that? And where do you kind of also, what have you learned over these last, let's say, 12 months? Yeah. So I personally, I had a pet topic that I like to look at, which was clean water and then technology around water. And especially on the open oceans, because you have a lot of this, you know plastic and so on but also pollution from vessels and so on and there are regulations in place that you uh should not do that and you have to take specific measures to not do that but um i found out that there's um not like one authority to take care of that so even the regulation is in place and there are high fines but who is who is following up on that and i think this is a question you always have to ask yourself if you have this this aspect in your business model of regulatory tailwinds if it's really how much you can be sure that that is there also in a few years from now.

26:46One aspect where I think policy plays a major role is in the hydrogen business because it has been raised like this is coming and helping us decouple all the sectors And within our team, we had five people looking into the different green molecule deal flow companies to find out which is the right application. And we follow those thought leaders like Michael Liebrecht, I think, and try to understand where it's coming. maybe and in those cases there's also an opportunity if the market if it doesn't get a lot of attention at the moment but we really believe that it's coming for a few applications then place the bets now when the valuations are at a like very realistic moment and not when it gets maximum attention but the valuations are maybe too high so for example in hydrogen if we find a technology that could be used for fuel cells and electrolyzers on a component level.

27:50So it's more less on the application side, but more on the enabling side. That is something that could make the cut at the moment. I'd love to ask you a bit about how you think about this when tech is waiting for the market versus when you're actually just double down. And you mentioned it earlier as well, that you're not always waiting for that ready to scale juncture to be met. I'd love to ask where do you land on that how do you think through that yeah we still see that in series a companies sometimes or we we think it might be a case of tech waiting for customers I think this this trap is is bigger in the earlier stages yeah we try to understand the market as much as possible so if there is an adoption already and how much the customer return on investment is um it can be calculated already so if it's very very far away from a positive roi and the demand is also not not showing then we step up we take a step back and yeah and say let's wait until this sector or this area of startups gets a little bit more traction and sometimes the startups, then the number of startups decreases naturally in this sector.

29:11But maybe sometimes we also see it coming back in two years and then it's in the right time. But it's an observation for each market and it's super difficult. We do ref calls, we align with other investors, we ask our corporate contacts, so learn from conferences as well. There are so many sources we try to take in to understand if it's the right time. Can you tell me a bit about what your plans are for expanding the EDCCF portfolio and the impact across Europe? So we are looking for people to join our team, small advertisement, because we want to continue with this pace of signing, let's say, eight startups per year.

29:54So we're happy to talk to anyone who's interested. There are a few sectors where we haven't made any investment yet, but where we believe we could do several investments. For example, in the automation space, robotics in any kind, semiconductor on several levels. We are excited to look at companies there. And cybersecurity, for example. Yeah, those are like subsectors that we think are very important and fit very well with our thesis. And across Europe is the other aspect of your question. We can invest outside of Germany if any business activities are happening in Germany. like you you are a team you have production side you have a sales office stuff like that subsidiary and we are about to sign our second french investment yeah within the next days uh we have one investment in switzerland um but the main team is in munich so we are looking to to expand and if there's any tech hub or you know that you would recommend i'm also very open to um to travel and have a look and our team is always on the road um but always but often on the road to be connected to a lot of players how big is the gccf team we are 13 people and we want to be maybe 20 people when we are at full growth and you're all based in germany of course yes which cities i'm based in Munich with a small team.

31:24We have a team in Berlin and a team in Cologne-Bonn. So it's in South Berlin and in the West. Let me ask you the question that anyone in Munich normally loves, but which since you represent all of Germany will be a harder one. Germany versus Munich. Why is it that Munich has picked up so much in venture lately and what's happening in Berlin? Well, I think Munich, with all the large industrial players around, is well positioned for hardware tech companies. And the ecosystem that has been created with the help of Klaten around TUM, the TU Munich, Technical University Munich, is also it has been active for a few years now and produced the first batch of very successful companies so this ecosystem is just one step more mature in comparison to other technical universities and in comparison to berlin uh berlin is amazing as well i think there we also we have a few portfolio companies there already also with hardware so it's not only focusing on software but it's difficult to differentiate.

32:38I think mobility, aviation, stuff like that is usually more linked to Munich because of the industry around it. We have a content strand on EVC, which is focused on corporates. I'd love to, and you've mentioned corporates a couple of times, I'd love to ask you a bit about the role of corporates in the venture ecosystem, how you collaborate with them, how you see them differently from the normal venture ecosystem? I mean, there are a lot of classic disadvantages that are usually repeated, and I think they're all valid, but there are also a lot of positive sides. And in the stage where we are looking at the companies where you need some large scale offtake agreements, maybe joint ventures to secure feedstock for the processes or with help in the on the distribution side it makes sense to cooperate and we have a few co-investments with corporate venture capital funds some of them turn out well some of them turn out okay also two of them have a delay on the commercial side now because you are dependent on one customer on your the major go-to market is with one customer but in general i would say it's it's rather positive so it can be really an acceleration um in the go-to market so for example with rewe the supermarket chain and our company uh project eden they do a meat alternative based on a textile industry a production tech um that helped a lot they first started in thousand supermarkets earlier this summer now they go into two thousand more than two thousand supermarkets and this is super helpful.

34:23The team is super great. Yeah, very cool. You have some good supermarkets in Germany doing good things for the venture ecosystem. Let's go to our section that will close off today's conversation, which is insights and advice for founders and investors. I'd love to ask you first on the founder side that seek to partner with DTCF, what key qualities or milestones do you look for when you assess them? Well, we usually have really great tech team and a well-rounded C-level and two qualities that we don't see in every team that we look at is, for example, hiring experienced and sector-focused people who are maybe 10 or 20 years older than the founders but have really sectoral knowledge is something that stands out and shows a lot of different qualities in the founder team.

35:17So this is something we like to see. Or on the other side, on the financial part, we like to have good financial modeling as well. It sounds like a no-brainer, but it actually isn't. Especially with cash flows, for example, you have a little CapEx and then the cash flow management, working capital. until it's more important for the deal flow that we look at because we have these physical goods in many cases. And there we see some differences. So this is cool if this is settled. And if we then turn to the investors, what can the private investors, be their VC funds or family offices, how can they think about partnering with you?