Pathfounders, Episode 1: Interview with Christian Hernandez of Climate tech VC 2150

0:00Mike Butcher:Hello and welcome to Path Founders. My name is Mike Butcher. I'm the founder and editor. And today I'm going to be interviewing Christian Hernandez, who's the founder of 2150 VC, one of the pioneering climate tech funds to come out of Europe in the last few years. And as many of you might know, Christian was also a founder executive of Facebook in Europe prior to this and also and then became a VC. and has definitely been a pioneering partner and VC in climate for many years, but also was really jumping into the space when it was actually unfashionable. The question is, is it becoming unfashionable again?

0:48Mike Butcher:Christian, thanks very much for coming on the Path Founders. Obviously, it's going to be a very big topic this year because Trump's back in power and climate appears to be off the agenda. But let's get the news out of the way and then we'll get into that. You've raised a€210 million fund. It's taking you a few years. Tell us about what's happened, your announcement this week, and what's going to happen next. So first of all, good to see you again, Mike. We've been having these chats in many different guises for many, many years. And I guess back in 2021, we did a similar interview when we announced 2150's existence and the first close back then.

1:30We did a first close in the first half of 21, finished closing the fund at the tail end of 21. And what we achieved now right before the holidays was a final close on Fund 2. So in four short years, we've gone from an idea to 500 million euros of assets under management across two funds. So Fund 2, as you mentioned, is 210 million. and we have already done seven investments out of that fund, which we can talk about across the US, Europe, one in Turkey. When we talked many years ago, yes, climate tech wasn't even a thing, as in literally the term was still called clean tech. Climate tech took off in 21, effectively, the IRA happened in the US, there was hope, there was aspirations, there was conferences.

2:15And yeah, things have changed specifically in the US in the last year, where that word is no longer a positive connotation. And policy is being unleashed to push things back from where we were even just a year ago.

2:30Mike Butcher:I know that a year ago, you announced your intention to raise this round. Did it become progressively harder as the year progressed with Trump becoming so anti-ESG and anti-environment? Yes and no. So there were certain there are certain investors where they do not want to be targeted in the US. And right now there's a big backlash against anything around climate ESG. And so certain investors that have to be public because I have to disclose what they invested in have shied away from the category. Other investors, for example, we have a US pension fund called the Church Pension Group. It's a 17.5 billion pension of the Episcopalian Church, so the Church of England in the US.

3:11They very actively wanted me to tell everybody that they were an LP. They're like, that's our mission. We actually want to back this category. We want you to tell the world that we're still back in the category. But overall, venture has slowed down, right? There's just been less capital flowing back to LPs and therefore less capital flowing into venture and private equity. And within venture, climate tech has slowed down in terms of fundraising. It has, I mean, there's still a number of names out there that we co-invest with. Bill Gates' Breakthrough, Generate Capital, Lower Carbon with Chris Saka, who continued to raise new vehicles.

3:50We very purposely did not change our narrative. We're still an Article 9 Climate Tech Fund and Vax Technologies at scale can, A, make a lot of money for our LPs, but B, also have a positive impact.

4:00Mike Butcher:And did you raise from European funds or European institutions as well? Yeah, so Fund 1 was primarily European. With Fund 2, we expanded geographically. So I already talked about the pension groups in the U.S., a number of family offices across Asia, U.S., and Europe. Or anchor investors were the same in Fund 1 and Fund 2. It's Novo Holdings, which is the$140 billion foundation that owns Novo Nordisk, IFO, which is a Danish sovereign fund, and then a number of financial institutions. It's actually a very consolidated LP base, 34, I believe, LPs. So that implies that the median check was actually quite large.

4:37Mike Butcher:Obviously, you found enthusiastic investors. And I think one of the interesting things about 2150 VC was that instead of doing something broadly as the first kind of wave of cleantech funds were like investing in solar power and that kind of wave technology, you decided to do something different, didn't you? you decided to focus on cities. Why was that? It's part of my own voyage into the space back in 2019. The realization that there was a misallocation of capital between the problem and the stuff that we were backing. So cities, 80 % of the world's population, according to the new way in which the UN measures it, vast majority of the world's energy consumption, vast majority of the world's waste.

5:19So if you think about cities and the industries that power them, that is about 50 % of all global emissions. Back when we got started, it was receiving about 11 % of all venture capital dollars. So that was problem one, misallocation of capital between problem and what we're funding. 50 % was going into mobility. And secondly, cities, we have technologies that we can deploy today and scale today to have an impact. My favorite example is always heat pumps. They're literally magical. One unit of energy in, three to five units of energy out. Let's get those deployed as quickly as possible, as broadly as possible today.

5:51And there was really very few people focused on this space. So A, it was an opportunity for us to be a series A fund. in this space where the problem was big and the opportunity was as well with less competition. Since then, I mean, there's been other partners that we've co-invested with who actually either have this as one of their strategies or have actually raised funds specifically for similar focus areas. And to be fair, we need lots more capital in the space.

6:17Mike Butcher:What sort of technologies have you seen appear that are specific to these cities? I mean, there was a prop tech boom a few years ago talking about greening of buildings. But I mean, how much of that kind of thing moves the needle? And what kinds of breakthrough stuff have you seen and invested in? Yeah. So the other thing that we did from the beginning is we're quite thematic in the problems that we try to go solve. So we do these, we call them deep dives. So big problem, what causes the problem? How could you solve it? Who's working on it? That generates a deal flow. And about two thirds of our portfolios in fund one and fund two came from those deep dives.

6:52So for example, first problem that we looked at was cemented concrete. It's the world's largest problem. It generates about seven to eight percent of global emissions. And we're not slowing down. We're literally pouring concrete like it's water around the world. In fund one, we did two investments in that space, Carbon Cure in Canada, Biomason in the U.S. In fund two, we already have a number of investments in that space that have not yet been announced. It's an unsexy but big problem that is perfect for us to try and go fix. By the way, when we first did the deep dive in 2020, we only found about 12 startups working on the space.

7:27We just redid it last year and we now found 95. So the innovation into this dirty, unsexy space has definitely taken off.

7:34Mike Butcher:I noticed that at one point you invested in electric crane for, you know, obviously for building projects. And how did that go? Yeah. So that company is called Amped Energy. It's based in Singapore. So interesting stat. A third of London's air pollution is actually caused by the construction industry. When I read that stat, I thought it was because it's dirty and there's kind of dust everywhere. No, it's the fact that your construction site, if you look out your window and you see a crane, that crane is likely powered by a diesel generator, which runs all day long. And so that diesel generator is just generating really bad air particles.

8:12What AMP does is it electrifies those generators to actually put in a battery power generator in construction sites when we first invested. Now they're also being used in mines. They're also being used in ports. So they've diversified across new verticals to try to decarbonize the addiction that we have for these diesel air polluting machines all over the place. They raised a Series B last year. Yeah, last year, we've been investors since 2021, and I'm still on the board and doing quite well now going into the US. And actually, it's live here in the UK. If you go by the Olympia site, the giant redevelopment, there's seven of those battery powered generators inside.

8:53Mike Butcher:Amazing. 210 million euro, obviously, it's a sizable amount. But obviously, many people are aware of the scale of the decarbonisation issue, given the climate crisis, which let's all acknowledge that scientists have all agreed on to 99 .9 % extent. The issue, though, is is that going to be enough? And what kind of fellow travelers in terms of funds do you have to come in and co-invest with you, alongside you, either you lead or they lead or you co-invest? Has there been a cooling of the environment because of obviously the U.S. administration being so cool itself? Yeah, no pun intended about the cooling, right?

9:40We need more cooling. When I started doing this, it was a moral imperative, right? Using something I've been doing for a while, which is a tool of venture to identify and scale solutions that could have impact at scale. Fund one, you know, 200 million deployed into 20 companies. We're already mitigating about one megaton last year, actually in 2024. We'll do the report this year, see how much we mitigated last year. If only 200 million can actually start achieving megaton level scale of impact, that gives me some hope. By the way, we need to be mitigating 25 gigatons, 25 billion tons by 2030. Little secret, we're not going to get there.

10:17But we need to scale out these solutions megaton by megaton around the world. So the challenge is these companies in some cases are capex heavy, right? They need to build physical stuff to replace bad physical stuff. So a couple of realizations. To your question on who the fellow travelers are, our biggest co-investor to date is Breakthrough Energy Ventures, the fund set up by Bill Gates. We've done six with them across geographies. We've done three, four maybe with Energy Impact Partners, which is the U.S.-European fund. We've done a couple with lower carbon. We've done some here in Europe with ETF, which is kind of the OG of climate tech in Europe.

10:56And then a long tail of others. Some are generalists, pure software. Others are climate funds. So that's at the Series A, Series B when we come in. Then who comes in next? Light Rock here in the UK. Generation, which is Al Gore's fund. In the U.S., there is B Capital. which is Eduardo Severin's fund. So there's not a long list, but a number of other players that can come in after us. And then the other important part in climate is that a lot of the funding for these companies is not necessarily gonna be equity. It's not necessarily gonna be venture capital. So in our portfolio today, for every euro that my companies have raised for equity, they've raised 0.75 euros in debt.

11:42And this is not government grants, this is actually Barclays HSBC, a BlackRock entity, giving loans for working capital, for factories, for asset financing. And ask me in five years' time, I think that ratio is going to be much bigger. I think there will have been much more debt than equity to actually scale up. We're talking about trillions needed per year to achieve the decarbonization ambition. I can move the needle a little bit, but we need a big, much bigger pool of capital. And that doesn't necessarily have to be venture. Actually, will not only be venture.

12:09Mike Butcher:So do you think that there's going to be more of an IPO trajectory for some of these companies i think certainly in the terms of the context of the us going so uh cold on esg literally deleting the word sustainability from government documents in the us do you think that there's going to be uh different kinds of exits for these kinds of companies uh and in different kinds of markets yeah i mean first of all be it climate tech or general VC, right? An IPO is not the usual exit route. You need to be on a certain scale, especially to float in the US. So where do we think the exits will come from?

12:51One is, yes, potentially one of them goes public. And by the way, when we back a company, we're backing a business plan, not necessarily just a do good thing, right? So this needs to be a company that can achieve scale, revenue, profitability, EBITDA, God forbid. So yes, there might be a public exit. Two is private equity, where a lot of these companies look like the industrial stuff that PE is used to backing. And every single private equity fund has raised a$3,$5,$7 billion climate fund. EQT has one. BlackRock has one with Temasek. KKR has one on the infrastructure side. So that's a natural potential exit path.

13:25And the third is actually the incumbents. I called a number of my CEOs the day after the Trump election just to check on how they were doing. And one had the right answer. He said, I've never wanted to be called a climate tech company. I just wanted to make a product that my customers saw as better, cheaper, and faster, which happens to do good for the world. So there's still corporate innovation that needs to happen. A lot of corporate innovation is now happening through acquisitions. We actually have seen a number of these corporates co-invest with us on cap tables and become distribution partners for the companies.

13:58We have a company, for example, called Luxwall. They make hyper-efficient glass out of the U.S. They just signed a partnership with Sangoban, which is the French, the largest glass manufacturer in the world, where Luxwell's technology is being licensed to Sangoban to make highly efficient glass out of their factory in France and ship it across Europe. We expect a lot more of that to happen as these technologies mature. And who knows where that goes.

14:21Mike Butcher:So in other words, instead of perhaps five, 10 years ago, you might have said this, the storytelling around some of these companies such as glass might have been, we save so much CO2 with this hyper efficient process, glass production process. And now the storytelling is about hyper efficiency and cost saving. Is that the optics that you're going for having to go for now? I mean, I think the selling point was still always the efficiency gains, right? So there's this notion of a green premium that people are willing to pay more for something that was better. That's not really the case, not at scale.

14:58Maybe you do it for one project to be able to show it off, but to actually be able to replace glass, double-pane leaky glass with something new, you have to be at price parity. It has to be much better. And the problem with glass specifically is the person that buys the glass is not the person that benefits from it. So the developer, the retrofitter of the building is not the tenant that's going to pay the lower energy price. So the buyer needs to see price parity because the benefit is going to accrue to somebody else. So I think a lot of the focus around is around energy efficiency, electrification as we try to wean ourselves off, especially in Europe, natural gas from eastern parts of the continent, and then being able to ensure that that electrification has the grid infrastructure to power.

15:41Mike Butcher:I see. So there is a little bit of a change in storytelling, but also it's quite clearly it's a sustainable business rather than just a nice to have. I think that many people listening or watching might also be interested in the storytelling to LPs you mentioned in the US. How sustainable is that over the next two, three, four years? Obviously, you've got this fund now. Eventually, you'll want to get to another fund, I presume. Will, do you see the same kind of storytelling working with those LPs or do you see the efficiencies kicking in and the numbers adding up? Yeah. So, I mean, first of all, we very purposely did not link the social impact or sustainability impact that we achieved to our carry, which many impact funds do.

16:30I always wanted to be evaluated first and foremost as a venture capital fund, right, competing with many of our friends who actually do software or general technologies, which means that by fund three, I'd better start returning cash to my LPs, have exits, have this mythical thing called DPI, meaning cash back. And that's what I'll be evaluating on first and foremost. Secondly, however, there is a subset of LPs that specifically backed us because we're what's called an Article 9 fund, which is a EU designation for funds that will only invest in positive outcomes. and they had sleeves of money from their clients or from their mandates to specifically find and back Article 9 funds.

17:10And we were evaluated because we're an Article 9 fund. We had family offices that had consultants that had specifically tasked them to go find climate funds, one specifically that wanted a climate fund specifically in the built environment. So I mean, I think the pools of capital are deep, but come three, four years time when we talk about this again, I will have been evaluated on how are my companies doing? I mean, today, we're already at a billion plus run rate in revenue across the portfolio. Fine, concentrated in a couple of them that are scaled up. Others are still nascent, but still 4 ,000 employees across the portfolio.

17:44These are like material companies of scale. Some of them are, God forbid, actually even gave profitability now. Obviously, then they still need to continue to mature and grow and at some point have an exit. But I can actually say that, yes, we found companies that have sustainability in the corporate sense while having a sustainability impact.

18:02Mike Butcher:Right, I see. So you're definitely going for these kinds of optics that any normal commoner garden VC would be going for, certain returns and numbers. Another thing is that we're all talking about artificial intelligence, of course, and you're investing in a lot of quite hard tech. It's hardware, some of it's industrial processes. To what extent is generative artificial intelligence affecting those industries? And how are they accelerating some of your companies, creating exponential growth, not just obviously in normal common day-to-day processes, perhaps, but perhaps the underlying products and technologies?

18:44Yeah, I mean, we also invest in pure software, right? So only about 40 % of the portfolio is deep tech, hard tech. We have a number of companies that are actually applied AI. There's one called Nodes and Links here in the UK that uses pretty advanced AI. The guy literally wrote a PhD, the founder wrote his PhD on this to help optimize the risk mitigation of infrastructure projects. Think HS2, think nuclear plants, think data centers. And it's a pretty advanced AI being applied to that problem set. We have looked at a number of companies using AI models to discover new materials, which I find fascinating.

19:22How can we actually use computation to hack chemistry, to accelerate discovery? There's some interesting companies in that space. Valuations are sometimes a bit wacky, which has scared us away from a couple of them. And then obviously what everybody's talking about, which is the energy demand that AI is going to need. Two interesting points on that. One, I do think that will drive interesting absorption of innovation by the owners of those data centers. So the Googles, the Microsofts, the Amazons are seeking to deploy efficient ways of powering their data centers. My favorite example is Microsoft just recommissioned Three Mile Island, the nuclear plant in the U.S.

19:58for a data center. So you're beginning to see them as clients for some of our technologies to put them into data centers for more efficient cooling, for more efficient, lower carbon construction, to effectively lower the cost of that chat GPT query. However, misconception is that I think we're over-focused on the energy demand coming just from data centers. The IEA just came out with a report at the end of last year that mapped out the expected increase in energy load from different sectors. And yes, data centers is big, but that's quite consolidated. That's SLOW in the UK. That's Dublin in Ireland.

20:30That's Virginia in the U.S. On a global basis, cooling, so keeping you alive with air conditioning, is a greater energy load than data centers. 1.3 times. Electrification of vehicles is about two times bigger than data centers. Electrification of industry is about three times bigger than data centers. So we have a massive problem around energy supply and energy creation, not only because of data centers, but because of all this massive move towards electrification of factories or cars or homes, which also gets made worse by the energy demand for your chat GPT query.

21:06Mike Butcher:Right. Yeah. But that's always going to come up, especially in the technology press, isn't it? But energy just seems to come. So much of today's discussion comes down to energy, whether it be compute for data centers or lowering the cost of living. And while you're concentrating on cities and other aspects of that as well as part of your thesis, not all of it, part of it, a large part, there's also such an interesting conversation going on about how fast we can produce new technologies in the energy space and I've seen things like new molten sand power plants or batteries I've seen also there's a lot of conversation about SMRs small modular nuclear reactors there's also encouraging science coming out of the efforts around fusion nuclear fusion what kinds of things that you see and you must obviously look keep quite a close eye on these this energy area and what what are the areas that you're most excited about perhaps the entrepreneurs the startups that you're looking at in that space yeah by the way smrs are are not small and they still take about 10 years to build but nuclear is definitely a part of it and i'll disagree with whoever thinks that nuclear is not one of the options that we should consider my green friends in Germany.

22:25Yes. If we solve nuclear fusion, then we have a whole other problem, which is about energy abundance and what the world could look like. And that's always been 10 years out for the last whatever it is, 30 years, right? But there's some - Nice problem to have. Yeah, exactly. So we actually have spent an interesting amount of time on two problem sets. One is energy transmission. When we make the energy and we get it over the pylons to where it needs to go, we lose about 30 % throughout the transmission. There's a cool company in Germany, we're not investors, that actually sends little kind of spider crawlers onto the cable and coats it with a specific chemical that actually improves the resistance that actually allows for less energy to be lost.

23:05Interesting, right? So let's make the current infrastructure better while we build new infrastructure. We did look at a nuclear fusion company, and when I got educated on the space, decided it was a bit too CapEx intensive for us. But geothermal is actually super interesting. Geothermal, somebody called it the most democratically available source of energy. Literally, you can make a hole anywhere in the world and tap into it. The problem is the cost of that hole. It's cost prohibitive for you to do it in your house just to go deep and get, but actually it might not be cost prohibitive to do it at a community scale.

23:36And you're seeing a couple of projects around that where there's community geothermal heating. So how can we find technologies that can also lower that cost and actually make geothermal a more accessible way of accessing the earth's heat. Literally just drilling a hole in a local neighborhood. It's a pretty deep hole. So you need a pretty big drill. Like literally, there's a company working on plasma drills to actually go deep for cheaper. So yeah, we do spend a fair amount of time also thinking about that. How can we actually power all this? We have insane amounts of energy capacity sitting literally off of our coast in the UK with offshore wind.