Investing in climatetech as a generalist VC firm, interview with Namratha Kothapalli 🌍

Impact Supporters Issue #28. Thanks for being here. If you have comments or feedback drop me a message.

Disclaimer from August Solliv: The views expressed are solely my own i.e. it’s my Sunday fun work 😉

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Key insights:

• Speedinvest launched its climate-focused investment team as they realized it was simply too big of an opportunity to miss out on

• Later-stage VC funds go in earlier in climatetech start-ups than other industries to take fewer risks, and as they are still figuring out the capital stack

• Doing due diligence on climate hardware requires a special focus on the team’s pace of iteration, the capital stack, and the economics - as well as classic characteristics

• Main advantages of being a generalist VC investing in climatetech: large centralized portfolio support, cooperation between portfolio start-ups, and bringing in a broad LP base

• Main hurdle of being a generalist VC in climatetech: generalist VC’s investment committees often have less climate science understanding and need more explanations to understand climate deeptech

• Namratha focuses on the electricity grid, energy markets, and agritech climate adaptation - and focuses less on mobility solutions

Greetings, Impact Supporters! 🌍 It’s August Solliv 👋 Here is what we discussed with the amazing Namratha (≈8 min reading time):

• Why Speedinvest invests in climate 🌱

• To specialize or not to specialize 🧭

• Advantages / Disadvantages of being a generalist investing in climate 🌪️

• Fundraising as a generalist VC 💼

• Adapting to investing in harware 🔩

• Late-stage VCs go in earlier than in other industries 🤑

• Due diligence of hardware climatetech start-ups 🔍

• Hot & cold industries 🔢

• Speedinvest is not an impact fund ❌

Meet Namratha Kothapalli 👋

Namratha started her career by focusing on building products. She spent more than 10 years in software engineering at small and large companies such as Intel and HP. She then chose to try something new and started out by spending a short time in the generalist London-based VC, Passion Capital. It made her realize that what she was really interested in was deeptech VC, which she describes as investing in IP-driven research-based companies. That’s how she started at Speedinvest. At Speedinvest, one of her first opportunities was in climate, and ever since she has been digging deep into that rabbit hole and keeps loving it! 🚀

Meet Speedinvest 💼

Speedinvest was founded in 2011. They invest up to €1M in pre-Seed companies and up to €3M in Seed deals, and they prefer to lead and co-lead. On the outside, Speedinvest seems like a generalist fund but on the inside, they are organized according to sector-focused themes like fintech, health, consumer, etc. Namratha sits on the Climate Tech & Industrial Tech team. The team looks at all polluting sectors (not just GHG but all pollution) such as agriculture, construction, mobility, energy, and manufacturing, etc. as long as the company ticks the boxes of adaptation, mitigation, and resilience. Speedinvest focuses on the EU and the UK, and has a growing presence in emerging markets.

Why Speedinvest invests in climate 🌱

At Speedinvest they have a team dedicated to solely to climate - here’s why:

Speedinvest used to have a team called “Industrial Tech”. Then within that team, some of the members started to push to do more on climate in the industrial sector, as they were seeing changes in the market, and Speedinvest had previously made some good deals in climate. The group got together 4-5 years ago and made an exercise of mapping out:

• What companies are raising? 💸

• How much capital are they raising? 💰

• How are the companies growing? 🌱

• What other VCs are investing in climate? 🌍

• How do the private markets look at climatetech? 🌐

After that exercise, they made the case to the partners to show the need to invest further in climatetech from a purely financial perspective. Their argument was that Speedinvest would miss out if they didn’t start focusing on climate. Their case got backed up by increasing regulation on climate and a lot of other funds going into the space - it was the right place and right time to launch the climate team 🕒

To specialize or not to specialize 🧭

Do you need a climate team to be the perfect investor? Namratha says that it is very hard to say. She says that there are founders who are great investors, there are students straight out of university who can make great investors. Being a good VC is a mix of expertise, good connections, timing, luck, and much more. Speedinvest chose to have a sector team as it’s part of their DNA 🧬 but another generalist might not need it.

Advantages / Disadvantages of being a generalist investing in climate 🌪️

Namratha mentions 3 advantages:

1. As a generalist, you can bring a wealth of support on board to the start-ups, besides the capital. Speedinvest, for example, has 300+ portfolio companies, primarily in Europe and some in emerging markets. No new impact VC fund has that. Speedinvest then does its best to connect founders from various stages and industries to share learnings and mistakes 🤝

2. Generalist VCs also typically can offer more centralized portfolio support. Speedinvest has one team that can help on topics from talent acquisition to go-to-market, and to making a sales deck. On top of that, they provide services that are more sector / company type specific, which climate-only funds might also have. For example, Speedinvest offers grant support 📝, which is very important for its deeptech start-ups.

3. Generalist VCs bring a very broad LP base. Speedinvest has a lot of financial institutions and corporates as LPs and these want to interact with the start-ups and want to work with the start-ups. Namratha sees that it can really move the needle for Pre-Seed and Seed start-ups to get access to corporates very early 🔗

Main hurdle of being a generalist VC in climatetech:

1. A generalist VC’s Investment Committee (IC) is not climate-specific. Speedinvest, for example, is split into 6 core teams but with one IC ⚖️ Therefore, the IC doesn’t necessarily have the specific climatetech knowledge to truly grasp all intricacies of the deeptech climate solutions that they have to evaluate. In an impact VC, the IC can have more specific climate knowledge (even though it is impossible to cover all climatetech competencies in one IC). At a generalist VC, this means that the IC becomes more reliant on the investment manager or whoever pitches a start-up to explain the science behind some of the deals 🧠

Is it easier to fundraise as a generalist VC? 💼

It’s neither easier nor harder. Namratha says that she sees that LPs differ a lot in what they want. For example, Speedinvest has Aviva and PwC as some of their LPs and they like to see the breadth of the start-ups that Speedinvest can bring. Whereas other corporates or financial institutions might want to focus their investments and innovation attention on decarbonization only and then they might prioritize a climate-only VC.

Late-stage VCs go in earlier than typically 🤑

Namratha highlights that the climatetech ecosystem behaves a bit differently than other industries. Late-stage VCs usually come in early for climatetech start-ups. Namratha sees three main reasons for this:

1. Climatetech start-ups are hype, so the late-stage fund wants to see them early - this is a trend in many hype industries 🔭

2. They prefer putting smaller ticket sizes on more uncertain investments 🎲 (there is less of a track record in climatetech, so they want reduced risk)

3. In Europe, the later-stage funds, still need to figure out the capital stack for the less traditional start-ups (HW). Going early, alleviates some complex issues of project financing, debt financing, etc. 🏗️

One of the main differences about investing at earlier stages is that in climatetech, early-stage start-ups are primarily judged on the team and their ability to increase their Technology Readiness Levels. Later-stage start-ups are judged on many more factors, such as delivering clear value to customers consistently selling, being able to raise other types of capital, scaling production, etc.

Due diligence of hardware climatetech start-ups 🔍

A good chunk of Speedinvest’s climate pipeline is hardware. This requires adapting some parts of their due diligence. Here are some of the things that Namratha say they focus on more in climatetech than other industries:

1. Pace of iteration - it is key for all start-ups, but very much so when building deeptech, as you need to be able to change your product repeatedly in industries that are not used to it 🔁

2. The capital stack - you must analyze the different sources of capital you need to arrive at production scale 💸

3. Economics - many climatetech start-ups have to produce commodity resources but at extremely large scale (e.g. water, cement, ammonia, etc.). Good economics are needed to ensure price parity - or ideally below current market price - to accept price fluctuations 💵

According to Namratha’s experience, it takes longer to due diligence (DD) a HW start-ups than a software (SW) start-up. But she believes that that is not necessarily a negative thing. The most important is not the quantity of deals that you DD but rather the quality.

Hot & cold industries 🔢

Namratha says that her job is to listen to founders. Speedinvest doesn’t blacklist any sectors but have some sectors that they underprioritize. Those are all the industries that have been overinvested. An example is mobility 🚗 A lot of those investments have gone to solutions that don’t have a large climate impact or to solutions that are very mature and not relevant for Speedinvest.

Namratha has some industries that she is looking at more than others at the moment. One of them is the electricity grid and the energy markets. She already made an investment in the space recently with the Dutch start-up, Tibo Energy, which is building smart energy communities 🔌 There are, however, so many angles to the topic that she is continuing to look at it. Namratha feels like it’s a space where the more she digs, the less she knows.

One of the other things that she constantly looks at is climate adaptation from an agritech perspective 🌾 She hasn’t made any investments in the space yet but would love to hear from any founders out there.

Speedinvest Climate is not an impact fund ❌

Namratha tells me that Speedinvest is not an impact fund and doesn’t call itself that. It’s an article 8 fund and operates as a generalist. Namratha says they are looking for companies that will operate in a net-zero economy and so have a clear climate angle. However, their main metric is whether customers will buy it. That will always be the most important for them and is why they are not an impact fund. To adapt to being climate-focused, they, however, have focused on upskilling their own workforce on climate topics. This enables them to make quicker investment decisions.

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