Kevin Stevens of Energize Capital joins Nick to discuss The Energy Transformation, Challenges with Transmission and Distribution, Nuclear vs. Renewables, and Why Unreasonable Hospitality is Necessary in VC. In this episode we cover:
- Challenges in Energy Distribution and Storage
- The Role of Batteries and Other Energy Storage Solutions
- Data Centers and Energy Consumption
- Nuclear Energy and Its Role in the Energy Transition
- Financing Challenges and Strategies for Energy and Climate Companies
- The Importance of Intellectual Humility and Debate in Investing
- Future of AI and Defensibility in Energy Software
- Evaluating Revenue Quality and Key Metrics for Success
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0:18
Kevin Stevens joins us today from Chicago. He’s a Partner at Energize Capital, a venture firm investing in energy and sustainability-focused startups. Prior to Energize, he was a founder of Intelis Capital a seed stage investor out of Dallas, Texas. Kevin, welcome to the show!
0:36
Thanks for having me from a local Chicago into a new Chicago in but I think fitting in nicely here. Really enjoying it. Yeah, it’s
0:42
crazy. It’s like we’re both in Chicago, but we’re still doing this.
0:47
It’s the world we live in now, right?
0:49
Okay, so give us your backstory and your path to venture. Yeah, absolutely.
0:53
So first of all, thanks for having me. I started my career in clean energy. It may be the the worst time possible to start a clean energy career in 2007 2008 and this was right at the time that that fracking was really taking hold. And so while wind and solar were cool, natural gas was cheap. And so I was working in finance for a company called NRG, which is one of the largest power generators in the world, and really got a perception of like, if clean energy was going to compete, it had to be cheap. So that, you know, my belief was that the only way to make it cheap was through innovation. And so I got interested in the startup space and joined a company called choose energy, which was a clean energy marketplace backed by Kleiner Perkins out of their green growth fund. It was one of the first 10 hires there in business development, and then joined kind of the product and engineering team, and eventually led product and engineering there until we scaled it to an exit. Yeah. And then joined energize four years ago to lead growth equity to help our company scale once they’ve hit, you know, kind of 20 million in revenue and up, we start exploring investment options, and I lead that team for the later stage side.
2:04
So you were a founder of intellis, and then you decided to, you know, transition over to energize. Why? Why? You know, sunset and TELUS and make the move?
2:14
Yeah, a couple reasons. Number one, personally felt like at the seed stage, I was just not as good or didn’t love. What I felt like was guessing at the time, like you could have a thesis on a particular space, but you’re really betting on a team that’s going to pivot and do well. And funnily enough, one of those investments is a company called amperon that became an energized capital company. We invested in them a couple of years ago. So I’d always stayed close to the space, but what I was really interested in, and I think what my skill set is, is, once you have a little bit of data and you’ve got product market fit, and you’re growing nicely, how to build to scale, how to go from, you know, 20 million in revenue to 100 million in revenue, and make make those jumps. So that was it. And then number two, I have a long relationship. I actually worked with John tough, our managing partner at choose energy, and so I had a history with the team here. I’d gotten to know the folks, the partners here at the firm, and as a result, really felt like this was home and couldn’t have done it without my spouse, who I convinced to come to Chicago with two young kids and no help, but really excited that I made the move. Are you a Texan original? I’m a native Texan, yeah, born and raised in the Dallas area, right? Well,
3:24
welcome to Windy City. Hopefully the winters don’t scare you away. You
3:28
know, I always tell people, it’s not the depth of the cold, but it’s when you get to Mother’s Day and you’ve had the 60 or 70 degree day, and then it goes down to 30, and you’re like, Okay, we’re summer. Yeah,
3:39
right, I hear you, well, 30 isn’t even scratching the surface. That’s true. All right, all right. And then tell us the thesis said, energize, you know, give us fund size broad strokes. Check size D. Lead, and what are you investing in?
3:52
Yeah. So at energize, we have, you know, maybe make a test step back here. What we do so in 2016 John tough and a gentleman named Michael Polsky, who is the founder of company, a Chicago based company called Invenergy, which is the large, largest privately held renewables developer in the world, came together and started talking about what the next phase of renewables looked like. And one of those was that envener G’s problems were getting so big that operating assets was becoming challenging. So to give you kind of a scale of this, in 2010 or so a solar field, a utility scale solar field was one football field big today, they average, like 10,000 football fields. So they’ve, they’ve 10,000x in size. And as you can imagine, like you can’t walk that field every day. You can’t check every panel every day. And so the technology that now does that is, you know, drone software. We have a company called drone deploy in our portfolio that does this. And so that was the insight, was that to accelerate the deployment of renewables and operations of them, we would have to implement software. And so there had to be a digital angle. So with that, in my. Mind they they launched this idea in 2016 we raised our first fund and closed it as on the venture side in 2018 it was $165 million fund. And then our second fund on the venture side doubled in size. After that fundraise, we realized that the opportunity was bigger than we’d imagined. We were underwriting most exits to come with car companies having 30 to 40 million in revenue, and we now have 10, over 30 and six approaching 100 million in revenue. And the Insight it, you know, kind of in between was we need a growth fund. These companies are getting bigger than we ever imagined. We want to be the partner of choice, from, from, you know, ideation, essentially series a commercialization to scale. And so that’s where the growth fund comes in. And that platform now manages about 350 million in capital and continues to grow amazing.
5:54
So let’s talk more about energy. Can you give us kind of, maybe start us off with, what are the major categories that this is most excited about, and are there any themes that you’re investing around in the space? Yeah,
6:08
there’s several. So a couple of the themes that we think are super pertinent. We’ve backed a lot of solar software in the last couple of years. On the residential side, we have a company called Aurora solar, which is the way that process used to work was, if you wanted to put solar on your home, someone would come knock on your door, ask permission to climb on your roof. They would take some measurements. They would take pictures of your trees, and then they would go back to their desk and like, disappear for two to three weeks, work with their internal engineers, etc, come up with with a plan and a quote for your house, and then knock on the door three weeks later and hope that you answered the door again with a quote. And what Aurora solar does is they take LIDAR data, and they take satellite data, and they have some drone data as well, through partnerships, and they can, basically, through machine learning, knock on your door. The sales person now can knock on your door, and they can put in your address, and they automatically get a quote for the the optimized solar array for your house. So like, even if you go on like Google, Google has a solar website that you can do this on. It’s powered by Aurora solar. And then on the utility scale side, we did the same thing, or the company called PV case. So if you think about what our utilities hook up to, they also have a similar problem designing solar fields. So we invested in kind of a similar idea there. We’re really bullish on batteries. We think the batteries are the next wave. If you look at the cost curves of batteries, they look very similar to solar and behaving similarly. And we think that there’s a software angle to how you deploy and operate those batteries. Long term, that ecosystem is very healthy, and then maybe putting it all together, these assets are all connected in a way that they never have been before. So every new asset now either has sensors on it, it’s connected via fiber, so it’s all essentially putting off data that you can analyze. And so we’ve made a few investments in the grid analytics space, including companies like amperon and then another company that’s actually also a local Chicago company, a company called Grid status. So we’re really bullish on those three trends right now, and maybe a little different than our peers and maybe a little more boring. We think that those trends are just going to continue to grow over the
8:16
next decade. Very nice, and for a company like Aurora, does it include, like, a complimentary financing solution as well, right? You give a quote to a homeowner, it’s in the 10s of 1000s of dollars, I would imagine, and a lot of people don’t want to go out of pocket for that, right? So how do you close that financing gap?
8:33
Yeah, that’s a great question. Today they use partners. So they’re partners with, like, four of the largest solar lenders. But you’ve nailed it. I think every vertical software company in every space, when they look to expand tam starts thinking about, how do we get into the flow of capital? And Aurora, you know, because their their arrays are so accurate. So just to give you an idea, when you use Aurora solar as a residential solar installer, their output and kind of the way that they optimize the plan. It’s like 95 to 96% accurate. And so that gives the underwriter confidence. And I’m underwriting the right loan for the right size array, I can kind of forecast operations and maintenance, what it’s going to cost to insure it, all of those things. And so it makes the whole process more seamless. How
9:16
do you think about where power is generated versus where it’s consumed. And kind of what I’m getting at here is you’ve got some applications like Aurora, where, largely they’re deploying on homes in areas that are dense, densely populated. So those are the areas that are probably prime consumers, right? But then you also have these fields that you’ve articulated like many, many 1000s of football fields. I’m assuming it’s in the southwest desert, somewhere where it’s very sunny, or in wind applications, you know, places in middle America where it’s very windy, but those are not centralized areas where power is consumed. So how do you think about distribution? Systems. How do you think about storage? You mentioned batteries, but there are other forms of storage as well. How do you think about that when, like, a lot of the renewable power is generated in areas where it won’t be consumed?
10:12
This is the question of the day. I think, in our space, when you think about that type of power and the other assets that are going in remotely our data centers. How do you get power from point A to point B? The simple truth is, in our country, we need more transmission we’re woefully behind on updating our transmission systems, and so if you think about as you nailed it, like these big solar arrays and wind farms are generally put in remote areas. You know, it’s either West Texas, it’s Iowa, Nebraska, the plains states, etc. And getting them to populated areas requires long lines of transmissions. Where transmission whereas a country we’ve kind of been slow to act there, primarily on the permitting side, whether it’s for environmental reasons or folks just not wanting big transmission lines in their backyard, et cetera. But truth be told, like that is the fix. I think there’s been a few pieces of legislation. It’s one of the places where there is some bipartisan agreement that we need to do something here. And there’s some talk that in the lame duck session coming up, that there will be something passed on transmission. We’re spending a lot of time there. We think software plays a really cool role, whether it’s designing transmission systems so that they’re not so that they’re optimized for length, so that they’re disrupting as much as little land as possible. You know, keeping ecosystems the same. It’s a really cool opportunity. We believe that the interconnection process itself is an opportunity. So if you are looking to build transmission or solar or wind, you have to get it connected to the grid, which requires a study by the utilities. Those are often done by hand by an engineer. We think software is perfect for those applications as well. So there’s a really interesting intersection here. But for us, it’s all about fixing transmission. If you really want to get renewables to the scale that we’re all looking to,
12:00
got it, got it. And how about on the storage front, are batteries? Have they innovated to the place where they are the best storage solution for most mass application, or are there other innovative technologies for storing energy that have emerged?
12:18
Yeah, it’s a great question. So one of the things that we track here at energize, and I think is really interesting is we call it like the three phases of innovation and hardware. And so the first phase is you have a really expensive piece of technology, whether it’s solar batteries or EVs, and you get scale of manufacturing and inflection point hits and drives the cost down. In that first phase, it’s typically, it’s typically the value all accrues to the customer. So EVs get cheaper. Solar panels get cheaper, etc. Batteries have acted in this way. And then when you get to the second phase, it’s like, okay, they’re cheap enough now that we can deploy at scale. And so then you get, you get a new business model. So Tesla comes up, Sunrun comes up, and energy comes up. So these companies that develop and deploy these assets evolve, and they naturally have to solve their problems with software. Batteries are acting in this way. So batteries are coming down. Even lithium ion now has reduced in cost by about 80% over the last five or six years and continues to fall there are new applications out there. I think iron that’s called the iron lung battery. Some, some people have done things with sodium, but we still believe, like, you know, lithium ion is, you know, the gold standard, essentially. And the great thing is, I think playing in software is that it doesn’t really matter to us what battery technology wins, so long as a battery technology wins and gets deployed at scale. Very
13:41
interesting. You know, I’m curious about data centers, and your take on data centers, you know, as they’ve proliferated around around the nation, and you know, things have moved to the cloud, bandwidth is not retreating, it’s only going to increase. You know, as more data gets consumed over the web and higher fidelity data via streaming, etc, etc, GPUs, so, so what does the future look like for data centers?
14:11
Yeah, I think we’re bullish. We think that you kind of mentioned more compute gets solved. I think as compute gets cheaper, and as AI gets cheaper, folks do more with it. You know, it looks a lot like Jevons paradox, where people think, if something gets cheaper over time, we’ll use less of it, or whatever, you know, whatever it may be. But the actual truth is that we find unique and innovative ways to consume more. Is kind of the consumption culture. Yeah, that’s right, that’s right. And so I think that’s where we’re headed. Here, for me, the unanswered question, and where I’m not an expert, is, does do chips get so efficient that it doesn’t change energy consumption? So that’s that’s kind of the the question we’re trying to answer. There are folks that believe we’re reaching the physical limits of GPUs, and there are folks that think that there’ll be a surprise. And Nvidia and those folks will continue to innovate. I think what we will see is we’ve seen is the tech companies finding ways to circumvent what is a very slow process, to get generation and data centers connected to the grid. So we recently saw Microsoft partner to reignite Three Mile Island, which is a good example of like trying to find power, I think we’ll see more of that. We’re seeing more micro grids being installed with data centers. And so if you put just to put it in lay terms, if you put storage and solar behind your meter, so if you use that before you use the utilities power, you can kind of circumvent all the processes that a utility requires, and that’s what data centers are doing. They’re saying, Okay, we’re not even going to worry about transmission or interconnection or anything like that. We’re just going to build our own grid locally, and we’ll use essentially the utility as backup power. So I think we’re going to see some innovation there. And it’s, I’m really excited for what it means for the space. It’s
15:58
really cool how you you can think about, and we’ve spoken for 10 years about, like, compute at the edge versus centralized compute in the cloud. And there’s kind of a parallel here with energy right consumption at the edge versus, you know, centralized. It reminds me of a number of pitches I saw a few years ago. And I’m curious to get your take and if you did anything in this space, but it was like building Bitcoin, you know, mining operations out on, like, oil rigs or, you know, places that that produce mass amounts of energy. Did you ever look at that space, and were those viable? We did, you know, concepts. We
16:35
did look at that space. At least, looked at an investment in that space. And I think the, you know, it’s interesting because, like, the energy piece for us is, like, you see, folks now trying to move energy around, right? They’re trying to optimize, oh, there’s too much generation here. If we store it or we don’t use, you know, we get someone else to use it, etc, you can kind of optimize demand, supply and demand. And it’s really a similar problem with Compute, specifically in crypto, there was a company I think that’s actually done fairly well, called cruso energy that that solved, that helps to solve this problem. It’s a portfolio company of another firm. We ended up taking the edge approach. We invested in a company called zadida, which helps folks in oil and gas or, you know, infrastructure, optimize compute before sending it to the cloud, both because it’s expensive and energy intensive. So if you think about a sensor out on an oil rig, it only has so much battery life it can consume, and so we’re trying to prolong that as long as possible and then make it cheaper to send data. And so far, that’s played out well, but I think it’s that balance of edge versus cloud. How does that all play out? I think we’re in for a couple of years of excitement in that space. Well, I’m
17:49
sure it’s similar for energy, right? If you’ve got, like, a solar farm somewhere, you probably have to convert that energy, you know, via Tru or something else, to whether it’s ACDC, you know, something that’s much more efficient to transmit over long distances.
18:05
Yeah, that’s right. And so it’s like, it’s all, whether it’s data and energy, it’s become an optimization problem, which is why I alluded to, like, we’re really interested in grid analytics, because we now think it’s an optimization problem. And if you kind of, you know, what happened in the cloud revolution, you know, oh 708, is all of these companies came up to observe and optimize data. You know, that’s when the splunks of the world get going. That’s when, you know, Alteryx, all of those firms, are up and running. And I think energy’s kind of been a similar inflection point. So
18:32
Kevin, you know, solar and wind have been a nice renewable energy story for a long time, right? But they just can’t generate enough to address demand. I think in 23 they totaled around 660k gigawatt hours of total production. What does the future hold for solar and wind, and will we see them become a larger share of energy supply in the States? It’s
18:56
a great question. I think the answer to the first part is yes, it will be a bigger portion of supply, if you look at so when we’re thinking about like what technologies are coming or which ones are reaching scale, each utility has a website where you can see the the interconnection queue, so you can see what type of assets are coming onto the grid, whether they’re natural gas plants, their nuclear plants, their solar, wind, storage, etc. Solar and storage are by far, far the largest. In some states, like Texas, they make up like 60% of what’s coming online. So you can look into the future and say this is going to happen. Maybe my controversial take, or my hot take, is that, like, natural gas is going to be around for a long time, and sometimes in climate circles, that’s not a popular answer, but you have to be pragmatic about what’s going to happen. And if you see, you know, these companies specifically in data centers, we just can’t meet that power demand with, with, with just solar and storage. I think long term it’s possible, but for the next couple of decades, we’re going to rely on on things like nuclear. Are and natural gas to offer firm more firm generation. Well, that
20:03
is the perfect segue to my next question. Kevin so I was listening to Bill Gurley and Brad gerstner’s podcast nuclear in Diablo Canyon out in SLO San Luis Obispo. They and many others in tech seem to be quite bullish on nuclear as the best solution for addressing increasing energy demand in sort of a low to no carbon way. My question for you is, you know, is nuclear the key to our country’s energy independence and the increases that we’re going to see in energy demands, you know, over the coming decade? Yeah,
20:34
I guess if I, if I upset one side with the previous answer, maybe I’ll upset the other side with this. That’s
20:39
good. Let’s be controversial, right? Let’s make everyone angry. Yeah,
20:43
that’s right. That’s right. I’m very much, I think it’s I’m very much in all of the above when it comes to the energy transition, I kind of alluded to that in my last answer, where I think we’re going to need nuclear, natural gas, but I’m also extremely, extremely bullish on what’s coming in solar and storage, and what’s has been accomplished there. The truth with nuclear, whether it’s regulation or how much it costs to build, or insurance, etc, is that it’s very expensive. And I think that gets missed by folks who are not experts in the space. So just to give you an idea, the only nuclear plant that we’ve built in this country and the last couple of decades is Vogel, and in Georgia, it overran costs by $17 billion and took seven years longer than expected to build. And so the speed at which nuclear can get up and running to meet these demand, to meet the demands of what has data centers, EVs, building, electrification, etc, we just haven’t proven as a country we can do it that that’s the, I think the biggest issue in nuclear, do I like do I like that? It’s becoming the views on it have become more positive. Absolutely, you see countries like France, which have built their entire, you know, generation, generation, generating fleet in nuclear. The counter example is Germany, which shut down all of their nuclear coming out of Fukushima and really crippled, you know, and put their crippled, their grid, and made, you know, made themselves reliant on Russia. So I think it’s in all the above. But these things, to me, often get oversimplified. It’s not as easy as just building more nuclear. It’s very expensive, it’s very hard, it’s very complicated. And we do have technologies like solar, storage, etc, that can be deployed today.
22:18
What do you mean that the US hasn’t proven that we can do that. So we,
22:22
like Vogel. Vogel is the only example of building a nuclear plant in the US in the last 30 years. It’s the only one that’s gone live. And it’s it was, it overran cost by 50% and said, you know, $17 billion and and seven years longer than expected. So we, just as a as a country, haven’t it’s been a long time since we’ve built nuclear at scale and done so rapidly. And I think that the complications there are much more are more numerous than folks expect.
22:52
Let’s talk about, you know, the financing side of things, Kevin, you know, talk to us a bit about how you’re seeing companies navigate the capital gap, you know, this messy middle of growth funding in the climate space,
23:03
first and foremost, quality still wins. If you have high, you know, high, if you have the metrics that all growth investors look for on the software side, you’ll get funding. They’re very competitive. I think that the companies that are struggling today are the ones that are, you know, 30, 40% growers, and still at a high rate of burn. And so we, you know, I, when I see companies in that space, the advice I always give them is, if you’re going to be a 30% grower, the path to profitability needs to be very clear, somewhat quick, you know, five quarters or less. Five, six quarters. That’s key, you know, to what we’re seeing. If you’re 100% plus grower at scale, those deals are still very competitive, so no problems there. What we did was we kind of advised all of our companies two years ago to work backwards to their next funding milestone. So if they were in that, you know, heading toward that middle, it was, what milestones do you need to hit the next round, and then how do we work backwards from there on? How we execute a plan to get there and extend your runway? Let’s give you two quarters of leeway. And as a result, we actually had no companies in market for the last 18 months unless it was a preemptive round done by an external party. So we were very fortunate there. But I think the companies that end up in the middle, that get stuck are the ones that kind of the growth levels off. They’re used to spending a lot of money. They’re used to high burn rate. And if they keep up that path, it becomes very difficult to fundraise, and it actually becomes very difficult to exit. Strategics are looking for something that they can add EBITDA too. They’re valued in the public markets off of EBITDA. So they want, that’s what they want to acquire this financial sponsors want to believe that at some point you will be profitable and service debt if interest rates come back down. And so it’s, it really is, if you are in that middle, especially that middle of growth, it’s more about showing your operational excellence. And. And your ability to create operating leverage
25:03
is part of the reason that you all raised a growth fund, because there’s sort of a dearth of growth options for Energy and Climate company. Yeah, I
25:12
think that’s exactly, that’s exactly was the the impetus for what we did. We saw the seed stage, if you just think about the maturity of our of our sector, so to speak, of climate, it was a natural like origination of seed, seed, seed funds. You had to get the ecosystem going. So seed blew up, and there’s now well over 100 seed funds focused on our space. We launched energize at that point with an emphasis on commercialization. You have something, how do we help you go to market? And we now have an entire internal inter team built on helping companies go to market, which is great. And then those companies grew up, and there was no capital, like, even if they were pretty successful, folks, just like we didn’t believe, we don’t believe in the the TAM of climate, we don’t believe in the space. And we said, Well, why not energize if we already know these companies well, and we have those, these these capabilities, let’s launch our growth fund. And then after that, what happened was the the large firms, KKR, you know, TPG, rise, General, Atlantic, beyond next zero, Blackstone, all launched their their funds. And what ended up happening was there’s no one in the middle. So the big guys all have their firms. They all have their funds. They’re focused on the space. The ecosystem at the low end is still very active. But in between, it’s it’s kind of hard to navigate. There’s this really great stat that there were 44 growth equity ish funds raised in climate since 2022 of them, 15 of them are over a billion dollars in size, and they control 90% of the capital in the space. So there’s, there’s just, it’s all at the higher end. It’s not in the middle. And so we feel, you know, really like we have a really nice market in the middle to help companies, you know, find, help companies find a partner, and then help them navigate until they’re ready for either a strategic outcome or one of the financial sponsors get interested.
27:04
I like it. I find it funny. You know, you see these posts on LinkedIn and other places, and they’re showing data of, like, early stage, VC versus late stage, and, you know, index returns, and you know, what’s the best stage? And it’s, it’s more nuanced than that, right? It’s a function of, like, what sector are you operating in? What’s the maturity of that? Where are the gaps, you know, over the coming five years? And sometimes those gaps close and it changes. And so people like to make these, I think broad statements about where in the asset class is best, but it’s, it’s a moving target. It’s not always the same place. Yeah, I think
27:39
that’s right, you know, one of the places that was great, that’s been great to be, kind of in this downturn, is the early stage. You know, it’s like, folks are still in your companies are still being, you know, created. There’s still a lot of momentum there. Valuations have come down. Like, that’s a great place to be. But also, I think, in the middle right now, with folks not, not being focused on it, like, valuations have come down. So if you’re an investor, it’s a awesome place to be, whereas if you know you’re in 2021 when everybody’s competing to deploy dollars, it was, it was really difficult. Valuations were really high. So it’s just a function of time,
28:12
very good. So, So Kevin, you and I had some fun correspondence about one of my favorite authors who also happens to be a VC, Morgan Housel. I think I’ve got his. I see a bunch of books behind you now I’m No, his book is behind me somewhere. I’m not sure exactly where, but psychology of money is one of my favorites. So we were talking about intelligence, right? He wrote this article where he states, I’ve come to believe that part of the reason professional money managers produce such lousy returns is because the industry attracts such intelligent people they’re too smart for their own good. There’s a fine line between intellectual rigor and believing your own bullshit, and smart people are more at risk than ordinary folks. So he goes on to talk about how being very smart makes it harder to listen to people who are less credentialed than you, even when they’re right. Kevin, as a VC without a crystal ball, you know? How do you how do you think about the balance between making smart bets on the future and being honest about not being able to predict it?
29:13
Yeah, that’s one of my favorite lines. It’s a little self serving, because calling is all smart, which is awesome, but, but there’s so much truth in it. It’s, I think it’s even more difficult when your thesis driven as energize is you have to believe that folks care about climate change, care about sustainability in the same way that you do or eventually will, which is maybe the more important part that that you’re headed somewhere that in five to 10 years really, really matters. And that means, like, when people it can be really easy to, like, dismiss solutions or business models, or we talked about nuclear, and as folks that have invested in solar and battery software, it’s really easy to be like, Oh, nuclear will never happen. And this is the way the future, except. Era, and so I think you you have to check your biases at the door. You also have to say, Oh, this has never worked in our space. And ask yourself, well, why could it work in our space? Or how could it work in our space? I think a couple of things that we’ve really done well internally, is that over the last couple of years, we spent a lot of time refining our investment process, essentially having a checklist that requires us to at least acknowledge there may be some bias or there may be something we’re missing. And we have this phrase internally called you have the obligation to dissent. So if you’re sitting in the investment team meeting, you’re required to say why you do or do not like something. You know, you should voice your opinion, and that goes from everyone from the most junior associates to the partner. So it’s really a culture of debate, and I can’t think of a better way to do it, like good process, good debate, and get to the ultimate outcomes, because it really is easy in this space to tell yourself a story about why you’re right and why everyone else is wrong, and that results in missing good investments. Kevin,
31:01
what characteristics of products and solutions do you think will win in this increasingly, AI first world that we find ourselves in.
31:09
This is one of the biggest debates we’re having internally. Now, a good example here is in the battery space. A lot of new startups are using AI to arbitrage power markets. So it’s like, if we lay this software on top, our AI will predict where power prices are going, and we’ll either charge your battery or discharge it onto the grid to maximize the revenue. But the question becomes like, is that a platform, or is that just a solution that everyone eventually figures out the arbitrage goes away, and therefore the value of your software goes away. And it’s something that we’ve debated. So they were debated internally. I think the other piece of it is folks that have a really cool feature, like, a good example is we’re seeing a lot of AI agents or call center bots in the home services space or in construction. And then the question becomes, how quickly can you build a system of record or a platform? There is it that the AI chats are recorded, and then, so now you have a queryable database. So if I’m a HVAC repair person, I can go to Nick’s house and say, What work have we done on his AC in the last 10 years? And I get a readout, et cetera, like, how quickly does that transition happen? Or, on the flip side, does a competitor, a service Titan, a pro core, someone who does construction or home services, do the APIs being created by folks like open API or open chat, the folks at chatgpt OpenAI, how quickly do they flip it to where the service Titan just easily builds their own chat, chat bot, right? So for us, it’s thinking about how, like is AI the tip of the spear, and how quickly can this team execute on on making them on building defensibility? Because I think that’s the question that’s still unanswered with a lot of folks.
32:58
How do you think AI changes defensibility in the energy space.
33:02
I think for software companies, it does it, it becomes more difficult. One of the great things about working in the energy space, I say great, it’s a double edged sword, is selling to utilities and these customers, where buying software slowly is a feature, not a bug. They’re not meant to make quick decisions, because they’re dealing with really critical infrastructure. And so distribution, the distribution mode, I think, actually becomes key. If you can lock in a utility, utility, sign 510, year contracts, if you have these big customers locked into big deals, you have more time to innovate, to build the features that your competitors are building, because you own the relationship. So when I think about where software is headed, I think a lot about, you know, it’s the distribution mode. It’s Do you have relationships with your customers? Are you already tied in, or a space where they’re not, they’re not replacing you, and then do they trust you to deploy new solutions? I think one of the other articles you talked about was like taste becoming a thing in AI and how do you curate software and curate solutions? I think that’s going to be a really big key for the next couple of years.
34:05
Inertia is a heck of a thing, Kevin, depending on what side of the table
34:09
good and bad. That’s right, that’s right. You know, while
34:13
we’re talking about these long term relationships and distribution advantages, you know, I’m curious to get your take on how you kind of define and evaluate revenue quality.
34:23
Yeah, so we’ve spent a lot. We spend a lot of time on this, and gross dollar retention actually has become the number one indicator of success for exit, and that’s because it’s an indicator of mission criticality. So during the last 18 months, 24 months, folks really reduced their software budgets. Our best companies held gross dollar retention in the mid 90s, and so like net dollar retention can be gamed. You can give a discount early and then expand a customer later on, and the net dollar retention becomes inflated. And there, for a while, net dollar retention was the popular metric we’ve reached. Cringed on that a little bit, and kind of look more at gross dollar retention. The second one is, we think a lot about gross margins, not just in a software sense, but a lot of companies, if you’re serving utilities, telecom, energy companies, big auto, Williams, et cetera, you have a services arm, usually a customer success or implementation arm, great gross margins in that space are like 40 ish percent. And so we started thinking about like, what does quality look like across different business models, whether it’s a services piece, a marketplace piece, or just traditional B to B SaaS, which everyone kind of knows what gross margin should land there. And then one that I think is very underestimated and under discussed is payback period, because that’s the cash you’re floating to your customer until you get paid back. Same with contribution margin. A lot of times, CAC and LTV get or LTV to cat gets the you know, the publicity, the blog posts, the you know, all that. But I think payback period matters even more, especially in an environment where fundraising is constrained. It’s how quickly are you turning over that cash? Love it.
35:57
Kevin, if we could feature anyone here on the show. Who should we interview and what topic would you like to hear them speak about? I
36:04
have two, two folks here, Irina Goldenberg from Highland Europe, her ability to communicate across culture. So when you’re a European investor, it’s, it’s you have to deal with so many cultures at once, and just the ability to communicate across those boundaries, to me is just a skill we could all use. I think it’s phenomenal. And I think is, you know, things like aI make software increasingly more global than it already is. That skill is just going to be one that we could all use, and then another one, maybe, maybe less well known. A mentor of mine is a gentleman named John Jaggers, and he’s one of the founders of seven Rosen and so, for anyone who knows the history of kind of my Dallas roots of venture capital. Dallas was actually a venture hotbed in the late 80s, early 90s. So all the telecom revolution was happening there. Ti was there, Nokia, Nortel, etc. Compaq is founded in Houston. Yeah. And seven Rosen was was kind of a little spin out of Kleiner at the time that their first capital came from them, and John was a founder of that firm. And history doesn’t repeat, but it rhymes. And so when you’re going through cycles, to have someone who saw the ups of the.com boom and all of that happen, it’s really great to be able to talk to folks. And I think we as an industry don’t maybe do a good job of, like, bringing those folks onto podcasts and talking about, like, the history and the cycles of the space, because I think these things all happen over and over again. Very
37:27
good. Kevin, what book, article or video would you recommend to listeners?
37:31
Book is unreasonable hospitality. It’s a book by Danny. No, it’s a Danny Meyer protege, will gurgara. I’m gonna butcher his last name. Okay? He is the he Danny Meyer basically turned over 11 Madison Park to him. And the book is all about, how do you do sales and service? And I just think, essentially, we’re in the sales and services business, whether it’s to our LPS or to our entrepreneurs. That’s our job. And I think we could all benefit from from learning that if I were going to do an article, it’s an article called solitude and leadership. And the whole premise of the article is that leadership is lonely and you have to really be able to sit with your thoughts and make difficult decisions. And then the video is running down a dream by Bill Gurley at UT. It’s such a great talk,
38:17
one of the best Kevin, do you have any habits, tactics or behaviors that are a force multiplier.
38:23
I’m a parent, so I have a unique ability to focus and prioritize. I think there’s only so many hours in the day and then consistency. I, you know, I I’ve been an avid I’ve been in fitness for 20 years. Every day in the gym. I’ve journaled every day for the last five I think that’s just a superpower, to be able to do the same thing no matter how boring it is over and over again, perfect. And then finally,
38:44
here, Kevin, what’s the best way for listeners to connect with you and follow along with Energize?
38:48
Yeah, so you can visit my blog is Kevin D stevens.com has a contact page, my email, my LinkedIn, all there. And if you want to find energize word energizecap.com and I think all of us are pretty active on on LinkedIn and all social media, and we’d love to hear from all the great entrepreneurs working in the climate space out there.
39:08
Awesome. Well, Kevin, I really appreciate you joining today. I look forward to reading more of your work. I really learned a lot today, and I appreciate you joining us. This was great. Awesome.
39:16
Likewise, Nick, I we didn’t get to it, but I’ve been I’ve been listening since my days at choose in 2015 So, okay, yeah, you’ve played a huge role and just my startup journey. So thank you so much for everything you do for us. Amazing.
39:28
Thank you sir for saying that. Appreciate
39:35
it. All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today until next time, remember to over, prepare, choose carefully and invest confidently. Thanks so much for listening.
