Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name’s Stewart Foley, I’ll be your host. All right, welcome back. Thanks for joining us. We’ve got a great podcast for you today, talking about energy in cleantech and how it impacts the insurance industry. And we are joined by the co-founders of Energy Foundry, Sara Chamberlain and Jason Blumberg. Thanks for being on.
Sara: Thanks.
Jason: Thanks for having us.
Stewart: We are thrilled that you’re here. And we have two of you in the same room, just to let everybody know. And so I’m going to ask you my same icebreaker questions that I ask all the time. So starting with you, Sara, where’d you grow up? What was your first job? And what’s a fun fact, in addition to being the co-founder of Energy Foundry?
Sara: Sure. I grew up in the suburbs of Chicago, a town called Buffalo Grove.
Stewart: Oh, close by. We’re in Barrington Hills. Absolutely.
Sara: Oh, sure. Yeah. We’re neighbors. I couldn’t wait to leave the small town and move down to the city, which I did after college. But my first real job was in environmental consulting. And I was going and looking at a lot of industrial manufacturing operations and trying to understand how to assess and quantify environmental risk. And what I noticed was there were a lot of chemicals, there were a lot of permits for air emissions and waste water and waste treatment. And the light bulb went on that there had to be a better way, which led me to this path.
Stewart: Very cool. What’s a fun fact?
Sara: A fun fact, I have a four-year-old and a six-year-old. So the last couple of years have been very, very busy.
Stewart: A blur, a blur. How about you, Jason? Where’d you grow up? And first job? Fun fact?
Jason: Yeah. Grew up in Detroit, working on cars. First job was tearing shingles off the roof of a house when I was either 13 or 14.
Stewart: There you go.
Jason: A neighbor does construction, needed some assistance. That was a terrible job, 100 degree heat, frying it up double. And I thought, “There’s got to be a better pathway for me than this.”
Stewart: Right. Where’s that college application? You’re only 13, Jason. That’s okay. I want to get started early.
Jason: That’s right.
Stewart: Absolutely. Well, how about a fun fact?
Jason: Yeah, fun fact. So undergrad at Michigan State, grad at U Chicago’s MBA program. And a couple years after graduating, they just surprised me and showed up at my door and said, “Hey, can you teach an MBA PhD class on how to take cleantech innovation and turn it into technologies to commercialize into the market?” I’ve been doing that for more than a decade. And it’s been fun, but it relates exactly to what we’re doing at our day job.
Stewart: Absolutely. And we share that alma mater. I just did my 20-year reunion, oddly enough. I went back, got my MBA much later. And so we’re talking about, “Oh gee, I need a hearing aid. That’s great. Isn’t it great?” That’s just what you want. You just go, “What are we doing?”
So before we go too far, this is an area that I know virtually nothing about, and I suspect that a lot of our listeners are about the same program. So if you could, give us a few minutes of background on, what is Energy Foundry? And then we’re going to get into some questions specifically on energy and cleantech.
Sara: Sure. So Energy Foundry is an early stage venture capital firm. So that means we’re investing in really early stage companies, folks that are a couple of people, maybe they’ve proven out their idea or they have a prototype in their lab and they’re really trying to build a business. And so we’ve been investing in this space, in the cleantech climate tech space, for more than a decade. Founded our firm in 2012, actually. We made our first investment in 2013. And that really makes us one of the pioneers in climate tech venture capital. There’s a lot of players today, but many of them have come into this space in recent years. We’re one of the few that’s also been investing in hardware and material science in addition to the traditional venture space of software investing. And it’s really a challenging space because of that.
What we’ve done is we really engage with every innovation known in North America, and that’s allowed us to build a platform that sees just about everything. We look at 1,500 technologies or companies every year, and we’ve been carefully tracking them since we started. So we have a database of over 8,000 innovations. And so what that does is it allows us to have better pattern recognition than just about anybody in the venture capital space. And from that list of 25 or 1,500 companies a year, what we’re trying to do is to down-select to a handful that are very novel technologies.
And the reason we’re looking for novel technologies is because we need a moat. We need something that gives us time to go from our lab-scale prototype to the grid-scale installation with large customers. And so we’re always looking for that unique technology that is both better and cheaper than whatever the incumbent has today. And we’re looking at things that are anywhere from 1 to 3 years away from the market, all the way 10 years out, things that are still in universities and research labs. And we’re quite active with them. There are sort of five thematic areas that we invest in: energy, mobility, water, waste and agriculture, so all-encompassing as you think about the major verticals that feed into climate tech.
Stewart: That’s really interesting. So I guess the first question I’d ask you is how does energy and cleantech venture align with the insurance industry? And I’ve always been beating a drum saying that climate extremes, it seems to me that the insurance industry has a lot of skin in the game, because when extreme weather events happen, the claims department phone starts ringing. So talk to us about how those worlds connect.
Jason: Thanks. So part of the economy that we impact is $14 trillion of GDP; on a global basis, almost as large as America’s impact on global GDP, and so a huge part of it. The specific areas that we see a lot of alignment, a lot of interest from insurance companies that we interact with, is first, of course, financial returns. So we’ve figured out a model that allows us to get top-tier returns, which is important of course, but also duration. The duration of these investments is longer; some industries want quick returns, but insurance is generally more interested in long-duration assets. And so the duration balancing helps as well, from the financial perspective.
From a sustainability impact, we get interest around PRI and UN SDG goals. So how do you meet the expectations around that? And as we’ve mapped our activities, it impacts about 50% of the actions that folks are looking for. And that’s not just us, this is all people with our similar focus area. On sustainability as well, it hits home with folks with climate and pollution control locally, and how does that impact them personally? And then if you look at the business that we’re focused on, the climate change impacts folks’ core business. As you mentioned, how does that impact their predictive models? And then lower costs and quicker deployment with PNC type of insurance and thinking about, how do you actually impact the cost line?
Stewart: And so when we’re talking about some real examples, what technologies and business models are you building that impact insurers?
Jason: So my old firm, McKinsey, did a recent report, which I think everybody knows. It’s just about every line of an insurance company’s claims are being hit. And so on that side of it, what’s the cost side for claims? If we look at buildings, we’re looking at, what are new materials, new construction processes, how do you reduce leaks? So for example, if you’re going to have to quickly rebuild a building, we have new window technology that allows for windows to be more energy efficient, which is positive for the consumer.
What’s beneficial for the insurance company is that it’s both lower cost and has a stronger window because it has a piece of plastic or polycarbonate in the middle that allows for less damage to happen in future incidences. And so if we look at that, it’s significantly better. If we look at concrete solutions that we’re working on that are both lower cost and stronger materials, those implementations in the built environment can be better. We’re also looking at things around modular movement of material or homes or buildings to reduce cost in emergency situations. And so as you think about climate and you think about cleantech and energy innovation, those trillions of dollars of industries, that material pulls all the way through.
And then if we think about the claims models, there’s a lot of work being done on, what are the new ways to improve environmental impact? So an example would be looking at the salinity of water and how does that predict what’s going to happen with the climate model, and then how does that impact how you should think about claims? And so there’s a fair bit of pull through there. If we look at cyber, we’re looking at what’s happening at the endpoint or could happen at the grid, for example, and how could you bring down a whole power grid? And we have companies like Network Perception there that are working at the endpoints to make sure the power grids are up. And then they’re translating that to oil and gas companies and other industries across there.
And then in the automotive space, what are new materials that will cost less or cheaper? You have transportation such as aircraft and marine, those are actually going to go electric more. And so how do folks need to think about a whole new value chain there of what’s going on there? So as we look at it, we see the modeling side, which is important. And then importantly, we see the cost side and battling inflation by using new innovations that are out there that battle the cost side. And that all rolls up under cleantech and climate.
Stewart: So you mentioned cement, right, which is a huge emitter. You talked about stronger, better. Is it also lower emissions as well? Is that a consideration?
Jason: Yeah, so let me give you an example of one that we’re working on today called Alchemy Environmental. They are taking waste material from 16 different potential places, so think about bad stuff going in the environment already, and turning that into the aggregate that goes into it. So rather than having to mine it out of the ground, rather than having the CO2 impact that comes from that, you can take bad waste material, have a process for cleaning it up and have it be lower cost than the aggregate that goes in today. Aggregate is 80% of the content of material that goes into cement.
Stewart: And aggregate is the … it’s not the cement itself, right? It’s the-
Jason: Right. You have the concrete, you have the cement, which is about 15% to 20%. You have the aggregate, which is all the material that fills in. The cement holds it together.
Stewart: It’s the rock, for lack of a better term, right?
Jason: Rock, exactly.
Stewart: Yeah, that’s interesting.
Sara: And I think it’s a good way to dimensionalize how we think a little bit differently about white space for investing. And so today, there are dozens of companies that are trying to decarbonize cement, which makes sense because that’s where a lot of the carbon emissions occur, from the kilns to heat that material. But it’s very crowded. And so when we came across Alchemy, out of our 1,500 companies a year that we evaluate, when we saw that they were turning industrial waste, 100% industrial waste into this aggregate product, they’re really decarbonizing the balance of concrete that nobody else is really touching. And so they have a potential to work with all of those cement decarbonization companies and work into a number of different end applications, whether it’s lightweight aggregate for buildings, or roofing tiles, or drainage tiles. There’s a lot of different embodiments for how you can take their material and productize it. So we really thought that was a big opportunity as well.
Stewart: That’s interesting, so no pun intended, right? Ready for this one? So climate tech is a hot topic these days. I love that. And you mentioned earlier, Jason, that it’s a $14 trillion worth of GDP. It’s also dominated by very large companies, right, automotive, industrial equipment, chemicals, et cetera. And those have succeeded through economies of scale. How do you and other VCs and startups compete against those companies, given that backdrop?
Sara: Yeah, it’s a great question. And I think the first way I would frame it is that other venture firms, other investors at the stage that we invest at, a lot of times what they’re looking for is momentum … they’re applying a momentum play. If there’s a particular segment that’s hot, for example, let’s take decarbonization of cement, they’ll say, “That whole market space is going, and so I just need to be there. I need a handful of companies. There are a dozen companies, and I’ll hope that 1 in 10 of those will carry the fund and will carry that thesis.”
And our approach is the inverse. So the first thing is we’ll actually take technology risk. You would probably never see another venture firm do a dozen cement decarbonization companies because there’s so much tech risk. We’ll actually look at technology risk. We’re experienced in doing so. And it also really parallels the insurance industry, what we’re doing. How do we understand and quantify and then manage those technology risks? How do we bring in the customers very early so that we’re really building a business? Our strategy is that, let’s say, 8 in 10 of our companies will be successful. And so we have to be very, very selective in picking the one that we think is really going to win in that market. And the way that we do this is this systemic approach of looking at everything. We sit down as a team every week and look at every business plan that comes in, in order to hone that pattern recognition and know what’s different and unique.
And then the next thing that we do that’s really critical is we work with these large corporations. You mentioned they are the dominant incumbents. And so we know that they’re a critical part of the equation. So in addition to working with all the research institutions and universities to find the novel innovations, we try to pair them very early in our diligence to understand, is this really better than what those existing chemical companies or industrial equipment companies are doing? Or does it fill a pain point for them that they haven’t been able to solve? Or does it allow them to enter into a new market space or into an adjacent market space where there’s better growth opportunities? And so we are very active in sort of managing that customer risk in the early days by working with them.
And part of that is that we’re, as I mentioned, very engaged in all these innovation hubs. We sit on a number of advisory boards in order to mentor and evaluate those technologies. And then we also have partnerships set up with these leading corporations who understand that we have this vantage point of the landscape that it will be very hard for them to build that. And so they work with us to say, “Hey, we’re looking at this set of companies or this technology challenge, what else have you all seen in that space?” And we can then synthesize a decade’s worth of learnings of how to do it the most efficiently, or which company maybe they haven’t yet met with that they should have on their radar. And so that’s how we win, is we work with them to pull it all the way through.
Stewart: Jason, anything to add there?
Jason: So if we look at this, what we spend a lot of time doing is really trying to quantify the risk of these innovations. There’s 1,500 that are coming in the door; we’re able to quickly dissect which ones are the most novel and interesting through assessing every one of them. But then from there, we try to take it and understand, what is the specific risk categories, how do we mitigate that risk and how can we live with it? So we’re able to quantify that, then compare it to returns to assess, is this both a high-return opportunity as well as a risk-managed opportunity?
And using that lens allows us to make bets on early stage innovation. It goes back to the knowledge base that Sara mentioned that we pull in to be able to quantify those risks, to understand the technology risks from our 16 different advisory boards that we’re on, and then the deeper relationships. Those include Argon National Labs, or Caltech, or many others in between, and then the corporate partners which have a similar number, world-class leading companies that are engaged with us as LPs, core strategic partners. And so we pull those together to quantify the risk.
Stewart: Very cool. So I got two questions here, one looking backward and one looking forward. So what are the biggest changes in the energy cleantech industry you’ve seen since you founded Energy Foundry what’s now over a decade ago?
Jason: Thanks. So about 20 years ago, I got into this industry when I was at McKinsey and helped build their early work in climate change, before cleantech was a word, in working with the industrial and utilities. And over that period, and then when we started this, you had the recovery money coming out from the stimulus under President Obama. And then at that time, what we saw was a lot of people not wanting to do anything. And so throughout this history over the last decade of Energy Foundry, there’s been limited interest in the end customer to pull through the innovation. So we’ve been very careful of, who would want to work with these technologies, how would we get them to do that; as we mentioned, having the customer involved from day one.
Today, fast-forward, in the last few years, what we’re seeing is real estate companies with name brands you’d know. We’re seeing large tech companies putting lots of money out there. We’re seeing large industrial companies spinning up CVCs and leaning in. And all these folks are saying, “What can I do to work on climate change, to work on reducing my cost, and to engage with these early stage innovations in an unbelievably meaningful way?” And so what that’s done is it’s taken companies like our company in Talhada, great company, reduces the usage of energy in a … let’s call it a hotel, by 35% to 50%.
And what they do is they take a boiler that’s been built from 100 years ago, same design, and they said, “Well, what if we make something that looks like a refrigerator that has three or four quick tankless heaters built in, and it’s industrial scale, and it’s the size of a refrigerator, you can just wheel it in, you don’t need a crane, it’s a quarter of the space or less, and so it’s a significantly better product? What if we take that and replace it so you get your 50% energy savings and CO2 savings, huge material savings and huge install savings?” They used to have to really sell hard to get that into the marketplace. Fast-forward to today, the customers are saying, “How can I solve it, and I want one of those.” And we’re seeing those same players coming to us and saying, “How can I get access to those innovations?” So it’s really changed the engagement model.
Another thing that we’re seeing is we’ve continued to see an increase in spending in R&D from the Department of Energy and others across the value chain, from $5 billion, to $7 billion, to $9 billion, to $11 billion in R&D at the earliest stages to push that out. And so that’s been a big change. We’ve also seen experienced entrepreneurs come into the market now that we have that, we didn’t have that before, and an increase in late stage capital. And so that has been useful for us to see more money, more entrepreneurs, more early stage research. But there is still a huge gap in the space that we’re at. There’s only a half dozen firms like ours, or less, that really take innovation and push it forward, and very few that can actually pull the pieces together to make it work; which is why, for example, for us, we’ve seen, in year to date, of the top 10 highest raises in the energy and cleantech space, so most amount of money raised by a startup, 20% of our companies we were at the earliest, we were their first investors.
Stewart: Oh, wow.
Jason: So then named cleantech firm of the year, and then you’ll find us on the list of most influential battery storage investors. And so all of this has come together based on the success we’ve had. But the market is pulling it now, and why there’s interest from a lot of folks in this space.
Stewart: Very cool. That’s impressive. So looking forward, what’s the outlook for the next 10 years, and how do you see it affecting the insurance industry?
Sara: Yeah, so Jason alluded to the ARRA stimulus from 2008, 2009. I mentioned that because I think a lot of people of … you can’t talk about the future of this space without noting the Inflation Reduction Act; major, major change. And actually, 10 years ago during the Obama stimulus, I was in D.C. I was working with Wilson Sonsini, which is one of the leaders and the climate space from a client perspective, startup perspective. And we were helping the client base at Wilson navigate that ARRA stimulus, all the capital that was flowing into these sectors and these companies. That was about an $8 billion allocation into clean energy, just to put it in perspective. And what we’re looking at now with the IRA is $400 billion, so a major, major boost. Previously, ARRA was spectacular for really unlocking solar and wind and what we know now as the staples in clean energy.
And so when I think about what’s coming 10 years from now with these tool sets and with the amount of investment flowing in, I mean, it is unlocking many, many other new innovations that layer on top of those, from heat pump innovations to window technologies like 3E Nano, which is the one Jason was describing before, which is more efficient, to distributed energy systems, to potentially things like hydrogen and carbon capture. There’s a lot of technology and a lot of research being done in those areas. And now it really does seem we have the tailwinds to tackle all of those other additive segments of the market.
Stewart: That’s interesting. I was at a PRI event and someone said that the Inflation Reduction Act … And by the way, full disclosure, I am practicing without a license of any kind, and I may have this wrong, so sorry in advance to everyone … That the Inflation Reduction Act made green hydrogen competitive with diesel fuel. Is that true? And the maybe bigger, less informed question is what is green hydrogen versus regular hydrogen? And if this goes too far afield, you can just go, “No.”
Jason: No, we live that. This is our life, so easy to answer.
Stewart: Good deal.
Jason: So green hydrogen is hydrogen that’s made from green electricity. And so what you’ve traditionally had then is the ability to not have CO2 because you’re making it from wind or solar and you convert the electrons into a liquid, and that’s green hydrogen. There is blue hydrogen, which is you make it from natural gas and you capture the CO2 as well, and that’s another pathway. So green hydrogen is $3 a kilogram, is the subsidy there. The selection, it appears to us, was designed to bridge the gap exactly between green and traditional hydrogen are close. It’s probably a dollar off. But what you see there then is that that does make it pretty competitive and comparable. So you see a huge rush into the space.
I think the thing that we’re looking at is, are there technologies that will unlock this and bring down the cost down cheaper or disrupt the market space? And so there is a big rush to make green hydrogen work. The subsidy does make that happen. But just like in the stimulus in ARRA, in the President Obama stimulus, you had a ton of people run into solar, and on the other end it was an electron, and they didn’t appreciate that there’s no differentiation in the output from one to the next. And you had these huge bankruptcies of solar companies. We have a bunch of people running into hydrogen today, and not all of them, I’m not saying all of them don’t, but many of them might not appreciate that it’s just a hydrogen molecule on the other end. And the buyer is just going to buy the cheapest one that solves their need. It could be green, it could be blue, it could be traditional, but they’re just going to solve the thing that meet meets their need.
And so you might find a lot of these folks with assets that don’t return as well, which is what we’re looking for, is what is the disruption either in the technology or the picks and shovels that solves that problem? And we’re continuing to harvest the innovations that are out there to find those unique gems among the pile of coal.
Stewart: Good deal. Just to wrap, and I’ll ask each of you this, what are you most optimistic about as you look out today?
Jason: Yeah, so for our space and in the insurance, one area, and then I’ll get to optimistic overall, is that renewables and renewable finance, which has traditionally been how the insurance industry accesses the green innovation, PRI and CO2 issues related to this, it’s oversaturated with capital. And so they need to move into different markets to meet those needs and get high returns and match the duration, and we fit well with that.
But stepping back, what I’m really optimistic about is that we can harness the power of innovation to address the most challenging issues. We can harness capitalism to drive this change. So by aligning the incentives of both the investor and these new technologies, we can create a paradigm that gives the best choice for individuals and makes that the best choice for society. And there’s no green premium on what we’re doing, a different lens than Bill Gates has mentioned out there. Really, the customer will say, “I want that,” and it’s because it’s better. And I think innovation and capitalism can drive that outcome.
Sara: And I would say I’m optimistic that we can really solve these problems for my children. I have two girls. And I think about all the technologies that we’re looking at that are really going to come to market in their lifetime, hopefully some in my lifetime. And thinking about their kids, my grandkids. It’s going to be here before we know it. And I have dedicated my entire career to this space because I truly believe that it’s needed and it’s doable.
Stewart: I love that. It’s very encouraging. I mean, my daughter’s just turned 18. She’s going to head off to college. And I mean, one of the things that with the advent of AI, it’s like, what do you tell her or how do you advise her about what to study? I mean, what will still be a field or what new field will there be 4 years from now? The pace of change is incredible. And I mean, I’ve learned so much from both of you today, and I really appreciate you being on and teaching us about an area that I just didn’t know a whole lot about. And I learned a bunch, and I just wanted to say thank you very much.
Jason: Thank you.
Stewart: We’ve been joined today by Sara Chamberlain and Jason Blumberg, co-founders of Energy Foundry. Thanks for listening. If you like us, please review us, rate us on Apple Podcasts. We certainly appreciate that. If you have ideas for podcasts, please shoot me a note at podcast@insuranceaum.com. My name’s Stewart Foley, and this is the InsuranceAUM.com podcast.
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