Recently, I had to do a minor renovation on my home: install a heat pump. I thought it would be as simple as a Google search. Little did I know, I’d end up combing through twenty or thirty websites, juggling finding reputable contractors with ones who were able to meet the unique needs of my property, or, even just people who would pick up the phone. One of the biggest pain points was not being able to conduct this process digitally. Most contractors’ websites are archaic, and almost everyone I wanted to work with required a phone call (and a subsequent game of phone tag). The project, which was supposed to be a quick-hit, kicked off in February. It’s now June and I’m still waiting on an installation.

My renovation story was a nightmare, but it’s anything but unique. Single-family homes in the United States are incredibly energy inefficient. In fact, roughly 20% of US energy-related greenhouse gas emissions come from heating, cooling, and powering households. If considered a country, these emissions would be the world’s sixth largest emitter, and larger than Germany. Common problems include windows that either leak or don’t close, and because many homes are built from wood, it’s not uncommon for them to be really poorly insulated. Add to that the fact that they typically have decades-old, fossil-fuel burning furnaces, and it’s easy to see why single family homes are such a massive contributor to greenhouse gas emissions. Then there’s the adjacent problem, which is what I went through: not only are many of these houses in dire need of renovation, but the renovation process itself is a labyrinthine and quagmire; super slow, complicated to navigate, and an uphill battle at every step.

That’s why, today, I’m proud to announce that Fifth Wall has invested in Sealed, a home wellness company that’s designed to help make energy efficient renovations seamless, resulting in homes that are more healthy, comfortable, and sustainable. The company is the proverbial Easy Button for home comfort and sustainability. They’re a one-stop-shop to evaluate what upgrades make sense for your house, and then Sealed finds and corrals the various contractors required to perform the work; and you as the home owner don’t pay anything up front. And the cherry on top? Sealed stands behind its work, and only gets paid if its customers actually save energy.

This investment is the first that we are leading out of Fifth Wall’s Climate Technology fund, as part of a $16 million Series B round that also garnered participation from Robert Downey Jr.’s FootPrint Coalition Ventures, as well as returning backers Cyrus Capital and CityRock Ventures. In addition, I’m proud to join Sealed’s Board of Directors.

Streamlining a process traditionally known as a logistical nightmare

If you’ve ever embarked on a home renovation project, you know that it’s pretty standard to work with local Mom-and-Pop contractors. While these contractors might do great work, organizing them can be a logistical nightmare, more akin to herding cats. From the start, these contractors rarely have a digital presence. Their websites are poorly designed, and appointments often need to be made over the phone. Once you do get a hold of them, it may take months to complete your project — perhaps parts need to be ordered, or schedules aren’t lining up. And then there’s the issue of trying to coordinate multiple contractors, whose calendars and workflows may need to complement one another. And then on top of that, because these small contractors don’t have the clout to have strong relationships with banks, you as the customer may have to front them all the money. In a worst case scenario, organizing a home renovation can be a full-time job, and not any easy one at that.

That’s where Sealed comes in. All you have to do is visit its website, and complete a brief quiz to determine whether your home is eligible. Then you’ll get set up with a consultation, during which time Sealed will help you identify weak points in your house and design a solution using machine learning that predicts a home’s energy efficiency with up to 99% accuracy. Its machine learning algorithms combine a number of difficult-to-replicate datasets, including utility data, demographic information, home characteristics, and project improvement details in order to get to that level of never-before-seen accuracy.

From there, Sealed will coordinate any necessary renovations to your home, from getting a heat pump installed, or deploying smart home technology, to installation of better insulations, and properly caulking your windows. They tap into a network of pre-vetted contractors, eliminating the difficult process of researching local installers. This also streamlines business for contractors, who can then focus on what they do best without having to worry about getting acquainted with ever-evolving and costly marketing strategies.

Finally, Sealed offers a unique payment program. While typical installations cost as much as $30,000, Sealed covers all upfront costs for its customers. Instead, after installation, homeowners pay Sealed a monthly fee, based on the actual energy saved as a result of the project. Best of all, Sealed stands behind their work: if your house doesn’t save energy, Sealed doesn’t get paid. So as a homeowner, you can be sure that Sealed is aligned with making the maximal impact for your home’s comfort and the planet

Delivering a sustainable, energy efficient solution for residential real estate owners

As I mentioned earlier, Sealed is the first investment we’ve led out of our Climate Technology fund. It’s a compelling business to us for a few reasons. Most saliently, buildings account for about 40% of all greenhouse gases. There’s a common misconception that the highest number of emissions come from cars, but in reality, transportation (all transportation, including planes, ships, rail, trucks, and cars) is only about 23% of the problem. If we want to get to carbon zero by 2050, we first and foremost need to focus on making our buildings more sustainable.

Sealed is helping to tackle this problem by embarking on a quest to retrofit the US’ existing residential building stock and help them run more efficiently. Globally, there are $270 trillion worth of buildings, and the vast majority of them aren’t energy efficient. Many were built poorly, aren’t well-insulated, and utilize out-of-date appliances. This presents both a massive investment opportunity and a massive decarbonization opportunity.

Sealed also stood out to us because of its incredible leadership. Overall, this is a space with a dearth of consumer-experts. Co-founder and CEO Lauren Salz is laser-focused on the consumerization of this tech, making incredible strides in the ease of the process for Sealed’s customers. And somehow, she’s managed to juggle guiding the company through this phase of growth and a fundraising cycle, all while becoming a new mom. Andy Frank, her co-founder and President, brings over twelve years of energy efficiency experience to bear.

The longer term vision for Sealed is to expand into new markets, like Texas, which recently experienced both significant grid issues during inclement winter weather and a crisis of poorly insulated homes.

Overall, residential home renovation is a space with incredible potential that we’ve never been able to realize, because so far it’s been fragmented and underserviced. As the US residential real estate market continues to sizzle, there is a massive opportunity for those who can develop sustainable solutions for a broken process, all while delivering cost savings to the consumer. We see not only incredible potential in Sealed, but the sector at large.

…

This post is presented for informational purposes only, is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Fifth Wall Ventures Management, LLC or its affiliates (collectively, “Fifth Wall”; any such investment vehicle, a “Fund”). Any such solicitation of an offer to purchase an interest will be made by a definitive private placement memorandum or other offering document.

Forward-looking statements and opinions as to carbon reduction initiatives and real estate markets or any other matters, as expressed in this presentation, are those of the individual presenters, but are not necessarily the views of Fifth Wall as a firm, and cannot constitute a guarantee of future success or profitable results. As a result, investors should not rely on such forward-looking statements and/or opinions, or on anything else contained in this post, in making their investment decisions. Moreover, certain information contained herein may have been obtained from published and non-published sources prepared by other parties and may not have been updated through the date hereof. While such information is believed to be reliable for the purposes for which it is used herein, Fifth Wall does not assume any responsibility for the accuracy or completeness of such information, and such information has not been independently verified by Fifth Wall. This presentation speaks as of its publication date, and Fifth Wall undertakes no obligation to update any of the information herein.

In addition, in considering any prior performance information contained in this post, prospective investors should bear in mind that past results are not necessarily indicative of future results, and there can be no assurance that any Fund will achieve results comparable to those of any prior or existing Fund or portfolio investment of Fifth Wall.

None of the information contained herein has been filed with the United States Securities and Exchange Commission, any securities administrator under any state securities laws or any other domestic or foreign governmental or self-regulatory authority. No such governmental or self-regulatory authority has passed or will pass on the merits of the offering of interests in any Fund or the adequacy of the information contained herein. Any representation to the contrary is unlawful.

This communication is intended only for persons resident in jurisdictions where the distribution or availability of this communication would not be contrary to applicable laws or regulations. Any products mentioned in this post may not be eligible for sale in some states or countries. Prospective investors should inform themselves as to the legal requirements and tax consequences of an investment in a Fund within the countries of their citizenship, residence, domicile and place of business.

No assurances can be given that any of the carbon reduction initiatives or other initiatives described in this presentation will be implemented or, if implemented, will be successful in effecting carbon reductions or any other initiatives. Further, no assurances can be given that any Fifth Wall fund or investment vehicle will ultimately be established to invest in these technologies or that such fund or investment vehicle, if established, will successfully identify and execute on investments that meet its stated objectives. Investments targeting carbon emission reductions involve substantial risks and may not ultimately meet Fifth Wall’s stated investment objectives. Investors should consult their own financial, tax, legal and other advisors in connection with any proposed investment and should carefully review all disclosures and descriptions of risk factors that are contained in relevant offering materials.

Fifth Wall Leads Sealed’s $16 Million Series B Round was originally published in Fifth Wall INSIGHTS on Medium, where people are continuing the conversation by highlighting and responding to this story.

The electric motor, while not especially alluring, has been around since the 1800s, and works quietly in the background of our daily lives, allowing our elevators, water pumps, and air conditioning systems to operate. In fact, almost half of the world’s electricity — $1.2 trillion per year — runs through electric motors. Unfortunately, most of those motors don’t run efficiently, and so up to half of that electricity is wasted. For those keeping up, that implies that almost a quarter of the world’s electricity is wasted by electric motors.

Turntide Technologies, led by Chairman and CEO Ryan Morris, has reimagined the electric motor, and developed something that is not only more efficient, but cheaper to manufacture, and more reliable. The company’s innovation — an advanced type of “switched reluctance motor” (SRM) — runs with 30% — 60% energy savings over the traditional AC Induction motors that they replace, and result in enormous energy savings for its users.

We have been so impressed by Turntide’s motor and its implications for the globe that we have invested in their Series B2 funding round. We join other equally-impressed investors including Breakthrough Energy Ventures, Keyframe Capital, FootPrint Coalition, Captain Planet LP, The Amazon Climate Pledge Fund, JLL Spark, and BMW i Ventures, to name a few.

In relentless pursuit of improving the electric motor

I first met Ryan Morris at a dinner in San Francisco, six years ago. He was an activist investor in his 20s whom Bloomberg had pinpointed as a wunderkind. Highly intelligent and a high-achiever, Ryan was obsessed with electric vehicles to a degree I had never seen. Over dinner, he revealed himself to be deeply knowledgeable about the subject, which was a breath of fresh air compared to most investors who have only a passing knowledge.

At the time of our meeting, Ryan was executive chairman of Sevcon, a company making electric powertrains for non-road vehicles (think forklifts). A year later, Sevcon was successfully sold, and, in relentless pursuit of his electric motor obsession, Ryan was introduced to Software Motor Company (SMC), initially making an investment in the firm and later becoming executive chairman. Today, that company is Turntide Technologies.

SMC was a low-margin electric motor manufacturer selling into the rather uneventful High Volume Air Conditioning (HVAC) market. Knowing this, I was curious to understand how they had captured Ryan’s attention, so I paid him a visit to peel the onion a little.

Puzzle solved

What I learned is that the motor SMC had designed (the SRM) was unique. It used the simplest motor architecture and only basic steel and copper — no exotic materials or magnets — which made it easier to manufacture. The historic downside to SRMs is that they are very finicky and difficult to control, and this is also the reason others in the industry had given up on improving them, relegating them to just a few niche corners of the world where their high reliability was tantamount — think nuclear power plants and submarines.

The difficulty is that SRMs must be fed electric current that has to be extremely and precisely “shaped,” lest the motor quickly become noisy and inefficient. No one had found a way to fix this, meaning traditional SRMs were noisy and inefficient, but reliable.

What Ryan found in the team at Turntide was an incredible group of academics who, for seemingly the first time ever, had cracked the code. By packaging edge computing into the motor itself, incorporating AI and machine learning to efficiently direct the current, and leveraging a sophisticated simulation-based design, the company had managed to make SRMs which were quiet, efficient, and reliable. A proverbial triple-threat. In effect, Turntide took the best of traditional SRM mechanics and paired it with the best of today’s technology to create a motor that is now considered the “LED” of the electric motor world. It’s essentially software wrapped in metal. The motors are cheaper to make, more reliable, and more efficient than traditional electric motors.

The largest real-world opportunity size I’ve seen

Motors are everywhere. From the elevators in your office building, to the fan in your car, and, as we saw with the debacles around the recent outages in Texas, electric motors run most of the most critical parts of our modern society, like water and sewage treatment plants. So, whilst being unsexy, it is a $100 billion market consuming 45% of the world’s electricity (9,900 trillion kWhs), at an annual cost of almost $1.2 trillion. In my career, this is likely the largest real-world opportunity size I’ve ever seen for a startup.

Savings for real estate equal to the entire U.S. energy bill

Turntide’s SRMs result in 30%-60% energy reductions in the real world. That statistic, verified by the U.S. Department of Energy and top electrical utilities, checked out across countries, customers and climates who are pushing out tonnes of HVAC. If Turntide’s motors replace all electric motors, it could result in approximately $500 billion in electrical cost savings, according to the company. That is immense. In fact, a year ago, I was in discussions with a global commercial real estate services company. In running the numbers, they discovered that if they swapped out all of the motors in the buildings they manage around the world with Turntide’s motors, they would save the equivalent of the entire United States’ electricity bill. That’s one company, installing one product. Real impact.

A practical solution to climate change

Fifth Wall’s own limited partners, who include some of the world’s largest real estate owner-operators, spend significantly on HVAC. In fact, depending on building heating and cooling needs, HVAC can comprise up to one-third of their total energy usage. With buildings contributing almost 40% of all greenhouse gas emissions globally, being able to save 30%-60% of the energy used in HVAC systems can meaningfully move the needle on climate change. And most importantly, it doesn’t require any crazy new science, or billions of dollars of research. These motors are here now, and can be installed immediately.

The equivalent of seven Amazon rainforests

Investing in Turntide Technologies may result in reaping the extraordinary benefits of SRMs’ multiple brute force advantages: greater reliability, greater efficiency, and lower cost production. Not only have these motors been profitable for Turntide and cost-saving for the clients, the effect these motors could have on the world’s carbon footprint and on climate change is massive. According to Morris, if we could replace all of the motors used in buildings on the planet with SRMs, it would be the carbon equivalent of adding seven Amazon rainforests. Effectively, what we believe we’ve landed on is a massive opportunity for a very practical arrow in our quiver against climate change.

In today’s age of instant-gratification and disposability, Turntide’s thoughtful approach to fixing what’s broken is rare and especially appreciated by Fifth Wall. It took Ryan Morris and the Turntide team to see the flaws of an old technology, hold a vision of improving it with new technology, and take the time to do so without wavering. Today, it’s clear we have the technology to make an enormous impact. As the globe races to meet carbon emission goals by the year 2050, we are proud to support Turntide and its quest to combat climate change in a very practical and powerful manner.

This post is presented for informational purposes only, is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Fifth Wall Ventures Management, LLC or its affiliates (collectively, “Fifth Wall”; any such investment vehicle, a “Fund”). Any such solicitation of an offer to purchase an interest will be made by a definitive private placement memorandum or other offering document.

Forward-looking statements and opinions as to carbon reduction initiatives and real estate markets or any other matters, as expressed in this presentation, are those of the individual presenters, but are not necessarily the views of Fifth Wall as a firm, and cannot constitute a guarantee of future success or profitable results. As a result, investors should not rely on such forward-looking statements and/or opinions, or on anything else contained in this post, in making their investment decisions. Moreover, certain information contained herein may have been obtained from published and non-published sources prepared by other parties and may not have been updated through the date hereof. While such information is believed to be reliable for the purposes for which it is used herein, Fifth Wall does not assume any responsibility for the accuracy or completeness of such information, and such information has not been independently verified by Fifth Wall. This presentation speaks as of its publication date, and Fifth Wall undertakes no obligation to update any of the information herein.

In addition, in considering any prior performance information contained in this post, prospective investors should bear in mind that past results are not necessarily indicative of future results, and there can be no assurance that any Fund will achieve results comparable to those of any prior or existing Fund or portfolio investment of Fifth Wall.

None of the information contained herein has been filed with the United States Securities and Exchange Commission, any securities administrator under any state securities laws or any other domestic or foreign governmental or self-regulatory authority. No such governmental or self-regulatory authority has passed or will pass on the merits of the offering of interests in any Fund or the adequacy of the information contained herein. Any representation to the contrary is unlawful.

This communication is intended only for persons resident in jurisdictions where the distribution or availability of this communication would not be contrary to applicable laws or regulations. Any products mentioned in this post may not be eligible for sale in some states or countries. Prospective investors should inform themselves as to the legal requirements and tax consequences of an investment in a Fund within the countries of their citizenship, residence, domicile and place of business.

No assurances can be given that any of the carbon reduction initiatives or other initiatives described in this presentation will be implemented or, if implemented, will be successful in effecting carbon reductions or any other initiatives. Further, no assurances can be given that any Fifth Wall fund or investment vehicle will ultimately be established to invest in these technologies or that such fund or investment vehicle, if established, will successfully identify and execute on investments that meet its stated objectives. Investments targeting carbon emission reductions involve substantial risks and may not ultimately meet Fifth Wall’s stated investment objectives. Investors should consult their own financial, tax, legal and other advisors in connection with any proposed investment and should carefully review all disclosures and descriptions of risk factors that are contained in relevant offering materials.

Fifth Wall Invests in Turntide Technologies’ Series B2 Round was originally published in Fifth Wall INSIGHTS on Medium, where people are continuing the conversation by highlighting and responding to this story.

Investing in climate tech makes ethical sense and it might be the best-returning category in venture capital history

From rising sea levels to wildfires, a lot of ink has been spilled in articles about the climate apocalypse and why it is businesses’ ethical imperative to decarbonize. As a result, we’re starting to see cracks in the traditional business façade against making investments in climate tech. Earlier this month, 40 of the largest companies in America signed a letter urging Congress and the Biden administration to do more. So, there is certainly movement in the right direction.

Decarbonizing our modern world is the right thing to do and a personal mission of mine. In addition to the ethical, normative arguments, I believe it’s also smart business. I’ve witnessed this first hand from my time at BMW i Ventures where I led the Sustainability investing practice, investing in companies such as Prometheus Fuels, Turntide, and PureCycle (NASDAQ: ROCH) and during my time at The Boring Company and Neuralink where I simultaneously led Finance and Operations for both companies.

From an investor perspective, my view is that climate tech might just become the best-returning category in the venture capital asset class. Meanwhile, the global real estate industry, responsible for 30% of greenhouse gas emissions, has gone unchecked with regard to its contributions to the climate crisis. Couple climate tech solutions with the global real estate industry’s massive climate change problem and I see an enormous potential upside for an up-and-coming batch of new entrepreneurs and companies — both in terms of returns, but also to help solve arguably the most pressing challenge of our generation.

In a 2019 opinion piece in The New York Times, Kara Swisher, one of the most respected tech journalists, predicted more investments in climate tech and shared that:

“…the world’s first trillionaire will be a green-tech entrepreneur.” — Kara Swisher

From what I know of Kara Swisher from her reporting, words matter. She’s had a front row seat for a couple of decades of tech development, she knows her stuff, and she isn’t one for hyperbole. If you’re still skeptical, let’s take a quick dive through Venture Capital 101. Good investments in venture capital typically follow a pretty standard playbook:

1. Find a large market….
2. That is being forced to change or transform by some new factor (e.g., new technology, regulatory pressure, new market forces).
3. Invest in the companies best positioned to capitalize on that change.

If the market is large (1); and you pick the transformational trend right (2); then chances are that most investments you make in step (3) will do fine; and if you happen to hit the overall category winner you hit it out of the ball park.

Here’s a good example: Salesforce.com (currently at a ~$200 billion market cap)

1. Find a large market: The Customer Relationship Management (CRM) industry was ~$20 billion in 2000
2. That is being forced to change or transform by some new factor: The internet was allowing software to be delivered without the need for on-premise servers for the first time (SaaS was becoming a thing), meaning it could be sold much faster and cheaper than the on-premise incumbent.
3. Invest in the companies best positioned to capitalize on that change: Salesforce.com was the first CRM solution built from the ground up to be delivered online — there WAS NO ON-PREMISE VERSION and their logo was even a “no-software” sign.

Or another one: AppDynamics (acquired by Cisco for $3.7 billion)

1. Find a large market: The Application Performance Management (APM) market was ~$2.7 billion in 2014
2. That is being forced to change or transform by some new factor: The rise of SaaS software (same trend as above!) meant that prior APM tools no longer worked for the new breed of SaaS applications being developed. Developers needed new tools.
3. Invest in the companies best positioned to capitalize on that change: AppDynamics was built from the ground up for this new breed of applications — it didn’t even work for the old, on-premise monolithic apps.

Or, just to really beat the dead horse: Uber (currently at ~$90 billion market cap)

1. Find a large market: The global taxi market was ~$300 billion in 2019.
2. That is being forced to change or transform by some new factor: The rise of smartphones with internet connections and GPS meant that for the first time you could use software to directly connect independent drivers to ride-hailers; disambiguating the stranglehold that central-dispatch taxi services had on the market.
3. Invest in the companies best positioned to capitalize on that change: Uber was built from the ground up for this mobile-first world; it didn’t have a central-dispatch, non-smartphone version.

So, the playbook works. But, let’s take a look at those market sizes. They are healthy — in the billions to hundreds of billions of dollars.

The key takeaway: it all starts with market size. If there isn’t a large market, it doesn’t matter if you win because winning a small market is like being crowned the tallest Lilliputian.

All of these businesses got to massive exits and huge venture capital returns in markets from ~$2.7 billion to ~$300 billion; but I believe it was the market size driving things from the start. If the market sizes were small, I think these exits would have been small too.

Historically, markets from ~$2.7 billion to $300 billion have been seen as large. Some of the most storied firms in venture capital — from Sequoia, to Accel, to Andreessen Horowitz — all cut their teeth in the enterprise Software market, which is currently around ~$460 billion in total. That’s pretty big — and their strong fund returns would attest to it being large.

But what if I told you there were much bigger markets…

The market is how big??

• The global Real Estate market is ~$9 trillion.
• Industry & Manufacturing is ~$43 trillion.;
• Transportation and Logistics is $6 trillion.

Each of these markets alone is 1 to 2 ORDERS OF MAGNITUDE larger than the markets that have driven such huge venture capital returns in the past, and combined we’re looking at a $58 trillion opportunity. And, each of these markets is a massive contributor to greenhouse gasses:

So, it’s no wonder that Morgan Stanley thinks “with potentially $3 trillion to $10 trillion of earnings before interest and taxes up for grabs, decarbonization could present a material economic and humanitarian opportunity.”

“Potentially $3 trillion to $10 trillion of earnings before interest and taxes up for grabs.” — Morgan Stanley

$3 trillion to $10 trillion of (earnings before interest and taxes) EBIT is up for grabs! To really stress the point — that’s EBIT, not revenue…

That’s roughly an order of magnitude more in EBIT (profit) than the enterprise software market’s annual $460 billion in REVENUE! Needless to say, this is a monstrous opportunity.

So, just to be pedantic — let’s run it through the VC 101 framework:

1. Find a large market: Is $9 trillion to $58 trillion of annual market large enough?
2. That is being forced to change or transform by some new factor: That is being forced by all of its stakeholders (regulators, their customers, and their investors) to decarbonize.
3. Invest in the companies best positioned to capitalize on that change: …let’s go hunting for some startups.

An Announcement

So it’s with the breathtaking size of the market as a backdrop that I’m very excited to announce that I’ve joined Fifth Wall to co-head the Climate Tech fund. We plan to invest in companies that produce technologies that could help decarbonize the $9 trillion real estate industry, as well as the $49 trillion of opportunity in adjacent, but relevant, markets like transportation and manufacturing.

I’m excited to be making this announcement because Fifth Wall has built a consortium of 60+ of the world’s most sophisticated owners, operators, and construction industry corporations. The leverage we can bring to the startups we invest in to help get their products distributed and installed globally in this industry is massive, and truly difficult to match.

Most importantly, I’m excited to make this announcement not only because I like the Earth, or because I think we should be decarbonizing the world, but because I believe it’s good business. And, according to BlackRock, I’m not alone. BlackRock’s 2020 Global Sustainable Investing Survey reports that respondents (425 investors in 27 countries representing an estimated U.S. $25 trillion in assets under management (AUM) plan to DOUBLE their sustainable AUM over the next five years, and 89% ranked the environment as the “priority most in focus”.

Climate change is a collective action problem that calls for a collective action solution. The outcome — reducing emissions — is for the public good, but it also calls for major capital flow and the possibility of massive financial returns. We need all hands on deck and every last available dollar to pull this off. Even Bill Gates is calling for a fivefold increase in investment related to climate change.

Who’s in?

If you’d like to learn more about why I joined Fifth Wall and the opportunity that awaits for the real estate industry to invest in and adopt climate technology, send me an email at sgs@fifthwall.com

Why I believe Fifth Wall’s Consortium Might Be Key to Solving One of the World’s Biggest Problems was originally published in Fifth Wall INSIGHTS on Medium, where people are continuing the conversation by highlighting and responding to this story.

Note: This story is a repost from the BMW i Ventures blog

Imagine you drive to the gas station and pump your car with gas…except, this time, your weekly pit stop won’t affect the environment whatsoever. The new kind of gasoline coursing through your vehicle doesn’t add CO2 to the atmosphere. In fact, it is molecularly identical to the gasoline made from oil — but instead of being mined from the earth, the fuel comes from existing CO2 in the atmosphere. What I’m describing might sound like science fiction, but with Prometheus Fuels, it’s leaping off the page to become a reality, as early as this year.

While renewable energy was once an expensive alternative, it’s now surpassing fossil fuels and coal plants in efficiency and affordability. According to the U.S. Energy Information Administration, this year the U.S. is set to produce more electricity from renewable energy than coal for the first time in history. And in many markets, it’s cheaper to build new renewables than to produce electricity from existing coal plants. What that means is that previously not-cost-competitive chemical processes that require lots of electricity to run are now starting to become economically viable far faster than people expected. To continue forging onward on this path, we are thrilled to partner with Prometheus Fuels, the energy company removing CO2 from the air and turning it into zero-net carbon gasoline. By massively reducing the climate impact of today’s internal combustion engines, Prometheus Fuels is at the forefront of renewable energy technology within the automotive industry.

According to the Environmental Protection Agency, a typical passenger vehicle emits about 4.6 metric tons of carbon dioxide per year and transportation accounts for ~25% of global greenhouse gas emissions. With Prometheus Fuels, this doesn’t have to be the case. Ordinary cars can use the fuel with no modifications, and given it is produced from CO2 that was extracted from the atmosphere, each gallon that is burned has net-zero carbon impact, or net-negative impact if you take into account the gallon of fossil-fuel gasoline that will not be burned because of the Prometheus fuel.

But why can’t we simply electrify vehicles? Why do we even need something like Prometheus? The average car stays on the road for 8 years in the United States (longer in other countries); this means that even if we were to only sell 100% electric vehicles starting today, it would still take well over 8 years to electrify all the cars on the road. Juxtapose that against the accelerating climate crisis and we realized it’s simply not fast enough. We need a solution like Prometheus to allow existing vehicles to become carbon-neutral while the world takes the time to electrify the fleet; which will realistically take decades. So Prometheus’ solution is a critical piece of the puzzle for fighting climate change at scale, now.

BMW i Ventures’ support of Prometheus underscores our mission to back purpose-driven entrepreneurs that are making real world impact on mobility. Our support will allow Prometheus Fuels to continue its mission of eliminating the need for fossil fuels, as well as accelerate the company’s efforts to bring its zero-net carbon fuel to consumers quickly.

A leader in the renewable energy space, Prometheus gasoline comes at a time when the need to combat climate change is no longer an option. Replacing all fuels made from oil and gas with zero-net carbon fuels can reduce global carbon emissions by approximately 25 percent, a huge step in the fight against climate change. We’re excited to see what Prometheus Fuels has in the pipeline next in its mission to eliminate fossil fuels.

Prometheus gasoline can be used in any car that uses gasoline now. Its carbon-neutral gasoline from CO2 is captured from the air, and will be coming to market priced competitively, compared to fossil fuels. Additionally, Prometheus Fuels provides zero-net carbon diesel fuels as well as gasoline and jet fuels which can be used in any aircraft.

Using its breakthrough technology and affordable electricity from renewables, Prometheus is solving key problems in CO2 capture, fuel synthesis and fuel separation to create zero-net carbon fuels, at scale, affordably.

Note: Opinions are my own, this is not an official BMW i Ventures post

BMW i Ventures just invested in Software Motor company — here’s my behind-the-scenes take on how that happened, and why we’re so excited about the company.

The Oracle of Electricity

When I first met Ryan Morris, currently Executive Chairman of Software Motor Company (SMC), it was at a dinner three years ago in San Francisco. At the time, Ryan was an activist hedge fund investor, and had been elected Executive Chairman of Sevcon, a 50-year old electric power-train company primarily focused on fork-lifts and other small industrial applications. I fancy myself something of an electrical and mechanical technology nerd, and know more about this stuff than most people in most rooms. But I was in for a rude awakening. Unlike most investors who have a light passing knowledge in a given subject, Ryan was deep in the space. Extremely deep. Matrix red pill deep.

Source: https://medium.com/@andrewpgsweeny/beyond-the-red-pill-and-the-blue-pill-9ef953d6e133

For those that know Ryan, what followed would be expected; but for the uninitiated, the tidal wave of information and insights about everything from motors, to batteries, to electric vehicles that came gushing from him over the next few hours was awe inspiring. This was no ordinary investor. I was intimidated. I was shook. But I was hooked.

Down the SRM Rabbit Hole

Fast forward a year and Sevcon had been successfully sold to Borg Warner and Ryan was now Executive Chairman of Software Motor Company. On the surface of it, this was a boring, low-margin electric motor manufacturer selling into the boring High Volume Air Conditioning (HVAC) market. A proverbial snoozefest. But I must have been missing something; after all — there had to be a reason why Ryan, the oracle of electric, was there and had seemingly gone “all in” on the company.

On my first visit to the company’s discrete Sunnyvale lab+office it seemed the snoozefest impression was correct. The low slung industrial buildings had a way of inspiring excitement the way that beige paint doesn’t. I was starting to think about ways to get out of there as quickly as possible.

That was, until I heard the numbers. SMC’s Switched Reluctance Motors (SRMs) were seeing 30%-70% reductions in energy usage in THE REAL WORLD. None of this bench-top test stuff, they had hundreds of motors pushing thousands of tonnes of HVAC at real world facilities for years, and the numbers bore out across countries, customers, and climates. The Department of Energy, and top Electrical Utilities had verified the numbers in highly rigorous, peer reviewed tests, and they checked out.

Source: Software Motor Company

Source: Software Motor Company

I was intrigued. But how much of an opportunity was this? Surely this is a crappy market that no-one should care about? Again, I was wrong.

The AC Induction motors that SMC’s SRMs are replacing typically run behind the scenes in unsexy places (think HVAC, pumping stations, sewer systems…), so it’s easy to forget just how common they are. In fact, Electric Motors are a $100 Billion per year market; and they consume 45% of the world’s electricity — some 9,900 Trillion kWhs, at an annual cost of over $1 Trillion. That means that SMC’s motors could chase a $100 Bn direct market opportunity, but also open up an additional $500 Bn in electrical cost savings. That’s probably the largest real-world opportunity size I’ve ever looked at for a startup.

Source: Software Motor Company

But surely there must be a catch. These new motors must use some exotic new materials, or designs, or be really tough to manufacture, they must cost a TON! Or maybe they are brittle and die all the time. There must be a downside somewhere!

And that was where I realized why Ryan was so bullish on this company. You see, Switched Reluctance Motors are conceptually the simplest motor architecture. They use no exotic materials or magnets (just basic steel and copper), and are simpler to manufacture than other motors. Even better, they are extremely reliable. In fact they are the design-of-choice for mission-critical use cases like nuclear power plants and mining where you need a fault-tolerant motor to continue running for decades. So they are cheaper to make, more reliable, and apparently more efficient. A seeming triple-threat.

Source: Software Motor Company

But then why has no-one else made mass-market SRMs before?

It turns out that SRMs are EXTREMELY difficult to control. You need to precisely shape the current going into them, and time it across each of the electromagnets highly accurately, otherwise you end up with a noisy, inefficient, vibrating mess of a motor. So whilst the SRM design is straight-forward and conceptually simple, they have been largely written off as a hopeless footnote by most of the rest of the industry because they were too difficult to control.

Source: Software Motor Company

However, SMC’s team saw a conflagration of trends coming together that would make SRM’s a realistic opportunity now, where they were impossible in the past:

1. Firstly, compute at the edge is getting extremely cheap because of smartphones. A cheap ARM SOC has many orders of magnitude the compute power today that a mainframe had a few decades ago. Think Raspberry Pi for $35.
2. Secondly, simulation software has come leaps and bounds allowing highly erratic, mechanically unstable systems like SRMs to be modeled effectively in the design phase; while GPUs allow the cost of that simulation to come down orders of magnitude.
3. Finally, AI and Machine Learning have surged ahead allowing control systems to create solutions to highly dynamic problems in far more efficient ways than could have previously been done with hand-coded rule-based systems.

Bringing these three things together means that you can build the control hardware and software for SRM’s many orders of magnitude cheaper than was previously possible, and the capabilities of the algorithms are so robust that they take an unstable, inefficient SRM, and make it more efficient than any similar motor before.

Source: U.S. Air Force/Shane A. Cuomo

A good analogy would be to modern fighter jets. Planes like the F-22 are mechanically unstable; they would not fly or be controllable by a human if you just fired up the engines and tried to fly them without a computer. But put a computer into the loop with the right control algorithms and you end up with a machine that is far more maneuverable than any non-”smart” plane ever could be.

SMC’s Switched Reluctance Motors are in effect the fighter jets of the electric motor world.

Source: Software Motor Company

Not Just A Good Investment

So from a business standpoint we are excited about SMC because they are chasing a massive market opportunity with a product that has multiple brute force advantages:

• Cheaper
• More Reliable
• More Efficient

We love companies that have unfair advantages like this.

But we would be remiss if we ignored the sustainability angle of this investment. If we just look at BMW’s infrastructure, it runs massive manufacturing facilities, each consuming tens-of-megawatts of electricity. In fact, BMW spends over €350 Million on electricity each year, and massive amounts of that are consumed by the process and HVAC electric motors in our facilities.

So the potential savings just to BMW on the facilities side are massive, and more than justify a large investment in SMC even if their technology never makes it into electric vehicle powertrains.

Source: Software Motor Company

Sustainability done right should bring efficiencies that make the logic close to a no-brainer. And SMC’s motors are about as close to the no-brainer line that we’ve ever seen in the sustainability space. In fact, the payback periods are better than LED light bulbs in most situations, which is very rare.

So, needless to say, while we think SMC is a good investment in and of itself, the opportunity to make a meaningful impact on electricity usage, and hence CO2 emissions globally, is what really gets us excited about partnering with the fantastic team at SMC.

Further Reading/Listening:

• Software Motor Company
• SMC Case Studies
• T-Rex Radio: SMC’s Culture-focused podcast

For SaaS companies, tracking the Expected Lifetime Value of a Customer (LTV) is one of the most critical key performance indicators (KPIs) that they can track, because it has massive implications on the unit economics, and therefore viability, of their businesses.

For both transactional, and recurring revenues (subscription) businesses the ratio between Customer Acquisition Cost (CAC — how much you pay to get the customer in the door), and the LTV of that customer (how much money they will deliver to you) → the CAC:LTV ratio, is the turning point that defines if they have a good business or not.

In simple terms, if it costs you $1 to get a customer in the door and they pay you $100 of Gross Margin over their life, that is probably a good business; but if it costs you $100 to get a customer in the door, and they only give you $1 of Gross Margin over their life as a customer, you should probably shut that business down.

So, if the CAC:LTV ratio is the turning point on which the viability of a business can be decided, it’s pretty critical that each of those numbers are calculated correctly.

The calculation of LTV is seemingly straight forward. You work out your churn rate (e.g what percentage of your customers leave every period), and then just do 1/churn%. E.g. if 10% of your customers leave each year, then 1/10% = 10 years is the average customer lifetime. Straight forward!

Well, unfortunately not.

The 1/churn% calculation only makes sense for large cohorts, and here’s why: It is a probabilistic calculation, so for small cohorts with few customers, the actual average customer lifetime could vary greatly from 1/churn%. To see this in action see this example of a small, 10 customer cohort, with 10% churn per month.

Note: There is a full excel file with all the examples for download at the bottom of the page.

What you’ll see here is that, as expected, the 1/churn% calculation with a 10% churn rate results in a 10 month customer lifetime; but a 10% churn rate also implies 1 customer leaves each month, and if that’s the case then all 10 customers will be gone within 10 months.

That means the average customer lifetime is actually 5.5 months, not 10 months. In other words, because the Cohort is small, the actuals deviate significantly from the idealized calculation. So in this case, the idealized calculation would have led you significantly astray (by ~45%!)

The Particle:Wave Duality of Customers

To get super geeky about this, the technical difference here is whether or not you think of customers as particles(unitary, indivisible, non-probabilistic), or waves (flowing, divisible, probabilistic.) And depending on the number of customers you have in a cohort, the math to deal with them shifts from particle math (non-probabilistic), to wave math (probabilistic) → it’s the particle:wave duality of customers!

Practically, what this means is that at small n, a 10% churn likely means you are losing a rough fixed NUMBER of customers per period in churn (in this example, 1 per period); whereas at large n you are losing a fixed PERCENTAGE of the customer base at each point in time. And the implication is that there are actually different equations for each of the customer lifetimes depending on the size of the cohort:

Large N: Customer Lifetime = 1 / Churn%

Small N: Customer Lifetime = ((1 / Churn %) + 1 )/ 2

This might be easiest to see in graph form. If you graph the shape of the percentage of a cohort’s customers that remain in the cohort over time, then the average customer life is the first integral of that curve, or visually, it’s the area under the curve.

Here, (a) is the Large N curve:

Customers Remaining = y
Churn Rate = cr
Period = x

Cohort Curve: y = (1 — cr)^x

Customer Life = area under the curve = 1 / cr

(b) is the Small N curve:

Customers Remaining = y
Churn Rate = cr
Period = x

Cohort Curve: y = 1 — (x * cr)

Customer Life = area under the curve = ((1 / Churn %) + 1 )/ 2

Don’t believe me? I built a simulator that does bottom-up simulation of what each customer in a cohort will do (stay vs. churn) in each period, and then ran the simulation a few hundred times.

Here it is for large cohorts (1,000 customers). You will see that the simulated behavior matches the idealized 1/churn% curve almost exactly:

And here it is for a small cohort (10 customers). You will see that the simulated behavior matches the small n cohort line closely. In this case the large n calculation would have been very wrong (~40% wrong) when calculating customer lifetime:

Why should we care?

So this seems all rather academic, but why the hell should we care?

Well this has massive implications for companies when they are at the early stage and trying to work out if their business model is viable.

Just using the example above, if you were to use the standard customer lifetime calculation, but a small cohort, your estimate of customer lifetime would have been off by over 40%. That is a massive difference. And if you’re spending significant dollars to get that customer through the door, that could easily be the difference between you surviving as a business or going bankrupt.

The Shape of Things To Come

But what’s even more important to realize is that these two formulae are only two potential shapes of your customer cohort curve.

The real tough problem for early stage companies is that they are trying to extrapolate from a small amount of data (only a few cohorts), over a small amount of time (often only a few months or years) and trying to work out what their customers will do over the next 3 to 10 years, all while not knowing if they will be acquiring similar customers, or if their types and quality of customer will change as they grow. That is a LOT of unknowns to be extrapolating.

In other words, if you are just at the end of your first year, you might run your calculations and see that you have a 10% churn rate. But what will your customers do next year? There isn’t a single correct answer. In fact, there are almost infinite scenarios for how your customers will behave given this 10% data point that you have. The four most common scenarios would be:

(a) My customers will behave like the idealized large cohort (1/churn%)
(b) My customers will behave like the idealized small cohort (((1 / Churn %) + 1 )/ 2)
(c) My bad customers initially leave, but then the remaining customers stick around ~forever
(d) My customers hit a wall (my cohorts collapse)

It’s essentially impossible to know which curve your customers will follow when you are early in the life of your company. Only time will tell.

The Bottom Line

The bottom line is that at the early stages of a company, the calculation of customer life, and therefore LTV should be viewed as both art and science. Hard-and-fast rules like 1/churn% are just as likely to be wrong as they are to be right.

The most prudent thing for you as the entrepreneur to do is to think of your potential customer lifetime as a range, from the best case (your customers have a horizontal asymptote), to the worst (your customers hit a wall).

Essentially, you should be thinking of your customers as living somewhere in the shaded are in the graph below:

As you get more information about how your customers behave through time you can tighten that range, but it will never cease to be a range. No real-world customers will ever conform perfectly to the 1/churn% rule, and you have to be ever cognizant of that fact.

Hence, in the interests of intellectual honesty, and not bankrupting your company, you should always talk about customer life, and hence LTV, as a range, not a hard and fast number. Further, you should ensure that you are spending sustainably according to your understanding of that range, how wide it is, and how wide it could be; rather than simply spending according to the value spat out by the hard-nosed, but often wrong 1/churn% calculation.

But most importantly — you should never stop being intellectually curious about how your customer cohorts are actually performing in the real world. They aren’t just numbers in a spreadsheet, there are real people behind those numbers, and people are irrational and unpredictable. People don’t conform to idealized equations. So you should never stop trying to fill in the gaps in your knowledge about their behavior in order to have the best possible estimate of what your LTV range could be.

And always remember — LTV is a range, not a number, and you should plan for both ends of the range accordingly.

Excel model and bottom up simulator available here.

In frank conversations with my founder friends, entrepreneurs, and even just the startup-curious, I often hear questions along the same general theme:

• My company is growing well, why aren’t any VC’s interested?
• VC’s keep telling me this is a “lifestyle” business, what the hell is that?

There are also a bunch of darker things I hear (and dark tales of VC’s of yore that I’m sure you’ve heard), that, once you dig into it, you’ll also realize are related to this same theme, e.g.

“It was completely crazy, the company just needed a small bridge round, and we could have gotten to an exit, but instead the investors let it die even though they’d invested millions of dollars previously, they just let it all go down the toilet.”

or

“ The VC board members just completely checked out. The company was doing ok, but they didn’t really seem to care.”

or even:

“The company could have been sold and gotten a decent exit, but instead the investors pushed for it to raise another round and swing for the fences, but then it failed and went to zero.”

The common theme behind all of these seemingly unrelated questions and stories is that VC’s seem to do some weird, odd, and apparently irrational things.

It turns out it’s because they need some crazy math to work out for their funds to pay off. That crazy math heavily impacts their actions:

• at the top of the funnel (the companies they are willing to invest in);
• in the middle of the funnel (how they act while they are board members);
• and most egregiously at the bottom of the funnel (when thinking about and pushing for exit opportunities.)

So herewith a breakdown of the math that drives VC’s funds sometimes bizarre behavior, and some of the ramifications it can have for you as a startup founder.

The Black Magic Math

Note: There’s a full cheatsheet spreadsheet at the bottom if you want to skip all the explanation

The simplest piece of the puzzle to understand is that VC’s are trying to maximize the returns of their fund. That’s for two somewhat obvious reasons:

1. They get a percentage of those profits of the fund (carried interest) and hence are pushing to maximize their take.
2. Secondly, they want to raise another fund in the future, and to do so they will need to court investors (Limited Partners, or LPs); and to best guaranty their likelihood of getting those investors for the next fund, they want this fund to be performing in the top quartile of funds. What does that mean in real terms? A top quartile VC fund returns on average ~20% IRR annually¹. If you compound that for ~7 years (the average amount of time that the money is “out the door” for the investor) you get a Multiple On Investment (MOI) of 3.6x². So, in basic math the VC needs to return 3.6x their entire fund in order to be considered “top quartile”. I.e. a $100M fund needs to return $360M to investors.

So the VC you are pitching is looking to AT LEAST 3.6x their fund.

“But my company is growing fast. I will 3.6x in the next year, so why is this investor not interested?”

Well — this is where the math starts to get really fun. Let’s get to some real world data:

By stage, deal sizes range from an average of ~$1.6M to ~$24M (Seed to Series D). But each of those rounds has DRASTICALLY different risk associated with them. For example, a traditional Series D is the round just prior to the IPO, so the likelihood of the company failing at that stage is essentially zero (though it does happen!); whereas 97.6% of Seed Round companies fail to make it to an exit!

So that means that each deal is by no-means a winner. In fact, the VC has to do multiple deals in order to get a winner. An A round investor needs to do ~6 deals to get a single winner (There are definitely investors with better batting averages than this, but most investors are not Barry Bonds.) Whereas a Seed round investor needs to do more than 40 deals to get a single win!

This really starts to get silly when you take into account the dollars that the investor has to “put out the door” to finance all of those investments:

To put this into perspective, that poor Seed round investor (who likely has a ~$50M fund) will probably have to deploy their entire fund just to get 2 winners!

Now, if you just had to 3.6x the money you put out the door, that wouldn’t be completely outlandish. But instead we have to take into account how much of that money the investor puts out the door will actually go to zero:

Again, picking on that Seed investor, out of the ~$20M they put out the door, only ~$500k is left when you take out all the companies that will go to zero.

So now the burden of getting to 3.6x isn’t on the ~$20M they put out the door, but instead on the remaining $500k of “good” dollars. Those good dollars need to return enough to 3.6x the entire $20M that went out the door. The $500k remaining needs to return >$70M!

That means the required return multiples on each winning deal can be outlandish:

And this is where the weird behavior of VC’s starts to become clearer — if they are “early stage” investors (e.g Seed and A round) they need your company to be between a ~20x to a ~150x deal for the math to even start to make sense for their fund.

The Ramifications of the Madness

There are some pretty straight forward ramifications of this. For a start, your “fast” growing company that doubled or even tripled revenue last year probably still isn’t interesting, because you are working off a small base, and the VC needs their investment to return 20x to 150x their money. Your company just doesn’t cut the mustard!

But let’s examine some of the really dark incentives that happen later on in the life of a company, after the VC has invested, because of this math.

What this math tells us is that when your company hits some struggles along the way, or the growth seems to be flattening out, the VC has to do the calculation on the marginal cost of spending more time on your company, or potentially investing more money. If their estimation at that stage is that your company has no chance of getting to that >20x for them, then the rational thing for them to do is to take their money, and their attention, and instead focus it on finding a new investment that does have the chance of reaching those thresholds.

In essence, because of this math VC’s are incented to declare you dead (or at least dead to them) even if you are a viable company, because you won’t get them to the large return multiple they require.

“The reports of my death have been greatly exaggerated.” — Mark Twain

In real terms this can manifest itself in a few ways:

1. A VC may not give you the bridge financing you need to get to your next stage of growth and rather let you die, because (in their estimation) you won’t get to the return multiple they need so that money is better spent betting on someone else who could be a 100x.
2. A VC may fully “check out” of your company, no longer attending your board meetings (or only attending in body not in spirit) → the “zombie board member”
3. If you have an exit acquisition offer on the table that may be good for you as a founder, and the employees, but won’t get the VC to the return threshold they need, they may push you to not take it and instead talk you into “swinging for the fences.” If you fail while trying that doesn’t matter, because you’re in the failure pile in their mind already.

The Cheat Sheet

[1] Cambridge Associates data

[2] I’m glossing over a TON of stuff on Gross Returns vs Returns Net Of Fees for simplicity.

[3] I’m also ignoring a bunch of math of follow-on investments and future-round dilution for simplicity.

[4] There are a bunch of different sources for this data with slightly different estimations of failure rates by stage. They don’t meaningfully change the math, and therefor the ramifications for the VC.

Special thanks to our summer MBA intern Shyam Allam for doing the research and analysis for this post.