Episode 202: The Role Venture Capital Plays in the Climate Transition with Prelude Venture's Co-Founder & Managing Director, Gabriel Kra
Episode 202: The Role Venture Capital Plays in the Climate Transition with Prelude Venture's Co-Founder & Managing Director, Gabriel Kra
Today's guest is Gabriel Kra, Managing Director and Co-founder at Prelude Ventures. Prelude Ventures is a venture capital firm partnering with entrepreneurs to address climate change. In this episode, Gabriel walks me through Prelude Ventures' founding story, Gabriel's career path leading to climate investing, and why a generalist mindset to climate investing is important. We also discuss Prelude's single LP model, why venture investing translates well to helping solve climate change, and the role fossil fuels play in the clean future.
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So talk a bit about Prelude and what you do.
Prelude has specific LPs who are really climate committed. Our founding LPs, our co-founders of the firm, Nat Simons and Laura Baxter-Simons are massive climate philanthropists, as well as entities affiliated with them are our LPs. And I literally went out to lunch with Nat, like sometime in 2008 or 2009. I'd known him a little bit personally, a little bit professionally, done a few things with him. And we started talking and he sort of said, "Look, we are an investment family."
We've stood up a bunch of hedge funds and a bunch of investment vehicles. We are now being incredibly active philanthropically in climate, although they were still very quiet about it back then, we should think about what's an investment strategy that we could have in, in climate and climate tech. And that was like 2009.
And Gabriel, what were you doing at the time?
At the time I was working at Deutsche Bank, I was in solar and semiconductor banking in the corporate finance group. So I had a great bird's eye view of what was sort of Cleantech 1.0, we covered and were active with a bunch of companies there. Before I did that, I was a tech entrepreneur. I was at a couple of hard tech startups, one in the semiconductor space, one in the optical telecommunication space, bringing really hard novel materials to market. And I was in the product management roles there. So I was able to bring to that moment, a technical background, hard-tech entrepreneurship with bumps and scars and bruises and some successes as well.
And then also just financial background, that I'd have gotten working three years at Deutsche Bank. So that gave me an interesting and broad-based background to bring to this effort. Once we got going in 2009 or in 2010, Cleantech 1.0 was crashing around us as we sort of started thinking about this platform. And there were not a lot of people who were getting active in climatetech, wasn't even a word cleantech back then, but we said, "We're going to figure this out and we're going to build a platform here." So it took us a little bit, but by 2013, we'd established Prelude Ventures.
One question before we get too far down that path. So prior to joining up with Nat and Laura, would you describe yourself as a capitalist that happened to work in clean energy or, or a climate warrior that was using capitalism as your mechanism for impact? How did you think about yourself and the decisions that you'd made up to that point?
It seems like everybody who is involved in climate and climate tech has an “aha” kind of moment. So I'm going to tell you my aha moment. And it goes way, way back. I grew up on Long Island and I went to school in New York City. I was not the most outdoorsy person. I was, I always skied. So I'm still an avid skier to this day. You want to distract me, start talking to me about skiing. I'll drop whatever I'm doing and talk to you about that. But my junior year of college, after my junior year, I was driving cross country with a friend. The goal was to get to California where my sister was in school at Stanford. She was getting her PhD. And my grand plan for my summer, between junior and senior year was to sleep on her couch and get a job somewhere out in Palo Alto, the golden land and just see a new place. That was my goal.
But along the way, we stopped in Yellowstone Park. We got into the park at like two in the morning, I was in a beat up old high Honda Accord. So we took the cooler out of the back of the Accord we had food and whatever because we were cheap. We didn't have much money. We stuck it on the roof of the Honda Accord and rolled back our seats so that we could go to sleep. We didn’t know where to sleep and we didn't have a tent or anything like that. So we got woken up like 5:00 or 6:00 in the morning by the ranger tapping on the window, we’re kids with New York plates, and he said, "Son, this is Bear Country. You can't put your cooler on your roof because you're just going to provide a snack for the bears."
So now it's like 6:00 in the morning and we're in Yellowstone Park. That was the most beautiful freaking place I'd ever seen or been. Me and my friend spent two days touring around the park, seeing all the sites, old faithful, the Grand Canyon of the Yellowstone, the geysers, the mud pots, everything. And somewhere along those two days, we stopped in and we got joked for the summer and I was a waiter in Grant Village in Yellowstone Park. The summer in 1989 after the fires we’re the summer of 88 and every weekend I went on a big back country hike and I bought a tent, and I bought a sleeping bag, and I bought hiking boots and I became like a super avid hiker, tracker outdoorsy kind of guy. When I graduated from college the next year, I didn't get a job on Wall Street or in tech or in anything.
I went to ski bum. I moved to Breckenridge Colorado. I got a dog and moved to Breckenridge, Colorado with my two best friends and, and lived there for a while. And then after I did that, I moved to Washington D.C. with my girlfriend at the time and I got a job working Green Peas. So waking up in Yellowstone, that's my aha moment. And I've been a climate activist ever since I was I was arrested at the Washington Monument in a civil disobedient direct action in 1992, protesting Bush number one’s lack of action at the Rio Earth Summit.
So I go way back when? After a few years working for Green Peace, I figured I needed to learn a little bit more. I went back to school and got a master's degree in atmosphere chemistry because I wanted to learn more about the science and like early to mid '90s, it was obvious this isn't news. We shouldn't be waking up in 2022 saying, "Why didn't somebody tell us about this years ago?" The certainty has been decreasing. The margin for error has been decreasing. We've known about this since the '70s earlier. But the models have been there since the '70s.
In 2009, when you were just getting going, what was the landscape in relation to the, the Kleiner Green Growth and Thedras, and, and that whole wave. So had that already happened and crashed and burned, or just from a timing standpoint, where were you relative to that? And how much did that factor into your thinking at the time?
I don't think Green Growth had been established but maybe they had or maybe they were sort of coming together right around that time. 2009 was the center of the financial crisis. And so the spit hadn't hit the fan yet with all of the ARA money that had come in. And I think that was the vehicle that put the money into cylinder so that all hadn't happened yet. So yeah, 2009 with ARA and the money that started still was still going into the Cleantech 1.0, companies was still somewhat optimistic time period, even though the financial crisis was immense.
And then by like 2010 or 11, things were really starting to go south. I remember it must have been in 2011 where we invested in some solar companies and then it must have been April of 11 where the polysilicon spot market prices crashed. I don't know if people remember that moment, but that was a signal that things were about to shift dramatic and Cleantech 1.0 or had shifted already. And you'd missed it if you hadn't seen it.
And so from 2011 to say, 2012 or ‘13 companies were really having trouble fundraising that continued through 2016 or ‘17. There was this five-ish year period where getting any funding into companies was just a real hard slog for everybody. So that time period was the heart of the dark quiet years for cleantech and climate tech. 2011 to 2013 or 2015. Solyndra is the poster child for the loan program. And certainly that was a financial failure, but that loan program, even in those days, it was in the black. So that was a bad loan. A lot of things that that loan program did were dramatically successful, they helped Tesla get to its first manufacturing stuff.
Elon Musk on the stage at the RPE conference announced that he was going to pay back all those loans early. There were some dramatic successes out of it. We shouldn't just remember Solyndra and a failure there. That program did a lot of good and fast to now Jigar Shah, taking it to brand new heights and new places that are really exciting.
One of the challenges about climate investing is that the essentially the economy needs to move to low carbon economy, which means that climate isn't a sector it's, it's every sector. So when you were just getting going, how did you think about generalists versus specialists from a sector standpoint, from a stage standpoint, from a check size standpoint, were these initially financial investments or was it more about learning? Like how did you start?
How did we start? It's a fun question and long pause because I'm trying to really recall how we started. The first thing I did is I set up an investment kind of committee with both people inside and outside, who I convinced to help us out so that it wasn't just me running around, chasing down good ideas or bad ideas and putting money to work without a team, I believe strongly in the powers of teams and the are groups of people to come to better decisions maybe than an individual will on his or her own. I still remember the first deal we did. And with your permission, I won't even name it. But one of my advisors, one of the people on that investment advisor committee, where I was really passionate about putting it forward said, "Yeah, well buddy's first investment is a disaster. So you might as well do this one."
He didn't like it. It didn't go well, the company didn't succeed. We've learned a lot from that. But even from that moment, everything was economic. We were always a financial investor. We always viewed ourselves as investing with a theme. You're . It's not a sector. There's a lot of sectors that you can invest in. But we were investing in a theme with a mission that was guiding what was inside or outside of that theme. But we were financial investors. The only metrics that we put on the fund is the return. The venture level return of the fund.
I am very proud to say that Prelude One is an evergreen fund. We're launching now investing out of a new fund with our same exact LPs. That's going to be a different fund structure, but Prelude one the evergreen, that thing is going to return. It's going to be a top decile, level return, maybe top quartile, depending, beause it's been a crazy bunch of time for venture capital asset class in general, but investing in only companies that are low carbon companies, climate tech companies. I mean incredibly proud of what we did and we made mistakes. We had successes, but we were always looking within that north star, is this climate positive? Does this get CO2 and CO2 equivalence out of the atmosphere? Once it passed through that gate, now we're talking purely a financial exercise.
How did at that time, if something cleared the impact threshold?
Sometimes it's really easy to do that. And especially in the early days, we weren't pushing corner cases, I'd say on that, we would look at a solar generation technology company and it was pretty easy to do that. There was another company that we did was reducing costs in solar. Reducing costs makes something more accessible. There is like a building technologies company where you could document how much less waste was generated on a construction site. Very easy, very quantifiable measurements. Early on in Prelude we did something that is now called Trove. About the circular economy.
And I don't remember when that was, say 2014 or 15. I'm not sure when we participated in the first round into that company. For us, we're like, this is a corner case reusing stuff instead of buying it new, like that's a corner case of what we are going to do. Well, now it seems blindingly obvious that the circular economy is low carbon. If you look at the metrics on how much stuff we throw away every year, especially clothing, everything, the embedded energy in manufacturing is immense. But back when we did that deal, we were like, "Ah, is this really clean tech? Is this really decarbonizing?" And we did a bunch of work and we convinced ourselves that it was, but at that point we thought, "Oh, this is an edge case." Now it like squarely in the middle of a great way to build a company that has a big impact and also makes money.
Did you have rules Gabriel coming in about what you wouldn't do?
We did. We didn't have them when we started, but we talked about it a lot and a couple of things. I think we were really smart on back in 2010, natural gas, the shell gas boom, was just getting going. And everybody was saying like freaking terrible, clever marketing, gas is a bridge to a clean energy transition, which I think is total BS, just to be clear. And we spent a bunch of time. I saw this company that was a really cool and interesting company doing profits for natural gas fracking. And so we had a debate. Would we do profits for natural gas fracking? And we decided, no, we don't want to do that. That's not cleantech. We also saw companies back then that were cleaning up coal plant emissions.
I'm not going to separate that from a similar conversation we had years later on point source carbon capture, but this was just like a technology that you could, could put in a flu stack that would make the cold burn cleaner. And therefore you hypothetically get more energy out of it. And we're like, "We're not going to" We thought about it. We looked at it. It was the first time we're not going to do anything with fossils. We are like, you might be able to make it argument that cleaning up coal in India and China and even in the U.S. back then is a better, it has a huge impact. You might make that argument. We're not going to do anything with fossil fuels.
And now that sounds again, blazingly obvious in 2010, there was still some genuine public and academic discourse on that. So that was one hardened task rule we never, never wanted to cross a line over. Aside from that, we made a commitment to sort of probe and look and be open-minded about opportunities. And I think that has served us well.
One question for you is how to stage factor into that equation. It sounds like people above all else, but is that relevant at a certain stage? But there's more but domain expertise was required at X stage and beyond or are there at least guidelines if not rules?
There's guidelines. Well, look, we want to be a series seed and series A investor. Those things mean different thing. So I'll even be specific. We want to invest seed stage investing nowadays feels like companies are calling $5 million rounds and above still their seed round. So we want to participate in those and we'll write a three if you're doing a five, four, $5 million seed round, we'll write you three, 4 million check. We can do that. And we will do that. And frankly, for a fund that says a 750 million fund running a three to $5 million check, you can take some real chances there. So, if I meet the entrepreneurs and they tell me a compelling story and I do some real diligence on it, I can get there pretty quickly on that. These days Series A companies are raising 20 million bucks.
So for your fund math, you want to write a 10 or $15 million check into that company. But you have to do a little more work on that. And probably you've got to be a little more knowledgeable about the industry or have to take the time to learn it. But again, it depends on the entrepreneur you know him well, I'm good friends with Matt Rogers of Nest Fame. And when I got the chance to invest in his latest venture, I just ran as far as fast as I could and put as much money as I could into it. Everybody wants to invest in that team.
And I didn't know a lot about the industry. I learned a lot and I had a lot of value to add as an investor to them, I believe. And you could ask them that would be a better metric of that. But that's a much easier equation, great entrepreneurs going after really big, hard problems. It's easier. So there's guidelines, there's rules, but I think the best investments are made by a combination of technical work, diligence, understanding the market, but then your heart you have to believe in and trust the team. That's going to build that company.
Which is that you won't do anything with fossil fuels. I want to just push on that a bit. Are you talking about fossil fuels or fossil fuel companies?
The former I think look we're co investors for the bunch of the venture firms on a number of companies. I think it's from some sort of philosophical perspective, people think of it as a bitter pill to swallow that the big oil giants are going to make money cleaning up the mess that they made you like, that's somebody that's a definite perspective that's out there and I can and empathize with that feeling I can say, "Okay, I get that." On the other hand, we don't have the time to waste and we need money and expertise from all sorts of industries and sources. And so we go into that conversation pretty pragmatically.
But what I was talking about is we don't want to invest in something that's going to make oil or coal or natural and gas you cheaper or last longer. And we have, we've had a couple of opportunities recently where we've had to stare down this decision or that decision by a company could do that. And are we comfortable with that? Yes or no. Or is there a different way to attack that problem and think about things within our portfolio because it's a different thing. Once you're an investor and you're a director and you have a fiduciary responsibility to the company and to all the stakeholders there, it's a different thing at that moment, even than when you're making an investment decision.
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