Catalyst with Shayle Kann - Crossing the valley of death

Episode Date: July 14, 2022

In climatetech, the ‘valley of death’ describes the lack of capital for newer solutions, especially those that mainstream investors view as unproven. The climate tech world is full of technologies that would be fantastic tools for fighting the climate crisis, if only they could cross this valley of death and scale. Scott Jacobs co-founded Generate Capital in 2014 to help address this problem. In this episode Shayle talks to Scott about how to successfully finance first-of-a-kind climatetech. They cover technologies like electric bus leasing, anaerobic digesters, microgrids and EV fleet charging infrastructure. And they dig in on: Winning over investors who don't have the time to understand complex technologies or business models The kinds of support, beyond capital, that first-of-a-kind technologies need from investors  Navigating the rising cost of capital and supply chain problems When exactly technologies have proven themselves in the eyes of investors Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you're a startup, investor, enterprise, or innovation ecosystem that's creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more. Solar Power International and Energy Storage International are returning in-person this year as part of RE+. Come join everyone in Anaheim for the largest, B2B clean energy event in North America. Catalyst listeners can receive 15% off a full conference, non-member pass using promo code CANARY15. Register here.

from the studios of PostScript Media and Canary Media. I'm Shale Khan, and this is Catalyst. Well, there are a number of accounts, as you well know, of something called the Valley of Death, which really describes the lack of capital for deploying newer solutions that are less well-proven or less mainstream in the eyes of the capital markets.

I would say there's quite a bit more, than just capital. Remember Infrastructure Week? Well, it's Infrastructure Week. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices

to manage 3.4 gigawatts of flexibility, built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energyhub.com. Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them.

I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. I'm Shail Khan. I'm a partner at the venture capital firm, energy impact partners. Welcome. So at the end of the day, climate tech is inevitably going to be in large part and infrastructure

game. All the cool new technologies being developed. up today, all the mature technologies that just need to be scaled up, they all either already depend or will soon depend on literally trillions of dollars of investment to build stuff that will last for years or more often decades. Power decarbonization needs generation, transmission, distribution, flexible load, vehicle electrification needs charging infrastructure, it needs to finance the rollout of the actual vehicles themselves, biomanufacturing needs bioreactors and so on and so forth.

Financing that infrastructure, particularly for technologies that haven't fully been taken up as mature and derrised by mainstream capital markets, has been the game of generate capital for years since 2014, in fact. But that game is changing. The technologies themselves, the markets, and perhaps most importantly at the moment, the macro environment, where things like interest rate increases have a direct impact on how and what you can and should build in climate tech land. So I've been meaning to talk to none other than my friend Scott Jacobs, who's the CEO of Generate. I've known Scott a long time, and I usually find him to be

at least one step ahead of the game, but you can judge for yourself whether you think that's true. So here's Scott. Scott, welcome to Catalyst. Thanks, Shale. It's great to be here. I'm excited to finally have you on. I want to talk, I guess, to start about the sort of founding thesis of Generate, where you thought there was a gap in the market for infrastructure finance in climate tech, or even what you called it whenever you founded the company. And then we'll talk a little bit about how that market has evolved and how you've had to evolve along with it. But what was the genesis of Generate? What was the founding idea? The original idea was really to try to address what we saw as a broken capital market

for sustainability broadly, and specifically for the area where we thought the biggest need was within sustainability, which is deploying the infrastructure of sustainability solutions. Most of that was about how do you get long-term capital? How do you get a true technical set of capabilities together? How do you make sure that you're really thinking about the customers and the communities that you will serve with that infrastructure for decades? and how do you bring all of that together under one roof in a way that aligns all the interests

of the stakeholders that are needed in order to actually have the license to operate as an infrastructure financier and an infrastructure operator? So let's go a level deeper there. So what was broken about the capital markets that you couldn't get that done X generate? Where was the bottleneck that a company trying to finance some of that infrastructure would run into? Well, there are a number of accounts, as you well know, of something called the Valley of Death, which really describes the lack of capital for deploying newer solutions that are less well-proven or less mainstream in the eyes of the capital markets.

I would say there's quite a bit more missing when you think about deploying solutions for sustainable infrastructure than just capital. And certainly in 2014 when we got started, there were a few folks offering capital for especially distributed infrastructure opportunities. You saw capital flowing to large-scale solar and large-scale wind, but you didn't really see any attention focused on some of the additional solutions we need to solve climate change, whether it's in other areas of the power sector like distributed technologies, for example, microgrids, battery storage, energy efficiency, or where you look at things like hydrogen vehicles, you look at things like electric vehicle infrastructure, and even in waste and agriculture, which are important parts of the climate solutions,

space, you saw very few investors or lenders willing to back projects in those areas because they just hadn't seen them before and because they're structurally misaligned in doing those types of deals for a variety of reasons. Right. So you just alluded to, I think, I guess, at least two core problems that we've seen in financing relatively new types of infrastructure in this space. One being the sort of getting over the information hump. So you have larger capital market players who want to write really big checks into either individual assets or portfolios of assets, but they're not really willing to spend the time to like dig in to deeply understand a new technology, particularly if the size of the check they could write on the other side of that

isn't, you know, in the hundreds of millions on day one. And then the second being the missile alignment that you just described of incentives. So maybe talk a little bit more about each of those. So taking an example, you guys have financed a bunch of, you said waste to value in ag. So let's talk about like anaerobic digesters, which I know has been a category that generates been really strong in. Like what was going on the anaerobic digestion market that made it difficult to finance projects? And then how do you create the right incentives to streamline it? Those are great points, Shail, and I think anaerobic digestion is a really good example of where we stepped into a void, but it's not just a capital problem that we stepped into, to your point. It's a whole set of issues that we were trying to address as we moved into anaerobic digestion. And as you know, anaerobic digesters have been deployed successfully for decades in Europe, where there were more incentives for the human capacity to be built, such as you know, anaerobic digesters have been deployed successfully for decades in Europe, where there were more incentives for the human capacity to be built, such as that there were human beings genuinely capable of building and managing anaerobic digestion

facilities. And now you have thousands of those projects across Europe, many of them successfully serving their customers and communities, taking waste streams and turning that into something more valuable. In the U.S., where landfills are a bit more available, and where real estate genuinely is a bit more available and where there are fewer price signals supporting the diversion of that waste into more productive uses, the market was underdeveloped.

And you saw a number of project developers struggling in anaerobic digestion not only to secure capital for building projects, but to secure all of the other elements of what makes a project successful, a good, solid feedstock. support system, a clear price signal for the revenue that they would look to produce by taking that waste and turning it into either gas or electricity or fertilizer or clean water.

A lack of regulatory support to address the filling of the landfills and the scarcity of landfill space that we expect to have over time here in the U.S. is a very local question at the end of the day. And so many regulatory bodies governing those local areas were not building in policy regimes to support the build out of anaerobic digester facilities or alternatives to landfills for organic waste. In general, what you see is just an underdeveloped market

kind of on every level. And in particular, when you have an underdeveloped market, the capital markets are unlikely to be the catalyst for that market to develop. You really need to see customer demand first and foremost that is solid. You need to have products that have product market fit, as you well know. You need to have human beings who are able to successfully steward capital and other resources to deliver against that customer demand. And then you'll see the capital flow if the projects are profitable. At the end of the day, what I'm saying is the projects in the U.S. have not been very profitable historically, and it's for a whole host of

reasons that those projects weren't profitable, and as a result, capital wasn't flowing. So what we decided to do was to test the thesis that projects could be profitable. If you align all the stakeholders, you build the human capacity, you secure the good customer demand, you ensure you engage in the community to highlight the benefits of these types of solutions. You work with policymakers to think about regulation that might be better for the world and that local community in terms of how you manage your waste. And then you can bring a capital solution that is truly long term that is across the capital structure serving the project developers and the project owners in ways that the traditional capital markets struggle to do, even if the markets are

developed and well established. I guess that gets to what makes this so challenging in some ways, which is it takes a lot. You have these markets that are underdeveloped, as you said, anaerobic digestion is a good example of one type, which is the technology actually is mature, as you said, it's been deployed for decades in Europe. And we just have a market that isn't quite built right here in the U.S., and there's a lot that needs to happen for it to get aligned. We'll talk later, I think, about the other category, which is technologies that are not yet mature and where they do need to be derrised. But even in just this first category, you know, traditional capital markets, project finance, suppliers, you know, they want to look at a project pro forma

and an engineering report and basically say, okay, do these numbers pencil and do I think that the risk is significantly mitigated by a combination of tech diligence? and the commercial offtake and so on, and then, okay, if it meets my threshold, then I'll deploy capital against it. It turns out in a bunch of these new markets, and, you know, anaerobic digestion is maybe one example. Another example, you mentioned microgrids. Microgens suffer from complexity, right? Like, there's no two microgrids that are alike each other. And so in every single case, you're underwriting to a totally different thing, basically, from the other thing. So every one of these, it seems to me, like, there deals that if you're

sitting inside the investment committee of like a large infrastructure finance operation, you would say this deal has hair on it of one kind or another. So I guess one, and the reason they don't then go after it anyway is it's a lot of work for what seems to them to be a small check size. How do you get over that, the like transaction cost problem? If you're going to solve that by doing all the work, like then you got to do a lot of work and you got to put a lot of people behind it, resources and time and money. Yeah, you hit the point on the head shell. We say it generate, we take risks, others won't, and we do work, others can't. And that is fundamentally how we were set up because we recognize that this is a systems problem,

that complexity is the enemy of most financing. And that's why we don't even think of ourselves as just a finance shop or just an investment firm. It's why we built ourselves as a company, because we actually need to have that technical capability that I was talking about, that operator mindset, the customer centricity. It's a lot more than just the box checking exercise or the Excel spreadsheet jockeying that you do in a typical finance organization. You actually have to think long term and build an entire business around addressing exactly that complexity you're talking about if you want to solve. the physical problem of climate change at the speed and scale that we are required to confront it with. All right. So I guess my perception of how the world has changed since 2014 and you guys found to generate, on one hand, you know, there have been more folks who've started to say and put capital behind the idea

of financing these slightly more esoteric asset classes within, as you call the sustainability infrastructure. I'd say it's still not, you know, we're still structurally undersupplied when it comes to capital in this part of the market, at least from my perspective, but there are more doing it. On the other hand, there's probably also a much broader array of types of infrastructure and technologies that meet this set of criteria that are ever evolving. You know, EV fleet charging infrastructure showed up in the past few years as a thing you could try to finance. That really didn't exist at any scale five or ten years ago, barely existed at any scale today, to be honest.

But there's a bunch more of those. But in the meantime, you've continued to broaden the horizons and try new things. All of that happening from 2014 up until very recently in the context of a macro bull market with low interest rates. And the fundamental thing that a lot of folks have always said about, certainly this was true with like wind and solar, but I think it applies to, you could tell me, I think it applies to a lot of this type of infrastructure, high cap-x, low-op-x. It's, you know, you pay for a lot of things up front, and you get savings over time, and that's particularly well-suited to a low-interest rate

environment. So presumably you've been sort of preparing for this day since you start to generate, what happens to all these opportunities and to these assets in an environment where we may have a recession plus rising interest rates? Well, let me, share our point of view, which is a little bit different from the point of view you just expressed, Shale, I would say, first of all, that capital is always available if there's a good project with good people managing it. That was true in 2014, and that's true today. And when I say project, I don't mean just physical projects. I mean companies. I mean opportunities, right? And so the question is, what's the right type of capital and what's the right set of other

criteria that need to be in place in order to successfully deliver against the promise of the opportunity. And that's a different set of questions. But in particular, I believe capital isn't scarce for sustainability solutions when they are good solutions, good opportunities with good people involved. What Generate has done to expand its scope over the last many years in response to, obviously more people coming into the market has been to just continue to deliver what we believe is the best partnering experience for either the companies that are technology solution providers or project developers, where they need lots of different types of capital and lots of different types of help, and also to think about the customer at the end of the day. How do we serve these customers successfully? How do we make sure that these solutions, do exactly as they are supposed to for these customers and communities who are expecting to benefit from them for decades, even generations. That is a set of questions, again, that most people in the capital markets community don't think very much about. But in this new environment

where you have interest rates going up and you have capital as a result more scarce, you're absolutely right, you're going to see a challenge with a capital-intensive industry like infrastructure. Across the board, you'll see capital scarcer to access, and we will probably see fewer projects built if you just look at the macro equation. I also want to remind us all, though, that what you're describing when you're saying interest rates are rising is primarily a debt question. And most projects are not just debt financed. Many people think that you just go access bank financing in the form of debt to build a project. And in fact, that's not at all true. Debt capital is actually quite easy to come by if you have the right sponsor. And the right sponsor means the right people and the right equity position below the debt. Generate has almost

never been project debt. It has almost always been project equity in addition to other sources of financing, which means we're the ones taking the risk that the projects actually work. We're the ones buying the projects from the project developers and then operating them long term for the customers and communities they're designed to serve. So as generate, we are less likely to be talking about interest rates because we're talking about what is the value of the project long term to the people who are going to benefit from it. And as a result, there's more of a conversation of partnering with the people that are actually building those projects, not just financing, and here's our interest rate, and here's our

capital structure. We work with the project developers to figure out. the optimal capital structure not only for the projects, but for them, so that we can do a lot more of these projects together over time, try to scale these solutions much more quickly, and integrate, for example, our trusted relationships with our customers, now numbering over 2000, who are relying on us for resilience and cost savings and decarbonization to drive a lower cost of customer acquisition, which means a faster adoption rate, which, which is a faster adoption rate, means more impact, more revenue, more profits for all who are involved, if done well. So understand that if you're thinking primarily about equity, interest rates have less of a direct

impact. But let's just put yourself in the shoes of a project developer of some sustainable infrastructure. All else equal, I would presume that the impact of the macro environment at the moment is at a minimum going to be the cost of debt to the extent that it would be available for my project will be higher. That changes the likely optimal capital stack that I might have for the project. It probably pushes me more toward more equity and less debt, but equity is always going to be more expensive. And so it just makes the cost of capital higher no matter how I'm financing the project. Is that not true? No, you're absolutely right. The cost of capital is definitely higher in today's environment versus six months ago. And it's likely to continue to rise

given inflationary concerns. And you're absolutely right also that the cost of capital is an important input to the economics of an individual project and thus the number of projects that might pencil for any of these project developers and, you know, their customers. It is also true that in the areas that we have been active, there is less debt available because there are fewer financiers willing to go into these projects. So what I was saying about Generate typically being Project Equity, if you look at the last eight years, many of our projects don't even have debt financing on them. So the question is how do you actually build the project so that it's profitable for all involved and how do you build more of them faster? That's the question we've been

trying to answer since our inception. You're also right that at a certain point, many of these markets mature to a level where debt financing is available. And the cost of capital can go down, which can also increase the adoptability or the total addressable market for those solutions. And we're trying to facilitate that transition from not mainstream to mainstream so that the cost of capital comes down. and we all have a chance to deploy a lot more of the sustainable infrastructure. I also think, though, that when we're talking about the macro environment, we'd be remiss in not talking about the supply chain questions that are really actually hurting more of our project developers and our customers

today more than the cost of capital that is slightly different today versus six months ago. The supply chain and the cost. of supplies have gone up far more than the cost of capital has gone up so far. And that volatility in the supply chain has been much more troubling for our partners than cost of capital changes has been so far. I was going to ask you about that. We've seen public reporting in some markets, so like utility scale grid energy storage, for example, where prices for projects are getting rebid. Projects are getting retrated because the upstream cost of commodities or the cost of

battery cells or whatever might be is rising. Certainly we see that across a bunch of different categories, obviously not just in energy storage. How do you think about, how do you think about derisking that? I mean, there's a lot of developers who kind of wear that risk, at least some of that risk. They thought they were going to be able to procure X component for Y cost at the time that they finance the project. Now at times, it looks like it's actually going to be, it's going to take six months longer, but probably more importantly, it's going to cost 50% more. Is there a way to hedge supply chain risk or who should be wearing it, I guess, at the end of the day? We look for ways to collaborate with our partners to address issues like that and have, in

fact, done aggregated purchases across multiple partners for a particular set of supplies. Over the last several years, this has happened multiple times where we've had to step in. And because of our scale, our balance sheet, our liquidity profile, our trust in the market, we're able to exercise some buyer power that individual developers are often having trouble accessing because they have smaller purchasing goals. They have shorter term liquidity. They have less established reputations with some of the suppliers. So you recently saw an announcement by some of the largest utility scale solar developers

getting together to make forward commitment on supply for U.S.-based manufacturing capacity and solar technology. We've done that at a smaller scale with multiple partners where we say we, at Generate, are willing to either backstop or make a purchase of a certain amount of supply, what can we do with the terms, the availability, the price of that supply if we step in intervening

with our scale and reputation? And we look for other opportunities to do that because it's one of the other elements of the help that our project developers need. Again, not being just a source of money, how can we be a source of true partnership where we're wearing that risk, to your point, alongside, you know, some of our project developer and technology company partners that need us to. Virtual power plants are becoming a reliable way for utilities to manage capacity, but enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched and being able to prove it, from the control room to the living room. Energy Hub's platform handles the full picture,

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Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts.

All right, I want to transfer from talking about the macro environment to talking about some specific markets within this sustainability infrastructure world. We've talked a little bit about anaerobic digestion. You mentioned microgrids, a few of those categories. I mean, one thing that I think I've always found exciting about Generate is you're sort of always looking at like, what are the markets that have all the right puzzle pieces to scale? The technology is de-risked. The buyers are there. Maybe it exists in another country, et cetera, et cetera. And yet the puzzle pieces haven't come together. What do you think are those markets today? Well, there are a number of interesting opportunities that people are just not yet. mobilized to address at the speed and scale we were talking about. You're absolutely right. We're always looking for the new ones, but I'll highlight a few that we're active in that aren't there yet even with our level of interest and involvement. One, for example, is electric bus leasing.

We developed a partnership several years ago and announced it publicly that we were working with BYD, the largest electric bus manufacturer in the world, I believe, to lease electric buses to take that high cost of acquisition from the customer and to turn it into a service-based arrangement where the customer wins over time because of the dramatic total cost of ownership benefits of an electric bus over a diesel bus or some other form of internal combustion engine. It hasn't scaled because municipalities rely typically on federal dollars and are accustomed to doing so when they make purchases for new vehicles. And so the value proposition of a leased bus is actually very difficult to communicate to the typical buyer of those buses.

We do have many commercial customers, university customers, and a handful of of municipal customers who have chosen the leasing path. But the leasing path is designed specifically to dramatically improve the total addressable market because most customers don't want to purchase the bus with their own cash. And so there's a huge education that's needed of the customer market and some behavior change that's necessary from their traditional mode of operations. and the way they've conditioned themselves. So I think there's a huge opportunity in not only electric vehicle leasing and electric vehicle infrastructure like charging depots and charging stations, but I think there's even a more

important solution to bring to the customers, which you might call mobility as a service or transportation as a service, where the customers get to actually pay by the mile or by the kilometer, if you're in a different country, that's something that I know customers want, but they don't know how to get it. And it goes back to the complexity we were talking about earlier. There's a system change necessary, not only the integration of a number of different technologies,

not only the support of a bunch of different types of capital, but again, a regulatory environment that might need to be more supportive, a customer that needs to be more educated and aware of the possibility, et cetera. And as a result, you're talking about difficulty because of the complexity. But we will likely see that market take off over the coming years because there's so much customer demand fundamentally for it. And I think that's really what I would use to frame a lot of the answers to your question. Where is there real customer demand?

that can be supplied by the existing solutions out there. Electric vehicle leasing is just one of the examples you wanted me to talk about. I definitely think there are a whole range of areas in the waste category that fit that description. We've already talked a little bit about our involvement in organic waste streams, like food waste or animal waste, and turning those into either renewable natural gas or renewable electricity. That's something that we've been doing and will, continue to support. And I think also is another area where, frankly, the market is underdeveloped relative to its potential, to your point. Plastics recycling, tire recycling. These are other

areas we expect to see a dramatic growth in because of the customer demand and the sustainability benefits, but require real system change to bring that complexity down. and to create more simple solutions that are financeable. Going back for a minute to the EV bus leasing or even EV fleet leasing idea, I mean, this has been one I've been interested in watching it play out. So just to put a finer point on it, right, the economics of electric vehicles in general, and this is particularly true of fleet vehicles and particularly particularly true of municipal buses, is the total cost of ownership tends to be low.

The upfront capital cost is high. And so it's this like obvious perfect fit for a model that doesn't require the customer to pay up front but gives them the savings over time. And so the lease has been with sort of one version of that. You described another version of that, which is the pay per mile idea. And in some ways that one, it looks, you know,

you could think about the source. solar analogy, right? As people were starting to finance residential solar, there was sort of a battle between leasing your solar on your rooftops and a power purchase agreement where you pay per kilowatt hour produced. I think of the pay per mile idea in EVs as being pretty similar to the power purchase agreement. But you really haven't seen that one take off, at least to my knowledge, there's some leasing going on and there's very little sort of pay per mile. And you mentioned the customer demand is there. This is what I've always wondered about the pay per mile thing.

Though it has some inherent logic to it, it's such a different way to think about how you pay for your car, whether it's an individual or a fleet. Nobody's doing that today. How do we gain conviction that there is customer demand for that model? Talk to customers. And they'll tell you, I would love to pay per mile for this thing, but I just can't sign up for it.

I can't get them. I can't get the vehicles. Yeah, we have countless enterprise customers who would love to be able to pay by the mile in order to more clearly articulate their total cost of ownership win that they would be getting. It's hard for these procurement managers to get through their own internal controls all the way through to the CFO to argue for a total cost of ownership. I think it goes back to the original question you asked me about what we were trying to address when we started generate in the capital markets and the short-term versus long-term approach to managing capital. CFOs have the same pressures on them that many investment firms have on them, that many banks have on them, to find a very quick return on investment, especially when the area that we're talking about is not considerably.

core to the business, transportation to very few businesses is a core activity. It might be core if you think about UPS or FedEx, and it's no surprise you're seeing folks like that be more progressive about driving decisions based on total cost of ownership. But there are many other customers out there asking for a TCO-driven model for paying for their transportation and even upgrading their transportation infrastructure. But they struggle internally because perhaps their CFO is being told by the analysts that cover their stock that they need to focus on same-store sales growth quarter to quarter, which is what the analysts will focus on in the earnings calls. and they don't necessarily want to see large capital investments in non-core activities like

transportation infrastructure. So I want to talk about some of the areas sort of a little bit outside where generate focuses or at least this focus historically, but where there may still be some gaps. I mean, the one that I think of as being, certainly this is true in our portfolio, right, we invest in a lot of fundamental technology companies that are pre-commercial when we invest, right? and they are going to need to build the first of a kind of whatever their thing is going to be. And inherently, when you're building the first of a kind, there's going to be some tech risk. Now, you can try to mitigate that tech risk in a million ways.

You can build a smaller version of the thing and then just say all you need to do is scale up. You can do super detailed engineering. But at the end of the day, you're going to have to build the first of whatever that thing is going to be. and that feels to me, I'm interested to hear whether you agree, that's still where the gap is really widest. It's really, really difficult to finance a first-of-a-kind thing on anything other than your own balance sheet. And I don't know if that's a solvable problem, because first-of-a-kind is those are inherently smaller projects. The transaction costs are inherently higher. The risk is inherently higher.

So all there is really available is you can finance it on your business. balance sheet or you can look for some kind of kind of outside the typical capital market solution. You can go to Jigger and try to get a deal-e loan guarantee. You can try to get funding from a non-dilutive source or something like that. But do you think that they're, first of all, do you agree that that gap still exists? And if so, do you think there is a solution to it ultimately? Or should companies just be preparing to build their first of a kind on their own balance sheet? at the end of the day. Well, that's a really good analysis and a really good question, and I would say, I agree with you that capital is scarce for first-of-a-kind technology scale up in the form of an

infrastructure project. I would say that's well-deserved as well, to your point. Is it ever going to change? I'm not sure. I think it goes back to an earlier point we made. There is money available for a good project. If it's a good project with good stewards, it will get funded. And so as I said before we started at Generate, back in the late 2000s, when the first time we heard the Valley of Death moniker come out, most of the things that died in the Valley of Death deserved to die. They didn't have a good proposition to the customer. They didn't have an economic proposition to the investor. So at the end of the day, those things always fail. I think Generate has found a way to take first-of-a-kind risk multiple times where we have partnered with technology companies and project developers

to build their first projects. And those are projects we believed were worthy of investment. Now, we believed they were worthy of investment because we got involved early enough to make it so in partnership with these companies. that we're developing them. So as much as we talk about our focus on proven solutions, we do believe there are proven solutions that have not been commercially scaled. And that is one of the areas that we continue to be very focused on at Generate.

And I do think we represent one of those outside of the traditional capital markets solutions that you were referring to. It's not just loan guarantees from the DOE, which actually needs to be for very large-scale projects and for companies that have a lot of time and money to deal with the government bureaucracy. It's also the case that there is blended finance out there where you have concessionary capital or philanthropic capital willing to take on some risks that private investors who are seeking a market-based or higher-than-market-based return are going to need. There are a number of creative ways to put together those projects, if the project is worthy of any of those types of capital.

And again, it goes back to, do you have a project that delivers value for the customer that can reliably return capital to the investors or the owners or the lenders? And that's not an easy equation to make work, but it is one you can make work with certain first-of-a-kind solutions if you have the right group of people around it, including folks that are willing to do the work and take the risk like Generators. I think you use the word proven technologies or proven solutions. Just taking it a step further, though, there are some things that are inherently unproven until you prove them. And so then, you know, companies are going to try to build the truly novel first-of-a-kind thing. Let's say they're able to figure out how to get the

first one built. They use some blended finance. They find concessionary capital, whatever it might be. The other question that a company is often ask that I think you have sort of unique insight into is at what point then does it become proven? Like how much operational data? I know this is not universal, but what do you need to see? What is the kind of thing you need to see from the performance of a given technology to say, from my perspective, this is the tech is derisked here and we can solve all the other problems through structuring. It's a good question, and like I like to say to many of these types of questions, it's very hard to paint with a broad brush in answering it.

It's very specific to the technology, the project, the regulatory environment, the people involved, the customers willing to sign up, et cetera. So at the end of the day, it really is a case-by-case question. What we like to see, as I've said, is a customer willing to pay for the output at a certain price that makes it profitable to produce the output for a certain period of time that allows us to at least get our money back, if not make a real return on investment commensurate with the risk undertaken by us as a financier. But perhaps more importantly, the risk undertaken by us as people and the time that we have to invest to get it there. not just us, of course, but all the others involved have to also get paid for the risk that they're taking either with money or time. The customer side is really the first part of it for me, is their real demonstrated customer demand for the output. And then the second question is, have you proven the ability to make the output at a close?

that is going to deliver a real margin when you put it in place and try to serve those customers. Then you have to think about the technical elements of it. Do we have multiple suppliers for different components such that if one of the suppliers goes down, we can continue to serve the customer? Do you have resilience in the human capacity necessary to keep that project up? There's only one expert in the world who can keep that project running. You can't ever finance that project, right? You need to have multiple people who can actually operate these facilities

so that you have resilience in that regard as well. We do like to see runtime. So we like to see whether or not, you know, in that demonstration facility, you've had consistent performance for a certain amount of time that indicates you'll be able to deliver that kind of consistent performance either at a larger scale or over a longer time horizon. So these are some of the things you think about, but these are not rocket science questions.

Do you have stable customer demand? Do you have a stable ability to produce for those customers? Do you have a solution that has already demonstrated? its ability to deliver the output as well as the margins necessary. Do you have resilience in all the supplies necessary to serve those customers? Those are the four basic points I would make. And then we always look at the actual company and the people involved and whether they have a track record, maybe not just at this particular organization,

but in other organizations that give you confidence, they can repeat that kind of experience with this. situation. Okay, so wrapping up, clearly we're in a fairly volatile time at the moment. Obviously, in the capital markets, it's volatile in every sector, but also as it pertains to sustainable infrastructure and climate. I mean, you know, we're recording this as the G7 is currently having discussions around how do we deal with the fact that we're going to need to increase production and imports of fossil fuels while still maintaining this kind of long-term decarbonization focus that we've got.

How do you think about navigating the short-term choppy waters but maintaining the foot on the gas on decarbonization as it pertains to infrastructure that needs to get deployed and the pace at which it needs to get deployed? I think it is depressing to look at the facts and the science today. and the progress that we still need to make against the problem of climate change, despite the increasing momentum

and great success stories that we can share about the last decade or so, and in particular the last couple of years in terms of climate solutions, their readiness, their adoption, the demand for them from customers, the support for them from the capital markets, we are just so far away still

from actually mitigating the climate change problem in a way that saves humanity. We have a limited number of years remaining to make a very dramatic change in the trajectory of carbon pollution. And we really need to think more about human capacity building than we have. We've focused a lot as a globe on policy and on capital and on technology.

We have focused far too little on the thing that brings it all together, which is people. And if you look, for example, in the United States, where you'd think we have a pretty developed market for these types of solutions and obviously have made pretty good progress, relatively speaking, in the last few years, again, relative to the prior years, we still lack the human capacity necessary to mobilize the $9.2 trillion a year that McKinsey says is necessary for the net zero transition. And if you look at that $9.2 trillion per year that's necessary, a lot of it is required to go into not the U.S. And not even the developed markets of Europe and the West, but to non-OECD countries where, many of the carbon emissions are going to be concentrated in the coming decades. And we have even less human capacity in many of those markets than we have in these developed markets.

And so I am particularly concerned that the discourse, whether it's at the G7 or at COP26, or at other conversations we have in the climate tech community, it's too much about technology, it's too much about capital, it's too much about policy, including policies that don't actually move the needle, and it's too little about human capacity and what really will move the needle from a policy standpoint, technology standpoint, or capital standpoint. Good way to end it there. Scott, thank you so much for doing this. It's good to finally have you on. Thanks so much, Shail. This was fun.

Scott Jacobs is the Cajos. CEO and a partner at Generate Capital. So what did you think? Let us know. As always, find the show on Twitter at At CatalystPod. You can also find me and Canary there. If you'd like to show today, go over to Spotify or Apple podcasts and leave us a rating and review. This show is a co-production of PostScript Media and Canary Media. Head over to Canarymedia.com for links and more info on today's topics. And as always, PostScript is supported by Prelude Ventures, the venture capital firm, that partners with entrepreneurs to address climate change across a range of sectors,

including advanced energy, food and agriculture, transportation and logistics, advanced materials in manufacturing, and advanced computing, and then maybe all that infrastructure that needs to get built from those things. This episode was produced by Daniel Waldorf, mixing by Greg Vilfrank and Sean Marquand, theme song by Sean Marquand. Our managing producer is Cecily Meza Martinez. I'm Shayle Khan, and this is Catalyst.