This Week in Startups - How VCs think about deploying reserves & follow-on funding + Quaise CEO Carlos Araque | E1546

Episode Date: August 28, 2022

Sunday show! On VC Sunday School, J+M discuss how VCs deploy reserves for follow-on funding. (1:58) Then, Molly interviews Quaise CEO & Co-Founder Carlos Araque about his geothermal drilling business! (24:02) (0:00) J+M tee up segments for Sunday! (1:58) Jason and Molly talk about how VCs deploy reserves for follow-on funding and bankroll management (10:31) OpenPhone - Get an extra 20% off any plan for your first 6 months at https://openphone.com/twist  (11:47) Golden State Warriors impact on Jason's system-based VC team building philosophy (15:48) J+M tee up today's TWiCS interview! (22:46) Neo.Tax - Get $500 off R&D tax credit fees at https://neo.tax/twist  (24:02) Quaise CEO Carlos Araque joins to break down his business: drilling to unlock geothermal energy (33:03) Helpware - Go to https://helpware.com/TWIST to get $1000 off your first invoice (34:10) Carlos explains the size of Quaise's opportunity and how he raised $50M+ Series A for a deep tech project, what their business model will look like, and more! Check out Quaise: https://www.quaise.energy FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood Subscribe to our YouTube to watch all full episodes: https://www.youtube.com/channel/UCkkhmBWfS7pILYIk0izkc3A?sub_confirmation=1

All right, happy Sunday. Everybody, welcome to the podcast. No day of rest. None. That's right. It's Sunday. We got a great VC Sunday school. We're going to talk about the nitty-gritty of deploying your reserves and how VCs

recycle the first set of reserves to put into their big winners. It's a great segment. Marlon, have a great discussion. Yeah. This is high-level stuff. Past like just thinking about investing in a company, but thinking about how to invest as a fund, 200-level, 200-level VC Sunday school. Bankroll management, as we see.

say in poker. Nice. And then it's another great this weekend climate startups. I interview Carlos Arake, the co-founder and CEO of Quays, developing drilling systems to access deep geothermal energy. We talk all the time about like nuclear and solar and wind and whatever. It turns out there's a pretty much endless reserve of heat and energy right down there under our feet. I am so excited about hearing about this. It's going to be a great show, everybody. Stick with us. This Week in Startups is brought to you by Open Phone. As a startup founder, a lot of mistakes are easy to roll back, but using your personal cell phone number as your company number isn't one of them. Open Phone makes it easy to get business phone numbers for you and your team right on top of your existing devices. Visit openphone.com slash twist to get 20% off your first six months. Neotax. Don't leave money on the table. claim your research and development tax credits with Neo Tax and get $500 off any service fees related to Neotax products. Learn more at Neo.tax slash twist.

And Helpware helps you outsource the tasks that slow your team down. From data entry to world class customer support, Helpware can help make you bionic. Go to helpware.com slash twist to get $1,000 off your first invoice. All right, everybody, it's Sunday. That means two great things are about to happen to you, if you hear my voice right now. One, VC Sunday School, two, this week in climate. Molly, what's your question this week as we sit here in the summer, August 2020? You're on your second half of your first year, being a venture capitalist, and you're kicking butt and taking names.

I love it. I love this job. It's so awesome. And it is like every time we have these conversations, they get just a little more advanced. And this comes from two things. One, an actual conversation I had with our president, Mike, where I was like, but I love this company. It's so interesting. And he was like, you know what, this company is interesting. But the calculation you have to make is, if we don't do this, will we have enough money to put more money into this? Like it's, you know, and so we started to

have this really interesting next level conversation, not just about investing, but about budgeting. Right. Right? Like budgeting your investment dollars. And so then, friend of the pod, Jason Lemkin, had this really interesting thread on Twitter earlier this week, analyzing his first solo VC fund and sharing some lessons. And one of the things he talked about was almost exactly this. Like when how to use your reserves, which first of all, we should cover what a reserve is.

How to use it. And then when to recycle your returns. Like almost like how to budget the money that you have to invest. Okay. So we need to have some definition of terms here. Yeah. So when. you raise a fund, let's say his $60 million fund, you might put out

40, 42 thirds of it into primary investment. So you put 40 million, let's say he did 20 companies, 2 million each. And he's got that 20 million sitting here. Of those 20 companies that he invested in, which ones break out, and then you have a chance to put more money into. Well, you know, as we always talk about, there's going to be, you know, 5% of your fund might be outliers. So in this case, that means one company. But let's just say there's two. And then there's two, let's say there's four that you think could be the breakout.

You're pretty sure of this one. The other three are looking really good. They're raising subsequent rounds. You get that $20 million. You invested in these companies, let's just say, at a $20 million valuation. Now you've got some at $100. You got some at $250. Those bets, that last $20 million that you put in is going to be as close to the sure bet as you can get

because you have known this company for three, four, five years. you've watched them grow, they go up and to the right. And now you have a chance to do what's called pro rata, maintain your ownership percentage by putting more money in. You have the right to do that. And therefore, you want to, before you harvest these returns, put that in there. Now, when you get an early return,

when you have a $60 million fund, you can say the first 10% of the money I get back from investments, I can recycle. So I invest that $40 million. Now I'm putting extra money into those four. Okay, let's say I put two million into each. I put eight million in. Okay, one of the other companies gets bought, it's a 5x.

I get, you know, whatever, $10 million back. Well, let's just say I get $6 million back. Okay, I have in the documents, the agreement with my LPs, I can recycle the first 10%, in his case, a 60 million fund with $6 million. Now I have $26 million to put in. And the $26 million is going into the best companies. Because the people who are in your fund, you know, they're looking at a 10-year window,

but you always have a couple of investments that come in early and sometimes they're trickles. Like we put 500K into this, we got half our money back. We put 250K into this. We got three times our money back. That's 750. So like even sending it to your LPs is like,

okay, you're sending them like a penny or five cents on the dollar. They're like, whatever, you know, or 10 cents on the dollar. That's not why they're in it. They're in it for that long ball. They're in it for that home run, my, the grand slam.

And man, when you put a little extra into the great companies, and I'll just give you the example of something I didn't do. I didn't put extra money into Robin Hood, calm, we did a little bit later. But Robin Hood and Uber, I was just one and done.

I was using Sequoia's money as a Sequoia Scout. Their philosophy was no follow-on, just, you know, make the investment, we'll see how it goes. If I had participated in the Series A that Bill Gurley did at 30 or 40 million for Uber, and it's trading at 60 billion or whatever,

still a great investment. Or if I'd done the one that Menlo had done at 300 million, still a great investment. The next round after that was $4 billion. You still had a $15 in it. So, you know, the subsequent rounds, and we all knew Uber was the winner. We knew that was the one.

Everybody did. It was obvious. But you didn't have access to buy those shares. And so that's what people are talking about here. So it is a competition to make those primary investments, of course, and you should think about that. But you have to be very judicious with the dry powder and who you're going to bet. That's not for you to make people feel good about themselves or somebody, you have to be cutthroat about it.

So when the founders you invested in, they're not up into the right, you can't give them that dry powder. You have to say that dry powder has been allocated to the top performance in the fund. And it's really hard when you believe in somebody, things didn't work out.

They're facing the risk of ruin. The company's getting shut down. And you say, I would love to give you $2 million extra out of my $25 million in dry powder here, 26 million. But I can't. I got to put it into my Uber. I got to put it into my Airbnb.

Hard conversation. So you've got your reserves, and you've got to like be precise and targeted about that because it gives you the possibility of buying more ownership in a winner. What's interesting too about Jason's thread is that then he said other Jason, Jason Leibkin, is that he said one of the things that he learned was that third checks he thought were a suboptimal use of reserves because he said they often bought trivial ownership but took cash that could impact other deals. And then he said a related learning is that it was a terrible mistake not to recycle an early exit, which you just talked about. He said we had an early exit, which was half of called capital. It seemed too much to recycle. So we distributed and I wish I had that cash now.

It's pretty nuanced, it sounds like. It does. The further you go. Like there's the simple thing, which is like, save your money and use it on the right bets. Double down on really good bets. Maybe don't triple down though. You know, what he's also lamenting here is, hey, the market's down. A lot of my companies are raising money. I probably could get a pretty good deal

on them too and buy more shares. So, you know, it's, I would say, you know, for Lemkin, this is a high class problem. He already has, according to this tweet storm, a 4.2x fund. So he's returning four times the cash people put in. Whereas the stock market doubles and, you know, people expect, you know, venture firms to double a triple. And he's already beyond that with quadruple. So he's doing great already. You know, you can over-optimized, but sometimes locking in wins is important, too. So the other dynamic you'll see is sometimes VC funds haven't sent anything where they have one fund where they sent a bunch back. It's doing great. The second fund's not doing good. The third fund's doing okay. Now they've got this dynamic where it's like, you know what, I want to show my LPs across three funds that I'm good at this. So fund manager dynamics are unique. And that's why I don't try to play any games with it. I like to distribute the shares early, get them out to people. I do like to recycle. That's an obvious best practice. But I am, I am. just ultimately focused on process. And I think that's what we talk about here on VC Sunday School.

And it's just a great gift for us to have created this segment because you can see my level of focus since you got here. And I'm doing this. I'm being really thoughtful about what is our process? And what are people in our investment team allowed to do? What am I telling them to do? And how am I instructing them? And we do, people don't know this.

We do most venture firms do one Monday meeting. We do two a week. Tuesday and Thursdays. We meet for two hours each time with 10 people, 11 people, 12 people. people. We are grinding it out. I feel bad because I feel like it's your hell because I will, I will take credit for initially suggesting that our investment meeting go from 30 to 90 minutes, because I was like, this seems like a really important meeting. And now it's two times, but I remember in your book you talked about how you didn't want to be a VC because you didn't want to have these

big love meetings. But you know what? You never know what life is going to bring. Well, here's what I'll say. You know, I didn't want to be a solo act. And then I happen to hire a bunch of people who I love working with. Yeah. You know, and so. So. Great. Like, all the learning we do on D.C. Sunday school, you guys, we are doing that at work every single day. I have made an outhanded comment to a fellow VC about our professional development. And literally, he was like, should I be doing that? I'm like, are you not doing that?

On the program today is Dorena Kulia. She is the founder of Open Phone. Welcome to the show, Dorena. Thank you so much, Jason. Great to be here. Now, what mistakes do most founders make with phone numbers in their startups? Really, delegation, right? because what ends up happening is that as a founder when you're starting, you do everything.

You're the salesperson, the support person. You make the coffee. You do HR, marketing, sales, recruiting, everything. But then eventually you have people joining the team. And what ends up happening is if as a founder, your phone number, let's forget about the privacy, the spam, all that problem. Let's say it doesn't exist. But you're not going to want a year into your company, two years into your company to have

all the support calls or. All the questions come to you because now you've just hired your support team. Why did you hire them? So that's another reason why having that separate number makes so much sense because you can always delegate those calls to your team as you grow. All right, everybody, here's your CTA, the old call to action. Twist listeners, 20% off any plan for your first six months. Just sign up at openphone.com slash twist.

And if you got an existing number, no problem. They'll put it right over. Openphone.com slash twist. O-P-E-H-O-N-P-H-O-N-E. slash twist today for 20% off. I've just been very influenced by watching the Warriors, you know, and having a couple of friends on the team. And they really focused on their process, you know,

and they really think about everybody's role on the team. And they're just, you know, they have a joy for playing the game properly and playing within a system. And when Kevin Durant came here, he had the ultimate success. MVP's of the finals, chips, MVP's of the regular season,

scoring time, whatever he had. He seemed like he checked every box. Before that, bad process, bad teammates, bad coaches. No success. After that, bad partner in Kyrie Irving. No dig to Kyrie Irving, but he hitched himself to a loon. He doesn't love the game. He didn't recycle his success into a winner.

He should have put all his reserves into the Warriors. Exactly. I mean, if he was here, they'd have a dynasty. Yeah. I mean, listen, whatever. I mean, he's a human being. He can make mistakes or whatever. But the point that I saw was, even a high performer, arguably,

the highest performer at that time in the league. And that's a league with Gianna, Steph, and LeBron in it. The highest performer was at his best when he was in a system. And he was not making it very far on the playoffs when he wasn't. He was having just the ultimate modest success. And so I think you really do have to focus on process. That is really in life. We had that great discussion earlier in the week about like, you know, should you go to college or not?

in the college, you know, forgiveness of loans, obviously very controversial. But aside from that, just thinking about the ROI of college is super important. And thinking about the process in which you learn skills, right?

And so I think for VCs and for founders, think about the process. How much you're learning, how are you getting better at the job? This is what it's really about. And can you get incrementally better, you know, every day?

And I try to get that myself personally. You know, I don't succeed every day, but every week, I think I do. I think I probably get, you know, maybe 1% better a week, which means every 72 weeks, I'm probably twice as good as what I do, and then I see you doing it,

and it's infectious in a company, isn't it? It is. Oh, absolutely. It 100% is like the thrill of working in a learning organization where you're just never resting. It can't be overstated. Right.

Versus a losing organization where people are like, I'm getting paid for this and like, oh, I need a union, blah, blah, blah, this and that, blah, blah. Sorry, I don't get me started. I'm not union.

But you, I mean, you were at some places is that if you try to be a tall poppy, they're like, oh, cut that one down. Right. Right. And now it's like, oh, you know, oh, Molly's a tall poppy. This person's a tall poppy.

This person. Oh, great. Let's have. How much, how much taller can they get? How much more fertilizer, soil, sunlight, water, vitamins can we give that person to grow as tall as possible, right? That's what winning organizations do. They're like, yeah, how much can we make staff or clay or Wiggins or whoever a champion?

Or Jordan. What can we do to make, right? You know, like pick everybody on. Yeah. Barry Payton the second. Yeah. They just went to every person and we're like, hey, let's make you better. Make you better.

That was funny when I called you when we were having dinner with Clay Thompson. That was hilarious. I am such an idiot. All I ever tell people that story is like, I'm the most awkward weirdo that ever weirdoed. It's pretty great. You're like, I'm your biggest fan and I got COVID for you. And he's like, okay. I was like, but I'm not mad.

And he's like, I'm pretty wasted. Yeah, we were both had a couple of cocktails. Yeah. I mean, we did win the championship. I cleaned myself in winning the championship. if even though all I think was going to the games.

You're like, we won. I was like, we had a great time. We won a big time. I think I said to my son the next day I was like, life has changed a lot in six months.

It has. Look at you. The best way is. The best way is. The worst. Just, you know. Just hanging out of clay.

Completing to them about my COVID. Like you do. As we say, as I say to people who work with me, stick with me. Stick with me. Stick with me. Stick with me. Stick with us.

Yeah, stick with us. Stick with us. What's next? Exactly. All right. next up, the segment that you promised when I said I wanted to come work here that we do every weekend. It's so freaking awesome.

This fantastic interview with this guy, Carlos Arake, this company has been getting a lot of attention. He's the co-founder and CEO of Quays. And they are developing brand new technology, new types of drilling technology, millimeter wave drilling, so that they can drill deep into the earth and access what's called deep or even ultra-deep geothermal energy. Sure. Gigawatt scale geothermal energy. I mean, this is, you don't need a nuclear plant. You just need to drill one of these.

And you can convert existing oil and gas infrastructure to dig for geothermal energy. It's more, it's totally consistent, right? None of that. The sun's not shining stuff. It's at the scale that we actually need for the energy transition. It's super fascinating. Or isn't to crack the earth open like an egg. Like maybe one or two, one of those.

Yeah, I was about to ask, like, how do you avoid releasing, like, like Satan and the demon spawn when you go that deep into the earth. But it makes total sense. If you can drill the holes, faster, better, cheaper, deeper, and we can get that, it would make geothermal probably more viable because my understanding is, as great as geothermal is, it's expensive to drill down into the earth and there are regulations. And it's just not as accessible as putting solar on your roof or, you know, whatever. Right now it's very geographically constrained.

It happens in places that are like very low. Like when I was in the salt and sea last year, actually, that's a place where they're doing because, and it's hydro. It's like super hot brine, salty water that's very close to their surface because these areas are like below sea level or have tectonic plates and just like give access to the water. This is just like drill state straight down, get the super freaking hot and get it up. And they've raised about $52 million and they're just and they're just in a lab. I mean, it's really early, but it, like feeling could be a game changer. Every time I listen to this weekend climate on Sundays, I feel more hopeful about that we're going to solve this problem. It just feels like it's within our grasp.

I mean, the technology is already there if we could execute and get alignment around spending the money. But every year that goes by, it feels like we lower the cost of these things. And so the free market starts taking effect and then a little bit of subsidies on the margin. a little bit of investment. It feels like it's turning over. And, you know, this feels like a race to the wire. When you see what's going on in the Lois in France, the river that's dried up. Yeah.

China's rivers drying up. China has had 75-ish days of like over 100 degrees across a massive swath of that gigantic country. Like, insane. It must be a coincidence that all this is happening at the same time. It's probably not part of a trend. No, come on. Pish posh.

It's just the weather always changes. It's been hot for like, you know, whatever, 39 of the last 40 years. That can't be it. You see my art piece back here, right? Oh, yeah. The blue is all of recorded history, and the red is the part where humans have been around.

Yeah. I mean, listen, I like a warm day. As much of the next day, I like a warm day. But I don't want 110 degrees, and I don't want the beautiful river. I've never been on a river barge in France. I hear it's a delightful thing to do to go down these rivers,

the sand, the Lois. all this great stuff and they're bad like it's gonna be on you know like no yeah it's funny actually I'm on a little bit of a kid cutty phase right now

the rapper but he collaborated on the Ariana Grande song just look up for the movie and I was just listening to it in the car and it literally is just like yeah guys we f*** it up but we are fixing it like the one thing that humans are super good at

is saving our own bacon we have done it all throughout his Every time that we were about to be extinct, we did things like invent fire and the wheel and agriculture, and we are going to tackle this. Well, I mean, did you say bears? Spears. Oh, spears. Yeah, to protect against the bears. Yeah, because of the bears.

I always, you know, I had this conversation with my friend Friedberg, and we were just texting, and I was like, can I ask you a stupid question? Like, we did this dwarf wheat stuff in the Mexico studies. You can look up dwarf wheat Mexico studies, you know, in the 40s or 50s. Like, this is like, they basically did a Manhattan project on per hectare. How many calories could you get out of it? And they were like, okay, yeah, we quadrupled it and we quadrupled it again. And like, yeah, nobody's ever going to be hungry again. And then all of a sudden, like, you open the news now and it's like, oh, these people are going to starve,

those people are going to starve. I'm like, what is happening here? Is it just that certain people in certain regions don't like wheat or, you know, we can't get it to them? because I can get anywhere on the planet in eight hours, or whatever it is, you know, 18 hours, like, we should be able to figure this out. So what's going on here is this culture, politics, dictators, not enough forethought, you know, foresight.

And he's like, all of the above. All of that. And I was like, oh, okay, so nobody should go hungry, yet people are still going hungry. This is a failure of leadership. And, you know, so much of the climate, and stuff that we talk about, it's like, well, wait a second. It's a hundred years of failure of leadership, but yes.

50 mile per gallon cars exist. Right. California just, California today, like, passed a new law that says no gasoline-powered cars can be sold here after 2035. Awesome. Let's go. But here's the good news. Like, you know, that's whatever it is, 13 years away, 12 years away.

Mm-hmm. there's plenty of time and we're not throwing the old cars away if you still want to buy a used you know Prius or a used truck fine but there's no excuse anymore folks I mean look at it there is no excuse the this this

recent spike in gas prices that's now abated unfortunately for one reason I don't want to see people suffer you know to have to meet their bills but man it was so great to see people looking up, what's the highest gas mileage car? You know, those searches go crazy

when gas hits $5, $6 a gallon. And then when gas goes down to $2 or $3, nobody looks at MPG. Right. Because they're like, well, it's an ex-a-bs everywhere, all over again. Yeah. And then, you know, you look at the average mileage in Europe and like, my God, there's so many cars that are so affordable now.

Forget about EVs. Forget about hybrids even. There are 50 to 60 mile per gallon cars. And electric bikes. They took electric bikes out of this new. you know, that's fine it. Yeah.

That was a bummer for me personally because I think they spread more joy than anything. I would have liked to see more joy in the world. All right, let's get to this interview. Anyway, yes. Another great week in the bag. Another great week. Right now it's so important for founders to save where they can.

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Sarake is the co-founder and CEO of Quays Energy. Thank you so much. We've been trying to book you forever. I am thrilled that you're on. Molly, thank you for inviting me. Glad to be here. So tell us for people who don't know, you got a lot of buzz in June for raising, I think, $52 million series A for deep, ultra-deep geothermal energy. Tell me what you're working on. Yeah. This is a company that's trying to unlock the largest clean energy source on Earth. It's exactly the kind of thing we need to transition energy away from fossil fuels. Within we have the technology to do that no matter where you are in the world. So that's what we're up to.

For people who don't know anything about geothermal, tell us about this. I mean, it's not intermittent. It's just right there. It's like the heat of the earth's crust. Like, why is it so great? It's reliable. It's always there and it's available globally. I like to tell people,

you can think of geothermal as the closing as you've ever been to inexhaustible clean energy. It's only three to 12 miles away from you, you know, right under your feet. And it is, it is scalable, scalable like fossil fuel, scalable, but clean. It powers the earth. It forms and shapes the planet. So it is, it is just abundant beyond measure. And it will continue to be there, whether we tap into it or not.

It will continue to be there, even after this sun. stop shining. So it's an incredible thing. Tell me, how did you come to this? It sounds like you have some previous experience in the oil industry and then also in commercializing world-changing technologies. What's your background and when did you get interested in geothermal? You speak about it so passionately. It's like, I believe in what I'm mesmerized by that magma core. I am. I am. I believe in what we're trying to do very much. So I come, I'm from Colombia and I found my way into MIT as an undergrad, you know, doing engineering. I'm a mechanical engineer, worked in oil and gas for 15 years, so very familiar with oil and gas technologies. And somebody, I had an inkling, you know, about 10 years

ago saying, you know, the energy transition is coming and I have half of my career in front of me to go and participate in that. So I decided to leave oil and gas, take that learning and the learnings, and then learn venture capital. You know, I figured venture capital is one of the very unique sources of funding that is very risk-tolerant and can potentially fund breakthrough ideas like these. Geothermal wasn't on my radar yet, but I had a feeling that it was going to be one of three things. It was going to be nuclear fusion, nuclear fission, or deep geothermal, not just normal geothermal,

but deep geothermal. So eventually I find my way into Quays, after learning a little bit of the way. about venture capital and decided to carry all of my background, all of my understanding for commercializing technologies, both in a corporate setting and in a venture capital setting, you know, in service of this new venture. Before we get to the differences between geothermal and deep geothermal, talk to me about what made you jettison nuclear. He said, you know, what was it about those two things that, that, or was it something

specific about geothermal that made you go like, this is way more promising? Yeah, so I think we need to do those three as a species. I think we shouldn't discount anything at all. But personally, my journey into geothermal just was, part of it was personal. My experience and my networks coming from oil and gas, there's a lot more overlap. But the other one is also trying to understand the magnitude of the challenge. You know, I reasoned nuclear could work, but it's still geopolitically very sensitive, and it still requires fuels

and we have to deal with waste. So that's going to be a significant challenge with nuclear fission. Fusion is wonderful. I hope we're there sometime soon, but it's going to have issues with scale up of the workforces, right? Even if fusion work tomorrow,

we're going to need millions of workers in fusion, some of them very specialized, and there's just not enough of them yet. So it's going to take a while to scale. And geothermal is very, very much like oil and gas. If you can change the economics, the risk-reward equation for geothermal, you have a beautiful pathway for the oil and gas to transition to that. So that was the logical part, but the non-logical part just happened to be that I am very familiar with subsurface oil and gas and the networks on the people there. Right.

So not to put too fine a point on it, geothermal is about drilling. So you're saying it's an area that you understand because it's about drilling, but also are you saying that potentially the oil and gas industry could transition to being a geothermal industry? I'd like to think so, right? So if you, I mean, I've looked at it from the other side. I've been on the other side of the oil and gas side looking at a geothermal project. And it's always very lukewarm because the economics are just not there, right? the risk reward is so far off from the risk reward of oil and gas development that you just

don't start it. So if you change that one thing, all of a sudden you present a transition pathway and capitalism, in my opinion, just takes over, right? People trying to make a business and at scale and profitably will just run with it. And that's the aspiration. I think that's a very compelling way to scale a global technology deployment so that it actually makes a difference anytime soon. All right, now let's talk about the energy. There's heat underground. You have to get it out.

And at Quays, you've developed a whole new technology for this deep geothermal, right? Or ultra deep. Talk to me about the types of geothermal and then what your technology does to get it. Absolutely. So geothermal has been around for a long time, longer than wind and solder for sure. As an electricity source, it goes back. back more than 100 years. So where you find it is typically in places where the heat is very close to the surface.

If you go to Iceland, you'll find plenty of geothermal, not only electricity, but heat as well. If you go to the Philippines, Indonesia, Kenya, Japan, New Zealand, the west coast of the United States, you see plenty of geothermal because it's easy, it's accessible. Right. I spent a lot of time last summer in the salt and sea actually doing research on the lithium extraction that they're doing connected to the geothermal plants there. You can actually just feel the heat from the ground. Now, that's hydrothermal. So when we talk about geothermal contributing to the energy mix, you're mostly talking about hydrothermal, which is basically there's water down there and we just drill and tap that water and it flows out and we make power with that.

We made electricity. Now, that's very geographically constrained. If you wanted to power the world with geothermal, you have to move away from that because those conditions just don't replicate elsewhere. So you're moving to different ideas for geothermal. One of them is called enhanced geothermal systems where you don't drill for the water, you drill for the heat. And that changes everything because heat is always there.

There's no such thing as drilling a cold hole. if you drill deep enough. So that's what we're trying to do to unlock enhanced geothermal systems or hot dry rock geothermal at scale. Now that's a new area because the drilling technology has been the impediment. It's just too expensive. It's not that we cannot do it. Humans have drilled really deep holes.

It's just it doesn't make sense. It's too expensive. So we're really trying to change the economic up drilling so that we can drill consistently in an economic, economically viable weight these holes to just make geothermal more accessible. And what are we talking about? We're talking about let's drill to 300 to 500 degrees Celsius. That's roughly 600 to 1,000 degrees Fahrenheit.

So hot, pretty hot, hotter than your oven. But exactly the type of temperatures that power plant uses, you know, cold power plants, gas power plants. And it so happens that if you wanted to do that no matter where you are in the world, well, you have to drill about three to 12 miles steep. It doesn't mean you always drill to 500 degrees Celsius. It doesn't mean you always drill to 12 miles deep. It means that if you can do that, you blanket the world in geothermal. And that's that journey.

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millimeter wave drilling so the the ideas come out of the plasma science fusion center in MIT these many of these ideas have mature over the last 50 years for fusion the idea of heating a plasma to fusion temperatures and and the sources the millimeter wave sources the electromagnetic sources you do that like microwave ovens but much more powerful all of those technologies we borrow so they were the first first ones to propose to repurpose a lot of that fusion technology and advancements into a drilling system for geothermal. Quays came into that picture 10 years into that process. So MIT had done 10 years of academic work laying the foundation and the scientific basis for these.

Quays came in 2018 to start the commercial journey. How do we transition that out of a university and start creating product development teams, operational teams, and ultimately commercial teams that can go and develop geothermal acids all over the world. Millimeter wave drilling is the best way to think about it. It's like your microwave oven, but slightly different frequency. Your microwave oven operates 2 gigahertz.

We're talking about 10 times that frequency, maybe 100 times that frequency. And there's many reasons to do that, but the bottom line is that it's the sweet spot of many physical things that actually make drilling into the earth, very convenient and possible. Now, it's early in that journey.

So we talk about this breakthrough being there, but there's a lot of work ahead of us in actually taking it to the field and demonstrate that it works at scale. So that's all ahead of the company. We're not doing projects. We're not doing power development. We are in that commercial journey out of the lab into the field to make that possible. So you're at the part where you're literally figuring out the drilling. Can you get three miles deep? We are at the part where we're building the machines to do precisely that.

Because in order to do the drilling, you have to build machines that can go out there in the field and do it. So that's the action that's taking place in the background. But of course, research never ends. So we have a very strong component of research with a national lab and with MIT because there's always things you do to improve technology and to make it better and more optimized. Now, venture capital is a risky business, but it's not usually R&D level risky. So how big is the opportunity here? Like, how did you convince these investors that, and possibly future investors, that this is, in fact, going to work and going to work at scale? I think we live in an interesting world.

Energy transition is taken much more seriously, and I think that sets the context for ideas as risky as these even being considering in the scope of venture capital. So the way I usually play these is, hey, number one, energy transition is going to happen. Number two, nothing. None of the current technological solutions are enough, not by a long shot. So we have to look into new places for new technologies. And number three, those technologies, things like fusion and deep geothermal, once they mature, they will be the workhorses of the transition. So you translate that into a model, a business model, and you're talking about a trillion-dollar company at maturity.

So that's, you have to balance the risk reward. It's very high risk, but it's also incredibly high reward. And many of these very mission-oriented venture capitalists realize once they accept those three statements that bets like ways have to be taken because there's just no other alternative. How, what will your business model look like once you commercialize? Are you going to become a utility? Are you going to license the technology? I assume you're not going to become a utility. but.

No, I like to avoid that. That would be the worst possible outcome for what you're building. We want to be in the business of selling kilowatt hours or BTOs of steam. And, you know, they come. But you will sell the energy, not necessarily the technology. Yeah. At maturity, that's what I pitched to my investors. We are an energy company, not a drilling company.

I'm much less interested in licensing. or being a drilling services provider, I'm very interested in going to a power plant and developing a geothermal field and selling them steam. I'm very interested in being a power project developer where we are an equity holder and bringing the key technology to the table. We want to get very close with emerging verticals,

you know, like hydrogen or director capture or green steel or green cement. All of those things require abundant, reliable, clean energy. We want to provide that. And if that takes the form of steam, so be it. If that takes the form of electricity, so be it. What will the, like a big problem with bringing new solar projects online is interconnection, literally infrastructure. What will the infrastructure need to look like?

I would imagine this will be somewhat discrete locations, right? There won't be like teeny little geothermal wells, like six of them in a neighborhood. That is correct. We're talking about utility scale, 100 megawatt, give or take. So there's two ways to envision this. The first one is we repower the power plant. So the power plants already exist. There's thousands of them around the world. They're already interconnected.

They're already permitted. So all we're doing is replacing steam from the boiler with steam from the ground. So there's really a big savings on infrastructure because you just need to drill and connect this thing to the power plant. in the case where there's no power plant, then you have the luxury of collocating a new power plant with the load centers. You don't have to be out there where the resource is available. The resource is available right here, right now.

So you build right here, right now, and you cut significantly the interconnection hurdles. Because, again, the resource is truly global. It's everywhere and available 24-7. How much land does it take? I mean, certainly you're talking about being able to potentially repurpose oil and gas drilling, but you know, Bill Gates talks in his book about how every solution has to, you have to take into account the amount of land that a solution takes. Solar takes a lot of land. How does this compare?

So this compares to fossil fuels. You know, we are as power dense as fossil fuels, which means the land intensity, the mineral and metals intensity. and the labor intensity per unit of energy are orders of magnitude less than wind and solar by virtue of the high power density. So it's truly, I mean, for me, it's very hard to imagine a world that advances by going to a lesser source, a less power-dense source of energy

as the primary energy supplier. So you have to stay the same or better. And I think deep geothermal, and that's why we go deep and hot, has that ability. If you stay shallow, if you stay more, modest in your ambitions, then geothermal is just like wind and solar in those intensities. But going deep really changes that. Are you worried about there, you know, there have been these conversations about fracking and

earthquakes. Like, what will be the, we see it with nuclear, right? There is a subset of environmentalists that oppose nuclear on environmental grounds. I would imagine there will be people who will oppose deep drilling. Oh, you bet. Some kind of, yeah. Yeah. How, what do we say to them?

Nothing that we do as humans has zero impact, right? So we got to be very educated as a species to actually understand what those impacts are. So I'm never going to handwave those issues. I think those things need to be managed and done properly. But I think they can be managed and they can be done properly. You know, fracking doesn't automatically mean earthquakes and deep geothermal doesn't automatically mean a massive earthquakes. It's quite the contrary. Many schools of thoughts in geology and deep geology actually say the contrary.

You know, because you're deeper, you actually have less susceptibility to seismic activity. And because you are away from tectonic boundaries, you actually are not disrupting those very same things that cause these issues. But in the end, it's not an easy matter and it's fully part of the health, safety, and environmental review of every single project. Will it change things like permitting? I know I'm projecting fire. to the future, but I can't help it. I read a lot of sci-fi. I mean, I would imagine there will have to be different types of conversations about permitting

or would like an existing oil and gas drilling lease cover something that Quays would want to do. Very much so. And we get approached by government at different levels. And the easiest answer I can give is if we treat the geotema doesn't come in one flavor and they all have different risk profiles. So then let's not regulate everything the same way. That's what, number two, if we treat deep geothermal on what we're trying to do,

the same way we treat oil and gas from a permitting and regulation point of view, we're 80% of the way there. So let's do that. Let's start with that. Because we pretty much bend over backwards for oil and gas right now. We do. We do. We do for many reasons.

Some are valid. Some are not valid. But if we can treat it the same way, 80% of the way where I need to be, right? And the other 20% is site specific, and it has to go through the regulation hurdles and the oversight. But that is my key focus. That is the biggest level for me. And that's the beauty of having an adjacent industry that's so well understood, minus the intensity again. We're not going to have the spills.

We're not going to have the blowouts. We're not going to have the carbon emissions. So that is a good mental aid to get us very close to where we need to be. how will you on that note power the drilling so the drilling operation looks it has the same power budget as a normal grilling operation and you power it with whatever is available if you're close to grids you'll power it with electricity from the grid if you're not you'll power it with a fuel today that's a fossil fuel in the future hopefully that's not a fossil fuel but some other fuel. In the end, developing the asset will give you a return on energy investment of

$10,000, $2,000 to $10,000 to $1. So what I mean by that is that you spend X energy, you know, let's say 100 units of energy to do the drilling, you're going to recover 2,000 times that over the life of that asset. So it's going to help tremendously in decarbonizing. And eventually, with more penetration, the new holes, the new drilling campaigns will be powered by other geothermal or other renewable power. Right. What is your timeline, your mental timeline for when this is the obvious and only solution for, not only, but the obvious and widespread solution for humanity? So I think it would be naive to say this is a 2020's solution.

2020s is when the company has to mature the technology and show provide proof of concept, not only of the drilling, but also the geothermal field and the repairing the power plant. So I always talk about let's focus 2020s on repairing that first power plant. And what follows then is the spread out of that campaign all over the world. So this is at 2030's prime time technology. Now, does it matter? you bet it matters because, you know, we will cover the 2020s with wind and solar and batteries, and we need to do that.

But when the 2030s and 2040s come, we'll realize that, you know, we need this level of energy intensity to decarbonize everything that's coming from the baseline down the pipeline. So I like to think that true commercial widespread deployment happens in the 30s and beyond. Why do you think geothermal, it was notable and a lot of people noticed. that the new inflation reduction act, which I'm just calling the climate bill, did at long last

include some incentives around geothermal, but it has not been a big area of investment or incentives. Why do you think that is? I think there's two reasons for that. The first one is that it is

not technologically available for these very deep and hot resources like we're trying. So it's still seen as very early. R&D and very experimental, right? The other reason is if you look at the existing one, the existing geothermal, it barely

moves the needle. So at a very high cost, and don't get me wrong, I vouch for every single one of the companies doing the geothermal out there because we need to spread more geothermal. But if you really zoom out and see what is the true potential of moving the needle, it's going to be small at a very high price. That's just a fact. That's just physics. That's just what's going to happen.

So to me, if we're going to get serious about geothermal, you have to consider they're very hard. And it's not unlike fusion, right? Why bother about fusion? Well, because we need it. And sooner or later, we're going to have it. And it's going to change everything. Same here.

So I think that's what's playing out there. I think as more of these companies deploy and they hit their niche markets and add value, it will continue to spread. But again, you know, we're talking about terawatts. You know, the only way to get there is by thinking very big and longer term. Right. And most of the geothermal projects that exist now primarily, like you said, hydrothermal are megawatt scale.

Tens of megawatts. Low megawatt scale. Yeah. Yeah. Yeah. We're talking about geothermal field development looking from an energy output point of view like an oil field development. That's really what we need to do.

And in this perfect sense, if you're trying to the space fossil fuels, that's your bar, right? You have to aim for that level. Otherwise, you're not this place. Amazing. I can't wait until you're ready to have a field trip because I love a field trip. So just let me know. Carlos Arake is the co-founder and CEO of Quays Energy.

And I can't wait to hear more. Thank you so much for the time. Thank you, Molly. Appreciate it. Thanks for listening, everybody. We'll be back tomorrow. Yes. And it's going to be chaos again.

It's going to be chaos. It's going to be chaos. But we'll hear for you. We got it here for you. You're back. We got your back. I suspect there's going to be some Adam Newman conversation. I'm just saying. We also, it's going to be a great week overall. We have a great interview with Sebastian Malaby, author of The Power Law, your favorite VC's favorite VC book coming up next week. Great book. Everybody should read it. It's going to be a great week, so we'll see you tomorrow. Bye-bye.