Episode 174: Climate Investing with Capricorn Investment Group's, Ion Yadigaroglu

Today's guest is Ion Yadigaroglu, Partner & Member of the Investment Committee of Capricorn Investment Group. Ion walks me through his climate journey, what motivated him to focus on climate, and an overview of Capricorn and the Technology Impact Fund.

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Talk a bit about Capricorn, what you do, and the origin story for the firm.

Well, that could be a long one. So, I'll try the short version, and you, you tell me. You know, there are actually two things going on. I'm co GP of a fund called the Technology Impact Fund. And Capricorn is actually a separate company. It's an investment company that has a balance sheet and has been backing impact funds for what will soon be close to 20 years. And that's the balance sheet that was primarily and originally from Jeff Skoll's, Skoll Foundation world. So, those are actually two separate things, but with really, really close ties and a lot of common history. So, I think here today, I'm probably here mostly because of the Technology Impact Fund, but we do call it Capricorn's Technology Impact Fund. So, you're not wrong about that.

So looking at the path forwards, how do we get out of the mess that we're in as it relates to climate? I mean, can capitalism take us there, or is it gonna continue to self reinforce on this path that doesn't factor in externalities, and continues to kind of accidentally cause more harm just by the omission of priorities?

So, I try not to think about anything that isn't optimistic. And clearly, there's a role for the hyper scaling, the just overnight scaling of great new models and great new technology. And so I focus a lot on that and where I can be, I try to act as an advocate as a citizen for policy and interventions of all kinds. There's a role for the nonprofit philanthropic world, there's a role for obviously a giant role for governments at all levels. And there's a role for large companies to play, there's a role for small and mid-sized companies and there's a role for new technology and startups. Right? All of it has to work in the right direction. We're obviously not succeeding so far. So, can just private enterprises do it on their own? Likely not. But it's got a really important role to play that isn't necessarily dependent on government.

Yeah, as you know, sometimes even well-intentioned policy doesn't always work. So, it's pretty tough... For sure government should be a big part of the equation. And if we're successful, it probably will have been in part, thanks to the government. But so far, it's been a mixed record, right? If you look at it, I mean, let's face it. Probably still the most impactful policy that we've seen when it comes to these areas that we really care about and think about all the long is still a George W policy, the renewable fuel standards with the ethanol. And look, with very mixed thoughts, right? Mixed success, I mean, it's become a really big business. It's put a big load on farming and, and the natural ecosystems. It's probably helped a little bit on the carbon side of things. And you know, you have to go back, right? Quite a few years to find other policies, which have really moved money in a way that's significant that have started with the government.

For sure, some of the clean Power mandates are having some impact. And I could volunteer a few other policies that are having an impact. But it's mostly not been that. Right? It's mostly been the scaling of new options and new technology.

 What is the mission, or the North Star if you will, of the Technology Impact Fund? How do you think about that?

Well, it's called impact for reason. Like we're looking for things that are gonna be incredibly successful. And as they scale, are having a big impact, obviously, positive impact. We didn't label it the Climate Fund, cause we do some things that are maybe not directly climate, we do also some enabling technologies like computation. We've always loved computation. We think the impacts of moving humanity's ability to do computation and data gathering, data insight forward as being really important. And that's a pretty indirect thing when it comes to climate. And so we decided not to back in the day, we decided not to call it a Climate Fund, but we could almost call it the Climate Fund, cause that's clearly what I wake up in the morning as a primary fear goal aspiration, is climate. But we occasionally do something that would fit somewhere else in impact.

And then, you know, a lot of people think about this as, "Okay, I'm gonna go make a bunch of money, and I wanna have a filter on it. I only want to do things that are good." I don't think about it, and my partner Dipender Saluja, they've been doing this since to start. We don't really think about it that way, right? We think of this as really the key insight, the key tool we use to find great investments. To take a mining analogy, just to make it dramatic. If you think there's a really rich gold mine that you wanna go develop, and it's in the middle of some, you know, Amazonian forest and you got to cross the river and go up and down a mountain to get there and then cross another river. And you know it's going to be a real adventure getting there, really tough going. You wanna really know that there's a goldmine at the end, right? That goldmine is really a rich goldmine. Cause that's the only way it's, the adventure is worth it.

Well, for us, that's the impact, right? If we're not looking at a technology that is, got some real giant promise, why would you embark on the adventure? We've made 45 investments over the last 20 years. So if you divide those two, that's only about three a year, and they're never easy. Like, I can't tell you one that's been easy. And you know, we have the... Some pretty big successes in there, including the second investment, was Tesla and number seven was SpaceX. And 10 years ago, we did QuantumScape. I mean, again, this, this has been, in many ways, very, very successful. But it's never been easy. And so, I don't quite understand people embark on a new company, a new startup, without seeing that like giant impact at the end of it, right? Cause that's what makes it all worthwhile.

If you really know why you're doing something and the big success and big impact you can have with it, then why even get started? So, we felt that over the years, it's really been a great filter at not trying to be too clever about making money. Instead, focusing on things that are really big, really fundamental, that are gonna be tough to do, but in the end, they are worth doing.

I wanna pick up on something that you said earlier about waking up every day as an optimist. As a clean tech investor who lived through the last wave, you've seen the different cycles here. And one observation that I have from people that were part of that last wave is that there's a fear from some that the new blood coming in, is too optimistic and too ignorant. They don't know what they don't know, and that they're going to make some of the same mistakes that were made last time around. And some of what I've heard from some of the newcomers coming in is that they, you know, scar tissue can be valuable institutional knowledge, but can also be shackled in some way and cause people to be cynical in a world where optimism is a requirement for this early-stage investing. So, what's your takeaway from the last cycle, and how do you feel as the capital comes in and space continues to increase at an accelerating rate?

It could be a rich answer, right? But just to maybe offer a couple of ideas. You know, first of all, like obviously for us, the cleantech, one point it was really good to us, right? It's not like we were losing our money, cause we had companies like Tesla and SpaceX that just were compounding at incredible rates. And so, I think you know, too quickly, the allocator community, or the rags that follow finance, tend to make these big statements about things without necessarily all of them being true. So, what really happened in cleantech 1.0, it really boiled down to two things that went wrong. One was ethanol, and the other was solar manufacturing. And yeah, both of those were a big deal. A lot of money was blown up in both of those. But that was it, no more, no less.

And so people overlearned some of those lessons. Ethanol really has only been a phenomenon in Brazil, but that's kind of been disconnected from the US version. And then in America based on the corn and a little bit here and there in places like Europe, but it's mostly been sort of Brazil, US. And you know, we had this love affair with like I said under the policies that George Bush enacted that created this mini-boom in ethanol in America. What we forgot here was that, well, first of all, this was not really tech, right? Because process, the fermentation process is reasonably simple and fairly low value add. So the machine is not, super sophisticated. So, it's really a commodities business. And then what we forgot is, we pretended in America that fuel isn't a monopoly. And in Brazil, there's really only one fuel company. So, it was very obvious that fuel is a monopoly.

And so the government brokers, between the makers of ethanol and the distributors of fuel. There's a... The government addresses the fact that there's only one buyer for that fuel. In America, we said, "Well, I'm gonna... There's gonna be all these venture-backed, independent fuel companies." But regionally, fuel is a monopoly in America. So, it's no different than Brazil. So, it's a crazy thing. But you know, ethanol has always been very profitable. It's just never been a good investment for venture. Now, is it a good investment for the climate? It probably was definitely not to start, it's probably marginally good for the climate today, right? If you look at the studies, but it is a big load on the natural ecosystems, and it does displace a lot of food production. So it is what it is. Like, I'm certainly not in love with ethanol. But it's not like ethanol doesn't work, right? It's been highly, highly profitable, it just hasn't been something. There's been no role for venture capital where venture capital could get a return in it.

And so all this stuff today is owned either by the Valeros of the world that distribute and blend a lot of fuel, or you know, the farmers that make the corn. But where do you sit with the venture fund in the middle of that? That was really naive. And then solar, I don't think that was a dumb thing. It's just it was hard to understand and predict, to what extent China would decide that it was strategic to China, and to build a solar manufacturing industry. And in the span of three years, China invested 50 billion into PV manufacturing. About half that in the melting of silicon into back then polycrystalline silicon ingots, and the other half into diffuse junction cell making. And as you know, that created this wonderful outcome for the world, which was the price of PV dropping by a factor of 10, over the span of like four or five years. But it was really, really tough for anyone that was a young company anywhere else in the world in solar.

And you could say, "Well, doesn't that happen all the time? I mean, China's always a factor." But even for China, that was, you know, 50 billion in three years is a lot of money, right? There are very few things that have ever seen that kind of capex cycle, even out of China. And so, that created a lot of graveyards, you know, it filled the graveyard of solar companies in Europe and the US. Why did allocators of capital, you know, that, that lost ethanol and solar react so negatively on the prospects for clean energy and venture? I mean, yeah, they probably overlearned that lesson. Uber has burned more cash, right? From venture capital firms, than probably any other venture-backed company in the history of venture. And it's still not clear whether that's a good business or not.

But we don't necessarily have that kind of overhang of, you know, "Oh, wow! Well, this is really capital intensive, and really, really tough." So a lot of this stuff is just mythology, right? It's not necessarily based on fact. It's things that emerge in the community.

As more venture dollars are starting to flow into climate tech, are you seeing areas where venture dollars are flowing that venture doesn't belong? Going back to your, your story about ethanol, and how it was naive to look at where venture would sit? Is that happening now? And if so, where?

Well, of course it is. But you only know after the fact, right? So, so we have to remain humble that, you know, most of what is going on right now I don't fund. And so of course, I think that most of the money getting allocated is misguided. But I'm happy that it is, right? Because we're not perfect in our judgment, we can't do everything. And it's okay if a lot of it goes bad because we need a few that don't really make a difference. So, look, today, we're live in a bit of a party, but there are some reasons for that party. And I think COVID has helped a lot. The world has finally figured out that climate needs to be addressed. And so, it's also a different context, right? We have a quality of entrepreneur coming into the space that is much greater than it was in the past.

I mean, who wants to go do something... I mean, so many people today wake up saying, "Look, I really need to do something about something meaningful." Right? And meaningful often is in the climate. So, so many really, really fantastically talented people are coming in saying, "I really wanna work in this space." And so they're creating great companies. And as you know, a big, big ingredient in any great company is just a fantastic team. So, that's... It's not just the technology, right? You also need the people to develop it, scale it, sell it, hire the people, do all that. That's why there's a lot of it. One of the reasons why our living a party is a real thing. And then consumers are really eager to make a difference now and governments are eager to make a difference. Look at you know, when we started with electric cars almost 20 years ago, and compare the narratives out there back then to where they are today, right? Politicians falling over themselves promising that everyone will drive an EV in the next 10 years.

We don't even have you know, remotely the industrial capacity to do some of those things. So, so it's not irrational that we're living some version of a party because we need to go really fast, and people are finally figuring out that it's a serious thing and that some of it will get done. But yes, just like there is in every boom, there will be a lot of breakages and a lot of bad dollars. And I shake my head every day when I see certain things that, you know, I know the people, or I know the tech, or I know the space, and I'm like, "Well, that's not gonna work." Sure. But that's okay.

 One of the things that I hear a lot from traditional VCs, for example, when, when looking at climate tech investing from a distance, and maybe being climate curious, is that they worry that investing in this area oftentimes requires future policy to come that is not in place yet. So, I guess one question is, do you agree with that? And then a follow-up is, would you make those bets in areas where you're confident that policy has to come because it's inevitable, given what's happening with our world and where things are going?

No, so I'm gonna completely disagree. In fact, like I said, I think policy has played almost no role to date. And where it has played a role and people have chased it, has typically not worked, right? So, like ethanol, I mean, ethanol wouldn't have existed without those original policy mandates. Even that, I'd have to qualify because if you look at the crush spread, meaning if you look at the cost of corn, and then you go on the highway and you buy gasoline, and you look at that spread, ethanol has almost always been profitable, with or without the additional credits, but it would be way, way, way more marginal without the large subsidies coming through these renewable fuel mandates and policies. And by the way, the California one is crazy. Like the amount of money getting thrown at low carbon fuels in California is a pretty crazy number.

And it's creating at times unhealthy side effects. But I mean, in a year's time, I might get three pitches out of hundreds, right? That relies on, "Hey, there's this subsidy or this money that's available. And if we chase it, right, we can get that money. And that's how our business model works." I mean, it almost never happens. I guess that's in part a big failure of government, right? There really hasn't been any effective policy today to scale up these new solutions. Some of it has been, I don't want to be too black and white. As I mentioned, I think the renewable power mandates have been a big deal in America, not necessarily globally. But certainly, in America, they've played a role. And we wouldn't have as much wind and solar without them. But that's kind of an indirect effect. Right? Like, we'd have a bunch anyway. And we might have more because some of those mandates have been, you know, pushing the CPUCs and others to kind of do more than they may be naturally would have.


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