The $450 million Kiko Ventures became the first evergreen climate fund when it launched in June 2022, said Founding Partner Arne Morteani.
When IP Group launched Kiko Ventures, it said it plans to invest $240 million in climate tech startups over the next five years.
In the NatureBacked podcast of Single.Earth, we are talking with investors about the vision of the new green world.
A few key takeaways from Arne Morteani::
There's lots of stuff that needs to happen, from carbon capture to next-generation solar, you name it. And all of these things need investors that are patient and can be there for the whole ride. All things equal, every entrepreneur should want full lifecycle investors that you can be with an evergreen structure.
It allows you to invest without doubt of running out of time and money in the way you would be doing within the traditional fund. And without this 10-year fixed mandate investment mandate that you would have in a traditional fund, you get an enormous amount of flexibility.
We just invested in what really is rocket science as far as heat pumps go. I mean, it literally is rocket science.
Cleantech, in many ways, is much more diverse and much more generalist than the actual generalist funds. And so a strategy where you just do everything a little bit, but focusing on stage isn't a logical strategy.
So we want to flip it on its head and say we're thematically focused first, and stage second.
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Tarmo Virki 0:06
Welcome to the NatureBacked podcast of Single.Earth. In this podcast, we are talking with investors about their vision of the new green world. My name is Tarmo Virki. And in this episode, I'm talking with Arne Morteani from Kiko Ventures. Enjoy the show.
Merit Valdsalu 0:20
Hey there, I'm Merit. I'm the CEO and co-founder of Single.Earth. We are building a nature-backed currency to empower you to fight against climate change and biodiversity loss; sign up at Single.Earth and be among the first to switch to a truly sustainable nature-based economy. And don't forget to join the discussion around climate change and biodiversity loss on our Discord channel. Enjoy the show.
Tarmo Virki 0:43
Welcome to the show, Arne. To start off, tell us a few words about Kiko Ventures. You officially launched just a few weeks ago. Right?
Arne Morteani 0:53
Yeah, we launched just about two weeks ago, after preparing this for over a year. And Kiko Ventures is, you know, at first sight, of course, it's another climate tech clean tech investor. There's been a number popping up over the last year in year two. But really, we tried to take a different angle, based on our experience, which has been very long in this in this area. So of the three founding partners, each one of us has been 20 odd years in and around the tech climate tech. Myself, I've been a solar researcher, and I did consult in the area. And the last 15 years, I've been in venture capital doing only clean tech, and I have been passionate about this all my life. I was a member of Greenpeace when I was a teenager. So this has been a theme since the 90s for me. And so, my two Founding Partners are similarly passionate about the topic and long-standing in the industry. And what we found is that the industry has 99.9% of the money in traditional funds structures, so-called JP LP funds, which are great and it's a great way of attracting capital to this space, but they have some shortcomings. And we felt that something called Evergreen money is needed in the space, which is defined by not being in a fund structure, but being basically a big pot of money. And you invest in, as you sell companies, the money comes back, and it's always the same pot of money, and you just keep on recycling the capital. If you need more capital and you were reasonably successful, you can also raise money into these vehicles or into these evergreen structures. But the money then goes into the same pot again. So it's not in a separate fund like in a traditional fund management organization, which means you don't get conflicts of interest between funds. And what it allows you to do is to invest without the other doubts of running out of time and money in the way you would be doing within the traditional fund. And without this 10-year fixed mandate investment mandate that you would have in a traditional fund, you get an enormous amount of flexibility. That wasn't really around in this ecosystem. And we launched Kiko to be the first evergreen fund focused exclusively on climate. We've done this is, basically we ringfenced an activity that already existed at an organization called IP group, which is a large listed venture capital outfit and it's been around for about 20 years and had quite a lot of success also by the cleantech team here. And so I joined the existing clean tech team to increase the commitment of my people to the space, and so we ringfenced this activity here now and have our own, you know, capital commitment, our own investment committee, team, brand, communication, decision making, etc. under this roof of IP group. IP group has been phenomenally supportive of us to make this happen. There are really only two ways you can do an evergreen fund, your evergreen investor. One is it's your own money, say family office. And the other way is to do it through a listed structure on the stock markets because you always will need, if you use other people's money, we will need to give people the option to exit at some point. And if you don't want to do this, the only other ways to do it are with the listed structure. So we needed a listed vehicle, and IP Group provides that.
Tarmo Virki 5:08
We have been talking quite a lot about the problem of the classical LP funds' 10-year cycles. And you know, if you go to climate tech in your year three on four and have to start thinking about getting out on the seventh or eighth, it's not too much time for that classical climate tech case, right.
Arne Morteani 5:28
You often run out of time, even with so-called venture cases, say a software company also even there, it's often an issue. It definitely is an issue for a lot of what people call a deep tech, where there's some level of science involved. And it's held back a lot of cleantech innovation. And that's been our frustration over the last 15, 20 years in the space; we've watched this and been frustrated about this. The team here at IP Group has watched it from the outside because they always had evergreen money. But a much smaller activity. Now it's a 450 million platform that we've created here. So we're really not just going in with Evergreen money, but we're going in at scale to really make stuff happen. And there's lots of stuff that needs to happen from carbon capture to next-generation solar; you name it. And all of these things need investors that are patient and can be there for the whole ride.
All things equal, every entrepreneur should want a full lifecycle investors investor that you can be with an evergreen structure. And we're going to do business model deals in software deals as well. But with the ambition to really build large global organizations, really build the climate champions of the future, and not grow it a bit for three years, and then try to find the exit.
Tarmo Virki 7:04
The Evergreen name is, of course, perfect for this industry, right?
Arne Morteani 7:12
Absolutely, yeah, it is, and frankly, even mainstream venture capital, it's increasingly recognized as something attractive. So last year, Sequoia made, made quite a lot of great publicity about what they call the Sequoia Fund, which is essentially a way of bundling the LP structures into a meta-structure that has some evergreen characteristics. And their argument was similar to what I just said. But also things like, once you've IPO-d company, actually, it often makes sense to hold on to it for a little while, which you can't with an LP structure. So they're calculated they could make, I think, could have made like 8 billion more sort of capital, if they had done that, of returns. And so there are lots of other advantages if you have that flexibility.
Tarmo Virki 8:07
You said that there are massive challenges that need a longer timeframe: what are the biggest challenges you're looking at?
Arne Morteani 8:18
I think there are there are some areas where you really want to be able to, to go, basically, to enable the next generation of science and technology to emerge. So one area where we've made multiple investments is the whole area of alternative fuels. That's hydrogen, but it's also fuel cells; it's also using ammonia for things. So all the ways you can replace fossil fuels, you will have to do that you can't do everything by electrification; that's the good part that needs to have alternative fuels. Either like in shipping or aviation, where you really just can't carry around all these batteries or hydrogen, you really need the proper fuel, but also areas in industry where we like, for example, steelmaking, where you want to do that with hydrogen rather than just electricity. So that's a big area. There are more business model-type areas, which are more traditional venture deals, but very interesting, and I think it's an option to build big champion companies. One of them is the whole area of call it as-a-service, where you, in effect, rent out assets rather than selling assets. So that can be anything for consumers; for example, there are more and more companies now that essentially rent out clothes rather than buying clothes. Obviously, we have car rental and those sorts of things. But it goes even into the industrial space; you have, in my personal favorite is, lubrication-as-a-service in the industry, where you, literally you, you sell the fact that you're lubricating a piece of industrial equipment, like, for example, the turbine in a power plant, you don't sell the lubricant, you just sell the fact that it's lubricated. And that, if you think it through, becomes really interesting from an environmental perspective because the incentive then is to use as little of the physical asset as possible to achieve the desired effect. So your engineering changes. Take this example; in the old model, you would want to create a situation where you sell as much lubricant as possible. In the New World, you want a situation where you use as little lubricant as possible. And the same thing, there's lighting as a service, for example, where you have light bulbs, basically in industrial plants, if you put the lights up there, and you still own them, and you just sell it as a service, you want these things to survive for a very, very long time. Well, right now, frankly, you know, also in Siemens and so on, historically have designed the light bulbs break after a certain time. So they have to be replaced. In areas like this, I think which are, which are gonna come very strong in the next five years plus,
Tarmo Virki 11:43
Really interesting, also that the fuel point you were making, I mean, the problem of the fuel could be, of course, solved on a political level, if you go and decide that natural gas is the renewable energy source, and totally green as the EU then it is, it's, I mean, you know, all the green.
Arne Morteani 12:08
Yeah, I mean, this is recent news. And it's very disappointing, frankly, that the EU made that decision. It goes to show how powerful the lobbies still are. What sounds like a conspiracy theorist if you say that, you know, a lot of bad things have happened through the lobbying, but it's really true. And I think this is a good indicator of that. However, normally reason wins out sooner or later, and in this transition period now, I think, in a few years' time, I would imagine the topic would come back on the table.
Tarmo Virki 12:51
You said you've been in a climate tech investment for quite a long time. Any kind of big cases you would like to tell us from your, from your personal history where you've been involved in, you know, building a successful climate company?
Arne Morteani 13:11
Maybe I give an example that is a bit unusual venture investment. I've done quite a lot of software business model investing and most of the traditional mainstream investing, but maybe give you an example that's a bit out there. And there's a company called E-leather which produces at some level recycled leather; it uses waste from the leather industry, it basically drizzles it up, so it's the individual fibers. And then reconstitutes the leather from that. And while doing that, it introduces what it's essentially a Kevlar type Net, which then creates the composite of that, of that Kevlar, a little bit of new 5% of the whole thing and, and 95% of leather fibers, creates something that looks, feels and smells like leather, but it's much, much higher performing. So it's actually an upcycling technology. And we invested when the company was already in double-digit revenue. So it was a late-stage venture deal in that regard, had a factory, and then 150 people ended was starting to sell into various industries. And we, that was built out to become the leading supplier into the airline industry globally and for leather seating in airlines. So almost anybody has sat on the E-leather seats already without knowing that it's, I think, 160 airlines or so that are flying in. And they do that because it's a Much higher performing material. And it's much lighter, which saves them a lot of fuel. So you get lots of benefits; you have the benefit of using that waste from the leather industry, which is about half of the tan leather gets thrown away. Because it's shave-offs and cut-offs, and that actually is not traditional waste, it's, it's, it's hazardous waste based, because of the Chromium-based leather tanning process. So you're reducing an enormous waste payload that exists out there; it's about 1 billion leather hides a year. So it's a lot of ways. And there are pictures of mountains of that leather waste. You're also creating co2 benefits, not just because you do less tanning and use waste, but also knock-on effects, like, for example, the airlines using less fuel. And you create a performance benefit because you create a material that actually is far better than using leather in itself. And then you have even more benefits, you have things like manufacturing benefits, because all of a sudden, you get that material of 100-meter long role, rather than having to deal with individual bits of animal skin. So you can feed it into an automated manufacturing process. And so you get all these cost advantages and process advantages as well. So it's the triple whammy of, of environmental performance and cost. That's really something that gets me excited.
Tarmo Virki 16:48
Totally. I think that's also a good kind of great example, that the oldest discussions about whether its profit or environment, you know, in many cases, they are total crap. Yeah, you know, you can have both with it. You don't have to be, you know, going for one or the other. Yeah, as an investor. Yeah.
Arne Morteani 17:11
Yes, yes, I think that is often the case. I think it's; we should not lose sight of the fact that we do need to do things where we need to spend money. But the conditions need to be created by the governments. So that the government covers the less economic part of it, and the commercial money can then pick it up. So I think it's true, but I would caution people to think that we get everything for free, so to speak, right? We can just change the world and make money, like 100% of the time. There is a degree of pain; there is a degree of, say, extra taxes of reallocating capital by the governments and so on that needs to happen. And this is happening.
Tarmo Virki 18:09
How do you see the kind of political will to actually drive the change, which is needed, so set up kind of desperately when looking at climate change?
Arne Morteani 18:24
In Europe, I think there is very consistent support for this. Despite what we just discussed on the gas, I think pretty much all the decision-makers in Europe have bought into the need for it. In the US, it's oscillating, as we know, between the two political parties. I think the Democrats are very much behind it, republicans less so. So it'll be quite fragile. I think China is very much bought into it. It's perfect alignment with their industrial agenda anyway. So it's not a conflict for them. And much more for conflict in the US, I think that is in China. So overall, we were going in the right direction. And I think there's no way back. The current energy crisis is an interesting one because, in a way, it makes us move backward because we're switching on coal plants again, you know, importing natural gas etc, etc. On the other hand, the high energy prices, the awareness people now have for not just climate change but also the energy security issues that come with fossil fuels, and dependency on fossil fuel-rich countries are all tailwinds for the energy transition, and the EU has this initiative now called we power u, which is a plan to create energy security through the energies transition. So people have now realized, actually, if we do this, right, we, we get double impact, we become greener and increase the energy security in Europe and energy independence in Europe.
Tarmo Virki 20:25
Looking at what's been going on on the Eastern Front of Europe, it's kind of desperately needed.
Arne Morteani 20:31
Absolutely, absolutely. And we will see next winter; we will see big parts of Europe suffering from gas dependency. And, of course, they don't want that to happen again. And they're not then many ways of solving that problem. Yes, of course, they could buy a mountain in Qatar, and so on. But that's a short-term solution. And all these countries are thinking about what we do longer term, and suppose that's perfectly aligned with the energy transition. So we are, in fact, as an investment organization, with the sort of putting a lot of topics that we found less interesting in the past and putting them back on the table because of the strong tailwinds.
Tarmo Virki 21:12
Somebody in one of the earlier episodes was telling how the VC industry is really excited about the heat pumps. And no one knew for a few years ago that this could ever happen.
Arne Morteani 21:23
Yeah, yeah, we just invested in what really is rocket science, as far as heat pumps go. I mean, it literally it really is rocket science. They haven't disclosed that yet. But it's just phenomenal technology that could revolutionize that space. And yeah, I mean, heat pumps are a big part of the solution.
Tarmo Virki 21:46
Interesting. The going forward, I mean, what's on your agenda in the coming quarters, in addition to the, you know, energy transition,
Arne Morteani 21:57
I mean, organizationally, we want to build a team, we want to build partnerships with thinking of is this evergreen, a platform that we can do partnering in a much more deep way, maybe, then then you can visit traditional structure, and you can invest in other funds, you can do all kinds of things. So that's, that's organizationally where we want to go.
In terms of investing, we want to build a number of areas where we may go deep. So we don't want to do some "spray and pray." But we want to build expertise and knowledge, and networks in specific areas over time. Another advantage of our structure, we will not so; basically, a traditional structure is kind of has to focus on stage, you know, you are series A investor, seed investor, but then has to do spray and pray on on a sector perspective, that's very dangerous for a clean tech because this there's lots of sectors that are completely disconnected. So there is literally a spray and pray it's very different from if you say a mainstream investor, we just do internet platforms, they all kind of similar, but if you invest in electrolyzers on one day, and ESG reporting software the next day they have nothing to do with each other. And so, actually, clean tech, in many ways, is much more diverse and much more generalist than the actual generalist funds. And so a strategy where you just do everything a little bit. But focusing on stage isn't a logical strategy driven by the LP sort of landscape; it's not a logical subject. So we want to flip it on its head and say we're thematically focused first and stage second. So we may call find a company or invest in a Series B round doesn't really matter as long as we feel comfortable in the area of if you understand that we have networks we can add value, etc., etc. So building out these areas where we have strength. That's for us on the agenda. We have one area already, which is the whole alternative fuel space that I spoke about. But there are the other areas - nature-based solutions are fascinating area actually, where we could also develop other finance products around and so so we want to build that house, but that's work in progress. Cool.
Tarmo Virki 24:38
Yeah. I lost my thought there for second, nature-based solutions; anything else you could kind of shed light on what could be the other potential focus areas?
Arne Morteani 24:52
Well, I mentioned circularity. Then it was as a service that was similar ideas. There is, I think there is almost like a revival of home energy, domestic energy going on, partly driven by the Ukraine crisis. And so it's this whole, you know, the house solar on the roof batteries, we have an investment already in the next generation water boiler, surprisingly, but it's also a technology, and it's phenomenal stuff, fast-growing, very fast growing company in our portfolio. So that whole how do you create the built environment homes? How do you create the energy transition? There are lots of interesting angles to that which view we plan to dig deeper into. Transport is still an interesting area, even though it's been worked on by VCs now for several years, quite heavily. So one needs to be a bit cautious; also quite overvalued a lot of things there. We have quite a lot of strength in everything material science. And that leads us a bit towards the battery space in those areas as well. Very difficult, though, to make the right calls. So probably going to be careful there for a while.
What else is there? We're looking at some really out-there ideas. So currently, we're looking at all the Hyperloop companies out there, which is a fascinating idea that I think is slowly maturing. And we are seeing some real early commercial traction in that space. So if that develops momentum, that's a really interesting area. Yeah, so those are some examples.
Tarmo Virki 26:52
The thing I was earlier thinking of is you mentioned the kind of cooperation with other investors, how much of the problem you see potentially from you know, LP driven funds 10-year limit problem, I would see that natural fit, you would probably have with some big family offices, which have, you know, evergreen approach their investments, too. But how about the kind of classical VC funds?
Arne Morteani 27:19
Yeah, I mean, we are structurally much better aligned with family offices, and we have good relationships with a number of family offices. We're also a more natural partner in a way because we're not asking for money, which is just something that, as an LP fund, makes it always a little bit tricky because they are always under suspicion to just wanting to raise money. And so definitely keen on building good relationships with like-minded family offices. Funds typically have a bit better reach and a bit more visibility. So there's definitely a role for funds as well. I think in many cases, we can work with funds, so there is no, there is no reason not to, fundamentally. Also, we can work with funds in ways where, for example, they might not make a certain investment because it doesn't fit so much to their structure. And then they showed it to us, and they said, Don't you guys want to do this? So so, there are lots of ways of collaborating? I mean, generally, we hope because we're not threatening to anybody, we're not, we're not taking anybody's money away. We are not competing for LP money. Hopefully, we can be your partner, conversation partner, and idea-exchange partner of choice for many people out there. And I believe we can add a lot, not just the three of us who have been in the area a lot, but a long time. But we are within that larger IP group universe. And that's a company that's present on four continents and has done venture capital for 20 years, as very good relationships with universities around the world. You know you have in-house IP lawyers here, for example, to assess patents and stuff. So we have capabilities that we can bring to the table.
Tarmo Virki 29:25
Cool. That's probably a good point to wrap up the discussion also. Thanks so much for joining us today.
Arne Morteani 29:34
Thank you very much. I enjoyed it.
Tarmo Virki 29:38
Join us again for the next episode. Thank you for listening. If you liked the show, please give us a good rating and leave the feedback in your podcast player so others will find it too. We will be back next week. Turn on to nature backup podcast.
Transcribed by https://otter.ai