Investing In Climate Tech With MUUS Climate Partners
MUUS Climate Partners (MCP), the venture capital arm of MUUS & Co., announced the close of its $50 million MUUS Convergence Fund in March. Here at CleanTechnica, we write a lot about clean, renewable energy and sustainable technology, but not nearly as much about the investment perspective. How climate tech and cleantech companies get financing and begin operating is an unfamiliar arena for most non-investors. The MCP funding announcement was a good opportunity to interview Michael Sonnenfeldt, the firm’s chairman, and one of its three partners. He shared some insights about how his firm invests in climate tech companies.
For those of us lay people who are not in the finance realm, what is climate-dedicated venture capital?
It’s a type of investing that provides financing to early-stage technologies focused on reducing global greenhouse gas emissions or the impacts of global warming. In the case of MUUS Climate Partners, we invest at the intersection of decarbonization and advanced technology, applying this “Convergence Thesis” to identify companies using tech to accelerate emissions reduction. And we invest at the cusp of commercialization — right when a company has either just signed up its first customer or has credible line of sight to that. This could be nano-thin advanced technology to improve the thermal qualities of windows, AI to allow the power grid to take on more renewables, sensors, and optics for the global railway market, and much more.
How does the MUUS Convergence Fund II evaluate companies to invest in?
Our goal is to invest in companies that are accelerating decarbonization while creating extraordinary financial returns. In evaluating companies, first we consider the founder and their track record. Next, we look for a sound plan to scale the product or service in a way that creates outsize climate impact and drives significant returns, and we make sure the company can demonstrate its commercial potential. We believe companies that fit our Convergence Thesis — especially the ones building highly competitive moats — will be the most important businesses of the next few decades. Finally, we look at whether we can help open doors for the company, whether it’s to other investors, policy contacts, research, talent, or other parts of our network. We tend to underwrite thoroughly and we’re not afraid to pass on “good” and patiently wait for “great.” We are happy to invest in both software and hardware, as long as we believe the company’s expected trajectory fits our target impact and returns.
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How many companies will the MUUS Convergence Fund II invest in?
We expect to invest in roughly 25 companies.
Does the fund provide any guidance to or own any part of the companies it invests in?
We pride ourselves on the ways in which we can support our portfolio companies. We have led capital raising rounds, opened doors, sat on boards, helped with introductions, and helped source personnel. We often bring technical or financial expertise they might not have. We want to be available to our portfolio companies, but we don’t want to get in their way or impose ourselves where we are not adding value or wanted. Each company is different, so we want to be flexible in our terms of engagement but fundamentally we want to give our portfolio companies access to the unique networks we have been building for over 40 years, and we want to help in the ways where we can have the biggest positive impact.
How does the fund determine if a company is making the right impact on climate change, or any impact?
MCP tracks the emissions reduction potential of every company it invests in, using the best available methods. The team also collaborates with some of the most knowledgeable academics and utilizes advanced climate models such as MIT’s En-ROADS climate simulator, to bring the science of climate solutions to our work.
How does the fund determine if a company is making the right impact on climate change, or any impact?
MCP deliberately built a team of people who could evaluate the potential climate impact of companies, both from a qualitative and quantitative standpoint. The qualitative side entails understanding the tools that certain industries need in order to decarbonize. To give a simple example, the team understands that “just” adding solar and wind to the grid will be inadequate to drive 100% decarbonization, because those resources only come online when the sun is shining, or wind is blowing. No doubt, there will be a great deal of value in new battery technology and clean fuels, but increasingly, sophisticated analytics and software tools will be critical to match energy supply and demand.
From a quantitative perspective, our team measures the emissions reduction potential of each company we invest in, using the best available resources to do so, and we track that potential against actual performance over time, in order to make those tools more accurate, and to maximize the impact of our portfolio.
What kind of annual return is expected for the companies invested in, or is there some other metric?
MCP’s team is determined to show that climate investments can generate outsize returns. The team believes that demonstrating that will attract more capital into the climate solutions space, which will generate more impact, and a positive feedback loop to address the most urgent challenge of our generation. In venture capital, top performing funds typically need to return at least 3x the capital they raise. MCP’s first fund is on pace to do so. MCP also evaluates the potential total return a potential investment could generate. For example, if a $2 million investment could generate a 10x return, that would be $20 million or 40% of a $50 million fund. It’s also possible that a $200,000 investment could generate a 100x return and be just as financially impactful as the $2 million investment. Generally, the team is focused on opportunities that have the capability to generate at least a 10x return.
What are some of Mr. Sonnenfeldt’s previous successes in renewable energy that lead to having the ability to manage MUUS Climate Partners (MCP)?
Michael was in renewable energy decades before it became a trend beginning with a solar street and parking lot lighting company he built, SOL. Eventually he acquired control of Canadian Publicly-traded Carmanah Technologies Corp., that manufactured and distributed solar systems around the world. Carmanah literally invented the solar powered waterway beacon that provides the red and green flashing lights, sitting atop navigational buoys in many navigable waterways around the world. The combined company had an extraordinary track record of success during the 5 years he chaired the public company. At the same time, some investments in battery and solar cell manufacturing were not as successful. When Michael first brought on Ben, the objective was to show that with the right discipline, climate could be an extraordinarily successful investment thematic. That discipline meant finding companies that could viably reduce greenhouse gas emissions in a capital-efficient manner, while placing a premium on great founding teams. Anyone who hasn’t failed probably is not taking much risk, but managing risk wisely and being very disciplined about the companies we invest in has resulted in Fund I investing in 25 companies across the climate spectrum which together, are performing extremely well. There simply is no substitute for experience, and in the climate space, we have been investing for over 30 years directly, and we have been building portfolios of investments for the last decade that give us a relatively unique perspective on how best to understand a company’s potential and its likelihood of success.
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