Breakthrough Energy Venture’s Wilted Garden Of Climate Investments

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Recently I sat down with Laurent Segalen and Gerard Reid, European cleantech investors, on their podcast Redefining Energy to talk about Breakthrough Energy Venture’s big misses. This followed our conversation about the cognitive biases of the billionaires such as Bill Gates which have persisted due to a bubble of confirmation that surrounds them long past the time when it should have been challenged and abandoned. As a result, BEV’s investments have barely made it to 50% sensible. Here’s the podcast and transcript, lightly edited.

Intro: You’re listening to Redefining Energy. Your co-hosts from Berlin, Gerard Reid, and from London, Laurent Segalen.

Laurent Segalen (LS): Today on Redefining Energy, we’re pursuing the conversation we had last week on Bill Gates and his investment theses, and this week with Gerard and Michael, we are going to dig into his investment vehicle, Breakthrough Energy Venture, but probably, Gerard, you want to start with a quote by Michael?

Gerard Reid (GR): Well, Michael, the reason we decided to actually have this show is because of an article you wrote. And I just want to sort of give the audience really a little bit of an idea of your thoughts. Okay, so let me start with, “to be clear, Gates is still highly resistant to the reality that we have almost all of the solutions we require, and that Breakthrough Energy Ventures is mostly invested in distractions.” You go on to say Breakthrough’s portfolio is littered with dead ends like fusion, alternative wind energy, carbon capture, hydrogen for energy, alternative gravity storage, etc. You do, though, end with, there’s good stuff in the portfolio, but far too much money has been wasted. So, Michael, you need to just explain to us how you came to these conclusions and why.

Michael Barnard (MB): This is not something which just emerged this past month. I’ve been looking at Breakthrough’s investments and Gates’ investments for years, and I’m scratching my head wondering, why would anybody put money into that? Because I always do my assessment on the trifecta, right? Will it be technically viable? Will it be economically competitive with clear alternatives? And will human beings accept it? And 38% of the portfolio doesn’t meet that perspective. And it’s not hard math that I do on this stuff. I’m known for assessing technologies, and 38% of their portfolio doesn’t make any sense. We’ve talked recently about the biases that would have emerged from the investors. And it’s not just Bill Gates, by the way. Branson started the fund, Khosla started the fund. Sergey Brin was part of the original founders.

There are 6 or 7 billionaires, but they clearly all established their perspective on climate 20 years ago. But they set up Breakthrough in 2015 when wind and solar clearly were fit for purpose, and battery, electric, ground transportation was clearly fit for purpose. Recently, we were talking about this, and it triggered me to do a full portfolio assessment of everything that’s in there, as opposed to just getting triggered by one thing crossing my screen or another. And so I did. And so there’s a whole bunch of, to be clear, probably slightly overstated, 52% of the portfolio is good stuff to be investing in from a client perspective, and a reasonable thing for a venture capital fund to invest in. And there’s some sideways stuff, another 14% [sic: 10%] or so, which is to be clear, not perfect stuff. It doesn’t make sense.

From a venture capital fund we can talk about why it’s still a good investment for somebody, but just didn’t make a lot of sense for what I understood their purpose was. But then there’s the 38% of stuff that’s like direct air capture and fusion, where they’re not going to solve the world’s problems by throwing more money at bad ideas that are going to take decades to do. Could have had a much greater perspective by putting a billion dollars into a wind farm than with 38% of their portfolio.

LS: Michael, thank you for giving us access to your Excel sheet. And if I look at it, you’ve made a taxonomy of the sectors he has invested in. So we don’t want to go into the hundred companies, but themes are interesting. So you’ve got biology, you’ve got buildings, you’ve got carbon management, you’ve got cement, you’ve got data, food, fuels, grid, heat, storage, hydrogen industry, metal, nuclear, renewables, storage, transportation and waste. So that’s a lot. Let’s try very quickly to take all those big categories one by one.

MB: In every one of these categories I found typically something good, in many cases a lot good. And in biology I found a lot good. The people who are in Breakthrough were looking at the biological space — or the stuff I assert is the biological space, this is my taxonomy, not theirs — knew what they were doing, so they were looking at nitrogen fixing for farmland to displace ammonia based fertilizers, which are a huge carbon problem. And they’ve got some useful stuff in there. I’m very bullish on biologically-based solutions, except for things which have been proven to be way too hard, like algae-based fuels, and that’s in the fuel space, they’ve got an algae-based fuel solution. So biology is good. Finding ways to enhance nature, finding ways to get nature to help us. These are some of the things that are invested in that are pretty reasonable.

GR: Michael, just which is the sector where you thought all the dogs were in.

MB: Energy and the carbon management solution were full of some pretty bad ideas. I also included Terrapower in there just because Gates was in there. But they have three fusion startups, and every time I look at fusion, it’s still 20 years away and it doesn’t get cheaper. ITER is now billions and years over. It has a million components, and that’s without any electrical generation. Anything that has a million components, once you bolt on electrical generation, is going to be very expensive electricity. I’ve looked at some of the technologies in the current crop of startups in fusion, and they don’t make sense. One of them literally is asserting they’re going to generate electricity in a novel way that nobody has ever done before. It’s literally unbelievability piled on unbelievability.

In the carbon capture space, materiality is 100 million tons a year, and they’re a long way from that. Mostly what I see in the carbon capture space is it’s a delaying tactic, heavily funded by the fossil fuel industry. And in fact, pretty much all the carbon capture and sequestration done today is used for enhanced oil recovery, or to harvest tax credits — or both in the case of Carbon Engineering — and in the energy generation space.

To be clear, they also have alternative wind generation. We know what works in wind generation. We’ve been generating electricity with wind since 1890, when three different inventors in three different countries in parallel, in the space of a year, all started generating electricity from wind generation. We know the power law for wind, we know the square of the radius, we know all that swept area stuff. We know Betz’s limit. They’re not going to invent something with one of their investments they have that’s going to magically improve wind generation and make it cheaper. It’s just part of the theses. Part of the challenge with these people is one of the biases they created 25 years ago was that wind generation was inadequate and we needed to have real generation of some sort.

And solar was inadequate. And as you and I have discussed, we’re now at a gigawatt of solar a day this year, and wind generation is just going from strength to strength as well. They’re completely fit for purpose things, they’re not impacting reliability. The Breakthrough portfolio just hasn’t internalized empirical reality around renewable generation. And so they keep making bad bets.

LS: The only bet I see for battery is Quantumscape, and there’s a lot of things to do in battery. The Quantumscape, I’m not a scientist or an engineer, so I cannot say if it’s going to succeed or not, but from a finance perspective, it went SPAC at US$140 per share and now it’s worth $7 per share. So as an investor, it’s a bit of a debacle, Breakthrough. But a lot of people are repeat offenders, offloading their PowerPoints on SPACs. They did Heliogen. They SPAC at $500 per share, now worth $3 ESS tech $18 per share now worth less than $1. Wow. They do a lot of science, but from a finance perspective, that’s pretty brutal.

MB: In the area of venture exits and actual going public rounds, we really kind of have to separate out useful companies that could have gone the IPO road versus companies that went the SPAC road because the SPAC is intentionally a pump and dump play. People who set it up with their themed investments really were exploiting an investment vehicle that had been targeted for infrastructure decades ago and was a useful part of the investment landscape in the United States. SPACs became the next vehicle for Wall Street people to exploit the markets to make a lot of money for themselves. The lack of due diligence on SPACS, I don’t want to personally put that at BEV’s doorstep. That was the United States and the SEC is now cracking down on SPACs for the most part. But it was clearly a bad idea. The first time it was introduced to me as an investment vehicle I went that’s a recipe for bad things to happen and that’s what happened.

LS: Let’s try to be a bit balanced here. We have the good, the bad and the ugly. So you talk a bit about the ugly already, which is all the nuclear thing, carbon management, they are really absurd stuff here.

MB: There is one good investment in carbon management. I’ll call them out for that because it will have use in the space where we’re doing industrial emissions of carbon dioxide that we can’t avoid. We have to capture it somehow and their technology should be useful for that. Their valuation is based upon doing a lot more than that. Probably we’ll have to have some unavoidable industrial emissions that we should deal with. But so much of their stuff in that space is bad that if we want to be balanced we should probably talk about some other space where they are doing more useful work.

LS: Let’s talk about good things. I have a list of companies which I’m following and some look very promising. Heat storage, Antora, Rondo in steel, Boston Metals, TS Conductor that we love, Fervo for geothermal, Natel for hydro, Kobold for 3d imaging four metals. Look, there’s a lot of good stuff.

MB: And these are all [mostly] on my list of thumbs up. They meet the trifecta of value. That doesn’t mean they’re going to win. Like Boston Metals has still got a lot of stuff to do to get from TRL level four or five to commercial scaled stuff. And then it’s got to compete with alternatives like hydrogen solutions for new iron. But at least it’s worth investing in. And if it works and it can scale and it will have competitive advantages against other things, it’ll be good there.

GR: I mean, thats one of the things I actually love about what these guys are doing, is that a lot of these businesses, if I went back, they just couldn’t get capital some years ago. Right now, with somebody like Breakthrough Venture, you have the chance to get capital to actually go and scale up your idea. Whether it’s crazy or not, it’s true.

MB: And once again, 52% get a thumbs up from me, except that the 38% that get a thumbs down from me clearly shouldn’t have received money. So it’s one of these balancing acts. And so I deeply respect what they’re trying to achieve. In December I wrote an article, we got a similar amount of attention, Pity the Poor Climate Qware Billionaire Oligarchs, where I explored the biases and the reasons why they were just getting stuff so wrong and not attending to empirical reality. And so I really appreciate the fact that there’s an opportunity for funding in this space.

And they stayed the course. Like the climate tech bubble first came up in the 2019 to 2021 space, then a lot of money exited because, among other things, SPACs were such a bad vehicle that it put a blanket of shame across the space. They spent a lot of money in spaces that were clearly tinselly, fog machine, laser light shows with no substance because they knew that they could get retail investors to give the Wall Street founders of the SPACs a lot of money and hence their plethora of lawsuits across that entire space. And Breakthrough stayed the course. They kept investing. Laurent, I think you have a perspective on how many investments they’ve made and the pace of those investments and the scale of those investments.

LS: Yeah, once a month. It’s a lot. It’s too much. But look, they’ve decided not to look for the needle in the haystack. Basically, they invested in the haystack.

MB: But to your point, though, that they didn’t because you said batteries. Let’s take batteries. There’s a lot of great investments in batteries and in this entire storage space. They have like one battery firm. And Fleet Zero is also good. It’s actually containerized batteries for shipping and rail. That’s another good investment. But that’s not batteries. That’s play for transportation, electrification. But why aren’t they in the battery space more heavily? Why did they miss that entire space?

LS: They got a bit blindsided by what we said in a previous episode. Much too much emphasis on carbon management and nuclear and hydrogen and they could have done much more on battery. But in the grand scheme of things, all the others, the Khoslas and the Stripes and everything, they are doing the same mistakes, so they’re not alone. And overall, there are a lot of good things they’ve done. So probably you might recount a bit your article, you’ve been a bit too gung ho in search of clickbaits, or you stay your course, I stay my course.

MB: 38% of stuff that’s obviously dead ends just from basic analysis, is not a good track record. And to be clear, not an investment assessment, a climate pollution investment. Does it make sense for them to be putting money into this if their goal is to help fix climate change? And so 38% wasted energy with the talent pool that is available to them is not a good track record.

GR: Michael, can I go back to where actually we started this, which was actually what you said was we actually have the technologies out there to do this transition. And I suppose my question to you really is, what should Breakthrough Energy then be putting their money in?

MB: They should not be putting any money into energy, because that’s a solved problem. They shouldn’t be putting any money into carbon capture because that’s avoiding the problem, is the right answer. But as we look at their metals, stuff like the mining technologies and the metals processing, those are tough industrial and mining spaces where we need better answers, more efficiency, decarbonization, those are actually technologically challenging spaces where we need solutions. Their investments in cement, another industrial sector, which requires massive decarbonization, is a mixed bag like, there’s some other stuff that’s good that I give a thumbs up to, and there’s others of the stuff doesn’t make sense, and it’s once again obvious from the fundamentals. But those are good sectors. Energy storage, batteries, and some of the other technologies to get some funding to try these out. Makes sense.

If we look at wind energy and solar, there’s incremental innovation along the entire supply chain. Minerals extraction, to processing, to refining, to manufacturing, to distribution, to construction. Everywhere along that very mature supply chain, there are point sources to make improvements. You’re not going to replace a wind turbine with wings on a clothesline, which is one of their solutions. You’re going to go into the sector of — let’s just take the nacelle of a wind turbine —, and you’re going to find somebody who has a specific solution for a 2% increase in efficiency in nacelle operations. And that’s going to be multiplied by hundreds of thousands of wind turbines or millions of wind turbines. That’s where you’re going to find the value proposition in wind energy.

In solar. Bill Nussey’s firm, for example, is great because it finds a 1% to 3% increase in solar panel efficiency with a process change. That’s a worthwhile investment. But you’re going to find those in deep, embedded in the industries, not from an outside perspective, replacing it.

LS: Well, I tell you where Gerard wants to invest. That’s his obsession. It’s transformers. They should invest in transformers.

GR: You’re right. Question is whether it’s a venture capital investment or not. Probably not. But there’s definitely work to be done in the transformer area.

LS: Okay. I conclude it’s complex. They’ve done good things. They’ve done stupid things. I think the stupid things are linked to the bias we referred to last week. But overall, I give them a pass because it’s tough. Gerard.

GR: No, I agree with you, Lauren. They’re going out there, putting money in where other people don’t do it. But I think what Michael’s also right, which is they do need a bit of common sense in some of their investments. And I use that word common sense, Michael, because I actually looked at some of their stuff as well. I actually thought it was laughable that they actually invested in one or two of these companies. It was that bad. I was thinking, wait a second. You’ve got scientists and engineers and great people here. How did you do that?

MB: They have the money to do technical due diligence far beyond anything I can do. If I can spot a problem in an hour, they should be able to hire subsurface geologists to assess the technologies they look at. I will say this as carefully as I can. I’m disappointed that 38% of their portfolio doesn’t make any sense. That money could have moved the needle. It didn’t.

And I’ll say the next thing very carefully. Bill Gates and the other billionaires get so much attention that the stuff they invest in unlocks more funding from other parties and changes policy. So when 40% of their portfolio is on bad ideas, that means 40% of their portfolio is amplified into bad ideas that divert good money, and divert policymakers.

We’re in the middle of a climate crisis. These people can be the wisest people in the world. And they weren’t. 52% though. Full thumbs up. And another 10% is just thumb sideways. Once again, they get a passing grade if the pass is 50%.

LS: Well, thank you for those final words. Next week we’ll have more, Michael, because we will pass on the main show conversation you had with Paul Martin that you heard on our sister show Redefining Energy – Tech. And Gerard, I talk to you in two weeks time.

GR: Look forward to it.

MB: Pleasure As always. Looking forward tno the next time we chat.

Outro: Thank you for listening to Redefining Energy. Don’t forget to rate the show and subscribe on Apple Podcast, Spotify, or the platform of your choice.