Jon Powers: Welcome to Experts Only Podcast sponsored by Clean Capital, and learn more at cleancapital.com. I’m your host, Jon Powers. Each week, we explore the intersection of energy, innovation, and finance with leaders across the industry. Thank you so much for joining us.

Thomas Byrne: Thank you for joining the Experts Only podcast. My name is Thom Byrne filling in this week for Jon Powers. Today we welcome Dan Oros of G2VP, a venture capital firm out of Silicon Valley, where Dan focuses on sustainable investments. He goes into his history in clean energy and venture capital, and tells a story about where he thinks the industry is headed. We hope you enjoy.

Dan Oros, partner at G2VP, a venture capital firm based in Silicon Valley, welcome to Experts Only podcast.

Daniel Oros: Thanks for having me, Thom.

Thomas Byrne: It’s awesome to have you on. To give our listeners some background on yourself, where’d you grow up?

Daniel Oros: I grew up in Ridgewood, New Jersey, which is a town just outside of New York City.

Thomas Byrne: I did not know you grew up in Ridgewood, New Jersey. Not too far from here. And how did you find your way to not just what you’re doing now, but what you’ve done for quite some time in clean energy and venture capital?

Daniel Oros: Well, I went to college at Stanford and majored in Industrial Engineering, and then ended up on Wall Street working at Goldman Sachs, and I was a currency trader where I was making markets in G10 currencies. And that was a really fun job, but I also felt like it was a job that over time would get automated, which it turns out it has, and I wanted to learn other investing skills. At Goldman Sachs, it has a great program for rotating analysts in different divisions, and I was able to apply for different divisions. And there happened to be a group that was at the time called Structured Investing that was looking for junior people to join the team. And I didn’t really know what it did, but I applied and got the job, and it turned out what they did was investing in tax-oriented project equity in 2005, the summer of 2005. And what that meant at the time was tax credits generated by renewable energy, which is wind power and solar power. And when I joined, they had just signed the deal to buy what became Horizon Wind Energy.

Thomas Byrne: Oh, yeah. Sure.

Daniel Oros: They just signed a deal to make the first PPA partnership in rooftop solar PPA with SunEdison and BP Energy at the time. And SunEdison was three people, Jigar Shah, Brian Robertson… Actually, four people. And it was really the very beginning of what they were doing.

Thomas Byrne: So Goldman was invested in Horizon, right?

Daniel Oros: Goldman had an appetite to do project equity for wind, and they had done a bunch of different investments in joint ventures, and then found a group that was the team that they then called Horizon. I think it was called Zilkha Renewable Energy that had both some projects under development and a huge pipeline. So what Goldman did was said, “Well, we’d like to invest a couple of billion dollars in these projects over the course of years. Why don’t we buy the developer so that we get proprietary access to all those projects?” So Goldman bought the developer on the idea that it would invest in all the projects that would be developed.

Thomas Byrne: And what role were you playing at Goldman in those first few ventures, or those first few investments in clean energy?

Daniel Oros: By the time I showed up, those investments were already executed, but the capital hadn’t yet been deployed. I showed up on a team on a small group that started to deploy that capital and started to integrate those businesses and pipelines into their capital that we were deploying. I learned at the time how to underwrite project equity, learned on how to analyze partnerships and all of the nitty gritty details of tax partnership. And also, importantly, learned about the underlying technology, the solar PV modules that we’re going into the projects, and the wind turbans and et cetera. We learned about the fundamentals of those businesses, and begin making investments in technology companies alongside those projects equity investments. And over the course of 2005 to 2008, built a portfolio of projects and what now would be called growth equity investments in a handful of those platforms and technology companies. And that included SunEdison corporate equity, that included First Solar before they were a public company, that included a handful of other companies, geothermal and ethanol, all of the clean tech sectors you would describe at the time.

Thomas Byrne: And was Goldman one of the few players doing anything like that, putting some money into the corporates and VCs even started getting going in the space yet? Who else was participating?

Daniel Oros: There were really limited participation with Sand Hill Road VCs that it did accelerate at the time. As I remember, there were some smaller funds that were making investments in venture capital, but were not Sand Hill Road VCs. Notably, a group called MissionPoint Capital. They were the early investors in SunEdison, and they taught us a lot about this kind of investment, as well as some funds that did get raised. Vantage Point was one of the early Sand Hill Road VCs that raised a big clean tech run. And then I would say the 2006 and ’07 timeframe is when that Sand Hill Road style of venture capital, went big into clean tech.

Thomas Byrne: That’s around the same time that you moved over into the VC space? I want to hear both things. How you ended up doing that, and also why these VCs started participating in this space. Let’s start with how did your career end up on Sand Hill Road?

Daniel Oros: Well, I joined Kleiner Perkins in the spring of 2009. Kleiner Perkins had raised a fund in the beginning of 2008 called Green Growth Fund. And that fund’s thesis was that clean tech businesses would require a larger amount of capital than a typical venture fund would be able to deploy over its life cycle, and that a growth fund made a lot of sense. And this was Kleiner Perkins first growth fund. About a year into its existence I joined the team, and my now partner, Ben Kortlang, was one of Kleiner Perkins first hires. And we had worked together investing at Goldman in this similar asset class, so we did have some experience in this sector that was different than the experience in Kleiner Perkins as venture investors had brought to it, and I think we complemented that team.

Thomas Byrne: VCs during this period of time, ’06, ’07, ’08, ’09, start participating in the space. How are they participating? Where are they coming in? What assets? What types of technologies do they like to put money into at that time?

Daniel Oros: Right. I think the most important thing to remember is that in… Let’s call it 2004 through 2006. In that period of time, there was a really limited number of technology success stories in terms of exits and IPOs for Sand Hill Road venture capital. It was kind of they were still coming out of the dot com bust. However, if you looked on Wall Street, the IPOs that were happening were solar IPOs and ethanol IPOs. And there was a relatively large amount of success in the IPOs that happened in 2004, ’05, and that’s what Sand Hill Road saw. And if you’re interested in going back into history, go look at the S1 for solar or Suntech Power, the Chinese PV module, or SunPower. They were all rapidly growing great margin profile businesses that looked just like businesses that you’d want to fund as a venture investor. That is what I think created the primordial soup of the clean tech boom and Silicon Valley’s interest in it. They said, “Wait a minute. We’re not in any of these clean tech IPOs. How do we get there?” And that’s what they built practices.

Thomas Byrne: And what years do you consider the boom?

Daniel Oros: I would say 2007 through 2009 or ’10.

Thomas Byrne: Got it.

Daniel Oros: I think some of the valuations and success stories in terms of paper valuations lasted into the financial crisis, in three of financial crises. But by 2010 or ’11, I think the solar, in particular, pricing was really getting challenged and margins collapsed, and many of the business models fell apart.

Thomas Byrne: I even remember First Solar’s public stock was north of… I don’t even remember the price, but it was very high. And then the financial crisis hit, and it and SunPower and probably a couple of others just came crashing down, and those were public companies.

Daniel Oros: Yes. My recollection is something on the order of maybe a $25 billion market cap for those kinds of companies.

Thomas Byrne: Yeah. What was the Green Growth Fund? What was the investment thesis? What types of companies did you guys look for to invest in?

Daniel Oros: At the time, clean tech I think was very focused on the idea that fossil energy or carbon-intensive energy sources were going to get the place to buy renewable or carbon-free energy sources. Part of the thesis was let’s go down the list of all of the different types of renewable and carbon-free energy sources and find the winners in each of those sectors, and try to invest in those winners. And that was a part of the thesis. And then as you continue to analyze the changes that were going on, and again, this is still mostly focused on energy, you’d see other areas like smart grid emerging. And the idea that using digital technology to transform and make the power grid more efficient was also very interesting and fit right into a clean tech mandate, so we would look at that.

And then using software to enhance the consumer experience in the power industry would lead you a company like Opower. That’s how you go from renewable energy to industrial technology and software technology. And what now is our [inaudible 00:11:29] G2 Venture Partners, which is applying emerging technology to more traditional industries sustainably. And you realize that these traditional industries have a massive presence in the economy and also a massive carbon impact, and if you’re able to bend the curve even slightly on these traditional industries using all kinds of technology, whether it’s replacing fossil kilowatt hours with green kilowatt hours or using software to make their operations more efficient, you can have a major sustainability impact.

Thomas Byrne: Yeah, there was this [crosstalk 00:12:03]-

Daniel Oros: [crosstalk 00:12:04] looking at now.

Thomas Byrne: Yeah. There was so many interesting companies out there. Now, Opower is an example of one that’s been around for quite some time doing things that weren’t as obviously clean energy as First Solar, but when you dig in a little bit, you find out that the business that they’ve created is actually a piece of the puzzle. Right? And it’s a really interesting one, because it caters to utilities, and there’s a lot of those out there.

Daniel Oros: It’s also important to remember as an investor, you can’t forget the fundamentals that you’re looking for really excellent businesses. Right? And the early days of the clean tech boom, there were a handful of very excellent businesses that were growing rapidly, and that’s where the initial returns came from. Over time, you want to continue identifying where there are areas of technology disruption and then identifying where startups, whether they’re venture-backed or not venture-backed, are creating and growing excellent businesses.

Thomas Byrne: Yeah. Let’s actually start digging into… Kind of fast forward. Get away from the anthropology and the history of the sector, and start thinking about today. What is the VC landscape today like in clean energy?

Daniel Oros: Right. One, it’s not limited to clean energy.

Thomas Byrne: Right.

Daniel Oros: I would say it’s expanding to a general concept of enterprise efficiency. That’s one way to describe it. And that covers energy, but it also covers areas like transportation, and industrial, and manufacturing, and agriculture. And so the investment lens has broadened to those different sectors. The other thing that you’re seeing in those different sectors is a convergence of trends. When we started investing in clean tech, the idea that the energy industry would be disrupted by the transportation industry or those two groups would care about each other was sort of a remote possibility. Now, you can’t tell the difference between them. Utilities are completely integrated into the electric vehicle rollout, and transportation companies, auto OEMs, are turning into mobility companies and they think about energy very strategically. The convergence of those trends is really critical to understand. That’s why at G2, part of our investor base is broad array of strategics that that don’t necessarily fit together, but within the constraints of looking at how technology is disrupting traditional industry, those trends are actually converging on each other.

Thomas Byrne: Can you elaborate on that a little bit more? The actual investors in your fund are strategics?

Daniel Oros: A portion of our investors, yeah, are strategic. An example would be Mitsui. They’re a Japanese industrial business, and they are looking at all of the areas that are important to us, like transportation, like energy, like agriculture, like manufacturing. Each of those are being disrupted by trends and different types of technology, but most of them are in the family of digital technologies that they can help us with and we can help them with. And we have partners. We have an auto OEM partner, we have an energy partner, that all are minority investors in our fund, that don’t drive what we do. And we make investments in areas that don’t have anything to do with their interests, but what we’ve found is that over time, the trends that we’re investing around and the companies that we invest in tend to touch all of them.

Thomas Byrne: Yeah. And it’s a way for them to keep a pulse on the more innovative companies and the more innovative business models that are out there.

Daniel Oros: Right. Another way I like to describe it is we help them see around corners. Right? I think that if you were an auto OEM, you probably were focused on electric vehicles 10 years ago, but you weren’t focused on how a company like Uber might impact your business. And now you certainly are looking around those corners.

Thomas Byrne: There’s a lot more money, from what I hear. I’m not remotely as close to it as you, but there is more money coming back into the VCs to invest in the big umbrella energy, clean energy type funds. Is that an accurate statement? I mean, I’ve seen more VCs pop up and fund green energy, clean energy related VCs in the last two years.

Daniel Oros: Yeah. I think so. And I think that the LP interest there is driven by a combination of… I think there’s a handful of families out there that have significant resources that are supporting and creating these and investing in these types of funds. There’s certainly some corporate capital that’s coming into the sector mostly for strategic reasons, and there’s also a growing institutional ESG type mandate that’s out there that is driving investor interest in these types of funds. And then the last is I think returns are pretty good, and the prospect of returns are excellent. And the capital will be looking for returns and be chasing returns over time. It has, I think, emerged from the depths of what was a pretty disappointing return set from the peak of the investing firm in 2008 to ’10 era.

Thomas Byrne: And are these… I mean, the logic that returns always had to be there seems so obvious, yet there was a period of time where some people were trying to get people to invest in clean energy and clean energy assets that where the returns weren’t supported. It’s a very obvious thing, but the returns just have to be there, whether you’re investing in the companies like you guys do, or at the asset levels like we do at Clean Capital. You can have all the ESG goals you want, but if you’re not able to show returns to your investors, you’re not going to get their money.

Daniel Oros: That’s right. And what’s tricky about venture capital as a sector is that it’s very difficult to project returns, and it’s very difficult to even… Because they lag so significantly with time. Whatever you’re investing in now won’t turn out to be a return until five or 10 years, so there’s a lot of prospective analysis going on in terms of how people are allocating capital.

Thomas Byrne: So at G2, what are you guys… Well, you’ve kind of gone through some of the sectors that you guys were investing in. What do you look at now? What’s interesting to you guys? What trends are you seeing in the market that are really interesting, that our listeners probably or perhaps are not seeing as closely?

Daniel Oros: Well, some areas of interest of ours that are interesting happen to be also hugely topical in the investing world, like the impact of autonomous vehicles on all of the supply chain of the transportation sector and then every other derivative of that. We also look at a track like last mile transportation, and what does it mean, and where are the investing opportunities around things like scooters and bike share and carpooling? We have a business in our portfolio, which is a fantastic business called Scoop, which is the leader in enterprise carpooling. In transportation, we likely will be continuing to invest across the connected autonomous electric share trends for this fund, and probably another decade beyond that.

Thomas Byrne: What is enterprise carpooling?

Daniel Oros: Well, enterprise carpooling is basically utilizing a network of people, individuals, that are driving, say, longer than 30 minutes to get to work by themselves. Utilizing an enterprise relationship, meaning if I work at company X, and there’s a thousand people who tend to go from the city into the suburbs, that company knows that other people are doing that. Why not create a really efficient way to link them up together, and then also link them up with the company that’s next door that also has that same problem? Scoop built a really excellent network of those employees, and then provides a way for their employers to subsidize those trips. And employees that commute together and don’t commute alone are much happier, they stay on their jobs longer, and it’s a really inexpensive way to offer a major benefit to their employees.

What they’ve been finding is their customers, which are both the companies, the employers, and the employees, the longer that they use Scoop, the more they are supporting the program, and they find a virtue is that group. And so they’re building out these carpooling networks in a couple of different regional areas, driven by early adopter employers who want to create a benefit for their employees in a particular region that might have a traffic problem, and where carpooling and commuting is a headache.

Thomas Byrne: So I’m sure they’re in the Los Angeles and San Francisco markets to start.

Daniel Oros: Yep. We did some work on this, and obviously carpooling is not a new idea. The idea of using an app for carpooling is not new, but they have been and continue to be the most successful carpooling network that we’ve ever seen by multiples. And part of what makes them special is remembering that the experience of the employee and the user is so important, and it’s a community of people. Right? It’s not just a transaction, and treating it like a community of people has made it very successful.

Thomas Byrne: Very cool. Do you think in 10 years, will the normal suburban family have two cars?

Daniel Oros: That’s a really excellent question. It might be that the normal suburban family changes, meaning not everybody is doing the same thing. There will be a lot more options than just having a car and having it sit in your driveway for most of the time, or the parking lot of your office most of its life. I think you’ll be utilizing mobility services of different kinds like carpooling, but also things like Uber and Lyft for a lot of the generic rides around town that you would do. Certainly, everyone’s utilizing it for the trips that were normally done with taxis and such. And then the question of when you are driving a car because you love driving it, or because you love the car because it does something’s particularly special, that’s where I think the car ownership market will be focused on.

Thomas Byrne: Oh, that’s interesting. I take the train to work, and I walk to the train. And there are, I kid you not, weeks that go by where I have a car that sits in the driveway that I don’t drive.

Daniel Oros: Yep. And frankly, I think a lot of these coast markets have a great public transportation system that works. Out here in California, it’s not as good, so there’s a lot more people driving by themselves, but that’s changing.

Thomas Byrne: Yeah. I remember the… What was it? I10, the 10 in Los Angeles, just being a parking lot when I was living out there. I couldn’t stand it.

Daniel Oros: It’s probably worse now.

Thomas Byrne: I think they have a train now though that goes from downtown to Santa Monica, to the Santa Monica area, which is only like five decades overdue.

Daniel Oros: Now you can get on a scooter once you get off the train.

Thomas Byrne: Exactly. For the last mile, right? All right. Let’s do a little rapid fire VC stuff for some of the entrepreneurs who are listening. Just quick, quick tidbits from you, based on your experience. What are the overall returns that VCs target?

Daniel Oros: I think it’s pretty typical for a venture investor to try to find a way to make at least three to five times their money, but in the best case scenario, more than 10 times their money on a particular investment.

Thomas Byrne: On a specific company investment.

Daniel Oros: On a specific company investment. On a fund investment, what I’ve heard… Some easy lingo is to think about a fund that gets a five X return is an A fund. Four X is a B, and a three X is a C fund.

Thomas Byrne: Hm. That’s pretty specific. How many companies, when you’re investing, do you expect to succeed versus fail?

Daniel Oros: Well, when we’re investing, our investing lens is, I would say, late growth, late venture, early growth. Rather than a seed or series A investor, we’re looking for most of our companies to at least not fail, and then a minority of them to succeed, and hopefully several of them to succeed spectacularly.

Thomas Byrne: Then throw some of your colleagues under the bus who are doing the early stage and series A investments. What’s going through their heads? If they make 50 investments, how many do they realistically think will succeed?

Daniel Oros: And I’m just speaking generically. I think they’re probably expecting half of them to not succeed in some way or another. Investing involves taking risk. Risk is what makes opportunities. That’s what generates return, and you need to be doing things that are not obvious, things that are hard to generate outside returns. That’s where it comes from. If things are obvious and easy to understand, then your evaluation will be high and your expectation of future return will be relatively low. That’s the business.

Thomas Byrne: Why do these companies fail?

Daniel Oros: The easiest explanation of why a company fails is their product technology doesn’t work at all. That’s one of them. And when we invest, we look to at least have gotten through that risk. The next is that they’re not able to scale revenue and margin at the same pace as scaling their operating expense, which then causes them to need to continue to raise and burn a lot of capital before they truly get to a place where their customers are driving revenue growth and margin. They can extend their margin from the customers to reinvest in growth. In that case, it’s execution and timing that matters a lot. If you start with a product that is in demand and is great, but companies that have 20 employees are very different than companies with 100 employees are very different than companies with 500 employees.

And going through that growth cycle is very challenging on an execution basis, meaning you need to hire people, and organizations go through stages where you know everybody and there’s no such thing as middle management. And then you add management layers, and you add decision processes, and you add external factors that you don’t have any control over. And smart people can have great ideas and great products and still fail.

Thomas Byrne: How many deals do you see versus actually invest in?

Daniel Oros: I think our ratio is probably in the two to five percent, meaning for every deal we do, we look at at least 20 and maybe in multiples of that.

Thomas Byrne: And how many [crosstalk 00:28:28]… Yeah. How many deals?

Daniel Oros: We’re making four to six investments in a year and we’re looking at hundreds.

Thomas Byrne: Yeah. And how many of those are just getting the pitch deck versus actually sitting down, understanding the business?

Daniel Oros: In my head I have some of those metrics, but we’ll get hundreds and hundreds of pitch decks. We’ll look hard and really engage with, I would say, dozens, many dozens of companies, and then get down to real work on a dozen or two companies before we make those investments.

Thomas Byrne: It’s good for the entrepreneurs to know those numbers. Lots of pitch decks go out, and the actual investment dollars, it’s a tiny slice of the-

Daniel Oros: What we really work on is our efficiency in making decisions, both because we have limited time and it’s important that we use it wisely, but of course the entrepreneurs have limited time as well. And it doesn’t do anybody any good to go down a path because we can’t make a decision.

Thomas Byrne: Yeah. Totally understandable.

Daniel Oros: We try to do our best to be as transparent as possible in our process, and I think entrepreneurs should ask that of whoever is looking at their business. When our portfolio companies are going to raise capital, the advice that we will give our CEOs is when they say, “Oh, we’re meeting with X, Y, Z, and it’s really exciting,” “Okay. Well, find out what their process is. What are they going to ask of you and when? And when can they provide information about how they’re thinking?” And that type of conversation can drive a much higher satisfaction interaction.

Thomas Byrne: Yeah. And for an entrepreneur, the importance of not spending too much time fundraising is a one-to-one ratio of are you spending time fundraising, or are you spending it on growing the business?

Daniel Oros: Right. Now that said, finding the right investor is hard, and that means you need to meet a lot of different [inaudible 00:30:45] a lot of different firms to get there. It is one of those work-intensive activities and time-intensive activities that you just have to invest in.

Thomas Byrne: Yeah. All right, we’re winding down here. Last question. I’m going to ask you to speculate a little bit here. VCs have to imagine a world that does not exist today. What do you envision in five to 10 years in energy sustainability, whatever? It’s an open-ended question.

Daniel Oros: What I’m really focused on right now is in the industrial workplace. I use the word industrial with some liberal definition of industrial. But just imagine places where a lot of people work, and they’re typically going to sit at a computer somewhere. They’re emailing people, and various software tools to design stuff, to procure stuff, to make stuff, and it’s been that workflow. And that interaction environment has been the same for probably about 15 or 20 years. I’m envisioning an environment where many of the tools and workflows that we as consumers have gotten accustomed to. Where companies like Uber and Amazon and Google have made our personal lives very mobile and very seamless. Where I can pay anybody anytime with digital money. I can order something I want on my phone and have it arrive the next day.

Well, why can’t an engineer who’s designing a bracket do the same thing without designing something, going to his supply chain manager, procuring it, doing paper quotes, picking up the phone, sending faxes? Why can’t they just design the product they want and have it delivered on their door the next day? I’m envisioning an industrial environment where those types of technologies are deployed, and services that are created around those technologies are ubiquitous around the workflows that drive the industrial economy. It’s not a typical way of looking at the future, but I think we’re going to look back and say, “Oh, wow. It was obvious that that type of future should exist.” And it’s going to exist, and there’s going to be some big businesses that support that build over time. Hopefully in our portfolio.

Thomas Byrne: We shall come back in five years and do this podcast again, and see if you’ve proved correct.

Daniel Oros: Let’s do it.

Thomas Byrne: All right, Dan. Dan Oros, partner at G2 Venture Partners, thank you so much for joining the Experts Only podcast.

Daniel Oros: Thank you, Thom.

Thomas Byrne: Thank you, Dan Oros, for a wonderful conversation. We hope everyone enjoyed it. Thank you to our producers, Lauren Glickman and Emily Connor, and thank you to our listeners for coming back to Clean Capital’s Experts Only podcast. Be sure to go to iTunes and give a review. We’ll see you next time.

Jon Powers: Thanks for listening in today’s conversation. Find more episodes on cleancapital.com, iTunes, or wherever you get your podcasts. If you like what you hear, be sure to subscribe and leave us a five star review. We look forward to continuing our conversation on energy, innovation, and finance with you.