How to spot disruptive tech decades before the competition

Venture capitalist Jason Blumberg shares his winning playbook for investing in cleantech solutions.

To stay ahead of the market, venture capital investor Jason Blumberg looks where no one else is looking. He and his team at Earth Foundry, the Chicago-based venture capital firm he co-founded in 2012, pore over hundreds and hundreds of climate solutions each year to find the truly transformative technologies. They’re on the hunt for the devices, energy storage solutions, advanced materials and other products that have the potential to both disrupt the market and help the environment. All that work gives them an edge. “We’re able to see trends years before other people,” he says.

The firm is actively working to bridge the funding gap that many startups in the hard-tech space face. While the majority of investors tend to favour software solutions that are faster to develop, Earth Foundry looks for early-stage ventures working on solutions that take more time — and capital — to develop. Over the last decade, Earth Foundry has invested in 27 climate tech companies, including three Canadian ventures: e-Zinc, Polystyvert and Nxlite.

Here, Blumberg shares his formula for making smart bets, what impresses him about Canadian startups and what tech trends he’s watching right now.

How do you identify promising technologies?

The first step is finding a novel solution that has breakthrough potential. Without that, you cannot disrupt the market. You really have to have a fundamental grasp of the industry it’s addressing and whether this innovation is significantly better. We see pretty much every innovation that’s out there in North America. We’ve seen more than 10,000 applications from startups. Seeing so many applications and talking to so many companies gives us an indication of what could be potential technical breakthroughs.

Hard tech can be a difficult choice for investors. Typically they need to see a return within a decade, which is relatively fast when you are developing a new technology. Plus, it can be difficult to gauge its potential. How did you get comfortable with investing in hard tech?

Part of the exercise in becoming comfortable is gaining in-depth knowledge about the solutions out there. Typically, everyone on the team will look through 1,800 innovations per year — that’s about 30 per week. Then, as a team, we discuss whether the solution is a novel intervention. We try to determine whether it’s significantly better than anything in the market by digging into it further with customers, partners, innovation hubs and our research partners.

If we move forward with the application, we will then explore the risks involved in bringing the innovation to the market and decide whether we can manage those risks. We’ll look at the team they have to see if this is a company we can help build a great business with. We know we have something interesting when the research is good and the team is good.

Then, we’ll look at the technology to determine whether it is 10 times better than what the incumbents are doing. We’ll look at the potential market size, what the financing gap is and how much the company needs.

Through our rigorous assessment process we’re able to de-risk our investments and accelerate the path to market, ensuring that our innovations scale effectively and sustainably.

Does Earth Foundry have a climate impact target it’s aiming to achieve with its investments?

We don’t have a specific climate target. We believe in helping the environment, and climate is a big part of it. But there are many other disasters and things that humans do to the Earth we want to solve as well. Instead, we look at whether the technology is better for the environment. That’s a grey area because we’re dealing with companies that are so nascent — they are still figuring out what impact that their technology could have. But we know what the trajectory could generally look like as they achieve their market goals. That’s worked out quite well for us. We’ve worked with researchers to estimate the impact our portfolio will have by 2030 — we’re on track to avoid 2.4 gigatons of carbon dioxide and deliver renewable energy to 1.4 million homes.

What challenges do you see in investing in Canadian cleantech compared to the U.S.? And what are the advantages?

There’s a risk aversion to co-invest on these types of innovations. That’s everywhere, but it’s somewhat more prevalent in Canada. On the flip side, the innovations here are tangible. If I go to California, somebody will have a PowerPoint deck, but they won’t really know what they’re talking about. But if I come to Canada, I find that the homework has been done, the innovation is real, and the folks can clearly articulate what they’re trying to do — they have the technical depth, grit and targeted local support to achieve outsized success in the global market. You take bets on companies and you try to promote those companies. So you select who you think could win, and then you support that. That produces, in my mind, much better outcomes.

What mistakes do you see companies making when pitching hard tech solutions?

Most startups don’t do a landscape analysis of what other innovative companies — large or small — are doing. So, they think they’re better. But understanding the competitive landscape is critical to ensuring a solution not only addresses the business challenge they are targeting, but does so in a way that beats current and future competitors. At Earth Foundry that’s one of the views we have — we can actually see what’s better. You’ve got to be the best in the world.

When Earth Foundry was first established, entrepreneurs weren’t required to exit within a predetermined time frame. Now, the funding model requires them to meet all obligations by a certain date. Why did you make the change?

For more than a decade, we didn’t need to raise funds, which actually gave us time to figure out our model and how to be successful in this space. At this point, building a diversified portfolio and understanding the risk of each startup is important. Investing in a significant breakthrough that could create some type of unicorn outcome might be worth taking the risk. But you probably wouldn’t want to manage an investment that will have a lower return profile over a 20-year long duration. There’s a little bit of magic in managing a portfolio — you don’t want a huge portfolio of stuff that’s all hanging out there.

The other thing we are trying to manage is the value inflection points — milestones that substantially increase a company’s valuation. So often a venture is trying to manage until its next raise. We actually work backwards. We look at how much they should raise and what inflection point that would get them there. This allows us to have earlier exits on things that produce good returns without having to have that huge home run. If you are a one-and-done type of shop, you need each deal to be larger. We do smaller hits instead, which allows us to shorten the timelines of milestones.

You see a ton of companies at an early stage — that must gives you a window into the future. What cleantech trends are you most excited about right now?

Because we see so many solutions, we’re able to see trends years before other people. We’re trying to be ahead of the market. Typically, areas where there are fanatic investors are really crowded. And that crowding actually causes a reduction and return profile in that sector. If we do find a sector like that, we will try to identify any missing opportunity versus crowding into that sector. That being said, I do think that circular economy and reuse is an area where we’re seeing a lot of interesting innovation — there’s a lot of innovation happening in Canada. Another area is carbon dioxide reuse for mitigation approaches — they’re getting into interesting value propositions.

Unlike traditional venture models that aim for one in 10 successes, we target eight in 10 and strategically embrace a diverse range of exit opportunities. This stratification of outcomes benefits the entrepreneurs we back and allows us the ability to deliver value across our portfolio, maintaining flexibility in how we achieve success for all stakeholders.

How do you support your ventures?

The way we view it is that we’re the coach on the sideline helping guide them, at least in the early years, until they’ve had $1 million to $5 million in revenue. There are a lot of other funds that are good at those later stages. We don’t just invest; we partner with our portfolio companies, providing the guidance and resources needed to navigate challenges and seize opportunities.The CEO should be calling us every week or two with what’s on their mind. And then we talk with them about how we can help them. We’re in day-to-day combat with them, helping them win the game.

 
Are you a climate tech investor interested in getting connected to the MaRS Climate team? Reach out to Leah Perry, senior manager in cleantech at MaRS, to learn more.