The Exchanges

Q We're really holed up in this building. Uh, no, the point being like, is it over?

A I don't think the impact of rising rates on the innovation economy and climate tech is, is over. I think, again, I don't think we can expect that this will pass, and we're going to go back to what it was in 21, early 22. Are there going to be other Sort of punctuated events that kind of smack you in the face with what the implications are. I would be surprised if there weren't. I think, you know, this, this rate rise is dramatic. We were basically in a declining rate environment for, like, 20 years. You know, there was sort of a run up and then, you know, down, you know, and they eased, uh, during the oh eight crisis, but a 20 year tailwind To asset prices in the form of declining rates. That's my entire career. There's been this, like, wind at my back that I didn't even know was there my entire investment career, and now the wind is kind of going to blow in our face a little bit, and so I think as an economy and as an investment ecosystem, it will take some recalibration as we internalize what that means for the cost of capital, particularly for capital consumptive companies, but then, you know, on the The larger, you know, in my prior life, you know, for larger companies with leverage, you know, that also introduces, you know, really meaningful impacts on your cost of capital and the decisions you make around, you know, when and how and how much to invest in your businesses, …

AI assessment note: “I don't think the impact of rising rates on the innovation economy and climate tech is, is over.”

Q of capital that, you know, I remember I was like tracking solar markets in 2009 ish, and it would have been amazing to get that kind of cost of capital for a utility scale, just like run of the mill, photovoltaic. Uh, project now getting that for kind of offshore wind, right? So that's one manifestation. What else sort of bubbled out of this, uh, this wave of new capital?

A Well, I mean, I, you know, we alluded to the SPAC phenomenon. I'd say, you know, fundamentally, cost of capital is a function of valuation of these assets, right? Like, as the, the yield required for these offshore wind assets goes down, the valuations go up, those things work in inverse. The same thing goes with the capital raised in The public markets, and so there was clearly a appetite for, you know, just the supply demand drove the cost of capital for some of these growth companies. These early stage companies that might be pre-revenue, certainly pre-cash flow, they were able to raise money to fund those cash flow losses in the public markets, also at very low effective costs of capital as well. So I'd say that's another, the two bookends of the spectrum where, you know, sort of the lower risk profile, um, not that offshore wind is, like, You know, there are obviously risks associated with, but relatively lower risk profile, you know, infrastructure-oriented things, and then higher risk profile growth companies. I'd say cost of capital for all of it went, went down in that, like you said, thirteen-year bull market, low-rate environment.

AI assessment note: “we alluded to the SPAC phenomenon... early stage companies that might be pre-revenue”

Q the moment. Um, but first let's just take a snapshot of what has been happening over the past few months. Can you talk a little bit about what are, what are we seeing broadly from a macro perspective? What's happening in interest rates? What do we, what can we say about what's happening in the market now? In general, and then we'll talk about climate change in relation to that.

A There was a hope, I think, by everyone that it was transient and would abate. It has not. Supply chains are not getting unstuck. Even after the ship got unstuck out of the Suez Canal, we've still got backups and ports, and I think I'm waiting, like, A year to get a new dishwasher. You know, it's, uh, it's, and all of those, and then the China lockdowns have continued, which, which of course haven't helped, and then the crisis in Ukraine that sent kind of commodity prices, fossil commodity prices to a different place, so I'd say all of those things stacked on top of one another in the macro context. It was interesting watching the markets, I would say, you know, you alluded, it's been not that long that we've been In this really chappy water, although it feels like longer than the days it has been, but it sort of was a lot of things that got added to the pile, and I think ultimately the rate rises and people internalizing what those meant after so many years of persistently low rates, and given how persistent inflation is, the reality that we're going to have to Potentially I do this faster than people thought. I think has people really concerned about a, a hard landing, which is terrifying.

AI assessment note: “ultimately the rate rises and people internalizing what those meant”

Q the reasons we talked about at the beginning. Um, You mentioned earlier, you think maybe the impact won't be quite as big as you might imagine. So yeah, tell me what you see happening in infrastructure as we are now actually seeing interest rates rise, uh, and what impact do you think it'll have on the pace of deployment of the things that we need to deploy at scale today?

A Yeah, so there are definitely people who are a lot better positioned to talk about the infrastructure side, but I'm going to give it my best go. You know, we spend a lot of time thinking about if ultimately the corpus of, I don't know if it's four or nine trillion, depending on who you're talking to, in terms of annual spend. That we need to get to net zero. A good chunk of that is gonna be, as you alluded to, the low-cost infrastructure capital that only flows within a pretty narrow risk-return framework. Needs a lot of downside protection. Needs not only tech to be de-risked, but needs input costs and off-take to also feel pretty predictable. And so, back to what I was saying earlier, I mean, I think the reality is the thing that sets the marginal cost on offtake, so take power, That's also going up. And so the reason why I think the impact won't be as big is as you think about the contracts that get struck, right? It's a function of, um, your ultimate spread is a function of your offtake minus your input costs. And so, and one of your input costs is going to be cost of financing, but as your offtake costs are going up too, that helps to support the economics of the project. And so there's inevitably a transition period where you're going from Essentially, cost of financing being extremely low to now, you know, it's a meaningful increase in kind of percentage terms, but the o…

AI assessment note: “reason why I think the impact won't be as big is”

Q uh, it's not our fault that this is dated. Given that, though, Let's, uh, let's start by talking about what has happened broadly and where we are today. And then obviously we want to focus in on the world that you and I inhabit, which is in climate tech universe. Um, but let's start more broadly. So how would you describe in brief semi layman's terms, what happened to SVB?

A It's funny, I'm pretty sure the reason you wanted to have me on to talk about this is because I'm, like, the one person who's old enough to have actually been around in the last crisis and have lived through it, um, in a pretty different seat, but I would say, okay, so taking a step back, I think hopefully this is not too, um, kind of rudimentary, but I'll spin through it quickly in terms of just what a bank is and how a bank balance sheet works. So banks, um, Kind of, by design, are, uh, money multipliers who take kind of demand deposits, essentially, your checking account, your savings account. We can talk separately about what the sweep accounts were, because those got a lot of press during this whole, um, during, during the whole, um, unraveling. But they take short-term demand deposits. Those are their liabilities. It's an obligation that if I Put my money with the bank, and then I decide I want it out, I can come get it, and then they deploy those liabilities as assets. Assets are their loans, they lend the money out, people pay them interest for lending the money out, and again, by design, banks are Short liabilities, longer duration assets. And so that sort of, you know, people talked about the duration mismatch, which was particularly egregious here, which is part of what contributed to the run, but that is sort of a, that is a feature, not a bug, of banks. Um, and tha…

AI assessment note: “duration mismatch, which was particularly egregious here, which is part of what contributed to the run”

Q Yeah, sort of an epic song. Um, to what degree is that related, caused by what, you know, the spark that was SVB, or to what degree is it just sort of like a broader function of what's going on in the macro world and things specific to Credit Suisse?

A Yeah, I mean, I think what's, what is emblematic about what happened is you can't necessarily predict what will spark a bank run. I mean, in this instance, it was You know, what, certainly if they had known in hindsight that that presentation was going to spark a bank run, they wouldn't have done it. They didn't think it should, you know. In fact, they had come out with a capital plan to, you know, kind of fill the hole, and by the way, they weren't telling folks anything new about, you know, sort of the, where the available for sale securities were trading relative to, um, anyway, so it was, it's hard to know what's going to spark it. I'd say on the Credit Suisse It did seem like it was primed. It was sort of a dried out forest waiting to see, like, what was going to light the spark. You know, they had material weaknesses that they had had to correct over time and announce, you know, there were sort of perpetual, there were the trading losses from that hedge fund years ago, and so there's just sort of been, you know, perpetual questions, I'd say, regarding bank management, and I think that is kind of one of the underlying Kind of messages from this whole situation as well, which is bank management around risk posture, around how they are even appreciating and internalizing the risks they're taking, whether they're duration risks or trading risks or reporting risks. It's, look,…

AI assessment note: “It was sort of a dried out forest waiting to see, like, what was going to light the spark.”

Q this is a, is this a gap that will remain to be filled for a while and it's going to make it harder for early stage climate tech companies or those trying to finance community solar or whatever it might be? Um, or is this really just, you know, the, the opportunity is going to shift from SVB to SVB two point O or from SVB to some other bank.

A I think, so first of all, you know, that's the beauty of capitalism. It's an opportunity. I'd say, you know, there's a technology, there's a role it played in the technology and innovation economy writ large, and climate in particular, that is clearly an opportunity for someone to step into. Will it look exactly like what it looked like in twenty-twenty-one? I think that will take a very long time. I, I don't expect we'll go all the way back there, but in terms of an institution investing into this vacuum, it feels primed for it, in my mind. So, you know, and you're already seeing it start, right? I mean, the outbound calls The, like, bring your money here. The, like, and so in my mind, that's already happening. People are stepping into the void. It's a little bit of a fray right now. Everyone's like, is that, is that a safe institution? Is that a safe institution? Everyone's still sort of trying to kind of, things will take a while to settle, but that will happen. Um, I think part of what made this business an exciting business to be, and I'm, again, the innovation economy writ large, kind of the venture-backed economy writ large, was because it was working. You know, my understanding of sort of that lending side, that the venture debt lending side of SBB's business is, you know, it wasn't, it wasn't a loss leader. It wasn't, um, super profitable. It was really just a really p…

AI assessment note: “People are stepping into the void. It's a little bit of a fray right now.”

Q You are too. With that said, do you think that we got out a little, we collectively in this world got out over our skis a little bit the past couple of years? Like, did it go too far?

A I think what I'd say is I don't want to, I don't want to tag us in the climate tech ecosystem as being sort of uniquely guilty of getting out over our skis. I think there is a, Over the course of, you know, a decade plus of incredibly low rates, the desire to find businesses that will grow and earn a return from that growth, I think, was a pretty universal desire. So you see this, you know, this dislocation in the market is not a climate tech dislocation. It's a, um, it's candidly going from, like, risk on to seeing a lot of those, you know, risk on bets pull back. I mean, you're seeing it hit Everything from, you know, our tech sector to the emerging markets, you know, it's just, you're seeing this rotation away from risk. You're seeing the flight to safety, to the dollar, and to treasuries, you know, so you, what you're seeing, I think, is, is more broadly a function of people, people's risk profile changing, and when risk profiles change, your appetite to fund capital consumptive profile businesses. What you're seeing broadly in the market is that appetite is changing, and I think For people like us who do this every day, and we look at businesses that, you know, do need to consume capital to grow and scale at the pace that we need them to and that they are capable of, you know, that's one thing. But, you know, as you look at the public markets, just that risk appetite can c…

AI assessment note: “I don't want to tag us in the climate tech ecosystem as being sort of uniquely guilty”

Q how do these things like collide with each other? And is there, is the ultimate result of that, that climate tech looks exactly like other major sectors of the economy, say tech broadly. In terms of the impacts of the macro environment on, on this sector, or is it somehow more insulated because of the other factors specific to this market? Do we have any idea how this plays out?

A I mean, the short answer is no, but that won't stop us from like pontificating and guessing about it, so we're just gonna, we're gonna, we're gonna take a crack. So I do think it's worth calling out, and this was interesting, that the ESG Fund flow. So there's the locked capital you alluded to that obviously doesn't de-link itself in committed closed-end pools. The ESG fund flows, the ones that can go back and forth, have actually been more resilient. Look, everything is down, right, but have been more resilient than conventional fund flows. Now, you know, again, this is the first time we're seeing this dynamic play out, so the reasons for why is We'll see how persistent it is, and then hopefully people will study it, but, you know, one could imagine that investors in ESG-linked assets have longer time horizons, do think more point-to-point, do think about longer duration, what their capital can return, and so are less fickle. Um, it could just be that that underlying trend of A desire to invest behind where people think the direction of travel is, which is, you know, towards Alpha really being created by these businesses that are aligned with climate goals, aligned with social and kind of governance objectives, is just stronger. And so, whatever it is, you are seeing them be, the early signs, again, it's super early, right, where, you know, there's basically Q-one data out, an…

AI assessment note: “the short answer is no, but that won't stop us from like pontificating”

Q back to SVB, because SVB was the primary de facto bank and lender for startups period, uh, certainly in Silicon Valley, but I think more broadly in the U S actually increasingly as well, that includes climate tech, but it's not specific to climate tech. So, you know, putting on your sort of climate lens, Do you think that there's any difference in the impact to climate tech versus tech?

A Oh, lots of, lots of thoughts on that. I would say, so yes, I mean, they're, they were just unbelievably embedded in the ecosystem. I'm a big believer, and I say this in the context of the climate transition as well, a lot, which is, you know, ultimately, this is about people being willing to do the work to take certain, like, risks or invest their time in An ecosystem. And so I thought what was unique about SVB is they had really taken the time to do the work to understand what are the needs of young companies? What are, what are the needs of a founder? And then also very specifically, there was that, you know, Times article on how SVB was, you know, in many ways a climate bank. I mean, the, they had really taken the time to understand the climate ecosystem, understand the transition, understand what are the different kind of unique challenges of climate companies. And so I think, yes, you know, generally there is a profile of capital consumptive company that had access, access to, you know, debt capital to effectively lever, you know, kind of a later stage round and extend runway. Um, you know, I've heard so many stories of companies who are like, nobody else would let me even set up a bank account. You know, the, just the KYC requirements, the way to navigate the system is so onerous. You know, getting an account set up at one of these large institutions that, you Isn't as s…

AI assessment note: “they had really taken the time to understand the climate ecosystem”

Q that in the moment feels extremely volatile and like the world is changing underneath your feet, but actually we're playing a longer game here, right? We're investing in things that have multi-year horizons, if not multi-decade horizons. How much do you adapt to what's happening on the, on the ground? And how much do you say, you know what, these are short-term trends. I'm in it for the long haul.

A It's a really good question. I, um, it's one that I have no doubt will continue to trade notes on as an ecosystem for some time. It's funny, I've, I've been doing, been investing for a while, so I remember going through this in oh eight, and we were staring at ourselves. I was doing, uh, larger cap private equity at the time, but similar conversations around how much should we be adjusting what we're doing in reaction to some of it was imposed on you because, uh, At the time I was working in leverage, you know, we were doing, we were leveraging things, and there was simply no leverage to be had because other actors in the system are pulling back. So I think some of these decisions will be made for us a little bit as the ecosystem, you know, if the IPO market shuts down, what does that mean in terms of if your access to capital is more limited, what does that mean in terms of how your companies need to recalibrate, burn, or think about just preserving cash flow? And so I think some of that is going to Naturally kind of emerge over time. I, I'd say being point to point is, is hard in times like this. I mean, so is staring at a screen and, and looking at all the red. That's hard too, but maintaining point to point resolve is hard. I think it comes back to a lot of what you said earlier around the necessity of the markets and sort of the inevitability, as we think about it, of thes…

AI assessment note: “some of these decisions will be made for us a little bit as the ecosystem”

Q Maybe this has already been disproven to some degree, but How do you think about sort of the relationship between this financial crisis, whatever you want to call it, interest rates and climate tech?

A So regulators have an objective in my mind, right? Their objective is to tame inflation. It's the dual mandate of unemployment and inflation, right, that they're constantly trying to manage. And right now we have pretty full employment. It's obviously not uniform and not consistent, but relatively full employment and inflation is high, and we're trying to get it in check. And so how do you get inflation in check? Well, you tighten. And so that is what the, the rate rises are. It's tightening. Is there some amount of tightening, which is really a contraction of credit, a contraction of, like, the money multiplication that goes on via financial institutions, that might now happen naturally, because banks might decide to hold, I mean, naturally is the wrong word, but, like, might happen as a consequence of this event, which is banks will hold more cash, they will be more conservative in their lending, um, they may have a less risk-on posture, um, So the Fed doesn't have to raise rates as much, but the ultimate implication of credit availability for projects, like, and the, you know, it's sort of six to one, half dozen to the other, maybe seven and five, you know, but it's, Ultimately, for the infrastructure projects you described, we need available credit, right? We need, um, or available capital, but, you know, low-cost capital, so hopefully a fair bit of, of credit in addition t…

AI assessment note: “Ultimately, for the infrastructure projects you described, we need available credit”