Patrick Sheehan on Fund Shack

#21 Patrick Sheehan on sustainable prosperity and venture capital

Fund Shack
Fund Shack
#21 Patrick Sheehan on sustainable prosperity and venture capital
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Patrick Sheehan of ETF Partners talks to Fund Shack’s Ross Butler about creating sustainable prosperity with venture capital. You can watch the video version here

Patrick Sheehan is a founding partner of ETF Partners, a leading European growth capital firm investing in innovative companies that have the potential to create a more sustainable future.

 

ROSS BUTLER

Patrick, welcome to fund shack. You set up ETF partners way back in 2006, then called the Environmental Technologies Fund. It must be strange that everyone’s caught up with you.

 

PATRICK SHEEHAN

It’s wonderful that people are much more conscious about sustainability and that’s great actually. You know, I’d like to think that haven’t quite caught up to be honest about it, but I’m being picky. No, we, that I I’ve been in venture capital over 20 years in Europe, in Silicon Valley back again and, and wanted to do my own thing. And so, so actually I and my colleagues sat down and thought what what’s worthwhile, right? What gives us a sense of being useful? And, and the idea that we could show that venture capital had a role to play in solving really big problems was it was just very attractive back then. And you know, I think the only thing we got wrong was we were a decade too early, but I think that’s by starting early and suffering the pains that any entrepreneur does actually of battling along for a decade has been good for us. And, and I think that’s probably why now we, we really feel we have a, an authentic leadership position.

 

ROSS BUTLER

Yeah. You were in Silicon Valley and had a successful venture capital career out there before you did any of this stuff.

 

PATRICK SHEEHAN

I’m really of confess to everyone listening, I started in venture capital in 1985, but back then it was a very different world that was in the UK sort of pre venture capital, if you will. And then Silicon Valley, my time, that was the.com era. So, so I’ve lived in a few different eras and, and the world keeps surprising us, right. We’re in a new one now.

 

ROSS BUTLER

Your thesis, while it was called the moments technologies fund, your investment thesis, must’ve evolved fairly significantly in the last 16, 14 years. 15. Yeah.

 

PATRICK SHEEHAN

I’d love to say yes, but not really. I think it was, I mean, in essence, it’s unchanged in, in the actually, you know, I’m an optimist and optimists are the people who can make change happen. I tend to think. So. I think it’s important to be optimistic. And I, I really feel that technology can supply a lot of the answers to achieving sustainable prosperity and venture capital can be really in a range of those technologies. And so that belief is unchanged. That’s, that’s what we do. And we’re never going to change what that is. We’re still investing across Europe, but change is not subtle under the hood. Actually, I’m happy to go into it, but it’s around learning where we can apply venture capital and where we actually it’s a bit harder because I think if we go back 15 years, we, we, we, we saw the needs. And so we wanted to apply venture capital, but it’s, you know, you can’t use a scalpel on every operation, right?

 

ROSS BUTLER

Well, this is exactly what I wanted to talk to you about actually, because we’ve got this global problem and it’s going to take a lot of solving, where does venture capital fit in?

 

PATRICK SHEEHAN

So I think it’s really important, but it brings, it has constraints as well as benefits, right? So venture capital allows people to take bigger risks and bigger opportunity, but, but actually we all typically all invest from 10 year fixed life funds. We need results in that timeframe where we have a potentially large, but still strange capital. So it works on, on some sets of problems, whether it can be quite quickly, very rapid growth. It works less well on a range of others, which are also important for the writer. So you know, I don’t think it works for nuclear fusion particularly well, there, there are some venture backed startups in that area. That’s I think massively important technology for 20 or 30 years time perhaps. Right. So, so we deal in the big term, which I think is, you know, results in, in a few years to 10 years, but not more. And, and we have to find companies that can grow pretty rapidly with relatively constrained capital, even in this venture capital environment. And so that’s a subset which has focused us more and more on digital technologies. And by the way, we can invest outside that area. But the sweet spot for us becomes digital technologies that deliver sustainable benefits. And it’s still pretty broad, but, but it’s not everything right

 

ROSS BUTLER

Out with the solar panel Passover or raised out with the wind farms. And then with smart digital technologies that help help us be more efficient.

 

PATRICK SHEEHAN

From our narrow perspective. Yes. But when we started out 15 years ago, there was a boom in solar, by the way, just to give you an illustration. And I remember when we talked to our investors at the time saying to them that there were then in 2006, seven over 50 thin film photovoltaics, it’s not just all federal tax, but just this one time. And, and there’s really the market for one or two, right. And revenue growth rates of those companies was probably 70% per annum, but there was very little margin in it. So we said, well, we’re probably never going to do those. Right. And that’s, that’s a low margin. It’s, it’s like the computer memory business used to be right. It’s all going to go to China. And, and sadly it has. So we have to be very careful of the sectors we play in, right. But there’s, there’s enough real innovation and added value to sustain and create durable businesses. So that really hasn’t changed going back to what hasn’t, hasn’t changed actually, Europe when we started was a great place to be. And it’s just got better. Europe’s really coming of agents. So we, we, our focus is Europe and we find some really really fabulous companies. Now,

 

ROSS BUTLER

In what sense is it, has it got better repeats entrepreneurs and technology is being spun out, that kind of thing.

 

PATRICK SHEEHAN

Yeah. Well then venture capital’s matured over the past 15 years, it’s become much more global industry. And, and so people know the roadmap now in a way that they didn’t before and, and people are much more focused on high growth companies and how to create them and know what the game plan is. And so it’s not just, there are more repeat entrepreneurs. There are people who have worked for successful entrepreneurs and there’s a much bigger ecosystem. So overall we just see better quality opportunities because there are people who are much more, you know, a greater number of people who are highly engaged and, and well, it’s really honestly refreshing if I think back over, there’s been a rapid change in the past 18 months around sustainability. Right. but, but it’s, it’s refreshing now that entrepreneurs have been selecting us in some of the recent investments we’ve made because of our brand values and our real values. And they quizzed us not on the usual venture capital, blah, blah, blah, but on the, you know, are you sincere? Cause we want, we want to deliver a positive impact and we want to make sure that you’re right behind us. And and we are, and so they’ve selected us and that’s, that’s, that’s, that’s so refreshing. Right? So having backing people where there’s aligned values makes life so much more simple.

 

ROSS BUTLER

That’s interesting because given that you aren’t doing like large renewable projects, but you are investing in more digital companies. To some degree, I look at your portfolio and I think, well, that, that could make sense regardless of the climate change pressure. And so you could get an entrepreneur that has set up a business that you find attractive for, for a set of reasons. And instead of for another set of reasons, but increasingly it sounds like they are

 

PATRICK SHEEHAN

That’s, that’s exactly right. So we’re, we’re not backing uncommercial companies. And what I like to say is the need is the opportunity actually. And so there is great need, right? And that’s why major industries are transforming that speed. And that’s why there’s opportunity for us, right? Our investors want to make as much money as possible to be clear right now, no one cuts us any breaks this. We say to them, we want to, to do well and to do good. It’s not all so on the entrepreneurs, we back could be backed by anybody, but, but they do tend to like the fact that we have a common agenda, the common mission. And I think that creates a better level of trust. Really. So our competition is, is quite diverse and it is some environmental funds. It is some mainstream funds.

 

ROSS BUTLER

I find your, your ETF’s flavor of environmentalism, very easy to swallow because it’s, you, you caught it optimistic and it is. But it’s also, I find very different to the kind of very pessimistic and is Knight anti humanistic anti-human view of environmental in the environment. And you’re, you’re effectively saying we, we, we have an efficiency problem. We just need to do more with what we’ve got or more with less. And, you know, that’s human progress in a nutshell, really.

 

PATRICK SHEEHAN

I mean, it’s the story of civilization really. And you know, I think the challenge of climate change is critical. The challenge of well, broadly of sustainable prosperity is critical, but, but good luck trying to convince someone, we need a more sustainable planet. Therefore everyone should be poorer. I mean, I would argue that that’s just not practical, right? We’ll spend so much time arguing about it. It’ll never happen. And so the, the, the way to make progress fastest is to use the system. We have capitalism, right? There’s many faults with it, but it’s there. Let’s not spend a decade changing it. Let’s just use it and get on with it. And, and to aim for delivering prosperity because there’s durable demand for it. And it isn’t incompatible by and large w we’re living more sustainably and a progress creates efficiency. And so I’m sure there are flaws with this argument at the nausea and by the way, and you know, it’s not innovation delivers unexpected things, so we’re not always right. But, but as a general theme, I think it’s profoundly important to think that way. And an innovation is absolutely the key.

 

ROSS BUTLER

You don’t say sustainable growth, you’re saying sustainable prosperity, which is a slightly different thing.

 

PATRICK SHEEHAN

Yes. Cause prosperity, I think is a better word. When people think of growth, they think of increasing consumption. I think actually, you know, you can have prosperity with decreasing consumption. You know, there’s only so much time you’re only going to eat in a meal, but we probably enjoy eating nicer meals. Right. So it’s, it’s moving towards a better quality world rather than a higher volume world, if you will.

 

ROSS BUTLER

So I’ve said that I liked your view of environmentalism, but I guess the flip side to that is to what extent does that view and how venture capital solves climate change really affects the big, the big problem? What, what’s the scale of the solution that venture capital brings? Is that a tiny piece or is it an important piece?

 

PATRICK SHEEHAN

It’s a really good question. It doesn’t solve everything to be clear. So how it fits in as an important piece of the puzzle though, I think so venture capital is not going to help with the rollout of solar. It’s not gonna help with, with delivering renewables at mass scale. That’s, that’s, you know, maybe a big infrastructure funds will do that. There’s different types of money, but it’s still an, a lot of money, but where venture capital plays a role as improving the efficiency of all that. So this is not solving the problem in the next year or two at all, right, when next year or two is urgent, we need more renewables, I think, but it is solving the problem of the next decade or two of making sure that we’re as efficient and effective as possible over that timeframe. And you know, you look at the cost curves of things like solar and wind.

Solar has probably fallen 90% in cost in the past 10 years, when more than 50% of costs in the past 10 years, that’s innovation and that’s and, and I think you can safely extrapolate that cost curve for another decade based on innovation. So it’s really critical. The impact of that is not quite so linear either because once these, these technologies become cost competitive or even cheaper, then they change other industries, right? And as you roll them out, the rate limiting step not becomes not the cost of their deployment is the intelligence with which you can use them. So other technologies are required. And then I think in that, in that, in that wave of know how to, to make efficient use of these new renewables of the electric car industry and the consequential problems, you know, et cetera. Now, I think venture capital has an enormous role to play and a lot of prior experience to draw on.

 

ROSS BUTLER

Yeah, it’s a classic venture capital conundrum though. The world is being disrupted by a mega-trend, what are the, all the unexpected con unintended consequences around that, that we can, we can explore it when people talk about this dramatic decline in the cost of solar and the learning curve and so on. It sounds amazing. Is it as amazing as it sounds though, because I mean, there are obviously the intermittency issues and so on. I kind of, whenever I hear it, I think, wow, the world is about to change dramatically and the energy companies are stuffed, but it doesn’t seem to be the case.

 

PATRICK SHEEHAN

Well I think we live in a world that’s quite hard to forecast. I think you can forecast cost reduction curves, by the way. I think you, it’s hard to forecast the consequences of the very easily. But, but if I go back in time 10 years ago, if I tried to talk to the CEO of an energy company, I couldn’t, and then I, then I might more recently you’ve talked to the marketing department who were claiming to do things on behalf of the energy company. And, and there was that, that sort of denial and obstructive constructive confusion. But in the past year or two, I can talk to the CEOs of energy companies. And by the way, I can say to them, you’re a bit stuffed, aren’t you? And they probably say yes. And so what’s important is these are bright and smart people. They live on the same planet as us. I’m not getting it. Then they are really engaged on how to solve the problem. And so they are beginning to innovate and do things. And so I, you know, I’m not one of these people who thinks big, big companies are the problem and evil. I think actually they are now beginning to change rapidly and will really be part of parts of the revolution. And so I think we need to support them rather than just attack them.

 

ROSS BUTLER

We live in a world where everyone wants to quantify everything, but it’s very difficult to be able to quantify potential impact. And, and so, so what I wanted to ask you was what are the most promising areas where the kind of incremental change, the incremental improvement could make a difference. But it’s going to be a very subjective answer, I guess you’re going to have to give.

 

PATRICK SHEEHAN

Yeah. And the best things tend to surprise us. Of course. So happy to answer that question, but there’s an implied agreement in what you said that, you know, that, that actually the most impactful things are often the hardest to quantify, right? Because you can quantify the predictable and the predictable is often less impactful. Holy See, now how it’s impactful. One of the problems of funding innovation suddenly the government and policy level is it’s really hard to quantify the benefits of the unknowns from innovation, right? And so that tends to be a stumbling block. So we are very focused on delivering innovation and impact, and we try to quantify it by the way for each of our companies, but we don’t get too hung up about it. Right. Otherwise you fall into let’s do that because it’s measurable as opposed to let’s do that because we think it’s impactful, right.

Even before the pandemic, we had started to look very hard at the logistics sector because it’s, it’s being quite, it had to been quite resistant to technology and actually quite a, quite a polluting industry. It depends on how you measure it. And so we we’d started to make one or two investments there. We made one before the pandemic certainly struggling. We made one after that, they’ve actually unsurprisingly and I’ll be doing very well. And so, so, you know, logistics and efficient distribution I think is, is a very important area for us. Mobility, I guess obviously remains profoundly important because the whole car industry is changing rapidly. And that, that has consequential impacts outside of its own industry into many things, not most obviously energy, but many other sectors as well. We we’ve looked and keep looking very hard at the what’s called the energy transition.

And again, this is a vast industry already changing rapidly, and we’re looking very carefully at very smart data companies. I’m hesitant here because I don’t really want to say AI because it’s such a buzz word, but I’ll say it anyway because that, but using intelligence to, to make smarter, better informed decisions. And in this past year, we, we, we invested, I’ll give you an example in a company called deep sea that uses genuine artificial intelligence to, to improve the efficiency of the shipping industry. And that’s a big polluter and, and enabling ships to operate as a measurably improved performance is, is very impactful. Now it doesn’t solve the problem that the shipping industry is polluting, but it it’s actually an incredibly efficient and quick way to, to improve the situation.

 

ROSS BUTLER

Oh, that makes total sense because obviously heavy transportation is one of the hardest things to, to, to get off of oil, to replace or oil. And so any improvement there,

 

PATRICK SHEEHAN

And, and particularly for us, we’re looking at where can we use technology to, to create improvement. And we’re, we’re looking increasingly at sustainable foods these days and at the, the impact of the rise of the green consumer, you know, we’re seeing very interesting companies popping up now. Not, not so long ago, we invested in another gentleman neobank had a digital bank, like, you know, there’s Monzo or Revolut, many others out there, and they’ve become very big, very quickly. And we found these guys in Germany who really able and nice people, who’ve created a green equivalent of one of those. So tomorrow is, is the green revenue, the green Monzo. And you know, I’m very happy with it. And it’s, it’s, it appeals very strongly to in, you know, engaged people, people who are engaged in sustainability want personally to do something with their money that that’s helpful for for climate changes, as opposed to potentially harmful. And so, and so if we’re finding different themes not all of them obvious where we think there’s big impact happening or about to happen. Let me try a

 

ROSS BUTLER

You did a deal called the modern milkmen. One component to all of this is, is behavioral obviously. And some of that behavior just harks back to the past. So I did a little bit of work with P and G who were introducing reusable, adamantium shampoo bottles. And that’d be rolled out across Europe this year. And, and you know, you might say great innovation, or you might say, well, that’s kind of 1950s

 

PATRICK SHEEHAN

Sort of back to the future sort of thing. But, but now the modern Melbourne is, is, is a really interesting company, actually, because if you’re English, you mean when you think of an old fashioned milk van and whistling and walking around in the morning and that all died. And they died in the name of efficiency and supermarkets delivering milk in much cheaper plastic containers. But the founder of Bob Milton, who Simon is a very able entrepreneur, very thoughtful guy. He told me he was inspired by, by David Attenborough’s blue planet actually decided that he really ought to do something now in his third startup, that to get rid of waste. And eventually he focused on essential grocery deliveries as an area where it would be relatively easy to get rid of waste. So it is a little bit of a back to the future thing and that the milk comes in glass bottles. There’s no plastic, you know, there’s no, there’s no waste wrapping. And, but there, the front-end may look delightfully traditional. The backend is, is you know, there’s a lot of digital science, a lot of know-how, there’s a lot of efficiency through micro distribution centers. And some of the jargon flips at the back end from old fashioned to very, very modern. And that company is doing extraordinarily well, actually.

 

ROSS BUTLER

I wasn’t being cynical by bringing it up at all. It’s like, no one wants to throw stuff away. And, and, and most people will even be put out a little bit, I would say in order to just feel like they’re not being unduly waste where you don’t have to be a greening to.

 

PATRICK SHEEHAN

And honestly, when I tell people about it, they nearly all say, great. Is does that deliver in my area? Right? Yeah. That’s a fairly easy check. And then I think one of the things we are seeing is this is sort of an efficient localism, if you will. And it’s, it’s far more green to avoid transporting stuff around the planet. And, and frankly, there’s probably better quality produce if it’s more local and more fresh. Yeah.

 

ROSS BUTLER

  1. So you are hesitant, you were hesitant to mention it, but it is very, very hot to, to what degree can it kind of create efficiencies that’s decreased simply put carbon emissions, would you, it,

 

PATRICK SHEEHAN

Well, I’m hesitant, hesitant to mention it because it’s overused as many buzzwords get, and it’s sort of from, from a, some cynical perspective, it’s just a good way to bump up valuation, to start waving your hands and start talking about AI. My second reason for cynicism is that the, the underlying science has not evolved very fast, right? Well, it has evolved is the speed with which computers can crunch numbers. And so using established, and if not old algorithms plus computing power, now you can deliver more. And so I think you know, I’d like to see more real innovation in the algorithms actually, but, but nonetheless computing power has evolved in such a way that there’s a far more applicability of these sledgehammers. And they’re very effective on certain classes of problems, right? So shipping is actually a really good class a problem.

And that, it, it it’s a bounded problem, as they say, it’s not, it’s not an open-ended question. You know, if you, if you wanted to use AI to find out about America, you know, forget it, it’s too vague question. But if you want to use AI to optimize a set of parameters that you know about, and, you know, you can’t have ridiculous parameters because it’s self-evident, then, then you’ve got a problem you can solve. So there, I think it’s really good for certain categories of optimization problem or certain categories of drug selection problem, but it, it’s not good for everything yet. And, and it will take a real intellectual revolution as well as a computing revolution. I think before we get to the science fiction end of the spectrum, it’s great for some things, but, but and we’re really keen that she’s to see more AI real-world applications that can drive efficiency. So we’re definitely on the lookout for those. And, and I think we will see more by the way, because of course, compute power continues to increase the storage costs continue to go down. And so, so applicability will rise for sure, but I think it’s, it’s, it’s nibbling at the real world rather than taking it over. Yeah.

 

ROSS BUTLER

I’m glad I asked that that’s fascinating and a slightly more prosaically you invest across Europe, even though you’re based in London. What’s it, you know, Europe has a pretty good reputation as as being environmentally aware and has been for some time, but what’s it like for entrepreneurial businesses doing business in Europe, perhaps in terms of government incentives, doing business with government, doing business with cities you know from a, from a, let’s say from a green perspective, and then just from a business perspective.

 

PATRICK SHEEHAN

So Europe is, is, there’s not one country, right? It’s complex and diverse and culturally different, you know, A-list but, but doing business with, with a sustainability agenda, I think is, is just a commercial advantage because there is more support, there is more Goodwill. And you specifically asked about governments and cities. Well, one of the outcomes of the pandemic is that European governments are gearing up to deploy a lot of in effect reconstruction money into the economy with a view as to the type of economy they want, and they want a green economy in Europe. And so, so actually we are expecting a lot of investment in and around the green economy and the acceleration of, of sustainability and that that’s, I think, going to be clearer and clearer as we go through this year. And you know, the UK is hosting cop 26 in November, I think, and there will be announcements in the UK, but actually the EU is putting money forward.

Denmark is putting money into its economy on, along this agenda, et cetera. So I think governments will be a source of capital of potentially large scale of capital, but it will move slowly and probably with a certain momentum rather than you know, what’s the phrase these days, this is not a speed boat. Cities you think should be faster, but, but actually when we have companies that they invest in smart or selling to cities, looking to become smart and intelligent, and it’s not an easy market because procurement cycles are still long, right? They’re still somewhat political, et cetera. So there’s great opportunity, but, but it’s not easy. But that said, if you’re an entrepreneur thinking about, or actually on sustainability, these are not the only benefits it’s, it’s frankly, much easier to recruit people. So we find our companies can by being genuinely focused on sustainability recruit better people more easily and how great to staff loyalty and greater satisfaction, you know, and that then extends beyond staff into their ecosystem generally. So, so I think actually in essence being green is increasingly just good business.

 

ROSS BUTLER

Hmm. Well, that’s such an important point because I mean, PE people in the businesses that you back is the most important thing. So if you were getting better talent for less money, or just better talent per se, it’s not the less money, sorry,

 

PATRICK SHEEHAN

But because you have to, you know, the deal is you have to give people the best opportunity. You have to give them as learning opportunity, but, but, but newer generations are find this much more appealing. And so it is easier to get better talent.

 

ROSS BUTLER

Good to go back to, you mentioned cop 22. And one of the criticisms of, of the the state led targets, I guess, is that that they can be seen as bad value for money. If you’re going to spend so much money on something that you pretty much know is going to be pretty inefficient, surely you should channel a bit more into an area that’s very, very kind of laser targeted on also making a return. Yeah,

 

PATRICK SHEEHAN

Innovation delivers a huge bang for the buck. And, and governments could sensibly deploy more capital there. But but, but typically infrastructure projects get more capital because they’re easier to quantify. So let’s, let’s make it pertinent to the UK. You know, only one of our geographies, but, but we’re spending 50 or 70 billion. I forget how much on a new train line from London to, to Birmingham Manchester. And, you know, maybe that’s a good thing, but it’s a hell of a lot of money. And a small fraction of that would have a profound impact on not just addressing climate change, but on the economic competitiveness of the entire country. So, so, but how would you rationalize that quantify? Well, that’s a bit harder, right? So, so the, the uncertainty and the femoral nature of innovation means it’s relatively underfunded. I think

 

ROSS BUTLER

Patrick, I wonder if you could leave me feeling really optimistic about the world, because, you know, w we’re all inundated with climate change doom and gloom, you have an optimistic outlook, you know, when you’re when you’re not in work mode and, and not in necessarily ETF mode, but just Patrick sheer mode, how do you generally feel about about progress on this score and, and where we’re headed?

 

PATRICK SHEEHAN

I am somewhat schizophrenia. I overall I’m optimistic because I think, well, there’s always a crisis, right? If you go through history I used to argue with my fellow students when I was a student about, about the upcoming nuclear apocalypse, right? And, and at least half of them thought there would be one before we got to the age we are now. And I was always on the, on the optimistic end of the spectrum saying the trend of civilization is, is positive. And that there are bumps in the road. If we apply ourselves, then we can do magical things. And you see that repeated through history. It does, I think bad news sells better, right? And it, and it is easier to stoke fear than to stoke hope. But, but, but actually there’s been an astonishing progress in the quality of living around the world, in our lifetime, right there, the, the there’s a billion, fewer Chinese people in poverty life expectancy’s gone up, Health’s gone up.

Education is going up. The internet has profoundly changed the way which we can collaborate. And by the way, you see the power of collaboration and the speed we can now deliver vaccines. People said it was impossible to deliver a vaccine in 18 or less has been less. And so actually, I, I think w w there’s a lot to go out. And if we, if we worry too much, you know, we’d like to fall off the tightrope, but there is no choice. Now, if we want to sustain a good standard of living for the, what is it, seven or 8 billion people on the planet we have to go forward and we have to be creative. And we, we have to be optimistic within that. I think we have to plan rationally, right? And on the concerns long-term planning long-term funding of innovation and technology being one sub sub set of that I think is really important. And there’s probably not enough of that. And so, so I’m a little bit schizophrenia, but not the optimistic.

 

ROSS BUTLER

I asked you to leave me optimistic and you’ve done exactly that. I’m really glad I asked the question, Patrick, thanks so much for sharing your thoughts and sparing your time.

 

AI, Green investment, growth capital, innovation, sustainability, Venture capital

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