Well, on the investment side, I think it is we're going through a reorganization of the venture capital scene, also with LPs being more reluctant to invest in funds. GPs deploying less capital. But on the long run, I believe that the whole startup ecosystem will continue driving innovation, not only as it has done in the in The US, but also will help Europe to thrive.
What I'm excited in the long run, or what I believe our investment hypothesis is that we will be powered by a 100% or nearly a 100% renewable energy. Mhmm. Welcome to The Investor, a podcast where I, Joel Palafinkel, your host, dives deep into the minds of the world's most influential institutional investors. In each episode, we sit down with an investor to hear about their journeys and how global markets are driving capital allocation. So join us on this journey as we explore these insights.
So we are live here. Hello, world. It is Wednesday. It's the middle kind of the middle of the summer. And, excited to have my my guest here, Felix from Vireo Ventures. He's currently in Germany. We were just talking about how we're dressed exactly the same, and, the weather is pretty hot in Germany. That's where we left off, But, you know, we're probably gonna go deeper on more sophisticated things like investing, asset allocation. But, Felix, welcome. Welcome to the to the show.
Glad that we Thank you very much. Yes. We were just speaking about us more or wearing the same same shirts and that we don't have just one, but actually, you know, those black shirts. This is from yeah, I've got at least like six of these. I've got a couple of different colors, but black, you know, matches everything. But but anyways, this is not a fashion show. We're talking about investing in tech and innovation, hopefully.
So, Felix, let's let's talk about you and your career, your background. Maybe you can start where start with where you where you grew up, what you studied, and I think kind of navigating your career into becoming an investor. You know, you've heard about my background and how I've had different twists and turns. So I'd love to hear your story and how you got to where you are. Yeah, of course.
So after my obligatory military service, which actually back in the time you still had to do, in Germany, I studied in Maastricht in The Netherlands, so international business studies. Spent a year in Spain Mhmm. Enjoying my time as an Erasmus student. Do you know Erasmus, the program, Joe? No. I don't. I I I actually didn't even know that Germany had a mandatory military service kind of like in Israel. So is it kind of like Israel where like if you're 18 you got to serve for a few years?
Yeah it was it was similar. It was ten month and you could choose between military service and civil service but you had to do like those ten months. And so I chose the military, did that for ten months. And then in, I say it last night, but Erasmus is like a program which allows you to study for a semester or two semesters abroad in another European country and it's basically someone something I can recommend to all European students at least. It's really worth it.
What's the difference between so the civil service versus the military service. What's the biggest difference? Guess the civil service, are you mostly working at a desk doing like government employee stuff? It's it's more you go to oh my god. How do you old people homes? Like, is that the the correct word? Yeah. Elderly. Yeah. The politically correct. You gotta make sure you don't get gotta make sure you don't get canceled with what you say. You know? Exactly. Elderly care.
You you supporting, like, churches, you're supporting kindergartens, all this kind of stuff and military service. Well, it was a military service. So you practiced to shoot and to do all the services around that. Did that for ten months and learned how to play the cards and had a quite funny time there. Then again, know, I studied international business studies. And from there on, I joined a publishing company, worked there for a year.
Kind of interesting, unfortunately, I wasn't responsible for digitizing their offering. And the owner was like really progressive. Unfortunately, his dad was still kind of the dark man in the back. So he hindering everything, which ultimately led me to join a Danish company as the product manager where I was responsible for their DIY paint. And I relaunched their brand, which is probably totally unknown in The United States. Helped to do that, did that for three years.
And then joined Philips as a key account manager for The UK and The Netherlands, helped to restructure their software activities. And in 02/2009, when the big wave of clean tech was hitting Europe, a colleague of mine and I decided that it was time for us to do something by our own. We have absolutely no clue about renewable energy. We had no clue about PV, photovoltaic systems. But we thought this is an amazing opportunity, found some guys that supported us on the technical side.
We did the sales and marketing and project development and actually started developing small and back at that time, large scale PV plants in Germany and The UK. Did this during the big boom phase from 02/2012 when the feed in tariffs were capped in The UK and then in Germany, we altered our business model, started a new company called Milk Sun, which traded existing PV plants.
By the time it became the largest online marketplace for trading PV assets, I joined Mott Solar later on, a US company, a US startup that was providing the sales tools for solar developers. And from that, I joined Energy Ventures, which actually made me become a venture capitalist. Mhmm. So real quick backing up. What does PV stand for? Photovoltaic. I hope I pronounced it correctly. So solar systems. Okay. So it's kind of well, how do you spell it? Photovoltaic. Photovoltaic. Okay. Got it.
Okay. Yeah. You know, something that's interesting about solar, I saw a really quick clip with Elon Musk. And, you know, one of the questions I forgot who was interviewing him, but they asked if you could put solar panels on a car if that would actually be enough energy to power the car, and it's actually not.
So what the car would have to do is actually when it's resting, it would have to, you know, have this thing like this panel expand when it's kind of parked and then that'll give it enough surface area. But what you could also do is just have panels all over the entire house. Then when your car is parked in the parking spot, there's like a solar beam that that maybe charges the car. So that's that was kind of interesting to me.
I kind of, you know, thought about that as you were talking about your solar experience. So what's changed significantly from your experience being, you know, an operator in the industry till now? You know, what are some of the innovations? Is solar much more powerful now? Does it have more throughput? I guess what what's some of the evolutions you've seen? Well, it has certainly the the the efficiency.
So what actually comes out of the radiation and becomes electricity that has dramatically increased. And by the same time, the costs of those modules have, I don't know, by decreased by 10 times. So they they have really, really come down. And going on to what you said about the cars, it is is totally true. Like, you will not be able to charge a car fully with just solar modules on the roof.
But what you can do is I know in The United States, you are driving a lot more, but in in Europe, we're driving per day per with a car around 40 kilometers, which is probably something like 25 miles. Mhmm. That's all. Yeah. And So you don't have that much transit. Is it because just people's workplaces just closer in proximity to where they I would say so. It's it's close. Have public transport. So people use I don't know.
Like, I presume in New York or other large cities, you're not using the car on a day to day basis. Yeah. So people commute to work, but the distance is, of course, much shorter. The the the country is much smaller. So you can actually charge your car on a sunny day, not to to get the full range on on the average that you need, but a couple of ten, twenty kilometers, you can actually charge in an ideal scenario with a solar system on the car. Mhmm. Okay. That's interesting.
Yeah. And I mean, lot of people are still biking. Obviously, they're gonna be biking 25 kilometers, but, but I think if you have yeah. I think if it's that proximity, it looks like if you have some type of system on the car, that could help. I mean, the cars are also battery powered as well. So I think the solar I guess, do the yeah. The the battery power that we see in Tesla's, I think they're are they like lithium ion? Yes. Like, recharge? Yes. So those are lithium.
And then and then I guess the solar could be a supplement to that to kinda get you to the next charging station. Exactly. That's the that's the idea. But what you described earlier that the the that you combine the solar system of your house or that you have on top of your house Yeah. With your car, your cooling, your heating, and have a own battery that manages everything when there is no sun shining. That's actually the future of what we already seen.
This is going also on our investment hypothesis of very rare ventures. This is exactly what we're looking at. So using renewable energy and using it smartly. Because if you were to plug in your car and charge it and you hold straight charges, no one has solar. We all take the energy from the grid and we all come home at 6PM, then the grid itself won't be stable enough, most likely.
So what I need to do is I need to defer the charging so that I know Joel will probably just drive 10 miles tomorrow. Hence, I don't need to charge your car because it has like a range of 300 miles. But maybe your wife will go 200 miles tomorrow, so she needs a fully charged car. And I know how fast your car is charging, and I know the state of church. So I can actually push that energy into your wife's car. And I can do exactly the same with the neighbors on the street.
Now if you have your own solar system, you could do that while you're while you're the sun is actually shining. However, most likely, when the sun is shining, you will be at work, so your car won't be at home. Hence, you you have to use other systems in the house. But this deferred charging or the the the deferring of of assets that are using electricity, that's one of the main topics we're looking at to invest in.
Okay. And, you know, so tell me some things that you've noticed with the ecosystem in Germany versus, you know, Scandinavia or the other regions in Europe. You know, just what are your observations on the investing ecosystem and just kind of the the investing landscape? That's a very difficult question. I think at least in the space of clean tech or renewable energy or smart buildings, smart homes, smart city mobility, the founder spectrum has become a lot more professional.
A lot of the founders that used to start a fintech or a marketplace or b to c product, you see that a lot of those people are now moving into clean tech, either because they wanna change the world or because they also regard that this market is growing exponentially and that you can make a lot of money in here. Within the ecosystems in Europe, it really depends on the markets. We believe that The UK market is probably the most developed when it comes to venture capital and startups.
We're also seeing a lot of interesting companies coming up in France, Benelux and then also Germany. What makes The UK more mature? Is it just more capital deployed? Is there just much more startups and just many more accelerators? I guess when you when you say that, are you just saying there's yeah. Is it is it the volume of investors and founders or is it also the capital deployed or both? Probably both. Also a different attitude.
I mean, the proximity to The United States were so the influence of The United States being maybe a bit bolder In The UK. Just take the risk and also the access to capital and makes it easy. And also if you're a US VC firm, probably your stop is is in The United Kingdom because it it you you you will speak the language. You you understand a lot more how things work, whereas in Germany, things might be a little slower.
And as such, in Germany, we have a tendency to be quite risk averse, unfortunately. And also, whereas failure is seen as kind of a positive thing as long as you learn from it in The United States, Failure is quite often seen as a negative thing in Germany in particular, but also in in other countries of Europe. So not so many people just try out an idea that they're having.
They rather want to work for corporate, you know, want the security, on the nine to five job, well paid, all all the benefits that you can get instead of working long hours and and hardly any pay. Yeah. No. That's totally that's totally fair. Yeah. It sounds like, you know, London has evolved. I mean, the feedback I got maybe six, seven years ago was that London was still much more conservative than New York, but I know there's a really robust fintech ecosystem.
Yeah. And it seems like the the clean tech ecosystem is definitely developing over there. I've had a lot of people come through our community that are really focused on clean tech and climate change, and I think, you know, it's definitely much more developed. It sounds like there's also a lot of government programs that support some of these initiatives too. Is that is that also the case in Germany?
Yeah. Well, if you were to ask the German government, they would probably tell you how amazing they are and how well they are supporting the ecosystem. I think there's a lot of room for improvement when it comes to employee share options, we are lagging far behind The United States, but also other European countries. Same goes for incentivizing business angels to take the risk to be the people on the cap table, either via tax write offs or reducing the loss, whatever measure there is.
Those programs in Germany, they are capped. Mhmm. Whereas in in The United Kingdom or also in France, there's a lot more done to support business angels really going into the ecosystem, taking the risk, and and pushing founders forward. So I'm as as I'm really impressed by the French ecosystem, how they have evolved in the last years. When I started venture capital in 02/2016, to in my opinion, still a bit slow, but things have really evolved there, like a totally different culture.
It's it has become a lot more English speaking, not just purely French. And the ecosystem in France with business angels, but also VC firms, that it's it's done really, really well. Yeah. No. That's amazing. I mean, I think there's also, just providing the barrier to entry, much to to be if you can make the barrier to entry much lower, that gets a lot more capital in. You know? I don't know if they have the similar type of accredited investor roles. Yeah. How does that work in Germany?
Do you have to be accredited and have a certain type of income, or can it be a test of knowledge to be be an angel? As an angel, I I'm not a tax adviser, so please don't take my advice for granted. But to my understanding, and so I have admin, you can just invest in any startup you would like to invest. Got it. You can't invest in in venture capital funds.
Yeah. If you would like to invest in venture capital funds, you have to be a semi professional professional investor, and that you have to prove. And here, you need to have a certain amount of income, disposable income, cash to actually show that that that you qualify for this. Yeah. Sure. Yeah. That makes sense. And then another question I have is, you know, how big is the corporate ecosystem? Because I can imagine there's probably some innovation labs and, you know, mobility, clean tech labs.
I think BMW has a mobility accelerator. But being in Germany, you know, what what kind of programs do they have, like, from the corporates, the CVCs? I'm sure they have some types of programs. I I know that yeah. The the only one I've heard of so far is BMW, but I I can imagine, you know, Mercedes and all these other brands probably have something to kinda support that. Actually, it's it's really funny that you're saying mentioning those names.
I'm in Schuylkill at the moment, tomorrow, there's the plug and play startup autobahn Mhmm. Where a lot of corporates are going to show up. Corporate CVCs are going to present their show and are going to showcase. I think the CVCs and I mean, I I I became a venture capitalist via CVC, so Yeah. I won't say anything bad. Mhmm. But a lot of these CVCs have fueled the party in the in the last years by deploying additional cash.
And I think as long as CVCs have the same motivation as the founders, so more exit driven, the management team has a carry or a virtual carry, and is not working just for bonuses, this is a great addition to the ecosystem. If it's just on a strategic level, I think it can be extremely difficult unless it's fully transparent. Then it can work, but I it it might make it a little bit harder also for the start ups. Then the question is always, why should a tier one start up go to a strategic CBC?
Yeah. Yeah. I mean, I think that's the bigger challenge with the CBC culture. So if you wanna make an event, you know, you don't typically go to demo days and, you know, send over a term sheet. You know, you express interest, and then you go through eight levels of leadership, and you get approval with the finance department. And then, and then from there, you know, you'll write a check. And if you do good, keep your head down. Don't, ask too many questions.
You'll get a title bump and, give you, like, maybe a 5,000 bonus and say, hey. You know, stay out of trouble. Keep your head down. Keep keep finding good deals. But that's kinda how CVCs. But you're right. If they have some type of upside economics and if the CVCs can also double dip where they can invest in the companies and, you know, they're also looking for financial return. You know, that's that's great. It improves kind of the balance sheet for for the company, right?
If that capital is going to some some holding company that that gets distributed back to the company, then I think that that could be I don't know. Again, I'm not an accountant. You're not an accountant. So but I'm assuming that'll help the the balance sheet at some point.
I think if it it like, to actually help the balance sheet, if you if you have a 100,000,000 fund and if you're now a bit corporate with a balance sheet of a few billion, then even if you tenfold that initial investment, it doesn't really move the needle. I mean, does move the needle a bit, but not really. I think CBCs are extremely important when it becomes, if they are financially driven, but at the same time bring additional values.
So for example, if you have a team that encourages the corporation between the startup and what's happening within the different units in the big corporate.
So not to just have a POC to showcase what we're doing and how innovative we are, but instead to really look for problems or challenges the core business is having and find solutions that startups are working on and and start working together to to solve that problem and at the same time, you know, help the big corporate and its core business and at the same time help the startup to grow and also invite other investors to become part of it.
So it's not only providing solution for you, but also for others and maybe even everyone because it's driven. Mhmm. Everyone really profits or benefits. Yeah. That's that's my recommendation for CBCs. No. No. I totally agree. I think that's, super valid point. And, I guess, also, if that company ends up becoming absorbed as, a department of their existing conglomerate, you know, then that could probably provide some value too.
What what are you excited about in the future, you know, for just the whole sector? You know, I I obviously definitely think you're excited about just cleaner energy and, you know, improving mobility. I can imagine smart cities that are that are obviously providing better efficiencies to, societies and governments could be helpful, especially if there's, efficiency in energy. But what what else are you excited about?
Well, on the investment side, I think it is we're going through a reorganization of the venture capital scene also with LPs being more reluctant to invest in funds. GPs deploying less capital. But on the long run, I believe that the whole startup ecosystem will continue driving innovation, only as it has done in The United in The US, but also will help Europe to thrive.
What I'm excited in the long run or what I believe or our investment hypothesis is that we will be powered by a 100% or nearly a 100% renewable energy. Mhmm. However, this will certainly take more than than ten years. So I don't think that we will see this in 02/1930, maybe not even in 02/1940. But when we reach that point Mhmm. We will have a chance to get close to zero marginal costs of energy.
Yeah. So just like us two speaking, we're not paying for the bit that is sent from Stuttgart to The United States, but rather we are paying for the provision of the services so that we can securely connect, that we always have internet available when we need it at the speedway that we have available. And so I believe that although the electron is still a physical good, so it won't probably be zero marginal cost, but it will have very low marginal cost.
And we will just pay for the provision of energy at a specific time, at a specific point. And this opens up a complete new way of doing business. It opens up charging your car for free in certain times, but then having an extremely expensive charging process when there's no energy or renewable energy in the grid. It offers cooling opportunities. It offers like electrifying more or less everything, either directly or indirectly via hydrogen, green hydrogen.
And ultimately, this will hopefully help us to reach net zero, which we have to achieve at one point unless we wanna see our earth kind of burning. Yeah. And what what do you think it's gonna take to get to net zero? And maybe for the audience, you can break down what net zero means. So net zero means that we are not emitting any more CO2 than the world actually absorbs via trays or algae or whatever it is. And you have two ways of reaching net zero.
You can work with carbon capture and storage, you can extract carbon or carbon removal in factories so that you collect the carbon and then you compress it and you either store it on the ground, you put it into concrete or whatever forms they are. And the other one is to actually reduce the CO2 while energy is produced. Energy is responsible for more than 70% of all CO2 emissions. So buildings, heating, cooling, transport, aviation, and the production of the electricity itself.
If we wanna reduce this, we need to invest well over a trillion US dollars. And hence, this is an amazing investment opportunity. Yeah. Doesn't this make sense? No. It does. Yeah. I think that's really helpful to unpack that. What are some of the opportunities that you see with hydrogen energy? You know, last time I checked, you know, it's you know, Goldman quoted them as a golden coated, you know, hydrogen energy as a $12,000,000,000,000 market.
So I don't know if you've been, you know, interested in in that sector, but maybe just kind of your thoughts on that whole ecosystem and, like, where it's headed. Hydrogen has seen a huge hype. Mhmm. And I believe we will see a lot of hydrogen coming up. However, green hydrogen, unfortunately, isn't the most efficient or the the way we produce green hydrogen, need a lot of abundant energy, which we do not have at the moment.
So right now, to use green hydrogen to power a car is maybe like drinking champagne when you're thirsty. You can do it, but it's probably a waste. Yeah. And hence, I believe we will see a lot of green hydrogen projects, but quite often that electricity can be used at least in the short term in better ways.
Especially looking into highly populated areas where I don't have the opportunity to build huge solar farms or I have a lot of resistance from the local communities to build onshore wind farms. So I need abundant energy to really produce green hydrogen at scale. We're seeing a lot of projects now in in Australia, in in South Africa, Namibia, and also Morocco, Tunisia, that they will build big solar farms Mhmm. To use that energy, a, for the local community and then ship it to to Europe.
But all the shipping is not yet organized, so it's still a long way until I can really ship green hydrogen. And, also, the the gas pipes, the for for standard gas that we are natural gas that we're having right now, they're not ready to transport green hydrogen because green hydrogen, now I don't know the English word, but disappears much easier. So hence, you have to really adapt the the pipeline system in in Europe to to actually transport green hydrogen. So it's a very long shot.
It will come, but it will take more time. Yeah. No. That makes sense. And then what what are some ways that you diligence founders? Because, I mean, there's so many I mean, it's just I would say, you know, you said hydrogen is hyped. I mean, I I hear a lot of hype around climate change. So, you know, if people were to diligence fund managers, if people were to diligence portfolio companies, can you break down what you should look for, in both, especially when they say they're looking at climate?
What are what are some of the reactions that LPs and GPs should be thinking about? Well, at least when we are looking at climate tech companies Mhmm. We we invest typically in a in a pre seed or seed stage within the initial ticket. So hence, for us, the most important point in our due diligence is the team. How well comprised is the team? Does the team have someone who can do sales? Does the team have someone who understands the technology and who can also run a technology team?
How how well are the the guys working together? What's the dynamic within the team? And we're seeing a lot of teams that come out of universities with great technicians. Unfortunately, a lot of those companies are lacking sales skills. And especially in the b to b sector, I think you have to be quite progressive and you need someone who has done it. And there's a saying in at least in Germany, when a German team starts up a company Mhmm. They hire nine technical guys.
Mhmm. And the CEO does sales on the side, but he has a technical background. Yeah. When a US team started, you hire nine salespeople, and the founder is doing the coding himself on the side while also doing sales. Yeah. And I personally believe not always the best ideas win, but you need to transport it to the market. So we we're really looking into their their sales strategy and their willingness Mhmm. To pivot and adapt their product.
So to go through this Eric Ries build, measure, learn loop as fast as possible. So to really get that product out and understand what the market is willing to pay for, is willing to actually use the product, or maybe they develop a technology that doesn't have that use case, but maybe a different use case. So we really wanna see how agile that team is in learning and adapting their offering. Mhmm. Yeah. This is the this is our main point.
Yeah. Yeah. I think with a lot of these climate solutions, what's a good way to roll this out? You know? So if you're building a hydrogen energy solution, what are you seeing people do? Are they doing some type of pilot where they're working with a few stakeholders or working with a corporate? I guess, what would be your advice for a founder that's, you know, maybe built some proprietary tech and wants to kinda go to market? Well, of all, to approach and to to pitch his idea to Vireo.
But, indeed, I I think the the energy market won't be completely disrupted by a start up. I think the incumbent players are are really, really strong. They have the financial means. The energy market is highly, highly regulated. So you cannot kick out one of the big incumbents. Some of them might go bankrupt, but certainly not because of disruption happened that was driven by a startup.
So I believe for a startup to really be successful, you need to find those key players that need your solution and just baggie bag. How do you say? Piggy bag? Piggy bag. Yes, exactly. You and drive you to success and find more of those and then work together with them. So that would be my solution. And sometimes the incumbents could be your lead investor because they have a vested interest to kind of either just acquire that technology or build on top of it. I think maybe at later rounds.
I would at least not suggest that you want a CVC in your pre seed or seed round, to be quite honest. Because I think then you become the company, the startup of company X. And then the question is why should other players in the market work with you when you have like already one of the big names that invested in you?
What you can do, what my recommendation was, if you were actually looking for CVCs, just don't take one, but take two or three from the same industry so that they even themselves out so that you are not the startup of this big corporate, but you rather have this big corporate portfolio that is in your cap table. Yeah. No. That's that's good. Good feedback. Good advice. And then let's talk about the emerging manager LP ecosystem.
So what are you know, we don't have to drop any names, you know, but what are LPs saying in the general sentiment? I'm, you know, I'm hearing a lot of people are pulling back. People are still deploying, but they're just a little more thoughtful around it. And then, you know, the GPs look, I've seen GPs cut their their fund size, which impacts their portfolio construction. I've seen GPs completely decide not to run a fund anymore.
You know, there's different GPs that have done well with different, you know, communities and ecosystems that they built. So just tell me, you know, just spill the tea, Felix. Tell me what Yeah. I think as I said, I think the fundraising Mhmm. Was a lot easier before the Ukraine war started, before we had the inflation, before we had the uncertainty, recession, energy crisis. I think all of that came together in February 2020. I've heard from a lot of GPs that they have altered their funds.
I've met some GPs that stopped fundraising because they were just annoyed. They closed their fund at just a fraction of what they initially wanted to run that fund maybe for two years instead of four years and then raise a new fund thereafter. However, there are also some funds that close quite quickly and that are doing a great job.