What it takes to become a climate tech CEO, with Katie Rae

are the same hiring, financing, supply chain. The more I observed the pressures on each company, I started to notice that there was a split. Some companies were led by serial entrepreneurs, someone who has experienced in dealing with the problems of a business. Other companies were led by a scientist or an engineer, the person whose deepest experience was studying the science that the company was based on. The choice of CEO is something that investors pay careful attention to.

They often do not want a scientist as the CEO. They want an experienced entrepreneur because the problems of running a business are hard to learn and very high stakes. My guest today is Katie Ray, who heads a large fund, and she has a different philosophy about meeting people where they are. We've certainly proven over the last five years that we've made some great bets on human beings that are more currently engineers or post docs and now are

really fantastic CEOs. Having that fundamental belief in people's abilities to learn and grow and run these things mean that more of these inventions will get out. Katie is the CEO of the Engine. It's a venture capital fund and a public benefit corporation that was spun out of MT in twenty six. It invests in so called tough tech that takes a scientific idea from proof of concept to commercial scale. The tough part is because usually it takes years of effort and lots of money to do it.

Others call it heart tech as a way of signaling that the technology is not based on software. Katie's job is to deploy over six hundred million dollars of venture funding for Boston area startups that are ready to scale. The people who seek funding from her are often scientists and engineers, and some of the ideas are far out

at first plush. Katie has led investments into companies as varied as Commonwealth Fusion Systems, a company building a compact nuclear fusion plant, Form Energy, which makes batteries that store renewable power by rusting an unrusting iron, and Boston Metal, a company that uses electricity to make steal. So when Katie's choosing who to invest in, she has a lot

to think about. She has to figure out how she can make sure that the companies have a promising idea that works and is going to be led by someone who can make it a functioning business. And because of where she sits, she's invested in making sure that the

journey from scientists to CEO can happen. I sat down with Katie at the Engine's headquarters near MT to talk about how it all got started, how she does due diligence on these companies with far out ideas, and why there should be no excuses for not having more women in this industry. Katie, welcome to the show. Thank you so much for having me. What got you the idea of starting this in the first place? How were you

able to raise money for these wacky ideas? Basically the way it started, I mean this was born out of MT right and very MT was born out of a bunch of research that showed that in the area we call tough tech, so things often with a physical instantiation, things that are not produced overnight, that take time to produce, that are often systems. Things like that we're not being invested into at the same rate, Like the rate of

investment had gone down over thirty years. But then if you overlaid that with the problems in the world that needed to be solved, you would see like, we're not investing into the things that will matter to our future. And so M. I. T very much was like, we've got to solve some of these problems. And so they put the shoulder of the university into saying, can we fundamentally shift who gets funded, why do they get funded.

That's the birth story of the Engine. M I. T was an anchor in our first fund and an amazing partner, Like you're sitting in our new building right now, which is only through a partnership with them. No venture fund could build a space like this. But if you think about the impact the Engine could have over time and the density of tough tech founders that will be in this building, so it will be over a thousand people here,

we have another space with another five hundred people. You start to get a density of companies and knowledge that can be rapidly transferred because everyone is in very close proximity. You've seen it in biotech, you saw it in software. You've seen these clusters develop and fund one was really an experiment to show that we could find incredible things to translate out and that they could be venture scale investments, and that we could find other investors to work with

us over time to scale these companies. I think we've done a pretty good job in that regard and us is there a metric by that you go to have met that target? Well, if you just think first Portfolio had twenty seven companies, we invested less than two hundred million so far, and they've raised three point seven billion dollars. Like, that's a pretty good metric by anybody's standard, and that means that many people have bet that these are venture

scale returns. You have built at the engine something that's quite unique, which is you invest in science ideas that have the potential to become big companies, but they start with science ideas that I would probably reframe it slightly. I would say I invest in two companies that are translating out of science and engineering labs that are ready to be built and proven outside of a lab and

then scaled. So I think that's a little bit subtly different than what you said, But they are all based on scientific evidence the scientific method of producing new things. But there is a science risk attached to these companies that you know, what is in the lab usually works

after many many tries, and sometimes it's replicable. Having done science for a while, I know how hard it is to even replicate papers with detailed instructions, but taking that and doing it at a commercial scale, where you are doing it millions of times or millions of tons, is a completely different challenge. So there's a ton of science risk in all the companies that you take, or science translation risk that you've taken in the engine, right, Yeah.

I think of it is you should have proven out the basic fundamentals of the science risk, and then there is engineering risk of scaling these things, which could take you back to scientific risk where you don't understand something again. But typically we try to make sure that you understand the mechanisms of acts and what would happen as you scale, and that you could simulate with software that you could

understand what they're going to look like. You know, for instance, if you invest into a fusion company, you better be pretty confident that when you build your magnets it's going to work. You understand the physics of whatever your new material is, etc. Or else, it's not really an investable asset. So it's different than a moonshot, right, A moonshot is in my mind, you are really heading into scientific core scientific risk still, whereas many of these you've proven out

the core science. You're heading into engineering risk, which could bring you back to scientific risk, but at a lesser level. And so engineering risks can take you back to science. You've now got more than forty companies in your portfolio. You've raised six hundred million dollars and above you've put in almost forty percent of that capital to work. What are the lessons you've learned in doing this for the

last five years? You know, when we started this, we laid out a set of assumptions about how much capital these companies would need, how much time it would take to translate, how you would have to build these teams, Like, we really laid out what our hypotheses were, and I think for the most part we were pretty close in that the teams would need multiple sets of labs, chemistry, biology, machines shops. They would need many kinds of experts around

them to get through their engineering risk. They would need to be surrounded by serial entrepreneurs and business people that could give them advice about how to scale the business side of their company or really how to take out business risk. That we would need to develop a robust capital stack that understood engineering based companies and the risk there are there, And depending on what that time frame was, that would dictate the kind of capital they needed to

prove out those risks. It would dictate what the potential upside would need to be to make those bets. So I think all of those things have played out. And that's because think about where I sit in the middle of MIT and the Boston region. So I had a lot of experts helping me understand that before we started. Are there climate tech companies that you would take as salient examples of having gone through that period and proven

out their lists. Commonwealth Fusion had to prove that they could build the first magnet and get the first magnet to twenty tesla right like. That was their fundamental proof point, and they did that in under three years. So what does it mean to get the first magnet to twenty Tesla's well, Tesla is the unit of strength of a magnet, named after the famous Serbian American engineer Nicola Tesla. Twenty

teslas is a really powerful magnet. An MRI machine like the one that doctors used to peer inside bodies, has a magnet that's about three teslas. Other examples form Energy. They're building kind of a long term battery for wind and solar to allow up to one hundred hours of storage. We also visited Farm Energy. You'll hear about how they got their iron air battery in a future episode. They started with an idea that wasn't working, and they pivoted to an idea that is now working, and that all

happened in a four year period. They raced two technologies against each other, and they knew from the beginning they weren't sure which would work, and one did work. Awesome, Like, what a wonderful way to run a company. So that fundamentally changes the economics of wind and solar for grid all. Give me another example. Let's see Boston Metal. So this is you know, electrification of the steel making process or

really metals production process, you know. So we started out in twenty eighteen and said it'll take about four years to prove this out pretty close, you know, right, even though the company had been founded in twenty twelve. So by the time you got to the investment, you're like, okay, now we are at that point there are investment makes sense because there's a four year child exactly right, and you don't know what the time period will be before

we invest. That's fine. So that's why we look at a big range of companies because some of them kind of take eight or nine or ten years in a lab or getting government funding before they're really ready. Right, that's the cost of doing business, right, And but we want to look at hey, what's the one to five year period where you take out big, big technical risks so then your deal with the normal technical risks and the business risks. Right. One other complication in climate tech

companies is that it's not just about the entrepreneurs. Obviously that is still a core part of building a company, but it's also about the science, and so you have to do a ton of due diligence. Is it real, is it within the limits and bounds of known science? And you do it across so many subjects. Of course, climate tech is what we're talking about, but that's not

the only thing you invest in. So what's your process for making sure that when a company comes and gives a pitch that you can then go back and do your homework and say, yes, we would like to invest. Yeah. So we run multiple processes all at the same time.

So we do fundamental landscaping of basically any area we would be interested investing in, and we look at which labs are doing research in there, what is the research they're doing, what the findings they're having, So you're looking at all the things that maybe created the breakthrough in the first place, right because science is this wonderfully collaborative space. Nothing just emerges from the ether. It is a collaborative.

So we look at those collaborations. We look at who got grants, what were they about, and why things are developing. That gives us this place to start from any investment. Now that has taken us years to build knowledge in different areas, and we're continually building knowledge and there we have a director of research who has many PhDs who work with us to kind of build these maps of what's happening. So that's one process. The second process is

specifically to a company. So our team is kind of built to be able to look at things like this. So most of our investment professionals have PhDs in a certain area and are d networked into others. So we will talk to people on the industry side and we will talk to people on the academic side to really get competing views of will this technology work. And that's of course after looking at the basic science, reading all

the papers, you know, trying to really understand that. So when we look at companies and ideas, we're first starting with what is their ambition and do they have the team to back that up. After the break, I asked Katie why the engine has so many signed to CEOs compared to Silicon Valley startups and why there are not

enough women CEOs in this industry. One of the things that we noticed in Silicon Valley during our tour of startups there and meeting venture capitalists was there was a bias, i would say, towards finding entrepreneurs behind climate tech companies that have had some business experience. They may be engineers, but that they have built companies or they are not engineers, but they are commercial minds who can capture the difficulties of what science they're trying to convert into a technology.

If you look at your portfolio, majority of the companies still have their CEOs to be the scientists who started

with the idea. Why is that? Yeah, I think, well, don't forget we work at the earliest stage as a venture right, so we're a true translation out of labs, and so our fundamental hypothesis is that there are some very tricky engineering and business decisions that have to be made in these deeply technical companies, and that if those trade offs aren't really understood, you could waste a lot

of money. So we think, certainly in the earliest phases of these things, you cannot just divorce the science from the scientist or divorce the engineering from the engineer, and that the better model is to surround that engineer with business talent and thinking to influence how they make those tradeoffs. But it's not the exclusive model, and it doesn't mean that the scientists should always be the CEO. I think

those decisions get made over time. But I'll tell you, in the pool of people that could be CEOs, these are monstrously smart, ambitious people, and when they start to understand that it is their job to learn the world of business and understand deal making, understand margin, understand how to grow a big business. A lot of them are very capable of doing this. And that doesn't mean everyone should be the CEO, but I think having this mindset that they shouldn't be, you're really leaving a lot of

great companies to the side. And we think that that's as risky is saying it has to be a business person that runs it. And I think, you know, we've certainly proven over the last five years that we've made some great bets on human beings that are we're currently engineers or post docs and now are really fantastic CEOs. Now you set out a thesis or try and fund companies that do hard science, and you were able to prove it out. In the process, you were also able

to raise more money for your own funds. Was that process easy? Is it getting easier? You know? How is capital in this area of tough tech coming through? Yeah? I mean, I think for the good or the bad of this, two or three fundamental things have happened in the last five years, right COVID sent to us deeply into really understanding we have a global supply chain issue, like how we produce things, how we get healthcare, how we actually do Almost everything we do today is going

to need to shift. So you see the US Government Act and things like the Chips Act and now the IRA. Then I think while people were kind of at home, there were so many things that happened in climate that I think galvanized this understanding that this stuff is real. Like we're not thirty years away from climate change. We are drastically in the middle of this. Now we have war in Russia, Ukraine and a lot of difficulty in China, so like that's just going to exacerbate all those issues.

So I think it used to be that people thought, oh, software and pharmaceuticals, those are the easy places to invest, And now I think LPSC we have fundamental risks that if we don't tackle with real deep science and engineering, that will take us a full step forward or two steps forward. We're in trouble right and LPs are limited partners. These are the people who put in the money in funds like yours, who then then you used to deploy towards companies. You mentioned m T was a founding LP.

Who are the others that are named? It's not something we typically talk about, but our limited partners are endowments and family offices that are at the scale of endowments that fundamentally see the type of impact and returns that we could have and love the types of things we're investing into. Now, many of the problems that your companies are trying to solve are addressing climate change are bigger problems globally, and the opportunity that they have to become

big companies is if they have a global market. Are there examples of problems being solved in like India or Nimbabwe or places where it's harder to scale a company or harder to take a new technology and deploy it, even if it might be the better, cheaper solution. Of course, this is a very complex question and not one that I can answer in one sentence. But the way we think about who we invest into and why we invest into these companies is we look at a global map

and global scale. Can they efficiently and as quickly as possible get to scaling globally? I mean that's also a question of returns, right if they can get to scaling globally. Often they're a great company, but we also fundamentally look at it from a values perspective of you know, will they have an effect not just in the richest areas of the world but everywhere. So for instance, wind and solar.

If you look at kind of all of Africa's current infrastructure for energy production, you would hope a lot of that is not just wind, renewables, not burning as much diesel, having a very flexible grid. So when we ask companies, hey, how could you ever get to that part of the world, We love to see companies that have thought it through, have pushed themselves to think that through, to think through partnerships that could help them get there faster because I

think it has bigger impact and faster speed to market. Yeah. Is there an example or two. It doesn't have to be climate tic. Yeah. Biobot, which is a wastewater analysis company, basically scaled very rapidly in lots of parts of the world to really look at wastewater to understand what is in your wastewater, whether it was for COVID or opioids like these are huge global problems of where to put your public health dollars and if you don't know where

the problems are. You're just smattering your dollars everywhere. So a company like that can get to global scale very quickly and have big impact very quickly because they have thought about the rest of the world, and so they have different partnerships. We talked a little bit about how many of your companies. A majority of your companies have scientists entrepreneurs. Many people thinking about solving problems right now are thinking about shouting a company. Who would be the

right person to start a company. One of the privileges that I have is sitting amongst some of the best universities in the world who've done an amazing job of attracting people from all over the globe. They're incredibly diverse group. I think the universities have done a great job of saying to people like, hey, you have agency in solving these problems. You can learn how to run companies. So I think it's part of our value system as well that we want to believe and help lots of people

learn how to be entrepreneurs. So we run programs like Blueprint, which are for PhDs in post docs to learn what it would really take to start and run a tough tech company, and I think that that open stance is I think the right one for creating more entrepreneurs. That doesn't mean they all are going to get back act by the engine, or should all be entrepreneurs, but I think having that fundamental belief in people's abilities to learn and grow and run these things mean that more of

these inventions will get out. So that's how we think of it. Right. This is something that probably you've been asked many times, is there are not very many women in this industry, not on the venture capitalist side, not in the founding of hart tech companies. There's also a supply chain problem here, which is that women don't make it to the science Technology engineering MATHS degree graduate PhD

level as often as men do. So there's a whole set of reasons why there is lack of gender diversity, But what has been your approach to try and tackle it as much as you can? If you look at just take MT in Harvard, there's an enormous number of women here in PhD and postdoctoral programs, So there's really no excuse that can't be backed as entrepreneurs out of there. So anybody who thinks it's a pipeline problem I just

don't buy it. There's tons of women, and I think they are often ignored, and so taking look at the mirror of how are you making decisions? Are you truly making them equitably? Because I don't think it's as much of a pipeline problem as people believe. Interesting and so if it's not, because that's the excuse many make. You know, most of the venture capitalists we spoke to in Silicon Valley are all men, and when we ask that question them, that's what they say, you know, we would love to.

But then they go, oh, but there are not that many of them. Come on, yes, there are fewer women. Yes, but what you see is when there are fewer women, often they're better than their male counterpart. Okay, last question for you. If you had a billboard outside a house by the message of the world, what would you put on it? Better on young people's ambition? That's what you do, That's what I do. Thank you so much for the time. This is a great conversation. Yes, so fun. Thank you

for the provocative questions and fun. The thing that I'm really taking away from this is how much I want to do that blueprint program, the one that Katie described where PhDs and postdocs learned what it's like to start and run a tough tech company. Is there a blueprint coming up? Yeah, there's a blueprint right now for seven weeks. Can I attend one of these? Sure? I do have a PhD. I'm not starting a company, but I just want to go through the process. You're absolutely welcome. Thanks

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