Capital Series: Michael Bruce, Emerson Collective
This episode is part of our Capital Series hosted by MCJ partner, Jason Jacobs. This series explores a diverse range of capital sources and the individuals who drive them. From family offices and institutional LPs to private equity, government funding, and more, we take a deep dive into the world of capital and its critical role in driving innovation and progress.
Michael Bruce serves as the Senior Director of Venture Investing, Environment and Energy at Emerson Collective. Emerson Collective, founded by Laurene Powell Jobs, is a game-changer in education, immigration reform, the environment, media and journalism, and health.
We were excited for this one because Emerson Collective is an interesting organization operating holistically across these areas. They also happen to be doing a lot in climate at a surprising scale, but they have not spoken too frequently about what they're up to publicly. So this was a special opportunity, and Michael does not disappoint.
Enjoy the show!
Get connected:
Michael Bruce LinkedIn
Jason Jacobs X / LinkedIn
MCJ Podcast / Collective / YouTube
*You can also reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded on Oct 26, 2023 (Published on Nov 29, 2023)
In this episode, we cover:
[2:14] An overview of Emerson Collective
[4:08] Michael's journey and what led him to work in climate
[11:08] His thoughts on energy vs. climate change
[16:56] Emerson's early climate efforts
[19:26] The firm's dedicated pool of capital and team structure
[22:29] Emerson's approach within climate and how it's evolved over time
[25:41] Thoughts on philanthrocapitalism
[27:15] Types of risk Emerson is comfortable taking
[32:11] Emerson's criteria for selecting climate investments
[37:31] Michael's thoughts on the future of oil and gas
[40:21] His views on the carbon market
[45:28] Why market sources alone aren't enough to address the climate crisis
-
Jason Jacobs (00:00):
Today on the MCJ Capital Series, our guest is Michael Bruce, senior director of venture investing environment and energy at Emerson Collective. Emerson Collective is a social change organization founded by Laurene Powell Jobs focused on education, immigration reform, the environment, media and journalism and health.
(00:21):
I was excited for this one because Emerson Collective is such an interesting organization operating holistically across these areas. At a surprising scale, they also happen to be doing a lot in climate, and they also happen to not have spoken too frequently about what they're up to publicly. So this was a special opportunity, and Michael does not disappoint. But before we start.
Cody Simms (00:45):
I'm Cody Simms.
Yin Lu (00:46):
I'm Yin Lu.
Jason Jacobs (00:47):
And I'm Jason Jacobs, and welcome to My Climate Journey.
Yin Lu (00:54):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (00:59):
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
Jason Jacobs (01:12):
Okay. Michael Bruce, welcome to the show.
Michael Bruce (01:15):
Wonderful to be here. Thanks for having me.
Jason Jacobs (01:17):
Thanks for coming. I think we share at least a few investments together, and I've met you briefly in passing at events, but we've never had a real discussion, so I guess it's only fitting, given our learning and public mantra at MCJ, that we'll do the first one live.
Michael Bruce (01:31):
All right. Looking forward to it. This will be fun. Yeah, since you live on the East Coast, I live on the West Coast, and we just got out of the pandemic time to be in the same room together [inaudible 00:01:40] been hard to come by, but glad we get to connect this way.
Jason Jacobs (01:42):
Well, for better or for worse travel's picking up again.
Michael Bruce (01:44):
Sure is.
Jason Jacobs (01:45):
Yeah, and it's better. There's obvious benefits to in-person and relationships and looking someone in the eye and stuff. But I mean, especially with young kids and pretty involved in extracurriculars and such, there's some downsides as well.
Michael Bruce (01:58):
There are. I haven't figured out how to be two places at once yet, so still working on that one.
Jason Jacobs (02:02):
Well, to kick things off, Michael, maybe just give an overview of Emerson Collective as a firm, and then next, I'll ask you to talk about where you sit within the organization in your group. So you can either combine that, or we can split them up.
Michael Bruce (02:14):
Emerson Collective was founded about 20 years ago but really got active about eight years ago. And it was founded by Laurene Powell Jobs as a platform to try and attack some of the systemic problems that societies facing using a variety of tools. Those tools include philanthropy, policy, arts and culture, as well as investing, and that's a part of the organization that I spend my time in. We also work on a variety of different issues, including education, immigration, oncology, media, as well as climate in the environment.
(02:47):
That's the part of the organization that I work on. The idea of Collective was that these sticky systemic issues that society has been wrestling with needed a new set of tools and approaches to dislodge them, and then also inspiration that broke down silos between different areas of systems change. So we deliberately are one team, and we get together on a regular basis, folks who are working on education, philanthropy as well as the folks like me who are working on climate investment, we try and be inspired by the work that we're doing and find opportunities for collaboration.
(03:22):
We call it the power of the collective when we find those opportunities to work at the seams between the different issue areas. But my day job is I'm a venture capitalist, look into partner with great entrepreneurs who are solving climate typically by applying technology to bottlenecks that are keeping the energy transition from going faster.
Jason Jacobs (03:41):
I mean, you've got an interesting backstory, at least on paper, given that it seems that you started as more of a generalist investment banker. And then I can't remember which order, but you worked in the White House for a while, and you worked in the oil and gas world, and then the last many years working in climate. Maybe just talk a bit about the journey of how you came to find yourself doing the work you're doing now and maybe some of the rationale behind what led you to climate in the first place as well.
Michael Bruce (04:08):
It's definitely been a circuitous journey was not something that was planned from the beginning, but more walking through doors as they opened. I guess, rewinding the tape, one thing that's important about my story is that I grew up in a family that's been in the energy business for over a hundred years, so I grew up learning about both oil and gas as well as the electric industry around the dinner table.
Jason Jacobs (04:28):
Where'd you grow up, Michael?
Michael Bruce (04:30):
In Kansas.
Jason Jacobs (04:31):
My partner Cody grew up in Kansas. Did you know that?
Michael Bruce (04:33):
I didn't know that.
Jason Jacobs (04:34):
Yeah, he's a Jayhawk for life.
Michael Bruce (04:36):
Okay. Well, I grew up in a family of a bunch of Jayhawks and...
Jason Jacobs (04:41):
Well, you guys should chat.
Michael Bruce (04:42):
Yeah, we had season tickets to KU basketball, so I still root for the Crimson and Blue every March when it rolls around. So my family had been in the energy business, including my great uncle was chairman of Kansas Gas and Electric and Built Wolf Creek Nuclear Power Plant when I was growing up. So kind of learned about the wonders of the atom. Got an opportunity to come out to Stanford. I was on the Stanford swim team.
Jason Jacobs (05:03):
You were an exceptional swimmer it seems.
Michael Bruce (05:06):
The sport treated me well. It was a fun journey, made some great friends throughout that journey, keep up with them to this day. So also swimming's great for developing discipline and hard work. There's no way you're going to win every race, so you also learn how to pick yourself up and keep going when you haven't accomplished your goals, which is a very valuable skill set and venture because it doesn't always go your way and you got to keep showing up. At Stanford, though, is really where I found this love of the intersection between my family's heritage of energy and technology. It was not a time where energy was the hot topic out here in Silicon Valley. When I would tell people what I wanted to do lon term, I would say, "I wanted to be an energy infrastructure developer," and most of them looked at me like, "Why [inaudible 00:05:47] you want to be in software?"
(05:48):
But I had a appreciation that energy was really the bedrock that made modern living possible as well as what the motive engine behind raising billions of people out of poverty. So my love of this sector and really came more out of the economic development side than the environmental side. I had an opportunity to join Credit Suisse out of school, and that was a great way to learn the way that financial flows worked and deals got done. Long-term, though, I found I wanted to be closer to the entrepreneurs, to the people who were building the businesses and really just the transactions towards the tail end of their private journey. Had an opportunity really at the behest of one of my mentors at Credit Suisse who said, "If you wanted to know how to do energy well, you need to know how money works, and you got a pretty good idea of that after working in Credit Suisse, but you also need to know how government works."
(06:40):
I had been a White House intern in college, so I did have some relationships in Washington, and I called them up, and they said, "You want to go from Wall Street to Washington? That's not a normal move. If that's what you want to do, come to town, and we'll set up some interviews." So I did and had an opportunity to join Secretary Bodman's team at the Department of Energy, in particular Assistant Secretary Karsner's team at energy efficiency and renewable energy. They were in the process of trying to hire in some private sector talent to implement the Energy Policy Act of 2005 [inaudible 00:07:10] I was a part of that hiring cycle. My job there was to accelerate the commercialization of advanced energy technologies. At the time, DOE had a great scientific pedigree, but because oil had been so cheap for so long, had kind of lost its tether to the broader market.
(07:26):
So since I was the imported senior advisor from Silicon Valley, my job was to try and rebuild those bridges. It was an incredible opportunity to try and work with some brilliant scientific minds. And also, at the time, Cleantech Venture themes were just starting to stand up and start teaching the venture capital community about what the government has been doing in the scientific research there. A few of the things I got to work on there. I started the Entrepreneur Residence program at the National Laboratories. I was on the secretary's task force to start RPE, which I was really excited about the opportunity to have a sandbox for a lot of the great ideas that people were working on because traditional government funding cycles, if we got a great idea at [inaudible 00:08:06], we had to put it in the next congressional appropriations budget, and maybe we could get that entrepreneur money in two years. That really wasn't aligned with the cycle of entrepreneurship.
(08:18):
And so, RPE was a great government intervention that I'm thrilled to have been a part of the story early on. So that was really where I learned energy technology deeply, having a chance to go around the National Laboratories and talk with some of the brilliant scientists that had been doing this work, and then also trying to marry that up with the commercial expertise from the venture capital community. So right out of government, I had a job with an expiration date, which, truth be told, is the only kind of government job I would want. I think it's a noble calling, but I am much more at home in the private sector working on building businesses and commercial deals, the Washington policy game, which is much more zero-sum than make the pie bigger. So I was thrilled to go back to the private sector. I was invited by the secretary that I worked with to help start a company, so I tried my hand in entrepreneurship.
(09:07):
The idea at the time was that there were a lot of great technologies with technical founders who hadn't yet figured out how to do project development cycles, and with my finance background and Andy Karsner's background as a project developer, we figured we could be a partner for that next phase of the journey of commercialization. Two weeks after I left the department, Lehman failed, so the world changed pretty dramatically around me and got a chance to see what it's like to be a risk-taker in a high beta business when the world is crashing around you. So can empathize with a lot of entrepreneurs who are experiencing some market undulations right now. We tried and manifest for about two years, but the Great Recession continued on. And then, I got an invitation to join Hannon Armstrong, which was starting a structured finance vehicle for sustainable infrastructure.
(09:59):
So you could kind of think of it of going from the supply side of the clean energy trade of working on making solar modules to the buy side of supplying the capital to the infrastructure projects. I was on the team that helped formulate the plan to take them public in 2013. We're the first real estate investment trust. The list on the New York Stock Exchange focused exclusively on supplying capital to sustainable infrastructure, and that was an incredible journey to learn what capital formation looks like for credit. A couple of years later, I got a call again from Andy, who is helping Laurene start a practice here at Emerson Collective focused on environment, and he said, "We've got a lot of tools in the tool chest. You're one of the rare people who has touched many of them, so you want to come and help me build a practice out here in Silicon Valley." So that's how I got to Emerson.
Jason Jacobs (10:55):
When you think about energy and you think about climate change or the energy transition, I guess, are those synonyms, or are they different? And how do you think about each of them, and where are the areas of overlap?
Michael Bruce (11:08):
Yeah, I think there's a lot of overlap, but I don't think they're quite synonyms. When I was at the Department of Energy, I mentioned it was during the energy crisis from 2006, 2008. When I joined the department, oil was $40 a barrel. While I was there it hit $147 a barrel, so it went from the sleepy political backwaters to the thing everyone in town wanted to talk about. The big focus then was really on energy security and how, as a country, do we not import as much oil. And so, energy efficiency was a huge focus. Alternative fuels was a big focus. It was kind of the beginning of the EV movement.
(11:41):
When I first joined the department, the EV budget for the government was on the order of $10 million. It's a little bigger now. We bumped it up to $100 million dollars pretty quickly when we figured out there was some potential in that pathway. But also, while I was there, IPCC in '07 was kind of the first time that the scientific community declared that climate change really was anthropogenic, that it was caused by human emissions. So a big part of our focus was trying to find the intersection points between the energy security policy, drivers, climate, and an environment, and then also economic development.
(12:15):
Ultimately, we were able to build a political coalition around those three drivers that created the Energy Independent Security Act of 2007. There was a bipartisan piece of legislation that went through a Democratic House and Senate and, ultimately, signed by President Bush. So I've been living at this intersection for a long time. I do think there's a lot of overlap between them, but certainly, there are parts of solving for energy security that are not also aligned with our climate goals. Here at Emerson Collective, we look for the things that do sit right at that intersection and are going to be able to both be good for security, economic development as well as for climate.
Jason Jacobs (12:52):
Before we get into the work of Emerson Collective, when you think about the problem of climate change and the transition that needs to occur, how do you think about the nature of that transition, where we are in that transition, and what it will take to complete the transition as efficiently and effectively as possible?
Michael Bruce (13:11):
So one of the things I've said for a long time is if we don't solve climate with technology, we haven't really solved it. Policy can be key for incubating and accelerating technologies, and also it can be key for slowing the technologies down. We've got a lot of regulatory systems in the United States that are built around presumptions that no longer apply. Basically, they assume that oil and gas or fossil fuels is the only way to power modern society, and we need to rethink those assumptions and clear the way for the energy transition.
(13:39):
But ultimately, so much of the future emission profile is going to be in the global south, and if we don't have cost-effective measures to encourage them to power... lifting people out of poverty with non-fossil fuel options, their priority is going to be lifting people out of poverty. And so technology's really the pathway to ultimately solve climate, and that's why I'm so excited to be working with these great entrepreneurs who are using technology to break down the bottlenecks to the energy transition.
Jason Jacobs (14:13):
And when you look at where we are and the nature of the problem before we get into the solutions, how bad do you think that things are going to get, and are you an optimist that we're going to do what we need to do to avert some of the worst scenarios that are potentially projected?
Michael Bruce (14:31):
I'm definitely on the optimistic side of things. I think humans have an extraordinary capacity to be innovative and solve big problems. The challenge you run into with climate is often that it's a lagging indicator of problems that have been done years or decades earlier. The challenge I see with climate is how do we make sure that we are moving soon enough so that we don't have to act decisively in the future. And so that's why we're working on finding solutions that we think have non-linear future impacts. We recognize that sometimes they will start slow, but you look in the venture business for opportunities that have really asymmetric upside. If you can knock that bottleneck down, they've got extraordinary markets that they can address.
(15:16):
Generally, I'm much more on the side of the continuum that looks for a future of abundance than one that's on the degrowth side of the movement. I don't think that would be politically palatable for future generations. And so if we're going to look to have the billions of people globally who would love to aspire to a Western standard of living, we're going to need to find a way to increase our energy supplies. I'd really love the way that the Kaya identity factors where it talks about the way you think about carbon, and there's ultimately the number of people, how wealthy they are, what's the energy intensity of that wealth, and then what's the carbon intensity of their energy supply.
(15:58):
So most of us are not going to want to go through a cycle of decreasing the global population. Most of us are going to want to see standards of living rise. So those two levers are net benefit to society and to humanity. The energy intensity of our wealth is something that we've made incredible strides in over the last couple of decades, particularly with digitization allowing us to create wealth without consuming energy. The key lever is how do we decrease carbon intensity of our energy supply. So that's the primary place that we are focused, but it takes a lot of different forms as you look for opportunities to deploy venture dollars.
Jason Jacobs (16:37):
So when Andy called you, I guess, what was the state of Emerson Collective as it relates to your climate effort, and then what was the state of Emerson Collective as it related to venture capital? And then what was the pitch in terms of what you would do and why when those two intersected directly?
Michael Bruce (16:56):
It was really early in Emerson's evolution. Laurene had been keeping a pretty low profile before that and had decided that it was time to really get in the game and use her brand and her resources and her voice, but she wanted to go through some experimentation and figure out what that would look like. So I was one of the early hires.
(17:15):
We really didn't have an investment team at the time. Most of the work had been done through intermediaries for investment with occasional co-investment, but Laurene said it's time to build our own team to invest in the things that she deeply cares about. So there were a few investments that have been made in EdTech, a few investments that have been made in climate, but usually, like I said, through intermediaries.
Jason Jacobs (17:38):
Intermediaries being like an LP and other funds or...
Michael Bruce (17:41):
LP and other funds, and then we would co-invest in the things that particularly resonated with Laurene. When I was hired, we had a clean sheet of paper. There was an opportunity to dream big and think about what we wanted to build. The original strategy, it was called Emerson Elemental, was to use all of the tools on one team focused on the environmental challenge. I had colleagues who were focused on convening and philanthropy and policy, and then I was focused predominantly on the investment strands. We worked under that strategy for about two years.
(18:13):
Ultimately, did decide to shift gears. And a big part of the reason for that was we discovered that philanthropists and investors and policymakers have different externally facing postures, and so it's helpful to give them space to develop their own strategies. And the somewhat trivial example I give is the way an investor uses the word equity is very different than the way a philanthropist does. And so when you don't even have shared language, developing shared strategies can be a challenge.
(18:42):
So we effectively turned our org chart on its side, and now we're predominantly organized by professional discipline rather than by mission area. So we still have the same tools. We still have the same mission areas that we're focused on. Just a slightly different way of organizing the team. So I'm on the venture team, and I lead the climate tech investing. I used to be on the elemental team. The team focused on environment, leading the investment functions.
Jason Jacobs (19:07):
Within the venture team, and I'll ask this but only answer the parts that you feel comfortable or are empowered to talk about, but is it one pool of capital across areas, or is it dedicated pools of capital for each, and is it one team across areas and is it dedicated teams for each? How does that manifest in [inaudible 00:19:24] practice structurally?
Michael Bruce (19:26):
We made some very deliberate decisions around those questions. We wrestled with them. Ultimately, we did decided to have be one pool of capital and one team. And so the idea there is we really want to be bringing our best thinking as well as outside eyes and tangential perspectives as we're making these decisions. We're not looking for a consensus, though, but we do want to make sure that we're getting the best thinking from all the investors around the table about the deals that we're doing.
(19:52):
I help our growth team review FinTech deals. I help our EdTech team review their deals then they review the deals that I'm working on. Ultimately, the deal teams are the ones, who, far away, spend the most time on them, but it was a deliberate decision to not have silos, not have different tracks, but really to try and bring one team with everyone bringing their best thinking together.
Yin Lu (20:14):
Hey everyone, I'm Yin, a partner at MCJ Collective here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning, and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week, we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change.
(20:40):
Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done. Many early-stage investments have been made, as well as ongoing events and programming like monthly women in climate meetups, idea jam sessions for early-stage founders, climate book club, art workshops, and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks, and enjoy the rest of the show.
Jason Jacobs (21:14):
When you first made the decision to split venture out into its own team and dedicated pool of capital, and I don't know if those were made at the same time or not, but irrelevant for my question, but what was the plan of attack and what was the initial thought on approach and how has that evolved over the years that you've been doing it?
Michael Bruce (21:38):
We formally had investment groups that were focused on Elemental. We also had one focused on education technologies. We had another team focused on media. We had a team focused on oncology, but we were finding that it was difficult to coordinate the efforts between those different groups. A big part of the effort when we turn the org chart on its side was saying there are a lot of things that are in common with the way that these groups are investing.
(22:02):
They're investing in different types of businesses, but what's going on in the broader market is shared. A lot of the deal terms we want to try and drive towards are shared, and so it's helpful to bring them all under kind of one team in a singular process to harmonize those efforts. Also, when people look at us from the outside, they tended to just see Emerson Collective. They didn't see the subteams. And so it was helpful also for us to be more unified in our approach in sharing our networks.
Jason Jacobs (22:29):
And so you did that, and then there was a venture team, and within that, there's a subset of that that focuses on climate. What were the initial thoughts on the approach within climate, and how has that evolved over time?
Michael Bruce (22:39):
We try and be nimble in our strategy. We're fortunate in that we don't need to go through typical fundraising cycles and make promises to LPs and then stick with try and implement those promises over four years. So we try and revisit our strategy every year and make sure that we're positioned in the right place and that we're reviewing the right types of opportunities to achieve our macro goals of relieving the bottlenecks of the energy transition using technology.
(23:04):
Early on, when we were first out of the gate, we were pretty focused on what people are now referring to, honestly, as the scale gap of how do we invest in these technologies that are going to require non-venture capital types of investment to really scale. So we made some investments in circular economy companies. We made some investments in air efficiency companies. Some of those companies have done really well, some of them have struggled, which is the case in a venture portfolio, but as we've to kind of continued to look, what is the DNA of Emerson? Kind of what are the passions of this organization and this group?
(23:37):
We discovered that it's really partnering with the builders. It's partnering with the dreamers and the people who are building the next generational-scale company. And so we move more towards technology and away from projects as we've continued to refine our investment strategy. Right now, we're really focused on two primary areas. One of them is material science breakthroughs, and the other one would be vertical SaaS applications. A lot of that's activities in the AI lane right now. There's areas where there's extraordinary upside if you are able to develop the technology with the performance specs the founders are starting their businesses around.
Jason Jacobs (24:18):
Do you have guidelines or typical when it comes to stage, check size, leading versus not leading, board seats?
Michael Bruce (24:26):
That also has changed over time. When we first got going, it was mostly leading and taking board seats. This was in the 2017, '18 era before climate tech was a term, and there wasn't a lot of capital chasing this space. That has shifted over the last couple of years to where there are a lot of great GPs that have been stood up out there. And so I'd say, more recently, we've been joining deals than we have been leading them.
(24:49):
Generally, I look to pick up the baton at series B and later. A big part of the reason for that is we think that's the part of the capital continuum that is least capitalized. There's a decent number of folks who can write the relatively small early-stage checks, and there's lots of institutional capital that wants to pick up the baton after you're at EBITDA positive. But it's that bottom part of the J curve where we found we think there's the best risk-adjusted opportunity to deploy our dollars.
(25:17):
So that's, generally, where we focus. I do have colleagues who work on the first check-in seed stage. They have a bit of a different underwriting methodology than I do of really investing around the passion of the entrepreneur and kind of their grit and rigor. I tend to underwrite more to product market fit. Obviously I still care about the team, and that's a key determinant, but it's a slightly different lens that we bring to the work that we do.
Jason Jacobs (25:41):
I've heard, and maybe this is dated language. I don't know if you still talk of yourselves this way, but of describing the organization as philanthro Capital One. Is that still a relevant term for the organization, or have you evolved away from it? And then two, what are the implications as it relates to looking strictly from a venture lens? How you think about financial returns and risk relative to a generalist firm that does have outside LPs?
Michael Bruce (26:05):
I would say, over time, we have become probably allergic to the term of impact investing. As is the case with any of these terms that get a lot of momentum behind them, people try and jam their particular agendas or strategies into them, and for the most part, people now think of that as capital that's willing to take concessionary returns to see something happen. We have a deep conviction that you're not going to solve these big problems if you don't mobilize the capital markets.
(26:33):
And the way you mobilize the capital markets is to be a player in the capital markets, and we have the privilege of getting to enter that fray and be a player in the venture capital community. The way that we have come to talk about it is that we are looking to partner with consequential companies, so companies that are going to deliver generational scale impact but also venture scale returns. We don't see it as a trade-off in our portfolio. We're looking for the companies where that profit and impact is aligned, and it will be able to drive significant capital formation to see these solutions really take off and address the scale of the problem with the scale of the solution that's commiserate.
Jason Jacobs (27:09):
I mean, you talked a little bit about risk, but I'd just love to... I hate the term double click, but-
Michael Bruce (27:15):
[inaudible 00:27:15].
Jason Jacobs (27:15):
... I'm going to use it anyways. But dig a little deeper into that. What types of risk are you okay with, and what types of risks you try to avoid?
Michael Bruce (27:23):
We're a venture capitalist, so risk is the business here. So types of risks that we're okay taking, technology risk is the name of the game. We realized that none of these technologies are going to be fully flushed out or verified, and you're betting on the team's ability to take it from where you initially invested into a full-scale commercial project or product. That's not something that we're afraid of. We also... Long timeframes is not something that will scare us off. We are permanent capital and so we don't have any artificial liquidity horizons to look at, and so that is one of our superpowers to be able to stay with the companies for long periods of time.
(27:58):
We are investors. We do like to, at some point, liquidate the position, but it's not something that we're going to drive sooner like a lot of closed-in funds might need to take the company to a new source of capital. We generally do invest in the United States, so international market risk is something that we haven't dedicated ourselves to understanding well, and largely, it's commercial pragmatism that's led us to stay here in the United States for the most part. But there's a lot of interesting energy transition opportunities opening up over in Europe right now, and so we've been building partnerships over there. In terms of other types of risk, we're not averse to subsequent financing risk.
(28:40):
As an investor with a great network into sources of capital that are non-venture, we actually thought, and that's one of our advantages, is helping our companies think through ways to subsequently capitalize the business beyond their life as a venture fund. Team risk. That's probably where we spend a lot of time is trying to really understand who are these entrepreneurs that we're backing. I'd say probably the risk that we are most allergic to is reputational risk. We want to make sure that we're partnering with entrepreneurs of high integrity that are values aligned with the direction that we want to see the world go.
Jason Jacobs (29:12):
Where does impact come into play here? And what I mean is if you are holding yourselves to the standards of financial returns, both because you are stewards of capital, even if it's single LP permanent capital, it's still capital, and you care about consequence, as you said, does the impact affect how you make decisions within the firm?
Michael Bruce (29:33):
It absolutely does. The way we think about it is, first on screening, we will only look at deals that are values aligned with the broader organization. There's got to be some tether into the things that Emerson's trying to accomplish. Fortunately, with climate, that's a very broad canvas to paint on. There's certainly investment categories that we've just decided are for other people to invest in and support that don't have the same type of alignment with the values of the organization.
Jason Jacobs (30:00):
Within climate, you mean?
Michael Bruce (30:02):
I would say kind of more in traditional venture categories where we're not going to follow the usual Sand Hill Road crowd into the latest hype cycle around Web3 kind of came and went. We had a few experiments in there, but always with a deliberate tension to kind of what's the impact story behind this opportunity may have been backing a entrepreneur who is from a historically underrepresented group. It may have been where they were looking to apply their resources, but we're always looking for an opportunity to open up new doors for these entrepreneurs. So we screen for impact. It's a commercial deal.
(30:38):
We'll negotiate the terms just like any other venture capitalists and hold our entrepreneurs to the same type of performance standards that others expect. And then on the backside, and this is really where the impact is is the portfolio services that we bring to bear. Often, it is in helping companies penetrate markets that maybe weren't high on their initial target list, but using our network and the doors we're able to open, it gives them new commercial opportunities to sell into these communities. I think one great example of that is that our partnership with Elemental Excelerator and their equity and justice track that they stood up of selling into communities that aren't necessarily the first ones that you think of when you're building a business.
(31:18):
We also have a whole diversity, equity, and inclusion guide that we help our companies think about what's the right way to implement these initiatives. How do you build diverse teams that work well together? How do you expand the top of the filter and go seek talent in places that other startups or other entrepreneurs don't think to look? That's really where we look to apply the impact is in the portfolio services side, so filtering and portfolio services are the two key impact areas.
Jason Jacobs (31:47):
Given how broad climate is, it's not really a sector. It's essentially rewiring every sector, and then there's so many different types of solutions, some local ones, some global ones, some physical ones, some digital ones, on and on and on. How do you know if something passes your climate filter? Some firms, for example, they have a gigaton or a half a gigaton threshold or things like that.
(32:11):
For us, we think that's great. But it's a little limiting because what about reskilling the labor force or what about winning the hearts and minds of hundreds of millions of people, or what about adaptation resiliency or enabling technologies that power marketplaces for credits or things like that? There's so much more that goes into it that's hard to put a specific gigaton threshold on. We struggle with that, but how do you think about it?
Michael Bruce (32:35):
We're largely guided by just the math that makes the venture business work. The opportunity on the backside's got to be quite large. We're not typically looking for the niche opportunities that are going to have a small market to address on the backside of relieving the bottleneck using technology, so that does lead you to bigger opportunities. I helped develop something called CarbonCount when I was at Hannon. We were trying to be very rigorous, and what was the carbon impact of every dollar that we deployed.
(33:02):
I actually had the privilege of doing the highest CarbonCount deal and the lowest CarbonCount deal while I was there, and we tried to implement a similar method when we're looking at investment here at Emerson. But there's a lot of variables that go into the equation that make for false precision. And so we try to not over rotate on that analysis, knowing that there's a broad spectrum depending on how you do attribution and where it gets deployed on the grid. There's a lot that's not knowable just in what the financial outcome will be, let alone what the impact outcome will be.
(33:33):
So for us, we do screen for it, and we talk about it, and we think about it, and we include it in our investment memos, but we don't have a half-a-gigaton metric or something like that. Generally, I'd say we're mostly guided on the way that we do deep dives, and we're looking for opportunities in certain sectors that we think are ripe for a venture investment, and so we've dedicated our focus to looking in that direction already. For the most part, our investments over the last couple of years have either been in decarbonizing the energy system or in electrifying transportation have been our two key categories.
(34:04):
There is one big climate category that we've decided is not for us for the time being and that is food and ag. There's really two reasons for that. One of them is food and ag has not been a great venture returning category for the last decade in general, and the second one is and probably the key driver. I grew up in Kansas. I know a lot of people who know a lot about ag. I just know I'm not one of them. We want to make sure that we're bringing some unique thinking and proprietary insight to the table before we make an investment, and we just can't convince ourselves. We have that proprietary insight into food and ag right now.
Jason Jacobs (34:37):
What do you think about the word additionality, and is it a relevant term in your efforts?
Michael Bruce (34:43):
We talk about it a lot, but I think sometimes people over-rotate on trying to solve for additionality. I generally think every participant in the market is having an impact, sometimes for good, sometimes for bad, but your mere presence in there is changing the way that capital flows and the types of businesses are getting built. I think we are all additional in a way. We do want to be focused on opportunities, like I said, that unlock something that wasn't possible beforehand.
(35:13):
I also want to be sufficiently self-aware, though, using old DC colloquialism that, "Success has a thousand fathers and failure is an orphan." If we're going to get there, success is going to be attributable to a lot of people moving together. And so the way that you attribute additionality, we often are all doing a small part of what ultimately will be a big outcome. We think about additionality, but it's not a key determinant in where we place our capital.
(35:41):
We're looking to partner with entrepreneurs who are going to build consequential companies that are delivering generational impact and venture-scale returns. And so there are often opportunities where these companies are doing great in their scaling, and a big part of what we bring to the table is a new network and the ability to help them think about how they drive impact inside of their house as well as with the products they can build.
Jason Jacobs (36:03):
And I just kind of have a punch list of questions I'm curious about. We probably won't get to all of them, but I just jotted down a few nodes. One is just how are you thinking about carbon removal.
Michael Bruce (36:13):
I've been a part of the carbon removal conversation since my time at DOE. I had an opportunity to review the DOE research portfolio and identify gaps in it, and one of the gaps that I had identified was how do we take carbon and make it a product rather than just a problem. There were businesses already, whether it was soft drinks or enhanced oil recovery that's already using CO₂ as a product, and so I thought it would be wise for us to spend some more research dollars on what are other opportunities there.
(36:42):
We've gone deep into CCUS opportunities a couple of times while I've been here at Emerson, and I'm a huge of governments continuing to support it and build markets around it. I do struggle presently with some of the direct air capture businesses. They found some early buyers, which is so important to find a beachhead market, but the slope of the demand curve on the backside, I think, has a lot of risk to it right now.
(37:08):
We do have one investment in the broader category, and that's in Twelve, which is a way of, once you have the CO₂, how do you upgrade it into a product that's important for industrial purposes? They have a CO₂ electrolyzer that makes carbon monoxide, which is [inaudible 00:37:24] industrial precursor for a lot of things, and right now, they're one of the leaders in the race for developing sustainable aviation and fuels.
Jason Jacobs (37:31):
We're also an investor in Twelve, so we share that one, and I think some others as well. How do you think about the future of oil and gas, and how do you think about the future of the oil majors? Two different questions.
Michael Bruce (37:44):
There's a reason we use oil and gas. I don't want to misquote it, but I love a line that, "If we hadn't discovered oil, we would've had to invent it." Its energy density the way that it only ignites under relatively limited conditions, so it's relatively safe as extraordinary performance attributes that have been a key driver of what has allowed for modern living. I think the task of displacing it is a tough task in some categories. There are other categories, however, that the steam cycle is really inefficient, and so it's pretty easy to see how renewables can displace the steam cycle for electricity generation. I think oil and gas is going to be with us for a while. The scale of the business is going to take us decades to transition away from.
(38:31):
I think there's a lot of great people who work in oil and gas. I know growing up there was a lot of pride both in my family, as well as a lot of the folks in Kansas in the way that the products that they supplied to the economy had helped people rise out of poverty and create new opportunities. And so I think it's important to honor the legacy of folks who've worked in oil and gas over the last decades and century. I think many of them are very much aware of the negative externalities of fossil fuel consumption and are working hard at what solutions could be, but I do think oil and gas isn't something that we're going to be able to squeeze out of the economy by 2030.
(39:12):
And that is where CCUS can be very important long-term is how do we pull the plug out of the bathtub? In terms of the oil majors, it's been interesting to watch their strategic journey here over just even the last couple of months. They are extraordinary organizations with great scale, huge balance sheets. They know how to deliver giant projects in ways that many other parts of society haven't been able to, so there's a lot of capabilities there and a lot of great people.
(39:41):
The challenge is a lot of their capabilities around moving molecules, and I think a lot of the energy system in the future will be more moving electrons, and how it is that they transition their skillset into the opportunities of the future, I think, is still TBD. They're learning that in real-time. I think you're seeing some of the oil majors having made big commitments over the last few years starting to pull back from those. Many of them are really excited about hydrogen. I don't share their enthusiasm. I think hydrogen is a difficult molecule to manage, and it'll have relatively limited long-term application in the energy transition.
Jason Jacobs (40:16):
How are you thinking about the current state of carbon markets offsets credits?
Michael Bruce (40:21):
It's been amazing to watch the carbon markets go through these waves. I remember when carbon markets were first coming about and kind of during my DOE days, and a lot of the excitement around standing up trading for them and then watching them absolutely collapse and face plant. We've tried to be self-aware of those lessons learned and also that when you've got a product that is fundamentally and intangible, it typically has a lot of volatility in its trading long term.
(40:53):
So when we've looked to invest in the carbon markets, it's usually on the intelligence layer. It's how do we help people understand where their carbon footprint is. How do we help people trust the carbon credits that they're buying are real and additional? But we've been circumspect and careful about investing in companies that effectively have long positions in carbon credits because I do think it will be a rollercoaster ride.
Jason Jacobs (41:16):
A couple more of these, and then we can kind of move towards wrapping. I know you've got a hard stop. One is just how do you think about the first-of-a-kind capital gap? Is it real and what are the best ways to address it, and is that something that you think Emerson has a potential role to play in at all?
Michael Bruce (41:31):
It's absolutely real. I actually actually view it more as a knowledge gap. I think a lot of these tech entrepreneurs are often great at pitching the big story to equity. But when you move into building your first project, you need to pitch to credit investors with downside protection and how this is really going to work, and it's going to generate money, and it's a different story. It's a different way of thinking.
(41:54):
Also, a lot of credit investors are not used to technology risk, and so backing a technology from a startup that doesn't have a strong balance sheet in credit to post and to know that they will be there to make good on their warranty guarantees in five or seven years is also a challenge, so it's absolutely a gap. I do think there are ways to solve it. I think it's largely around knowledge and network and with some amount of business model innovation as well.
(42:22):
One of the areas that I've long been an advocate of is shifting the DOE loan guarantees mandates slightly not to be full project wraps, but really to be technology performance guarantees because that's the key thing that the private sector has difficulty underwriting, and I think there is a social good in the government backing that and helping these early technologies get off the ground. A lot of the other aspects of the early projects can be well understood. It's really that technology guarantee layer that is a challenge.
Jason Jacobs (42:50):
How do you think about the green premium? Is it something that we need to bet on that it's prudent to bet on, or is it something to stay away from at all costs? So, for example, if there's a low-carbon cement that is much lower carbon but is more expensive for the same product otherwise will that ever fly, or should you run for the hills?
Michael Bruce (43:13):
The way that we think about investing is we are comfortable with a green premium with the early adopters who are excited about the category and willing to be a part of getting the market moving. But we need to be convinced that long-term at scale, the technology will be competitive with the incumbent technologies or else significant policy mechanisms to try and close that gap. I don't think, like with cement long-term, that the way the market is currently structured between the cement suppliers and then, ultimately, the building owners and all the different links in the chain, that's a very different thing to coordinate a premium through.
(43:49):
I think, likely, the way that market will need to evolve is similar to the way you've seen the renewable energy standards, the RINs or the RECs, all these different credit markets that will really kind of jump over that whole supply chain from the cement supplier to the ultimate building owner who is usually the one who cares about how green their building materials are. Credits have an enormous role to play in this. They need to be thoughtfully structured, particularly to get things rolling, but often credits can also outlive their usefulness. I actually think renewable energy credits are a great example of that.
(44:23):
They were huge for getting renewable energy out of the gate. They started as a voluntary mechanism. Ultimately, the policymakers identified it as an efficient mechanism for driving increased renewable penetration and adopted it. The big challenge, though, is it's typically done on an annual net settlement basis, which is not the way electricity actually works. I would love to see the renewable energy credit market evolve into one that is settled more on real-time and smaller time increments the way that electricity works physically.
Jason Jacobs (44:53):
And the last question's more of an existential one, which is, I'm with you that market forces are the most powerful lever that we've got and that if you try to rely on other things, that it is not a durable solution so that if we want to make progress, you need to be financially compelling. I'm with you on that. I'm also with you on the fact that asking people in the global south, for example, not to benefit from stepping up and having more modern lifestyles and such is unrealistic and unfair.
(45:28):
I'm with you there too. I guess my question is, market forces are the best way to make progress, but is it going to get us there anywhere near in the timeframe that we need? It feels a bit sometimes like we're watching a train crash in slow motion. It's better to make some progress than none, but that the market forces will not be enough, and I don't know quite what to do about that.
Michael Bruce (45:47):
I agree with you that market forces alone will not be enough. One of the ways I've long described this is the solution it's going to be at the intersection between the people living out here in Silicon Valley basically technologists, the people living in New York who are allocating large chunks typically of project capital for deployment, the folks living in Washington who are setting the rules, who are making the policy, but also the people who are in Los Angeles. It's really important that we win over the hearts and minds in this, so I don't see it as a single vector.
(46:19):
I think each vector is important, and I think you need to figure out how to get those three moving in harmony together. I also want to acknowledge that a lot of this deployment is going to happen not in the coastal cities that I just mentioned, but it's going to happen in the middle of the country. That's where a lot of our existing productive capacity is. It's where a lot of the wind that's getting put up, and so it's really important that we find solutions that have a broader political appeal than what you're going to find sometimes in blue coastal cities.
Jason Jacobs (46:47):
I know we're out of time, so is there anything I didn't ask that I should have or any parting words for listeners?
Michael Bruce (46:51):
I love what you guys are doing, trying to educate the community, breaking down silos. I think that's great. I think if we had another opportunity to connect, I would love to talk about how do we get the right side of the aisle more engaged in this. Having been in Washington on the right side of the aisle while I was there, that's kind of one of my long-term passions is connecting with people that haven't traditionally been a part of this community and coalition.
Jason Jacobs (47:13):
Well, let's make that a follow-up. I do have some ideas, but we'll save that for another day.
Michael Bruce (47:17):
Sounds great, Jason. Appreciate all the work you do. Thanks for your time.
Jason Jacobs (47:20):
Thanks, Michael. Thanks again for joining us on My Climate Journey podcast.
Cody Simms (47:26):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem-solving capacity.
Jason Jacobs (47:35):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com, and if you have a guest suggestion, let us know that via Twitter @mcjpod.
Yin Lu (47:48):
For weekly climate op-eds, jobs, community events, and investment announcements from our MCJ venture funds, be sure to subscribe to our newsletter on our website.
Cody Simms (47:58):
Thanks, and see you next episode.
