Energy Tech Startups

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0:16 to the show. Today, I'm really excited to have with me guests from Latham and Watkins. I have with me here Scott Craig and Jim Moroni. Latham and Watkins is one of the world's most prestigious law

0:29 firms and a major player in both energy sector and the startup ecosystem. Welcome. Thanks. Happy to be here and given you guys are in Houston. I'm in Austin. Jim's in the Valley, but Jim can

0:42 tell you he's a Texas guy as well. So we're happy to be part of this. Yeah, I'm really, really excited to have you guys here. This is the first time we're doing it so that we're all for virtual

0:54 but hopefully it's going to go well Um, yeah, so let's start off with, um, you know, just a brief introduction of both of you Scott and Jim tell Us a little bit about your backgrounds and and and

1:07 then you know introducing Latham and Watkins and in general your role within the energy transition and how you're helping startups I'll be more than everybody to be on the Murky Brown Yes my name is

1:23 Jim Earlier I grew up in Texas and then I'm out in California now as Scott mentioned I went to UTI law school graduated ninety nine nineteen ninety nine for for those and moved out to Silicon Valley

1:40 and have been working with startups in the ecosystem out there ever since at the time Latham was a president in Texas we now have bright presence there but I didn't have a chance to stay with what I

1:55 love Latham and the chance to stay with Latham in Texas in Dallas and started working with startups, and I've been doing that ever since. And I have been working with startups in the energy

2:08 transition and adjacent areas, pretty much my whole career, at least for the last 15 years. And I was head of our clean tech group back when we called it that 15 years ago. Yeah, I'm also, we

2:23 have been with Latham for about three years, but I've been practicing in Austin for almost 20 years doing emerging companies, startup work across industries. One of the cool things since I've been

2:32 at Latham is as not a mention at the beginning, we've got a really global, like leaning power and energy and infrastructure. And to be able to combine our emerging company practice with our energy

2:44 and infrastructure practice has really presented a lot of opportunities, I think, for startup companies to have kind of a one-stop shop for both the early stuff. And then if things go well, the

2:53 later private capital needs other needs that they have. But generally speaking, you know, just have enjoyed, I'm from Houston and kind of plugging back into that world a little bit. I started my

3:05 career there and after, you know, being here for almost 20 years, having a lot of exposure to what's going on there and the excitement of what's going on there in energy tech has been a lot of fun.

3:17 So I think there's a couple of distinctions about the energy transition that makes working with startups interesting here, right? Because it's, yes, we're dealing with company formation and growth

3:28 challenges. But at some point you're, you know, we're building things at a massive scale. Tell us a little bit about, you know, why that marrying of like energy and infrastructure, expertise,

3:40 you know, matters even for our little, you know, startup companies who hope to be big one day. And my view on it is having worked across industries, you've got the typical startup that might be

3:49 in software and they could just go raise venture capital and, you know, eventually just let go, you know, fly and be fine. It's, you know, a little bit easier. to enter the market. I think

4:00 with energy tech, venture capital helps at the beginning. But at some point, like you said, Jason, there's a lot of capital that's required for a lot of these companies, and it doesn't

4:09 necessarily make sense to go to the traditional venture capital route down the line. Whether it's project finance, whether it's debt, whether it's some other kind of capital, there's an inflection

4:22 point with a lot of energy tech companies, particularly if there's heavy industry or a lot of hard science or manufacturing facilities or

4:32 plants that it doesn't make sense to fund from up top. And so I think, again, what we see is there's a lot of companies that need to find more creative ways to grow because for two reasons, one,

4:46 it's not necessarily economically efficient to do it from the top, and two,

4:51 frankly, there's going to be better return for them and better opportunity to fund projects. Venture capital funds aren't used to funding. manufacturing facilities, for instance. Yeah, I think

5:01 that's what makes Latham unique in the market and allows us to help our clients kind of provide advice across the chain in different areas that you may have the more traditional West Coast VC firms

5:16 that are great with startups that have the traditional path. You may have the firms in Texas that are great with the EI and have done that historically. There's not that many places, and I don't

5:22 know, there's any place that does it like life and that can marry those two together. And sometimes just being able to talk to clients and bring in the right expertise to help advise them because

5:40 you reach these critical points of fundraising and making strategic decisions about how we're gonna do things and it's helpful to bring in expertise that says, Okay, we've advised on these, we've

5:55 advised on these.

6:02 tell you some pros and cons and help you think through these decisions. One of the things that I think struck me when I first started my energy career is in many ways, you can build an entire

6:08 business based around contracts really in the energy industry in a way that's distinct from maybe a software startup where in the SaaS world there's a lot about user interface and how do people engage

6:20 in retention. And here, sometimes we're talking about 10-year off takes, 20-year off takes in the entire value of a business can be won or lost on how you put your very many contracts together to

6:35 create and extract value.

6:40 And you got to steer for such a long time. So can you share with us how you help the startups navigate like these really long tail, very important engagement they have to create? Yeah. I mean, I

6:52 think in our world, the sooner we get them in front of the right people, both from the legal perspective in the business. perspective the better, because you want to try to plan that future out.

7:02 And you're right, like a lot of these companies, as they're building, you know, they're all pre revenue, right? And they're not going to get to the revenue until those contracts are signed. And

7:11 that's something that, you know, you know, I'm sure we'll talk about this later, but, you know, being plugged into the industry to the players in the industry to know how to get into that supply

7:22 chain, how to get those off take agreements in place, or whatever type of contract you need to prove to whoever's funding you that you're going to be ready to go day one whenever your facility or

7:32 whatever it is is being funded.

7:35 I think that's key. And again, it's all about planning from the beginning, like things might change, but to have a plan, like I'm going to raise a seat and an A and get the pilot going. But once

7:45 I've got the pilot going, that means I got to go find the off takes for my big, you know, production plan or whatever it's going to be. Having that plan upfront and talking to people early, I

7:56 think it is the. is the best path if you wait or if you're with

8:02 experts or whatever that don't have the expertise on that commercial side. 'Cause that's very different than what you said than what's most venture capital companies are used to dealing with. But so

8:12 having folks that are familiar with the commercial aspect in those commercial contracts, which are quite complicated, whether it's an EPC agreement for constructing or these off-take agreements,

8:21 you wanna have someone that knows what they're doing and talking about it early is better, 'cause I think that maybe some entrepreneurs maybe don't fully understand the complexity. And also kind of,

8:34 they're gonna get run over by some of these big companies and they're just gonna have to take the terms if they wanna deal, so. Yeah, no, that's super interesting. And it was, it's interesting

8:44 also to hear, Jim, what you were talking about, how you started the clean tech department lay them in walk-ins you ended how up moving then and

8:55 to Silicon Valley, and I think what I'm hearing from you guys is like, you know, you're also bringing there's this side of like how do you set up a successful startup, but then scaling it to

9:09 become

9:12 a multi kind of billion dollar company at some point, but you know, we're talking about heavy industries, we're talking about big industrial projects, and in some way you're kind of marrying all

9:26 the knowledge and expertise and experience you have in house of working with energy companies. Is that correct? Yeah, just to clear I didn't start the clean tech or but I did run it for a few years,

9:39 but I would say that back, you know, 15 years ago, it was a challenge. We sometimes would joke, you know, clean tech as such had gone through some troughs. We would joke that I

9:54 I would joke that I was also partially running the insolvency group because I had so many clients who

10:01 hit that trough of despair and never got through it. I think part of that challenge is that the technology has to be there to get that investment to scale up. Some of those were just a little too

10:13 early. I worked with several solar companies, Stion and Miya Soleil, where US-based solar companies that we're trying to do in the US They started with the venture investment, obviously, to

10:27 really scale up was going to be capital-intensive and not in the wheelhouse for those types of investors. We did bring in some strategic investors along the way in those early rounds, but ultimately

10:41 still the cost curve wasn't there for them to really make the massive investments to get through. Sometimes the timing just isn't right, and I would say there were a lot of companies 15 years ago

10:52 we're just a little bit too early. What's interesting now is that things have advanced and cross-perv has changed so that it's a little easier to get through that than it was 15 years ago. I think

11:05 that's going to continue on. But it's

11:08 been interesting to see that over the career. And I think our presence in Texas is kind of coincided with that as well. So I think we're really well positioned at this time and take advantage of

11:12 that and see companies that really are able

11:34 to come through and go through the whole stage. Yeah. And I guess what I'm also hearing from a lot of other startups and investors who come to Texas is that in places like New York and the Bay Area,

11:39 you have that a lot of experience from venture capital. And there's a lot that we can learn from in terms of fundraising. But then there's a lot we can learn from Texas in terms of project finance.

11:53 that creativity that you spoke about, Scott, on how do you actually fund more capital-intensive projects over the long term, and how we actually need a different playbook for climate tech funding

12:07 than we're used to for SaaS. Yeah, I mean, I think that's right.

12:13 If you think about Houston versus maybe the Valley or New York or Boston,

12:20 the money is really coming from traditional oil and gas. And, but the other piece that I think is there, and I think that it needs to be remembered is, these supply chains are built and they're

12:33 there, and the connections that the traditional and gas companies have or energy companies in general, they're there and without those connections, it's really hard for a startup company to plug in

12:43 to that supply chain to help with the energy transition and helping those companies enter the transition So I think having the - growth mindset and

12:55 the willingness to take, I won't say gambles, but ventures from the venture capital community is important early on. But at some point, you've got to bring in the people that know the industry.

13:05 And not that there's not people all over the country that know the industry, but I think that those early stage investors aren't always the ones that know how to really plug in the industry. They're

13:15 the ones that know how to get the entrepreneur off and running. And at some point you've got to, depending, you know, whether it's, you know, geothermal or solar or, you know, you just have

13:26 this technology, this device or widget that's going to help in the energy transition, you're going to have to figure out how to plug it into the supply chain. And how are you going to get involved

13:37 in? That's where the the strategics and the folks that have traditionally invested in any energy industry can be a huge help just because they've got the connections. One of the things that I was

13:49 curious about and maybe you can shed some light on is there's There's a lot of ways to monetize, ways to go to market in our industry. And I was connecting with an entrepreneur a few weeks ago and

14:01 just introducing them to a lot of these different concepts from a yield code to an MLP, which really like seems to me to be innovations that come out of our like Houston innovation ecosystem. But

14:15 the entrepreneur turned to me and said, Well, where do you learn about all these things? 'Cause it seems like there's a lot of different strategies and a lot of times an entrepreneur is trying to

14:27 figure out like how do they actually, you know, build a business model and they're doing it at the super early stage. And then they have to turn around and explain it to investors, right? And

14:37 it's not clear there's like a MBA program you can go get that'll teach you all the different types of structures to extract value. Does that mean that you would go to a law firm for support for or is

14:47 that something where you'd have to go find someone in industry? How does an entrepreneur really tackle this big hairy challenge of putting together that business model when they really don't know

14:58 everything, and can't know everything? Scott, yeah, I don't know. I mean, I think that's going to be a combination. What we act as advisors to our clients, not only on the legal side, but

15:09 just what we've seen over the course of our careers have been doing this for 25 years. And you see a lot of things and a lot of things change and give you some ideas at least So, I don't know that

15:20 we would necessarily be the resource that would help them build out the models and figure out the financing, but we certainly would be helpful in steering them in the right direction and have the

15:32 contacts. You're probably not going to sit down with an investor who's never done a yield co and try to explain it to them and get them to go. So, that would be more introductions to the right

15:43 investors and have you talked to someone in this area and someone in this area. we can bring those things together and kind of help steer the client in the right direction to get more knowledgeable

15:57 to help them think through those things. Yeah, I think that's right. Like we'll have the pattern recognition. Like if we see a term sheet, like Jim probably agree, like I'll see term sheets

16:06 sometimes come in and our clients super excited about it. And I can just see things in the term sheet that make, they're just red flags to me. And, you know, more often than not these days, I'm

16:17 end up being, you know, I think we end up being right as far as the red flags that we noted. Doesn't mean the deal doesn't happen, but it sometimes makes it harder. So I think pattern recognition

16:28 helps us, but to Jim's point, we're not gonna be the finance or the product guys that help kind of figure out what the best path is, but we can help navigate through pattern recognition and then

16:38 finding the expertise. Like for instance, you say, you'll color an MLP, like we've got capital markets folks that have done more MLPs than anybody I mean, it basically any capital markets

16:48 attorney. Houston's Done a ton of them LPS so it's you know that's where we can marry once what we can help identify the you know with the other experts maybe we're the best passers and then find the

17:00 right experts to bring in and execute because that's what we're here for us to help execute on it in a way that is best for our client yeah let's dig into that a little bit and in terms of the red

17:09 flags that you see and cause I'm sure some of our startups you know want to be aware of it and and there's probably the same pattern also from like the investors who give you that term sheet that they

17:22 try to get away with some of these things what are the things these what are these red flags that we should be looking out for Yeah I mean some of the ones I think are not actually very industry

17:31 specific but you know the one that always gets me is when you get a term sheet from an investor and it's one of your first two rounds your Cedar you're A and they're like we're going to go raise ten

17:40 million dollars and will commit two million dollars of that and I you know that doesn't mean it's not going to happen what it means is they're trying to lock you into exclusivity and then they're

17:49 going to go try to find the rest of the10 million. I mean, I like to see a lead investor that's going to be taking most of the round because I tend to see those deals get tougher and sometimes go

18:02 sideways because it's really just what it is. It's an investor kicking the tires. I

18:09 mean, I think the other thing that we sometimes see, and I don't necessarily discourage it, but I think it makes it tougher for companies. It might be a little bit paradoxical, but it's companies

18:20 delivering their own term sheets to investors, especially early. I think it can work for safe friends and family rounds, but if you're trying to go out to institutions with your own term sheet,

18:30 one, you might be negotiating against yourself and you don't even know it based on the terms you're putting in your term sheet, but two, I would say the most traditional rounds, the ones that go

18:41 smoother, we're getting a term sheet from an investor that we negotiate and then we draft docs from there. So if you're having to put your own term sheet out there to go chase money, as opposed to

18:51 just pitching investors and having them deliver term sheets, I think that's usually a red flag, but I think you're going to have a harder time raising money that way from the people that you want to

19:00 raise money from Yeah, a lot of times you'll hear investors say I'm very interested once you have a lead, and that can be frustrating to hear. It's just the fact there's a lot of investors who

19:15 really legitimately are saying that it's not just an excuse, sometimes it's an excuse to a friendly way to say no without saying no But other times it really is just, it's not our forte to set the

19:32 valuation, and so we want to lead and then we'll come in. And

19:39 you can help counsel clients, but sometimes they get frustrated and say okay, well let's just create a term sheet to see if that works, that doesn't work. Usually it means you need to go out and

19:49 find it and finally and sometimes that's where you can marry around with a more traditional venture Investor who is willing to leave and is willing to set some terms and then allow other people to

20:00 come in alongside And it's harder to do that because you're talking to different types of investors and trying to bring something together But sometimes that's just what's necessary. I mean the other

20:10 thing I'd always recommend for entrepreneurs is they get a term sheet from somebody And they're not I mean if it's not like a brand name make them introduce you to other portfolio companies and see

20:19 how it's going Obviously, they're gonna try to introduce you to the best But if I've seen investors unwilling to do that and to me, that's a super that's a huge red flag And as much as they are

20:29 Diligerencing you you should be diligently them Particularly again, if they're not if it's not the Coastless or sequoias or or in Dreesons of the world that everyone knows There's a lot of folks that

20:40 want to get in the game and don't have a ton of experience and, you know, that doesn't mean they can't be a great. partner, but you got to do that reverse diligence and what should a founder be

20:50 looking for when they're doing that diligence? Number one is do they have the money, which is what I think I heard you say earlier. Right. Right. But what else should they be asking? Well, yeah,

20:58 I mean, do that. I think there's that. Yeah. But I was just saying, look, you can negotiate all the terms you want. And you do. At the end of the day, if you have to crack open those

21:14 documents to make decisions, you've probably already gotten yourself in trouble. The relationship is critical. And so it doesn't matter. I mean, it matters. But at the end of the day, whatever

21:27 you, whatever you agree to when they come in, it's about the relationship and the relationship in the boardroom and the advice that you're getting the connections that you're, the, the contacts

21:40 you're being presented with That's that.

21:44 the relationship and just basically running the business together as a partner, and it's hard to do that if you don't know who the investor is or a check is not a check. It's more than just money,

21:57 and so you really have to, I think, build a relationship is how I think of it. And part of that is understanding how

22:06 they've built relationships with other people And when you get to a tough decision, I mean, a lot of times, new rates are tough decision aware. You have a runway, and the end of the runway is

22:19 coming, and you need to figure things out, and things can get a little stressful in those circumstances, and you need a good partner to help, you know, think through that support, support the

22:31 company. And some people are terrific at that, and really build a brand around that that's more important to them than getting better terms in the documents. And others, you know, might might not

22:45 be. So it's really critical to just kind of get some visibility as much as you can and to have that person that's going to be a partner to you and the company. How do you guys, I was literally

22:56 working through advising one of our companies here. How do you guys think about like these trade-offs of different terms like control versus valuation?

23:07 And how do you like teach an entrepreneur or like why control matters? I guess, and I just might get some of the weeds. And if you can give us some examples of the things you look out for. Yeah,

23:20 my philosophy, typically when I'm working with a founder, look, that's my relationship with the company. And early on, the founder's interest and the company's interest are almost 100 aligned as

23:30 long as the founder has control of the board and the stock. As the company grows, one of my goals is to ensure, based on our leverage, that the founder, whether it's through some kind of super

23:42 voting stock or. just having control or whatever continues to make control of the cap table and of the board.

23:50 As you raise more rounds, that becomes harder and harder to do, whether it's through dilution, whether it's through you just lost leverage, or you want to take on a very important investor that

24:01 has certain. And then when that happens, when that starts to happen, the founders' interest and the company's interest start to diverge a little bit. And there have been times when I've been, I

24:11 think we've been asked by boards to exit founders, because the founders lost control of the company. Well, that was our relationship, but we represent the company at the end of the day. And so

24:23 circling back to your question, I think that's my goal with all of our clients to the best of our ability to have the founders maintain control as long as possible. Again, eventually, as companies

24:34 grow, that that may not be possible. But

24:39 it's something we strive for, because that allows the founder. the founder's interest and the company's interest to stay as aligned as possible for as long as possible.

24:49 We could talk about terms. Jim, I don't know if you have other thoughts on that, but I think terms just depends on who the investor is. What am I getting from this investor? Is it worth the

24:55 control

24:58 or is it just money? If it's just money, then maybe the control makes less sense. If it's a true strategic partnership, maybe I'm more willing to give up some control because they understand the

25:08 industry or whatever. That could be a much longer conversation. Yeah, I think the control is a spectrum. At some point, it's going to

25:20 flip. Try to hang on to it for the founders as long as possible.

25:26 That's

25:33 not always 100. The founder may not be the right person as the company grows into a different stage from where it started, but usually the founder is the one who's going to have to. that has the

25:42 vision, that has the drive to at least get you to a certain point. I also think the stage of the company early on, you know, you're going to need to raise more money, most likely, and to hand

25:59 over the keys to an investor who can just shut

26:04 you down because they don't want to keep doing it I fight really hard against that because you never know, I mean, back to that, they may decided to go in a different direction, and they're not

26:17 interested, and so you just really have to be careful, and especially in those early stages, not to put yourself in a position where you don't even have the ability to go out and raise additional

26:26 funding. I do want to come back to that. One of the things I found in Houston, and maybe Jimmy can comment on this,

26:34 Houston has a lot of capital where it almost comes in from a position of wanting control and then kind of hiring a management team.

26:43 and I've seen enough startups go out and get a term sheet where it really looks like the investor either wants majority or where they're treating the founders as not necessarily those visionaries.

26:57 It's someone who's going to execute on a plan and it creates a challenge in the market where you want to go off and build something and

27:09 you're not necessarily in that position. I remember seeing a term sheet for a startup where they would get, I think it's called a back-end promote, they would get like their equity after the

27:20 company made money and I would never see that in a technology-based startup and it makes me wonder is that a like a weird vestige of just like the way Houston works and investors need to be trained on,

27:34 you know, this doesn't necessarily match up with those expectations of a technology startup

27:40 Or is there something else going on? I just don't really understand here in Houston.

27:47 And Jim, I don't know if that's something you want to. Yeah, I mean, I think the biggest, I mean, well, the top line thing is just, they're not venture investors, actually. So they can't

27:58 fail, right? Like, you know, maybe they can on one, but like, you know, venture investors are investing in 20 companies. And if two become unicorns, they're probably making a pretty good

28:08 return, especially for the early stage. Whereas I think the typical Houston investor doesn't have the venture background. Like, if you think of everyone that's been investing in upstream EMP

28:18 that's moving their turrets to energy tech, they don't get it, you know, in the same way. Or that's unfair to them. That's not their return profile. Like, they can't lose. And so they need to

28:30 have more control to ensure that if things aren't going the way they want it to, that their LPs are gonna be mad at them.

28:39 their LPs are investing in them for a different reason than the venture capitals LPs are investing in a venture capital fund. I think that's the main reason, but to your point Jason, I do think

28:49 that there is some education that can be done if these companies truly want to invest in technology companies that are found or led. I think both sides need that education because I think there's a

28:60 middle ground there. I don't think entrepreneurs should be giving up control of their company

29:05 unless there's very special circumstances to it early on, if they see a ton of upside in what they're doing. Obviously, money's king, and so if that's the only money you can get, it is what it is.

29:18 At the same time, I think that entrepreneurs need to be aware that if they're looking for money from Houston, there's going to be more hooks in it than there would be if they were getting money from

29:27 an early stage venture fund. It's just a fact. It's

29:33 all going to, the rubber is going to hit And it's really, really with, you know, what.

29:37 We work with high -growth companies really that's what we're trying to do and you know it if you're going to grow quickly into a large market that can be disruptive and in and now go from zero

29:49 thousand in a few years then that then that had that should have the return profile to allow for some more rest of the investor part in it may just be there if you have that profile then it may just

30:01 be that in the early in the early rounds where it's it's even more risky because you you still have some technology risk market adoption rescue and other things that you haven't really figured out yet

30:12 but you still have the potential for for a home run then it may be that you marry you know early stage venture and as early rounds to to sort of maintain controlling it through that point sorta get to

30:26 a little more of a proven technology that can then sound and then it's maybe an easier sell so it can be just a different time and stage of the company you might talk to different investors and Yes,

30:38 you can try to educate folks about that, but it's gonna be an uphill battle sometimes to do that, and sometimes the best thing to do is to recognize where are we in our journey and what's gonna make

30:51 sense for us, which is part of what, you know, where we started, which is, you know, you can help, I think, think through those things at least, so that it's just on your mind. Like, if

31:00 there's not just one path, you can think about different paths and try to find what's best for you at that particular stage of the company And that doesn't always mean you're gonna, you're gonna

31:10 find that solution, but you can at least turn over those rocks and try. Are you ready to lead the decarbonization charge? Energy Technexes is your platform for growth, offering unique resources

31:22 and expertise for energy in carbon tech founders. Join us at energytechnexescom and start building your Thunderlisset. So, and in Houston,

31:32 we have a lot of the strategic

31:37 corporate, right? What have you seen in terms of their approach and how that's different? And, you know, what are the pros and cons of taking investment from a CVC? In my experience, a lot of

31:49 them don't lead. And so it's like, great, you got them on your cap table and they offer an entree into their network and that's terrific. I think the ones that do lead,

32:02 you know, I think there's some obvious things like writer first refusal's most favorite nation clauses, things that could like chill things, whether it's on your exit or whether it's commercially.

32:13 You know, I think there's always the concern that, you know, if you've got one corporate VC on your cap table, then the doing commercial agreements with one of their competitor companies might be

32:25 harder. I've not seen that, but I'm sure that that dynamic exists. I think the biggest thing is just ensuring if it's super early that you're not again. It's all about control, that you're not

32:37 doing something that's going to limit your ability to exit your company or raise more money. I haven't seen the CVCs be horribly grabby in that regard, again, a

32:49 lot of them don't like to lead. I think it's more the direct corporate investment where it's the actual corporation that's investing where we see a little bit more

32:59 aggressiveness as far as controlling what the company can do in the future And some of that, I think, may just come from a

33:08 number of deals and, you know, back to the question we were talking about before, if you're

33:15 an investor and you come in with

33:19 terms that are onerous and you miss out on the investment and it turns out it was a

33:25 100x return, you're going to be a little bit more cautious the next time you come in with terms like that So over time, I think, as you're, as you're noticing and, you know, reacting to the

33:39 competition because of this competition for investors at the end of the day, if the company's good, you're going to adapt. And I think a lot of the CBCs have already done that. So they're

33:54 recognizing that there's, you know, some gray space in between, you know, the private equity terms and the adventure terms and you've got to figure out where you are in that spectrum But the

34:05 things that Scott mentioned that they do tend to care about are, look, I'm putting a foothold into this company because maybe if it does prove itself out, we want to require the company. And so

34:18 what will be important to them are terms like making sure that they at least have awareness that there's a deal happening so they can participate. If not, you know, and I'll write a first refusal,

34:30 but pretty hard on that one because it does to achieve the process. if you know someone's got the last look at a deal. And usually you can be pretty, you can be successful in convincing people that

34:44 that's ultimately not in anyone's best interest to just have that much control. But just making sure that look, you're not gonna wake up one day and read in the newspaper that the company got sold

34:55 out. The other thing, you know, allowed with respect to corporations where we've seen involvement is at the project level as opposed to up top So like, I'm a startup and my pilot worked and now

35:06 I'm doing my first project. You're getting your off-take agreements but oftentimes there might be a corporate partner, like a big multinational that you do that project with. Whether it's in the

35:18 form of a joint venture or some commercial arrangement, that's another way we've seen people plug in with corporate arms. And again, with the projects, what makes it nice is that that's gonna be

35:29 its own entity. Usually it's gonna be almost its own business you're going to want to separate the liability from that company. to your top co and, you know, potentially, you know, this is sort

35:40 of the dream for energy tech companies that have project, you know, finance in their future is you're having all these projects and each of those projects can spin out and be its own thing. Like

35:48 IPO that one or sell this one, you know, and that's the, you know, the dream model, I think, for a lot of these companies. And, you know, there's been a number I used to that have, and

35:59 across the country, obviously they've tried to follow that path. And, you know, that's where I think the corporations can come in and help And that type of financing is going to be much more

36:08 structured, obviously, and more debt-like. And you might have some government grants, you might have some tax credits, you've got some

36:22 debt financing, maybe some equity on top of that. But it's a much more complicated stack, But it's the - Because it is except it can be a separate entity in a separate finance and you really doing

36:35 that apart separate apart an hour and requires a whole different set of skills and can you talk a little bit about some of the trends that you might be seeing in the industry particularly with the

36:47 climate tech clean tech space in terms of deal structures terms and also fundraising in general how how is that going I mean I think I'll let Jim speak to it as well as what he's seeing out there but

37:01 you know I I get it we've talked a lot about it we're seeing a lot of houston money try to get involved and you know trying to navigate those those terms I think you know that the biggest issue again

37:13 is like getting from that that initial money that helps you develop your product to took to commercialization and I you know I think we've seen some success stories there recently and but that's all

37:26 that's still the hardest part to do and end up getting way We still haven't, and, you know, Jason and Nadia, you can tell me if you've seen more of it. I think at least in Texas, we still

37:37 haven't seen a lot of the coastal money come into the companies that are here. And, you know, I think that one trend, unless of a trend, but something I'd like to see is more interaction with

37:52 the various players in here and then in both coasts. 'Cause I think that can open up a lot because

38:01 I think that the way the companies are getting funded on the coasts is a little bit more traditional than your capital. And I think there's just, and it's just 'cause of access and geography,

38:12 there's just more, I think there's more opportunity, Jim. I don't know what your view on it is. I mean, it's always easy. It's hard to say how the market is because some clients are, they just

38:24 fall out of bed and they've got five term sheets And then if that's your experience, you're like, oh, it's -

38:31 It's great. And others are knocking on 1, 000 doors. So I'd say, generally speaking, over the last couple of years, good companies are certainly getting funded.

38:49 If you're

38:54 not quite there, it's a much bigger challenge So it's really weeding. As a finer filter, I

39:04 would say on how these have been getting funded now. But

39:09 summer is doing great in my portfolio. And others are just hanging on trying to get through it. But that's probably the case. I do think there's some people that are just predernaturally gifted at

39:21 fundraising. There's some founders that just - it doesn't matter what their product or their businesses. They just know how to do it And whether it's because they've succeeded in the past, are just

39:31 good at it. And so

39:34 I've seen it where it's like, I don't know how this company raised money and this one didn't. I think I don't know how many times I've seen that story where I'm like, this, because it just seems

39:41 like this other one's a much better play, but just the execution by the founder just isn't quite the same. But you know, so sometimes it's substance isn't really the reason.

39:53 And going back to it. Yeah, and one of the challenges. Go ahead, Jim.

39:58 Sorry, I'm just going to say a perennial challenge and with with

40:05 growth companies is it's still it's still just not a an area where you see a lot of bankers play. It's just it's almost a back to the yellow flag question. I mean, when you're raising a series B

40:21 round and you have a a banker involved, that's got that can sometimes just be the the red flag because the you know usually it's Ideally, if you have investors and they are excited about the company,

40:34 they're calling

40:38 people for you because nothing's better for these guys than to be able to share something that's exciting and going to be profitable for other investors too. Or sometimes they're so excited about it

40:48 They

40:57 don't want to share anything like that all from themselves, but if you're hiring a banker, it's just a tough, and it just isn't that prominent, at least, and maybe you see it differently, Scott

41:09 and Houston.

41:12 And so it does put a lot on the founders and those early investors, which again, back to the, you know your investors, some investors can be super helpful in helping you raise that next round and

41:27 making the right introductions whether it's other venture.

41:32 the venture funders or strategics or whatnot, it's critically important if you have that assistance. But a lot of it does fall on the founders and some of them, that's just not what their forte was.

41:47 They are great technologists, but they're just not great funders. So it's a lot of things have to go right for everything to come together. And sometimes it's just unfortunate. It's just hard to

41:58 fundraise for some Do you find in this like a post-COVID era that people have to get on a plane and go out to California and New York?

42:09 Or, 'cause I think generally you said that we aren't necessarily seeing the capital come into Houston the way we're hoping. And is that a matter of our entrepreneurs aren't spreading their net

42:20 enough?

42:22 I don't know if you got something. I think I would stop. Scott, sorry. Yeah, I think it's coming. Yeah. Yeah, no, I think it's coming but I just, I don't know that it's. Look, I think that

42:32 you've got events like the rice event in September and the whole week you guys put together, which was great. I think that's always drawn people to Houston to come see these companies. And those

42:42 companies are from actually the ones that show up at the rice event are all over the world.

42:47 So I think it's coming. Bill Gates at Sarah Week last year since talked about how the Houston is going to be the Silicon Valley of energy tech. And I think that there's opportunity there. I do

42:58 think I think the solution really is more the money working together. Like having a Houston PE fund that's transitioned to energy tech or is playing in that space investing alongside a name brand VC

43:14 fund from the Valley. I'm sure it's happened. I think I can think of a couple examples actually. But the more that happens, the more you can plug in the folks that can help you from a growth

43:22 mindset on the VC side and the others that can help you on the commercial side with the strategic, just the people that know the industry. I think that combination will be helpful. Flying out, I

43:34 never know how helpful conferences and stuff are. I think it probably depends on the conference. But obviously, going to places where there's going to be a critical, massive people that might be

43:45 interested in your company is always going to be a good thing. I don't know that the Sandhill Road Tour is always effective,

43:54 especially just because we're talking about the Valley, but Boston's another city in New York. A lot of those VCs that we've heard, they don't invest in energy tech anyway. So

44:05 you want to find the right fund. And then I think that's the other thing is like, find the right fund, don't just go to 10 funds and see if someone's going to write you a check. I think you can,

44:15 and then even more narrow than that, find the right partner or partners at that fund that are the ones you want to talk to and then try to get a warm intro. I mean, that's the best approach to me

44:27 and then if you can do it on your home. soil, like if you do it in Houston grade, if you have to fly out, that's fine. But I think this is evolving. I mean, I don't think people thought of

44:37 Houston as a huge technology center 10 years ago. And I think that's, you know, that's changing in that regard. And I'd say Houston, it'll say just Texas in general. So how should this come

44:50 inevitable? This is almost the most important question is how should founders think about valuation as you guys are seeing it play out. And I think that the data shows that in Houston,

45:03 valuations are a steep discount compared to some activity on the coasts. And so that's a factor of supply demand. There's just more supply of capital.

45:14 But even amongst energy and heart tech companies, it feels like there's a discount.

45:21 There's the financial question of how do I approach this? There's the negotiating question of how do I approach this but where do you guys find um your your counseling your founders to help them find

45:31 that you know that deal that that ultimately was at the right Price I Mean I can tell you how I how we usually think about them you know in the traditional venture space to sit if there's a little bit

45:44 of a finger in the air that at some stage because you haven't even gotten to the point of having Yeah so it depends on the stage right I mean once you have the good news and bad news about having

45:57 customers and revenue is that now you have customers and revenue started you know model around versus sometimes it's better from the Irish standpoint not to have that is then you're really looking at

46:09 what's the n market what's the potential here and that a lot of these really are just like thinking of it in that sense and okay how much are you raising and what percentage of the company AM I going

46:21 out so early stage rounded that an investor might be looking for somewhere At 20 of the company. You can kind of back into that. We're raising10 million and you want 20 of the company. That means

46:36 it's a50 million post or 20.

46:42 A lot of people, I mean, as simple as that is how much am I investing and how much do I want to own. As the company grows in stages, that's obviously going to change. That may just be a different

46:55 mindset That's not maybe how a lot of the Houston capital is coming in thinking about it. Scott, I don't know what you

47:04 see. I'm not sure the industry specific, Jason. I think there's a central time zone discount. I'll be completely frank with

47:11 you. I can probably point to two or three Austin companies that got really outside of the outsized valuations for one reason or another that were eye opening, but for the most part, the

47:24 discounts that I see the sort of. whether it's here in Austin or it's in Houston or just generally speaking outside the coasts are somewhat discounted. And I think it has to do with a little bit of

47:38 FOMO and depends on the market and like I say FOMO by investors. So if you've got just all those investors around all of these startup companies in the Valley, there's just there's so much there can

47:49 be buzz or maybe there shouldn't be buzz sometimes just because they're all talking about a hot company. And I think

47:57 I don't think that's necessarily it's not it's not great. Yeah, we want valuations to be higher, but there's a downside to your valuation being too high early on because there's a thing called

48:04 early illusion protection. And if you raise, I tell founders all the time that want to go raise from their friends and family in a super high valuation is if you do that, then you're you're you're

48:14 going to hose yourself when the institutional is coming and say, yeah, you're not worth 10 million worth 5 million. So, you know, there's again, higher valuations always seem better, are better,

48:24 will be better in the long run, but. you know, early on, if you get too greedy with valuation, even if you perform your next round might say, look, that was way too high. We need the level set.

48:38 And there may be macro factors that affect that too. I mean, we're seeing that right now. I've got a client that's doing much better than it was doing in 2021. But valuations were so outsized then

48:47 that they got something that was absolutely ridiculous and they're performing, they're meeting their numbers, but they're raising around right now that it's a 30 down round And just because of the

48:57 markets changed. And we're seeing a lot of that. I think Jim, probably you are too. I mean, it's where companies that are doing pretty well are having to do down rounds. So there is a downside

49:07 for outsized valuations. Again, not saying don't go get the best thing you can get, just know that

49:16 you want to be able to support that in your next round. You don't want to get something that you're not going to be able to support with results.

49:23 Yeah, there's a tough conversation. I've gone through several boom and bust cycles in my career. I started right when the NASDAQ crashed in 2000. So I've always been cautious of the too high

49:35 evaluation, just because I've been in the trenches on too many deals over the years where the evaluation has gone down and it just makes everything work complicated. It can be done and you work

49:48 through it and you need good lawyers for that But so we're ultimately there for you, but it's definitely more challenging. And what makes it challenging? 'Cause in some ways, the price is the

50:00 price, right? If you do your process and you get a term sheet that's down 30, like what can you do? Like talk us to kind of that board meeting that makes it hard. Yeah, I mean, this goes back

50:13 to the control issue and investor's ability to block grants and it's just human nature. People don't like to write down their investment, especially in private companies. where you have the luxury

50:23 of being able to close your eyes and not necessarily mark the market even if you should. And so a lot of times you get investors who just don't wanna do that. And so

50:36 some people are even willing to trade some structure to keep valuation high. You can kind of structure into evaluation if you want. There was, in a couple of years ago, there were companies that

50:49 really wanted to be a unicorn. But the market was telling them the evaluation was 700, 800 million. Well, they would go to investors and say, well, I'd really like to have a one in front of the

51:01 valuation. How can we get there? Okay, well, we can put some structure into this equity to give us more downside protection. And if you were willing to make that trade off, we can make it look

51:16 better. So you might have some of those conversations And just to clarify from the audience, so when you say structure, are these like terms like participating preferred or getting like an

51:26 anti-dilution protection, like what it just means more terms around that class? When I say

51:34 structure, I mean, any of those things, it's just that

51:39 the deviation from the plain vanilla and participating preferred with broad-based weighted average, you know, just basically straight forward. You might say, I want to participate in preferred or

51:52 I'm going to have a 2x on the downside or I'm going to

51:58 have a creating dividend that gets paid up. So there's any number of different bells and whistles you can throw on it to make it more attractive. Now, again, you're going to have to, that's going

52:12 to be there for future rounds and one of the. The lessons is you know all investors come in and look at what you've given prior investors is there that I like that I'd like that same thing too so I

52:25 get stuck with it yet the other issues math problem Abi So if if you have an Andalusian adjustment that's creating more as converted shares this is Gonna get really wonky but it creates more as

52:36 converted shares on your cap table and the investors going to say all of that goes in the free money so if you have a thirty percent discount on valuation it's going to be more than a thirty per cent

52:46 discount on share price and in in all of those can so it can be like a death spiral if it's too much of a down round because every extra share resulting from the Andalusian adjustment goes into the

52:58 Pre money which drives the price further down which creates a you know a bigger in a dilution adjustment and if there's these inner of spreadsheets that we can put together to make to calculate it all

53:08 but you know I've seen deals where Edo it was maybe at thirty or forty percent discount that because of the the way everything looked on their cap table and the adjustment, it was much, much worse

53:23 and then we're now doing reverse splits to right size of cap table. So, you know, the anti-dilution adjustments,

53:30 like, it's all manageable, but it both creates the complications and negotiation for the next rounds or if you're trying to save that valuation, but if you're actually taking the down round, it's

53:43 much more deluded, I think, than people realize, particularly if you're raising a significant amount of money at a down round, because that's why it's weighted, the more money you're raising,

53:51 and the further down it is, the more of an adjustment you're going to have. And that's particularly true in why you don't really see it very often, almost never. I think the statistics for a full

54:04 ratchet are less than 1, maybe even less than 01, because if you have a full ratchet, a full ratchet is an anti-dolution adjustment that I'm going to get, for my money, for my investment, if you

54:21 ever do an investment with an evaluation lower than that, I readjust my entire investment as if I invested at that lower price, well, you can't predict the future, but that may be,

54:36 and usually is, it just crushes the company and particularly management and founders because, you know, there's only, here's, the pie isn't changing, so if you give 70 of the pie to one investor,

54:48 that takes it away from everybody else, and it can really crush the company, which is why I think you just don't really see those terms, and when you do that,

55:00 that would be, that's usually a red flag

55:11 for me because it's, it sounds good on paper, but if you've ever been through it, you can see how it actually works, it, it, it doesn't really work. Good, I know, I think those are some

55:15 really good tips that. Um, a lot of our founders can learn from, um, you know, we in Houston, we think that we have all the ingredients to create these, uh, what we call at the energy tech

55:27 nexus Thunderlizards of the future. Um, so these clean tech companies that are really going to transform our energy industry and lead the energy transition, um, except for maybe, you know, the

55:38 capital, the early stage capital, um, we're hoping that we could kind of build that ecosystem here and also attract investors from abroad. Um, you know, based on your experience of, you know,

55:50 Chris Scott, you being in Austin, Jim, and you're being in the Bay Area and what you've seen on, um, the coast. What do you think Houston is lacking? And what do we do think we need to do to

56:03 really position ourselves to be a leader within this space? I think the first thing it's, you know, it's just,

56:12 there's going to need to be a little luck probably, um, know, if you think about how Austin was built through the semiconductors in Dell and then just everything that spun out of that really

56:22 created a, you have the university here too. I know that, you know, in a different industry, the medical center in Houston has been trying to figure out how to monetize everything that's coming

56:31 out of there for a long time. I think they have the same capital issues that the energy tech does, you know, until, you know, so the most obvious way is for someone to put their boots on the

56:45 ground there and be a true sort of energy transition clean tech venture fund with a significant amount of money. The other thing potentially that could come into play is if, you know, I'm not going

56:57 to name any names, but there's a number of private equity funds in Houston that are starting to dabble in venture. Again, they still have the private equity mindset we talked about earlier, but as

57:06 they start to see successful exits, that's going to encourage them to continue to invest in the more speculative space of venture. Um, you know, I think that's, you need success stories. Uh,

57:21 and then it becomes the flywheel that you want, you want to see there. So like, um, and that's why I think, you know, it's going to take time. But I think that Houston's well on its way. I

57:30 mean, I, I can name five or six companies that are super exciting that are based there, a couple of them are clients. So we're really excited about that too But,

57:41 you know, it's if we see them succeed and we see them exit and we see those founders get liquid and those founders then re put that money back into the industry and the community. I mean, that's

57:54 how it builds. Um, and, you know, ideally there's also people that move, but I think

57:59 the, the, the more, the more, um, realistic path, they'll be organically, and then, then people will start to see and then they'll start to throw capital in. Um, from, from everywhere else.

58:11 I was going to say, feel free to name drop those five companies that were. Walking about in Houston

58:18 like the ones that the ones that I think about that are doing really cool stuff they'd have actually gone to Sir to that project space phase and some are clients but I I think of a syzgy mattox some

58:31 Vita's done really cool stuff and there's a fourth one I'm missing that but like these companies that are have these really amazing new technologies and you know I know that Aura and the other more

58:44 private equity than they are venture but they've got a lot of companies that that that look like venture companies are Pre revenue and we work with a number of them but they're Super exciting like you

58:54 know utility global or bile there to us AH so there's there's a number that are really I think you know on their way and again just hopefully it starts to create that Flywheel effect can and I think

59:08 apart from those that you named we had these geothermal companies also coming up and with the the for row and SC systems Yeah I think there's one there's one in Austin to a geothermal that is doing

59:22 quite well so can I can recall the name of it that you create and any kind of laughed advice you want to leave for and for founders who are starting off and maybe those were now maybe heading towards

59:36 you know really scaling and entering this growth phase in terms of like when should they be thinking about interacting with the legal team and just in general advice that you want to give to us Yeah I

59:50 mean you should always have your first carnivore snapper and nobody I mean it it is a joke about it but I mean it never people are sometimes concerned outdoors that I pass money and I will tie

1:00:11 conversations with people who are thinking about doing something I'm just getting started and I think one mistake that people make is they start working on something before forming a company and they

1:00:25 just figure, Well, I'll do that later. And

1:00:31 it kind of advanced things to the point where now they, maybe they get a term sheet because they're out talking to people in the industry and somebody says, That's a great idea. I want to come and

1:00:39 find that. Now at that point, they haven't formed a company They haven't issued themselves equity, they've got a term sheet, now there's going to be some value there and even just the founder

1:00:51 getting stock in that company may have some tax complications that wouldn't have arisen if they just formed a company and then started working under the rubric of that. So sometimes it's just really

1:01:04 simple to get a company set up and the founder stock issue so that you're working under that

1:01:11 umbrella and sometimes that's a mistake we see. i pilot so then you know it it is certainly helpful again we're not bankers but we we can have we can help steer in the right direction of you know

1:01:25 people to talk to it and it's a it's a heart it is not easy to do and the more people you talk to and the more people you interact with that with the more educated going to you're going to be and the

1:01:39 better off you'll be in and we're certainly happy to help with with our sundowner gathering I agree with all that I think data you know know know what you want to be I mean like we I talked to clients

1:01:51 weekly or potential clients weekly and some of them you know it's like I I have a services company it's going to be profitable right away I'm never going to have to raise money and I like that's

1:02:02 awesome for you you don't need a big law firm it may maybe call us when you're going to sell your company but you know but at the same time it's like I am Gonna have to raise five hundred K then I'm

1:02:11 going to have to raise five million then 20 million, then my pilot project's going to get done, and then I'm going to do project finance. But if everything goes well, I'm going to be a unicorn,

1:02:19 but I just know I'm going to have, then get with a firm that can handle that whole life cycle as soon as possible. I think we scaled down really, really well early stage. I think you have to.

1:02:32 If you're working in emerging companies, whether you're with big law or small law, and ultimately, I think that

1:02:42 you can truly be pennywise pound foolish on the legal side.

1:02:46 It's our job to set expectations and make sure that there's no surprises when it comes to that. But I do think that it's always going to be worth, especially the companies you guys are talking to

1:02:57 that are part of ETN, to make sure that they've got legal counsel that can bring them through their life cycle. Well, thank you. Awesome. Yeah, thank you for joining us. Yeah, go ahead now No,

1:03:07 I was just going to say that was yeah, really, really good advice. Thank you for sharing. Some are kind of the pitfalls, the mistakes that founders make, what are the things that they need to be

1:03:17 looking out for, the red flags and in general sharing what you're seeing in the industry. And the great work that you're doing, working with these founders and helping these companies overcome

1:03:29 obstacles and

1:03:32 succeed.