Vaughn Blake

Ernst & Vaughn — Blue Bear Capital

Wednesday, May 25, 2022

Blue Bear Capital invests in technologies for the energy sector ($1-4M first check).  We talk with Ernst and Vaughn about the energy supply chain, the growth of renewables and what Ernst calls BroPEC.

 

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If you think that the $30 trillion dollar energy sector is important, then you’re gonna like today’s show. I’m zooming with Ernst and Vaughn from BlueBear Capital. BlueBear invests in technology for the energy sector.

But they’re looking at the full energy supply chains. It was a pretty broad scope of investments, as I understand it. Not a lot in your guy’s portfolio. It’s really like on the consumer side of energy. But you guys can tell me about that. Ernst and Vaughn and I are all here in L.A., but we’re on Zoom for this one. So thank you both for zooming with me. Yeah, thanks for having us. Thanks for having us.

I think you were literally our last in person meeting and in the first or second week of March before we all went into lockdown. Remember, we did the elbow bump in your office.

Yeah, I should’ve about my microphone’s had I know Vaughn.

So when I when I start with you, I’ll put you on the spot and just give me some the basics of blue air, what you guys invest in, what’s our attraction, what size checks, all that stuff.

Yeah, absolutely. So BlueBear Capital focuses on investing in data driven technologies that optimize, enable or protect energy assets and the energy supply chain in terms of stage where we’re less focused on the sort of alphabet declination of seeds or is a series B and more focused on companies have demonstrated early customer traction VIER revenue with Enterpriser industrial scale. So once the companies reach that milestone, that’s when we start getting interested. And we are our range of check sizes about $1 to 4 million usually during and around $2.5 million on average for our first check and we intend to follow on.

We save about 2 to 1 in terms of capital for reserves in our versus our initial investment. That’s great. And did I I sort of tried to characterize it as being more this energy supply chain rather than consumer. Do you have certain you know, do you focus on renewables or do you have certain themes within that?Yes, we do. So we really focused on the the industrial activities and the supply chain complexity that are required to get energy from production all the way through to market.

We’re less likely to invest in, let’s say, a smart home thermostat or because a scooter because that’s last mile transportation. We’re more interested in software like operational A.I. or industrial communications and connectivity that’s deployed in a large scale wind farms, solar park, refinery transportation network grid infrastructure. So most of that trillions of dollars of year spent in the energy industry is actually in those complex industrial operations. And that’s where we found the least penetration of software.

So the greatest investment need and opportunity.

And from what you just said, you used wind turbines, solar farms. Do you have a renewables focus or is it more traditional oil and gas?

So I hesitate to say that we don’t touch oil and gas because actually a lot of the world’s largest oil and gas operators are aggressively pivoting towards building wind and solar and grid infrastructure. So sometimes our portfolio companies, customers, maybe a Chevron or a BP or Shell, but actually they’re redirecting a lot of that engineering, procurement and construction talent towards more sustainable resources. And that’s really where the bulk of our Fund one exposure and investment is. And also what we see the outlook and for Fund II.

Interesting. So did you say like so like an Exxon or someone they’re putting more of their they’re putting resources towards the new renewables.

They have historically been a bit of an exception, but even they have now deployed solar and I think even now some wind to power some of the electricity needs on their oil and gas fields. And they’ve been also an early and aggressive investor in things like biofuels, algae. So, yeah, there’s there’s very few players left in the traditional energy industry who aren’t at least hedging, if not more aggressively pushing renewable sources.

I think I think I need to go take a selfie. Buy a solar panel on an oil field.

Somehow that’s too good Ernst.

Sticking with you for a second because you started BlueBear and have deep background in this sector. Maybe start us off by your background. The first energy energy technology investment project I was involved in was actually a hydrogen fuel cell business, and I remember at the time the company was excited that Hillary Clinton was touring the plant. And this is not when she was a presidential candidate or secretary of state, she was actually still a governor of New York.

So it feels like several lifetimes ago. And since then, I spent a few years and energy M&A and then ended up joining a private equity firm that specializes exclusively in energy. So a company that has $40 billion of assets under management and invested in over one hundred and fifty energy company.

And that’s really where I developed the original starting point of what’s now BlueBear’s network of peers of ours. So a lot of people from places like Blackstone, KKR, Apollo, TVG, a lot of the private equity firms that quietly. Direct about 40 percent of all energy spending in the US. So you may think of Chevron and Exxon and BP, but actually a lot of those private equity backed companies are doing a very high proportion of wind solar and traditional energy development.

And we found that they did not have good access to Silicon Valley and to digital tech in general. So that was a big catalyst for making the transition and partnering up with Vaughn.

OK, so tell me more about that, so 40 percent of the energy spent is done is directed by or sort of.

In these companies is done by these companies that are owned by PE firms, is that what you’re saying?

So if I’m a portfolio company of yours and I want to get a contract with one of these, do I go through the PE firm or do I go to the more the operating company?

Yeah, it’s a good question. It’s really more to the operating company and. We’ll talking in a minute about our, ah, close engagement with the founders and BlueBear’s portfolio, but typically if you’re the, let’s say, industrial IOT connectivity provider or the predictive maintenance A.I. and air quotes provider, you’re trying to get the actual operating company to use your software or use your your your technology solution. So you probably have a relationship with the asset manager, the head of operations that are field services, the head of I.T.

And they may be interested, but they don’t necessarily have board approval. A lot of these boards have been pretty cynical about Silicon Valley technologies or things that A.I. is just buzzwords, not a real thing. And that’s one area where BlueBear tends to directly support the sales process and the customer landing and expanding process.

We provide air cover by having the personal relationships at that board and ownership level to reinforce what the field and the asset level people already see as valuable that may not have the authority or the budget to to deploy.  Air cover as a service in any way.

Because because you’re leveraging those PE fund relationships, among others.

Yet we also have pretty close links with a lot of the corporates themselves. But the PE part is is usually the most opaque and inaccessible to tech company founders. Yes, I find the whole PE industry, it’s fairly opaque. And and so at Riverstone, you know, we’re there. Tell me a little bit about Riverstone just in terms of what were you guys doing with with your investing?

The firm would basically find a management team with some exceptional insight and provide a line of capital to build and grow a business. So it’s much more of a venture capital type mindset than more the LBO focused and financial engineering focused firms out there. In this case, the main difference is check size.

Those lines of equity instead of five or 10 million would be two hundred or five hundred million because the capital is going into building expensive infrastructure, whether it’s wind farms or oil and gas facilities.

But I sort of thought in PE, that the idea was to flip it, but not to own it either, not to be the majority owner.

And so I’m surprised that 40 percent of the energy industry is controlled by T if it’s meant to be sort of a more short term relationship. Sure.

A lot of the development spending happens earlier in the cycle. So if you’re building a commissioning or preparing to build, let’s say, a utility scale solar plant, you are securing the land. Your organizing, the engineering, procurement, the construction, the commissioning the grid interconnection. So there’s just a lot of relatively complex industrial activity you have to take care of. And that’s fairly expensive and that’s funded through a combination of debt and equity, like many things.

And then once the business has gone into operations, the private equity investors may have sold out or stepped off the board, but they still maintain close relationships with the management team and the companies activity. So they’re easy for us to get connected to through that network. OK. I mean, I. It’s it’s all very interesting, but I’ll I’ll go back to BlueBear and what you guys are doing here.

Do you as do you do this because, you know, out as a do you have like an environmental focus? And and what do you see kind of today in in the energy sector maybe as it relates to the growth of renewables?

Yeah. I undoubtedly joined BlueBear to be, I guess, to have a front row seat and at least contribute in a small way to the energy transition, which I think is, you know, the defining event of our lifetime. The way that, you know. There are, I guess, two trends that we feel very strongly about and I think are essentially irrefutable. And that’s one increasing digitisation of industry writ large. More data, more digital, more software cetera, and the shift from sort of conventional fossil fuels to a more renewable and distributed energy future.

And even if, you know, there there has been exposure to what’s seen as, you know, a more typical hydrocarbon based generation process, the investments that we’re making are specifically made to reduce the environmental impact that those businesses might might be providing.

Where are we in that transition? Just broad strokes globally, which is similar to in the US. Still between 80 to 85 percent of the energy needs are coming from conventional sources. That’s much lower in certain regions. There was a day recently when I believe California power more than 70 percent of the grid through renewables.

So how when demand is a little bit lower and baseline production from sunny days and good infrastructure is relatively higher, you can get a really high percentage penetration from renewables. And then actually what starts to become challenging is the market structure and some of the infrastructure. So we see the bottlenecks and challenges evolving in each one of those as an investment opportunity set of its own. Exactly. The curtailment in storage. You’re probably next step in terms of major secular shifts with renewables becoming more economical to produce.

Obviously times they can even exceed capacity. And with the excess capacity, you’re kind of stuck in a position where you need to figure out a way to actually store. So storage I think is going to be one of the next emerging game changers.

There’s a little irony because a lot of the oil and gas community has pointed at storage as being the Achilles heel of renewables. Right. You can only really produce wind and solar when the sun is shining or the wind is blowing. 

And the irony is that we’re we’re recording this here on a day where the price of oil dropped to one point to nearly negative $30. Yeah.

And that is because you. If you haven’t been checking out the you know, the the wires today, there is such a. A glut of production coming online compared to the demand as coronavirus and long term other things slow down demand for oil that there literally are not enough places to store the oil coming out of the wellhead. And so storage is suddenly being much better addressed by technology innovations over the last couple of decades.

And wind and solar development and the basic technologies like tanks and and depleted reservoirs are suddenly not sufficient for an industry that’s been operating for 100 hundred years.

Right. I mean, I think of storage when you say storage, I’m thinking of battery technology for renewables.

But yeah, I mean, I’m super interested in your perspective on what’s going on today in the world in terms of the Saudis and the Russians were there.

Do you know? I don’t know.

Having a standoff and have been shipping their oil over towards us.

I haven’t really been following it, but yeah, we will. We like to call it Broke Peck. So there’s this era of complete, complete free for all. And then Overpeck was formed and then more recently, OPEC plus or the Russians were more engaged.

But then over the last about 18 months, there’s been this series of basically playtest interviews, supply global energy supply policy by tweet where m.b.a.s and Putin and the US president basically make promises to each other and and organize how they’re going to communicate that.

And that’s that’s fine. That’s probably a necessary component of of directing such strategically important industries. But you just cannot enforce tens of thousands of independent producers in the US and dozens of countries that are fundamentally having to meet budget demands and fund things like health care and education through energy sales. So to not expect there to be rampant, let’s say, non-compliance with OPEC policies even among OPEC members, let alone a bunch of drillers in West Texas, it seems very naive.

So we’re not surprised that there is a bit of disarray, of course. Nobody expected the economic shut down the corona viruses led to the reason that the contracts fell through the floor today is because they expire today. So, you know, usually folks are trading these contracts and it’s going from, you know, holder to holder to holder. But when the contract expires, there’s actually delivery required. So today, whoever’s holding those contracts is actually going to have to receive delivery of a thousand barrels of oil for every every contract sale.

How much did consumption drop off? About Covid? About 20 million barrels, which is roughly 20 percent. And OPEC has been able or OPEC plus. We called broke back again because it’s really three individuals who’ve got an outsized affect right now.

They they’ve been able to cut something like 10 percent or at least claim to agree to cut something like 10 percent. If you really imagine a lot of these producers, whether they’re governments or private companies, taking one on the chin for the rest of the world, we’ll see what actually comes through.

Well, but until bringing this back to BlueBear a little bit, which is where are you guys, where do you see the tech applied to this situation or, you know, broadly to the market.  Well, part of the part of the origin of this strategy was. In our energy private equity days, we would be sitting at board meetings of major wind developers or offshore oil and gas producers, and you would actually have a 30 foot blade fall off a turbine or an offshore power supply get cut off and nobody would know exactly why or how long it would take to fix or to where to get replacement parts in a very timely manner.

And these are sophisticated operators, so they know it as well as anybody in the industry can possibly know it. That just wasn’t a very high standard. At the meantime, you’d come out of those meetings and you’d order your Uber and it would pick you up on demand. You’d be able to check the temperature in your bedroom from a smartphone app. You’d be able to order whatever you want for the next days or weeks trip on Amazon. So really be the bulk of our investment is in taking. Proven technology concepts enabled by software engineering and data science and deploying them in a very tailored, thoughtful way to these large critical use cases.

There’s something that’s called a great career change going on right now where basically all of the man in the management class is approaching retirement age.

And there is a basically an entire generation left the energy industry during the crash of of the oil crash in the 80s. So there’s this massive generational gap between management of two to five years ago and what management will look like look like tomorrow. So, one, there’s a massive opportunity for this industry to digitize. We have digital natives sort of running running the show. But to there’s a significant amount of knowledge transfer that could put that maybe even three to five years ago would have been lost.

But sort of enabling some of these, I guess, quote unquote, frontier technologies that enable that knowledge transfer, whether it’s immersive computing, whether it’s voice, whether it’s a car, whether it’s AML and LP, but sort of gathering, processing, validating, communicating and transferring that knowledge from the older the older generation to the newer generation is something that it’s really exciting, something that I try and try and take advantage of in terms of investment opportunities.

What does that mean? I mean, I don’t think you mean, you know, digital photo albums or something like. What does that mean to codify that knowledge transfer?

Sure. So one example is a deal that we’re just actually closing on today in the middle of the the. Coronavirus shut down, we’re still seeing both from our team and and some of our favorite co-investors, great continued engagement in the v.c. Funding landscape. But this is a business that basically deploys a voice interface to allow workers to go through any kind of maintenance and operations activities without having to constantly either pick out a tablet or a phone or walk over to a shared workstation and type things in. So it’s an example where we’re using existant technologies to capture industrial operations data and not just do that task faster. It’s like 80 percent faster task completion times that the company Darch has has registered.

But in the course of. Processing all of that information through a voice layer. You’re actually extracting a lot of the. A lot of the knowledge, the context awareness and the background knowledge that these teams have by by taking in exactly what they’re thinking while they’re doing something as opposed to what they want to write down in 10 seconds at the end of a busy day. 

Got it. And so in in that example or in a lot of these examples, you guys said at the beginning that you’re looking for someone who has at least one. I think you said industrial contract ago.

Yeah, so typically we engage once the businesses where we can engage much earlier, but we might invest once a business has demonstrated six figure. Revenue run rate potential or actual revenue run rate. And that’s because we like to see a scale of enterprise deployment that we can multiply through our network. So if you’ve sold your enterprise software to a couple of independent when sold or related service companies, we can take those case studies and present them to dozens or some cases over 100 operators that are quietly owned by the private equity universe again.

I’m going to turn this over to Vaughn, which is fun before this. Well, you should give me the quick version of your background as well. But before this, you were doing Frontier Tech Investing. And so I am curious about your perspective on the on energy investing now.

Yeah, for sure. So, yeah. Prior to BlueBear there I ran that or I guess technically still run a solo general partnership called Autochrome Ventures. It is usually precedes or series a fund where the thesis that I developed was called it Applied Frontier.

So the industrial enterprise application of Frontier Technologies that fund I guess invests in about twenty five companies, everything from immersive computing to human computer interaction, space tech, synthetic biology and AML narrowly applied. I’d say the the most frontier aspects of energy are a little bit more binary. Nowadays, you know, these are things that are usually material science based or, you know, battery chemistry that those sorts of those sorts of deals that are.

Very far out in terms of understanding whether or not they can sort of hit the ground, hit the ground running and promise to return.

I think they’re extremely attractive from a technological standpoint. I understand why, especially a lot of, you know, friends of mine that still invest purely through the lens of sort of deep tech, you know, try and back those companies. There’s just going to be a significant attrition rate around or around a portfolio construct in that capacity. What I’m seeing now is, again, some certainty, some of the technologies that three to five years ago might have been seen as particularly cutting edge a-r, for example, having just extremely intuitive and impactful applications with within within the industrial space.

I mean, you know, everybody’s seen the the old McKinsey or Gartner projection of the size of the VR market and everybody’s going to be sitting in their houses with with Occupy on it. It turns out that that, you know, the most, I guess sort of initial and effective and again, impactful application is our screens for industrial workers to help them with things like compliance management and workflow management. It might be helpful to run through a few quick case studies, I can probably do it in under a minute.

Great, so just giving you a quick tour. Our first investment was in a company called Mineral Soft. There’s really just a ERP system for mineral rights and royalties owner. So a lot of the farmers and ranchers who have energy asset passive income that was exited pretty quickly and successfully to a strategic business called Midian that does remote monitoring diagnostics for rooftop solar. They have over two hundred thousand rooftop solar assets that they manage with with remote monitoring software and extremely efficient and timely missions.

Secure provides industrial cybersecurity, making sure your your tank farms and and gas plants and shipping assets aren’t being hacked into or at the extreme blown-up. Shoreline provides simulation and optimization software for offshore wind development and operations and management. Raptor maps as is really digitizing the entire process of building an operating utility scale. Solar farms free wired does electric vehicle infrastructure, software and components ever activies battery free industrial sensor technology taking just ambient lighting and tiny temperature differentials to power IAPT sensors. Copper manages demand data for power, electricity and water, gas, electricity and water.

Transect is digitizing and automating the ability to run all kinds of environmental impact assessments. If you’re trying to build a transmission line or any kind of energy asset, you have to get permits, identify endangered species, cultural heritage sites, right of ways. All that can be can be done much more automatically and digitally through through their analytics and cloud software.

So. Each of these are technologies that you can map to some other business use case, but they just have not been well developed for managing large complex again, often cases multi-billion dollar assets in the energy supply chain. 

So staying on BlueBear, you guys are both in L.A., Koray, L.A. How many people total are on the team?

Because you have a few. You have some presence in other cities.

Yeah, I can run through the team overview briefly, and that’s, of course, are our greatest asset, our greatest strength. So three of us are full time in L.A. on myself and our GC and C.O.O. Hank, who is a former Latham and Watkins attorney. Then we have Carolyn Funk, who’s in the Bay Area. She’s a p._h._d. Who who supported the German Energy Agency and then worked in the Venture Partnership and Development Team at Siemens for several years before becoming CEO of two different energy storage companies and helping them get from from seed to series.

We also have our CTO was a computer science p_h_d_ and really our expert on software risk assessment and software development acceleration, Rob McGinness and and very importantly, a couple of our most most effective and supportive advisors and investors, people like Tim Kopra, who is a former NASA astronaut and longtime military veteran who’s based in Houston. He was really Hands-On and fun one. And as a leader and kind of our team development and Fund II. And Lord Browne, the former chairman and CEO of BP, was also on the boards of Intel and Goldman Sachs and many other firms.

Again, tremendous perspective, a network in the energy industry and someone I worked for directly for many years. He has a great team. I am I think I told you I heard you on the oil and gas podcast. Good podcast.

Surprisingly good podcasts, actually.

Yeah, they need to rename it because it’s really energy, everybody. And oil gas is re-branding to energy.

Interesting. Interesting. And yes, Tim, your, you know, former astronaut colleague was on that one, but I was glad that I got Vaughn. I just got to say, I said I don’t want him.

I want mine for sure. Great. Great. Well, I’ve really been enjoying getting to know you guys. So on the personal side of things. So Vaughn, I had I had Noramay Cadena on the podcast and she said that she and Carmen and they’re the two g._p._s, they’re two of the jobs at MiLA Capital. She said that they are 10 percent of all Latina general partners in the US.

Is that crazy? Yeah, it’s pretty unfortunate, but it’s not particularly. I’m not I’m not surprised, unfortunately.

Well, I mean, I was going to ask you, like, how many black GPs are there in L.A.? Like it’s got be. I bet you know, the mall is my guess. Yeah.

far be it for me to speak for anyone else. And I think the experience is many splendored. For every black, we see it just like it is for every black person in America. But, you know, I think that it’s definitely a problem that needs to be addressed. I think that, you know, diverse perspectives drive. You know, higher returns. So, you know, you can see the sort of one of the things that I really appreciate.

Actually about about BlueBear is that all of our backgrounds are remarkably different.

So, yeah, I mean, I’ve tried to do a lot from, you know, quietly investing in the funds. As an LP and the funds of a diverse fund managers as well as, you know, supporting on the angel side a fair amount of entrepreneurs. And that’s the only way that I think the problem is going to change is, you know, having capital in those hands. Absolutely, absolutely, 100 percent sometimes. I mean, I’m part of a lot of the women’s network, said the female founder networks.

And, you know, it’s great to have mentorship, but actually capital means.

Yeah, yes. Oh, that’s got to have both.

Yeah, that’s it’s pretty, pretty important factor in this game. Yeah.

And we’re absolutely we’re asked a lot about our ESG footing and as investors in technologies that improve how the energy in and as as is now called climate tech businesses work.

That’s the central set of principles for us. We also believe the S and the G deserve just as much focus. And we we try to have ESG and health and safety and diversity be the top agenda item in every single board meeting of all companies. And then we, of course, have to live that ourselves as a as an investor. That’s great. But I really appreciate getting to know BlueBear better and I feel like I learned a lot today. So thank you guys for making the time.

Thanks a lot. Thank you, Minnie.