What’s it all about?
I was delighted when the Fifth Wall people reached out about the podcast. For some time I’ve wanted to address areas of the climate challenge, and areas of technology that are hugely important, but don’t often get much press or attention, including on this podcast. In particular the Built Environment is of enormous importance to us all on many levels, it is of course where we live and work, and because of that impacts not just our immediate lives, but as you will hear, contributes far more to carbon emissions than transport, which gets most coverage at present. Greg has a great background, including reporting directly to Elon Musk at the Boring Company and Neuralink. Take a listen.
About Greg Smithies:
Greg is a Partner at Fifth Wall, where he co-leads the Climate Technology Investment team.
Prior to joining Fifth Wall, Greg was a Partner at BMW i Ventures where he led the Sustainability investing practice, investing in companies such as Prometheus Fuels, and PureCycle (NASDAQ: ROCH). Before joining BMW i Ventures, Greg led Finance & Operations for both The Boring Company and Neuralink simultaneously.
Greg started his investment career at Battery Ventures where he covered early-stage enterprise technology startups, as well as industrial technology buyouts. Successful exits from his work there include Nutanix (NASDAQ: NTNX), AppDynamics (acquired by Cisco Systems, Inc.), and IST (acquired by Scott Brand).
Greg was born in Pretoria, South Africa, and currently lives in Oakland, CA. He graduated from the University of Pennsylvania’s Wharton School where he received a BS in Economics and a BS in Computer Science.
About Fifth Wall:
Founded in 2016 and based in Los Angeles, California, Fifth Wall, a Certified B Corporation, is the largest venture capital firm focused on technology-driven innovation for the global real estate industry. With approximately $2.5 billion in commitments and capital under management, Fifth Wall connects many of the world’s largest owners and operators of real estate with the entrepreneurs who are redefining the future of the Built World. Fifth Wall is backed by a global mix of more than 70+ investors from 15 countries, including Acadia Realty Trust, Azora, BNP Paribas Real Estate, British Land, CBRE, Cushman & Wakefield, D.R. Horton, Equity Residential, Gecina, GLP, Hines, Host Hotels & Resorts, Hudson Pacific Properties, Ivanhoé Cambridge, Jamestown, Knight Frank, Lennar, Lowe’s Home Improvement, Macerich, Marriott International, MERLIN Properties, MetLife Investment Management, Mitsubishi Estate, News Corp, MOMENI, Nuveen Real Estate, PGIM Real Estate, Pontos Group, Prologis, PulteGroup, Related Companies, SEGRO, Starwood Capital, Toll Brothers, Vanke, and others. Fifth Wall believes this strategic corporate consortium represents one of the largest groups of potential partners in the global Built World ecosystem, which can result in game-changing investments and collaborations in promising portfolio companies in retail, residential and multi-family, commercial, industrial, hospitality, and more.
- Greg Smithies on Linked In: https://www.linkedin.com/in/gregsmithies/
- Fifth Wall Website: https://fifthwall.com/
- Fifth Wall on LinkedIn: https://www.linkedin.com/company/fifth-wall-ventures/
About Hyperion Executive Search:
Hyperion are a specialist executive search firm working with some of the most innovative cleantech companies in the world, helping to find extraordinary talent to enable their growth and success. Partnering with leading cleantech VCs, as well as directly with founders and entrepreneurs in the sector. With our clients we are transforming business and growing a strong and prosperous cleantech economy.
If you want to grow your team, or move forward your career, visit www.hyperionsearch.com, or email firstname.lastname@example.org
- Energy and Civilization: A History- Vaclav Smil: https://www.amazon.co.uk/gp/product/B08BSZC81R/ref=dbs_a_def_rwt_hsch_vapi_tkin_p1_i3
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David Hunt 0:32
Hello, I’m David Hunt, CEO and founder of Hyperion executive search and your host for the leading clean tech podcast. For some time now, I’ve been keen to bring attention to technologies that address the carbon emissions and environment impact from the built environment. So much so that we’ve recently launched a smart cities team at Hyperion to work alongside the future mobility team. It may not always be sexy, but it is a sector where so much impact can be made in the fight to reduce global carbon emissions. And for that reason, I’m delighted to have as my guest this week, Greg Smith is partner of fifth or fifth wall a pioneering and advisory based approach to venture capital and the first and largest VC firm advising corporates on and investing in built world technology regulates the climate technology investment team. Prior to joining the fifth Ward, Greg was a partner of BMW i ventures where he led the sustainability investing practice investing in companies such as promethease, fuels and pure cycle. Before joining BMW, I ventures Greg led finance and operations for both the boring company and neural link simultaneously. I hope you enjoy the episode. Hey, Greg, it’s great to have you on the lids and findet podcast. Hey, great to be here. Thanks for having me. Good, good. So listen to this, you know, we primarily talk to or we usually talk to founders and hear their stories of high growth and fast growth and all the thrills, spills, trials and tribulations that comes with that in the clean tech environment. But clearly really one of the key important parts apart from people and talent, which is of course my aspect is is the financial side. So it’s really good to get a view from time to time from the investment community and from VCs. And particularly, I wanted to talk to you because of your focus in and around I guess you could call prop tech or construction tech or essentially investments in companies who are making the impact in the built environment because it doesn’t always get a lot of airtime isn’t always as sexy is a new Tesla or a Fisker coming to market to some people at least? Not necessarily to everybody actually by definition. Yeah, but actually I love buildings and construction and stuff so there’s there’s a whole load of stuff to get stuck into but before we do that, Greg you’re just you’ve got an interesting background yourself both on the investment side and also obviously in the executive side, including some time with the boring company also. Perhaps you give the audience just a little bit of flavour. What brought you to join fifth Wallace apart?
Greg Smithies – Fifth Wall 2:55
Yeah, absolutely. Um, yeah, maybe the 30 seconds background on me is I run fifth world’s climate tech investing practice here. Football is the world’s largest venture capital fund that’s focused on what we call the built environment, right. But it’s construction, real estate infrastructure and a little bit of energy buildings consume about 40% of the world’s power. So you can’t do built environment without touching energy as well. Prior to this, I founded and ran BMW i ventures climate investing practice. So there was a hyper focus on how to decarbonize manufacturing supply chain and obviously transportation. Before that, I was in the Elon Musk world for a number of years. I reported directly to Ilan as head of finance and operations as both the boring company and neuro link simultaneously, which is a little nuts. Boring company. For those who aren’t familiar digging tunnels and building mass transportation systems and selling flame throwers and neuro link putting microchips in people’s heads. You’d be surprised how many people think that Ilan already put a microchip in their head. And then I started my investment career at a at a fund called battery ventures, which people might be familiar with. It’s a relatively large these days, I think it’s about a $9 billion fund. What’s somewhat unique about them as they do everything from early seed stage investing through venture through growth all the way through to private equity buyouts. Typically when you’re there you kind of specialise, you know, I’m an early stage person or I’m a private equity buyouts person, through some weird happenstances. I ended up actually doing everything there, right. So from seed through growth, through to private equity, but mainly around industrial tech. And that’s actually the the tie into climate tech. So if you think of industrial tech, industrial tech is, is this unsexy technology that really is behind the scenes running the world, right? construction, manufacturing, supply chain, oil and gas, all of these things that, you know, maybe your typical VCs don’t understand, but they are the vast majority of most of the world’s GDP. And that goes all the way back. My tie into that is my first job was at an ammonium nitrate explosives blank for example. So I think people refer to me probably a little bit more as like a hardhat and work boots type VC as opposed to a tick tock VC if you if you send me the next tech talk on the next Facebook, I wouldn’t know what to do with it because I don’t understand humans. But show me the next interesting a big, boring industrial chemical process. And I’ll get pretty jazzed about that.
David Hunt 5:11
I think we’re cut from the same cloth. I’ve always worked in that kind of environment. So let’s talk about that. Because I, we had a guest recently where we were talking about heavy industry and the importance of decarbonizing heavy industry. And particularly at that time, we were talking about green hydrogen and its potential to address heavy industry, which is such a major contributor to carbon emissions. But again, that’s you say, people don’t really draw the conclusion of just how much a building or buildings contrary to common missions, both in terms of their construction, clearly, but also in their just in the maintenance and operation. You’ve got some stats, I guess, around that, but be interesting to why it is that you focus in that area. And if you do have some, some statistics to share around just how big an impact the built environment those have.
Greg Smithies – Fifth Wall 5:57
Yeah, so I think the big the big headline statistic that a lot of people just don’t understand, and this sort of slaps you in the face is that buildings, and this is across construction and running an operating buildings account for about 40% of all greenhouse gas emissions. And to put that in perspective, what everybody thinks is the big bad wolf, right transportation, and this is, you know, planes, trains, ships, cars, trucks, all of them combined, is only a little bit over 20%. And so the way I kind of like to think about it is you as an individual, if you’re thinking about how do I decarbonize my footprint on the planet, you know, you’ve got a couple of options, I can buy an electric car, I could, you know, switch to being vegan, or I can talk my office manager into adjusting the thermostat in my office building, right and, and it turns out that actually just adjusting the thermostat in my office building is probably going to have more impact, because you’ve got about $270 trillion worth of buildings out there, right is by far the world’s largest asset class. They’re consuming as I said, 40% of the world’s energy. In technical terms, when it comes to efficiency, the vast majority of them are kind of crap. It’s, so they’re bleeding energy they using too much. And so what really attracted me to this space is there is literally no way that we as as a species, decarbonize our impact of the world if we don’t fix the problem with buildings. And, and that on top of it, it is just this massive opportunity, because the asset class is so large, so you have these interesting situations where like, just the markets, just for electric motors on the roof of commercial buildings is almost $100 billion market, right. So from a venture capital point of view, because this asset class is so large, there are lots of stupendously big markets inside it. But from an ethical point of view, there’s no way that humanity decarbonize itself without fixing the building problem.
David Hunt 7:42
Yeah, no, absolutely. I think it’s certainly in I guess, in Europe or in Scandinavia, because we’ve suffered quite a lot from the cold heating is an area where again, people don’t necessarily think about the consequences of heating, just how much impact it has, in terms of energy and carbon intensity. But there are large parts of the world and growing parts of where we’re actually calling buildings is equally, if not more. So the problem. particulars recede into these crazy heat waves, obviously, in Canada, and elsewhere, Siberia, places where you obviously don’t expect to get heat waves of any magnitude, let alone what we’ve seen. So in terms of technologies and the kinds of things you invest with, and we’ll in I should say, and we’re going to talk about hopefully some some examples. But broadly, how much of your time effort is sort of focused towards construction related technologies versus I get operations and maintenance office entities and maintenance of existing assets and portfolios?
Greg Smithies – Fifth Wall 8:36
Yeah, so we actually try and track the the carbon impact relatively closely. So if you think of that 40% of global greenhouse gas emissions that are accountable for buildings, round, about a quarter of that is the construction phase and round about three quarters of that is operating phase. So in terms of dollars out the door here for the fund, we’re roughly trying to track to that. However, there are some caveats, which is the emissions that come out for construction of buildings are kind of happen right now. Right, whereas operating phase stuff for rebuilding happens, you know, amortised over the life of that building. So there is some evidence that maybe we should be over indexing a little bit more on the construction side of the equation, just because embodied carbon, and for those who aren’t familiar, embodied carbon literally means the the carbon inside the materials, right. So your concrete, your steel, the carbon that went into producing them, because that’s all getting released right now. Even for buildings that may go and stand for the next year, 50 years. And we do have a critical sort of immediate problem. We might end up over indexing a little bit on the construction sort of material side of the equation. So maybe we end up at a third of the fund going into those and two thirds into operating stage stuff. But roughly we’re trying to track to the to the carbon impact of these things.
David Hunt 9:52
Okay, that’s interesting. I would have assumed that actually, the construction was more carbon intensive than the long term running of buildings, but it’s interest That’s that’s not the case.
Greg Smithies – Fifth Wall 10:01
Well, actually, I think what you should realise there is just how many existing buildings are out there, right? Because I think when you imagine how much co2 is released, when you make, say, you know, 1000 tonnes of concrete to go into a skyscraper, like that is stupendous amounts, you can just look at that skyscraper and go, holy cow, there must be a tonne of co2, you know, absolutely massive amounts of co2. And then that just puts into perspective, how many buildings there are out there that even so the operating stage co2 emissions outweigh them significantly here, right.
David Hunt 10:33
Okay. So let’s put over investment. How about heaven? And Greg, in terms of fifth wall? How did the fund come about? And what is it? What sort of are your priorities in terms of investments? What sort of ticket sizes, what sort of technologies are really interested the fund?
Greg Smithies – Fifth Wall 10:48
Yeah, maybe I’ll just give you a little bit of background here on Fifth, we’ll just sort of put this into into perspective. So first of all, as I mentioned, the world’s largest venture fund focused on what we call the built environments, how we’ve grown, we’ve got about two and a half billion dollars under management now. And I think it’s that’s significantly more than the entire rest of the prop tech VC world combined. Now, the reason why we’ve been able to raise that much money and grow so quickly, is because of a somewhat unique model we have here, which is that about half of that money comes from the world’s largest consortium of owners, operators, developers of the buildings and infrastructure, right. So names you would know if you go to our website, big, big landlords, big development, folks, big construction companies have come together to put their money into into fourthwall. And so you can almost think of us as a bit of a new industry Consortium. And the reason why that’s that’s important is because the fact that we have a climate tech fund Now isn’t that we sort of concocted this in in a vacuum and decided that this was something good ethically to do it is something good ethically to do. But it’s actually because a whole bunch of our corporate LP partners came to us and said, Look, we as an industry have got a carbon problem. And we need help fixing it. And the reason why they were coming to us is there’s a couple of things going on. But the main thing is that over roughly the last 18 to 24 months, we’ve seen a massive upheaval in the capital markets where a bunch of the people who are the the ultimate sort of sources of capital, think the sovereign wealth funds, the pensions and endowments, you know, the hundreds of trillions of dollars, we’ve got a god out there. They’ve all made climate pledges, and they’ve said we only want to invest in projects that are clean. This is why you’ve seen the flight of capital away from the oil and gas industry. And all of the crazy stuff that we’ve seen happened to Chevron and Exxon, and you know, the legal stuff going against shell, all of their capitals, leaving the oil and gas industry. And similarly inside real estate where you’ve got $270 trillion of buildings, average debt, right, so like 60 to 80% debt loads on these buildings. So rough numbers, you got $200 trillion of debt on this asset class. And the debt markets are saying we only want to back clean projects. And so what that ultimately means is that the cost of capital for clean buildings is going down, while the cost of capital for quote unquote, dirty buildings is going up. And cost of capital is basically the one thing that drives this whole industry. Right? So long story short, the reason why this fund came about is because our corporate LPs was saying we really would like to unlock this lower cost of capital, it’s great when the Invisible Hand of economic starts, you know, Jesus take the wheel, right? It starts a flywheel here, and the industry wants to do this. The problem is, is that the industry actually doesn’t have the tools in order to do it, if you went out and bought all of the best technologies on the planet right now to decarbonize a building. And by the way, many of these technologies wouldn’t actually make economic sense, they wouldn’t have the right capex payback period. So you probably wouldn’t buy them. But just for argument’s sake, if you bought all of the best technology available on the planet, it would not even solve 50% of the carbon problem of buildings, you get to something like 47%. So the industry is looking at this and saying, Hey, we really want to decarbonize, but we don’t have the technologies to do it. Therefore, we think that venture capital fund is the right way to go. So that’s why the fund exists. But then as far as sort of what we’re looking at investing in and the sorts of opportunities there are, it’s probably easiest conceptually to think about this as through the lifecycle of a building. You know, we’ve we’ve discussed a little bit about raw materials, but think of a building it starts out as raw materials, concrete, steel, then you go and construct it, you build it, then you operate it for 30 4050 years, and then at some point, you tear it down. If we look through that, those sort of four stages here on the raw materials going into this is in scope for us, right, we are looking for new types of concrete, new types of steel, the reason why I keep bringing up concrete, as I think of concrete on its own was a country in terms of emissions. It would be like the sick the biggest emitter in the planet, right? It’s it’s terrible stuff when it comes to co2. So we would love to have better ways to make and make concrete and steel and gloss or alternatives for them. On the construction phase. You’re looking at software to just design better buildings. You know, a lot Buildings was designed poorly, right? They face the wrong way. You know, you’d love to build them so that they are passively heated and passively cooled and design them better. But then there’s also better ways to construct things. Right? So where you have less wastage, a fascinating stat I, I actually heard yesterday is that roundabout 5% of all the. So, construction, it uses up about 40% of all of the raw materials on the planet. And out of that, round about 10 to 15% of it goes straight through the construction and straight into the landfill without ever actually being used, right is literally they ordered the wrong thing. And then they throw it away. Right?
David Hunt 15:46
Yeah, yeah, shocking. I got a I got a friend in the UK, who runs a business that does well runs a business is a not for profit, but it’s essentially recycles builders waste and actually credible amounts of materials, everything from kitchens to to concrete to marble to anything that goes in the building, like because there’s either over ordered or under, just ended up being chucked away. It’s crazy.
Greg Smithies – Fifth Wall 16:06
Yeah, so super, super wasteful industry, about 40% of all of the materials in landfills is building related, right? So around the construction, construction stage, we’re looking at new ways of building that don’t have waste like that think prefab think 3d printing stuff like that. On operating side, we’ve discussed this a little bit. There’s software here, you know, you would like building management systems. So you want heating or cooling conference rooms that no one’s in, I think we just had a massive eye opener here with COVID, because a bunch of our office buildings that we thought were efficient, were sitting empty, but their power drawer didn’t go down to zero when they were empty, their power drawer went down maybe 5%. Right. So clearly there’s there’s a long way to go on the software side. But also, if you’ve I don’t know, own a smart thermostat, like a nest thermostat in your house, you know, there’s only so far that that software algorithm can take you if your windows don’t seal and your furnace in your basement is 30 or 40 years old, right in terms of efficiency. So we’re also looking at equipment that you can retrofit in here, better h vac systems, better heating, better cooling veterans, ulation, better windows, a lot of boring stuff here. But stuff that really moves the needle. And then that final stage sort of end of life, we kind of discussed a little bit about, you know, how can we reuse these these materials, or even better actually, the best building for the planet is one way you don’t have to build it or you don’t have to tear one down, just extend the life of the existing buildings. And here you’re thinking about, you know, better ways to retrofit on, say cladding on the outside for insulation, so that you can keep up the buildings that you have, with them still being insulated and good. Um, so massive broad opportunities out there. Because these markets are, as I said, construction, you know, the first two stages here, we build five to $8 trillion worth of buildings every year. monstrous right? construction is typically like 10 15% of most GDP and in most of the world. And then the existing buildings as we said $270 trillion of opportunity there as well.
David Hunt 17:56
Let’s look at the words to attack because I guess in within your clean new climate tackle clean tech is an umbrella and MBM within that you get construction tech or prop tech and various variations on a theme. I think most people when they hear of tech do kind of think of the the sexy, primarily digital types of technology or the revolutionary stuff, which of course is great. Absolutely. But a lot of what you’re saying there is actually not slowly incremental, clearly game changing to an extent but not reinventing the wheel necessarily. It’s about making things much more better, much more efficient and not necessarily always digital. So again, perhaps of interest, how much of your, or the investment Do you see going into digital software related platforms and tools and solutions versus just improved building materials, windows, doors, glass, etc?
Greg Smithies – Fifth Wall 18:44
Yeah, I think, you know, pure software is probably going to be not a significant amount, like, you know, maybe 20% going going into pure software. And this is to my analogy around, you know, a nest thermostat can only move move you so far. However, software enabled, enabling other technologies will probably be the vast majority of the funds. So, you know, to name some names the first company that we invested in out of this fund, right at the beginning of the year, it’s a company called turn tide motors, they’ve got high efficiency, electric motors that drop into your existing big h vac. You know, the air conditioning systems on the roofs of big commercial buildings, right? There motors are somewhere between 30 and 50% more efficient in the real world. And the crazy thing is round, about half of the world’s electricity goes through motors like this. So if we say on average these these motors like 50% more efficient, that means literally one company with one product could save a quarter of the world’s electricity. It’s crazy. That’s why you know, breakthrough energy ventures has invested there Jeff Bezos, personally the Rockefeller Foundation, most fun Robert Downey Jr. So we’ve invested alongside Iron Man in this one too. Super excited about it. The reason why I’m bringing it up is because the electric motor portion of that is only sort of 50 sense of the story. The other 50% of the stories, the reason why their motors are so much more efficient is they’ve got incredible IP around a machine learning algorithm that actually controls that motor, right, which would have been impossible, even four or five years ago, because it’s a combination of the power of computers getting so cheap, because everybody has iPhones, right? So we can buy super cheap compute. And then there’s some science involved in the machine learning side of it, in order to actually build that algorithm and for it to talk to the motor fast enough. But my point here is that the hardware portion of it, whilst important is being unlocked by the sort of digital side of it. And so I think many of the of the opportunities we’re going after will look like that even the material science stuff, the reason why we can invent new ways to make concrete or steel, is because we’ve got better machine learning and AI systems in order to do the material science side of the equation more rapidly, if you know much about material science, typically, the way that you do or used to do it is literally just trial and error, right. And these days, now, we actually have AI systems that can throw spaghetti at a wall faster than any human can. And therefore you can massively accelerate, accelerate material science stuff. So long story short, I think the AI and the digital sort of aspects of these things will permeate probably all of the investments that we’re doing, but pure software will be minimal.
David Hunt 21:24
Right. Okay. Another interesting thing, I guess, in terms of the founders and the teams that you invest in, I was reading something that Iran, I think, as insisted around the sort of the makeup of entrepreneurs when they found their first successful business, what age they are, and what the profile is. And I was just wondering whether there’s a distinct different profile of founder or entrepreneur in climate tech profits tech that you would see in more as a traditional clean technology areas.
Greg Smithies – Fifth Wall 21:52
Yeah, I would say probably here that there is no, no exact sort of plutonian ideal of the, of the founder, right. But um, it does lean slightly different. So typically, you know, the normal sort of startups that everybody knows about the internet startups you’re looking at, maybe it’s an ex engineer from Facebook, or Google spinning out, and then starting up, they’re starting up their own thing, what we see a lot more of people coming out of industry and industry here can be everything from you know, john deere tractors to, to a whole similar five cements, right. And these, therefore are not people who are here in Silicon Valley, have walked up and down Sand Hill Road a whole bunch of times and met with every every single VC, they might be in Middle America, they might be in Europe, they might be coming out of Asia, they are not typically as adept at fundraising and know the ways of the world when it comes to navigating Silicon Valley, and all of those things. So I would say that it’s a much more diverse background of people. And I mean, diverse from literally educational background, through demographic backgrounds, and then just where these companies are being founded. And so we do have to have a very global scope and sort of a very large, wide lens on the sorts of companies that we’re looking for. The other anecdote, I will say, and this might sound a little bit pejorative, but it’s, it’s not that it is pejorative, it’s just true, is the vast majority of internet companies and stuff, kind of, because Silicon Valley is so sort of pale, male and stale. They all sort of look very similar in terms of their backgrounds, you know, Stanford, and Stanford engineers, MIT engineers, those sorts of things, who all look somewhat similar, what we do see in these startups, and it’s maybe a little bit of a historical thing that impact II type companies tend to just have a very different background. So more minority founded, more female LED, those sorts of things, which you definitely do see in the founders. Yeah.
David Hunt 23:48
Yeah. Yeah. Which is, of course, great to see. In every sort of areas, that diversity of thought and diversity of experiences are, I think, critical to their success, long term of businesses. You touched on a point there in terms of fundraising, or the or perhaps because founders might have come from industry and had an idea or a concept as to how they could take their learnings and their career experiences and create something meaningful and useful. But like I say, not necessarily used to knock on doors of VCs and putting together pitch decks and everything else. So interesting to see how you assess companies that are in or ideas that come your way, because clearly, I guess some of them might be great ideas, but not presented particularly well for those reasons. How would you kind of look at a pitch deck or how you can look at a concept and how do people come across your fund?
Greg Smithies – Fifth Wall 24:41
Yeah, so I think just on that directly, as we’ve got to get pretty adept at, I don’t know, speaking engineer, right. So So most of most of the companies we’re looking at, as you sort of alluded to, probably not the most polished presentations when it comes to it and you’ve kind of got to separate the wheat from the chaff I would say this is mainly in the background of our team on the on the investment side here. Most of the team have got sort of technical backgrounds. They’ve been working in these sorts of companies for a while. So we’ve kind of sort of got our eye in, but in terms of how we actually find these companies, because as I said, like the Silicon Valley solution of how you, how do you go and find that Google engineer who’s going to spin out and start the next company is that everybody’s here, you know, they’re in Silicon Valley, they’re in San Francisco and down on on the peninsula. And there’s a very sort of tried and true method. Everybody’s at the rosewood hotel on Thursday afternoon stay and type thing, right? Like, there’s a small niche niche way that everybody does this stuff. What we have to do, because these companies are so much more global, is, we have an unfair advantage here because of our corporate partner network, right. So we’ve gotten over 70 of the world’s largest owners and operators, they’re across 15 countries. And what that means is when any of these startups go to pitch, our corporate partners, our corporate partners, pumped them over to us. And so we just have what you could almost think of as a massive global dragnet to find all of these startups that passively kicks up, you know, probably a couple 1000 startups every quarter. So very, very significant in scale. But when you’re going after this sort of demographic of founder, where you know that they’re probably coming out of the woodwork all over the planet, is probably the only scalable way to really do this. Because the traditional sort of Silicon Valley way of doing it of of schmoozing at coffee shops, or within a sort of one mile radius of your office isn’t going to cut it in this space. Right?
David Hunt 26:35
Yeah, I guess it’s really interesting, one of which I say your deal flow essentially coming from those funds and partners who are part of all people who’ve invested in the fund. But on the flip side of that, once people are within your radar, I guess then you also have to tame market, but you have a, you know, a receptive market for that technology, if they if they have been able to convince you to invest and help them to grow. So I think that’s always why a strategic or an institutional investor can bring a lot more than a pure VC quite often, because they bring so much more than money, bring potentially open markets, open doors for the technology to get trials and pilots and the opportunity to to be active.
Greg Smithies – Fifth Wall 27:13
Yeah, absolutely. So round about half of our firm is people that we would sort of think of as coverage and or advisory. So these are people who are working directly between the startups and our corporate partners, to almost be like midwives to introduce the technology into large corporate partners. And, and typically large fortune 500 companies are not very good at ingesting new innovative startup technologies. And in the same vein, startups typically are not used to dealing with large fortune 500 customers, right. And so there is a whole lot of value that we do bring to both sides of the equation to the to the corporate partners and to the startups in getting sort of a meeting of the minds to to allow these two people to actually have good meaningful conversations to actually ingest and use the technology that’s there. But it’s, it’s a side of the equation that often goes sort of ignored by many other VC funds, but it’s critical.
David Hunt 28:09
Yeah, yeah. Yeah, absolutely. In terms of areas where the growth the way where you’re focusing technology wise, I do not see it that way. But are there sort of areas of technology where you think actually, this is going to be hot for another way of putting though there’s going to be a lot of real innovation in this particular area of property technology? And we’re going to focus a lot of time and effort looking there? Or is it more, I guess, building type or specific or related more to the, the sector rather than the technology?
Greg Smithies – Fifth Wall 28:41
Yeah, I the way I think about this is kind of, are we maybe opportunistic, in looking at deals, are we more sort of thesis driven? Right? are we are we doing a deep dive into a space and discovering all the companies in that space and then picking the best one? Or are we reacting as deals come in the door. And we as a fund are typically just much more heavily on the thesis driven side of the equation, you know, going and doing deep dives and discovering all the companies in the space. Now, what those deep dive thesis areas are, are heavily informed by our corporate partners and by the startups that we’re seeing coming in the door. Right. So it might be a case of, you know, all of a sudden, and I’ll make this up. But it’s, it’s thinly veiled, because this is relatively close to reality. All of a sudden, we we hear from, you know, four, maybe five different corporate partners who have excess warehouse space, that they would like to learn more about vertical farming, right? Then we go out and say, okay, maybe there’s some signal here that a bunch of these corporate partners are interested. Therefore, we go and research the vertical farming space and figure out, you know, okay, these are the top 10 companies in the space, maybe in a company one and two are decent investments, should we go and invest in them and then you know, we invest in Company B, right? It might also come out that we go and do a deep dive in space, figure out that it’s super strategically important for our corporate partners, but not a good venture capital investment, right. And so we do a lot of that as well. But long story short, most of the way that we’re doing these investments are very deep dive thesis driven work. And sort of some of some of the ones we’re working on right now, you might not have noticed, but the west coast of America is about to run out of water, right? A couple of years ago, Capetown, almost ran out of water. This whole issue of drinking water, I think was probably seen as something that the Bill and Melinda Gates Foundation should do, because it was I don’t know only Indian Africa who had this as a problem, and it was seen as much more impact he, I can tell you, the world’s gonna change its tune when some of the richest people on the planet open their taps, and you know, clean water doesn’t come out, right? When la runs out of water, people are gonna start a start taking notice. And so we’re doing a heavy deep dive at the moment into water tech. And this might be something as as maybe gross as water recycling, right? How do you how do you do better water recycling and water treatments? All the way through to some sci fi stuff, how do you suck water out of the atmosphere, atmospheric water generation, right? And, and sort of everything in between. But that’s an example where we’re seeing sort of a conflagration of events, meaning big sort of climate events, but then also pulled through from our corporate LPs, because the cost of hooking up to municipal sewer systems and people’s cost of water and sort of going through the roof. And so they’re seeing it on their op x line and their buildings or on their construction costs when they’re hooking up to the sewer lines that is getting much more much more expensive. And so we were seeing pulled through from them as well. But it doesn’t take a very deep reading of the daily weather news to figure out that what is going to be a big theme, right?
David Hunt 31:45
Yeah, yeah, no, absolutely. One of the major releases the major resource that we are so dependent on and, yeah, scary. Just how close to a lot of cities have come recently, not just in on the west coast to, to running out of water. Even in Germany recently, the right move a couple years ago, the rain was kind of at levels where you couldn’t use it as a transportation network has been another problem. Yeah, yeah. Yeah, absolutely. So one thing that’s interesting, I’ve been in and around clean tech since 2007. And clearly things like solar and wind, things like batteries, things like electric vehicles right now are going through exponential growth. But clearly, those are overnight successes that were far from overnight successes. There’s, there’s a lot of legwork needs to be done. There’s a lot of inertia in traditional industries, be they rolling gas with a traditional automotive with a traditional utilities to eventually get around to the point of having to do things for variety of reasons, either policy or financially driven, economically driven. It sounds to me from what you’ve said, and that the perhaps the construction industry again, you know, long established and fairly old school, in some ways, industry is perhaps a bit more receptive to change. I guess that doesn’t apply to everybody, of course. But do you see in Nashville, do you see a real receptive desire in the industry as a whole to change?
Greg Smithies – Fifth Wall 33:08
Um, I’d say there’s a bifurcation here, right? There are, you know, as with most industries, there are people who want to put their head in the sand, right, ostrich their way through this thing? And there are those people who see, you know, don’t let a good good crisis go to waste. Actually, this is a big opportunity. And in any industry, the real question is, where is that line between the ostriches and the people who think this is an opportunity? You know, is it 5% of the market thinks it’s an opportunity? Or is it 50%? in the in the construction and real estate industry, I think it is still low, right, we’re still only seeing it as sort of the leading bleeding edge firms are the ones who are seeing this as an opportunity to pull away from their competitors. But that it is growing fast. And this has a knock on effect of what we’re seeing in all of the other industries, right. The construction and building industry sees what’s happening in the oil and gas industry, which is, you know, activist investors, the highest quality investors leaving the asset class, the legal stuff going on, right? They’re looking at that and saying, wow, you know, the pitchforks are coming in. There’s there’s the saying, right, how did you go bankrupt? And the answer is two ways. It was slowly at first and then all of a sudden, right. And that’s actually how an exponential growth curve happens. And humans are very bad at understanding exponential growth curves. So we typically see them as slow and then a cliff, right? That’s typically the way that industries have to change, or that industries do change. I’d say right now this industry is right at the inflection point between slow and steady and the cliff portion of that exponential growth curve, where the people who are seeing this as an opportunity who are building climate stuff into their DNA are just going to end up having lower cost of capital lower operating costs, right because they buildings are cheaper to operate, you know, higher higher rents that they can charge lower vacancy rates. They will just Be more profitable than their competitors. As a more profitable company, they will attract more capital, right, their stock prices will be higher. And they’ll end up sort of pulling away from all of the other people playing ostrich. So that flywheel is definitely taking up, but it is still a minority of the of the market. Right.
David Hunt 35:17
Right. How do you see insurance plan appealing? So what I thought was really interesting a few years ago is when the insurers started to stop insuring coal plants, for example, or some really heavy, including industries, that clearly has a knock on effect of the availability of the cost, of course, and of course, then the cost of capital, which we touched on before. Clearly, I guess the insurance sector for the built environment is phenomenal, and scale and size. Do you seeing that the insurers are interested or playing a part in this transition?
Greg Smithies – Fifth Wall 35:46
Yeah, so what you’re digging into here is just this concept of stranded assets, right? And what a stranded asset is just just, if people aren’t familiar, right is an asset that in visceral terms, it literally might be it is stranded, right, seawater rise has cut off this building from the mainland, and therefore no one wants to live in it anymore. But I think what’s going to happen decades before that is situations where you can’t finance or you can’t insure a building, and therefore it just becomes an economic to, to own it. What’s going on with the insurers is that they right now are at an inflection points where they are trying to rebuild all of their insurance models, right, their predictive models, and the actuarial tables for this new world that we’re in, if you know much about how they’ve typically done their pricing. Most of it is built on the back, especially for climate related risk, right? flooding fires, you should check my math on this, but buildings are worth less if they’re underwater on fire, right. But typically how the insurance companies have done this as they’ve used things like FEMA, flood maps, and FEMA flood, flood maps are typically updated once a decade and they’re backward looking right. Whereas now we have a new crop of startups that are building sort of proactive forward looking predictive climate models that are updated, you know, on a daily or even hourly basis with satellite data, right and building those into their models. And I think the plural of anecdote is data. I am currently at anecdote level, but I have had discussions with probably five of the top 10 largest insurers in the world. Every single one of them right now is in the process. There’s somewhere along the along the path of introducing these new proactive predictive models into their actuarial tables process. And once that’s done, it’s not like there’s any judgments involved, if you know, the way that these big insurance companies work as if their actuarial model says this is not an insurable asset, like that’s it, you’re done. Right? You can shop around and maybe find a different insurer who, who isn’t as sophisticated, but then you’re going to be paying more for insurance, because you’re kind of going to tier two and tier three folks. So this is an inevitability, it’s a win, not an F. And I can say that the top insurance companies right now are in the process of updating all of their models. So it’s gonna happen.
David Hunt 38:09
Yeah, it’s just I mean, just here in the UK, you just drive around and see so many buildings being built on floodplains pay housing, primarily. Because the blue is the shorter the housing, the whole dynamic is changing. We saw obviously tragedy recently in in Florida, how much you can say that was directly linked to climate. But we do see that the the seaboard is clearly encroaching on existing buildings. It’s, yeah, I think it’s something which like you said before, it’s the equivalent of turning on the tap, when a building falls down or something dramatic happens, it starts to make everybody particularly in the rich world kind of realise that actually, they’re safe, secure. Environment isn’t necessarily safe and security once was, which is frightening, and not necessarily a good thing. But clearly from a from a driving or change point of view. It’s a good thing.
Greg Smithies – Fifth Wall 38:55
Yeah, I mean, it’s, it’s sad that we as an industry are moving so slowly. But at the same time, if there is a silver lining to say, entire towns being burnt down, it’s that it’s a wake up call, right, that’s hopefully going to accelerate what this industry does, right?
David Hunt 39:14
Yeah, yeah, no, she’s just tragic. But clearly, there are hopefully some positive outcomes in the same way as there have been with with COVID. And we won’t go into the sort of ways of working on that come come from the last year or two in terms of what we’ve learned. But it’s been really fascinating, great to spend some time with you talking about a sector which doesn’t necessarily always get the appreciation for the impact. It has both positive and negative on our lives day to day, but obviously on the climate in the longer term because of its impact. And I guess you have to ask we all are in this sector, by definition, optimistic that we can make the changes but as we have seen recently, an acceleration of examples of climate impacts. Are you seeing sufficient in your mind funds, we’re certainly seeing a lot of funds we touched on one before the money is Coming to become available, but we can make sufficient impacts over the next 10 to 15 years to really head off the worst of what could come.
Greg Smithies – Fifth Wall 40:09
So I will be, I’ll be both optimistic and pessimistic here, which is optimistic, we are seeing a massive uptick in the amount of dollars going into the space and being raised for the space. Right, literally just this morning TPG rise announced their next fund. I think they’ve closed five and a half billion dollars into it, and they’re still targeting seven. Right, fantastic. That’s the late stage Growth Fund. We need we need all of those, right? Yep. So the optimistic side is yes, it looks like there is a lot of capital flowing into the space and we need every dollar that we can get. However, here’s the the flip side of that is the amount of capital we need versus how much actually needs to be spent, or how large the opportunity is, is still nowhere near what we see in other areas of venture capital. So let’s just look at another space that people might be familiar with, but like enterprise, SAS software, which, where Where’s everybody made all of their venture capital returns in the last, you know, 20 years, it’s basically either the internet or enterprise software like those, those are the two categories, enterprise software, as an entire market size is round about $800 billion. I mean, even for argument’s sake, let’s call it a trillion dollars worth of markets, the total amount of venture capital and growth equity going off to that $1 trillion worth of market is probably somewhere around 300 400, maybe $500 billion, right. So you’ve kind of got 30 to 50% sort of coverage of venture capital dollars going out that market opportunities. Whereas if we look at the market opportunity for climates, tech, just in real estate, given that you’ve got $270 trillion worth of buildings that need to be retrofitted, we’re building five to a trillion dollars worth of new buildings every year. That means that the climate tech opportunity just in this space is somewhere between two and $5 trillion every year, for the next 50 years, obviously, with some ramp up, right, yeah, but the total dollars going after that opportunity says two to $5 trillion opportunity. But the total dollars going after it, I don’t know, less than 100 100 billion right now. Right? Probably considerably less than 100 billion, even call it 50. So long story short, we could probably increase the total amount of dollars into the space by one, two, maybe three orders of magnitude. And we’d still, you know, be good. Right? So I’m very heartened at the massive uptake we’ve seen recently. But we’ve still got a long way to go.
David Hunt 42:32
Long Way to go. Indeed, yeah, no, thanks for sharing it clicking closing, Gregor, actually, we always tend to look a little bit back on the individual. And you’ve clearly had a very interesting career, including, obviously reporting directly to Ilan, and I know a few people that haven’t that’s always been some interesting anecdotes from, from having done. So. But yeah, have there been any particular inspirations to you in your journey would be that sort of books, teachers, thought leaders, individuals that have inspired you to be in this space and to do what you do?
Greg Smithies – Fifth Wall 43:04
I think actually, probably the biggest, biggest inspiration, and this is gonna sound like I’m dodging the question, but it’s actually I’m gonna put it on to the next, the next generation of people coming through, which is that for roughly the last 20 years, our best and brightest people in the world have all been going and you know, chasing, making their millions at Google or Facebook, optimising ad clickthroughs rights, this is a travesty for humanity. So the biggest inspiration, I actually have the Gen Z folks entering the workforce right now, who clearly wants more in their paycheck than just dollars, right? They are looking to make an impact, to really push the needle on things that matter. And I think this is also part of why and also not to say that millennials didn’t do this, but I think the Gen Z folks are so dialled this up to 11. Right. And so that is an incredible inspiration for me. It kind of seems that there is hope. And there’s this, this saying that, you know, we don’t inherit the from our parents, we instead sort of lease it from our children, right, pretty much we’re protecting it for our children. And every day, as more and more of these people enter the workforce, I hope that the people at the top end of the spectrum, you know, the folks towards the end of their career, who just kind of have all of the power are inspired on a daily basis by these young people entering the workforce, to do more impact and to to really make a change. And I do think that a lot of what we’re seeing right now in these industries turning on a dime in the amount of dollars going into space, actually is because of the sort of the new generations coming into the workforce. Sure. Yeah, just on a purely sort of personal basis on just other things that I find. Interesting, I would say just every single year you should go through Bill Gates’s reading list and There’s always something good in there. The one that I’m reading at the moment is, what is it? It’s energy by Vaclav smil. Yeah. Which is, if you just want a good primer on how to think about the world in terms of energy, because what most people don’t think about is that actually energy is the one thing that makes everything possible, right? any piece of material you see out there took energy to produce, right? any animal that’s growing any food you eat, there’s energy that went into that. And so it is kind of like, it’s an incredibly useful way of looking at the world. And so that’s a vehicle of smells, energy. Or maybe it’s called energy and civilization. Yeah,
David Hunt 45:40
yeah. Yeah, I’ll share that. Again. It’s one it’s one that has come up a few times it is actually is a does change your thinking or brings a lot of obvious things to mind that are in your office once they pointed out to you. And yeah, thanks for sharing that. Thanks for sharing your time, Greg, and thanks for telling us a little bit more about what you’re up to. And, again, more power to you and to those people who are as passionate about dirty lumps of concrete as they are about electric vehicles because we need more of more of all of us doing our part. So thanks for sharing. Yep, absolutely. Great to spend the time. Thanks. Great.