Why aren't energy startups funded like software? (with Doug Rand) 01:06:42

Hey Limited Partners, before we dive into this episode with Doug Rand, which for the record is one of my favorites to date, I wanted to remind everyone about our global virtual meetup.

Next week, we will all be getting together on the internet to celebrate acquired passing the million download milestone. It'll be February 21st at 5.30 p.m. Pacific, which is 8.30 p.m. Eastern time. We'll be using Zoom and structuring it as a live Q&A with folks. We haven't done one of these before, but in the spirit of experimenting with the edges of the podcasting medium, we're going to give it a shot. If you want to join, mark your calendar now, and you can check out the Slack or the website beforehand with the link.

And now onto this fascinating and important discussion on clean energy funding and the whole capital supply chain with Doug Rand. Hello, Acquired Limited partners, and welcome to the bonus show. David and I are here with a very special guest for you today, Doug Rand. So hello, Doug. Hello. Thank you so much for joining us on the show. Thank you for having me.

So listeners, I know Doug because he is the co-founder of Boundless, which is a Pioneer Square Labs spin-out company that is making it humane and sane to immigrate to the United States with absolute trust and confidence and really modern tools.

That was a really good elevator pitch. I might have to steal that. I think you guys have, uh, AB tested the sort of the perfect way to describe it on your website, but I couldn't quite remember it. Humane and sane. That's a great tagline. Yeah. Yeah. Well, it's better on an audio cause it rhymes. Yeah. Um, but today listeners, we're going to, uh, uh, uh,

dive into a topic that Doug knows really well, and that's the state of, uh, energy funding in the United States. And, and particularly given sort of the, um, global energy crisis that we're in and, and specifically around, uh, um, you know, carbon emissions. Um, Doug has a ton of really cool nuanced thoughts and, and basically history in sort of, um, uh,

different startups that have tried to innovate in in energy and how funding flows to them over the years and uh and we had this great coffee a couple months ago and i thought gosh this is something that really needs to be shared more broadly and that that our lps would really dig um and so so doug uh

And to kick it over to you, I know that you worked in the Obama administration. You've appeared sort of all over national news and different TV platforms talking about both immigration and some of the entrepreneurship stuff you worked on in the White House. Can you give us a little bit of sense of sort of your background and what got you into the space? Sure. Yeah, I'd be happy to. Well, I mean, briefly, I guess.

I'm just your typical evolutionary biologist turned theater publisher turned policy wonk turned tech entrepreneur. Uh, I won't bore you. Yeah. With the full, with the full story. But I mean, basically I, I was very fortunate and came to the white house, uh, on a public policy fellowship in 2010. Uh, and I was in this wonderful part of the white house called the office of science and technology policy. Um,

which under the Obama administration really expanded and had a whole range of really exciting activities going on. And I was given pretty much a new portfolio because I'd been an entrepreneur before. And we're still digging our way out of the recession. Everyone's...

in the country and particularly policymakers were thinking about job creation. And at the time, it was still some fairly new research that showed that startups, not just in tech, but across the board and not just in Silicon Valley, but across the country. But the new companies really have a special role to play in job creation and innovation more than incumbents. And that traditionally, small business policy was already

was always a central concern of any president, but that's probably different from policies to promote high growth potential startups. So what would those policies look like? And so that was a really exciting mission to pursue.

Start and you work. Here's a new policy proposal, a policy portfolio. Go figure it out. Right. And that that led to things like the international entrepreneur rule. So, I mean, yeah. So like most of the things I worked on were technology neutral and industry neutral.

Let's just sustain and grow America's lead as the best place on earth to start and scale a company. And so I did things around access to capital, most prominently something called the Jobs Act, which has made it possible to do crowdfunding for debt and equity and also has made IPOs a little bit less costly. And I did things on...

entrepreneurship, to try to do some public-private partnerships around making sure that you don't have to look a certain way or be from a certain zip code to get funding. And I did a lot of stuff around immigration because it turns out that

When you go around the country and talk to smart people in tech, whether they're investors or entrepreneurs or engineers, and you say, hi, I'm from the federal government and I'm trying to promote entrepreneurship. They don't want to talk about taxes or regulations or access to capital or all the things that you'd expect. They want to talk about immigration policy. And so it was a very, very immediate realization that if I was going to work on entrepreneurship and innovation for the Obama administration, I need to work on immigration policy as well.

That's awesome. And obviously related to Boundless, but I think there's some crazy stat. I think something like two thirds of Sequoia's portfolio over the 40 years that they've been doing venture have at least one non-native US founder. It's crazy. Yeah, for sure. You can go on and on. Most of the

uh, if not most, at least a pretty high percentage of the fortune 500 were founded by immigrants or their children. Um, more than half the current unicorns have a, have an immigrant founder. I mean, just go on and on and on. Um, so, so I worked on all this stuff, which was really, really exciting and really, uh, gratifying. But then, um,

I was always interested in the interaction between technology, innovation, climate solutions. And so one of the things I worked on that was more technology industry specific was something we ended up calling the Clean Energy Investment Initiative. And that was really focused on

the fact that, okay, we have all these policies to support high growth, potential startups across the board, but sure. It looks like if you're trying to attack something, you know, attack a problem in, uh, anything to do with a fundamental innovation and clean energy, uh, that's a whole other set of challenges in terms of financing and, and other, uh, yeah, existential risks for, for a company. Um, and that's, and that's,

and that's the thing I really want to dig in today on. I'll let you, I'll let you finish in a second. But the, the question that's been like ruminating in my mind ever since we had coffee is, uh, you know, if I want to start a new SAS business, there's a ton of capital available to me. If I want to start, um, a new, uh, sort of shoot for the moon consumer experience, both in entertainment or social, there's capital available to me. There's plenty of sort of, uh, deeper tech plays. If I want to do a AI solution for something, or I want to even, uh,

innovate in hardware and go raise $100 million to do something groundbreaking in hardware, that's available to me. But if I want to make a serious dent in building new technology to help address global climate issues, and I want to work on clean energy, that capital is way, way harder to find. And really, why is that? Right. And so I went through my own

uh kind of aha or maybe more appropriately oh no moment uh in that same vein like midway through my my time at the white house where i yeah i was we're all worrying about this problem uh in terms of whether our our entire innovation machine is really working um and particularly acutely after the

kind of boom bust of VC investment in more fundamental clean tech that happened starting around 2006, 2007, and then crashing around. Well, I mean, right after the recession for a lot of reasons. But then there was this one number I looked at that just really crystallized it. Well, really three numbers. You look at global clean tech R&D spending by governments.

So this is like really basic science, some applied R&D with actual end use in mind. But this is the stuff that only governments can fund. It's never, you know, across the political spectrum, everyone agrees that this is not stuff that private industry is ever going to invest in because the time horizons are too long and it's too risky.

That number is about $15 billion a year. And about half of that's in the United States, not just in the Department of Energy, but in other agencies as well. And it should be a lot higher.

Any expert would tell you it needs to be many multiples higher for us to really be at the scale of the problem. But that's still a big number. So that's $15 billion in government and academic funding for clean energy research? Yeah. So government's funding mostly scientists at universities, to some extent in private industry as well. But that's the public investment.

And then if you look all the way at the other end of the, uh, of the, uh, time horizon and you look at, you know, what private capital is, you know, the, the capital markets are deploying into mature technologies. It's about 300 billion a year. Um, and that number has, has been rising, but not high enough. Most, most experts think it needs to be a trillion a year, uh, for us to, uh, not burn through our carbon budget. Um, and,

And that's mostly, that's 300 billion a year is mostly building new wind turbines and building new solar panels. Got it. So that's 300 billion a year just in clean energy initiatives, but not necessarily like...

or new technologies. Yeah, that's like, that includes everything and it's mostly just asset finance. It's like putting hardware on the ground. Stuff we know, you know, like, you know, Goldman Sachs knows that this new wind farm is going to return such and such, you know, capital over time and so the capital markets open up like they're supposed to and you get more wind farms. So, that's, those are the, those are the two data points on either end of the innovation cycle. Yeah,

But then when you look in between, this is where panic can ensue because it's bad enough that we're under-investing in R&D and under-investing in deployment. But if you look inside that $300 billion and say, okay, well, how much of that is venture investment? It's pretty low. And then when you look inside that venture investment number and just look at seed and series A,

and exclude things that aren't really kind of science intensive clean tech. Like basically if you exclude Opower and Nest and companies like that, which, you know, those are great companies and I'm glad they exist.

What, Oracle bought Opower and then Google bought Nest? That's right. Yep. Great exits, great companies, definitely contributing to climate solutions, but they're fundamentally software companies with a bit of a hardware twist for Nest. You exclude all that and suddenly this number comes staring up at you. At least this was true in 2014. I went back and checked before the show and I don't think it's budged a great deal since then. Guess how much money globally...

uh, was going into clean tech, uh, seed in series a, I mean, very, very little, like I'm 300 million, 500. Yeah. Well done. Yeah. Between two and 300 million.

Wow. You know, and compare that to, as Ben was saying earlier, you know, you want to build an enterprise software company, a SaaS company, you want to build a marketplace, you want to build a direct-to-consumer brand. Like, it's orders of magnitude more than that. Yeah, I mean, didn't VC just had its best year ever, didn't it? Or maybe not best year ever, but best year since a couple of bubbles ago. Well, that includes growth rounds. Yeah, but even to seed in Series A, you know, yeah, I mean.

many, many billions of dollars. Right. So, I mean, $200 million a year, that's, you know, $200, $300 million a year. That's about the entire budget of ARPA-E, which is just one federal agency in one country. Um,

So Doug, if I went and raised like a $250 million clean tech focused Series A fund, and that would be similar to like a Madrona where David and I used to work, that's focused on a bunch of different technologies, but a Series A sort of standard size Series A fund, that's actually on the low end these days, I'd be doubling the entire global investment in that category. Well, in Series A funding-

Great point. I would think about it this way. So let's take Bill Gates and his billionaire collective that started Breakthrough Energy Ventures a couple of years back. That's a billion dollar fund. I believe they've said they want to deploy that over five years. So they single-handedly doubled that number if they're going to invest. Which on the one hand is awesome. But on the other hand, that's not a really repeatable thing. Yeah.

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Great question. And I'll answer in a probably cartoonishly simple way. But I mean, the big story is, I mean, let's start with the good news. A lot of the public investments in clean energy R&D have really paid off if you look at the past 50 years or you look at post-war. So, yeah.

The cost of building a wind turbine has plummeted. The cost of building a photovoltaic panel, the cost of lithium ion batteries, which are essential for electric cars taking off. LED lighting has plummeted.

has gotten incredibly cheap relative to less than a decade ago. So there are these fundamental innovations in physics, some of them dating back to the 50s or earlier, that are finally really getting cost competitive. And that's contributing to that $300 billion in deployment we talked about. So we have these precedents for early stage R&D, whether it was at Bell Labs or at a university,

ultimately, uh, getting to commercial scale and the capital markets opening up. Um, the bad news is that, uh,

our standard model that we think of in, in the current era for how you fund some kind of breakthrough innovation is venture capital and venture capital got really interested in, uh, in climate solutions and clean energy technologies around 2006, 2007, when, uh, gas prices were really high and they were, every forecaster said they were going to get higher. Um, when it looked like policy was moving in the right direction, uh,

Um, you know, that we were, you know, that it would be insane to imagine that, uh, the United States and other countries wouldn't be figuring out a way to do a carbon tax or some kind of carbon pricing at some point in the very near future. Um, and John door, and I mean, not to single him out, but lots of, uh, lots of really, uh, brand name investors said, you know, we, we, this is a, this is the, this is a huge opportunity and we got to get in. Um, and Kleiner had their whole separate fund within Kleiner called the green growth fund for many years.

Right. And then it all fell off a cliff. And that happened for a lot of reasons that are exogenous, like, you know, the Great Recession. But it's entirely possible that even without a recession, things wouldn't have gone so well. I mean, for one thing, ironically, another thing

uh, public R and D success story is, uh, fracking and the, you know, shale oil revolution. I mean, that, that started as a, as some, uh, publicly funded research in the seventies and eighties and onward, if I'm not mistaken, and, really hit its stride in just the last decade to now the United States being a huge global oil producer, a natural gas producer, uh,

Um, and so all of those predictions about global costs of, uh, of, uh, petroleum just were totally wrong. And so we live in a world where it's even harder to, to be competitive with, um, with, uh, fossil fuels, whether, whether you're dealing with something on the electricity side or on the, um, transportation side. Um, but, but I, I really believe that, uh, there's even more fundamental problems, which is that, um,

VC as, as it has evolved since the seventies, um, just isn't a good fit for, uh, doing something innovative in physics or chemistry, um, or even some certain kinds of biology, unless you're looking at, uh, solving something that relates to human health or agriculture. Um,

Um, you know, if you, if you want to do something innovative in computer science or, or biology for human health, you have sources of funding. It's called, like you said, it's called, you know, most VC plus, you know, a significant chunk that goes to biotech and device medical devices. Um, and Doug, can you talk about why that is? So like the capital structure of venture, why doesn't it make sense if you want to do a fundamental innovation in physics? Well, I mean,

I mean, let's think about how you, you know, all the companies you've profiled on this show, presumably. It's not cheap to scale a software company. It takes a lot of capital. But you can typically do it within 10 years.

And the investors kind of know from the earliest stages onward how things are going.

So if, uh, if, if you get, if you raise a seed stage and like you get no traction, it's over. Right. It's funny. It's a really cute piece. Like it's not even just the amount of capital because it takes a huge amount of capital, like you said, to scale, you know, even software companies these days, but it's that you, you can, uh, you know, dip the oil stick in, if you will, to use a bad metaphor for this episode, uh, along the way. Yeah.

Yeah, exactly. And David, it's funny, you and I have lamented in the past, like, it's not as much lamented, but reflected on what a long game we're in, both in startups and in venture that, you know, startups are sort of like, it's really five years before you sort of know if, you know, before you start to see anything. Venture can be 10 to 20 before you really know over a couple of funds if your strategy is really an effective one. You know, at least

you can check in 18 months into these companies and be like, well, how's it been so far? It's a whole different scenario if it's, you know, we're trying to fundamentally discover a new battery technology. Exactly. Exactly. I mean, you've got to pour all that. You've got to pour the same or more capital into that company, but you won't know if it has a prayer

Until years in. And then even if the technology works now, how do you get the economics right when you try to go to industrial scale? I don't know if you're about to go here, but something I've always wondered that maybe you can help us and our listeners with is why is that? Like, why is it so difficult?

hard to, you know, I mean, like in, in tech, you know, we think even fundamental technological advances, like our previous main episode, um, was about arm, uh, and developing, you know, the risk architecture for chipsets. Like that was done by a team of, you know, 12 engineers in Cambridge, you know, over the course of like a couple months. And then they figured out that the technology worked right. Like what, what is it about these other, you know, these

uh, energy technologies that just make it take so much longer. Uh, well, I think fundamentally atoms are more surprising and messier than bits. Um, and, and to some extent, um, everything I just said, uh,

the obvious counter would be, well, what about biotech? Because if I'm trying to design a new drug or some other new therapy, I'm dealing in a very, very messy world of biology. I heard a great line from a biotech CEO I met a while back who said, I run a biotech company. I'm just like any other company, except I'm unburdened by revenue.

Like a software company can take a long time to be profitable, but a biotech company can take a long time to generate a dollar of revenue. And that's because you have to show that it works in humans and you have to go through all these clinical trials. But therein lies the kind of weird and miraculous...

that allows biotech to fit into the VC model, which is that at the end of the rainbow, you get monopoly rights to a therapy that has been clinically demonstrated to improve some part

of health in human beings and you get, well, probably not all 20 years, but you get a pretty healthy amount of time to exploit. Right. Whereas versus at the end of the solar panel rainbow, you get like intense competition and driving down everything to commodities and like no profits whatsoever. Exactly. It's like, congratulations. Now you're competing with global oil prices or, um, you know, heavily subsidized Chinese solar panels or, you know, every,

Every, you know, electrons are fungible. And so you're competing with like every other source of electrons, every other source of hydrocarbons. So, yeah.

that pot of gold is not really visible um and there are almost no really great i mean think about all the unicorns you can point to in uh uh in software i mean that number is is just going up up into the right and uh and if you're paying attention to biotech there's all kinds of incredible ipos and acquisitions going on all the time it's really hard to find uh

those kinds of success stories in physics or chemistry or bioengineering for fuels that you need both to make the emotional and the rigorous economic case for massive upstream investment. It's interesting. So the framework to think about sort of investable opportunities in cleantech really is

Where does it look more like biotech where it does take an enormous amount of money to develop and any single one will probably fail. But let's say you invest an enormous amount of money in 10 different promising companies. They would have to have the profile that they have that pot of gold at the end. And so it can't be, hey, we're trying to produce a solar panel that is still going to compete against natural gas. It has to be...

we're going to create a technology that enables some entirely new use case and new market that isn't directly competitive in a commoditized way. And the thing that comes to mind that I keep thinking on is there's all sorts of things that are impossible right now because batteries have not had a step

function of improvement in the last 30 years. It's been this sort of like 10 to 15% year over year of lithium ion. You know, Apple's pushing the ball forward. Tesla's pushing the ball forward. But like, there's no way, the biggest problem in energy right now is it's inefficient to transfer it. And it's really, really inefficient to store it.

So like if you go generate a bunch of energy by capturing geothermal in Iceland, there's basically no way to like capture that. What are you going to do? Charge up a bunch of batteries and ship it across a barge to the, to Europe. Like it's, it's hard to move, hard to store. The global energy sneaker net. Yeah. Yeah. And so it does feel like you sort of have to figure out like what, what technology are we skating after that does have that sort of monopoly right baked into the fact that it's, it's not a commodity. Yeah.

Right. And look, I mean, it's great news that the cost of lithium ion batteries is going down and there's, there's this super unproductive debate in energy circles between those who say that's all we need. And we can just, you know, keep bringing down the manufacturing costs of existing technologies. And then those who say, no, that'll never get us there. If we don't invent some whiz bang new thing, we're dead. Um, I would say we need to be running hard at both. Um,

pretty obviously, because who knows? But the terrifying thing, among many other terrifying things that we're talking about today, is that if we're basically not investing in any or scarcely any fundamentally new technologies, then where are we going to be in 10, 20 years? It's too late to plant the tree.

Um, and so we need to be thinking on those timescales. Um, so yeah, I mean, like, like, like we were saying, you know, that we, we've, uh, the, the, the modern VC model isn't that old. Um, and, uh, yeah, it's what embedded in the sixties and really the cash started to pile in, in the mid nineties. Right. And do you know, do you know what the policy change was that really allowed it to happen? No. Oh, this is a, this is a great story. Uh,

It's so obscure. There's like, do you know what ERISA is? No, David, you know this? Being a fund manager now. Oh, there you go. Yes. But yeah, I don't know the heck of it. It's the federal law that governs the investment of pensions for retirement.

And so for, for a long time, uh, if you were a, if you were a pension fund manager with any nexus to the federal government, you, you had to be extremely conservative in what you invested in. Um, and that started to change. I forget exactly when, but I think it was in the seventies, um, when the department of labor, I don't know if it was Congress, the department of labor, clearly I need to get the story straight, but, uh, something, something was issued called the prudent man rule. Um,

which basically said, it's okay to invest part of your portfolio in risky things as long as that's what a prudent person would do. And so that opened the door for the LPs of the world to start investing in private equity funds and hedge funds and venture capital funds. And so it's not- The irony is-

Now, as a fund manager in venture, you don't want ERISA LPs because it comes with FOIA, which is the Freedom of Information Act, which all public pensions are subject to, which means disclosing investment performance and returns, which many VCs don't want to do.

Oh, yeah. You wouldn't want anyone to know that. Yeah, exactly. There is an irony there. Well, I mean, that's the irony behind it. So much of what we see around us usually has its origins in some kind of public investment. But once a new industry is created or a new Fortune 50 company is created, nobody wants to really...

uh, uh, uh, describe their origin story as like a taxpayer funded. Yeah. Well, this policy changed and then, uh, yeah. Yeah. That's actually super interesting. You're totally right. I, I've never thought about that, but that, uh, because a lot of those early venture funds were, it was public pensions that were the LPs behind them. Right. Yeah.

And then, you know, prove the model, get great returns, and now it's just part of the landscape. And still to this day, I mean, with UTIMCO and CalPERS, I mean, there's still an enormous number of LPs or an LP capital that is from public pension funds. UTIMCO is different because it's a university endowment. But yeah, CalPERS and the... It's Canadian, actually, but OMERS, the Ontario...

whatever. Anyway, also a large pension fund, big, big funder of VC firms. Right. And so we, you know, back to what I was working on a couple of years back, because it's a good segue. I mean, we talked to a lot of these LPs and we weren't really able to change ERISA, but we did try to do what we could through executive actions to try to

create some new incentives for capital flow all the way upstream to, uh, to clean energy, you know, novel clean energy technologies. And so that was the, uh,

that was this, uh, initiative we called the clean energy investment initiative, which involves some policy changes and involves some private sector commitments, including by, um, big pension funds. Um, so, you know, on the private sector side, we had a bunch of funds, uh, uh, include, and it's a banks, uh, committing not in an enforceable way, but in a aspirational and I think realistic way, uh, about $4 billion, uh, to, um,

you know, over the next several years, uh, to invest in early stage technologies and clean energy. Um, and then we, and then we tried to do our part as the executive branch with some policy changes. And some of those things you're probably familiar with. I mean, they're, they're really cool, um,

federal energy programs like ARPA-E. I'm not saying that we created ARPA-E in 2015. It's been around since the beginning of the Obama administration. It was actually created under the Bush administration. Yeah, Doug, that's actually worth a little bit of a deep dive. So you mentioned ARPA-E earlier. And when you and I had coffee, I think I had heard of it, but I didn't know really anything about it. What is it? Why should we be optimistic about it? Why does it sound like DARPA? Sure.

It sounds like DARPA on purpose. So DARPA, for the LPs who may not be familiar with it, is the Defense Advanced Research Projects Agency. And it has a wonderful history. Do you know when and why DARPA was created? It feels like a world war, but I'm not sure. Yeah, well, soon after World War II, when it was actually the Cold War, that was the direct antecedent. So Sputnik.

was the, was the trigger. Sputnik happened and everyone in America freaked out. And the department of defense and its allies said, never again, will we be surprised by this kind of technical technological leapfrogging? Interesting. And so DARPA was created and funded to both anticipate and create technological surprise. Yeah.

That's their mission. And so, so DARPA gets a fair chunk of money. I mean, it's, it's, it's, it's modest compared to the size of the defense budget, but and, and it's not a lab in and of itself. It's really talented program managers who come in from universities and from private industry for typically for five year hitches and create a program and run a funding competition and guide the funding recipients towards some goals. So this is,

this is a total aside, but, um, Steve blank, uh, you know, of, uh, lean startup fame and, and the like, he has a great talk. He may have even written a, uh, book or a secret history of Silicon Valley. Yeah, exactly. That explains all this. It's, it's amazing. It really, you know, it does come from DARPA. Uh, yeah, that's great. So, I mean, DARPA is credited with, um, creating ARPA net, which was the precursor to the internets. Um, uh,

And stealth technology. And I mean, I'm going to leave out all kinds of things. But more recently, they, you know, DARPA jumpstarted autonomous vehicles with a prize about 10, 15 years ago. And then there's actually some terrific coverage recently of the amazing things DARPA has been doing with robotic prosthetic arms recently.

um, and direct neural connections. So, I mean, it's, it's, it's the sci-fi, uh, part of the department of defense. And so, uh, a decade or so ago, policymakers started thinking, well, you know, if DARPA, if this DARPA model has been so successful at creating breakthrough technologies as a, as a government mini agency, we clearly need the same thing for energy and not just defense. Um, so we should consciously model, uh, a new, uh, unit within the department of energy, uh,

that will also be an advanced research project agency. So basically just straight analogy, DARPA is to the department of defense as ARPA-E is to the department of energy. It's in a different building. It has totally different program managers. It has totally different leadership. It has all, all these special authorities from Congress to, um, to be more flexible and, uh, and take bigger risks. Um, and so everyone loves ARPA-E, uh,

Democrats, Republicans, private sector, public sector. It's a terrific agency. It has really talented people. It's still going gangbusters. And it even got a bit of a funding increase in the last budget, even though the Trump budget proposed to zero it out. Wow. Fun.

So for all those who are listening who want to have like, who think about contributing to public service at some point in the future, I do want to recommend being a program manager at ARPA-E or any number of other programs.

government agencies at some point now or in the future because you get to control you know 10 to 50 million dollars and uh steer it towards a tough uh technology problem it's like being a private sector investor but with public money taking much bigger bets um well yeah okay so i have one quick comment and then a question which you basically answered but i just want to put a fine point on it um i mean the comment is yeah like uh the secret history of

so is better than, you know, anything. And, and even the venture capital history we've been talking about that like policy has a huge impact on business and technology. Yes. Often unintended. Yeah. Which we don't underscore enough on this show. Um, but, but my question is, so at ARPA-E, what is the main thing they're doing? Are they, are they, are these the, the agency and these program managers, are they deploying capital to researchers or,

Good question. So, I mean, it's a funding agency. It's like the National Science Foundation. You know, they're not doing any of the research in-house. They will, you know, you have a program manager who's empowered to come up with a theme and a solicitation for ideas. And so, you know, there's like, I mean, to give you one example, some of them are the kinds of things you'd imagine, like there's a, there's a,

Probably somewhere in the neighborhood of $50 million funding opportunity for projects to advance nuclear fusion. And there's other ones for different transportation technologies. There's a couple that seem kind of out of left field until you start to think about it. Like there was recently a program.

or a funding opportunity for teleconferencing technology, breakthrough teleconferencing technologies. Why? Well, because that's a key to reducing air travel. And then every couple of years they do an open competition where RPE is not specifying the technology need and anyone with a remotely relevant energy technology across the board can apply for funds. And so the winners of these funds are typically...

university teams or startups or national laboratories or occasionally large companies. So anybody can compete and there's a peer review process. And then you probably get, I don't know, like a dozen or so winners within each program. And then they have three years to

to achieve their technical and economic objectives. And the program manager kind of coaches them through that. Super cool. Yeah. And it is, you know, this is, as you mentioned, like the DARPA challenge that DARPA had with autonomous vehicles.

Shoot, I was in college. I remember I had friends who were on Princeton's DARPA team, DARPA Challenge team. And yeah, it's out of that. You draw a direct line to Tesla Autopilot, Waymo, everything going on. The new company, Aurora, just raised $500 million today. They're all the same people that were competing in the DARPA Challenge. Right. That was a particularly catalytic prize, for sure. But I also want to add, I mean, ARPA-E is...

I think justifiably a really bright shining object. But there's all kinds of other stuff going on in the federal government that's advancing clean energy innovation with a commercial end in mind. I mean, there's a different part of the Department of Energy that

was traditionally just kind of the solar technology office, but was both rebranded and I think fundamentally reshaped as something called Sunshot in the Obama administration, which had a very clear... Do you know the Sunshot story? I don't know anything about it, but it's like moonshot, but solar. It's a great name. Yeah, it's a play on moonshot. And it still exists. And the basic idea was, well, look,

solar solar panel costs are falling but honestly um the the cost of the panels is is becoming less and less important um if you look at the total cost of a solar panel uh it's it's

It's all kinds of soft costs. So, I mean, even if you got the cost of the hardware down to zero, it still wouldn't be cheap enough to, at least at the time, it still wouldn't be cheap enough to compete with incumbent energy sources. Because of installation and transmission. Installation and, yeah, and all these other things. Customer acquisition and storage.

And so the goal of SunShot was let's get the cost of installed solar down to a dollar a watt in the next X years. And we're actually on track as an economy to achieve that. It's not entirely because of the Department of Energy SunShot program, but they certainly helped a lot. And it showed how you can... I think it was a very...

and important test case for how you can do government-funded R&D because, I mean, Sunshot's organized to a large extent just like we talked about R&D. You have program managers who define different funding opportunities and try to provide resources and guidance to the researcher teams who get the money. But I think this was one of the first and best examples of a government program with a clear and compelling approach

economic end game in mind. It wasn't just like, let's make solar cheaper or let's fund great solar technology. It's like economy-wide, we know where we need to go to make this whole range of technologies competitive. And so let's make a bunch of bets. Right.

in the form of different research projects and startups. And they did technology plays and they also did software plays. I mean, so they did hardware plays and they did software plays. And innovated a lot of stuff. So it's not just RPE. There's good stuff going on. There's good stuff at the National Science Foundation. There's good stuff at NASA. There's good stuff at Department of Defense. Steve Blank deserves a lot of credit for helping

the National Science Foundation turned Lean Startup into a program for scientists called I-Corps, which is now also with the Department of Energy and a bunch of other agencies. So, yeah, I could go on. And then I also wanted to...

just while we're talking about good news, before we get back into despair, you know, while we're talking about kind of fund incentives and CalPERS and things like that, we were able to do some super wonky things that I hope have an impact, at least in theory they should, which is that, you know, what levers does the Department of Treasury have to change how innovation is financed? Well, they can clarify, you know,

if you're a philanthropy, when and how you can use both your endowment funds for riskier investments and your philanthropic funds for maybe some forward-leaning unusual investments. And so they came out with new policies on both of those fronts. So with your endowment, it's called a mission-related investment. And with your grant dollars, it's called a program-related investment. And these are kind of like,

like weird transactions for most foundations. They're scary. They're not sure if the IRS is going to come down on them if they stray outside sort of traditional investments. Um, and this was a way to say, no, you, you can, you can be a little bolder. You can be a little more experimental. You can invest in things that align with your mission that aren't, um, you know, the usual, just like hand over all your money to, uh, you know, it's a black rock and let them put it in traditional investment strategies. Um,

And then we also had the Department of Labor put out new guidance that would apply to some of the ERISA subject funds as well. That's like, it's okay to do environmental, social and governance standards. That's not going to get you in trouble. And that was something that a lot of the impact investing community was really clamoring for.

Yeah. So again, I mean, I wish I could, I mean, I should have done some more research before the show. So I could say, and the reports show that this is increased funding by X. I actually don't know the answer because I haven't been paying as close attention to this in the last year or so, but those are the kinds of levers that you try to pull when you don't have a Congress that's willing to do anything. I think the point you made earlier too, when we were talking about, you know, the secret history of Silicon Valley and DARPA and whatnot is like,

You need to be planning the trees now. And regardless of whatever results there have been since, you know, the mid 2010s, like it's not long enough, you know, uh, it took, um, even the DARPA challenge is perfect. I mean, it was the early two thousands when the DARPA challenge was happening and we're only just seeing like industry come out of it now, you know? Right.

This gets to sort of the big question that I wanted to pose to you, Doug, to kind of put a point on all of this. So obviously we're in a place where, uh, um, sort of, uh, every sane and educated and or, uh,

you know, willing to believe the facts person realizes that like we are, we are headed in a really dangerous direction faster than ever now, uh, in a very scarily near timeframe, you know, in our lives and our children's lives. And so something big needs to change. Um,

Uh, if, if you could sort of be the architect of a system that, um, you know, changed, uh, uh, that set up the right incentives for dollars to flow to the right places and when, and how much money needs to flow where, and what types of investments should people be making and where it's, what's public and what's private, like, what do you think needs to change? And, and what are, um, really some of the, the, what are the catalysts here that need to set something in motion? Yeah.

Yeah, that's the question. Thank you for asking it. So, I mean, there's a bunch of things that are obviously good and need to happen. So we definitely need more money, more public R&D funding. That's always good. Fortunately, against all odds, that number is going in the right direction and not the wrong direction even now, which just shows that there's more bipartisan support in Congress.

for government-funded R&D than one might have expected, despite what the current administration might think. And globally, the number is going up thanks to a set of commitments that President Obama and Bill Gates and a number of other world leaders and private investors brokered in 2015 called Mission Innovation.

Um, there's, it's also, you know, we, we can't have enough, uh, really good innovative commercialization models to, to take, uh, promising technologies across this chasm of death from government funded science project to, uh, venture backable technology. Um, and actually, um, the, the organization that Bill Gates has, has, uh, has, has recently spun up called breakthrough energy. Um,

So there's a venture fund that we talked about, but there's also a bunch of other activities they're doing. They just released a report just a couple of days ago, I think, that's terrific and has all kinds of really great ideas about all kinds of innovative commercialization models at the state and federal level, the private sector level. If you want to see the whole menu, I'm not going to claim it for myself. Just go read the executive summary. It's great. But that's all on the supply side.

And that's all, you know, creating more shots on the day.

Um, and, uh, and making them a little less likely to fail in the earliest stages. Um, but everything we've talked about so far is really about fundamentally reshaping demand. Um, that, that, you know, like you said, a SAS company or an AI company or a, or a drug company, they, they can take advantage of jackpot economics. There's a pot of gold at the end of the rainbow. You want to solve a problem in physics or chemistry or biology that has nothing to do with human health. Uh,

where's the jackpot? What's the incentive alignment for investment dollars to flow there?

Yeah. And that's among the many things that keeps me up at night is that, is that I don't, I don't know how, I certainly don't see anything happening right now that gives me immense confidence that that fundamental, uh, mismatch, uh, is going to be cured like tomorrow. Um, there are some really interesting examples of how it can work and, uh, and, and, and hopefully, um, you know, these will be,

scaled up. And I should say, I mean, the other thing, it's not just about capital, it's about talent. I mean, like, you know, I mean, like how many companies is Pioneer Square Labs interested in backing that are doing anything like we're talking about? I'm thinking approximately zero. And that's rational. You know, it's not that...

Right. I mean, and think about everyone who, you know, has the fire to become an entrepreneur and change the world and is graduating from college or dropping out of college or, you know, like swirling around Seattle looking for the next big thing. I mean, I, I would say there's an enormous number of people who have, who are talented entrepreneurs or could become talented entrepreneurs who care deeply about climate change and are not going to go for it because, uh,

I mean, entrepreneurship is risky enough. It's so funny as you're, as you're saying this right now, I'm thinking about like, I'm at the sort of phase of my life where I'm trying to figure out what I do for work. And, and then there's sort of the, the passion areas that I have for things that are important and impactful to me and trying hard to, to bridge that gap and climate is an enormous one. And it is shockingly hard to somehow take the work that we do in, you know,

innovation technology and funding and and apply that to this area and uh uh i'm encouraged by you know there's um all sorts of even pure software solutions where you could do things like um use machine learning to optimize the uh layout of a wind farm or you know there's all sorts of like even like typical b2b sas companies that you could start that are focused on improving the yield of a lot of these technologies but actually supposedly this was uh

the first project that deep, that deep mind did within Google after they acquired it was optimized Google's, uh, data center energy consumption, uh,

And I think actually that paid back something like the savings from that were so impactful that they paid back the entire cost of the acquisition. Yes. Yeah. That was really cool. It reduced it like 40%. It was incredible. Yeah. Wow. So, Doug, I would push back on how many are organizations with capital interested in funding. I'd love to figure out how to make the better case for that.

You know, I, and I think, yeah. And I mean, I, and I think, Oh, go ahead. Sorry. I think I'm, I'm, uh, maybe I'm foolish cause you spent a lot more time in this than, than me, but like, I'm definitely optimistic that, uh, um, there are ways to throw two and $3 million at a lot of these things and take, you know, a lot of the businesses that we start are not actually technology innovations. They're applying a, um,

sort of modern business model and modern distribution to, you know, technology that's been around five or 10 years and solving a new, it's really a business model innovation. And so I do wonder if there's a lot of those to be had that can be seriously impactful on energy. I mean, let's end on like,

you know, an up note and a kind of question mark. I mean, the up note is yes, there are endless problems to solve and scale right now with the existing VC model. And, uh, and I hope that lots of the hundreds of really talented people and foresighted investors, uh, continue to go after them. Um, it,

This is not a time to despair. There are more nests and O powers and even more fundamental hardware-oriented companies to start and grow. And let's do it. Let's flood the zone. Go ahead. Well, I have a very specific question for you, but keep going. You had a but or an and there. But at the same time,

Like we need to be at net carbon, uh, zero by mid century. Um, and so, uh,

We need all that activity to happen, but it's not enough. We have to plant a lot more trees right now and a lot more ambitious trees. My metaphor is falling apart. You know, we need to have air travel be net, net, net carbon zero. I mean, nobody knows how to do that yet. We need to have, I mean, yeah, right. Ocean shipping needs to be net carbon zero buildings, making cement, making steel. We need to figure out how to suck carbon out of the atmosphere because there's, you know, because we're running out of options. Yeah.

And so, how do you get the capital markets particularly... It's not that I want to give up on VC. I just think that the pot of gold doesn't exist. And so, how do you conjure it into existence? So, I don't have the perfect answer, but I think there are some promising models out there that I hope people are thinking about. So...

I would put them all under the category of demand pull as opposed to supply. Okay, so this is my very specific question for you. Is a company that I think is probably now our second most popular episode on Acquired ever that kind of, in many ways, fits the bill of everything you're talking about, and that's Tesla. When you were in the administration and

and now thinking about that, like is, uh,

because here's a company that, uh, the stated goal, you know, Elon's goal is to reduce, you know, to, uh, accelerate, uh, clean energy adoption and transform the auto industry. Um, and, uh, do it by creating an end user product that, uh, drives wild demand. Uh, and he's kind of done all those things. Um, is that a good model or, or not? Uh, yeah,

I mean, so far, so good. Although the last year has been a little bit rocky. I mean, I think that, yes, becoming independently wealthy based on PayPal and then plowing all your money into something that nobody thinks is going to work and then being talented enough and hiring enough

incredibly talented people to survive a bunch of near-death experiences and then getting government loans in the depths of the Great Recession that you then pay back and disclaim because it's bad optics. And then somehow navigating the press and the capital markets and the incredible difficulty of

of new manufacturing processes and thereby basically creating a world in which even if you fail, the auto majors are now committed to this path. I mean, hats off. I mean, that's awesome. This is Tesla part two right here. Right, right. Well, I guess what's interesting where I'm going with this is like,

that story, the Tesla journey, you know, as crazy and wild as it is, it's no crazier than any other story of a company we tell on acquired. And, um, you know, that's what the venture capital and the startup model is meant to enable. Um, um, and, uh, you know, it just so happened that Elon funded it himself to start, but, uh, especially now in a post Tesla world, like

The next Teslas are going to be funded by venture capital, you know, in whatever. Well, the next Tesla. So what do you mean by that? Oh, in whatever. Like, like, for instance, there's a company called Boom, which is building a new supersonic jet. Now, I don't know how they're thinking about energy. Right. But like the VC community is certainly going into air travel. And, you know, Ben's talked about, you know, eVTOL, right. Electronic vehicles.

vertical takeoff and landing vehicles. Yeah. Um, uh, uh, that's being funded by the VC community and, uh, Uber, right? Like Uber itself, you know, uh, is, is funding that. So, um,

you know, anyway, I guess that's my hopeful ending point. Yeah, no, there are, there are, there are, but there are, um, lots of reasons to hope, but it all, we all need, we need more of it. And, uh, and my point about, uh, the Tesla story is that let's not forget that. I mean, basically he was spending his own money in the beginning and it was, you know, by definition, that's stupid money. That's, that's money that, um, is not repeatable from, for, you know, in most other contexts. And he was willing to lose it all. Um,

And it turned out to be a really good bet, both for him and the world. I mean, the story is still not over, but so far so good, like I said. Like that's not something that we can tell a young entrepreneur or an experienced entrepreneur who wants to do something new and say, yeah, just spend your entire network on this thing that nobody says is going to work. Yeah.

So, uh, so back to this, the, the promising, uh, a world of demand pull mechanisms. If you can come up with a sexier name for it, please let me know because, uh,

Uh, that's not it, but, um, well, it starts, it starts, you know, the one, one great example is the DARPA autonomous vehicle challenge. You know, the prize is a very small scale, but potentially high impact demand pool where you basically say, um, we're putting out, you know, X prize has pioneered this as well. Here's a pot of money. It's usually sub a hundred million, uh, sometimes sub 10 million, but, but it's very clear who wins, but it's completely technology agnostic. And, um, and when it works well, uh,

even if the winner you know still is really buggy um it shows that there's a path to a big market and so people start to pile on um certainly not every most prizes do not end with that incredible you know decades-long success story but you know the lunar x prize is is actually uh bearing some fruit right now with uh you know small rockets and and uh and and small satellites um

uh, really taking off and getting more private capital. So that's, that's kind of like the sexy example that everybody kind of knows. Um, another one, not to dwell on Elon Musk, uh, too much in this episode, but, um, if you want to go beyond prizes, you can look at milestone payments. So SpaceX would not exist. Uh, if NASA hadn't blown up its usual contractor process, um, yeah,

And so, yeah, go ahead. It's funny. I was going to take us home here, but like, you want to take a couple minutes, Doug, and explain old world, new world with the transformation of NASA there and how the funding allocation changed? Sure. Well, I mean, I wish it was old world, new world. I mean, we'll see if that transition actually happens. But yeah, I mean, traditionally, if you think about Apollo or the space shuttle or any big NASA program, basically NASA...

put out a set of requirements and a giant aerospace contractor won the contract, whether it was Northrop Grumman or Boeing or you name it, there's only a handful of them. And then they get something delightful called cost plus, which is go build the thing and we'll pay you for the cost of building a thing plus a guaranteed profit margin.

Um, so guess what incentive that sets up? Yeah. Uh, I mean the James Webb, the James Webb telescope is still grounded at Goddard space center, not far from where I live. Um, because it's like over budget and, uh, and, you know, way beyond its launch schedule. And, you know, like if the, if the contractor screws up, you know, whatever, like there's to get paid. Um,

So the innovation with this commercial cargo program that NASA launched during the Obama administration was they put out the competition, but you had to achieve certain actual practical milestones to get the next slug of money. And then you had to do something else to get the next slug of money and something else to get the next slug of money. So it would very much mimic like a VC round.

But the requirements were not over-specified. It's like, we don't... The design is up to you, aerospace company, which happened to be SpaceX and I think a couple of other companies. You just need to show that you can...

complete, you know, test number one successfully. And then you need to show that you can get a empty capsule to the space station. Then you need to show that you can get cargo to the space station and then you kind of get more contracts and more milestone payments, uh, the more you succeed. Um, so that's some, and that, again, that's, that's, uh, that is also basically how biotech works. I mean, the, the three clinical trials of the FDA are basically, um, effectively three milestones that you can raise money off of. Um, and,

And so the question is like, how can you design stuff like that for air travel and ocean shipping and buildings and cement manufacturing and carbon removal? Um, I, I'd love to see more of that. Um, and, uh, and I think the kind of, uh, the dream is that you have something even, you know, really big, like something called an advanced market commitment, um, which is where, you know, whether it's government buyers or, or more likely private sector buyers say, um, you

If you can make a jet fuel that meets the following specs and that's verified by a neutral technological, technical arbiter, then you get a billion dollar contract that kind of replicates patent rights and then gives you something better than a commodity market to graduate into. So those are the kind of like financial fundamental shifts that

I hope we see over the next couple of years so that it doesn't have to be like, you know, kind of just like, so it's, it's, it's I don't want to say this the wrong way. So that in some ways the problem starts to take care of itself just based on market logic, as opposed to, you know, investors and entrepreneurs who have something more, you know,

emotional going on. Yep. Put the right incentive model in place such that market forces guide us to a sustainable and, you know, great solution.

Yeah. Well, Doug, we're, you know, we don't all die. I was going to say that. That's a great place to leave us, Doug. But no, David, that is a great place to leave us to finish off this episode. Doug, where can our listeners, if you were to point our listeners somewhere and say, hey, either check out what I'm up to here or follow me here or where should they find you on the internet?

Oh, uh, well, I, uh, I'm at, at Doug underscore Rand on Twitter. Um, and, uh, link my LinkedIn profile is a good way to read up on more of what I, uh, did during the Obama years. Awesome. Well, thank you so much. Uh,

We hope you enjoy this bonus episode. We love feedback. So if you want to hear sort of more stuff like this, or I hate to say this in front of Doug, less stuff like this, like we just want to know what you're feeling when you finish these episodes and what we should make more of. And I think we'll see you next time.

David and I are new to this and very much experimenting. And so really appreciate all your feedback. If you like this, feel free to share that you're an LP on Twitter. There's a link in the show notes to be able to do that and bring other folks in to hear the important stuff that Doug is thinking about too. So Doug, thanks a ton.

Thank you so much. Thank you for having me. I really enjoyed this conversation. Yeah. Well, hopefully it sparks some entrepreneurs to, you know, start thinking in this area because we need them. We do. Yes. This is a very, this is a very goal oriented podcast. Amen. All right. See you next time. Thanks everyone.