Regeneration.VC is focused on reducing consumption in order to deal with climate change
Venture capital used to be a cottage industry, with very few investing in tomorrow’s products and services. Oh, how times have changed! While there are more startups than ever, there’s also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We’re highlighting key members of the community to find out.
Smith has founded and operated media and real estate businesses and enjoyed an extensive career as a global touring DJ. He led numerous environmental initiatives and has been an active investor in early to later stage impact companies.
Starting in the late 90s, he ran marketing and digital platforms for Smith Broadcasting, a group of 20 network TV stations, which eventually sold to Boston Ventures. Shortly thereafter, he followed a lifelong passion in becoming a touring DJ, performing alongside Guns N Roses, Rihanna, and Diplo. In 2006, Smith launched and scaled The Playlist Generation, a leading background music provider to over 10,000 retail locations. In 2010, he co-founded Creative Space, an adaptive reuse real estate firm responsible for 80 projects in LA & SF.
In 2015, he formed Ponvalley, an environmental initiative with philanthropic, research, and impact investing practices. Within two weeks following the 2016 election, Smith assembled an emergency climate summit with Former VP Al Gore, Gen. Wesley Clark, the Dept. of Energy, and Harvard leadership. He currently serves on the boards of PVBLIC Foundation, the American Renewable Energy Institute, and the Sustainable Change Alliance. He is a founding advisor to Salk Institute’s Harnessing Plants Initiative and served as a Venture Fellow at UC Santa Barbara’s Bren School.
Smith is a graduate of Northwestern University. He resides in Santa Barbara with his wife and two kids.
VatorNews: Tell me about Regeneration.VC, what you’re all about, your philosophy and methodology, and where you fit into the venture ecosystem.
Michael Smith: We’re just now at the beginning of a materials and reuse revolution. Our mission at Regeneration.VC is to reimagine consumer industry through an environmental lens; the materials that go into products, the brands and services that use those materials, and the technologies that keep those materials in use and circulating. Right now, 45% of global greenhouse gas emissions come just from the things that we are producing and using every day. The average product has 6.3 times its own weight in carbon emissions related to it. But we see an opportunity for consumers to really make a difference: we can vastly improve the planet through purchasing decisions. Every bite of food, every bar of soap we buy, every t-shirt, has an impact and the underlying supply chains that service those industries have an impact. And so, we want to supercharge the evolution of the consumer and move them more towards a circular and regenerative model. So, that’s really the overarching goal of the firm.
VN: What does that mean in terms of investing? What types of companies are you investing in? Are there specific verticals that you’re looking at that are particularly exciting?
MS: We’re an early stage firm, so we’re primarily investing in Seed and Series A companies. That is where the most need is, there’s a real lack of capital there, there’s a lack of funds that are focused on that particular frame and that’s where we, as previous entrepreneurs and business builders, get really excited about getting in the trenches with our founders and making things happen for these underlying technologies that so badly need to scale and commercialize. There are a lot of great growth and public market opportunities now in the environmental space, but there continues to be a lack of early stage funding for the types of work that we’re doing.
We do this across three verticals. The first we refer to as the design phase, and these are the materials that go into products. This is fibers in clothes, packaging, better food and beverage inputs, formulation for CPG. The second we call use, and these are the brands and services that take those materials and create a circular or regenerative pathway for those materials. That can be a Patagonia or an Allbirds or any better-for-the-planet CPG brand. Lastly is reuse technology: this is if you’re not sending something to landfill, which right now over 92% of everything winds up in a landfill or an ocean or a natural system, so how do we reutilize that product? That could be finding a waste stream that we can get value out of, upcycling it; that could be repairing something instead of throwing it out, which is a huge issue in e-waste right now; that could be renting something, like our portfolio company Arrive, so you don’t need to make as many things, you can share goods and services; that could be refilling and reusing packing; or even just making things that can last for years and decades and be passed between generations. So, those are the three pockets that we invest in, and within them there are a lot of exciting areas that we consider, but that’s the focus of our thesis.
VN: Talk to me about some of those exciting areas within those three focuses. It seems like there’s a very broad range you can be investing in, everything from Uber, for example, all the way to like materials companies. So, there’s a lot of space for you to invest.
MS: There is a lot of space in the sense that it’s an ecosystem and we want to be investing in the packaging and materials that go into the brands we’re investing in. Then, how do we keep those goods moving and utilized? It could be a digital solution underpinning reverse logistics, which is a really exciting new area that we focus on. There’s an opportunity for us to find unique inventions of what would be traditional industries. You have 10% of global emissions happening in apparel, a lot of that is within a complex supply chain and within harmful and toxic materials. You can use things from nature, synthesize them to, say, synthetic biology and use new approaches of bioreactors to grow sets that have dramatically lower carbon emissions. One example of this is Vitro Labs in our portfolio: they biopsy cells from cows, or it could be from a crocodile or other animal, they cultivate those in a bioreactor to grow hide and they can safely create leather in a lab, which has all the properties that you’re used to with leather but with dramatically lower water, carbon, and other chemical inputs. So, synthetic biology is something that we get really excited about, both on the materials side and the reuse side.
VN: Are you investing in any of those in Beyond Meat and Impossible Foods companies?
MS: If you think about it, Vitro Labs is one of those companies for materials, it’s just for materials and apparel. We have not made any alternative meat investments and I would say, of all the sectors in our arena, that’s probably the heaviest funded and has the most amount of funds focused on that particular problem. So, we would prefer to help with the packaging of those products; if you have a product like a Beyond or Impossible, but it uses single-use plastic or a non-reusable container, what are the other things that we can invest in to help make products more circular or potentially regenerative? Maybe it’s a home compostable or something like that.
VN: You said that there really wasn’t much early stage investment space in this area. Why do you think that is?
MS: Only 2% of capital is going to the consumer, and most of that is growth stage, so very little is going to Seed and Series A. There are a few reasons: one, as highlighted at the top of our call, when you have these big Silicon Valley ventures that focus so heavily on enterprise SaaS and health and big bucket items, and there’s been a focus and obsession on software, for a variety of reasons. But we believe that the new tools that are emerging will enable better scaling within hardware and better opportunity and that there’s also software solutions required to empower these new ways of producing things at scale, more environmental methods.
VN: Investors often say hardware is more difficult to invest in for a variety of reasons. One is that it’s probably more expensive and it takes longer. Is that correct?
MS: In the past, it was, but I think that’s starting to become challenged and that’s why you’re starting to see more funds emerge around hardware. A good part of our mandate is figuring out how we can create these material sciences and utilize these material science breakthroughs, but do it within infrastructure that either currently exists or that has a limited technical risk going forward.
VN: What’s the macro trend you’re betting on?
MS: We weigh economic and environmental returns equally. So, we need to see incredible economic opportunities, like any venture fund would look for, so a great multiple on invested capital, but we also need to have a measured environmental outlook on the business. Is it going to end up reducing greenhouse gas emissions, reducing toxics, improving water use? There is a major movement within ESG right now, and billions to trillions of public market dollars, that are going into ESG products. The current state of how we measure those metrics are changing; the FCC has looked to regulate it and that’s something we feel is very important, that we have great baselines we can compare ourselves to and that the large market can partner with us and can look to acquire businesses in and around our space. You have Apple, Microsoft Amazon, Google, all these companies are making circular commitments in the business sense and environmental sense, yet they are woefully behind on the commitments that they’re making in most cases. And so, we will help them and we want to propel this trend and work within a frame where business is already communicating to us where they want to be.
VN: You recently raised a $45 million fund, so how many investments will you be making a year and how much is that going to be in dollar amount?
MS: We made five investments last year, and we’ll be on track to make about the same, maybe slightly more, this year. It will be about 17 to 18 companies for this fund, based on our construction, so you can do a work back in terms of allocation; we did about 15% to 20% roughly last year, we’ll do about the same this year, the same next year, and then have room to follow-on in certain situations.
VN: Since you’re investing in Seed and Series A, what do you need to see traction at that point from companies you invest in? Or is it too early for that? If you do want to see traction, do you have specific numbers that you want to see?
MS: We want to make sure there’s either some limited amount of revenue, which could be in that $1 million range, or there’s a major offtake agreement from a corporate partner. That allows us to get more confidence and to really focus in and to put more behind the solution, because we know that we have something that we can kick off with. You won’t see us going into anything that’s pre-revenue or pre-commitment from corporate, not because that’s not interesting to us, maybe we end up investing at a later point, but just because we’re limited in the amount of investments we can make, and we like to get very active with our team. So, we want to be able to immediately sink in and open up channel partnerships and really activate networks to add value and supercharge our investment.
VN: So, you’d never invest pre-product, that wouldn’t be something you would do.
VN: Ok, so what do you want to see from the product? Maybe it’s a little bit more difficult because with a software company, they just use the software, they can test it themselves. But if you’re talking about a materials company, how do you determine that that’s a product that people will want?
MS: When they have some amount of sales, we can speak to their customers, and if they have an offtake agreement with a major corporation, we can speak to that major corporate and see what they want and what they’re looking for and learn from that. We have our own take on things as well; is it something that we’d feel proud of and want to get behind? What’s unique about us is that we measure or look at the life cycle assessment of a product to make sure that it’s better environmentally. If it’s not at least as good as what it’s replacing, we’re probably not interested. We don’t want to invest in things that are worse than what already exists; we want to improve and we want to inspire and scale and grow because that’s where we think the big opportunity is.
VN: What’s the due diligence on the environmental impact? How do you measure that?
MS: You want to get what’s called a life cycle assessment, which is calorie counting for carbon, more or less. It looks at all of the environmental components that go into it, the supply chain, where products are sourced, and how it’s utilized at the end of life, so we look at and consider it. You can get what’s called a bill of materials, where you can see exactly within something and make judgments from that. Then you build an analysis on the company that relates to those components and we call it REG, which is our “Regenerative Environmental Gauge”, and we judge a company on green, yellow, red. If it’s green, they’re doing something that’s either exceptional, really exciting, checks our boxes; if it’s yellow, then they’re doing something that may not be ideal, maybe it’s the best that’s currently available, and maybe there’s ways we can add value and help them on; and then there’s red. If there’s more than one or two reds, it’s very problematic, probably not going to invest or it’s something that we can easily do to help them resolve that red. So, that’s the right way to think about that gauge.
VN: What do you look for in those founders and those entrepreneurs? What are the qualities that you’re looking for in the team and what makes you want to invest in them?
MS: Give an inferior product to an exceptional team and they’ll figure out a way to win. What’s unique about what we do in answering that particular question is people come to the climate emergency and this issue that we work on for a variety of reasons, and a lot have all the right intentions, but they don’t have that killer instinct on the business side. There are many ways to solve and to work on environmental issues, but if you’re going to do it through a for-profit lens, we are looking for leadership that has great business understanding and knows how to compete and win. We are competing in our business against the most subsidized industry in the world, the fossil fuel industry, with trillions of subsidies a year going against what we’re doing. These are not easy issues and competitors to face. And so, if you don’t have that killer instinct on top of an unerring focus, you probably are not going to succeed.
VN: Let’s discuss valuations, especially over the last couple of years, which have been record years in terms of capital deployment and that we’ve all seen valuations shoot up at the same time. So where are we now versus a couple years ago? How have you seen that evolve? And where do you see that going?
MS: When I started fully focused investing in climate a little over seven years ago, there were very few investors, there were very few folks focused on this space. So, I’m very encouraged that over the last two to three years, there have been a whole number of climate tech focused funds emerging and coming on board. We need thousands more in what we do. The valuations from seven years ago were much more humble because there just weren’t investors. Now there are, which is exciting to have and there are certain categories, like you mentioned, plant based meats, that are being driven up quickly but the majority of what we focus on is still relatively humble in terms of valuation. We see great opportunities and companies that can displace multibillion dollar interests, that, with the right guidance, and the right progress, have a chance to become very, very large businesses, 10 or 100 times larger than where we’re investing in them. It’s not a simple field to crack into: you need to have an understanding of different skill sets than enterprise SaaS or fintech or security or Web3, or whatever the focus might be. With that said, there are those companies within our realm as well and we want to learn, embrace, and utilize those technologies.
VN: A lot of VCs that I talk to say that valuations are too high, that they’re worried about companies taking too much money at too high valuations. That seems to be the opposite of what you’re saying for your space, that they aren’t high enough yet.
MS: We’re excited as investors about where they are now, but it requires some work to get them to the growth phases. The good news is there’s a massive amount of, tens to low hundreds of millions in growth, for what we do. The gap in between is the big opportunity, and so there is room for, like I was saying, hundreds to thousands of investors to do what we’re doing. I don’t know how exciting it is to have another enterprise SaaS fund right now and I look at some of those valuations and I can’t make much sense of them. You look at the public markets with a lot of enterprise tech companies dropping 50, 70, 90%. I can’t give you many of those same examples in our space; I can give you a handful, but it’s not the norm.
VN: You said there’s been a lot of growth in terms of focus on this area over the last seven years. So, obviously there is some competition for you. So talk to me about your differentiation from those funds and let’s start with limited partners. I’m assuming that a lot of firms are going to the same LPs, and so when you talk to them, what’s your pitch?
MS: We’re the first fund around regenerative solutions for the consumer industry and many of the LPS that we got resonated with that. They saw the bigger opportunity that, “gosh, these are multi trillion dollar industries. Why wouldn’t there be a fund focused on delivering next generation solutions for these?” There are some players out there, but we were thinking about the system a little bit differently, and that comes from our Strategic Advisor, William McDonough, who created the circular economy with his book Cradle to Cradle. And so, evolving our methodology to start to bring in regenerative solutions also spoke to some of our LPS. Because we’re an emerging manager, because this is a first time fund, it was challenging speaking to huge institutions that wanted to see a track record with multiple funds and a lot of ongoing performance metrics that we just don’t have yet. So, it’s for us to prove at this point that we can execute on this model and create great value and returns and then, ideally, scale it up and keep after it. And in the meantime,, there will be new funds coming on board as well, which will only evolve and improve the overall ecosystem.
VN: Let’s look at it from the entrepreneurs’ lens. What’s your pitch to the entrepreneur? What do you offer them?
MS: We call that “supercharging.” We come in and we work at a regular cadence to address specific initiatives that we can do as a core team and as our advisory team. That can be opening sales opportunities, it could be helping them source tech, or helping with their framework for how they communicate themselves. So, we have a group of humans with us that like to be hands on. Who you partner with and who’s funding you take are probably the most important decisions you’ll make as a founder. We love helping and coming up with creative solutions to problems along the way.
VN: The way I’ve heard it sounds like a marriage. You’re going to be with this person for like ten years, so you better like them.
MS: Exactly. You want to work with people who you want to see win. Life is too short and we have important things that we need to accomplish and we want to find great people who you want to get in the trenches with .
VN: Tell me about some of the companies you’ve invested in. What made you want to invest in them?
MS: Sure, so something I’m really excited about and we just did the seed round is Cruz Foam, and what they’re doing is making waste streams from industries that otherwise go to a landfill and create methane, and then they find other fibers and turn it into circular foam. So, all these existing machines can be utilized to make something that is compostable, and you have flatscreen TVs, even washer dryer, all kinds of things wrapped in there and we’ll get it at home, you put it in soil and it’s gone in two months, completely compostable. So, it goes from a methane source to a positive opportunity in your soil in your backyard. It’s really exciting, major corporates are signing up to use it right now, and there will be some big announcements shortly from Cruz Foam. It’s circular and it’s regenerative packaging. Next year California is labeling styrofoam a carcinogen, as is New York, New Jersey and other states, but there have been very few viable alternatives to styrofoam.
Another one is called CleanO2 and this a commercialized company with a business revolved around their CarbonX units, which is about the size of a refrigerator and it’s installed in a natural gas heating room where it captures emissions and it turns them into carbonites. These carbonates are high value and sensitive ingredients that are used in a lot of products including soaps and detergents. We are harvesting what’s called pearl ash from these units and turning it into soaps and fertilizers, products that can be used by a nearby farm. So, right now we’ve got 25 angiopoietins. Each one captures six to eight tons of carbon a year, which is about 20% of emissions that come out of HVAC systems. They also have this soap product they can sell to the buildings. So, it’s quite unique from a consumer perspective, and from a tech perspective as well.
VN: Tell me a bit about yourself, your background, and how you got into venture.
MS: In my 20s I was part of a company that owned radio stations and so I was helping bring our CDs online. They sold that business and then I followed my passion which was music and I became a DJ, and ended up touring with Guns N’ Roses, Kanye West, Rihanna, and Diplo and a whole bunch of others. People asked me if I could make music for hotels or retail stores and so I started a Muzak competitor called The Playlist Generation and I scaled that. We had a great run and I sold it. And as I was traveling around, I was seeing the word in front of me changing. I’ve always contributed to environmental causes, but I believed I should do something about it. So, I’ve spent the last seven and a half years learning everything I could about the climate emergency. I was meeting other VCs, meeting other interested entrepreneurs, and I was excited to take my personal knowledge and do something about it, and that’s where Regeneration.VC came from.
VN: What are some of the lessons you’ve learned? What are some of the things about venture that surprised you?
MS: What surprised me is that when I started I was invited into deals, even though I had no network, very limited experience in the field, to co-invest with people like Bill Gates, huge names in the industry. That did two things: one, it told me there’s not a lot of investors, and two, that I’ve got a ton to learn.
Two or three years ago, a lot more investors started saying, “I’ve been doing it this way, I want to try something else. I’m inspired, I want to do something useful with my capital.” So, now there’s a huge amount of interest in this and funds can differentiate themselves on the problem. Maybe they’re good at enterprise, so they can find a business to invest in; maybe they’re good at supply chain issues; everyone can take it from a different angle. I love that we can connect around carbon issues that bring us together and get us moving collaboratively as a community.
VN: That’s the part of the job that you love the most and that really excites you?
MS: I’ve got a five year old son and a seven year old daughter and life has been really great to me to this point. So, if I can find something that I can do to make a difference on environmental issues, I want to do everything I can to make sure I keep getting to do this.