Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Wal van Lierop is the Executive Chairman and Founding Partner at Chrysalix Venture Capital, one of the most respected and recognized venture capital firms that focuses on energy technology and industrial innovation, and is located in British Columbia, Canada. Prior to founding Chrysalix in 2001, Dr. van Lierop had a number of positions in the energy industry, from being a university professor to corporate executive to international consultant and founding New Ventures BC. Especially passionate about the cleantech space, he has won numerous awards from Canada’s Clean50 and Clean16 contests, contributed to Forbes, and participated as a speaker at events like the Cleantech Forum, Energy for Tomorrow, and many more. At Chrysalix, he continues to actively support startups by investing, advising, and scaling up companies with breakthrough solutions for the energy transition.
How did it all start? How did you decide to enter the venture investment business?
I’ve been involved in the energy industry for almost fifty years. After having been a university professor, a consultant with McKinsey for many years, and a VP in the management team of one of Canada’s largest energy companies, I was already working on the need for innovation and a related corporate venturing group, and used that to start Chrysalix in 2001. Alongside, I was also the founder of New Ventures BC, which provides support and mentoring to young companies via an annual competition that we organize in British Columbia. New Ventures BC helps young companies with the tricks and traps of entrepreneurship, particularly in the very difficult space of the energy transition for large industrial companies, like the ones in the mining industry, energy industry, construction industry, cement industry, and so on.
What was the most unusual startup you have ever supported? Or, maybe, your favorite or memorable one?
The most unusual startup we ever supported is a company we are still invested in, called General Fusion. Fusion energy is the Holy Grail of clean energy. If we are so lucky that we can be net-zero by 2050, an aspiration that many large companies have, then we need something else in addition to solar, wind, batteries, and biomass to get there. We have achieved a lot with the technologies in these areas, but in order to turn the heavy industries that are responsible for the bulk of the CO2 production all over the world into net-zero, we need something else. That something will likely have to come out of the nuclear area.
We all know the difficulties of traditional nuclear fission: the runaway process and the enormous radiation that is produced. With nuclear fusion, you have a totally different process. Instead of using energy to split atoms, like what happened in Chernobyl, you use energy to fuse atoms together and if you do that in the right way, a lot of additional energy gets created. If you stop the energy, the entire process stops, so you don’t have a potential runaway process like you had in Chernobyl. You also have a situation where there’s hardly any radiation produced, it’s more comparable to the nuclear radiation you have in an academic hospital, and the nuclear waste is extremely limited, too. It’s just a fraction of the nuclear waste that is produced during fission, and nuclear fusion waste has a half-life of less than 200 years, not hundreds of thousands of years like you have with fission. People are very hopeful that fusion will break through and when it does, it will change the energy landscape completely because it will provide cheap, safe, clean, baseload energy and that is what the world needs.
There are currently a number of very big government-funded fusion energy projects going on all over the world, most notably the ITER project in France, which is on target to be operational by 2040-2045. In the meantime, there are about 30 startups in the nuclear fusion space and they are all targeting to be commercial in the early 2030s. General Fusion, in which I have invested, just recently announced that they are building a demo plant in the UK that is on target to be operational by 2025. We’re working towards the first commercial plants by 2030. This is very important because many countries and utilities under the Paris Agreement have agreed to retire coal-fired power plants by the early 2030s. Fusion needs to be ready in time for us to reach that goal, and I think that between General Fusion, Commonwealth, and TAE, formerly known as Tri Alpha, there are quite a few small privately funded fusion companies that have enormous chances to be successful. Some people may say, “How can a small company succeed against a big, multi-government-supported institution like ITER?” My answer to them is that 120 years ago, there were also big government-funded and military-funded institutions looking for a breakthrough in the invention that everybody wanted in that moment in time, the airplane, but it was the Wright Brothers, two guys in a garage, who flew the first plane, and that is what we are probably are going to see here again. The biggest disruptions usually come from outside of our own industry and that is why we are supporting General Fusion; we trust that it will turn the world of energy totally upside down.
How do you usually select startups to support? What are your criteria?
The technology being developed needs to be disruptive, new, and defendable. As we’re very often the first to invest, we need to be able to take a significant ownership stake; that is more than 30% of the company. In the early stages, we work side by side with management in order to give the company the best possible start. Then, over time, we become the builder of the first syndicate and the team who is leading the company. A breakthrough technology with a half-hearted management team will fail, whereas an okay technology with an excellent management team is probably going to do just fine.
And are there any other special qualities you look for in teams?
A team needs to be cohesive. A team needs to really work as a group of like-minded people who complement each other and support each other in an extremely focused way because focus is what makes early-stage companies win.
What is the geography of your interests?
We are focused on doing investments all over the world, but in practice, most of our investments take place in North America, increasingly in Europe, and we’re also starting to look in Southeast Asia.
At which stage do you prefer to enter?
We enter in the Seed or Series A stage. We are often the first institutional investor in and the first investor that tries to bring a syndicate together for the next round.
And when do you usually decide to exit?
We exit when enough value has been created. When we don’t see the value creation that we expect in a certain timeframe, one of the key things a VC will do is to kill the underperforming portfolio companies in order to ensure that you can direct all of your resources to your potential winners. When a company is not doing so well, many people are tempted to invest a lot of time, effort, and money into trying to save that company; that’s natural. That’s not what you should be doing though; you should focus on potential winners.
Are there certain industries or fields you like yet will never invest in?
I do like a lot of consumer applications, but we do explicitly B2B. I am intrigued by the ongoing avalanche of apps that come out of Silicon Valley and for which people are willing to pay enormous amounts of money, but I will not invest in that. I think that if we’re serious about building solutions for the energy transition, if we are serious about wanting to become net-zero by 2050, then we should find ways to attract more capital to building solutions with that purpose. The ongoing discussion I have is how can we ensure that capital from impact or ESG-investors ends up in the most active companies working on solutions for a cleaner world. Most of the ESG and impact funds have divested their money from oil and gas companies, but they put that money into the big tech companies out of Silicon Valley like Amazon, Apple, and so on. We should ensure that at least part of that money ends up in the hands of companies like General Fusion, companies that really can make a difference to the world. The impact General Fusion can have on the world, compared to what Airbnb, for example, can have on the world, is incomparable.
Have you ever rejected a startup and then regret it?
Yes, absolutely. I’m not going to list the names, but I will say that sometimes people surprise you. I wish them all the best, good for them.
How do startup teams usually find you? Do you wait for inflow, or do you scout actively?
We have a widely recognized and trusted brand name, so we get at least 80 inbound requests from companies with new opportunities every month. We also have a very active network of large companies that work with us, including advisors, investors, and limited partners in Chrysalix. They send us many of the deals they come across because many of these large companies don’t have the capabilities to work with very early stage companies. We also have Chrysalix’s extensive supporting academic network. Our limited partners, or investors, tell us what their need for innovation is and what their pain points are in their business processes, and we use that information to do our deal scouting. Sometimes there are very significant pain points for which there is no early-stage company yet, or for which there is no solution in the market yet. Together with that limited partner, we send out a request for proposals in our academic network. That academic network has about 20 top universities spread around the world. Then, professors and teams from these universities compete to find a solution. Over time, we will see if we can build a company around these small teams and take them further.
Investors usually prefer to work with teams, but maybe you have ever supported a one-person startup?
As we invest so early, sometimes we have to build the team from the ground up. We have situations where we do a bake-off between several CEO candidates, and once the CEO is in place, they can start building the rest of the team.
How many of those who, as you said, knock on your door go through your selection process? How many times per year do you invest?
That depends a little bit. Let’s say we get a total of 800 to 1,000 deals a year. In not-so-active years, we may invest in two or three out of the thousand. In more active years, we may do eight or nine investments.
What is your due diligence procedure, and how long does it approximately take?
That could be six weeks to two months, but it could also be up to five months, in particular in those cases where we work with academics in very early seed stage projects. When it comes to due diligence, we look at: does the technology work, is the market big enough, is the technology patentable, is it defensible, and what is the strength of the team. During COVID, it was a little bit difficult because you want to be eye to eye with the people who are running the company to understand if you can trust them, and that is very difficult to do virtually.
Regarding the COVID, are there any long-term consequences you see in that?
I think that people have become much more focused, which is good. Very often, it is at the bottom of a recession when the strong companies of the future are born.
Generally speaking, do you see COVID as a threat or an opportunity to the VC business and VC world?
On the one hand, it has made the world more separated from each other, but on the other hand, the world has become smaller through our virtual interactions. I hope that we can find the right hybrid model moving forward.
How big is a check size you usually issue for the startups you support?
We could invest very early with something as small as $250,000. More typically, we write a check for about $3 million, and over the lifetime of the investment we would contribute a maximum of $15 to 18 million.
What is your process of working with startups once you invest in them?
We are very active investors. At a minimum, we are a board member, but typically the real work happens in between these meetings. We’re working with the companies on scaling them up and unlocking market opportunities, and in that regard, we provide unique connections to the enormous corporate network that we have. Large corporations closely monitor how our portfolio companies are developing, so that they can see over time when a company is substantial enough for them to start engaging with. They then understand: can we do a joint venture, can we do a market development or pure R&D deal, or can we become a follow-on investor or maybe even an acquirer. The bottom line is that we are more than just a financial investor; we are a very active contributor to scaling up companies.
How much runway should a startup have to feel safe?
When we invest, we like to give a company 18 months of runway. If a company has less than half a year, we need to be close to closing the next round. We generally do not like to do bridge financing, but that may from time to time be necessary if market circumstances are difficult but you believe in the company and have to carry it further until the market is ready for them.
What qualities do you think are important for a good VC?
You need to have a good understanding of technology. You cannot be a specialist in everything, however, you have to be able to ask the right questions and find the right experts who can help you with your due diligence. You have to have a very solid understanding of market opportunities and be very well versed in the types of financial deals that you can make for the companies and, of course, for your VC. Last but not least, you have to be able to pick the right people.
What, to your mind, are the common mistakes startups usually make?
Very often, they think they have time; very often they want to have more time. Very often, engineers, if they’re in the leading positions, think that they can take time to develop an opportunity, and they are also convinced that when they have developed something unique, the market will embrace it. However, it only starts to mean something if somebody else looks at it and is willing to pay for it. An understanding of the market opportunities is very important. If you drive for a very high valuation early in the process, then in a follow-on financing that may come back to haunt you. If, as a result of that, you need to accept a down round in that follow-on financing, you could easily end up in a negative spiral.
Are there any things you learned from fellow investors?
The most important thing is that as an early-stage VC, you take risks; this is not for the faint of heart. Most VCs are nervous overachievers. If somebody doesn’t play, that’s important.
And the same question for startup teams and founders. Is there anything you learned from them?
I’m always fascinated by how focused people can be, and I really like that. I always tell them, “Never stop believing in yourself.”
Are there any other things that surprised or impressed you the most when you started doing venture investments?
What surprised me in the cleantech space is how long it takes, how many people talk about it, and yet how few people actually want to put their money into it. Like I’ve already said, it’s not for the faint of heart.
Where do you get your daily information from?
The big international news media online and, of course, the newspapers, like The New York Times and The Wall Street Journal, and many specific online media outlets, from Bloomberg to Forbes.
What useful resources can you suggest to startup founders and teams? Books, blogs, movies, whatever.
Many MBA schools have all kinds of resources about how to build teams, how to go for financing. It totally depends on the needs of a specific company what to recommend.
How did the venture ecosystem change over the last, to say, twenty years, or just over time?
In the cleantech space, we have seen a very interesting development. 20 years ago in the venture capital world, in 2001, there was a moment when the internet bubble in Silicon Valley burst. When that happened, most VCs in the Valley started looking for the next big shiny thing, and they decided it was cleantech. In 2001 until about 2008, you saw an enormous jump in cleantech investments, and then Silicon Valley started to realize that building these solutions is actually very difficult; it is more fundamental innovation than most of the Internet apps they were used to. Around 2008, they thought, “This is taking too long,” and some players even declared that it was impossible to make money in cleantech, so they walked away. Now we see a revival, everybody in Silicon Valley is working on decarbonization solutions. I hope that people will learn from the early 2000s.
If you were to think of VC business as a game, would it be chess, checkers, backgammon, go, card games?
It’s a team sport, so it’s definitely soccer. It’s not chess. I love chess, but that’s more an individual sport. VC is definitely a team sport.
Finally, your three pieces of advice to startup founders and teams.
The first and most important thing is to never stop believing in yourself. Two, be prepared to put a lot of time into this. For startup founders, there are no nine to five, Monday to Friday work weeks. You really have to believe in this and go for it. Three is to listen to the market and when it comes calling, don’t focus on “I’m not ready, the technology needs to become perfect, and only when the technology is perfect I will go to the market.” When the market is ready, you have to go there.