Interview with Don Carlson, Venture Investor and Advisor
How did you get started in this business?
I got started in sustainable venture capital more than two decades ago when an old friend approached me with an investment opportunity in a wind energy company. At the time, I was working as the Chief Knowledge Officer for the investment banking division at Goldman Sachs in downtown Manhattan. My friend came by for lunch on the patio with a young entrepreneur, Sandy de Reisky, who planned to drive around places like Oklahoma and Wyoming buying up wind rights on family farms. It was the spring of 2000 – very early days for renewable energy. Really just 5 guys and a station wagon sipping lemonade on front porches and showing farmers how they could make much more money off their land while still farming. That’s how Greenlight Energy was born. The company bundled wind rights into permitted, approved wind energy projects and then sold those off to larger wind developers.
In 2007 BP Alternatives acquired Greenlight Energy for $120 million, which was the largest wind deal in history at that time. I remember vividly because we were vacationing in New Hampshire with my small children. I stopped at an ATM to take out some cash for ice cream and the bank balance printed on the receipt took my breath away. I was hooked! Imagine making real money while contributing to solving one of the world’s most vexing problems. My most recent investments have been in the “Midnight” eVOTL aircraft with Archer Aviation (check out the cool promo with Usher) – super-quiet, safe, elegantly electric-powered Jetsons style flying cars designed to eliminate big city congestion with short hops to airports and other destinations. What’s not to love about advancing cool technologies that save the planet?
How does your company make money?
We invest in early stage entrepreneurial ventures, primarily in renewable energy, smart grid, energy storage, efficiency innovations, and other forms of sustainable business. Like most venture firms, we lose money on many of them and make significant returns on a few. I try my best to help the founders and their teams make wise decisions, build their networks, and get to profitability because I believe in the companies and because their success is the only way I can make money as an investor.
How does your company go about acquiring new customers?
We don’t recruit customers because we are investing my personal assets in a portfolio of promising start ups in sustainable business. Venture capital is an extraordinarily risky business. Putting my own resources at risk is scary enough. I would not feel great about deploying other people’s money in early stage companies. The runway is far too long and the risk of disappointing people far too great. I wouldn’t sleep at night.
How did you work your way up in this business?
My background in finance at Goldman Sachs, my education in economics, and my legal training from Harvard Law School all have been invaluable to me as an investor. It’s incredibly helpful to be able to understand and negotiate the investment documents without relying on an outside lawyer, to understand the company financials at a deeper level, and to appreciate the rhythms and flows of the capital markets. Right now the “higher for longer” interest rates have effectively shut down venture capital financing; it has been a very rough few years in the venture sector and a lot of really promising companies with important new technologies to combat climate change are failing every month because they can’t get access to capital. Understanding the forces and factors behind that phenomenon is essential.
What made you want to work in this industry?
I believe that capitalism is a tool, not an ideology. When that tool is put to work effectively toward a worthy end it is the most powerful tool ever invented by humans. Making a living by deploying my own capital in service of creating a more sustainable economy powered by infinite renewable energy is an almost unbelievable privilege.
What is it that you feel makes you good at your job?
The best times are when a young company really finds its stride and begins to succeed financially. A good example would be SimpliSafe, a DIY home alarm company founded by Chad Laurans, one of my former analysts at Goldman Sachs. Chad is a software engineer as well as a financial expert. But he dreamed of building a true manufacturing company with a real product – “something you can drop on your foot” was the way he explained it. I was one of the first 3 investors in SimpliSafe. Chad came sailing with me one day on my small boat and pitched me on his new idea.
I’m a huge believer in Chad and his talent and self-discipline, so this was one of those times when you place a bet on the entrepreneur himself. He and his wife Eleanor worked hard to perfect the product, find their market niche, and build relationships with channel partners. They packaged and shipped alarm systems from their living room; when there was a glitch with the “panic button” feature Chad flew to China to rewrite the software code and fix the manufacturing issues himself. Seven years into that hard, sustained work, Chad negotiated a major capital investment from Sequoia Capital in a structure that was nothing short of brilliant. At that point we knew the company would succeed. In 2018 Chad sold SimpliSafe to a large private equity firm for almost a billion dollars. That was by far my most successful investment – the investment in Chad Laurans.
What are the perks of working in this type of business?
I get to work with and support talented, ambitious young people with big dreams and deep commitment to their work. Leah Ellis is a brilliant chemical scientist who has developed a way to make low-carbon cement at Sublime Systems – a company she founded to eliminate one of the largest sources of carbon emissions on earth. Cole Johnson took the lessons he learned from doing charitable work in Africa and founded the Looma Project to help artisanal and sustainable farmers market their products more effectively. Matt Maroon is busting his butt to get the hyper-efficient electrostatic motor technology developed by scientists at C-Motive into mainstream commerce in cooling towers and data centers.
When things are going well I take great pride supporting these entrepreneurs in their work to accelerate the transition to a sustainable economy. We all grow up hoping to do well while doing good. I’ve been very fortunate to achieve that goal, even though there have been many hurdles, setbacks, and hard times along the way.
What are the disadvantages of working in this field?
Oh boy, there are plenty. First, many young companies fail – for a multitude of financial, legal, logistical and timing reasons that have little if anything to do with the value of their ideas, products, and technologies. Those are very tough outcomes for all concerned. The worst part is that so many factors are way beyond the control of the company and its founders and investors. Jacked up interest rates, global pandemics, and ever-changing government policies are just some of the exogenous variables that can make or break entrepreneurial ventures.
Second, the cycle is VERY long. Even a spectacular success like SimpliSafe took 11 long years to come to fruition. And those years are inevitably marked by setbacks and ever-present uncertainty. It’s very hard to sustain patience, faith, and follow on capital investment for that long.
Anyone with a low tolerance for risk or a need for instant gratification should run far away from this field.
What’s the most rewarding part of your work?
That’s easy: Making money while making the world cleaner, safer and more sustainable. In the long run, we need to evolve toward a form of democratic capitalism that is far more attuned to humans’ need for community, security and a sustainable relationship with the natural world. I’m starting an initiative on those topics this month called “Markets & Morals.” By advocating for sustainable investment I think we can make meaningful progress toward a form of capitalism that works much better and produces much more fair and equitable outcomes.
Where is your industry headed? What excites you about the future of this line of work?
I am frankly worried about the future of venture capital. There is a time in the evolution of every company when it needs to shift from raising new equity (selling stock) to making use of debt through the credit market (loans). Right now there is no access to the credit markets for promising companies that are not (yet) profitable. That’s partly because of the failure of Silicon Valley Bank and First Republic which were both active in “venture debt.” But it’s mostly about high interest rates and lenders’ inexperience in understanding how to evaluate the creditworthiness of startups. S2G Ventures has dubbed this problem the “missing middle.” Growth stage companies seeking to scale up manufacturing, build out a sales funnel, or fund a pilot project with a strategic customer can’t access the credit they need to finance these critical dimensions of their growth.
The ”missing middle” is a HUGE problem and therefore a HUGE business opportunity. I plan to deploy significant capital and energy into the solutions to this problem in the near future.
I’m working with a group of investors, entrepreneurs and philanthropists to develop a three-legged solution. One key leg is the brand new transferability of energy investment and production tax credits made possible by the Inflation Reduction Act – a potentially enormous source of income (and collateral) for startups that could make them more attractive borrowers if properly understood. President Biden’s initiative has greatly expanded the scope of companies who qualify for these tax credits and has also created a new market for selling the credits to other companies who can use them immediately. (Pre-profit companies don’t pay taxes yet so they can’t make effective use of tax credits.)
The most promising market maker is Crux, founded by former US Treasury official Albert Johnson, an online marketplace for buying and selling energy-related tax credits which is poised to become a major part of the financial sector. Another leg is the creation of a guaranty pool using philanthropic money to provide a backstop for loans that don’t work out. This form of “catalytic capital” is extremely powerful because every dollar of guaranty can support 10-20x that amount of loans. The final leg is the excellent work being done by EZRA Climate to assemble and curate a portfolio of highly promising companies in proven sectors like e-mobility and energy storage who will be the first cadre of reliable borrowers to conquer the missing middle. Dan Rosen and Dori Rutkevitz (who together built the highly successful Mosaic solar finance operation) are spearheading this important work at EZRA.
If these pieces can come together successfully we may see a whole new generation of startups tackling the overwhelming problem of climate change and leading the transition to a renewable energy economy. And the beautiful part is that there are plenty of opportunities to make money all along the way.
What advice do you give people who want to get into your field of work?
If you want to be a venture capital investor, my best advice is to get the training and education that will enable you to be successful – specifically in finance and law. Then go to work for one of the big players in private equity to see how the world of finance works in practice. Most startups end up having their successful exit by selling to a private equity firm or strategic customer.
For me it worked well to have other regular income along the way as a lawyer and as a consultant to large family-owned businesses – which I still do. That helps a lot because the returns to venture investing are so lumpy, unpredictable and long-term.
For entrepreneurs my advice is the opposite. You have no choice but to dive in headfirst and commit everything you’ve got to your company. That’s what investors will expect of you and is the only way I’ve seen people succeed. But before you take that plunge, spend as many years as you can building a strong network in the financial world and learning from people who have been investing for decades.
Are you willing to be a mentor? If so, how should someone contact you?
One of my favorite perks is developing strong relationships with younger folks getting started in the world of venture investing and entrepreneurship. I feel I have a lot of hard-earned lessons to share from 24 years and about 30 distinct early stage investments across a wide span of opportunities. Some of my closest friendship have come from mentoring – and I’ve gotten really good at it!
