This is part one of our exclusive interview with Lara Koole, Founder & CIO of Carbon Equity.
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A little bit about Lara Koole
Lara Koole is the Founder and CIO of Carbon Equity, the first global alternative climate investment platform. Lara is a former partner of Phillips Ventures where she set up their corporate venture fund, doing both direct investments and fund investments.
Lara and her team have just closed their first financing round and are in the midst of building their first Fund of Funds-feeder fund. In this first part of our talk, Lara gives us a rundown on Carbon Equity, how it is changing the way VC works.
Some things you’ll learn from Lara Koole:
– How Lara and her team are unleashing the power of VC to tackle climate change
– How retail investors are going to be able to invest in VC through Carbon Equity
– Why and how the VC model is adapted by Carbon Equity, including a “no carry” policy (!)
– Perspectives on Feeder Funds and how Carbon Equity are using them
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David Cruz e Silva (David): Lara, tell us the story of Carbon Equity and what you’re doing.
Lara Koole (Lara): Carbon equity is my dream project, in many ways. We launched in January and we’re building the global alternative climate investment platform.
Capital can be a driving force for many things in our world. In our case, we’re talking about Venture Capital, and we all know the importance of capital in driving change. We wanted to figure out how we could direct as much capital as possible for a positive impact on the biggest challenge of our generation which we believe is climate change. So, when that’s our mission, where should capital go to have the biggest impact and address climate? I think we need to solve for two things:
- Innovation – we need a lot of exciting new technologies that can build a more sustainable world.
- Transformation – we need new and traditional companies to change their behaviours, change the way they operate and become more sustainable. And that happens mostly in the private market.
So, while there are a lot of platforms coming up for investors that make them able to invest in public climate portfolios, we focus on the private markets and we start with the climate vertical in Venture Capital.
We’re going to build our mission to open Climate VC for smaller ticket investors. The thing is, the larger institutional investors are able to find and access Venture Capital, so they’re already looking more towards climate and the Environmental, Social and Governance Criteria (ESG) in a lot of ways, but the smaller investors can’t participate in this whole opportunity. They cannot invest in Venture Capital; the entry tickets are way too high and illiquidity is a problem. So, our mission is to unlock retail capital towards true climate investing in Venture Capital and maybe even Private Equity down the line.
Andreas Munk Holm (Andreas): The natural follow-up question has to be: how the hell do you do that Lara? [laughs]
Lara: It’s complex, I can tell you, because unlocking this asset class for retail investors means letting in a group of investors who are, typically, not so familiar with Venture Capital. It’s also a higher risk asset class. In VC there’s the underlying investment in Startups and that causes a lot of diversity in returns.
First, we had to figure out the regulatory complexity but that was just the start and we’re working on three main goals now:
- Get a regulatory license to be able to offer smaller ticket investments;
- Educate our investor audience about venture capital and the type of assets involved;
- Build an infrastructure to do self-onboarding, self-management, self-administration, automate the process as much as possible and reduce the cost of managing such a large base of participants.
Andreas: It’s usually said that raising a VC firm or a Fund of Funds (FoF) is like chewing glass, and what you’re doing is even harder, Lara. Considering how difficult it is for any normal fund, how do you make the economics of this undertaking work for you?
Lara: Often, the first thing people say when we talk about us being a FoF is: “Hey, that sounds like fees on fees!” So how do we make it work? In principle, our model needs to be based on volume, so we need scale to have as many smaller funds as possible on our platform. We think that the economics in a very low fee model can work, but it means no performance fees, no carry, none of all that. Just a flat percentage that we take to fund our operation and keep it very simple and transparent.
We have a way to keep the cost as low as possible, using technology to ensure that we can actually manage everything with that low fee level.
David: Is it me or did you say no carry?
Lara: You’re absolutely right, I said no carry!
David: That is quite different! Has that impacted the way LPs perceive it in the sense of alignment of interests?
Lara: In the end, what we do is curating the best climate funds and the best managers, with the expertise to select the right companies. The most difficult part of our role is in the beginning when we must make that selection. But then, the hard work becomes the work of the fund managers themselves, who must go and find the best companies, and support them along their journey while in their portfolios. At that stage, we essentially follow and provide content back to our participants, to help them get engaged with what’s happening and for them to know what kind of companies are in their portfolio. But it’s in the initial selection that our real effort lies, so I find it hard to argue why carry would make sense in our role as an intermediary.
Andreas: That’s interesting! Normally I would see LPs arguing with the management fee, and not the carry. And I perceive the carry as being a very strong alignment incentive. Have you had no pushback on it?
Lara: We’ve had, absolutely! We have had many discussions on this topic but, in the end, our mission is to drive as much capital towards climate innovation as possible, while engaging as many people on that journey as we can, globally. Our tagline is “investing billions with millions”. That’s where we want to go and the simpler and more transparent we make our fee structure, the easier it will become for those investors to make the decision. There’s a little additionality in the fees, but they get access through our platform, they get the content, they get the relationship and the curated funds that we provide.
David: Democratizing VC as an asset class is, of course, great but there’s the flip side to it: This is a risky asset class, and a lot of people don’t know it. They need to be made aware of the risk so that, in their personal wealth management, they must understand that they shouldn’t allocate all their savings to this and that it isn’t a substitute for a retirement plan. What are you doing to make sure that all these retail investors are fully aware of what they’re getting into?
Lara: Well, let me first explain how we look at the potential investor basis. We’re still starting at the top of the pyramid. We’re starting at the High Net Worth Individuals (HNWI) and Family Office level and that also has a regulatory constraint: Initially, we cannot accept tickets below 100k in the Netherlands, and that threshold can be as high as 250k in other countries. So, we’re starting by addressing that audience, they typically have some experience with this asset class. For them, we do feeder funds that allow them to get into one specific fund, with a smaller ticket. So instead of the five or ten million they would need to access such a fund, they can participate down to the legally set minimum.
For the smaller investors, the first product we envision is a fund of funds. We’re looking at creating a diversified set of investments in about eight to ten climate VCs, which enables a lot more differentiation than investing in a single VC. This also has another benefit for those smaller investors: it reduces their risk of losing all their money since that becomes a very low probability in such a large portfolio.
And enabling diversification is key when making VC accessible for retail investors. Our end game is for the feeders to have lower entry tickets as well and by doing that we intend that people can build their own fund of funds and diversify by themselves, based on the information we provide on impact, return and risk.
Another important point when working with the HNWI audience is what will be our positioning and message towards them, as many of them are unaware of venture capital. They only know the cool startups and the success stories, and there will be a journey to take them on, with information on what’s happening in this asset class and but it’s also about creating liquidity options down the line.
Andreas: Lara, most people would agree that the regulations controlling fund and private company investing are a difficult climate to navigate in, so hearing you, I can’t help but think that you assume that some of the existing red tapes will loosen up?
Lara: I’ve got to agree on the difficult climate [laughs]. But on a more serious note, those regulatory constraints exist for a reason. I think that part of our mission is based on the premise that if people are made part owners of the solutions, that will create a level of engagement beyond what people can currently do, e.g. like buying off their carbon footprint. But, in that same vein, it’s also very important that people tread carefully in this asset class. We want to be very careful in accepting money that may be beyond people’s means or too high a percentage of their investable assets. It fits the principles of our company to make sure we treat that correctly.
An option we thought about is having an allocation calculator on our website, where you fill in your total investable assets and we provide some recommendations on what the right allocation mix could be. If we believe the additionality is high enough, at some point we might be adding other asset classes that are less risky, but also have a role to play in climate change. We could think about forestry funds, or other real assets, but also private equity that’s really working on transforming existing companies. But those are just some examples.
Andreas: One of the vehicles you’re setting up is a fund of funds and you mentioned that your main work there is in the selection process. That also means that there’s not much of a value add from your side to the fund managers. Why do you believe that you can get access to the best funds?
Lara: We are in a domain where you have quite a lot of mission-driven managers, and they are in it for more than purely the financial benefits of this business. Therefore, we already see a lot of acceptance on softer criteria at the start. For example, we have fund managers saying that they really like having the opportunity to provide access to more retail investors. It gives them a way to get engagement from entrepreneurs who don’t yet have the capital to participate under normal circumstances, but who could bring interesting expertise and deal flow to the fund. They’re mission-aligned and see an interesting audience.
We’re also seeing a growing interest in the feeder vehicles. Funds are interested in bringing in groups of people that they cannot accommodate themselves, but they would love to bring in: friends and family, entrepreneurs from previous portfolios… Where the funds struggle with the onboarding, the KYC, the fund administration of a large group of smaller LPs, we can facilitate all of that for them.
Andreas: Lara, I’m curious, when you’re building all this tech and the machine to make that work, why do you limit yourself to only doing it for climate? I would say that this is needed across the whole ecosystem.
Lara Interestingly, that is an ongoing discussion we’re having as a company: do we want to do the infrastructure play for any VC or do we want to become the best curated climate asset platform? If you look at the intrinsic motivation that had me, Jacqueline van den Ende, Lisa Rubinstein, Tim Molendijk, Jeff Gomez and the whole team start this company, it was really built on the climate premise – on this being the biggest challenge of our generation but also a very exciting opportunity. Right now, we have the chance to rebuild the world in a different way, with a different vision. And playing a role in that space is what gets us most excited about it.
That being said, for the current path, we need that infrastructure anyway. Maybe at some point we can enable it for other VCs and hopefully every venture fund will start to contribute to that world we’re envisioning, so there won’t even be a delineation between impact or traditional investing anymore, it will all be aligned. I hope we can play a role in getting to that stage!
David: In previous interviews, we’ve spoken about the VC landscape and what’s happening. There are super exciting things happening upstream, but also downstream. One that we particularly like to talk about, because it resonates with our readers, is the rise of micro-VCs, solo-GPs and so on. Then you have super interesting data from Kauffman Fellows saying that emerging managers have better returns. And one of our guests argued “yes, that’s interesting but it’s a different asset class, it’s much riskier.” So, how do you look at this balance of different profiles of VCs, as you’re thinking about selecting VCs, democratizing, and opening the access to it?
Lara: That’s super relevant for what we’re trying to do. I find a new climate VC almost every two weeks, there’s a lot of new funds and emerging managers in the climate space. As a starting point, we say our value proposition is access to top tier climate funds. In that story, it would be difficult for us to start with first-time funds or with micro funds, although we have had some conversations with them. But we hope that, as long as we make very transparent what the type of fund is, we can actually support emerging managers more.
It’s difficult though, and I’ve had conversations with those first-time funds. They’re also struggling with how to make things work, with finding a way to convince that first cornerstone LP, that could then drive the interest of the others who are just looking at each other… What do you use as a base to prove your ability that you’re going to be able to make your fund thesis and strategy work? Because even though doing a VC deal is not rocket science, building a good portfolio and making good decisions is quite difficult.
And we actually did the same thing when we were raising for our micro fund, we were a first-time fund also, but with a FoF proposition. Our idea was to raise a 50 million FoF, invested across 8 to 10 climate VCs, and that would be our first product. But then we realized that we don’t really have much of a track record. I mean, I did FoF investing at Philips, so I’ve done it for quite a few years, but it was more from a strategic perspective, which is a little bit different. So, that got us to the decision of doing a series of micro funds, which are the tiny feeders we’ve been talking about. These are, basically, smaller buckets of capital where we can already create some track record and prove that we’re able to access the climate funds that we’ve selected and build those relationships. That also allows us to prove that the machine works, even though we’re just starting.
Andreas: You’ve referred to your feeder funds a couple of times and a lot of our readers might be asking themselves what those are. Are they Special Purpose Vehicles (SPVs), or are they something different?
Lara: Yes, they’re essentially SPVs. They’re a simple Dutch structure that we use, which is called fund for joint accounts. Essentially, it’s a contract between us, the investor participants, and the underlying fund manager, where we represent the pooled investors as an LP in said fund. We arrange for communication with the underlying fund as well as with the participants, that are our investors.
David: And can you also explain to our readers the concept behind the feeder fund vs a fund?
Lara: A feeder fund is a funnel into a larger master fund. It groups participants into one entity, so it’s simpler for the fund manager not to have to deal with all the smaller investors underneath but just with one representative into the fund. Essentially, it’s a pool of capital.
David: Lara, when are you launching, when do you expect to close and how can LPs, or potential LPs, get in contact with you? And when should they?
Lara: Well, we’re putting our first feeder fund on the market as we speak. However, right now we’re only allowed to market it in the Netherlands so the other participants and readers will have to be a little patient until we’re able to open it up internationally as well.
We’re opening up our first fund and it’s actually a relatively small allocation because part of that feeder is already filled by the fund manager and their friends and family. It’s a terrific way for us to get in business, and we’re raising that. We have about six to eight weeks to raise it, then we’ll close in at the end of August, participating in the final close of the underlying fund. And it is a very exciting one, called 2150. They’re based in Denmark, focus on urban sustainability and we’ve actually known them for quite some time. I know Christian Hernandez, one of the fund managers, from my previous life at Philips. Being able to kick off with a good fund that has a size that makes it not the riskiest asset to jump into is a thrilling great opportunity for us!
This is the end of part one of our interview with Lara Koole, Founder and CIO of Carbon Equity.
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