Gerald Brady: Some of you may know that before I joined Silicon Valley Bank I worked at Siemens, so I have a strong affinity with all things German and I am really pleased that we have got Crispin Leick, from Innogy Ventures and Jules Kortenhorst – I probably mangled that as an Englishman who speaks no German! For those who do not know Innogy, it is an independent venture fund but is closely affiliated with RWE, so a very different type of corporate venture group.
Crispin Leick (pictured right): We have heard today about regular venture capital investors and about corporate venture capital investors. I do not know what we are – irregular, perhaps, or something like that – but basically we have a strong corporate backer in RWE Innogy, the renewal arm of a top five utility in Europe and in addition, we were happy to welcome as another core sponsor a German private bank – Bankhaus Lamper – which also has a lot of interest in renewables, so we are doing renewable technologies. But before I speak for too long, I want to hand over directly to Jules, to tell you very quickly what Topell Energy is trying to achieve.
Jules Kortenhorst (pictured left): Thank you, Crispin and good afternoon, everyone. Topell is a biomass torrefaction company. To help you a bit, biomass torrefaction is the toasting of biomass which changes biomass into something that resembles charcoal, which effectively does three things. It makes the product far more energy dense and thus much easier and cheaper to transport. It makes the product homogeneous and finally and very importantly, it is much easier to handle for utilities in their power operations because in effect, it processes like regular coal, whilst being a renewable power.
Crispin Leick: Everyone got that? [Laughter] It can be quite a game changer in the whole biomass chain so something quite impressive that this technology can achieve.
We have already invested at the seed stage. It was mentioned earlier today that corporates should move earlier, take risks. At the time we were really convinced of the company at that time – company being a big word. It was founded with our investment, basically. It was four guys four years ago, with an idea, then we partnered and worked it out over these past four years and now we are talking about an entity of 40 people, with a €20 million asset that is running, producing something. In addition, it is an entity that has raised in total 35 million euros, the larger part of which is non-dilutive money, which is always welcome for the equity. Also a nice fit in today’s event is that Topell Energy has in fact just signed, a couple of days ago, the B round with over €10 million and we are very pleased to be able to welcome as well a strong new investor. We are not able to talk about that at greater length but it will be hitting the press pretty soon.
So, Jules, tell us a bit about what it’s like to work – utilities have the image of being the conservative of the conservative and venture capital is the opposite – so what is it like to work with such an investor with this big utility in the background?
Jules Kortenhorst: Naturally, I only agreed to talk about this with Crispin in this public setting after the financing had been settled and we had agreed on a price! Because all the nice things I am going to be saying about him now I was not necessarily saying two weeks ago! [Laughter] Joking aside, we have had an absolutely great experience with Innogy Ventures. They have been a most excellent combination of venture capitalists on the one hand and a corporate partner on the other.
Let me start by giving you an example of how this original deal four years ago came about. From start to finish, a several million dollar investment in a period of five months is not the normal decision timeframe in a large scale utility and I have found that on the whole, you guys are able to react at the speed we want to move at, as opposed to the speed that is traditional in those large companies. At the same time, although we are not hindered by it we benefit from the capabilities of the large corporate. For instance, when it comes to bringing about the depth of expertise that colleagues of Crispin in RWE have on combustion technologies, on handling of biomass, you always succeed in finding the right person – some Herr Doktor Professor who has spent his entire life focused on the subject area, a depth of expertise that we can obviously not possibly afford in a company of only 40 people. I would say then, great expertise, great support, but none of the overhang of a large corporate and really quick decision making is a really good combination.
Crispin Leick: That was the nice part – what’s next? Let’s talk about some of the possible restrictions. You basically want to go out and sell your technology to all types of customers, so are there any restrictions? Why is RWE doing this – I suppose that’s one for me to answer! How is that going?
Jules Kortenhorst: There are challenges to be faced. The first is that if you are trying to sell into the utility industry and one of the largest European utilities is your partner, then some of your competitors look at you and wonder whether they can trust you, or whether everything that they discuss with you is automatically going to land on the desk of RWE. How open versus a closed book are you? Also, there is the immediate assumption that we are back with the entire balance sheet of RWE, whereas we understand of course that a venture investment is just that – an investment for the amount that the venture capital firm commits. That can often be confusing for contract parties that we deal with.
Another thing that I have noticed – and with my background, I have worked in the past both for large companies (I worked for ten years with Shell) as well as smaller ones – is that there really is a big difference when it comes to dealing with the outside depending on whether you are large or small. We have had that experience when we look at contracts. A company the size of Topell does not necessarily strike the same kinds of deal that you can strike when you are the size of RWE, with the market muscle and the power that you guys can bring to bear. Sometimes, therefore, we have to struggle to understand that it is simply not possible to negotiate this at this point. I realise that RWE would like to have this in the contract but for Topell, it is not yet achievable.
There are pros and cons, therefore, but on the whole it has been a highly productive relationship.
Crispin Leick: That was the same for me personally. I have a 15 year background in the energy business, so negotiating for small as well as big companies, like Enron or RWE or Repower – quite large contracts – and to accept that the start ups move three times faster but on commercial terms they sometimes need to accept things, not to be hindered and to continue to grow, is one of the more difficult parts for me. Being an active investment supervisory board but then recognising that sometimes you need to accept things that normally, in my commercial life, I would not accept is definitely not so easy for us.
Jules Kortenhorst: But I would also say that we are learning about that together. We recently changed roles. I used to be Chairman of the company and am now the CEO and Crispin has taken over as Chairman. So we have very active dialogue and speak probably three times a week and we are also learning together how we can best benefit from your and your colleagues’ active involvement in the company and where it is best to let the company go and maybe have a knock occasionally and find its own way is a very interesting growth for us.
Crispin Leick: It is important to understand that we are lucky to have a big advantage. If you have a utility as a backer, it is not a technology company so in that sense, the utility wants to use the technology and can act as a customer, which helps. When you look at the first large asset, this is co-owned by RWE, not by the VC group but by the commercial group. So there is no strategic thinking that gets in our way of thinking about shareholder value and trying to increase the value of Topell because ultimately, this is the only thing that we are incentivised by, even though we have a corporate backer as a VC fund.
What about exit then? You are not there yet but what are you expecting there? And are there any restrictions?
Jules Kortenhorst: Obviously, that is critically important also for management that acts as an investor itself. We have a clear understanding, as you just said, that because you are strategically really acting as the venture capitalist rather than as corporate investor, we will have freedom to pursue whatever the right path seems to be for Topell when it comes to an exit. We still have a way to go. We recognise that this is an emerging sector and the company, although probably slightly ahead of our competition, is still at a relatively stage. I am very confident though that a couple of years hence, when we look at the alternatives, we will have all the flexibility that we may need.
Should we open it up for questions now and see if anyone has a different view, or wants to know something?
James Mawson: I am interested in RWE’s or Innogy’s decision to say, ‘Okay, we’ll back the CE. We’ll find four people.’ Or, ‘We like the idea’. How did that process come? Did you approach them, Jules? Or did you have a matrix to say, ‘Okay, we want something in biomass. We want to game-change that because we think that longer term that will distribute our power’ – or whatever it might be – ‘We will find a team or find people who’ve got that technology.’ How does that discussion proceed to say, ‘We’ve got this. We think we can do it. This could work together’?
Jules Kortenhorst: As all the VCs in the field, we are highly focused on renewable technology and every team that is setting up a company with a renewable technology probably knows, more or less, that we are there. Still, when we look back over the last four years at the deals that we actually did, the ones where there was the highest probability that we would do the deal are still where we get the link through some of our corporate lines. The corporate experts only come to us, of course, after they have already dealt with a company, when they like what they see and like the technology, so that we get a reference basically. That is one line. Then as you mentioned before, what we are very actively doing – because I probably need to explain our innovation model – it is rather an upside-down model of a classical VC.
We are doing sector analysis, so we know precisely what we like, what we want. Then we go and look at, say, the 30 companies that are active in that field, which ones are highly innovative, early stage, and approach them. That is also one of the major areas where we get deals done. It is also in fact in our experience far easier to contact, even to cold call, a company. You tell them that you know a lot about their space, that you want to cooperate with them, that you want to understand and then, one day, they may want to go faster and that is when you might be able to talk about an investment. It is very different from a situation where a company is seeking foreign investors and running with advisers and so on.
Our innovation model is, in a way, also upside-down. From what we know of the classic corporate venturing model, you basically have a technology company and commercial units that define which technologies are interesting and which are not. As a corporate VC, you try to join your dots around that. Here, with a utility – not wishing to make fun of our main sponsor – they are not looking for innovation. They are using existing technologies. They are paid for reliability, paid for ensuring that the lights don’t go out! So it is a totally different set up. We are trying to make up our minds about what future topics may be. We have very good access of course to the strategy guys in the utilities but then we try to offer them options as well. We try to influence the strategy and whether we succeed there or not is to be discussed perhaps ten years from now.
Take Topell as a good example. We invested four years ago and the whole biomass strategy of RWE actually changed one and a half years ago. We are focusing now very much on biomass whereas before, if we were to ask RWE whether we should invest in Topell, they would have been indifferent and probably said not to because it might not work. That is not how we deal with RWE but basically we know all the experts in RWE, the people in the various fields, and as Ruth mentioned we are always surprised that in a company of 50,000 employees if you have access to the right tools, you can always find somebody with highly relevant experience in the area you are looking at. Then you can sit down with them to discuss where the bottlenecks are and take it a step further forward.
Question (Davorin Kuchner, Texas Instruments): Was there any point during negotiation before investing when there was any discussion about trying to extract any unfair terms – exclusivity and such like?
Jules Kortenhorst: About once a day! How long do you have? [Laughter]
Let me totally straight. It is interesting because as part of the funding round that Crispin was referring to, which we cannot speak about, one investor did not commit and that became a big issue. There was a certain preference arrangement that this investor wanted specifically to achieve and it was incredibly hard for you to accept –
Crispin Leick: Let’s be quite frank here: it was a corporate backed venture unit which was asking for unfair articles in the shareholder agreement – special treatment, in effect – and that is for us not to accept and definitely not for the company. So that does not work.
Jules Kortenhorst: We have seen it therefore but it does not form part of our relationship. Yes, we can have incredibly tough debates about terms but the fact that they are around and we have taken in so much capital and we are doing well is an indication that we have been able to bridge those discussions. But we did both go through these very interesting talks, ‘What do you mean, you want a clause in the shareholder agreement whereby you get certain rights that other customers can’t get? No, just a minute, this doesn’t work for us and it didn’t work for you, nor did it work for management’. So we see it happening but it forms no part of our relationship.
Crispin Leick: We want to scale that business and make this company really big and have a nice exit. We are not interested in restrictions of any kind.
Jules Kortenhorst: In fact, to be quite honest, we were talking over lunch about my pipeline and what the outlook is and discussing the possibility of selling some of our plans to RWE and in fact, RWE has already indicated that in due course, they are likely to be a customer of our technology. We were joking that that negotiation would be pretty tough but that success in it would be driven by the fact that there would be alternatives open to us. Other customers will take up our test so there is definitely no sense between the two of us that there will be any preference.
Crispin Leick: It was also said earlier today, in another panel, that there is a strict distinction between us, as the shareholder, the VC investor, and the commercial units of RWE. I speak to them. I know them closely. I can translate – they just talk alongside each other; they don’t understand each other; they don’t really understand what is going on. So if something like the supply department of RWE is coming up with some credit risk rules, the start up might be asking what that is; I can try to help there. But I never interfere in any negotiations. That is something to be done between the commercial unit and the company; otherwise I would have a clear conflict of interest there.
Gerald Brady: Thank you very much. That was fantastic. [Applause]