How to Build a Capital-intensive Startup in a Tough Venture Market

4:29PM Sep 19, 2023

Speakers:

Nikki Pechet

Sophie Bakalar

Chris Power

Keywords:

capital

companies

venture

business

fund

series

capital intensive businesses

investors

raise

people

climate

returns

building

important

bit

debt

year

aapko

valuations

capex

All right.

Hello, and thanks for joining us. Today we're going to discuss how venture capital is not just slower. It's also a lot more focused on profits than growth compared to a few years ago. And yet here we have companies and VC who are founding and funding capital intensive businesses. In area from sustainability, to manufacturing to homebuilding. And we want to share some of the lessons of how they did it. And the main point is that those not just venture capital, sorry, Sophie. So I actually want to ask you, Nikki what other sources founders can tap into for their capital intensive businesses?

Great, so thank you guys for being here. Hope this is a helpful discussion. I'm Nikki, I'm co founder and CEO of homebound. We are a Series C technology enabled home builder on a mission to make it possible for anyone anywhere to build the home we built a proprietary software platform that makes homebuilding both more efficient with better customer experiences. And over the course of the last five years since founding the company we've announced over 150 million raised from lots of top venture capitalists like Google Ventures COSLA for runner thrive, and many others, but we've also raised hundreds of millions of dollars of real estate capital from investors like Goldman Sachs. So that's my perspective that I'm bringing to the panel today. I think we'll all try to represent both our own experience but also what we've seen and sort of know about from other businesses that could be helpful. So the thing that I think is most important, first is your role as an entrepreneur and leader of your business is recruit a team, create a vision, and then raise capital and raise capital in this environment is really challenging. And so the thing that we found, I think all of us up here to be really helpful is knowing how to raise different kinds of capital matched to different use cases in your business. So in our business, for example, we've innovated on funding structure by pulling apart what we call the operating company, or the aapko, which is a technology business where all of our tech assets sit and where all of our venture dollars go. And they fund investment in primarily technology but also to some extent growth. And then we've separated that from real estate assets. So we have a separate fund that we call a property company or a prop CO and that's where we can raise capital that's focused on getting returns from those real estate assets. And it's helpful because venture capitalists like Sophie are looking for 30 40% Plus rates of return every year on their capital real estate investors. In our first fund we're looking for eight or 10% return on their capital, which we can easily deliver with real estate assets. Today, that number is up a little bit. It's more like mid teens high teens returns for real estate capital, but that capital is plenty. And we can even in this environment, we can go out and raise quite a bit of capital there that helps fund growth for the rest of the business and gives us more leverage on our venture dollars.

Yeah, I think so if you'd like give some perspective on why venture capital, like your fine was restructured, is it something you see commonly in your portfolio?

The aapko prop co model? Yeah, at later stages. And in really capital intensive businesses, we have started to see this and it's just really important to understand the way that the capital is flowing, what your priority is in the capital stack. But yeah, it's definitely a model we're seeing a lot more particularly in climate tech, which is where I'm focused as a as a VC, because that model can be really attractive for isolating higher returns and higher risk assets for for companies but it's just one one model. I think there are, you know, to Nikki's point there are a lot of different ways of structuring capital to match the type of industry you're in the type of risks that you're taking on so that it aligns with the stakeholders that you're taking that capital from. So obviously, as a venture capitalist, I think venture is a really important piece of the puzzle for a lot of industries and primarily for technology businesses at the earlier stages. It's really important, but being able to access capital from, you know, real estate specialists or from, you know, different types of debt providers and and one thing I think is really important, particularly within climate tech is understanding the opportunities around grants and subsidies because that space has just become so powerful for so many different types of businesses in the industry in just the last year and a half. I mean, there's been so much activity because of the IRA, the inflation and Reduction Act and so many opportunities for companies to access completely non dilutive sources of capital. So, yeah, those are just a few but there's there are a ton of different ways of getting capital for a really capital intensive business.

And just to add a bit more context on being capital intensive, because I think it's pretty intuitive that homebuilding or manufacturing or capital intensive but can you explain why climate tech is capital intensive? Usually?