Tuesday, February 13, 2024

Thin Line Capital closes Fund II - Looking Back as a Long-Time Climate Investor/Entrepreneur


December was an incredibly busy month, culminating in the completion of two significant milestones for the firm.  We made the final investment for Thin Line Capital Fund I, completing its portfolio.  We also successfully completed fundraising for Thin Line Capital Fund II, reaching its final close.

The final investment in the Fund I portfolio is a company called XGS Energy.  I have been following geothermal energy since 2007 when I was living in Australia.  Geothermal, I believe, will be the next exciting boom in renewable energy production, following the explosive growth we’ve seen in wind, solar, and energy storage.  Geothermal has the potential to provide firmed (or dispatchable) carbon free energy, solving the variability problems that wind and solar have.  Both wind and solar have gone from a few gigawatts of global capacity, to being around a terawatt, each, of global installed capacity.  Geothermal today is around 20 GW, which is where solar was in 2008 (only 16 years ago!).  I fully expect a similar rise in geothermal production, and I expect XGS to be a significant player in that.

I’ve always positioned Thin Line Capital as a firm with long-standing roots in the clean energy and sustainability industry.  I started my cleantech career in 1994, when I published “Recovery of Thermomechanical Exergy from Cryofuels”, originally at the World Hydrogen Energy Conference when I was an undergrad with IESVic at the University of Victoria.  My career led through hybrid electric vehicle development, fuel cell development, to MIT, which ultimately led me to Southern California, to the home of the initial EV1 development.  As the first cleantech boom was ignited I was with a concentrated PV company when we raised our first capital (thank you Nth Power and Rockport); I joined an Australian VC firm and invested alongside KPCB and Khosla into Ausra, a concentrated solar company.  With the collapse of the cleantech boom, I returned to Pasadena and joined the XPRIZE Foundation to help launch an Energy XPRIZE.

Following this, for a period of over twelve years, I was able to start several companies at Idealab, including Energy Cache, Energy Vault, and Heliogen.  I was the CEO of two of these, and had terrific support from Idealab, Bill Gates, Claremont Creek, and a number of other investors.  Finally, around 2017 (see my logo), I first started talking to people about the resurgence of cleantech (thank you Howard Morgan!).  Overcoming the stigma from the 2006-2008 industry failures, then getting a final close of Fund I in the middle of Covid was a real challenge.  And, while raising a first fund is difficult, continuing to raise funds, demonstrating the viability of the investment thesis, and the long term viability of the firm, is the real name of the game.  With this success, I thought that this was a good time to look back on lessons learned through the execution of Fund I.

Lessons Learned

While putting a lot of money into a company that fails isn’t great, putting too little money into a company that takes off is arguably worse.  Discipline matters, and sticking to an investment thesis is key.  Randomly approaching different opportunities in an ad hoc manner, with no consideration of stage, check size, or valuation, is a terrible way to hedge risk and develop a structured portfolio.

Investing in picks and shovels – into companies with a low capex solution supporting a fast growing vertical – is a strong strategy for returns.  
A frustrating gap of many clean energy companies is the need to use venture dollars, or rely on government grants, to build “first of a kind” projects.  Given our investment capacity, companies managing market risk rather than technology risk have been a much better fit for Thin Line Capital’s seed-stage funds.  Of course, remaining flexible for the occasional exciting exception is important.

Seed entrepreneurs can provide disproportionate outcomes if given the right mentorship and support.  Seed stage companies all have “holes” – they wouldn’t be seed-stage without them.  However, by recognizing which holes are fixable, and which are catastrophic, makes all the difference.  Investing in those companies where I can provide specific expertise to help fill those holes provides me with an enormous advantage.

Who you invest with can matter almost as much as who you invest in.  Partnerships matter, and we’ve striven to nurture those with world-class coinvestors.  I’m pleased to say that we’ve partnered with certain investors multiple times, validating our confidence in them, and their confidence in Thin Line.

Being a startup founder is difficult, stressful, uncertain, and lonely. One of the strengths of Thin Line Capital that I try to emphasize is my own experience as a repeat founder and CEO.  A founder is limited in who they can speak with on the challenges of a company, and I think the founders I work with would agree that the greatest strength we bring is our ability to help them plan a path forward.

However, given that, it’s important to remember:

The founder is driving the company; the investor is supporting. Even though many of my companies have navigated through multiple crises and successes (in just the last year!), we must never lose sight of the fact that they are in driver’s seat, with all of the responsibilities which come from sitting in that chair.  At best, as the investor, I’m in the passenger seat holding the map.  It’s critical to empower founders with the responsibility and resources to make the right calls.

I have been incredibly privileged to work with the companies that formed the portfolio for Fund I.  I am greatly appreciative of the LPs who have chosen to back Thin Line Capital (both Fund I and Fund II).  I am now setting my sights to finding extraordinary founders building extraordinary companies for Fund II, and I look forward to whoever I may partner with along the way!

Aaron Fyke, Founder and Managing Partner

Thin Line Capital