This Funding Model is Helping Fight Climate Change

Justin Norman: I'd love to talk about why build the venture studio model in the first place. Obviously it's much more expensive to operate. It's a lot more work…

James Mwangi: You have no choice. You talked about the venture studio model being more expensive. I think it seems more expensive. But it actually ends up being a lot more efficient.

Maxime Bayen: It's also a lot harder to fundraise for yet we're doing it. So there must be a reason why we do that, right? And the reason is that it works. 

Lyndsay Holley Handler: And it's not just Africa where the venture studio model is working right now. It is actually the way to invest and build great companies globally.

Justin Norman: That's James Mwangi from Africa Climate Ventures, Maxime Bayen from Catalyst Fund, and Lyndsay Holley Handler from Delta40 - three investors employing a venture-building model to help founders solve climate-related problems in Africa. We met up for this roundtable conversation on venture building and climate during the 2024 Climate Week in New York City.

Justin Norman: How do you guys get the global investing community interested in the African story?

Maxime Bayen: Africa, despite being the least contributing to climate change, is the most affected. This is already a reality. This is a global problem, but Africa is actually well positioned to be a disproportionately large part of the solution. 

Lyndsay Holley Handler: So how do we just create a thriving entrepreneurial ecosystem in what will be one of the most consequential and important markets on earth? 

James Mwangi: China rode the industrial transformation story. India is riding the knowledge worker story. Africa will ride the climate worker story into being at the center of the global climate economy. 

Justin Norman: I want to talk about why climate to start. James, can we start with you? Why start Africa Climate Ventures and focus on helping climate founders? 

James Mwangi: So interestingly, our starting point was in climate. It was where can Africa be globally competitive? And our thesis was that if you look at what the world needs to do over the next 30 years or so to get to net zero and hopefully begin the process thereafter of climate repair, we need to decarbonize everything that we do today. We need to shift how we do lots of heavy industry. We need to look after and expand natural carbon sinks, and we need to expand our capacity to remove carbon from the atmosphere, scale with engineered and hybrid approaches as well. Across all of those areas. Africa, because of its labor force, because of its range of natural resources, the land mass, the mineral resources, the biodiversity, etcetera, and most importantly, because of its just unimaginable super abundance of untapped renewable energy, is in a really interesting position to be a global leader.

People tend to think, well, in the race to 0, Africa is 4 or 5 percent of the global economy, 4 or 5 percent of the emissions problem, not really where the answer is at. But, actually, it's gonna be much bigger than that of a share of the overall solution because it has the potential to capture disproportionate shares of the global decarbonized economy. And so that's why we focused on it because we need to solve a jobs challenge, solve an opportunity challenge, and the planet needs to solve a climate change challenge.

Justin Norman: I like that you said it didn't really start with climate because I suspect the answers might be similar for both of you too. Lyndsay, maybe also just based on your background in building a climate-focused company, can you tell me why why start Delta40 and focus on Climate Ventures as well?

Lyndsay Holley Handler: Yeah. So like James, I started off really passionate about just how do we solve problems in Africa in a way that we can deliver products and services that change lives on the continent, 1st and foremost. So my journey started in the village. I spent several years living in rural Africa, and I was investing in small and medium-sized businesses and noticed that all of these businesses could not grow because of lack of access to energy. They were using dirty energy like diesel and kerosene.

And and that was actually not just dirty and not just admitting, but it was more expensive than the energy that we could deliver with renewables. And so I spent 10 years building a company called Phoenix where we actually created an affordable solar product for the African market that delivered energy at a lower cost than dirty energy, which drove growth of businesses, improved quality of life, improved educational outcomes. So I think what's exciting is I think there are many opportunities in Africa where we can actually change lives and drive economic growth in a way that is also tackling climate change and global emissions, and that's what we built Delta40 to focus on.

Justin Norman: And, Maxime, you guys are focused on climate adaptation and resilience. And isn't that kind of the adaptation and resilience story? Is that climate-friendly? But there needs to be an impact on livelihoods. And can you maybe talk a little bit more about why Climate in the context of Catalyst Fund?

Maxime Bayen: A bit similar to James, you know, Catalyst Fund didn't start with climate. Initially, the focus was on financial inclusion. We did that for 8 years and worked within over 60 companies. We've been able to prove that the venture-building model works through that. And initially the goal was to be catalytic as the name of the fund says it.

Because back then, you know, 8 years ago, fintech wasn't really a thing yet in the continent. Fast forward, you know, 8 years later, there's a lot more funding that went to Fintech and we can't ignore anymore the magnitude of the problem of climate change in the continent. One thing that I've always been amazed with, when working with startups in Africa for a decade now, is the kind of problems we're tackling and where this problem sits in, you know, Maslow's pyramid. And now with climate change, it's sort of like it takes the whole picture. Basically, you can't just ignore it.

I was reading recently that, you know, in the past 3 decades, the average temperature in Africa has increased by 0.3 degrees for every every 10 years. This is faster than anywhere else in the world. So it's like no matter what sector of the economy we're looking at across the continent, climate change is hitting it quite badly. So that's why we we decided to, you know, really shift our focus with Catalyst on on climate adaptation 3 years ago. We believe it's so central to the entire ecosystem that it can't be ignored.

Justin Norman: My experience speaking to a lot of climate-focused founders is that they're really trying to solve problems that they are experiencing themselves. Right? So we often maybe we're here in New York right now might talk about climate in terms of the numbers that we see on a chart, but the founders are really experiencing it, especially if it's in the context of agriculture, for example. So I think that that also has an impact on the founders that you guys are choosing to back. Lyndsay, I know that you have a very explicit approach at Delta40 in terms of the type of founders that you want to back in the context of climate action.

So can you say a little bit more about who you back and why you choose to back them?

Lyndsay Holley Handler: At Delta40, we're backing top founders that have significant experience building products from idea to commercial scale or companies. And we wanna back them in their first leap into entrepreneurship. They've done this in the corporate sector. We wanna back them as they kinda start their 1st company or several of our founders are second-time founders. And we wanna demystify this idea that all the founders in Africa are 23-year-old graduates out of college.

There's incredible talent on the African continent that if they had access to capital, could build extraordinary businesses. And so those are the kinds of founders that we were backing at Delta40. And so the other thing we focus on is backing founders on the front line, so founders that are close to the customers and markets they serve. And specifically, we back African and female founders. Right now in Kenya, African founders receive less than 25% of all VC.

And in climate, that number is much worse. I don't have the exact percentage. And female founders are getting less than 5% of all capital. And we believe that, actually, it's a competitive advantage and not just checking in the ESG box to invest in African and female founders who understand these markets deeply.

Justin Norman: James, from your perspective, I know that you are also kind of looking at opportunities. Right? And in some cases, you're co-building as well Yeah. Finding people, good managers to run. So maybe you can talk about that in the context of how the businesses that you are either cofounding or funding are being brought to bear, the sort of profile of the founders that you're backing as well, and why you're choosing to make the investments that you're making.

James Mwangi: To begin with, our lens into this is and I think everything that Lyndsay said actually really resonates, but we come to it from a slightly different starting point, which is we begin with a sense of where are we seeing the ingredients of a real structural comparative advantage on a global level for businesses operating in Africa. And then we have 3, let's call them modalities through a true play. The first one is there are businesses that are filling certain niches. Climate-smart businesses that are filling certain niches have just cracked an aspect of product market fit, have just cracked other aspect. And now we're running into other challenges of Africa, which is its 50 odd markets that you then need to access after the first one, each one with its own characteristics.

And one of the things we're bringing is this ability to build local teams that can, in a sense, take a technology or solution into a new market where we see a clear fit. And many of the things we look for in the teams that we put together for that are things that Lyndsay already touched on. People who know how to build a business, have worked in a business, etcetera. The second is finding businesses that are already on a journey, have built some of the critical elements of what we think of as a globally competitive climate business and just need a particular angle or capability. And there, we'll climb in and provide that capability either by putting in an individual or adding ourselves in.

And there, it's saying that there's so many spaces where, you know, you thought you were just solving, say, an affordable fertilizer challenge in your community, but it turns out you're on the frontier of high-quality carbon removals as well because of the way that you're doing this. But we need to add that component of your business and help scale that up. And that's a combination of what you're doing on the ground and connecting it to global markets in the right way. And then the 3rd modality is, hey, here's an idea that makes a lot of sense. No one is doing it in part because there are no domestic market signals for it.

Right? It's maybe serving a need that's not visible domestically but can be served really competitively domestically. And there, what we've done is literally say, well, where are those seasoned business builders that we can put together into a coherent team to go after fierce opportunity?

Justin Norman: And, Maxime, what's your perspective from Catalyst Fund? I know that you have some perspectives also on where you can best add support in the context of the types of ventures that are being built. So maybe a little different from ACV and Delta40.

Maxime Bayen: Firstly, I mean, on the topic of identifying the right founders, fully aligned with what was said. I mean, we actually have a mandate to back 80% of our portfolio needs to be local founders. We're at the moment at 95% actually out of the 22 portfolios that we have so far. And we're targeting 40% female-led portfolio startups in the group. And I think we're at 31% or so.

So we're on the right trajectory. And we're doing that similarly because we believe there are a lot of best founders. One thing that we also pay a lot of attention to is the founder market fit, I would say. During the diligence, I mean, of course, you know, you can't really make it as rational as as as it would be on, you know, financials and so on, but we try to spend a lot of time assessing the teams. And one of the ways we do that is really spending a lot of time with the with the CEO and the cofounders trying to understand what's what's the story, what really led them to start this.

It's not really a discussion about the business itself. It's a discussion about them. Why did they do that? Why are they best positioned to do it? What would they do if they're not be building the startup?

And that usually, you know, brings us interesting, answers on, you know, what's what's at stake here, because we know it's so hard to build across the continent. So that's an important point. Now to what we bring, in terms of of value addition, I mean, to your point, we take a slightly different approach because we back startups that are already existing. We don't build them from scratch. Usually, the startups that we invest in are, you know, 2 to 3 years old.

They are already a team, you know, 5 to 10 people in place, and we help them to be basically go through what we call, you know, this this sort of valley of death that is a little bit challenging in terms of fundraising and so on. So that's that's really what where our sweet spot is. 

Justin Norman: And I think there's a common thread throughout all of you, though, is this question about what do founders need. Right? And why all of you have chosen to be much more than just a traditional investor in terms of providing that support that founders need. And so I'd love to talk more about that question and why build the venture studio model in the first place. Right?

Obviously, it's much more expensive to operate. It's a lot more work. So you could choose to just be regular investors, but I think all of you have chosen not to. And so the question is, why? Lyndsay, maybe I'll start with you.

Why do you think the venture studio model is particularly important in this context?

Lyndsay Holley Handler: Yeah. Well, I think my passion for the venture studio model came from being a CEO myself. So I spent 10 years building a climate company, and in that time, like, so many highs and lows. And the investors and the TA that I had access to had never built companies in Africa. And it was very hard to make use of that technical assistance that traditionally comes with funds, and I think it was very well-meaning.

But it was hard for that to be useful to me on that journey. And I think that, you know, we built Delta40, and it's a team of founders and operators. So I think you need the founder, entrepreneur, CEO, but we also have just operators that have been inside companies that have scaled. And we're really passionate about making that experience available to our founders and not just in a 1 hour a month kind of advisory way, but in a way that allows us to roll up our sleeves and actually support companies when they need it. Particularly in Africa, you don't raise enough equity to build massive c teams and massive engineering teams the way you could in in some other markets.

It's harder to get C-level talent to come into startups because we haven't seen as many exits yet. So right now, the model that we're passionate about in the venture studio space is how do we bring experienced C-level talent and operators key roles, you know, into the companies through a shared venture studio model.

Justin Norman: So, Maxime, from a Catalyst Fund perspective, what are some of the things that your founders need?

Maxime Bayen: There are a couple of things that a lot of them need and then things that are quite specific into the the skill sets that they have announced. All founders are, you know, tech people or product people, finance people. And so we try to really adapt to the different needs that they may have. We don't come in with, you know, the standard package of support. And actually, we don't really like the word support or advisory or consulting or even technical assistance for that matter.

We're really here to build with them. We've sort of become part of the team for 6, 7, 8 months. Sometimes even act as, you know, interim CTO, interim CMO, CFO and so on. And that's, I think, really the DNA of Catalyst Fund is, you know, to adapt to what the founders need and instead of asking them to adapt to what we need as investors. So that's what I can say.

Another thing important here to add is a common thread that we see across founders is that, you know, it's it's a lonely journey for a lot of them. And as CEO, cofounders and so on, I think they appreciate the opportunity to have a team that they can engage with on a daily basis. We talk with them every day. We're on WhatsApp, we're on calls, we meet them and so on. We're here to answer any kind of question.

What's interesting is that often, they already know the answers to a lot of the decisions they need to take, but they just need a bit of reassurance. And somebody that tells them, yeah, I think, you know, that makes sense. We've looked at it and that makes sense. So, you know, often that's something that we that we can bring beyond the, you know, technical support of helping them to build the companies. 

Justin Norman: Are there characteristics about building in the African context or building African Climate Ventures in particular that lend itself well to the venture studio model or that say these founders need more support or a particular kind of support? I'm curious to know.

Because I guess every founder needs support, but is there certain aspects of building in Africa or building Climate Ventures in Africa in particular that mean that the support is better or more well received or sets these companies up for success? James?

James Mwangi: I think some of it is if you think about a lot of the verticals of climate and climate investing, they're new everywhere. There's a lot of evolution of how these markets will work, how value will be created and distributed that's being determined in lots of places around the world. And at the same time, the African context and local grounding matters to delivering. It's very rare that you will find a founder who has both the wherewithal to really get deep into all of the things you will need to manage in the local context to actually deliver at scale and at quality. Oh, and also has time to really plug into what's happening with Article 6 negotiations on the future of compliance-based carbon markets and what does that mean for the kind of financial structure they will need in order to capture the value of the climate externality of their business in a way that allows the business to scale quickly?

And frankly, just passively investing in the business and saying, here's a pile of cash. Go invest it to grow your business. There's not a liquid market for that type of expertise and partnership. Right? And so you have no choice.

You talked earlier about the venture studio model being more expensive. I think it seems more expensive. But when you contrast it with spending incoming and well-intended investment capital poorly, not even because you don't know where to spend it, there's no place to spend it well, it actually ends up being a lot more efficient to provide in-kind support of the kind that's needed. Being an actual hands-on partner that's allowing the connection of the 3 or 4 different worlds of technology, carbon markets, policy, local operations in a way that then the founder team can focus on what they're good at.

Lyndsay Holley Handler: I mean, I just love that point that it's different than the 2 in 20 fund model, but it could be more efficient, James. I love that point because I think that's the message that needs to get out is it's not more expensive. It's different but could be fundamentally more efficient than each of those companies using precious equity dollars to hire that same carbon consultant. There's one other example I wanted to give, Justin, about the Ventures UML and why Africa, why Climate, is almost all of these companies become incredibly vertically integrated in Africa. There isn't an ecosystem they can plug into and focus on one part of the problem and one part of the solution.

They have to not just build their product, but the financing for their customers. They have to finance themselves in ways that most companies in the US don't even dream of having to finance themselves. So I think what's exciting about the venture studio model is also thinking about how we bring in corporate partnerships. So we've been focusing a lot on building a community of corporates that can do either can help these companies be less vertically integrated, more efficient, and scale faster on the continent as they're delivering solutions, or that we can use their balance sheet. And corporates have very low cost of capital relative to banks and startups in Africa.

So how do we work with corporates to get lower cost of capital? Because climate ventures are more capital-intensive, and the cost of capital is a big issue. So I think one very concrete example of the venture studio model in Africa can be how we work with corporates to scale innovation.

Justin Norman: Just back to this idea also about having no choice. A big theme in my exploration of startups over the years often is also that if you feel that the venture studio model, there's no choice but to provide hands-on support often because value chains aren't complete. Like, the startups also have no choice but to build a full stack, and, obviously, that requires more. And so I'm interested in this idea of the venture investors having to be more startup-like in their approach to Africa because of the nature of the market in which they're building, and there's funding considerations to that as well. Maybe we should talk a little bit about that because climate startups in particular are often doing blended finance.

Right? And kind of all of you guys are doing blended finance to fund your operations as well. Maxime, do you want to start? Obviously, there's Catalyst Fund and there's BFA in that relationship, and your your funding operations in a unique way too.

Maxime Bayen: I mean, it's true. I mean, we're leveraging definitely blend blended finance for, for what we do. So the specificity about Catalyst Fund is that, you know, one of our GPs is actually BFA Global.

So we'll we'll link to a slightly bigger company, which allows us to have the structure of entry building basically, and also allows us to raise the fund, in the in the first place. That has been working quite quite well. But beyond that, I want to to highlight the importance of different types of capital that funds can leverage, to to run this kind of model, like venture building. So, you know, grants and, you know, other technical assistance, facility that that are accessible. That's been very important.

So, you know, we've been working with CPI, for instance, for several years and and others. That's been extremely, extremely helpful to make these these models possible. Because, yes, in a typical, VC model, that would be that would be quite hard to to do venture building. And on top of that, you know, you were saying earlier, you know, that having the studio model is is harder to operate, but it's also a lot harder to fundraise for because you're outside the plain vanilla type of model. And so, you know, one thing that we often say to to investors is that, you know, if this if you think about it, it's harder to fundraise for, yet we're doing it.

So there must be a reason why we do that. Right? And the reason is that it works. You know? We've seen it works.

I mean, to James' point earlier, you know, we see that as a as a derisking mechanism for our investments. You know? Founders come to us and sometimes say, oh, can I have just the the cash component without the venture building? And we say, no. That's not one or the other.

It's actually they come together because maybe you as a founder don't know it yet, but we know it's going to be beneficial to your success. And so we bring it together. So that derisking mechanism is quite powerful and, and that's why we we continue despite all these challenges.

James Mwangi: Maxime, building on that, 2 things I often observe. The first one is when you ask investors, how are you doing with your traditional 2 20 vanilla models? How many of your investments through those channels? And now we have about a 20-year track record of meaningful leaning in by a range of investors into those types of vehicles across the continent. And I think for a range of reasons, it has been hard going.

And often, there's a temptation to say, well, that's an Africa thing. But look at every other emerging market in its first stages of transformation. And what you see is operators who bring capital and operating expertise, which tend to be either family conglomerates, Keiretsu, etcetera, etcetera. Local operating platforms that are deploying capital and capacity are what is needed in the early going because, again, there isn't 20 service providers to choose from for issue a or b. There isn't a deep liquid market of CFOs just looking for their next gig having proven themselves. It makes sense.

Maxime Bayen: If they are, they're expensive.

James Mwangi: Exactly. Right? And so it makes sense to actually say, well, a good chunk of what you're doing to derisk your investment is you're getting your hands dirty alongside the founders. And I think that sometimes helps, but I think still people tend to norm to a model that's actually quite unique, which is well-established deep capital markets, talent markets, large well-established technical stacks and infrastructure, where you can then say, I want my money to just go to help this person invest in 1, 2, 3 famous. That doesn't really reflect the world we operate in.

Lyndsay Holley Handler: Because I think what I find our team was just doing a lot of research on the venture studio model, you know, looking a lot of Max Pog’s work on this globally. And what I actually think is fascinating is it's not just Africa where the venture studio model is working right now. I wanna kind of challenge when I first brought Delta40 and the venture studio model to Silicon Valley, so many of the old guard VCs who were some of my mentors 20 years ago and I thought, for sure, would back us, were like, the venture studio model doesn't work. But what's a fascinating trend is the big VC firms like Sequoia and so many others have these platform teams and operations teams. And, actually, that is what we're doing.

So I have learned we need to use their language when talking to them. And there's a great number that I wanted to share, which is they did a study of global VC firms with significant platforms, meaning they're investing a lot in operational support, moderate, and no platform. And when you take into account the amount of money that they're investing in the platform, the returns for funds with a significant platform were 33% IRRs versus 22% IRRs with no platform. And so that is the number that we need to share the world. And I think we actually need to start saying that, like, this is not just for Africa.

It is actually the way to invest and build great companies globally because everyone's trying to figure out how to replicate the early days of Silicon Valley, in Austin, in Europe, and it's not working. So I think this model, we could export it Yep. From Africa to other markets.

Justin Norman: The lesson for me is if the US or Silicon Valley has deep talent pools, has, you know, liquid capital markets, all of that, like, that actually had to be built. Right? And so whether it's by platform teams or whether it's by people that came before, like, all of this stuff was built. Right? And so all that we're really saying is that the ecosystem and all of the things that enable success need to be built, and, obviously, there's a business model to how you actually build that.

And I think that that's an important part of the story is and especially maybe for Climate Ventures in particular. Right? We also talk about they're not sort of the traditional zero marginal cost software businesses. Like, we're talking about hardware and everything else. Right?

So maybe everything that you just said is even exacerbated further because of the nature of the problems and the solutions in the common space in particular.

James Mwangi: I think that's exactly right because very few of the things we are seeing are going to look like, well, seed, series a, series b, series c, then exit to the market. Very quickly, you're running into, alright, we're gonna need to do a lot of structured finance to pay for a big piece of kit or infrastructure. Or actually, this is going to be a series of separately financed projects that look very different, have a business that's operating behind them, but it's not going to be kind of the traditional venture ladder in many ways, in part because you're building the ecosystem, which is financed differently than the individual pets that operate within the ecosystem once it's built. 

Maxime Bayen: A slightly nuanced point on this from my side is that I think the traditional VC model works for that, but it's not enough. So we have seen actually a number of climate startups across the continent and elsewhere go through the typical seed, series a, series b, and so on. But on the side, they're also able to, you know, raise debt and and other, types of assets. So it's I don't think it's either or. I think it's, you know, it's probably both are needed.

But this model can work. And what's interesting is that we have seen, you know, in Europe and in the US, when you talk to climate-focused VCs, they tell you all their backing is basically hardware and assets heavy. And so I don't think we're there yet in Africa because even when you talk to VCs that say that they're doing more climate tech, you know, when you send them deal flow and they're like, oh no, this is asset heavy. We don't do that.

So, you know, we're not there yet, but I think this transition is slowly, happening across the continent, and it's very needed.

Lyndsay Holley Handler: I actually think what's interesting is that one or two or three studios can support an ecosystem of 20 funds. So I think we don't need every fund to be a venture studio. In fact, I think the work that that all of us are doing, you know, there's many follow-on investors that can actually benefit from and leverage the work that we're doing. So I think we can have both and that, actually, the ecosystem will thrive if there's kinda different players.

Justin Norman: In the context then of all of the conversations that you guys are having with prospective partners and corporate partners and investors and LPs for both funds and for venture studios, What do we need to do collectively to make sure that more people understand the merits of this model? And you've talked a little bit about some of the pushback that you get, whether rational or not. But what are the messages that we need to get across to them, and what are some of the obstacles that we need to overcome in order for more people to see the merits and ultimately support this model?

Lyndsay Holley Handler: My dream is that we have a model for investing in venture studios that's simple and clear and that becomes industry standard, or let's call it 2 to 3 different models because we don't wanna create just one other 2 and 20, but 2 to 3 models. And, actually, I remember, you know, Justin, you've done a lot of work on just educating people about different models, and there's some great white papers out there that have actually just laid out. Here's model 1, 2, or 3 for venture studios in the US. And, actually, I wanted to kind of put it out there to Africa Climate Ventures and Catalyst Fund. You know?

How can we work together to kind of put our legal structures out there, have a couple firms who know how to implement them, and then, you know, we might need to do a roadshow with the DFIs because we know the DFIs put the majority of capital into funds. And how do we bring them along, get their input in that process?

Justin Norman: Maybe let's do it a little live. Is it there's a fund and then there's a, like, an operating business that does the venture support, in terms of what the models could be. Like, what's that's the thesis of what, a, is the best way to return capital and support founders, and then, b, also what is perhaps the most agreeable for the people that are going to fund it?

Maxime Bayen: To answer one of these, I mean, the way we have tried to structure it is to remain as close as possible to the traditional VC model because this industry doesn't like to change too quickly. In our approach, venture building the way we cover the cost of venture building is actually through our initial investment. So part of what we initially invest in this in the startups goes to finance the venture building. It's not like an additional fund or private fund or a different facility that finance this. And this has worked rather, rather well.

But I mean, I'm sure there can be other models. And actually, you know, coming back to blended finance, you know, one thing that we start to do more and more is to engage with other organizations that want to, you know, provide technical assistance or grant funding to this industry. And, you know, we work with them to add even more venture building to some of our portfolio companies that already, you know, already de-risk instead of spreading even more thin on different models. So that's, you know, one thing that we're trying to do. But to answer your initial question, how do we make this understood by everybody?

We need a couple of years. You know, that's the reality. We need to show that it works. We have seen it works in terms of the venture-building model because we have been doing that for 8 years. We have a survival rate of 90 percent, across 80 companies.

So we've seen this work because at pre-seed, normally, you're rather close to 50 or 40% survival rate. So now proving it it works for climate is the journey we embarked on. We need a little bit of time to prove that. I think we're close. I mean, I think maybe a year or 2 years more, we'll be able to get there.

Justin Norman: I mean, the exit's question is maybe beyond the scope of this conversation, but that's a perpetual question in the ecosystem, for sure. Do either of you have a perspective on sort of what the models could or should look like?

James Mwangi: We set off to say we're setting up as a permanent capital whole core to begin with. The core business which we'll build first is not a fund. We may have a fund adjacent. And exactly as we had expected and as others have calculated, that creates friction in the fundraising conversations. We are trying, and we've had some success in getting a first wave of capital in.

And I think then you need to show success and traction and then raise money, essentially, as a company. So going into a price round now and seeing whether we can get investors comfortable with investing in us as a business that builds businesses. Beyond that, I do think that there's a role for a fund structure alongside for follow ons, and larger tickets. But we thought, let's actually have the hard conversation very much upfront. And, you know, even for ourselves in terms of how we invest our own time and talent and aspiration was we really believe that something different needs to work.

And if the market says it's not ready for it, then that will tell us something. But it's a journey. And I think the last thing I'll say, and and I think it argues, Lyndsay, for what you are suggesting in terms of, of creating more and more of a common front around why we need new structures, It's at an individual level. Many of the counterparties we're talking to as we're fundraising will say what you're doing structurally makes sense. We understand why you're doing it.

If it were my money or if I was the only decision-maker, I would back you. And frankly, you know, we've had the most success with people who are investing their own money. But the institutional inertia of established archetypes and established models is such that it's really difficult for people to take that next step and say, this feels like something that could work. It should work and so on. So educating and creating perhaps an alternate pathway, I think will give all these decision makers the support.

I wouldn't say the cover, just the support that they need to make the case.

Lyndsay Holley Handler: I think we've had a fierce debate about this over the last 3 years, and we have, you know, being open, we have spent so much time and money with our lawyers looking at multiple structures. And we've even taken those structures, gone out to fundraise against them, and not had the success we needed because of the structure. So we have to go back to the drawing board. So it's been a journey and a lot of time and money spent on this and a lot of, like, lost inertia. So just, you know, for anyone listening that is going through that experience, you know, it has been the single biggest barrier to building Delta40 today.

But I think in each of those conversations you learn and so one of the places we've landed and I've actually just wanna say too, like, I've taken inspiration, James, from you as somebody that people in the ecosystem really respect saying I'm doing a permanent capital vehicle. Because I think the more experienced builders and operators and investors that do challenge the status quo and say, we're gonna try something different, it really helps. Like, if it's one of us, if it's inexperienced leaders doing this, it's not gonna work. But if there are experienced folks kinda challenging the 2 and 20 model and suggesting alternatives, I think we really need that. So what we've done at Delta40 is the venture studio is also a a holdco and a permanent capital vehicle.

So any returns into the venture studio, we have the ability to recycle those. And that is if we make this work, that is one of the most magical parts of this model that will actually end up, in my view, generating so much more return than a traditional fund structure because we do not have to deliver all of that principle back to investors. We get to reuse that and reinvest that as a studio. So I think we should really stick to our guns on part of this model being a permanent capital vehicle because that's also most appropriate for climate in Africa, which is not a b to b SaaS model that's gonna have a 7-year fund cycle that we need to to turn around. So at the same time, I love this idea of a sidecar that brings in a bunch of global capital.

That's 2 and 20, and so we can kind of funnel the the less creative money or the money from institutions that can't be as creative into the ecosystem in a 2 and 20. But then next to that, I am really passionate about let's fund the venture studio with a different model and not just out of the funds of the 2 and 20 fund. I think we've gotta really push this forward. What's really promising is several DFIs now are actually creating a program for venture studios and pockets of funding. So FMO, I wanna give them a lot of credit.

They wanna do market development, and they actually have been working with us and others to create pockets of funding for venture studios. BII's Kinetic Fund has really catalytic innovative capital. So I think now is a really good moment, but let's include maybe some of these big capital allocators in the structuring discussions and maybe even in this white paper.

Justin Norman: Yeah. And maybe it's worth also talking just a little bit about in the context of a permanent capital vehicle or, you know, this notion that, you know, whatever software business in a 2 and 20 model with a 7-year cycle. Can we talk about some of the businesses and what are they building and why it takes so long so that the people listening can understand, like, oh, okay. Like, we can't fund that with a traditional. And there's not gonna be an exit after 7 years because it's taking them 5 years just to do this one thing. Are there any that come to mind?

Maxime Bayen: I've got some. To take that one. I mean, first of all, the average exit time in Africa is not 7 years. Even in Fintech, even in ecommerce. It's rather somewhere going if you take the Paystack, the InstaDeep and so on, we're somewhere between 10 12 years.

So that already put things in perspective. I actually do think that we can get exiting time in tech in 10 to 12 years. I mean, there's no reason why it shouldn't happen elsewhere in the world. Some of our companies are on this trajectory as well. So I don't think it's that different.

One thing that is for sure yet is is there some of these models that require a little bit more r and d, more capex, intensity, and so on. But that new  to the continent. I mean, you know, in a lot of the models, it's not it was not just software anyway. I mean, take Yocco, for instance, South Africa. You know, like, they started with hardware, deploying, card readers.

You know? This is not just software. And so and yet they have they have been able to go through the traditional structure. So I think Time Attack is not completely far from that. Now what's a bit more challenging is in there are some niche areas.

Right now, for instance, biotechnology, I mean, if you're talking about, you know, alternative protein cultivation and so on, like, that that requires a bit different kind of models because, yes, before you can launch anything, you will need to spend 3, 4, 5 years just on r and d. But the thing is that this can be financed with grants. It can be financed with, you know, non-dilutive capital and so on. I don't think this is the role for VC to enter at that point. When they are at the point where their r and d is completed, then that's where we can get in.

And that's what we have done, for instance, with Octavia Carbon in in in Kenya. You know, we came in when quite a bit of the r and d was done already, and that's where first VC check makes sense.

Justin Norman: Yeah. That's an important point is when does the clock start also and making sure that the founders know that they shouldn't start the clock if they have to do 5 years of R&D. Is there any examples or references you guys want to? Two ends of the spectrum. Right?

James Mwangi: So one of our businesses is delivering a soil amendment that actually has a soil amendment with carbon removal characteristics. If it works and if the science checks out, actually, you'll be able to turn capital around really fast. So actually, we are we have a problem on the other side. Our business could actually end up being quite scalable without taking that much upfront capital, and that ability to recycle the resources and scale up, it becomes really, really interesting on one end of the spectrum. On the other end, you know, if you're trying to do a green industrial park, and you're trying to recruit a number of large use cases to that green industrial park, there is a period during which you are just trying to get all the trains to arrive on time, the same time.

Then you get everyone to FID, and then the construction starts. And so you're literally saying that by the time the full vision of this green industrial park is realized and all the different components are there, you're turning on the lights, like, 10 years from the day you started the journey. But conversely, if someone doesn't take that early stage that only really a venture mindset can embrace that risk, that's day 0, can we get everyone to a yes of some kind, and someone has to write that check and put in that time, then nothing else can happen downstream. So we've got things that are really, really long-tailed where, you know, if we are 10 or 12 years, we'll be really happy. There's things that we expect to have recovered our initial investment in a year or 2, and kind of just be recycling it to scale up.

And that diversity is just really hard to reconcile with. Any fund model we end up with will force us to do 1 or the other. The ticket sizes are to start on this side are too small. This one here takes too long. You kind of need to take a very different and flexible approach.

Justin Norman: Portfolio construction, obviously, is an important part of this as well. Lyndsay?

Lyndsay Holley Handler: Yeah. I'll just add a couple examples just to, you know, bring some of the companies into the discussion. You know, if I think about our 11 companies in climate in Africa, such as clean cooking companies, aquaculture companies, ag companies, energy companies, one of the consistent kinda needs that I think is different is they need a bit of equity, but they need a lot of debt. And debt is incredibly expensive on the continent, and in many cases, just inaccessible right now. And so I think when we think about the original VC model in Silicon Valley, companies weren't raising debt until the series d e f.

Right? And we're raising debt at the seed round. And that is just fundamentally different. So what do we need? We need to bring debt partners into this model, and, actually, Venture Studios can create very solid companies that have good governance, have good financial management.

And so I think we might be well positioned to help our companies raise debt. And then the second thing I just think is interesting about all of our companies. Many of them will take 10 years and a lot of capital to become profitable and to shoot off dividends or be acquired. But I think for those listening, that doesn't mean we need to wait 10 years to exit. So I actually think venture studios can be very, very strategic about how we think about exits.

And at Delta40, we are very actively thinking about how do we exit some of our common shares from our venture building at year 3, 4, 5. If we raise a great a, let's exit some of those shares. Let's bring that back into the venture studio model. Use that to build our next company. How do we think about early m and a?

I think, historically, everybody thinks you have to build a company from idea to traction to profitability to sell it. In fact, we did a whole analysis of the exits in Africa. Most companies that actually have a good M&A outcome. We sold Fenix to Engie. I know Shola's story of selling Paystack to Stripe.

We both sold our companies kind of on the path to profitability, but before profitability. And we used the m and a to achieve profitability. So another path we should all be thinking about as studios is how do we build companies to create product pricing market fit, adoption, and positive unit economics? And we do exits at year 5, 6, 7 to a corporate that will take that to scale. And then all those early-stage innovators, we all know they're not the CEOs for scale anyways.

Let's bring them back in the early stage. Let's bring the capital back. And so I think we should challenge this notion that exits are always gonna take a decade or more.

Justin Norman: We're here in New York. It's Climate Week New York. I am developing a deep appreciation for all of you because you're selling an African story. You're selling a climate story. You're selling a blended finance hardware story. You're selling a venture studio story. 

I think we talked a little bit about why climate. We talked a little bit about the sort of merits of the venture studio. Maybe the other thing is just in addition to having to pitch the merits of the venture studio model, how do you guys get the global investing community or the climate community, in particular, interested in the African story? What is that story that you're telling?

And who are the sort of either institutions or people, foundations, whatever, that are most interested in coming on this journey in particular? 

Maxime Bayen: For us, there's always the sort of two sides of the narrative. The first thing is something that we all know. You know, the fact that Africa, despite being the least contributing to climate change, is the most affected. This already a reality. That's really why we focus on adaptation. That's really a story that we're we're trying to get out there.

The second thing is really that, you know, this is a global problem, but Africa is actually well positioned to be disproportionately large part of the solution. You have massive variable lands. You have amazing talents. If we go back to the, you know, one of our portfolio companies, Octavia Carbon, for instance, direct air carbon capture. They're the first one in the global south to do that.

They're actually able to get to a point where they are very competitive in that in that, global markets, you know. So they are able to store carbon at much lower price than anybody else globally because this is done in Africa and because you have the right mix of access to, you know, renewable energy, which is massively needed, the right geology to store carbon locally, and so on. 

James Mwangi: So, yes, the continent is affected by climate change, but it's also at a place where it can be a large part of the solution. So that's really where we're trying to push out there. So what I've been trying to get people to see very much in line, Maxim, with your point is we're entering a period where there's an increasing premium to being able to take a green or low emissions pathway in whatever it is that you're doing. And also that, firstly, let's set aside Africa. The tropics share that characteristic of having contributed the least to global emissions to date but are also feeling the worst effects because that's where a lot of the first direct impacts of climate change are most pronounced.

But they share something else, which is they are the most energy-dense part of the planet from a renewables perspective. And also the land masses are very richly endowed with a whole range of the critical resources we need. And so what I like to say is, look, when it comes to the race for green energy or, for a range of things, you can't buy latitude and you can't buy geology and you probably can't buy biodiversity of a particular kind. And that means there are certain things that can just only be done in certain places. And I pair that with a second story because I think there's always a skepticism of do you really think Africa is going to be a global green industrialization leader?

And I say, I'll point you to a 30,000-person village on the margins of the global economy in really one of the poorest countries in the world and ask you to think about investing there. You'll probably say no. And then I'll remove the date stamp and and the geography and say you're looking at Shenzhen in 1981. Right? 30,000 people on the margins of the global economy, a critical global industrial hub.

And what does that tell you? China rode the industrial transformation story. India is writing the knowledge worker story. Africa will guide the climate worker story with its 1,500,000,000 young workers into being at the center of the global climate economy. It's just hard to envision another way that we hit our climate targets in any realistic way than that being the case.

Lyndsay Holley Handler: James, is the perfect person to kind of speak to why Africa, why climate. I think I'll just add on to that is that I think beyond climate. I think Africa by 21 100 is gonna have 40% of the world, which is why we're called Delta40 by 2050, 33% of the workforce. And that to me is 33% of the world's talent, and we already know today it has a greater number of entrepreneurs per capita than any other market. I mean, African entrepreneurs have been employing the most people on the continent relative to other markets for a long time now.

So how do we actually just create a thriving entrepreneurial ecosystem in what will be one of the most consequential and important markets on Earth? And I think if we start now as if we were in Singapore and Shenzhen 40 years ago, if we start now, every company that has an exit is gonna lead to many, many more entrepreneurs going into the ecosystem and starting 10 more companies. The capital will stay in Africa. And so we'll have the capital on the continent to see the next generation of entrepreneurs, and Africa will be solving its own problems with creative solutions there. And that is important for the world to care about.

You know, we need to make sure Africa is thriving over the next century, but, also, I think I think we're gonna see innovations leaving Africa. They're gonna change the way we live in America and Europe. So I think for me, it's it's climate, but it's climate plus just how do we build a thriving entrepreneurial ecosystem.

Justin Norman: So let's try and summarize. We all believe that for a variety of reasons, including and especially Africa's natural endowments, it has potential outsized impact it can play in the climate story from a climate innovation perspective, in particular. But in a nascent tech ecosystem, and particularly when dealing with climate solutions that are not sort of a traditional software business, these founders need more support in an environment where there's less infrastructure. That infrastructure and the ecosystems around it need to be built.

So there are merits for the venture studio model as a result of that context, and it's not an either-or 2 and 20 traditional model, but it's both. Right? We need support. We need to find business models that can lend the support, that also builds the ecosystem that might make it possible for there to be more traditional 2 and 20 models in the future. Exits, corporate partners, all of that sort of thing then sort of create this feedback loop that can create thriving climate companies and green industries in Africa, which hopefully can change not only the continent, but the rest of the world. How was that?

Maxime Bayen: Pretty good. 

James Mwangi: Excellent. 

Justin Norman: That was all off the cuff! 

James Mwangi: Very good.

Maxime Bayen: Impressive.