Venturing into Grid Technology: VC Insights for Deep Tech Startups. A chat with Brad Jones, Principal @ SE Ventures

A lot of times if you sign a big utility with a capitalized contract, you'll receive a slug of cash that's equivalent to what an early stage fundraise would look like. So founders should be conscious of this because it really can't help extend the time in between fundraising routes. Welcome to Deep Tech Catalyst. The channel by the Scenarianist was science-meat venture. Together with global investors and experts, we uncover how to turn breakthrough scientific discoveries into investible deep tech startups. Welcome back to Deep Tech Catalyst. Today we have Brad Johnson, principal at SE Ventures. Hi Brad, it's fantastic and we do with us today. Thanks so much for having me, Necla. So to start our fantastic conversation about the great technologies, can you provide a bit of context about your background and your investment focus please? Sure. So I'm a principal at SE Ventures. We're based in the San Francisco Bay Area and we back startups focused on energy, industrial automation and AI. Our mandate is pretty flexible. We can lead rounds. We can follow on. We invest up and down the capital stack from seed all the way through Series C. We're investing out of a $520 million fund and we're fully backed by Schneider Electric. So one of the ways that we try and add value is by helping our portfolio companies land customer relationships or channel partnerships within the Schneider ecosystem. And at the firm, I cover all things related to energy. So grid innovation, data center tech, AI agents, verticalize for the energy sector. It's an exciting time to be investing in these categories, so looking forward to channel a little bit more about it today. Yeah, thank you for your introduction. And yeah, likewise, and so to start. It's a pivotal moment for innovation, especially in the energy sector due to the transition of energy by the attitude of the stage to talk about it. And so it's a particular moment for grid technology. And let's say I would like to maybe start providing a context on the field. Maybe I'd like to be the key drivers and let's say the consequences of potential prices of the energy sector, let's say. Yeah, absolutely. So ultimately pricing is a supply and demand issue. And in the US, the demand for electricity is increasing rapidly. So last year, demand surge by around 3%, and that's after being flat for well over a decade. And 3% might not seem like the biggest amount, but it's actually one of the highest growth rates that we've seen in 100 years. So alongside this demand growth, we're facing challenges that inhibit our supply, including more frequent and severe natural disasters that are impacting the grid. So wildfires, hurricanes, flooding, these all cause billions to damage, end damage to infrastructure each year. And majority of the grid outages that we face are actually related to some type of weather event. Take even a simple thing like a heat wave, folks crank up a seed demand for electricity spikes. And the grid simply isn't set up to handle this type of volatility. So the result can be fried infrastructure and blackouts. So we're seeing a huge increase in electricity demand. And there's several factors that are restricting our ability to meet this demand. So there's a supply demand imbalance that's providing a very unique opportunity for founders to come in and solve big problems. You asked about the drivers of demand. These are things that most of us are aware of. It's a mass build out of data centers to support the adoption of generative AI, continued growth of EVs both in the consumer market, as well as with commercial fleets, and the broad electrification of industrial processes, electricity is becoming the most economic way to power useful work at scale. So we expect all of these trends and others to continue supporting this growth. And from all of these drivers, one thing I would hone in on is data centers. In terms of hardware infrastructure for grid, which are the most exciting, let's say, three, four areas of innovation for you today, you are most excited about. And let's say, which are the specific problems along the supply chain you mentioned before they solve? Yeah. So an easy way we like to break down the market, start up tackling issues with energy supply and those that are using hardware to solve demand challenges. So just two quick examples. One company we're excited about includes PANO AI. PANO is using camera hardware and computer vision to detect wildfires as soon as they start. And this helps utilities protect their infrastructure and make energy supplied more resilient. On the demand side, we're seeing a ton of startups working to bring energy generation to the load itself. And this is called behind the meter generation. So one example of this is ALO that's building a small scale and nuclear facility that powers data centers. And given ALO, health data centers reduce the amount of energy that they need to pull from the grid, they help to mitigate challenges with demand. They actually just raised a very large series B round. So these are just two examples. Every day we're seeing more and more teams come to market with new innovative solutions. And it's an exciting time to be investing in ecosystem. Can you provide a context for those maybe are not in the energy field, but new to the grid deck on the capital intensity of a project like grid, contextualizing topics and topics of a specific project. And then a deep dive a little bit more on how to navigate the integration. But first, I'd like to know what you let's say look for the typical in-beach decks in terms of capital strategy. So how they can build a syndication of their stack from ground zero prototype to the first pilot. Yeah, so I think one thing that would be helpful to cover for mostly hardware founders, but also software founders in grid technologies is capitalization that the utilities go through in order to fund their investments in things like new technologies as well as new infrastructure. And this is an important concept because it can help startups determine one, of course, their fundraising strategy, but also how they go to market, how they position themselves in terms of communicating their ROI. So when utility capitalizes an investment, it does two things. They're able to finance the project and they're able to realize a rate of return on the investment. And these expenses are typically passed on to rate pairs in the form of increased electricity prices. So the process of utility capitalization can vary state by state. In California, we have a public utility commission that regulates investor owned utilities like PG&A or yard largest utility. And the commission determines things that can and can be capitalized. So for new technologies like hardware as well as software, the commission will conduct studies and these include benchmarking the ROI against what's available in the market today. So a really good example of this that I've chatted with a few founders about to reduce the risk of wildfires. It's a very common practice for utilities to bury transmission and distribution lines under ground. They literally just dig a hole for the infrastructure. And this makes it less exposed to severe weather. So high winds aren't necessarily going to knock over a distribution pole and cause a wildfire. In most states, in most cases, utilities can in fact capitalize this, but undergrounding lines can cost well over a million dollars per mile. And so because the expense of underground lines is so high, utility commission deemed it relevant to assess other ways to protect the infrastructure. So they looked at new technologies, including computer vision and several other partners and clear new tech for capitalization. So the reason they did this is because computer vision, other comparable solutions come to the same conclusion, right? They protect utility infrastructure, help make the supply more resilient, but they're much less expensive than underground and wires on a per mile basis. So if startups can get their solution capitalized, it's a huge advantage. Yeah, utilities get a rate of return of up to 10% for these capitalized solutions. And this is on top of the benefits that a startup solution can bring to the table. So utilities are incentivized to adopt and scale up capitalized technologies. And you mentioned OPEX. The alternative to a utility capitalizing project is for them to log it as OPEX. And this means that it comes out of utilities operating budget. And utilities already operate with pretty thin margins. So OPEX purchases can reduce these margins even more and slow down sales cycles. for startups. So when you think about capitalization strategy for a company, whether it's hardware or software that's selling into grid, it's actually quite interesting because a lot of times if you're going through this capitalization approach, like a utility is capitalizing your hardware or hardware software combo, a lot of times you'll see three to five year contracts and that's abnormal. In most other technology categories, you're seeing one to three year contracts, right? And when you sell that contract, a utility might want to pay that full total contract value up front. So a lot of times if you sign a big utility with a capitalized contract, you'll receive a slug of cash that's equivalent to what an early stage fundraise would look like. The go-to market for grid is the hyper-scaler of the data center or the energetic provider helping the founders maybe later to find the customer in the data center. Given the data center are not topical, so the energy demand for the data center, the recording of the energy is a very important issue for them. In example, OpEx budget in order to let's say, run AI and all the programs. So which is the best go-to market strategy for grid? Probably you will say the energy provider, but are there, let's say, some, let's say, a net to share about the road to go-to market from zero to zero? Yeah, it certainly depends what your end customer is going to be. So if you're behind the meter generation company like ALO, you're building data centers or your exo-watt, you're building solar plus storage that's made for behind the meter use cases, then data centers are likely your best customer because the demand is quite high. Hyper-scalers are trying to build data centers at very, very rapid rates. So they're looking towards innovative technology solutions to help and come resolve that load. Utilities might move a lot more slowly when it comes to new generation methodologies and interconnection cues are also quite long, so it's hard to hook up to the grid. So if you have a big meaty private customer that's willing to buy your technology, that's likely going to be the most effective strategy. Yeah, okay. And, the utility side, especially navigating the sales and the value proposition for new utility, do you think it's a better idea to integrate a new, let's say, in an existing workflow solution or to, let's say, rebuild all the workflow in a specific, for instance, a distribution channel or, let's say, access to the, for a moment, the producer, so the source of energy today, let's say, solar wind, wind, the user mentioned before, but especially if you sell an application of grid, you need to take care about the integrity and existing workflow. It's more compelling for the utility or on the other way around, it's time to maybe rethink about how the grid will storage and distribute the energy. Yeah, it's a great question. When it comes to software plus hardware solutions, think about panel, like I mentioned, there's another very popular solution called gridware, which is attaching physical devices to distribution lines to inform utilities where there are faults. These types of solutions, utilities can be resistant to UI that's outside of their existing systems. So generally, it's much easier for a startup to land a customer at the tech-fit seamlessly into utilities existing workflows. So think about an example, utility operators have control systems up at all times that show critical metrics for grid health. So they simply don't have the screen space to have another application or user interface up on this screen. So founders, when they're building a software component of their overall solution, they need to think about how they can drive real ROI with limited real estate. So if your optimizing grid operations say you might need to integrate with the distribution management system and deliver insights in a way that one isn't intrusive to existing workflows and two doesn't require a ton of additional training. You have to make this very, very easy to adopt. And in some cases, building on top of existing utility systems to drive value can be really, really cumbersome if not impossible. And this is where founders can get creative with their product strategy. We recently chatted with a company called Send Pilot, which is allowing engineers to interact with the company's AI agents via email. So the agents will respond to incoming emails with Excel analyses and other plants that engineers are actually used to seeing. So it doesn't require any retraining. And in some cases, yeah, this looks very similar to a consultant's workflow, which is something that utilities are very used to dealing with. So when you take these types of strategies, it can stream on onboarding, it can speed up adoption, and it can even help with things like your pricing considerations. If utilities are used to paying for something on a consultative basis, you might be able to charge a similar amount, structure the contract the same way. So just a few considerations. And the final thing I'll say as it relates to product strategy, founders can also build features that help to streamline approval for capitalization, that concept that really can accelerate a hardware or software startup to good market. So a couple things you can do with the software side of things, simple UI that's very easy to adopt, shareable links for collaboration, smart back end infrastructure. So you can offer a watered down version of the product for free without offering a ton of costs, getting creative on the product side can really help to lead to quick adoption from all stakeholders in the ecosystem. And ultimately capitalization is done through public utility commissions. So they take in a consideration all of the points of stakeholders within their jurisdiction. So if your technology is servicing the needs of everyone within that ecosystem, it's much more likely to be capitalized. So if you can build features to promote that at a low cost, then you're in pretty good shape. Assuming that the founder had a great in tech innovation, that can be integrated into a typical workflow of a utility provider, which are the key stakeholders and the right approach to interact with the stakeholders of the utility, the say company and navigate the sales. Can you provide some rule of thumb here, let's say not to make the timeline longer or let's say make the from start with the wrong approach with all the stakeholders of a team of maybe a very structure of the company of the utility like yours. Getting in front of utilities can be very, very difficult. So it can be helpful to have people in your network that are ready to make those introductions. And utilities are also very siloed. If you're selling a disaster management solution, then you're probably not going to sell into the same person where if they're doing like full real time grid operations, right? So it does help to get C-suite access, but the people really driving these sales, these integrations are going to be the boots on the ground like directors of X in whatever specific department that you're attempting to address. One thing to note as it relates to the dynamics of the ecosystem, the energy industry has thought leaders that try and set standards for innovation. So a good example of this is PG&E in California. They're an early adopter of computer vision for wildfire solutions. They're a first mover and building a mission control center for disaster response. And other utilities in California look towards PG&E for guidance on their innovation strategy. And regulators use their pilot successes and their failures to help guide these capitalization decisions that I mentioned. So successful work with PG&E, Excel energy, next era, and other thought leaders can be a huge accelerator. And a lot of startups will go after these players first. But you need to consider when you're approaching these players, whether or not the solution is truly ready for scale. Because if it's not, and PG&E wants to roll this out very quickly, things can backfire and have an adverse effect on the company's brand. And there are ability to acquire all of the customers in that region because you've just had some challenges with one of the thought leaders. Once you earn an integrated tech and you build an effective solution to storage energy, there is the project, there is the prototype, it is working. The first step for founders will be probably to approach a corporate in order to develop a relationship with them and the support that we have to market. And when is the time to think about the regulatory and the regulatory approval of the device and let's say are there some things to prioritize before approaching the B2B. be the first B2B negotiation for your device in order to be not unprepared and let's say, not to let's say, take another couple of months to solve this problem. So can you anticipate some question, Thunder, we'll find in this kind of negotiation concerning a special iteratoripath? Yeah, partnering with an established industry player can have a lot of benefit, right? It can help you build trust, it can accelerate your sales cycles, and specifically within utilities. A lot of times they like buying a bundled offering versus an individual point solution. And from the utilities perspective, there's several benefits to a bundled offering. It ensures the data, the workflows are fully integrated so they can trust the system actually works when they need it the most. And buying and bundles can help with things like this concept of capitalization, contract, the streamline for the utility, the ROI of a package solution might be higher, so it's easier to make a case to regulators. So having a strategy around channel partnership, it's definitely important for founders to consider in the sector. And when it comes to what founders should watch out for in this space, know that corporates can be very risk-averse. And specifically, they prefer to partner with a later stage company, even if an early stage startups tech is better. And thinking about this from a corporate perspective, there's less risk in later stage companies going out of business, and later stage companies have a dedicated partnership manager. So it's less risky, it's easier to deal with them. So founders need to work really, really hard to win channel partnerships in some cases. Some at a potential partner is already speaking to all of the competitors in the landscape today. So you need to lean into differentiation, your scalability, your ROI. Founders might need to demonstrate twice as much value to win over a later stage competitor. So take these channel discussions very seriously. Take them as seriously as you would want your top prospects. Fantastic. Thank you very much. I have a question for you very quickly because we have a couple of minutes left. How did the stage and the maturity of the company, and you provide just an answer, which is a typical precede seed, and so you say, right, maturity level stage for an hardware, green tech, and a software application maybe? Yeah, that sounds great. So as it relates to pre-seed, this is pretty standard with any hardware, hardware plus software company. It's a team. It's a well-thought-out market analysis. And I will emphasize the point on market analysis. I think it's pretty interesting when founders have really thoughtful scenario analyses that change their market size due to things like new policies, incentives, climate risks. All of these factors can have a pretty big impact on which GEOs use scale into first. For example, if you launch a product in Irkott and you need to pivot into Kaiso and you're at the precede stage, it could require a ton of products and business model changes. So you might need to raise capital again, add a down-value-wastement if you don't really get the market assessment right. So that's something we'll certainly look for at the seed stage or precede. And then, Steve typically will see anywhere between 0 and 1 million in revenue. And preferably that revenue is recurring. We always appreciate it when founders can still sell their hardware solutions. Maybe that looks more like a one-time sale, but they back it up with software so that they can theoretically rip that software out unless contracts are renewed. Obviously, it's much easier to build a large business off of a recurring revenue base. And we've seen several startups in the category that are selling hardware successfully execute on that recurring contract. So it's not possible in all situations, but it's something that's definitely worthwhile considering. So that's another consideration that we'll have at the early stage. Before we have a ton of metrics, quantitative metrics that we can assess. Another thing that I would note at Post Series A, the rounds can start to look a little bit bigger than you would think about in traditional enterprise SaaS. We've seen several early stage grid companies raise 20, 30, 40 million dollar rounds at the Series A stage. So it looks a little bit more like generative AI in terms of round sizes and in some cases the valuation. So in terms of benchmark to get to that Series A stage, typically we look at one to five million in revenue. That would be great. But it also depends on what your gross margin profile looks like. That can sometimes be a little bit lower when you're selling grid technologies. It depends on what your sales cycle is. So there are several factors associated with it. I wouldn't say that there's a standardized template for going out for your seed Series A, Series B. No, but you provide a very great overview of it. Thank you. This is the end of our conversation. I thank you a lot for your time and sharing a valuable toast with our community. Yeah. Thanks so much, Nicolette. Appreciate you having me. Thank you for any grid founders that are building in the space. We'd love to chat.