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FOUNDERS & FRIENDS PODCAST

With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

Ascent Energy Ventures invests in startups focused on applying digital tools to the energy industry

Posted on: 05/19/2024

David Forsberg

David Forsberg

Managing Partner - Ascent Energy Ventures


David Forsberg of Ascent Energy Ventures - Podcast Summary

David Forsberg of Ascent Energy Ventures discusses Ascent’s unique investment focus on digital tools for the energy industry, and explains how he reviews potential investments.

David Forsberg of Ascent Energy Ventures - Podcast Transcript

Healy: Hey, everybody, this is Healy Jones. Welcome to the Founders and Friends podcast. Today I’m very pleased to welcome our special guest, David Forsberg of Ascent Energy Ventures, a well-known energy tech investor. Before we dive in, quick word from our sponsor. Hey, this is Healy Jones, VP of Financial Strategy here at Kruze Consulting, andI want to say thanks to our podcast sponsor, ARC. At Kruze, we’ve got a number of clients successfully using ARC to manage their deposits, payments, access financing, all in one place. One of the things that ARC provides that’s really great is over a quarter of a million dollars in FDIC coverage. Their insurance program goes beyond the standard limit and it secures up to five and a quarter million dollars. So, startups that have even more cash than that can go and access treasury solutions to provide yield and safety. If you’re a startup looking for a secure financial solution that can help you scale, please check out our sponsor ARC at ARC.tech. All right. Thanks. Well, David, how are you doing?
David: I’m doing great, buddy. Great to see you.
Healy: Yeah. Good to see you, too. It’s been a little while. Sounds like you’re having some fun, snow in Denver right now.
David: Yeah. We’re digging ourselves out from at least a foot.
Healy: That’s sounds like a good time. I know you’re a skier, too, so that’s pretty awesome.
David: Yeah. We can’t get up to the mountains right now because all the roads are closed, otherwise I wouldn’t be here.
Healy: That’s crazy. Okay. Well, then I count myself lucky. Why don’t you tell the podcast world a little bit about who you are and a little bit about Ascent because you are a different VC than a lot of the ones I float around with here in Silicon Valley.
David: My background, just to be quick, is in public equities, usually long, short, quantitative strategies. And then, I worked for a single-family office on the investment side, and from there kind of saw an opportunity and developed a thesis in the trend of, “Automation is coming to all sectors.” And, the industrial sectors are particular digital laggards. The energy industry broadly defined is very sophisticated in terms of engineering tech and very unsophisticated in terms of digital tech, so a major digital laggard. There was just an opportunity to invest in what I call the digital transformation of the energy industry. And, the best way to articulate the thesis happened to be through early stage venture, and that’s how we eventually led to Ascent-
Healy: Sounds-
David: … when we invest in digital companies that are earlier stage.
Healy: I mean, big energy, oil, and gas companies are known to invest a lot in technology, but-
David: Yes.
Healy: … I imagine most of it is, “How do we drill this thing better?,” or, “How do we identify where XYZ shale formation is?” Right? Little bit different than digital. What are some of the big challenges and opportunities in investing in the digital transformation of energy?
David: Yeah. I mean, I think it starts at kind of that data gathering component. And then, it’s that data processing and pieces that are related to that and structuring. And then, it’s the automation of process or applying that data to operations and from there more automated or machine learning AI types of things. The biggest problem right now is the gathering and structuring of data. It’s hard to do these higher-level tasks until you’ve accomplished that simple structure. And unlike other industries, the energy industry, and this is traditional energy, future of energy, it’s really paper-driven type of industries.
Healy: Hmm. So, you’ve got to digitize a lot of that, and then you can, what? Do fun stuff like AI? What else can you do once you start to digitize that information?
David: Well, you start determining how you’re going to operate your business more efficiently, better, but making better decisions, both faster and improved outcomes. And, I think that’s where we are today, is more in that earlier stages of where other industries were a decade ago. And then, one of the other issues, too, is that these industries are really engineer-driven and that engineer mindset, we’re not talking software engineer, we’re talking about physical engineer, they are very risk-averse and have a low tolerance for failure, and that makes decision making in terms of adoption or change incredibly tedious and slow. So, I think that’s another issue, too, is that the industry is slow to even see value in these new solutions.
Healy: Interesting. So, I was going to ask a follow-up question. What’s the hardest part that your start-up sees selling into this industry? Is that one of the hardest-
David: Yeah.
Healy: … parts?
David: Yeah. I mean, that would be it. It’s incredibly slow sales cycle. It’s incredibly insider-driven. It’s fast followers, slow early adopters. Because if you think about it, if you’re an engineer, you don’t want the bridge to fall down or the building to explode or any of that. People get hurt if you’re an engineer-
Healy: Right.
David: … and you screw up. With software, it’s just not that case. The barriers or the risks of adopting something that doesn’t maybe work out as advertised is actually fairly low for some of these corporations.
Healy: That makes a lot of sense. It’s interesting to have to try to deal with that type of mentality. When you’re selling to an engineer, you’d almost feel like the engineer should be embracing the new stuff. But, I guess it makes sense that they’re busy building physical things that are particularly around people. You don’t want stuff to break.
David: Yeah.
Healy: What advice do you give to your founders as they’re trying to get their sales and marketing up and running?
David: There’s probably a lot, But, one of the things as it relates to sales and marketing is that things aren’t done in this industry until the document is signed. We have a lot. And this is one of the advantages of being energy focused, I can take a look at the sales pipeline and say, “That company’s very unlikely to adopt this anytime soon, even though they’ve said that they want to buy it.” There are some repeat offenders. I won’t name them, but they say that they’re going to close on a contract and two years go by before they’ve actually signed it or done it. And even then, it doesn’t happen. So-
Healy: Wow.
David: … I think that’s one of the unique pieces here, that it’s not done until it’s done.
Healy: Are there unique milestones or metrics that you’re looking for when you’re serving the energy tech world, when you’re trying to make an investment? Is it all different than what a typical SaaS investor would look at?
David: Yeah. I think they’re different. One of the big pieces is just number of customers. It’s less about, “Oh, I have $6 million of ARR,” because that could come from one customer in this industry. If you only have one customer, you could be captured by that entity. So, we like to see a diversity of a customer base and that’s something that I think is a great metric versus say revenue. That-
Healy: That’s really interesting.
David: Yeah. That, from a sales perspective, is really key.
Healy: That’s amazing. What about on a technical perspective? When do you invest in these businesses? Do you invest sort of pre-products or as revenue is generated? What kind of stage and then what do you look for from a technical perspective?
David: I think in most cases, but specifically in my industry, investors are rarely compensated for the risk they take in the pre-product. Two dudes in a deck stage are how I describe it.
Healy: Okay.
David: I think that that risk profile is a negative expectation bet, in general. So, for me, I like to see a product in the marketplace. I like to see some customer validation and adoption before I’m deploying capital.
Healy: Ah. So, when was the last time a founder really impressed you with their pitch? What did they do that kind of set them apart from all the different companies you talk with?
David: All my founders, the same. All my children, the same. They all do great job, pitching. Some of these products, I would call, they’re B2B. They’re highly technical. Oftentimes, they can be a bit boring. They’re not SpaceX. We’re not launching stuff to the moon. This is highly intense or technical stuff. So being able to take that subject and make it entertaining, or interesting in the narrative, and really talk about the future and where it’s going, I think that’s something that is very impressive with these founders, and understanding where this space could be and helping take the investor on that journey. Because even a domain expert like myself, we don’t know. We don’t know that niche as well as a founder does. There’s just no-
Healy: Right.
David: … way. So, too many founders get wrapped up in the present, and I think fail to talk about the future. And if you think about the value of a company or the way an investor is assessing the company, for all these companies, the present has no value, the present business. It’s all about, “Where are you going to be in 1, 3, 5, and 10 years?” So, the best founders I think, from a presentation perspective, can make a boring subject exciting, get you excited about it, and really take you on a journey to the future.
Healy: Sounds pretty awesome. So, somebody’s got to be able to not only have a product in market with some good customers, they have to explain to you the vision about where that thing is going in a way that gets you to put down your phone and pay attention.
David: Yeah. That’s how we value these things.
Healy: Yeah. How are you meeting the founders that you’re investing in? Think of this question as giving advice to founders who are trying to network into VCs, like you.
David: So, I’m very open to communication. There’re ways to reach out to me, LinkedIn. I’m probably overly active there. I have a website with an email on it, that I respond to or pay attention to. I know my space really, really well. I’m one of the few capital providers in the space, which is why I’m here. My capital is more valuable, the less capital providers there are. So, you can network into me pretty easily. I respond to cold calls and frankly, I think all VCs should be open. Just by definition, your network is not as vast as you think it is. You should be open to deal flow coming in from any source.
Healy: That’s awesome. Yeah. That’s definitely a little different than a lot of the investors I know who look for that sort of warm intro, or a founder that they’re working with and like is introducing them to another founder. That definitely feels a little more like the Silicon Valley way. So, it’s awesome that you’re actually responding to people who are coming into you cold.
David: Yeah. I think that’s a bad way.
Healy: That’s great.
David: I think-
Healy: That’s awesome.
David: … you’re missing a lot of great deal flow by being closed.
Healy: So, you talked a little bit about what founders can do better in terms of talking about their vision and things like that, but in terms of a piece of advice you’d give to founders who are getting ready to embark on raising venture funding, what’s the biggest piece of advice you’d give a founder that’s looking to raise funding?
David: You should decide if you really are a venture-backable. I think you should think about, “Do I have the right product for venture capital?” I think a lot of people just assume that they should go get venture capital. Maybe, they need venture capital. But, if you don’t fit the profile of the investor, you are going to spin your wheels and spend money and waste time. I think you should start there, really doing a deep-dive self-assessment on whether or not you should be there. Okay. Then once you get there, I think it’s really important to decide, “Who is this ideally suited for?” And if you have the right lure for that fish, you will catch that fish. I got something the other day, they call themselves a climate tech company or sustainability company doing sustainable hair extensions. Well, I don’t know that market. I don’t care about that market. It’s not a market that I’m ever going to participate in, so why waste the time? And I know an email is low cost to the sender, but why bother? It’s not going to happen. So, I think you should really decide who it is that you’re going after. And if all of those people say no, well, there needs to be some sort of assessment about whether or not you have the right business for them. It doesn’t mean your business is bad. Most businesses just aren’t ideally suited to our cost of capital.
Healy: Mm-hmm. Yeah. I think that’s pretty good advice. Kruze only works at companies that are raising venture funding. We do talk to a lot of founders who are aspiring to raise venture funding, and I’m not necessarily surprised by it. I guess I’m just used to it at this point, but there are certainly a lot of founders who are building good businesses that aren’t venture backable. It’s not that it’s not good business, it’s just that this business is not going to generate a hundred million dollars in revenue and potentially be worth a billion dollars in a few years. This is a business that can grow profitably and get to a decent size and be a great business for that founder to run, but it’s not the type of business that should raise 10 million in venture funding. They get a-
David: Exactly. I think a few years ago you had Brian Parks on your broadcast, who’s a friend and a great guy here in Denver. He calls them stallions instead of unicorns, I think. Great things, but just not quite there.
Healy: Yeah. Exactly. The wrong business, if a stallion in this case, raises venture funding. That VC can really screw the business up by pushing for growth.
David: Yes.
Healy: It doesn’t make any sense. Burning a bunch of money, messing up the cap table, it doesn’t make sense for every business to try to go that big. A lot of businesses can just be great businesses. So, I strongly agree with you.
David: Businesses have different stages, too. There’s that early stage where maybe it’s just still figuring things out, figuring out that product and where it’s going to fit in your ideal customer. It doesn’t make sense to take that kind of capital at that stage because you’re just going to sit on it or you’re going to burn it, at which point you’re a dead business.
Healy: Another place where I’m often giving advice, not legal advice, but people do ask me the question. That’s all right, that’s my purview. In a term sheet, where do you think a lot of founders get confused? If you were to sit down with every founder in the world and say, “Hey, before you get this term sheet, understand what this line means,” what do you think the most important line is for them to understand?
David: So it’s a line, but I think that there are two categories. The first is you can only sell a hundred percent of your business, and I think it relates to cap table and other things. Be really thoughtful about what you are giving away in that term sheet in terms of a percentage of your business and what the valuation of your business is and what that means for future raises and think a couple steps down the road. So many founder get so excited about getting a term sheet, that they glance over some things that really should be relevant. And, that’s really where you can get sideways or upside down. You only have 100% so be careful about it. The other is, and I was just on a call with a founder the other day, we’re not invested in them, just advising him, and he got pushed out of a business eight years ago or so. He was a co-founder, and he is ultra sensitive about control. He’s got a term sheet, and it’s a good sum of money. It’s a great term sheet, but he was really upset about, “Oh, they want to have the 250K veto of me taking out any loans or me paying somebody,” and all these control pieces. He was very upset about them and I said, “Dude, that is not something to get upset about. Those are standard.” And, I think this speaks to something that’s going on in venture, in general across the entire space, which is the era of capital has no value and the era of founder gets whatever they want on a term sheet and the era of no governance, that era is coming to an end, although there are still some… Bad actors is the wrong word. But, there are still some VCs out there or capital providers that still exist in the old world. But for the most part, that era is coming to a rapid end, as it should.
Healy: Yeah, yeah. Thing’s got a little crazy there. The punch bowl is definitely gone, and I think Kefler was hung over. The world’s changed back to probably what it should be, which is raising venture funding is hard. Building a venture capital backed business is hard. Being a venture investor is hard, but that’s probably what it’s supposed to be. You know?
David: Yeah. Capital has value. Capital has cost.
Healy: The companies that you’re working with, what stage are you typically starting to get involved with them?
David: Well, we’ll get involved at any stage really, but we’re investing what I call late seed early series A, would just kind of fit into the nomenclature of traditional venture. It’s gotten so blurred these days, this alphabet soup of what’s what. We’d like to see some revenue. We’d like to see a product in the marketplace. We’d like to see a diversification of customer base.
Healy: Yeah, yeah. I was about to ask you. I think you answered the question like that. What does it take to raise a Series A in the energy tech market? And, it sounds like you just answered it.
David: Yeah. I think the space is still looking for revenue traction. I think that’s important and customer adoption.
Healy: What about Series B? To get to that next stage, is it just a continued scale? What other features do you need to have as a founder in the energy tech business to raise the B?
David: So, this is one of the unique things about the space that I’m in. A number of these companies don’t need additional capital-
Healy: That’s pretty different.
David: … or much additional capital beyond that.
Healy: That’s really different.
David: They become-
Healy: Yeah.
David: … highly profitable at that stage. Okay?
Healy: Wow.
David: So if they are raising a Series B, they don’t need the capital, a lot of them, so you won’t see it. Or, they exit at that stage, too. Majority of exits in this space especially, but I think across venture, is going through M&A and going through private equity and those other things, and if you get too big, there’s no exit potential.
Healy: Yeah. I mean, I think Carta has a stat that 85% of start-ups get acquired by the Series B or something, maybe even before the Series B. A huge percent of start-ups get acquired much earlier than founders think.
David: I mean, Carta produced some data today, and I was fiddling around with it in spreadsheet. I’ve got it right here. I mean, Series B, of the 2018 class 2% are closed, half a percent through M&A and 0.1%, one, went through an IPO. So, it’s just a small amount.
Healy: Yeah. It’s hard. It’s a very hard thing to do to be a founder. It’s really, really tough.
David: So if you are raising a B, the thing that they’re going to want to see is, and I think this is true for all, not just my space, they need to see that there’s a clear line of sight to massive growth. Like, “We’re going to put capital in and you’re going to 10x that. This is a machine now.
Healy: That’s right.
David: We’re no longer debating anything. You have demonstrated that the machine works, and it prints money in Series A. By the end of Series A, capital raised because Series B, it’s time to really go.
Healy: I strongly agree that you have to have that sales and marketing engine line ready to go with a huge potential target market for the B, and even the C even more so. So, that’s awesome. Kind of changing it up, completely, now. We talked a little bit about this, but I really want to hear your opinions on it. The venture industry is very different now than it was when we first met, what? Three or four years ago? How long? A long time ago. It’s a very different world now. What trends are you seeing as a VC in the venture world that are really different or important right now?
David: I could be wrong, but I think the trend of people that are non-venture investors with investment backgrounds, that’s my background so I’m biased here, are going to start coming into venture. The dispersion of returns, it just is nothing. It’s a big, blinking light for investors. So, I think that’s going to start happening, even though we’ve seen it. Version 1.0 didn’t work out all that well, or maybe it will. But as of right now, it’s certainly not working out that well. But, I think you’re going to see a lot of public equity type investors, in the search for Edge and Alpha, looking at that dispersion of returns and venture and coming over here. That’s one trend that I don’t think is going to reverse. Two, the cost of capital has increased materially. A lot of deals that maybe made sense on paper four years ago, no longer make any sense. And, I think there’s a lot of people that are… I’ll call them venture gamblers, not venture investors. They take bets that have negative expectation versus bets that have positive expectation. That era is going to work itself out pretty quickly here.
Healy: The world definitely is changing in that respect. For sure. I’m trying to remember. I don’t think it was a Carter thing, but I did see somebody analyze the performance of… I would say a professional investor, so mainly equity type investors, and some were private equity types in the venture world. Some of them did pretty well. I mean, there’s obviously examples of ones that maybe are more TBD right now. Right? Some of those hedge funds-
David: Yeah.
Healy: … that came in and didn’t apparently do any due diligence or anything like that. We’ll see-
David: Sure.
Healy: … how those portfolios end up. I do think there’s a strong case to be made for a savvy investor person investing early stage. That seems very reasonable to me. I’m willing to say that not everybody has to be an operator dude to invest in early-stage VC.
David: I think there’s a component to being an operator that certainly brings a lot of value. But, I think that value and that knowledge and that experience has a strong decay over time.
Healy: Oh, for sure, for sure. It doesn’t take very long. Yes. 100%. If you were running a sales and marketing team 10 years ago, I wouldn’t want you giving super tactical advice to a founder right now. That’s a big change. Yeah.
David: Yeah. So, yeah. That will always have a place, but I think it’s pretty minimal, or will decline over time.
Healy: Yeah. Totally. Awesome. Well, this has been a super fun conversation. This is really fun. Do you want to let people know sort of where to find you on LinkedIn, where to find you online?
David: Sure. Our website is ascentev.com. You can go to our website there. I’m David Forsberg, and you can look me up pretty quickly on LinkedIn. I’m very open to conversations from just about anybody.
Healy: Amazing, David. Well thanks for your time, again, and hopefully, connect with you again soon.
David: Buddy, it’s great chatting with you.

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