It’s a truism in the climate tech world that hardware is paramount. After all, you can’t curb carbon pollution without fixing cement, steel, hydrogen, and more. But as with anything today, hardware is just part of the equation.
“In almost every case, hardware is going to be developed with software in mind,” Vaughn Blake, partner at Blue Bear Capital, told TechCrunch
It’s why Blue Bear Capital is taking a software-centric approach — one that, even if it’s not contrarian, swims against the prevailing currents in climate, industrial, and energy investing, where funds that invest in hardware or a mix of hardware and software tend to dominate.
“We think the impact potential of digital solutions and applied AI is tremendous,” said Ernst Sack, partner at Blue Bear.
Take, for example, a solar company, he said. Like any hardware, solar farms encounter equipment problems that can limit power production. But, Sack said, if an operator is able to use a monitoring service like Raptor Maps, a company Blue Bear is invested in, it could help them minimize losses.
“Take 10% just as a round number,” Sack said. “A company like Raptor Maps is deployed across over 100 gigawatts of solar generation capacity, and a 10% of performance improvement is 10 gigawatts. That’s roughly equivalent to 10 billion of cap-ex and something like three to five coal-fired power plants or nuclear plants.”
Sack, Blake, and their colleagues see opportunity beyond traditional climate-friendly technologies like solar. “The applicability of AI is so universal,” Sack said, citing wind, water treatment, refrigeration, steel, cement, chemicals production, and marine and aviation logistics.
“So many parts of the world economy have an energy intensity where, if we were to build a physical, hard asset or a hardware company, it can almost always only serve one narrow vertical. Maybe a big vertical, but it’s a vertical. Whereas software is really universally applicable.”
To invest in that thesis, Blue Bear recently raised a $160 million third fund. Limited partners include the McKnight Foundation, Rockefeller Brothers Fund, UBS, Woven Earth Ventures, and Zoma Capital along with executives from private equity and infrastructure funds.
Blue Bear borrows a bit from those LPs’ approaches to investing, bringing more of a later-stage strategy to earlier-stage investing. The fund is reserving twice as much money for follow-on investments as initial checks; for the typical $5 million check Blue Bear plans to write, it’s holding another $10 million for additional investments to maintain ownership. The fund expects to invest in about 15 companies, Blake said.
By keeping the portfolio small, he added, the fund is hoping that it can help more companies make it to an exit.
“The model through which we invest understands and presupposes that IPOs are going to be less likely in the markets in which we invest,” Blake said. “And M&A, whether that’s strategic or private equity-backed, are much more likely.” As a result, each successful exit might be smaller than the usual outsize numbers that many venture funds target, but in aggregate, he said they hope to deliver similar returns for LPs.