Episode 113: Katie Rae, The Engine
Today's guest is Katie Rae, CEO & Managing Partner of The Engine.
The Engine is a venture capital fund, spun out of MIT, that invests in early-stage companies, solving the world's biggest problems through the convergence of breakthrough science, engineering, and leadership. A for-profit organized as a public benefit corporation, The Engine not only maximizes for investor returns but also for purpose. Its investing focuses on several so-called “tough tech” domains: reversal climate change, biological human health (e.g. agriculture), “compute of tomorrow” and infrastructure (e.g. quantum computing). Primarily, it invests early at the seed stage or small Series A as the lead investor.
I was excited for this one, as Katie is an old friend and a longtime fixture in the Boston innovation community. She's advised hundreds of founders and invested in a myriad of companies. Now at The Engine, she serves as a board member at Commonwealth Fusion Systems, Form Energy, Via Separations and Lilac Solutions. We have a great discussion in this episode about tough tech, why it matters and what led Katie to switching gears to focus exclusively on what historically has been an underfunded field of innovation.
Enjoy the show!
You can find me on Twitter @jjacobs22 (me), @mcjpod (podcast) or @mcjcollective (company). You can reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
In today's episode, we cover:
The benefits of partnering with MIT in founding The Engine
The mission and vision of The Engine
The Engine’s focus on “tough tech” and the role it plays as a backer of it
How The Engine compares with a typical VC firm and important differences that makes it unique
How Katie landed at The Engine after a long career in technology and investing
The role MIT plays at The Engine
The relationship between The Engine and its portfolio companies
The cross-functional resources The Engine brings to bear on behalf of its companies
Katie’s perspective on balancing investor returns and organizational mission
The criteria The Engine uses in selecting companies in which to invest
How VC has become more MBA-driven than science-driven and the neglect of “tough tech”
The biggest gap in the financing landscape for “tough tech”
The overlap between The Engine’s style of investing and the style popularized on Sand Hill Road
What The Engine’s LPs think of the incubator’s hybrid impact and returns mission
What Katie thinks of “impact investing”
How Katie would allocate a $100B to deliver impact
The durability of “tough tech”
Links to topics discussed in this episode:
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Jason Jacobs: Hello everyone. This is Jason Jacobs and welcome to My Climate Journey. This show follows my journey to interview a wide range of guests to better understand, and make sense of, the formidable problem of climate change and try to figure out how people like you and I can help.
Today's guest is Katie Ray, CEO and Managing Partner at The Engine.
The Engine is a venture capital fund, built by MIT, that invests in early-stage companies, solving the world's biggest problems through the convergence of breakthrough science, engineering, and leadership. This is a bonus episode meaning it's only available to paying MCJ members. Thank you for being a member and I hope you enjoy the show.
I was excited for this one, as Katie is an old friend and a longtime fixture in the Boston innovation community. She's advised hundreds of founders and invested in over a hundred companies. Now at The Engine, she serves as a board member at Commonwealth Fusion Systems, Form Energy, Via Separations and Lilac Solutions.
The engine is a venture capital fund built by MIT that invests in early stage companies solving the world's biggest problems through the convergence of breakthrough science, engineering, and leadership. We have a great discussion in this episode about tough tech, why it matters, what drew Katie to switching gears to focusing exclusively on tough tech innovation at The Engine.
Why Katie believes that tough deck has historically, at least in recent years, been underfunded. What they're doing at The Engine about that and how they've structured themselves to better align with the types of capital that tough tech needs to be effective. And then we have a great discussion about the broader landscape: the role of government, the role of policy, the role of innovation, the role of capital and what we can do as a society and in innovation to facilitate more tough tech to solve more of the most formidable societal problems.
Katie Rae, welcome to the show.
Katie Rae: Thank you so much. Glad to be here.
Jason Jacobs: Well, this is such a trip because, as we were just reminiscing before we hit record, when I was first starting to think about making the transition, I still had an unrelated company that I had raised money for and was a few months down that path and it was feeling wrong and this area was kind of pulling at me and, and you made a very similar transition albeit much further along than me, but I feel like in a way, this is a year and a half later, it's all kind of coming full circle here.
Katie Rae: So nice to see you and the progress you've made. It's just awesome.
Jason Jacobs: Well, likewise, Katie, I think with MCJ, I mean, there was no expectations. It was just like this weirdo who was coming to climate. Whereas with The Engine, there were tons of expectations because it, you know, it's MIT and it's like all these luminaries involved and stuff like that. But I have to say in the short time that The Engine's been around, you guys have done nothing but exceed expectations. I mean, it's been thrilling to watch what you've been able to do and thrilling to watch that it's been happening right here in Boston as well. So congrats to you.
Katie Rae: Thank you. It's a little over three years now since we launched The Engine really officially, and it has been wild, but I just had a recent board meeting, which I always love. And at the end of it, one of the board members said, "well, you're not an infant anymore, but you're a toddler. So toddler stage is still delicate."
You know, you're still early in this journey, but we can sit up and we can eat our own meal. So it's great.
Jason Jacobs: I went to your event a few months ago and I'll tell you that didn't feel like a, an infant or a toddler event. It felt, I mean, it felt like it was put on by someone who's been doing it for a long, long time.
Well, of course you have been doing it a long time, just not with your Engine business card.
Katie Rae: Well, you know, I think, really one of the wonderful things about being partnered with MIT is that it really gave us a huge acceleration in the early stages of building The Engine and by the people we could pull together the capital, the ideas, the ambition.
When I first started, President Rafael Reif, we had a wonderful conversation at the end. He said, "you have no excuse to fail. Go and succeed brilliantly" for some people that could feel like, oh, it's crazy expectations. But for me, it's just so freeing to feel that way and to feel like we're doing something important and we're just excited to wake up every day with massive ambition to get these world-changing technologies out of the lab and into companies that can scale globally and make a real impact. So I mean, how lucky am I to wake up with that as my mission every day? And so, I think that brings lifts you up, but also, you know this better than anyone else, we live in the Boston region.
There are so many incredible people. There are so many incredible entrepreneurs. There's so much incredible ambition with purpose. So that's also made it much easier to get started and to get going.
Jason Jacobs: So for anyone that might be listening, that doesn't know, what's The Engine.
Katie Rae: So The Engine was born out of MIT. So actually it's a for-profit spin out out of MIT. And it was really essentially begun to say, hey, there are some really big problems the world is facing. And obviously climate change is one of those. It's not the only one, but it is one. And for those types of problems, which we call kind of "tough tech." So it's like a global problem.
It probably requires science and engineering breakthrough of some type to be able to solve it, but it also requires often longer timeframes and physical instanciation. There was a gap in funding for these types of companies, right? Because software is easy, you know, software we know how to fund that. We know how to fund SaaS companies and consumer internet companies. But, some of these types of companies are harder to fund in the beginning phases. And it's because they are more capital intensive to get off the ground. It's not necessarily longterm, they're more capital intensive, but those early phases are. So when you think of what The Engine does, we back teams and people that are trying to solve massive global problems with technology. And you need the combination between engineering, science, and leadership to get these things off the ground. So, The Engine is a venture capital fund, so we often serve as the lead investor in these companies, we have infrastructure, so we have space and services to make it cheaper and easier and faster to get them launched.
And we have a network that MIT helped us begin of it. It's real relationships, government relationships, and industry relationships. Maybe to expertise, et cetera, that should ease the path for tough tech founders. That's basically what we do. I'm an investor with a set of resources that most don't get to have at the stage we're at. So it's really fun.
Jason Jacobs: So relative to the, typical venture fund structure, I mean, I know that I think timeframe is one big difference that there's longer time horizons on the fund, correct?
Katie Rae: That's correct.
Jason Jacobs: Other than that is everything else the same?
Katie Rae: Very similar, except for maybe a couple of differences. One, we have a public benefit corporation as our management company.
So we actually have a mission, if you don't know what a public benefit corporation is, it is that you can balance mission with financial returns. In a regular corporation, we've got to maximize shareholder value. Here, you can maximize mission and shareholder value. And I think having that as the center of The Engine continually brings us back to not only the financial returns we seek, but also the purpose and that keeps everybody focused on what we think is really important.
And it means that we build things beyond just a venture capital fund. That's why we have the tough tech summit, which we were talking about, where we want to gather many, many different types of people to make the ecosystem around tough tech, stronger. We hope that helps The Engine, but we hope it also other funds and others sources of capital succeed as well. We get to kind of bring our friends along too is how I think of that.
Jason Jacobs: So you grew up in software?
Katie Rae: Yes.
Jason Jacobs: And you just made the statement that software is easier. So I'm wondering, given that you were in a position where you were at the top of your game in software and "software is easier," why make the transition and how did that transition come about?
Katie Rae: It's a great question. Well, first of all, I invested into things beyond software before this, and I never expected to be at The Engine. It wasn't... well, it's not the kind of thing where you decide you want to apply for that job. I was running a venture capital fund called Project 11, and I was about to go out and raise another round, another fund.
And I called a really dear friend of mine, David Fialkow at General Catalyst. And I said, David, I'm going out to raise another fund. Who should I talk to? He's an amazing fundraiser. And he said, you're not. You're not raising another fund. And I was like, are you crazy? And you know, I've worked my butt off to do this.
Of course, I'm going to raise another fund. And he said, you gotta come meet these MIT folks. They're doing something that's extraordinary. And you're exactly the right person to do this with them. And so, I mean, as, as a friend, I said, sure, I'll go meet them. And it just struck me. It was like one of those moments in your life. And, you know, I'm fast forwarding through a lot of meetings, but it was one of those moments in my life where I was like, okay, there could be nothing more purpose-driven. I actually have the skill set to do this, you know, and what an incredible partner to go get important things done in the world with.
MIT is beyond anything you could imagine as a partner, right? They have resources, connectivity, intellectual curiosity. And so many wonderful people that teach or are administrators there that are truly committed to making an impact in the world. It was just one of those crazy moments that happened. But once I kind of realized what they were trying to do, I just couldn't stop thinking about it. I was like, okay, there's no doubt. I'm going to make a big change and go and do this. And I've got a lot to learn, but I also had thought I had enough to offer. And there were enough similarities between entrepreneurship, whether it's tough tech or software. There's a lot of the entrepreneurial journey is pretty similar.
The funders might be different or the regulation might be different. Those are all learnable. They're just adding to a network that I already had. It just kind of started like that. And I'm certainly simplifying things, which I hate when that happens on a podcast like, Oh yeah, I just decided do it. And then money rolled in.
So worked really hard to set up a structure that we thought could last for a long time making meaningful impact. And then we sought partnership. Not just from MIT, but with other limited partners and institutions that we thought we'd set up a company or a, a place that would give our entrepreneurs an unfair advantage in order to win.
And that if they won, everyone would be proud and we would make money. So like we set up some of the structures really right. That's because of the people at MIT who thought through this, like Israel Ruiz and was fundamental to having this get off the ground. And you know, he's founding chairman, but also really thought through structure. Universities are complicated places and don't often do for-profits spin out. So it took some creativity to get this done.
Jason Jacobs: So, how would you describe the relationship at this point between The Engine and MIT? How is MIT involved and in what ways is it separate and distinct?
Katie Rae: MIT is involved multiple people from MIT serve on my board. I meet regularly with the president and other people that run MIT.
We are involved with many of the principal investigators, with many of the students and places of entrepreneurship there. All the industrial relationships. You know, we are part of MIT and many deep layer of important relationships there. And I think for them, they feel like MIT feels and rightly so that they birthed The Engine and they've done things like we're building out --which was announced maybe six months ago -- we're building out 750 Main Street, which is one of the original Polaroid buildings.
That's where the original labs were. We could never do that without MIT. They're building the building. And there are so many relationships that they bring to bear, but we are separate in that this is a for profit; MIT is an investor, but there are many other investors and..
Jason Jacobs: Are there other university investors?
Katie Rae: There are. Yes, yes. And that one of the really cool things about MIT is that, when we set up The Engine, it didn't need to be exclusive to them that they wanted The Engine to thrive in this Boston ecosystem. And of course, look at things coming out of MIT, but also at the other universities. And that openness, I think is the spirit of what we're doing.
And that openness means that the best ideas will rise to the top and get backed. And I think that's one of the things many people live in fear. MIT did not live in fear of this. They know, they have great people. They know they're working on some of the most impactful cutting edge ideas that can solve big problems, but there are others too, and then that would bring the community together around The Engine.
So I think that has played out. So we've done investments into companies coming out of Tufts, Northeastern, Harvard, et cetera. And those are really important...
Jason Jacobs: All New England focus, Katie?
Katie Rae: All new England focused. We've done a couple of investments outside of New England, and as our network grows, we see a lot of deals, not in New England, but our focus is here.
It'll be the vast majority will be New England focused. There's so much going on in this region and we have a place for them to begin their startups and work on these companies. There's a lot of reasons why we give them even more of an advantage here.
Jason Jacobs: And in terms of, I mean, I've heard the term accelerator thrown around describing The Engine.
I've heard the term fund being thrown out. Obviously, there's a fund component and there's an accelerator component, but are these separate and distinct or is there a one size fits all model? Is it case by case, what is the nature of the relationship between The Engine and the companies that The Engine backs?
Katie Rae: So The Engine invests into companies. We have space and services that our founders can access. So it's not an accelerator like a Techstars or a YC in any way. We feel like it takes time to build companies like this. It takes lab space, it takes machine tools, you know? And so we want to provide those and make it simpler.
And really, if you want to speak financial terms, we want to shift every cost, that in general, tough tech founders face that are fixed and make them variable. So by sharing equipment, it will bring the cost down for everybody. So that's kind of the accelerator part. And then our team works with every company on all kinds of areas of building their business, whether it's marketing or product strategy or business strategy or relationships industry.
So we try to surround the companies with people and expertise that can push them along further and faster.
Jason Jacobs: And it seems I have not, you know, sharpened my pencil and done analysis or anything like that, but it seems like relative to other funds of your size, you have a bigger in-house team. Is that true?
And if so, what are those people doing?
Katie Rae: I think we do, in general, have a bigger team. We made a decision early on that, once our fund was closed, we would hire as many people as we could with the resources we had to really get down into the weeds with the teams and be helpful. And I say weeds in the very best way, because that's how companies get built from the ground up, right? And so, you know, if you're coming out of a PhD or a postdoc in biology, you're doing something super important or chemical engineering. There are so many parts of building a business you've never had to do before, right? You've written grants or, but you've never and built a business. So we just said, let's make the easy parts easy because so many times the easy parts seem like a mystery to someone who's never done it before.
So we've just tried to pull in things like finance and marketing and people who work on our operations team that can help with figuring out equipment or experiments, et cetera. So we just tried to think about everything that would make their lives easier. Now, of course, it's only for a period of time and then they start to build their own team and these are really smart people. So you don't have to tell them more than once, how to figure out these kind of early stages, but we thought it would go faster and better if we were around for some of those types of questions and infrastructure building on a team. But, there are three partners in the fund like many partnerships. So Anne Dewitt, Reed Sturtevant and myself. And then, then we have a platform team that adds kind of special sauce there. And then we have an operations team that runs our labs and services. So it's really those three pieces that make up The Engine.
Jason Jacobs: Uh, huh. And given that you mentioned that being under the umbrella of a public benefit corporation enables you to make mission an equal citizen with returns.
I'm curious when it comes to internally measuring yourselves and your success, what do you look at? So, I mean, there's kind of the traditional VC returns that most venture funds, or all venture funds, would look at. But given this kind of twist to the model, how do you think about mission as it relates to your performance?
Katie Rae: Yeah. So we don't believe that you have to trade off returns for mission. And I think there have been many that have proven that out. And we certainly believe that now there's a lot of hard work between me saying that and that actually being the truth, but I think venture capital in general, when you look at any company, you have to be able to figure out how does this become a billion plus dollar company, deca-billion.
Yeah. And so everything that we look at, we do a quick filter on, does it match... is the mission of this company big enough that we care? And then the next quick pass is this company doing something that could be big enough that we care? And if both of those are true. Then we'll dive in.
Jason Jacobs: It's similar to BV in that regard where it's like the upfront filter.
And so with you, it's about purpose in these kind of thematic areas with BEV it's a half a gigaton threshold, but then once you're in the door, then it looks like any other venture fund word from an assessment standpoint.
Katie Rae: That's right.
Jason Jacobs: Yeah. Okay, cool. And just one other tactical question, then we can kind of jump into more topical, tough tech areas, but typical check, typical stage, um, domain areas that are most interesting and relevant?
Katie Rae: Yeah. So we typically are the lead investor in either a series C or a small A. Think $1 to $3 million check. We do write some smaller checks, which we think of as experimental. There's some piece of data we need, or the team needs to build something out. So an under $1 million check, we do write those, but it's we think of those as team building.
Those are, we very much are going to want to lead your seed and A, if we do that. There are times that we write a larger check into a much larger round and with other co-investors. But bread and butter is that kind of seed check where we are the lead. We take a board seat and work with the founders through the next two to five years as they raise their A and B, et cetera, and grow the company.
Jason Jacobs: Uh huh. And then what about domains?
Katie Rae: Domains. Three big areas: the first is in reversal climate change, and that could mean many different things, but that's the problem we're going after. The second is acceleration of human health, which includes both agriculture ag and all things health, but don't think digital health think like things that will make meaningfully leap in direct in healthcare; it involves biology put it that way. Then what we think of as infrastructure or "compute of tomorrow." So all things, quantum, photonics, how do we move bits and bytes or learn faster. There's a whole bucket there that we think is super important.
Jason Jacobs: Switching gears from Engine specific. But if you look at tough tech in general, you mentioned that it's an area that had a gap and wasn't getting as much funding as it needs.
Why do you think that gap has historically existed?
Katie Rae: Well, I mean, I think, you know, if you... by the way, this is where venture capital started. So it's not that it's always existed, but if you just look at momentum and trends, you'll see that over time, venture capital has become more MBA-driven than science and technology driven with the rise of software.
Those are basically business decisions you're making about a company. So that means there are fewer and fewer people looking at the hard sciences and hard technology as just an industry and there's been a lot of success and software investing, right? So there's a trend toward that. The other day trend is in pharma.
Pharma has cracked the code on how to take a really big science risk, but get something to market through the public markets quite quickly in order to return that capital. But, anything else in tough tech has been difficult. I'm sure you've talked to plenty of people about why didn't "green tech 1.0" or "clean tech 1.0" fail. People look back at some of those things and they say, Oh, it's because the technology was hard.
There's a bunch of different reasons why certain companies failed and I'm certainly no historical expert on that, but it's been out of favor because you have to have deep scientific knowledge and engineering knowledge. You have to be both assess that; like Commonwealth Fusion, who you know well, that's not a typical assessment of a company and technology risks. And so that takes time and effort to do. When something's easier or there's a very good industry built around it people tend to jump on the things that are known. And so that's just left a gap here that has widened over time. There's no great reason for it because these types of companies you can have tremendous returns on them, if you're willing to go through that work upfront to understand the science and engineering and what is the gap to getting to building a business. And if you have people with a little more patience to go through that, we think the opportunities are enormous, but it's grown out of favor.
Jason Jacobs: And I'm going to oversimplify. But when I think about these hard tech and I know way less about it than you, but there's kind of seed where you're talking about entering, and then there's the equity follow-on rounds that tend to be larger, but also, you know, more venture or growth stage equity capital, and then there's project finance when it comes to building plants and infrastructure and things like that.
Where's the biggest gap as you see and is that how you think about staging in terms of capital into these companies? Or do you have a different lens?
Katie Rae: Yeah, I mean, I think back to creative finance companies. If we want to focus a little bit on kind of the energy sector or reversal of climate change.
Almost always you're building some kind of power plant or plant. So that is where project finance comes in, right? And there's an abundance of project finance, but it's a narrow glide path. To get it right, they have to understand the economics of how they're going to return the capital and in a very precise way.
So tough tech companies have to get to the point where project finance available to them. Now, between where we invest in there. There are multiple sources of capital, right? There's partnership with the government. There's partnership with industry. There's equity. There's corporates that, that do a lot of investing that understand these areas. But, you have to be willing to say, and to work with very different types of organizations to get these things funded.
And that's the fun of it. It's a puzzle. But there is abundant capital to do things like this. You just have to figure out how it gets pieced together and how you get access to it. When we think of some of the core areas that The Engine works on, it is developing that capital stack, both our understanding of it.
But also who's in that capital stack and the creativeness in which we work together. So for instance ARPA-E, have you gone down and interviewed the folks at ARPA-E yet?
Jason Jacobs: I've talked to several of them, but they're, aren't allowed to speak publicly for whatever reason, at least not to me.
Katie Rae: Okay. So the head of ARPA-E came out of JP Morgan.
JP Morgan is the master of how to finance anything, right? If you start to look at how people think about financing these things. What you're really looking for is people with that creative energy to say, that's the problem we have to solve. Wait a second. I've seen this and that. And the other thing, let's piece these things together and get it done. Why do people engage in that with the areas that The Engine works on? It's because who could not be proud of the impact you're going to make. And also the huge business you're going to create. If Bob Mumgaard succeeds at Commonwealth Fusion to have the first plant that's net positive energy and with zero carbon emissions.
That's so awesome and so important to the world that draws very, very creative people around it, that challenge. And so I see my role at The Engine to find those people, to work with those people and think about all the different solutions to kind of, again, figuring out the puzzle of each of these. So that's, that's kind of what we do.
Jason Jacobs: And where are the biggest gaps if you look at the tough tech landscape today, as you see them?
Katie Rae: Yeah. I mean, I think it is certainly in the early stages where you have both technology risk, business risk, and often regulation risk. And so that gap where we play now is a big gap. There's also a gap at what we call "first-of-its-kind."
So when you're going to build your first power plant. You've got to figure out how you're going to finance that without equity, because often it takes a lot of capital. And so I think of that as kind of a second gap.
Jason Jacobs: But yet there's an abundance of project finance capital, as you said, given that there's an abundance of that capital yet. There's a gap in getting that first of its kind plant built. Why is that?
Katie Rae: Because there's risk in building the first plant and that risk it's like, why do most venture capitalists want to do software? They understand that risk better. In project finance, it's much easier to finance the third power plant than the first, because so much of the risk has been taken out there's rationality in this too. Right? Your upside will be bigger if you win and you finance the first one versus the third one. And so there's a way to solve for that risk, but is just is a smaller subset of people and organizations.
Jason Jacobs: And when I guess there are different options to solve it, it could come from a private for-profit asset class or it could come from somebody, like the government, that maybe is doing it more in a grant, like way or there's other buckets.
Katie Rae: Exactly. A combination of all those things. That's what I mean by creative finance is that it's not probably going to be one of those things.
It's going to be a combination of shared risk. And you know, if you think about the areas we play in. The U.S. Government certainly has a real interest in making sure these industries get born here. And, uh, not just from the impact, but from what that will mean economically. And so we do have common interests.
There's also great thinkers like Andy Lowe, who I don't have you interviewed Andy Lowe yet at MIT?
Jason Jacobs: No, and I, I've not heard that name actually.
Katie Rae: He's played kind of in biology, but he thinks about how the public could share risks and I'm gonna butcher his ideas. So, sorry if I do that, but think about how the public could both bear the risk of investing into things like this, but also get the upside.
So are there ways to create basically baskets of stocks around this that allows the public to finance some of these solutions to big problems. So one of the first famous ones he was talking about doing was, could you do that for cancer? So you'd have a big pile of money for cancer, but if it won, the people invest in that stock when to write awesome. Or like, think about Tracy Palandjian at Social Finance, where she does these social impact bonds. So it is both charities, philanthropies and investors coming together with blended finance to invest into good into impact. But in this case it could be impact and upside. And so you have to bring these kind of creative solutions and minds together.
But the sky's the limit then, right? And certainly, as I said before, we are lucky to be in the city because we have that confluence of great investors from pre-seed, from angel all the way through big public market investors think Wellington, Fidelity, you know, et cetera. So a lot of understanding about how to finance things and people want to dig into problems that are big, important, and game and could be game changing companies.
Jason Jacobs: I've seen The Engine's name come up as co-investors with Breakthrough Energy Ventures at teams multiple times. I'm curious though, what's the overlap between The Engine type of tough tech portfolio and Sandhill Road.
Let's say more traditional venture capital. So what does that look like today and what should it be looking forward?
Katie Rae: You know, I think it depends on what you think of traditional Sandhill Road, but like, there are plenty...
Jason Jacobs: Sequoia, Andreesen Horrowitz, DCVC, Founders Fund... there's some firms that do this kind of investing, but most of them still don't. And I guess my question is is that how it should be going forward? Or do you believe that traditional Sandhill Road style venture has a bigger role to play in this area?
Katie Rae: That's a great question. I certainly think almost every firm has their kind of wild bet what they would call their wild bet where like they took a bet on technology risk.
I think for our founders. You definitely prefer to work with people who understand what they're doing in this area. So who traditionally look at things like this and bet on them. But I do think people are going to wake up to the fact that they're can be very good returns here, you know, look at DCVC and founders fund and a bunch of these and people are going to be like, or DBL.
Righ? I mean, DBL consistently has great returns. Awesome. People then have to get their heads around. How did they assess science risk, but continued good returns, I think will drive more people there. And by the way, it's not just those four funds that I've just named our Luxe. People like NEA have been taking risk like this. Khosla Ventures... there are a lot of them. But it is more partner-dependent on if they can get comfortable with it. So I think there's certainly a role to add partners to funds that they could be looking at companies like this, because I think the returns are there and you do see that across. Sequoia has many people who are deep-tech investors. And I could name 50 firms like that.
Jason Jacobs: And here's a self-serving question because I kind of fit the profile of what I'm asking. But if for someone who maybe has spent their career, let's say they founded three companies before, but they've all been consumer or SaaS or, or some area that's well, outside of this tough tech realm, but they are drawn to the purpose and the impact of tough tech and they believe.
That the returns will be there as well. So they believe in the thesis, but they just don't have the expertise or the training. What is the role for those types of people? Should they stay in their lane or what would you like to see more of them heading this way? And if you want to see more of them head this way, what should they do or what kind of systemically should be built or provided to help make sure that they have a smooth transition.
For things that we invest into, it does generally come out of a lab that is doing deep engineering and science work. But that does not mean that those teams aren't comprised of people that don't come out those spaces, right. There's many, many things to do to build the business. And so what we think about is kind of what that total team that needs to surround something specifically for you.
You could be an amazing partner to somebody where you co-found a company together and they bring the science and engineering and you bring the know how of creating momentum around a business. And I'm not believing that you're going to turn somebody who's not a science and engineering person into being able to do that overnight, right? They'd have to put a sustained effort into that.
So is there a similar sound bite in tough tech to the Paul Graham hacker hustler in the software world?
Katie Rae: Well, it's not hacker; it's engineer. I mean, but deep, deep engineer, somebody who is an inventor and can make it. So it's like, it's both of those things. And, sorry, I'm not quick enough on my feet to give you a soundbite there, but it's the combo.
Jason Jacobs: And to be clear, I'm not asking if that analogy fits directly.
It's more like, what is the right balance of team makeup here? And maybe the answer is it totally depends because one type of tough tech is totally different than another. And one. And it depends who the first founder is in the door. Before you think about who the right partner should be. I'm genuinely curious because I am coming across more and more software founders who are driven by impact and purpose and hugely ambitious.
So if they want to tackle climate, let's say, well, they look at the domains that matter and it's not exclusively, but a lot of it is tough tech and they, and I, we just don't feel equipped.
Katie Rae: I think you should feel equipped, maybe not as that original founder, right? Because you're talking about a scientific or engineering breakthrough that takes years in a lab to get to almost always.
So you're not going to replace that part. But as soon as that comes out of lab, you know, now you've got to build a real company around it. So you should feel fully equipped to help there. I think it requires educating yourself on the science and engineering so that you're not naive about that. But that's not hard if you're curious, which I mean, someone like you, you're infinitely curious.
So I think if you start to compile it, understanding around that, but then I always tell people is like, what is your lane? If you're a great marketer, you're a great communicator, you know, storyteller, like you have to stay in your lane. You're not going to become everything. And all of a sudden, overnight a great scientist.
So pick have your lane that you can get in tribute to one of these scientific founders. And then I think those combinations are beautiful. It's no problem
Jason Jacobs: I'm hopping around a bit. But another thing that I, I picked up on from earlier in the discussion was you mentioned that in some cases, the regulatory landscape matters. Do you find, I mean, coming into seed stage, is it more the follow on investors that need to navigate that?
Or is that something that you put a lot of thought and attention and resources to at the stage that The Engine gets involved
Katie Rae: Oh yeah, we look at it. We try to understand what the hurdle is there. So is it a very low hurdle with like an FDA? Is it a super high hurdle? Because it basically what it means is you're understanding the financing plan for the company and how much capital they'll need after you, which is a very important element of diligence. And if it's in energy, you're trying to understand the regulation there or biology.
Jason Jacobs: How do you think about it a price on carbon as it relates to investing. If you knew that something had potential to make a huge impact, but it required a price on carbon to be economical. Is that a big red flag?
Katie Rae: That's hard. Really hard. And we typically don't bet on that. Our arguments always say they can do great without it, but boy, if they had it, they'd do way better, you know? And so, but if we can't get to our hurdle without a carbon tax, we, we generally don't invest.
Jason Jacobs: And when it comes to the LP makeup, I'm curious, given that mission is an equal citizen with returns, but you believe that you don't need to compromise on returns to make impact an equal citizen.
Does that mean that when you look at the big institutional LPs and fund to funds and firms like that, is it purely a return story to them?
Katie Rae: No, they love the combo. They wouldn't have said yes to me. And I think more and more people are seeing that there doesn't have to be this divide between those two things, right?
You're not sacrificing returns for mission. And I think their data would bear that out. By the way a lot of people say they're investing for impact. And these LPs see a lot of things that look like nicer yoga mats, that those are the kind of impact they're looking for. But when they look at The Engine, they're like, okay, you could birth whole industries that feels like that's both financial and impact.
Jason Jacobs: Katie, you're very nice and I know that your relationships are the world to you. So I don't know how honestly, you're going to answer this question, but what do you think about the category called "impact investing?"
Katie Rae: I think anything that gets as much buzz as impact investing has gotten, it starts to get crazy.
Everybody that wants to be an impact, you know? I try to do just for my brain and this is also what I do with entrepreneurs. Oh, they're in a hot space. They're in...AI chips or whatever. I'm like, I don't want to hear it. Stop the buzz. I just want to hear what you're actually doing. So when people say they're impacting investors, I'm like, great.
Take me through, what does that mean? And what are you investing into? And what's your process? And then that helps me assess what kind of impact investor they are. I think it's awesome that a lot of people want to be doing impact investing, but I would say there are a lot of people that want to do impact. Impact investing is a much smaller, like true investing for returns is a smaller subcategory of that.
And that's kind of where we can fit in that category.
Jason Jacobs: One reason I ask is that I remember a conversation I had with Ric Fulop when I ran into him at the airport and what he was saying, we were waiting for a plane and we were chatting. And one of the things that he said to me is that if you're bringing, let's say a tough tech company to bear that you think ultimately can have a huge impact. When you think about that first beachhead market, you shouldn't even consider impact. You should just look for where you can build a strong business and then expand into those impactful areas over time from a mission standpoint, once you have a core profitable engine. Do you agree or disagree with that statement?
Katie Rae: Well, first of all, I'm just thinking about Ric Fulop. So I've met Rik Fulop in a bouncy house is the first conversation.
Jason Jacobs: That's a good deflection but I'm going to allow it because I liked the direction.
Katie Rae: So I think Ric is right in that you have to build profitable longterm businesses. Anything else won't matter. You will not have the impact you want. If you don't have a big business, because you won't have the global reach that you need. So that's what we think about is how do they become a longterm sustainable business?
And that's how we pick our beachhead market. Not saying that beachhead is the most impact, because it's too hard to do that. So we say what builds a big longterm business? And impact just escalates from that.
Jason Jacobs: Have you had a situation where a portfolio company started with the best of intentions and then it hit a fork in the road where there was one market that was more impactful and another market that could build a bigger business? And if so, what counsel did you give them at that time?
Katie Rae: Listen, we don't control these companies. We're not private equity. We're venture capital. The founders run the companies. We just try to make sure people do. And by the way, yes, we have had this situation. We've had this exact situation where a sexy market came and it was going to be much faster, but we were like, oh my God, we would have never backed a company doing that.
Not that they're bad or evil or anything. It's fine. It's a great business, but it's not an Engine business. And so we essentially just kind of pulled back and certainly we'll always help the founder they're in our portfolio, but it's probably not one we'll continue to invest in. And luckily when they find something like that and decide to do that, there's often other investors that can keep going with the company, but that's kind of the choice that we'll make then.
Jason Jacobs: Taking a step back and looking at the overall state of tough tech today, I've heard many people say that tough tech remains dramatically underfunded. Do you agree?
Katie Rae: Yes, I do. Especially if you think about the competitive nature of any of these industries and where other nations are investing. Yes, we are competing globally and where these industries get born and where the science gets really an engineering really gets made is extremely competitive and different places are set up to support tough tech companies and building of whole industries with a lot of capital. So I think from a U.S. perspective, we are under investing.
Jason Jacobs: If we magically one day, maybe even in January, had an administration in place who cared about these things.
And you had a one hour slot on the calendar with the president at that time, and you could deliver a message to him or her and make recommendations for how to increase the tough tech funding and create more big, impactful, tough tech companies. What recommendations would you make and why?
Katie Rae: Yeah, I think we have plenty of invention and I think actually the U.S. Government does a very good job on that. I mean, now that I just said that people are going to be like "no we don't," but we have such richness in that in this country. I do think that we need more help on the, getting these things all the way through to be grown into big companies so that the kind of public private partnerships and project finance dollars.
Those need to flow much faster and with much more structure, because I think that's where industries get born or lost. Not necessarily the invention where we are really good at, but you've got to get them along the continuum so that that industry grows up here and those dollars have to be there to do that. And the U.S. Government plays a huge role in that.
And they know it. Every administration knows that including the current one, I can have many, many disagreements with current politics, but it's not that the U.S. Government has stopped investing in tough tech. In fact, some fusion programs have been funded. I mean, there's a bunch of things that have happened because any human that sees the data of the impact, the U S government can have on creating industry knows that they've got to invest.
Jason Jacobs: You had mentioned public private partnerships and project finance. If I double click on each of those, any thoughts on things we could do to bring about more of each of those?
Katie Rae: People convene, they either convene and like the government's convening on like, how do we do more grantmaking or private is convening again?
I think what we need to do is. Pull together like the most creative minds on this and start really forming different kinds of programs, different kinds of structures that can fund these types of industries. And it will be a collaboration between government philanthropy and private capital. And we should embrace the messiness of that in order to get it done in our system of government.
If you look at the Chinese, right? You can do a very top down support of an entire industry. We are much more bottoms up, which means we've got to be more creative with the U.S. Government and that's cool 'cause I think many flowers, bloom, many inventors bloom. There is this creative destruction that continues to happen, which I think ultimately creates stronger companies and industries, but it also means that if you stop putting that intention from the top, from the government, these things can disintegrate really quickly. We've got to just keep convening those groups and working it through and giving the right incentives. That's the role of government is like, what are the incentives to do the right thing for our community?
And I think there are a lot of ways to do that. And by the way, there are examples from around the world where governments do this very well and very creatively in order to create incentives for things to happen in certain places. So we just have to keep doing that.
I think you're touching on another fear of mine in terms of entering the tough tech arena. Is that in consumer, for example, where I spent a number of years there, wasn't a lot of dealing with big corporate bureaucracy. And it was actually one of the liberating things about being an entrepreneur and from a distance--and I've never tried-- but it seems like if you're in an area like tough tech, that does have to deal a lot with the government, that the government seems from a distance like the bureaucracy is even worse than it is with dealing with these big companies. Is it oil and water or do you feel like there's pockets of the government where you're working with people of the same caliber and energy and pacing and ambition that you would be working with in our little nook of the private sector?
Listen, there are some incredible people working in our government. And often people do it for a short stint and they do it because they've come out of industry and want to give back and many, many reasons for it. Right. But the U.S. Government still attracts great people. And by the way, there's longterm dedicated servants of the U.S. that are in all areas of government.
But, of course, there's bureaucracy. But what we found is people want to support. They want to figure out how these companies continue to thrive and you see it in DARPA, ARPA and NIH, and there are so many people working to make these startups go and thrive. And a lot of creativity about how you do that.
Tough tech may seem like yes, there is regulation, but there's also something really different than on the consumer side. Like consumer, anybody could throw up that website and now you're just competing on like small changes. Not many people can decide they're going to start a longterm battery storage company.
So there are moats that get created around these tough tech companies that are really good for the long term, right? And so you got to get through until you got a company, but once you do, you've got a lot of structural advantage. And that, whereas if you're running a consumer internet software company, you know how competitive that is and how few barriers to entry there are for somebody else. Both sides have their difficulties and both sides have their upsides and winning. And it's just a slightly different game.
Jason Jacobs: Two final questions, Katie. One is just, if you had a hundred billion dollars and you could allocate it towards anything to maximize its impact on cultivating more tough tech innovation, where would you put it? And how would you allocate that money?
Katie Rae: That's a great question.
I would definitely take part of it, probably a small part, 'cause you don't need that much and create a set of real prizes for the inventors. And I would set up a set of global issues, but the prizes can't be a million bucks. Like if you're doing something in tough tech, those prizes could be 50 million bucks and create that space race for the next generation.
So how old are your kids right now, Jason?
Jason Jacobs: They are five and eight.
Katie Rae: Okay. By the time they're 10 and 13, they should be like, that's the race I want to be on. And then they start getting super psyched about an area, whether it's climate change or something in health, that they look at a group of people who win that prize and say, that's it that's my calling. They're doing something so cool. So I would want some money for that. And then the rest I would put into structural changes around how to finance these things. So once they're rolling, you could keep going. And you know, if you think about an infrastructure fund that could do first of its kind new power plants, I mean, you're going to need a $10 billion fund. You might even need a $50 billion fund. And so I think there are some exciting things that you can do on both ends of the spectrum that could have a huge impact on the world we live in and the world we leave to our kids.
Jason Jacobs: And my last question is just, if you weren't building The Engine and you want it to have the biggest impact that you personally could have on tough tech innovation, what would you be doing?
Katie Rae: It's funny, in my interview for The Engine, one of my board members, Sue Siegel said, okay, Katie, what are you going to do after The Engine? And I was like, is this a trick question? I was like, it seems like I'm going to be doing this for a really long time. And I said, well, Sue, what do you think I would be doing?
She was like, you'd be in government. And I was like, what? But I could imagine doing the service piece in government and trying to make some changes there too, but that's, that's a long way away. This is way too much fun.
Jason Jacobs: Awesome. Well, we've covered so much ground. Is there anything I didn't ask you that I should have? Or any parting words for listeners?
Katie Rae: I would just say when we say tough tech, what we mean is that it has staying power. People think, Oh, it's hard. It's like, no, we're going to invest in the things that have staying power and impact. And it is so fun to be there. And jump in no matter what your skill set is.
Jason Jacobs: Awesome. Well, such an important topic, Katie, and thank you so much for coming on the show and for all the work that you do.
Katie Rae: Thank you.
Jason Jacobs: Hey everyone, Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey, you can visit us at MyClimateJourney.co. Note that is ".co" not ".com." Someday, we'll get the.com, but right now ".co". You can also find me on Twitter @jjacobs22 where I would encourage you to share your feedback on the episode or suggestions for future guests you'd like to hear. And before I let you go, if you enjoyed the show, please share an episode with a friend or consider leaving review on iTunes. The lawyers made me say that, thank you.
