Shadow Ventures: Building a cleaner future
In an interview with CleanTech News, Senior Associate Nick Durham discusses the healthy buildings movement, start-ups to watch, and the impact of COVID-19 on Shadow Venture’s mission to build a better future.
Investing in start-ups that bring innovation to the built environment, Shadow Ventures operates in two distinct capacities. “We’re first and foremost a seed-stage venture capital firm,” Durham began, referencing the traditional venture investment side of their operations.
However, emphasising the importance of executing substantial due diligence, Durham explains: “over the last two years we’ve really been focusing on building our incubator program, and that’s why you see the incubator companies outnumbering our investment portfolio.”
The riskiest part of seed investing is team and execution risk – both things an investor can vet. Our new model is to use the incubator to de-risk our investments. We work with these companies for 6-12 months and then when we feel comfortable with their ability to execute, and we get to know their teams, we can then say they’re venture investable directly out of the incubator.”
Confident in this new structure, Shadow Ventures has recently launched their newest fund – Shadow Fund 3 – which will be invested directly into start-ups from their incubator program.
“We about to do our first investment from the incubator, which will close in July,” Durham reveals, “so that’ll be our approach from here on out.”
Emerging Trends & Start-Ups to Watch
Although at first glance Shadow Ventures’ thesis may not seem centred around sustainability, its presence is implicit for the majority of their portfolio companies.
“Every tech company we’re looking at in real estate and construction is making advances towards sustainability”, Durham explains, “It’s a prerequisite. They must be eliminating waste, improving inefficiencies, engineering new environmentally conscious materials or methods.”
Speaking to recent trends he’s noticed within the built environment, Durham continues:
“At the forefront of the real estate and construction industries at the moment is the healthy buildings movement, which is a key trend we’re seeing as a result of COVID-19. I think there are nine different qualities you’d look for in a building, but there is a more pronounced focus now are air quality, space utilization, spatial measuring / contract tracing.”
What I think what that’s going to do is pull in this broader trend of thinking more seriously about our own personal health, and quickly that expands to our living space on earth. So, over time we believe that these issues will come more and more to the forefront, and we’re trying to get ahead of that and encourage people to invest in it now.”
As an investor on the ‘front line of sourcing’, Durham then went on to discuss the cleantech projects that excited him most within Shadow Ventures’ portfolio.
“We have a ton cleantech solutions in our incubator but my favourite project is actually Icon, which is in our investment portfolio. They can print a 3D home in a matter of weeks (ultimately for half the cost) with sustainable concrete. They are solving the affordable housing crisis and also solving massive waste issues in construction, which at scale could have a huge environmental impact.”
“On the smart building side, we’re also seeing a strong cluster around net zero buildings: smart windows, green roofs, circular heat, cooling, and water systems, distributed energy and storage, advanced automation (push systems that modulate energy activity on their own).”
Impact of COVID-19
Speaking to the impact of COVID-19 on Shadow Venture’s operations, Durham didn’t beat around the bush.
“Admittedly, the built environment was hard hit,” he began. “If you look at the most affected industries in the world in terms of COVID – supply chains, retail, restaurants – they’re all underpinned by real estate, so commercial, office and retail environments were all severely affected.
“In terms of SMEs, for anyone who was already creating a solution and building a business, the economic climate is a bit uncertain,” Durham explained. “So, from a fundraising perspective, most are active and understanding the need to put an extra cushion under their cash position to make sure they’re covered from a long-term perspective.
At Shadow Ventures, we’re probably upping our initial investment by at least 30% in most cases, just to make sure they have that extra available in case that uncertainty persists.”
At the same time, difficult environments like this tend to ultimately accelerate creativity and drive entrepreneurs to go out and do what they do best, which is to enhance the ways we live. So, in our sector, we’ve seen a lot of activity in terms of deal flow come from the sheer number of people who are now raising who hadn’t been before.”
In terms of securing investment, Durham says “we’ve seen a lot of VCs experiencing pressure from their LPs to stay active in the last few months, finding hidden opportunities and doing deals to stop pools of capital stagnating.
But there’s no doubt a lot of investors are being cautious. The amount of time it takes to fully vet a deal given the macro environment is something that a lot of entrepreneurs are really feeling, especially given the valuation decreases we’ve been hearing from other VCs and in the media.”
However, this value decrease is not a phenomenon that has affected Shadow Ventures.
As Durham explained: “For later-stage deals – Series A, Series B – they’ll definitely see a decrease because they’re not hitting their numbers as they should be, and value is dependent on metrics. But seed deals aren’t in sales mode; they’re still building their products and maybe inching into market, and as a result nothing really changed for them. So, for us, there hasn’t been a noticeable decrease in valuation.
I think we’re moving past the initial shock of COVID-19, I think on the whole people are feeling a lot more comfortable about what this is, and can now get more predictive as a result.”
Said Durham, addressing venture as an industry.
Advice for Entrepreneurs
Closing our conversation with advice for entrepreneurs raising in today’s climate, Durham is quick to emphasize the importance of industry connections.
“Leverage your network, it’s much easier. Everyone knows that, but I think the reason it doesn’t happen as much as it should is because people are afraid to ask for introductions. So, be forward about asking for introductions, and if it’s not the right fit for one investor they will probably know a host of others who would be interested in the deal.
If you are doing cold outreach, make it as personal as possible, so do your research upfront.
“Also be ultra-transparent – everyone likes to skew traction and write a narrative that serves them well, but be real about where you are in your journey. It’s just going to help your case in the long run because a serious investor is going to dig into the company, and will have questions which you can either address upfront, or make the investor address themselves.”