AgTech Profits Meet Planet: Where Climate Impact and VC Returns Align | Sarah Nolet, Tenacious Ventures (#128)

In food and agriculture, technology first is not the way to think about investing in the food and ag system. Things don't scale because just of the technology, it's much more about the business model and the humans. We shifted to the systems lens of where are the thematics independent of what technology is underlying them, independent of where we are on the venture hype cycle that are these evergreen themes that we think are gonna be driving both impact and returns in the space.

Sarah, thanks so much for getting up so super early to do this with me today and coming on the show. No, thanks for having me, Scott. I'm excited about it. You grew up in Silicon Valley with both of your parents working as chemical engineers in the semiconductor industry.

Now, most people hear Silicon Valley and think software startups and apps, but you were raised in what you call a hard tech manufacturing environment where things like physics and chemistry actually matter. So, what was that like for you growing up there? Yeah, I think your relationship to the silicon and Silicon Valley probably depends on your age. And at least for my parents, that meant the kind of original Silicon Valley, where the chemistry and the hardware was really what was driving a lot of the innovation and making the whole future possible.

And so both my parents are chemical engineers, they worked in the semiconductor industry. I don't think either of them worked as engineers. They both ended up pretty quickly on the sales and marketing side. My dad became an entrepreneur and eventually an entrepreneur and investor.

So I guess what that meant for me is that dinner table conversations were truly about business from as long as I can remember. And I didn't think that would have an impact on me. But looking back and looking at my career, it's pretty hard to argue that it didn't. So I imagined it, you know, it's played a role in more ways than I can imagine.

When you say Silicon Valley, I've done a lot there and worked for a Silicon Valley firm at one point. Where specifically are you talking about? So I grew up in the Bay Area in the town over from Palo Alto in a town called Los Altos, which was an amazing place to grow up. And yeah, kind of Google.

I actually remember going to baseball practice of all things. And there, my coach had a I played baseball with the boys for probably far too long. My coach had a shirt and I remember going, Oh, you know, what's a googly? And he was like, Oh, it's Ask Jeeves.

And I was like, Oh, okay, I'm gonna go play first base. It didn't register. I obviously should have said, Can I give you $50 to buy half a share? But that was just the world we lived in where all that stuff was.

I guess when we say you growing up, that must have been 90s and early 2000s. I was born in the 80s, yeah. But yeah, I grew up in the 90s and early 2000s. Different world then.

And actually in the 90s, I was working for Silicon Graphics. I don't know if you remember that. That was called the G Wiz Company. A lot of people your age now say, what was the name of that company?

Because they've long disappeared. But I do remember coming back from lunch one day and driving down the frontage road beside 101. Uh, and I saw an office building with one of these banners, you know, with strings tied when you have a startup, and it was Google. Yeah.

Yep, yeah, and there you go. That was their first kind of office run. So yeah, it was a different place then. Totally.

And it's totally different now. So later when you got into biology and agriculture, you became skeptical of the whole move fast, break things mentality. That had to come from somewhere. Where did that come from?

Yeah, it's been an evolution, I would say, of first like learning about startups and venture capital and how those two things have been a matched pair and how they've changed the world in so many ways. And then as I've spent more time in agriculture, like questioning and seeing where the current iteration of that's really focused on software and even the new iteration that's really focused on artificial intelligence does and doesn't fit a physical world of investing. And a good example would just be um seasonality.

Another would be regulatory approval. So there's sometimes just fundamental constraints or dynamics in an industry that means you can't quite go at the same pace or do things in the same way. And that's not necessarily a bad thing, it's just a different thing. But that's a lot of what we spend our time, yeah, wrestling with is how do you innovate amidst those constraints or even turn them into strengths.

And then around 2007, you went to Tufts near Boston and studied computer science combined with human factors engineering, sometimes called engineering psychology. So that's an interesting combination. Why Tufts and why that combination? Yeah.

If I'm really honest, I was focused for the first 18, probably even 20 years of my life on playing sports primarily. And that was every sport imaginable. But the decision for college was play a couple D3 sports or one D1 sport. And I ended up picking the combination of uh a top-tier school, which I was fortunate enough to get into and play a couple sports.

And Tufts was a great combo of those things. And I wanted to be on the East Coast, probably for as much of a get as far away from home and go beyond my own reasons as anything. But yeah, that's how I ended up at Tufts and yeah, did end up double majoring and played through varsity sports and had a blast. Tell me about this human factors.

I'm not sure I actually know anything about that, other than supposed to optimize the interface between people and systems, but what do you actually study? Well, I'm forever grateful for them for a name that has meant endless questions for the next several decades because no one knows really what it is. And I was kind of the same. I saw a poster in the commons of the university at some point that said, Do you ever get frustrated that things aren't really made for people?

Do you wish they were made a little more sensibly for humans? And that was like, Yes, I am frustrated by that. And it really exactly as you described it, Scott, that's really what the discipline is. It came out of early medical device design and ergonomics and a lot of like physical device and physical interfaces between people and humans, but has evolved a lot more into software and user interface design and those kinds of things.

So there were people in the program really focused on the physical side. Some focused more on like how do you design a laparoscopic device so that doctors can interact with it, but then see the patient and the surgeries go well and all that kind of stuff. Some people were focused more on systems like air traffic control and the hierarchy between the pilot and the co-pilot, and how does the system and the rule book get designed so that good decisions get made and people are safe?

And then some were focused on more digital, like how do I build software interfaces that people can actually know where the button is to be clicked and that kind of stuff. What you're doing now with ag tech startups, do you see founders who've built brilliant technology but somehow completely ignored the human factor of how a farmer would use it? Yes. So, I mean, I think that's true in every industry, not just agriculture.

Uh, sometimes for good reasons and oftentimes for frustrating outcomes. So, yeah, absolutely. Whether it's the user interface, where's the button or how do I do this? Or missing, hey, this isn't gonna work because you're making a recommendation that we should irrigate this tree and that tree, but our irrigation system has one big nozzle and sprays the whole orchard.

So we we don't have that control. And so great recommendation software, but the physical world can't do it, or more like on the business model side. You should just charge farmers subscription revenue, and then the farmers go, that's not gonna work for me because you're not actually adding value the whole year. And so plenty of examples of where those two things don't meet.

So before we leave your university education, you were a serious athlete, you alluded to that, and I think a three-sport varsity athlete at Tufts, soccer, basketball, and track, and earned all American honors in soccer, which soccer in the US is a little different standard than in Europe and Latin America, but still notable. And I've seen pictures of you personally on Manley Beach and Sydney, where you're clearly a serious beach volleyball player. I found somewhere in my homework that sports taught you as much as your technical training.

So unpack that for me. And what did you learn from athletics that you couldn't have learned in engineering school? Oh my gosh. Yeah, definitely would say it's taught me more.

Also, some great pictures on the internet, it seems, for research that have stayed with me for years. I think that one of the big ones that comes to mind is the combination of like hard work, teamwork, and overcoming setbacks. And in sports, you just get knocked in the teeth all the time. You're not gonna win every game, you're not gonna win every race, you're not gonna have every training go well.

And that sort of how do you overcome that? How do you make decisions about what you keep doing and what you stop doing? How do you find the right balance of pushing through it and grit versus no, I actually need rest? All that kind of stuff is such a part of sports.

How do I get help? How do I ask for coaching? How do I learn from others? How do I take on advice and get feedback?

In the business world, some of those concepts like seem harder, I think, or more strange for people to grasp, asking for help in coaching or taking more rest or that kind of stuff. So I'm really grateful to have yeah, learned that in a different field. After you got out of Tufts, I guess we're talking about somewhere around 2011, you went to work for US defense industry contractor as a systems engineer. So that's a little bit surprising based on what you're doing now.

Were you consulting or was this in-house? And what were you actually working on? And what were you doing? I was working at a company that was building, was really known for that kind of interface and human factor design element of both physical and digital systems for in a military context.

And so we were a small defense contractor, often working with large primes to be that kind of representation of the user. I was in-house and we were designing at that time like systems for the kind of future intelligence analyst. And yeah, my role was really like a product management role, I would say, working with a team of engineers and then thinking about user stories and business requirements, translating between the business, the user, and the technical requirements. Does this company have a name, or was this some kind of CIA front shop, like like Defense Systems Inc.

No, it did have a name called Charles River Analytics. We, it's funny you say that because I've described my background of career and just the tangential path to agriculture. And I'll never forget, I was on the podcast of this sort of farmer influencer, this was years ago, and he was like, Look, you're just a spy, right? You like there's just no way you live in Australia, you're in Argentina, like you're just a spy.

And he couldn't shake that, but no, it's not true. In another life, maybe I would have been, but not in this one. He did that for some years, and then around 2014, something shifts, you become disillusioned with the defense work. So I guess I kind of want to understand that moment and what happened, and when did you realize this wasn't the path for you?

Yeah. Like anything, it's really a combination of factors. For me, a big one was the pace of innovation. When again, I'd grown up in Silicon Valley and seen how that world moves, and then working in a context where you're bidding for government contracts.

And then as a small firm, we had the requirements of the primes, the requirements of the military, all of the complexity inherent in that, plus the end use and how aligned that was to any kind of like impact mission that I felt, or even just I didn't want to wake up every Saturday and study how many stars on the uniform of the general meant what and how I should act in a context. It just wasn't interested. Whereas I knew there were other areas that when I got passionate about it, I was gonna go 160% at it.

And this just wasn't it didn't have that pull. So a combination of actors at the time, Palantir was accelerating and getting funding and doing some similar stuff to what we were doing. And so it just felt, again, that pace that you could move with a different business and funding model was something that was compelling. But I didn't actually know for sure I wanted to leave the defense industry.

It was like a slow hunch. And I found out that there was a systems engineering program at MIT. And like I didn't want to go to grad school, I wasn't thinking about getting a master's, but reading about that program, it was like, oh my gosh, these people are speaking my language. Like they're talking about complex systems, they're talking about how the business requirements actually matter, and they're talking about how the users actually matter, and it's not just designing one component, and it just felt like this is a thing I want to go do more of.

And so I decided to apply, thought I had no business getting in in any way, and was fortunate enough to get in. And so then it was like, oh, okay, am I gonna do this part-time or full-time? And realized, okay, I actually do want to go full-time, but first I need to just take a moment and say, I'm an adult now. I actually have some choices here.

I'm not playing sports anymore. That's not what's ruling my life. What do I really want to do? And I never studied abroad and decided to go to South America and just take some time for myself.

And that's actually how I got interested in agriculture. And so then when I went back to MIT, I had a whole different focus and whole different way in which I wanted to apply that systems engineering program. You've called this an accidental gap year. And you went to Argentina thinking it was gonna be a holiday, but then you ended up living and working on farms.

Take me through that decision, what happened. I guess you did different things like harvesting organic tomatoes and Mendoza and hot, buggy, messy, making $12 a day. Yeah, that's right. I was originally focused on again, just getting off a beaten path.

I like to joke that I was gonna see if I could be a hippie, and that's a little bit true that I was gonna try to go be a hippie. Mostly I just wanted to like get away from sort of everything I had grown up around, whether you want to call that capitalism and wealth, and just was like, I need to fully go figure out like who I am without any of that, is how I would explain it now. At the time, it was a combination of probably a bit of rebellion, a bit of curiosity, and a bit of, I want to be in nature, I want to be near mountains.

And all of that led me to farms. And farms were a place I could stay for exchange of doing some work on the farm and be near mountains and hike and kind of hang out in nature. And so the original plan was three or four weeks. And as an American, folks would know that feels like a really long holiday.

Like I sublet my apartment. I was like, I'm I'm taking this big break. And I got there and I met all these Australians and Israelis who were happy to take six, nine, twelve months off and just be backpacking around. I was like, wait, you can do that.

I didn't know that was a thing. And the more I learned it was, the more I decided, okay, I need actually some time here and some white space. And so I ended up staying for almost a year traveling around. And most of that was living on farms and doing various odd jobs.

First, probably to pay room and board and have an experience and meet people and improve my Spanish. And over time, because I started to be really interested in the agriculture system and what technology was being used and why people making very little money were so happy, and why they were so mad at all the people making a lot of money and how the industrial system was impacting them and yet delivering a lot of the technology. And all those questions were ones that I did want to wake up Saturday morning and spend time on.

And so that was really the initial kind of pull into agriculture. Like you just went down there. So, how did you find these jobs for this network of backpackers? You were already someone who had a career, you know, so not like a study abroad program you were on.

No, exactly. And there was obviously the internet, but it wasn't like the way it is now where you could just connect with these communities and find these things. It was a bit trickier. But yeah, there's a program called like Wolfing, Worldwide Opportunities on Organic Farms, decently established program, and connects basically workers or backpackers with initially small-scale organic farms to do like manual labor in exchange for room and board.

And so I'd heard about that program, found it online, wrote some emails in my broken Spanish and waited for them to get back to me. And then once you're there and in with one farm, you're able to say, okay, I'm thinking about going here. And they're like, Oh, we know this farm there. They host people and you sort of jump the network and get embedded.

So I ended up staying on a few different farms, one in particular for a number of months. But yeah, the view from the internet is different than the view from the boots on the ground, like many things, but that's where it started. Nevertheless, with all these very idealistic goals, you ended up doing the farm's books and optimizing systems. So it seems like you couldn't help yourself.

So this idea you had to become a hippie, what did that failure to unplug tell you about yourself? Yeah, plenty of. That's right. Yeah, exactly.

Exactly. You really learn who you are when there's nothing to do and you ask if you can do the books. Uh, I learned how different it feels to really care about the people and the industry that you're in. I couldn't stop thinking like podcasts and books and conversations, like I the pull of I want to work in this industry.

There's something about these people and these systems and the nature. And so that pull was something that I hadn't felt other than in sports. And that was really interesting. And then the second was like, you know, who I am.

Like, I do want to have a career. I am ambitious. And this question of how does money and capitalism fit with these idealistic values and the food system and healthy food and nature, like, you know, the people I was with were often talking about those things as opposites. And there was a sort of glorifying of the kind of hippie lifestyle alternative lifestyle.

And yet I saw the things that were missing or that could be brought if you brought in the power of scale and wealth and those engines. And yet that also didn't feel fully right. And so this kind of like tension between the two was something that I was feeling personally. Like I wanted to try to be a hippie, but I also was like, I'm only here funding this myself because I worked and made money in this system.

And so that kind of like inner tension was being reflected in the industry. And that just taught me so much about, I guess, where I want to spend the next couple of decades because that's exactly what I've been doing. That taught you that you're officially now an adult. Yeah, indeed.

I think that's right. I think that's right. Interesting. I guess that ended when you needed to show up at MIT because you did that before you went to MIT.

That's right. Yeah. And I actually deferred when I was there. I remember trying to get access to, I think it probably was Skype at the time, to be able to make a call to the director of the program from this farm and be like, hey, can I come like later?

And they're like, What? Sorry, who are you? What is this? But yeah, I was able to defer.

And so yeah, that was before. So then you showed up at MIT and fast forward, you did a thesis titled Accelerating Sustainability Oriented Innovations in Agribusiness, which sounds like an MIT thesis. But in that work, you identified a critical disconnect that a lot of technology was being pushed onto farmers instead of being pulled by what they're actually experiencing and what their challenges are. So I guess you wrote that around 2016.

Is that still the core problem today that you're working in? Or is that all fixed now? If only just a 10-year problem and we've sorted it. No, look, it is still a problem.

And again, it's a problem in every industry where the tech push versus sort of market pull is a thing, but it is uh particularly challenging agriculture where you often have people building solutions that bring a wealth of knowledge, but not from the context in which the users are operating. And so you have this sort of need to match the operating environment and constraints and decisions and incentives to the technology development environment. And whether that's coders getting out on farm or into the factory, or the entrepreneurs who've built a software business learning how to build a software and hardware business, that sort of translation, plus then the funding models that can back it is definitely still a work in progress.

And then you moved to Sydney, Australia. And the plan, I think originally was one year while your partner set up HubSpot's Australia-New Zealand office. But as we know now, you never left and you've built your entire career there. Tell me how this played out.

What made you stay? Yeah. We so we moved for David's job, my now husband, and he like we both did the dance of, Oh, we want to live overseas someday again. Is Australia the right place?

Do we want to go back to somewhere like South America? And then you go, okay, time out. We have a sort of path here that's set up. I don't have a job because I'm still in grad school.

This is gonna be great. Oh, let's just go for a year and surf every day and be expats. And then getting here, I started looking at agriculture in Australia and I didn't know really anything about it, but kept finding how unique it is and how for both the impacts of climate change and technology adoption, it's a pretty compelling environment for a bunch of reasons, like the lack of subsidies being one of them. And so just the way farmers farm and the way the industry is set up is pretty interesting.

And I ended up talking to people about that, writing a bit about my thesis, going to a few conferences, and kept getting asked to do projects. And so, you know, despite my resistance to both consulting and finance coming out of grad school, still the sort of hippie in the back of my head, I started a consulting business, which was apparently on the way to becoming a funds management business as well. So uh I failed again in the hippie. Finally surrendered.

That's right. That's right. Wave the right flag. So your consulting firm was Ag Fentic.

That's right. And it seemed like you didn't waste time to do other You co-founded Farmers to Founders, and then you launched a podcast, which still is going. Agtech, tell me a little bit about those two things and as well as AgTentic, what you were doing. Yeah.

So we were consulting at the intersection of technology, agriculture, and sustainability, doing work with corporates, with industry groups and research organizations, and with startups. And that looked like somewhat traditional management consulting, strategy consulting, workshops, white papers, reports, that kind of thing. A lot of it was an opportunity to help build the kind of innovation ecosystem. I don't know how to say that without buzzwords.

If Scott, please tell me, like fewer syllables in that phrase. Like, I don't know, the way companies do stuff. But yeah, Australia was really going through a kind of build of the venture capital space, like funds and early unicorns and those kinds of things. And then agriculture was undergoing a lot of innovation and the digital was hitting ag in lots of ways.

And so someplace I was in the right place at the right time to do a lot of work in that space and to help connect those two things. So to the startups that were thinking about agriculture and the investors who saw ag as a strength in Australia didn't have deal flow. And we were running the Sydney Ag Tech meetup and had this podcast and a lot of it right place at the right time. And a lot of it sort of the playbook of how you build the layers between the humans, like the connective tissue of how innovation actually happens.

People have to know people and have ideas and go to a thing. And so we built and ran a lot of that in the early days. The podcast being a kind of global-facing example, the meetup was something we ran in in Sydney in person. And then Farmers to Founders was a joint venture that was programs for farmers with the idea that sometimes innovation comes from the farm, not from the city to the farm.

And that we also have to work on the adoption side as well. And adoption readiness and education around that was important. Yeah, a number of very cool partnerships and programs along the way as we built the consulting business. And yeah.

Around 2019, you co-founded Tenacious Ventures, which is where you're at now. And you co-founded that with Matthew Pryor, who is a founder, a previous founder, and he has successfully exited the sale of his ag tech company, Observent. You're an ecosystem builder and systems engineer. So how did you two come together and decide to start a fund, which puts you fully into where you said you're not going?

Indeed. Matthew was actually one of the first people I met when I came to Australia. And I remember, like I didn't know anyone in the whole country, Scott. I I think I asked like my parents and some of my professors.

And I think my computer science professor knew a professor here and made an intro. And so I went and got coffee with that person. And my mom had a friend from Rotary that, and so I went and got and like that was it. Like I didn't know anyone else in the whole country.

And so I was just looking online, like Ag Tech, digital innovation, you know, what's out there. And I found an article that Matthew had written, and this was 2016. And I reached out to him probably on LinkedIn or at that point. And he got back to me and said, Yeah, give me a call.

Like, would love to chat. And so I called him, and he happened to be coming to Sydney the next week for a conference. And so I came along to that conference and we met and grabbed a beer, and it kicked off what became a couple years of kind of informal collaborations and chats. He was starting his exit from Observant and then getting more involved in the ecosystem.

And we just kept seeing that the kinds of startups we liked in this space when we were both judges of pitch competitions or those kinds of things were the ones that others didn't like. They were like the grittier, probably had a physical element, didn't know how to speak fluent Silicon Valley, but actually understood the industry or actually were solving a problem that we thought was pretty real. And that kind of common view on maybe the playbook doesn't look exactly like it does in other sectors was really what brought us together.

And so he ended up joining Agentic as a partner first. And so we got a chance to work together and do some projects and see what it was like to be co-founders. And then we launched the first fund and rebranded as Tenacious Ventures. So we actually still run the capital side of the business, which is funds management, and then the advisory side, both under the Tenacious Ventures brand.

So that just morphed. You bolted on the fund and then rebranded. That's right. That's right.

And we actually sold off farmers to founders at the same time to my other co-founder in that business, and they still run that, and it's still a great part of the ecosystem. And you still do the podcast. And we still do the podcast, yes. So today you're managing about 50 million Aussie dollars across two different funds.

And you have something called a strategic to Australia mandate. So break that down to me. And why don't you just give an overview for people unfamiliar with Tenacious Ventures? What do you actually do?

What's the mission? What are you trying to achieve? And the 10,000 meter view. Sure.

Yeah, our mission at Tenacious is to unlock impact at scale in agri-food systems. We say impact, we mean climate impact. So resilience, adaptation, and decarbonization. When we say at scale, we really mean, as has been a theme in our chat, about like how do you use the power of private sector incentives and technology to do that in not small-scale systems, but also across the planet, ideally.

And then agri-food systems being the whole food and ag value chain. So not just the on-farm part, but actually thinking about how the whole value chain works and how innovation is delivered to farms and ultimately into food and fiber. And we do that through the advice side of the business, as we talked about before, and the like content and ecosystem building. And then on the capital side, we are raising our second fund and investing out of that fund now.

And we do early stage minority equity investing in innovative uh ag tech companies, what they would be called, startups. And strategic to Australia on the capital side really means companies that are doing something in Australia, whether they're headquartered here, whether they're expanding here, whether they're just solving problems here. Like that's our home base. And again, as I alluded to a little bit before, Australia is pretty unique.

Secondly, subsidized agricultural economy, farmers are big and large, soils are really poor, climate's really volatile. And so it makes innovation both tough and necessary. And so we've always just seen how that's really good conditions for adoption. Your target returns, are they regular VC or what are they?

Obviously, can't give investment advice, but we look at sort of 25% plus IRR, two and a half X net cash on cash. So in in the realm of venture returns for sure. So it's non-concessionary impact, but we think impact is really like a driver for why we'll see those returns in this space because of what people at want and what farmers need in how food and fiber is produced. I guess my question is are you a climate fund that happens to invest in agriculture?

Or are you an agriculture fund that delivers climate impact? How do you think about that? Yeah, I want to say, why does it matter? And then what I've learned in fundraising is it really matters because the finance world wants to split things into buckets and the whole it's all nuanced and these lines are blurry, like just doesn't work well as a sales pitch or in explaining who you are.

So if I had to pick it's the latter because we only invest in agri-food tech, we don't invest in other areas of climate, and climate impact is one of the outcomes we deliver. So I think it is definitely the latter. This is an investor podcast. So I want to comment on this.

You operate as a ESVCLP. Now, in this business, we love acronyms, but that probably is a new one for a lot of people listening because it relates to Australia. And it stands for Early Stage Venture Capital Limited Partnership. ESVCLP.

Got it, everybody? Okay, so that's a specific Australian government structure. So for listeners outside of Australia, including me, explain what this is and why it's critical for making deep tech investing viable in your market. Yeah, so it's probably an acronym no one will ever have to use, although maybe if they're looking at Australia.

But yeah, appreciate the chance to explain it. It's a scheme set up by the federal government in Australia a number of years ago for incentivizing investment in early stage companies. And there's uh basically tax benefits for investors, LPs in the funds. And so that's a tax offset for 10% of committed capital annually.

And then there's no capital gains tax on returns. And so it's an incentive scheme to bring more capital into early stage funds. On the fund side, you have to invest in eligible investments. And so that includes a early stage test.

So how many how assets under management for the company, as well as an Australia test that they're significantly in Australia. Does it impose any constraints on you as to how you deploy capital? To that latter point, companies have to be early stage, so under 50 million in assets at the time of investment, and 80% have to pass the Australia test. You do have a sort of 20% safe harbor in case companies flip up to become US companies or otherwise expand.

But yes, that those are the plus reporting and compliance aspects as well. Now, you explicitly target what you call the productive middle of agriculture. And I believe I'm right, that's like commercial family farms that manage the vast majority of the world's arable land. You've argued that most impact investors focus too much on the edges, smallhold farmers in developing countries or high-tech vertical farming in cities, and they ignore the messy reality of broadacre industrial farming.

Give the pitch why you believe the productive middle is where the real climate impact leverage lies. Yeah. Farmers are the original like stewards of the land, and they actually have such a strong incentive to manage that land well. And what we haven't always had is the conditions where that incentive can be manifested.

And so bringing more technology to help farmers do that and make money in doing that is to me the greatest opportunity to continue to harness those incentives to manage soil better, to manage nature better, and to deliver healthier food and fiber to folks. So it's really like the combination of where does the incentive lie, where is their scale, and what's untapped here. And especially in Australia, that's what the majority of farms are in the US and North America as well. There's a market size angle as well.

I found in your 2023 impact report, there's a line in there that says Alpha is in impact. So that's a specific claim. A lot of people think you have to choose between returns and impact. I hear it all the time.

So walk me through your theory of change logic. How do you draw a direct line from the activity of a startup? Let's say, and some of the things we'll talk about that you're invested in, like robotic insects managing waste or autonomous robots spraying fields to the measurable outcome of climate resilience, and do that without falling into the trap of vanity metrics. I think it's hard to argue that people aren't driven by their wallets and by their own incentives.

And so I'm not at all arguing with that. If you can have both, it's a one plus one equals three. And so that's really how we see it. And in food and agriculture and food and fiber, there often has been a trade-off.

Like we have to pick do we want the expensive, nice, small-scale, produced near me local thing that's supposed to be healthier for me and pay four X more, or do I want to just buy the thing and get on with it and make dinner for my kids? And that trade-off has existed, and I don't believe it has to. And so in breaking that trade-off, you're creating an economic opportunity. So that's really what we're trying to do is bring in technologies and unlock new business models that mean doing things more sustainably is easier and better.

And we think people will absolutely pay for that. What we don't believe is that you need to have a green premium or that it's a good investment thesis to say we'll charge people more to make these things happen. And so that's how we come at it. There'd be some other angles too that we've seen now that we've been doing this for a couple of years, like the founders that are building these companies, having an impact mission, not just a commercial mission, I think makes them better founders.

And when things get tough, I don't know if you can swear on your podcast, but when shit hits the fan, as it for sure will in building a company, like I've seen them get up out of bed stronger because of the mission alignment. I've seen them have to go with their teams for a tight payroll cycle because the investor funding hadn't come through, and everyone said we're happy to not take a salary because we want to work at this company because we want to change the world in this way.

And there's a bunch of subtle ways where the impact is the alpha two, in that the talent you attract and the impact alignment that kind of brings the people together that actually do the work as well. Do you think it's always true? I support your thesis, but I hear all kinds of things here. And there's a lot of people who are very strict about this and say we don't sacrifice returns, we're getting market rate returns.

Or the argument oftentimes is it's superior because we've got a superior set of metrics that we're managing. Uh, I've heard others say, but that's just because people are picking and choosing the projects that can fall into that, which tends to slide more into climate and things that tend to be more oriented towards social uh and can't really survive without blended capital or something like that. Is your thesis that it will always be superior? Yeah, it's a fascinating question.

Uh I think you you'd have to say no, because for sure, there's things that the world needs. Like there, there's externalities, there's market failure, there's things that we could argue society should have that someone other than someone making money needs to pay for. And so I'm not debating that at all. What I would say is that there can be viable models deployed that do both and only do both.

And so within our fund, within our business, there's absolutely plenty of opportunities and hundreds of millions or billions of dollars of them where that is true. Not that every opportunity that's gonna be true for us. Someone's got to pay for the stuff that just is market failure or tragedy of the commons or whatever you want to call it. And I think that it can be more true on the social side for sure.

We focus on impact from an environmental and climate lens. And in agriculture in particular, like I said before, I mean farmers and the value chain have commercial reasons why resilience and adaptation to climate change is absolutely imperative to the bottom line. And so there are just so many opportunities where you can align those two things. And that's really what we look for.

You've identified a $1.1 trillion funding gap for climate, smart agriculture. But you said the problem isn't actually the money. So what is it then?

So we didn't do that research, but there is plenty of good research about the funding gap on that. I think that's BCG. If I'm trying to give credit where credit's due, uh, can fact check me. But the the problem is often not the money.

It's is the the the business models work to get these things adopted at scale? And is the money and the company a fit for each other? And that goes back to what we were saying about how the finance world thinks and the split between impact and how much nuance are people willing to accept and fund timelines and all this kind of stuff. So there's plenty of opportunity for innovation in how that capital is deployed, how those businesses are built, as much as just how that technology is developed and what's on the cutting edge there.

I'm always start high, but we're gonna increasingly drill down because I want to get down to what you're doing. And you operate on a mantra that you can't eat software. You said that you need to invest in atoms, not just bits, but then you've clarified that you're not anti-software, just that you're anti-software that ignores physical constraints. So, yeah, make that real about what you're targeting, and then what happens when you're talking to LPs who are used to capital efficiency and fast iteration cycles of SaaS businesses, and how do you get them comfortable with the capital intensity and slower timeliness of hardware and biotech in agriculture?

Yeah. So that point about you can't eat software, hopefully that's pretty self-explanatory. If someone can prove me wrong on that, I would love to hear it. In Food and Ag, there is, we think, more opportunity for transformation of atoms and molecules.

And that's because of how food and agriculture actually physically works. And so then you're exactly right. Like, how do you get comfortable with investing in this space? And like, where do you don't throw out the baby with the bathwater and just do what venture capital has been invented to do?

These models exist, they've been successful, and so apply it in this space. And then where do you need to say, time out, that actually might not work here? And so one just tangible example of that would be people say farmers are really slow adopters, and adoption is gonna take a long time and you have to wait. Then, in in some ways, that can be true.

Farmers are business owners, they are not consumers, they are managing extreme amounts of risk, they're discerning customers, and they're not just gonna buy something that doesn't fit for their system. So it can take longer to get started. At the same time, though, there's really good data about how when something really works, farmers adopt as faster, faster than basically anyone else. If you look at GPS contractors, if you look at GMO seeds, like things that have moved the needle, adopted faster than the iPhone.

And I think you have to understand how the system works to get into some of the nuance here and say when it works, it can go fast. And maybe the cost of customer acquisition is higher because of that time frame, but the lifetime value could be a lot greater because they're really loyal customers. And when you have a presence in a geography, the sort of network effects locally rapidly increase adoption in that area. And just as an example, when you just apply a straight traditional venture lens, you're going, oh, slow and CAC is high and this doesn't make sense.

But when you actually understand it, you go, if my trade-off is with build the product and it really gets adopted, higher LTV, then actually that can work. I just need to set expectations appropriately. So those are some of the things that we think about in some of the examples we're trying to prove out in making the capital model fit for this industry. So you organize your investment thesis around what you call six pathways for systems-level climate impact.

Explain that framework to me and how does it actually work in practice? Sure. At the risk of sounding too self-deprecating, I'll tell you another story. When we first went to you think about being fund managers and raise our first fund, Matthew and I hadn't managed money for others.

We were truly emerging managers. We had a thesis, we had operating experience, we had deal flow, we had community, but we hadn't done the funds management part. And so we were obviously seeking a lot of help and advice in how do you build a business in this space. One example, what goes in the IM?

How do you write or PPM in the US? How do you write this document that is supposed to outline your whole thesis and all the things you're going to do, and in particular, like all the areas you're going to invest? And the advice was keep it simple and focus on the technology. And so in our first IM, we've got a lot of it's AG plus robotics and IoT and like different specific innovate, like technology-led innovations.

And that was great. We raised the fund and it was also 2020 and 2021. So probably some factors there to point to. And it's not like things don't get bought because of the technology, things don't scale because just of the technology, it's much more about the business model and the humans.

And so we shifted to really talk about a systems lens of where are the thematics independent of what technology is underlying them, independent of where we are on the venture hype cycle, that are these evergreen themes that we think are going to be driving both impact and returns in the space. And so to give you a tangible example, sustainable protein is one of our thematics. And depending on what year you were looking at this space, that might have sounded like, oh, we mean alternative protein or plant-based protein.

But again, we've come at it as demand for protein is absolutely growing as the lower middle class industrialize and as population and consumer demands shift, protein demand is absolutely skyrocketing. And it is an imperative and commercial opportunity to produce that protein as sustainably as possible. Now, whether that comes from algae or cows, there are opportunities in this space. And so agnostic to yeah, the particular technology, that's a thematic for us that we think is going to be really strong.

The six pathways, what are they? Sustainable protein is one. Waste and resource recovery is another, where we think about how can supply chains be redesigned, how can products get sort of upcycled or valorized to be reused. Look at embedded finance and risk, the financial mechanisms, insurance, enhanced data management to fund climate transition or these novel business models, lower intensity production, which is how do you respond to the opportunities and Threats for reduced chemicals, less energy, fewer emissions and do so profitably, enhance natural capital.

So again, farmers as managers of land, but how agri-food interacts with the natural world? How do we like incentivize and reward ecosystem services would be the term that often gets talked about in the space? And then democratize infrastructure. And so how do we uh unlock new economics that can come from distributed production or doing things outside of the current paradigm of like big centralized capital-intensive infrastructure, whether that's production of a fertilizer or food or other things, those kind of new value chains that can be unlocked.

How did you end up on those six? Yeah, we got asked this by a potential investor the other day. And Matthew and I were both on the call and it was like, okay, who tells the story first? Because I think we'd have a consistent story here, but it's a bit blurry, right?

Because it really was the culmination of our lived experience. And I had been thinking about sustainability and systems in food and ag since my thesis and writing about it from the quasi-academic context, and then thinking about how you pitch that to LPs and family offices versus institutional investors, and how do you frame that? And then thinking internally, how does that actually guide our team to have diversification along the value chain and then what's actually authentic to us?

And so it was really like a culmination of our lived experience, both Matthew and I separately, and then as a firm, what we were seeing in terms of opportunities and deal flow. And I think alternative protein and that kind of hype cycle is such a good example because you just saw how hot that space was and how much funding was going into it, and then how it really hasn't panned out. And there's plenty of funds out there saying, yes, agri-food tech picks up cut out vertical farming and cut out alternative protein.

It's easy to say because like hindsight is 2020. What I think is more compelling and more true is what is the underlying schematic that we're driving those things, what worked and what didn't, and how do we leverage those lessons to actually deliver on the promise that was sitting below that particular hype cycle or that particular fad? And that's really what we want to do with the pathways. So is this something that has evolved?

And day one, you didn't have six. That's right. Didn't have six. I think we we've had eight, we've had five, we've wondered are they all apples to apples?

It's evolving. If I understand right, this is kind of like top of funnel, so to speak. When deal flow comes in, it has to fit in one of these six pathways. Yeah.

I think how does it fit? If I'm truly honest, I think these pathways are a representation of how we think about the system in which we operate and how we think the opportunities are roughly categorized. And to open the conversation that this isn't technology led, and we didn't talk about it, but you can't think of food nag as like, wait, so do you invest on the farm or do you invest in the supply chain? It's yes, both, because like the how do you think innovation gets to the farm?

Why not all of it drives up driveways and knocks on farmers' doors, right? And so it's a representation of the way we approach investing in this space, and that has a bunch of impacts to your point about top of the funnel, evaluating diversity, diversification across the portfolio, thinking about trends and research we want to do along these lines to say where do we need to be spending more time and being more proactive, content that we put out. So it has a bunch of implications, but I think, yeah, it's more of a kind of representation of how we think about the world.

So let's go through your investment process. You use something called the OCP framework. So we got another acronym. The OCP stands for Opportunity Company and Partnership, an internal scorecard for how you make capital allocation decisions.

So break down each one of these pillars for me. And how does that actually work when you're sitting in a room deciding whether to write a check or not? It's funny so that like I wasn't trained in finance, I hadn't worked in finance. And so the acronym SUP that is the finance world has been so frustrating to me personally, where I've just been in meetings trying to be impressive to some investor, and they're saying at first it would be like, oh, my distressed credit fund that blah, blah, blah.

And I was like, I have no idea what they're talking about. They might as well be speaking another language, let alone the acronyms. And now I'm clearly guilty of it. I appreciate you calling me out on this.

So yeah, we're not going to be able to do that. No, it's it's a long-running thing I bang away on here. Yeah, no, I know that. But I it's a much a reminder for myself to too that there's other people who aren't up these learning curves.

And so talking about it is important and appreciate you giving me the chance to explain it. So, yeah, pretty standard framework in some ways, opportunity, like market competition, the kind of macro picture, would market size big enough, how are things changing? Company would be team tech traction, is how many talk about it? Really, what is unique about this business?

We'd look at intellectual property, we'd look at how much tech risk versus market risk we think there is, and a lot on team given the stage at which we invest. And then partnership, also known as deal. I just think deal sets everyone up on the wrong foot to be thinking about how someone wins and someone loses versus ideally you're setting off on a partnership. And for us in particular, because of our returns thesis and because of how we we think impact and outcomes will be delivered, that alignment with founders and with co-investors early on is really important.

And like partnership is just a way to keep emphasizing that for us from the beginning. But that would be things like the terms and the valuation and the cap table and that kind of stuff. On that last uh P, the P of OCP, you're really trying to add value beyond just providing the money. But could you walk me through an example of a will pass on a decision you made where the opportunity was genuinely huge and the company was really strong, but the partnership meaning your ability to help just wasn't there and you passed?

And this is one where I think anyone who's on the LP side of things knows how much all these key peas or general partners will say, we had value and we're more than money. And we started our first fund pitch deck iteration had low volume, high conviction, high support in there. And then we got into it and took away high support because it frankly felt arrogant and it felt like we were putting the focus on us instead of on the founders doing the actual work. And I think that there's a lot of truth to that.

We've come around to say they're both true. We do want to add value, whether we always nail that, ask our founders. I'm sure we don't always nail that. But generally for us, it's really a are you operating in a domain and a geography where we can help?

And then depending on how much we think that's true, we might decide to take a board seat or not take a board seat. We might decide to invest more or less or those kinds of things. So it gives us, again, that kind of cue to say, how do we want to structure this partnership in a way that's gonna work? Or who takes the board seat?

Do we appoint someone in our network versus one of the general partners at the firm does it? So a cue to take those things into consideration. Examples where we have passed would most commonly be valuation, great opportunity, great company, but we think the they're gonna be out over their skis with the amount of money they're gonna need to raise and what the returns might be. So that would be decently common.

And then another one would be probably on geography for us. So if they're not doing anything related to Australia and New Zealand, we're just not the right fit. Like we're a relatively small fund. We have, we think, lots of strategic advantages in this geography.

And if you're not in this geography, we're just probably not the right partner. So happy to introduce you to folks who might be. So you reserve 60% of your fund for follow-on capital investing. And that's massive.

Most VCs don't do that. So, what do you know about this hardware valley of death that they don't understand? If you think of venture capital as like a homogeneous business model, I think you're probably not paying attention to how it's evolving in the space right now. There are and will need to be many flavors of venture capital and how this is done.

The mega funds on one side and the kind of small sector-specific funds on the other, and maybe there's a model or two in between that can work. We're obviously on the smaller industry-specific side. And so a lot of how we think about managing for risk is because of the industry and investing in agri-food and the capital intensity of the businesses and the relatively limited pool of potential co-investors. Like generalist VCs don't want to back this stuff in many cases because they have a dollar and they could otherwise put it in AI.

That doesn't mean it's not a good investment opportunity or that there isn't money to be made here. It just might not be the right fit for their strategy. And so if our companies need to raise that capital, we want to be able to support them. And we also want to have the relationship with them and ownership in them that's going to be a win-win outcome for all of us.

And so the combination of those things means a reserve strategy is really important to be able to double down on and support those companies. And it's funny, going back to what I said about like high conviction, high support, ask a founder like the best way to support them is to write a check. And so we also want to be able to do that, not just say, look, we'll make an intro, but where possible, let's write a check too. I'd like to talk about a couple examples of real portfolio companies you invested in to make it real for listeners, what you're actually doing.

You can pick anyone. I mentioned Swarm Farm Robotics, which is a bet you made on integrated autonomy. I'd like to understand what's the impact that you are going to achieve from that. Yeah.

So Swarm Farm is a great example. They're founded by Andrew and Jossi Bate, who are a husband and wife team in regional Queensland that started the company on their farm. You can already see how far from the traditional Silicon Valley template we're going. But we met them through our advisory business initially in kind of intros through the space.

They were thinking about raising their first professional round of capital. And we did some work for them on strategy and pitch deck as they were navigating that journey. And then when we actually went to raise the fund, we stopped doing the advisory work and put them in our funnel, so to speak, because we were pretty excited about them. What they do is build autonomous vehicles for use in eventually Broadacre and eventually more farms.

The model I think that probably resonates with most folks is like App Store and iPhone. So they build the iPhone of the robotics platform. So the assembly of the robot and how it moves in the field, and then all the software and obstacle detection and planning where the robot goes, the integration with the implement that actually does whether that's mowing or spraying or spreading fertilizer. So they build that software hardware stack and then they partner with others to the point about the app store, the implement providers, who are the different attachments or apps in the ecosystem that do those different jobs.

And for farmers, that means they can solve a massive challenge around labor access. So most farmers can't get humans to come do the jobs that they need them to do, especially in Australia, but true in North America and increasingly true with current challenges around immigration, et cetera. So having a 24-7 worker that never shows up hungover, that's always on time, that does what you say is pretty compelling and means you can get a bunch of jobs done that you wouldn't otherwise get done because you can't get humans to do it.

It also means from an environmental perspective that you've got a smaller piece of equipment. So less compaction in the soil, more water retention, and then you've got reduced application of herbicide because technologies like a precision application of herbicides are possible because you can drive slower, you can you just allow the cameras to detect the weeds and not the plants and just spray those, then overall reduce the amount of chemistry you're putting out. And so a kind of compounding of benefits economically and from an impact perspective that they've unlocked with that technology.

So we invested in them in 2020 in their first kind of institutional round, and then have followed on in their two subsequent rounds. They just closed a $30 million Series B this past year. Another company in your portfolio caught my eye is Gotera. Explain what they do, which sounds like a movie premise.

And yeah, tell me about that investment. Yeah, sure. Gotera's actually our first investment out of fund one, and they use modular technology with a biological process inside, which I can talk more about to manage organic food waste. So think of all the things that you don't buy at the supermarket that have to get thrown out that you don't eat off your plate, they get collected in an urban waste collection environment, the stuff that comes out of hotel chains and like all the organic food waste we don't eat, the back of a juice factory, the back of a beer brewer, like all that kind of stuff basically goes to landfill now.

And our landfills are filling up and running out of space and increasingly getting taxed to be able to access and not to mention the emissions profile of the kind of methane that's going into them. So there's a massive problem, like 40% of food is wasted, and that seems pretty inefficient from both an economic and impact perspective. What Gotera is able to do is put infrastructure on site. So in the bottom of a hotel, for example, or in the bottom of an industrial complex that has offices and restaurants and retail, or stacked infrastructure in a more centralized location to represent more of a factory, but by stacking their modules and organic waste is tipped into those units, consumed by the biological process.

And then at the other end is two byproducts, both of which can be monetized, a protein that can go to livestock, and a fertilizer product that can be sold into the agriculture industry. So they get paid for the management of the waste, which is an existing paradigm. Your trash cans or bins, as they would call them here, get collected, and there's a per bin and per tip fee or a kind of lease fee to put a unit on site, and then the protein and the fertilizer offtake on the other end of that.

Now, you alluding to science fiction is probably because of what's in inside of the unit, the biological process. Yeah, there's no real way to sugarcoat it other than it's maggots, is what's in there. So it's black soldier fly larvae that consume the organic waste, also known as maggots, and they're phenomenal creatures that eat everything and have a number of benefits when they do. And so the technology that Goteras built is designed to manage those larva end-to-end to be able to run that biological process in those units at scale.

Yeah, but they're called robotic units. Yeah. So like the the technology within them is fully automated, temperature and humidity controlled, etc. A human doesn't need to go in and move stuff, the process is fully contained.

And so the I think the reason to describe it as a unit with a biological process inside is because for the customers, that is their experience. They don't need to know what's in the box. It is a box that works, and whatever was inside of it is not really of relevance to them. And that's because of how they've designed the technology to handle that process.

Does it just leave inorganic material? So everything that comes out of it is organic. And I suppose the fertilizer is organic fertilizer, and then it's left with some inorganic, or is it already pre-sorted by what it goes in? Organic is do you mean from a chemical perspective or do you mean from a certification perspective?

Because the certification of like organic fertilizer would be a different discussion. But the what comes out of it is water as a byproduct. And so that's taken care of through the existing plumbing systems, and then the frass is the fertilizer of the insect poop. And then the insects themselves are then taken off and slaughtered and rendered, and that's what becomes the protein product.

And yeah, that that's what comes out of it. There's no like leftover food or anything like that. It all gets consumed. You did say it's fertilizer though.

That's correct. So the the insect poop is liquid and that's called Frass. And so there's like a fertilizer component, a water component. So again, it depends on if they're on site or centralized and how that's separated and managed.

You can have different configurations of the system. So a third one I could talk about is a company called Embryo. And they are a so not embryo, but embryo, which is which will always auto-correct forever, I think, in typing it. But they're a in that sustainable protein scene we talked about before, they're a livestock genetic improvement platform company.

Basically, IVF for cows would be the way to explain it. And IVF is something that happens in the livestock industry already, but is really only accessible to the top tier of commercial producers because of a number of reasons, how expensive it is, the labor requirements to do the implantation, et cetera. And so they have both biotech around more efficient creation of embryos and a medical device effectively to implant the embryos into cows, which is a pretty nasty and manual process now that is not pleasant for the humans or the cows, think like lots of shoulder injuries in doing that.

And so in solving those dual problems, they unlock rapid genetic improvement. The tagline for them is seven years and seven days. And so what would normally take multiple cycles of conventional breeding or even artificial insemination can be accelerated. And so whether that's productivity traits and or sustainability traits, you're getting that into the commercial herd faster.

And so that's both the commercial and impact outcome. Right. Now you talk about Australia being a crystal ball for global ag tech. And I guess your idea is that if a technology can survive Australian heat and drought and unsubsidized economics that can work anywhere.

Can you explain that just a little bit to make that understandable to people who maybe never been there? Yeah, for sure. It's funny when you think of Australia, and I was guilty of this before I came. I don't know.

Either you've got opera house in the Sydney Harbor from the Olympics, you see that picture, you've got scary deadly animals, shark attacks and spiders, or you've got the desert. And all of those are true, but they're definitely not the vast majority of Australia, in the sense that it's a very diverse agricultural production environment. We've got specialty crops, we grow fruits and mangoes and avocados, and we also grow large-scale grains, cotton and wheat, and those kinds of things.

Uniquely, though, the agriculture system here isn't really subsidized. So second least subsidized agricultural economy after New Zealand, and the way in which funding is delivered from the federal government taxpayers is into research. And that research uh often has a kind of innovation or technology angle as well. And so that creates some pretty exciting conditions for adoption.

The other thing would be like really poor soils here and really volatile climate. So just overall the operating environment for farmers is really tough to farm and they have to be super commercial because there isn't a kind of floor backed by something like the farm bill that we have in the US. And that means they're very keen adopters of technology and things that say in places like the US, we're hoping to get more adoption of through incentives or programs, whether that's no-till or cover cropping, controlled traffic farming, like Australia's been doing for years because it commercially makes sense and then has these kind of sustainability benefits that farmers often also care about.

And so we see that as a really, yeah, like a unique conditions for what the rest of the world is going to need to adopt. What I would say though, Scott, just to caveat, these are large-scale farms in most cases, even larger than we often see in the US. And so I wouldn't draw the analogy necessarily to what's happening in Australia is a canary in the coal mine for Kenya or for Vietnam. So it is similar to the Latin American, North American production systems, but I wouldn't draw the parallel to smallholder farming systems in other parts of the world.

Not for emerging markets necessarily. Correct. As your portfolio companies scale globally, regrow, for example, moving its headquarters to the US, doesn't Australia risk losing the IP and the value? In the end, could tenacious just end up being a feeder fund for offshore acquirers?

Yeah, good question. I see the smile on your face when you ask it. So possibly yes, but the alternative is we don't develop it here and the Australian farmers don't get it, and they can wait an extra 10 years to adopt it when someone else builds it and hopefully prioritizes Australia. So I think it's uh starting out on the back foe when that doesn't really make sense.

And to go the other way, like those unique conditions often mean it will get adopted faster here initially, and that proves out the model, and the companies can then attract funding and scale elsewhere. So by no means do we only invest in companies that are staying in Australia or for whom Australia is their only market. That's unlikely to be interesting for our model. And from a like Australian industry perspective, starting here means Australian farmers get access first.

And that's a win-win because they are those early adopters and and keen partners to trial and test. And so I think it's a win-win, even if that company then scales and then Australians own equity in it and benefit that way. Let's talk about impact measurement. You make the distinction between measuring practices versus measuring outcomes.

Practices are what a farmer did, outcomes are what actually happened to carbon levels or emissions in this case. How do you measure impact? And then how do you make sure you're measuring real outcomes and not just activities that feel good? Yeah, I think there's a couple flavors of this.

Your example there, Scott, was like on farm and the whole discipline around carbon and ecosystem services. And then the other lens would be like, how do we do it at Tenacious? And so I'll maybe talk about the so on the former, there's a whole debate about that practices versus outcomes and what makes More sense at Tenacious. We again think about impact at scale.

And what we don't want to do is build a perfect measurement system for a company that once they're scaled, they'll do it. And in doing that, we've effectively killed them because they never got to scale. And so then it's like, what's the point? And so we're finding the balance between is there rigor to our impact assessment and is there integrity to the impact lens?

And let's get out of the way so they can actually build the scale that delivers the impact in the first place. And that's the balance we're always seeking to find. So we positively screen for impact when something comes into our funnel, when we get an intro, when we first look at a pitch deck, do we think this is going to pass the impact kind of test? And for us, that's three lenses: ecological sustainability, decarbonization, or adaptation and resilience.

If we don't think it fits those, and it's rare that this happens, but it does happen, then we say probably not a fit for us. And then as we go to assess the company on the OCP framework, part of the company part is impact. And so we write up an impact assessment using third-party data wherever possible about the impact that they'll have in delivering the system change that they're seeking to do. And so in an example like Gotera, that's really obvious.

It's super like the more waste, every ton of waste they manage is a ton that doesn't go into the landfill. You can do the delta and emissions calculation and boom. So the more revenue equals less methane, super easy. There's other companies we've invested in where it's more indirect or whether, or where the initial impact is quantified one way and the impact at scale is quantified another way.

To give you an example, a company we've invested in called Rapid AIM has sensors to detect insect pests on farm and help growers transition to more sustainable practices, because they actually know real-time pest pressures. That's a at scale, maybe we can move off of synthetic pesticides, and that has a massive emissions and biology and nature impact. But until they roll out those grids and build those sensors and develop business model, like none of that's happening. In the near term, there's fewer humans driving diesel-fueled trucks to go check traps because they're getting an alert on their phone that the insects are there and they're not.

And so the near-term way we said this is a decarbonization impact is fewer miles being driven. In the long term, though, what actually matters is can we make this transition to biodigital pest intelligence? And so we would look at that in our quantification, and then we would agree with the company what makes sense to report on an annual basis. And we put that in our term sheet.

And that that's like how we quantify it and track it moving forward. And do you feel you get good data? It really depends. Sometimes, yes, absolutely, and sometimes not.

We've had companies that come to us having commissioned a custom LCA and a lifecycle assessment and using both industry benchmark data and then applied to their circumstances, and they have that all done and we can look at it. In other cases, we're connecting dots between data sets that that sort of apply and making assumptions about how that will change. In those cases, though, the founders almost always want better data and want to fund that better data for themselves just when it makes sense.

And then it probably doesn't make sense when you're a seed stage company and that budget could be spent on actually getting your product to work. You've applied a concept called the Cobra effect to ag tech metrics. So first, tell me the story behind the cobra effect, because I think people need to understand the history of it, and then tell why you're conflating that with ag tech metrics. Yeah, this was a fun story about unintended consequences.

So basically, in British colonial rule of India, back in the day, they noticed that there were lots of cobras and that was causing a problem. And so they put a bounty on cobra bodies on killing them, and thinking then we'll kill them and we'll eradicate them from society sort of makes sense. Turns out that once people were going to get paid to turn in cobras, they were gonna start farming them so that they had more cobras to turn in and get paid for those dead cobras. So, like a classic example of unintended consequences, and where the metric you're measuring can actually create these perverse outcomes and incentivized behavior that you don't want to happen.

And so we think that's true. It's a well-studied psychological effect and applies to ag tech investing to impact investing absolutely as well. The best part of the story is they finally realized unintended consequences. So they took away the bounty.

And then all the cobras that they had been breeding, they just released them all. That's right. So not only unintended, and there were more of them, but then they got released and they were more in society, which is exactly the thing that they didn't want to happen. So Cobra Effect, I think, is the name that people remember because of that story.

It's another name for Goodheart's Law, is the kind of psychological phenomenon when a measure becomes a target, it ceases to be a good measure. So where do you see the biggest risk of cobra effects right now, today, and how we're measuring agricultural carbon sequestration or any other ag tech metric? Yeah. So this is not unique to AgTech, but I think plays out in ag tech, especially in the last couple of years, where the interest from investors has been buoyed in some sense by like climate interest.

And so soil carbon sequestration and climate outcomes. There's like a real incentive for startups to show, look at our impact credentials and also look at our VC fundable, look at our growth rate, look at our this, look at our that. And they show these metrics that are really about what they think investors want to see, not actually about what drives business success. And I totally get the challenge because the conversation we had before about nuance, it's tough to have enough like credibility with an investor that they want to listen to the nuance that you're trying to explain.

It's a lot easier to just give exactly the top line thing that they're looking for in the way they think they're looking for it. But sometimes, especially to find that alignment in those partners, you need to talk about adoption was slow this season because there was a drought. And so there were no apples that grew. And so the Apple farmers didn't buy more technology.

Now, that said, we've done all this engagement about and built a product for the orange industry, and those Apple farmers are committed to come on board next year. And so this isn't a bad business. The seasonality meant we had a bad year. And so, again, the incentive though would be like explain it differently, cut that out, only to talk about a new MVP, like, you know, give the investors the language they want, more farms, more acres, like all that kind of stuff.

When the real story might be the depth with which you could go with a couple customers that's actually going to lead to higher LTV in the subsequent seasons. And it's a harder story to tell, but actually the metrics that matter. So I think that dynamic of like kind of investor versus customer facing is where we see it play out a lot. And that could be commercial metrics or impact metrics.

You talk about impact at scale, and then several times you've explicitly rejected concessionary impact and the idea that you have to somehow accept lower financial returns to achieve uh social or environmental good. But here's a question: Is there a ceiling to how big an ag tech company can get before it starts compromising its regenerative mission for growth? Do the incentives and pressures of hyperscale eventually corrupt the impact thesis? So I think that's absolutely possible.

Like that is an outcome that can happen. I don't think it's necessary. I don't think it's inherent in the design of how this has to work. What I do think is more likely to lead to that outcome is if the funding model is not aligned.

And for example, if you're solving as a company or as an investor for markups and higher valuations, not customer value and ultimate shareholder returns, then yeah, you're probably gonna be in a position where you're adding more product lines or building more stuff or raising more capital that takes you out of a window of acquisition by the incumbents in whose hands you could actually deliver that impact at scale and deliver returns to your shareholders. And so I don't think it's necessary, but I do think it has and can happen if you're not aligned on solving for what actually matters.

The venture market fell off a cliff in 2023 and 2024, especially for climate tech. You've written a bit about this being a reckoning for ag tech. Is this actually revealing that maybe the standard 10-year venture fund model is somehow fundamentally broken for agriculture? Because agriculture operates on biological cycles that don't necessarily fit into that timeline.

Yeah. So if you want a fund that you can say is ag tech and that can invest in like anything in the category, then yeah, you probably need an evergreen fund and you probably need a longer time frame. If you want to have a 10-year fund that fits the venture model, you absolutely can in ag tech. You're gonna have to do things slightly differently.

And so for us, like just as a specific example, we have a 10-year fund, two possible one-year extensions, and we invest in companies that have a certain blend of technical versus market risk that don't need to raise multiple rounds of additional capital. And for us, in terms of alignment with founders, where a two, three, four, or five hundred million dollar exit can absolutely move the needle on our fund economics and their lives and the impact mission. And that's an alignment question and a risk strategy question, not a can you do venture capital returns?

It's like, how does the strategy apply in this space? I'm sure though, you see deals where impact would be massive, but the venture math just doesn't work. Too capital intensive, timeline too long. If you could design a new financial instrument for deep tech agriculture from scratch, what would that look like?

What needs to exist that doesn't exist today? Yeah. So a couple that I think would be really impactful are like a blended fund that does have a catalytic sleeve and that has a commercial sleeve, where you can say one subsidizing the other, you can say that it's concessionary, call it whatever you want. Those terms tend to have a negative signaling, but there's plenty of people who are pouring philanthropic dollars in to solve these questions and they're not expecting any money back.

And so why don't we shift that needle to expect some money back or to specifically enable the commercial return? And then we have a much bigger market of things that we can fund and we take off the expectations of they need to deliver a particular type of venture outcome and they can ensure that it stays high integrity to the impact mission. So I think that's one possible example. I think another example would be you talk about like first of a kind finance.

I think creative structures that bring in customers and industry funding as the offtake and as part of the system sooner to sure up that market demand, and then can unlock actual quote unquote traditional finance or debt financing for some of those CapEx intensive like facilities, because you have the customer in the loop with skin in the game shuring up that offtake, more models that blend those things, not necessarily concessionary funding that just say we'll take a punt on this facility, but creative structuring around how the offtake is guaranteed and how the risk is mitigated for all parties that that need to bring in there.

And then I think the third is just the what's the verb for heterogeneity? Like the diversification, I guess, the splitting of venture capital. Like the world where we keep looking at this asset class as one thing just doesn't make sense to me. And I think the having different flavors of it will be true.

And so then it's not a value judgment on good or bad, it's a diversification strategy within a high-risk, high return asset class. And that creates more capital for investing in things that might take seven to nine years still within a 10-year fund and still deliver the kind of return. And depending on how much you own, can still absolutely deliver significant returns, but it's not going to be 18,000% growth in two years or whatever. And they're just different.

So I think that's like not a new model, but a recognition of the different flavors of models that need to exist in space. The regenerative agriculture movement is exploding now. You've been pretty critical of it. Why?

What's the problem that nobody wants to talk about? I guess maybe I have been critical. I was gonna say I had a bit of a cringe when you said that. It's probably true.

I subscribe to as a consumer, I would love to eat and pay for regenerative food. But many of the farms I lived on in South America were regenerative farms. I wear Patagonia jackets as a human, as much in that world and a believer in it. From an investment perspective, I worry that we're like idealizing a system that can't be built from the current state.

Like getting from here to fully regenerative when every step you have to take needs to be a fully regenerative step is completely impractical. And so we can talk about it all we want, but we're gonna be limited to drinking wine in Silicon Valley and having that conversation with other rich people who can afford it, and we're never actually gonna make the change that matters because some of the steps along the way have to work with the whole system and have to take a progress over perfection kind of approach.

And I think that I mean, I've seen that the progress over perfection and the pragmatism is what resonates with farmers who are actually doing a lot of this work. And so if you say you can't ever use a drop of chemistry fore, otherwise we're taking away your certification and you lose your market access, who's gonna sign up for that? Because there are years where the way the heat brings in certain pests or the the just requirements of farming in nature, where nature doesn't care what certification you've signed up to, might mean you need to use certain products sensibly, responsibly, that that are deemed safe is absolutely part of a holistic system.

And black and white view, I think it is pretty challenging. And so that's probably my biggest criticism of it. The other one would be the just the like the virtue signaling that comes with it and the implication that if you're not regenerative, you're some kind of like degenerate. And again, I think that doesn't respect the realities of what it's like to run a farming business that intersects with nature.

All of that said, if I zoom out, like I would much rather align with regenerative wholesale subscribe. If we could just do that, we should. I think it's just impractical for how we get there. And doing it at scale from the get-go is entirely unproven and currently unfundable.

And I think it's more about how we get to a more regenerative outcome and being less polarizing and more inclusive along the way so that we can do it at scale. We can drink wine and talk about it at Davos too. Indeed. Indeed.

And look, we need those people too, and we need that capital, and we need the way they think and the way they operate and the networks that they have. And so that's part of my challenge is I can tell you a story, Scott. Like I'm sure you've been in rooms like this. I was in a room at New York Climate Week this year, and it was a regenerative ag event, and I was thrilled to be there.

And I like the work that some of those people have done is truly amazing, and I re deeply respect it on farm and in the financial world. And they spent the whole dinner basically shitting on an author who's recently come out with a book about climate smart agriculture and that advocates for the use of more technology and sustainable intensification to reduce the emissions impact of agriculture. And if you zoom out, like you guys are on the same team. Like both of you guys are trying to solve this problem in slightly different ways, but same team.

And the more energy we spend like infighting on people who want the same thing, like the more we're missing the plot. And so it's that that I sometimes struggle with. See, nothing good came out of the printing press, you know? Yeah, there you go.

There you go. Yeah. So, Sarah, you have two funds, and I mentioned that at the beginning, but we didn't talk about fund two. So, fund one, you had a target, I think of 50 million, but in the end you closed it at 35 or something like that.

It was actually a 30 million dollar target and we closed it at 35, not to play the vanity metrics game, but that is actually the truth. And then fund two target is is 50, and we've raised about 25. Okay, but you're still targeting uh 50. That's right.

Okay, so tell me about that. So you've already raised 25, you said. Is the focus of this fund any different than fund one? Tell me about the mandate.

Yeah, so largely the same, and building on the lessons, of which there have been many, as you can imagine, both in the market cycles we've been through and just as first-time fund managers, the lessons in scar tissue over the last five years. I think the theme would be like owning the conviction we have in what works in agri-food tech. And so combination of that strategic to Australia mandate, a structure that gives us flexibility to maximize those tax benefits that we talked about with ESV CLP, but doesn't limit us to companies that are only headquartered here, if there are opportunities that are strategic to Australia but not headquartered here, a alignment with founders around building businesses that solve for customer problems and shareholder value, not just valuation upticks.

And that has implications for how much we want to own, how much capital they're gonna raise, an alignment with the founders around that, and then kind of entry point how much technical risk we're willing to take. So we are willing to take technical risk, but we want to make sure that market risk and traction is really there. We're not gonna raise two more rounds to prove we can actually build it before we know if anyone's actually gonna buy it. And so those kind of companies are out of mandate for us.

And if I remember correctly, I think this fund has a slightly wider mandate where you can do international investing as long as it remains Australia. What's the word? Yeah, Australia relevant or we talked about ESVCLP the way we did things in fund one, like we were an ESVCLP fund, and so the ESVCLP rules govern the strategy. And that's not really the right way to build the fund.

You want to have a strategy and then you want a structure that enables that strategy. And so our strategy is strategic to Australia, and our structure is an ESVCLP stapled to a managed investment trust, and so that we can take full advantage of the Australian tax benefits when the investment complies with that scheme, but we are not limited by that scheme if the investment doesn't. So for us, the mandate is strategic to Australia. Why are we the right investors?

What are you doing that we actually have an advantage in? And then the structure reflects that. So, Sarah, I've got some short answer rapid-fire questions for you before we wrap up. Don't overthink these, just give me whatever comes to your mind.

Or if nothing does, feel free to take a pass because that's okay too. If you had to name the single most important challenge in the agri-food, tech and climate smart venture space right now at this time, what would it be? Getting the smartest minds to solve these problems, not chase metrics in other spaces. What do you know now about ag tech and impact venture capital investing that you wish you knew in 2019 when you co-founded Tenacious Ventures and raised your fund?

The intimacy of the relationship between founders and their investors and how much humility and introspection it takes to really be a good investor and a good director. You don't have to name names, but can you describe an investment you made that you were convinced of at the time you invested that it ticked all your impact and climate boxes, but in the end it didn't turn out the way you expected? And what did you learn from that experience? We made an investment where we thought partnerships with ag chem companies would be really strong because the public strategy of many of those ag chem companies was to transition towards biologicals.

In the actual negotiations of some of those deals, it turned out that they'd love to just sell some more agrichemicals for the next couple of years and delay that transition. And so the structuring of that partnership was a bit more complex and the revenue realized from it in the near term was slower. And that was definitely a challenge that we didn't we couldn't see the details of from the outside. Is there anything in hindsight that might have tipped you off to this lack of commitment?

I don't know that we could have known that beforehand because actually finding the right partner in other geographies that's proven true and those kinds of things. I think it's the the conviction on that strategy versus more testing of okay, do we work with ad chem companies? Do we work with retailers? Do we go direct to growers and iteratively testing where the business model fit faster rather than the amount of time we spent trying to get those contracts over the line with the ad chem companies?

And so in that sense, more of a traditional quote unquote Silicon Valley approach of that iteratively testing and having the commercial acumen on the team to do that is in hindsight, testing more broadly first before spending that time, especially because then if the season passes and you don't have that deal done, then the season has passed. And if there's a seasonality element, you've lost a year. And now the converse of that, can you describe an investment that you had some level of skepticism about, either at the time you invested, or maybe you ultimately passed on it?

And in the end, it turned out way better than you thought, and you were pleased you invested, or if you had passed on it, you wish you hadn't. And what was the lesson learned from that experience? One of the biases or templates that I took into this was the founders are the CEOs and they need to be making robots. And noodle salaries, and it's all about the equity.

And that's a good place to start, but is not the only model for how this can work. And so there's been a couple of cases where there's been a hired CEO brought in and they've made a more substantial salary and brought more substantial experience. And the incentives have still been aligned. That part's really important.

And the commitment has still been there. That's been really important. But the pattern matching of you've got to make 90K and do this from your garage and be 27, like that's just not the only playbook here. And it's not what the data shows either.

But I've come a long way on just how much that experience and being a veteran matters in all the diverse ways that can show that challenging that template of compensation and alignment. And if someone wants to get into the ag tech and climate smart venture capital investing space, where would you advise them to start or cut their teeth? It's extremely self-serving to plug our podcast, but I think that's the reason you go on podcasts is to do things like that. Obviously, we've got ag tech, so what?

There's a number of other really great podcasts in this space. So if you're a podcast listener checking out the future of agriculture podcast or ours would be places to start. I think there's Ag Funder News, there's a number of really great resources in this space. I would say also go to a farm.

Every holiday I go on, my poor husband gets dragged to a farm and just see it. Like it's one thing to again talk about it over a glass of wine in Silicon Valley, and it's another to get out there and see what it's like to feed a pig or to drive a combine. And farmers are often very gracious hosts and want to teach you. If you want to learn and ask questions, yeah, call one up or tweet at one or whatever and go visit a farm.

You can see some farmland from Davos. Strong love for Davos, I'm scared. Sarah, this has been fascinating for me. Your journey from Silicon Valley origins to harvesting tomatoes in Argentina to ultimately co-founding Australia's first dedicated AgTech VC is very compelling, especially when you're building climate-resilient agricultural systems that deliver VC returns.

And the whole Cobra effect story, you got a lot of great stories. So thanks for taking the time to do a deep dive on this with me today. I really learned a lot. Yeah.

Thank you, Scott. And thanks for all the research that you and the team do. I know how hard that is and really appreciate it. Yeah, thank you.

It makes it really fun. So before we wrap up, tell everyone where they can find out all about the great things you guys are doing at Tenacious Ventures and connect with the work that you're doing. Yeah, so check out tenacious.ventures is where you can find that, or look up the AgTech Sell What podcast wherever you get your podcasts.

And what's the best way for someone to reach out to you if they want to contact you? LinkedIn would be the best one, and pretty easy to find there. Perfect. Everyone should definitely check out tenacious.

ventures. I think everything is exactly as it sounds for the investment work and the Ag Tech So What podcast. And I guess that's everywhere podcasts can be found. And then follow Sarah and on her LinkedIn profile.

So Sarah, thanks so much for coming on today. Thank you so much, Scott. All right, thanks again. Goodbye, everybody.

You've been listening to SRI 360. If you enjoyed it, please hit the like button and subscribe to get future episodes. You can find an archive of all previous podcast interviews and more articles and information on SRI, ESG, Impact Investing, Sustainable Investing, and socially responsible investing at our website, SRI360.com.

If you'd like to read more lessons learned from world-class SRI investors, get a copy of Scott Arnell's book, Sustainable and Responsible Investing 360. It's a must-read for anyone wanting to know more about investing for positive social, environmental, and ethical impact. All with market financial returns. These are the stories and tactics of those leading the way as sustainable and responsible investing goes mainstream.

Sustainable and Responsible Investing 360 is now available in hardcover, ebook, and audiobook format wherever books are sold. You've been listening to SRI 360. If you enjoyed it, please hit the like button and subscribe to get future episodes. You can find an archive of all previous podcast interviews and more articles and information on SRI, ESG, Impact Investing, Sustainable Investing, and socially responsible investing at our website, SRI360.

com. If you'd like to read more lessons learned from world-class SRI investors, get a copy of Scott Arnell's book, Sustainable and Responsible Investing 360. It's a must-read for anyone wanting to know more about investing for positive social, environmental, and ethical impact. All with market financial returns.

These are the stories and tactics of those leading the way as sustainable and responsible investing goes mainstream. Sustainable and responsible investing 360 is now available in hardcover, ebook, in audiobook format wherever books are sold.