Fifth Wall’s Greg Smithies on ESG, Climate Tech and Construction
Greg Smithies’ LinkedIn profile describes the principal and co-head of climate technology at venture capital giant Fifth Wall as an “Investor in Climate Tech, Sustainability, AI, Robotics, and Software applied to unsexy industries.”
Proptech Insider spoke with Smithies in late July about his work in these industries, and whether such investment can have a meaningful impact on climate change in particular.
The interview has been edited for length and clarity.
PropTech Insider: How long have you been at Fifth Wall?
Greg Smithies: I’ve been at Fifth Wall since November. I came in to launch and head the climate tech investing practice. I came from BMW i Ventures. That’s where I was leading investments on how you decarbonize the manufacturing supply chain and, obviously, mobility.
I’ve worked in the Elon Musk world before. I was head of finance operations at the Boring Company, digging tunnels at Neuralink, putting microchips in people’s heads. I reported directly to Elon. People always ask how it is that you do both those jobs because they are different. And it turns out both jobs are actually digging holes. They’re just very different size holes. [Laughs.]
I started my investing career at a fund called Battery Ventures, which you might be familiar with. It’s a $9 billion fund that does everything from early seed stage to late-stage private equity and buyouts. But I’ve mainly always been focused on industrial tech — big, heavy industries: construction, manufacturing, supply chain, and sort of boring industries that most other VCs don’t understand.
With your wide tech and entrepreneurial background, why did you choose Fifth Wall and why did they choose you for your unique role?
Fifth Wall is the world’s largest venture capital fund that’s focused on what we call the built environment. Think of that as real estate construction infrastructures, a little bit of energy. We’ve got about $2.5 billion under management, which is by far the largest venture capital fund in the space. I think Fifth Wall has raised more than the entire rest of the industry combined.
And what is unique about Fifth Wall’s model is that, out of that $2.5 billion, about half of it comes from a very large consortium of some of the largest owners, operators, and developers of real estate and infrastructure in the world. There are a little over 70 of them, and that network is large and growing. We account for about 7.5 billion square feet of commercial real estate and about 1.5 billion of industrial space.
The reason why that is so interesting is because the most difficult things to do inside venture capital are, basically: How do you find all the startups? How do you evaluate whether those startups are good or bad? And then, how do you help those startups grow after you invest?
And this global consortium of Fifth Wall’s, pooled together, really means that Fifth Wall has access to pretty much any startup in the real estate space pitching any of our corporate partners. Those partners send them over to us. Our corporate partners help us to diligence them to separate the wheat from the chaff. We can typically find the good companies as diamonds in the rough, just much faster and much better than anybody else.
Then, the final piece of the puzzle is: How do you really help those startups grow? And our consortium allows us to help startups to get their products in front of some of the largest buyers in the world, and then sort of shepherd them in and help our corporate partners adopt some game-changing technologies for them. Because, if we are going to decarbonize this industry … and, by the way, buildings account for about 40 percent of all greenhouse gases in the world, more than transportation. Everybody thinks that it’s planes, trains and automobiles that are the big, bad wolf — but the big, bad wolf is buildings.
What startups have you looked at that really excited you recently?
I think what I really like about this space is that we actually have whole categories that I would call boring, and then other things that might look sci-fi, but both of them can have massive implications because of the size of this market. You’ve got $270 trillion worth of buildings out there. So, it means that even the most boring things like, I don’t know, better gloss insulation inside windows, actually end up being able to really move the needle globally in terms of size of market and impact on the environment.
For instance, one of the first companies to invest in and out of the fund is a company called Turntide Technologies. They’ve got high-efficiency HVAC motors that sit in big commercial blowers. The market for these motors is about $100 billion per year, and motors like this consume literally 50 percent of all of the electricity on the planet. Turntide’s motors are somewhere between 30 and 60 percent more efficient, so about 50 percent on average. That literally means one company’s product could save a quarter of the world’s electricity usage.
Maybe another example might be what I’d put more into the sort of sci-fi side of the equation, a company such as Prometheus Fuels, which sucks CO2 out of the air and converts it into long-chain hydrocarbons [converting them to] gasoline, diesel, jet fuel, all of those.
But then, also, it turns out most of the rest of our world is made out of oil — so plastics, adhesives, insulation, paints, all of these things are made out of oil. We’ve technically been able to do this for the last 70 years, just no one’s ever been able to do it profitably. The next best people on the planet to be able to do it … for like $50 a gallon of gasoline. That’s not exciting, I’m not going to buy $50 per gallon gasoline.
What is very exciting about Prometheus is they can currently do that at about $2.40 per gallon, which is crazy. That’s essentially a license to print money. And it means that we could fundamentally power our world. All the industries that cannot switch to electricity, we could power them with clean, renewable fuels that are literally sucked out of the CO2 in the air.
Is Fifth Wall invested in that company?
Unfortunately, I can’t comment on that at the moment. But, hopefully, some news soon.
Good. This is the place where, as an old editor liked to say, to which you should come to commit some news. Also, Prometheus sucks CO2 out of the air and converts it back into oil. Isn’t that part of the problem, though? There’s too much oil in the world. And we don’t want to be using it more, right?
The problem with oil isn’t so much that we’re burning it and using it as fuel, as that you’re taking CO2 that wasn’t in the atmosphere millions of years ago and releasing it into the atmosphere now. So, you are increasing the mass amounts of CO2 in the atmosphere.
What’s different with Prometheus is you have sucked that CO2 out of the air, converted it into fuel and you can burn it right now. So, the net amounts of CO2 in the atmosphere, when you’re using it — this is why they’re actually known as net zero fields — you are not changing the total amounts of CO2 in the atmosphere that way.
I’m going to push back one more time on that. You’re recycling fossil fuels, but it still gives an incentive to companies and countries to drill for oil, which can cause great environmental harm in spills and explosions. Is this a real solution?
It is actually, because, ultimately, what’s great is that at scale, any technology collapses to the marginal cost of its inputs. In this case, solar electricity and air, which are free. That means that, actually, this company at scale can undercut the production costs of every oil manufacturer on the planet, other than maybe the Saudis, which means Prometheus is able to produce oil equivalent at about $35 per barrel. But, $35 per barrel was below the production cost of 73 percent of the world’s producers, which basically means, instead of being an incentive for these other people to drill more, you actually undercut them on price.
And, are you worried about all the power from oil money that “Creepy” [Putin] has in Russia? It turns out this one company can undercut all of Russia’s oil production, because Russia’s marginal cost of a barrel of oil is about $55. Instead of being an incentive for people to keep drilling, this actually undercuts them and puts them out of business.
What else has caught your attention? ESG?
So, clean buildings are just fundamentally better for the planet. But, often what people think is that these buildings are more expensive. It turns out that, actually, with a lot of these technologies, clean buildings are cheaper because they’re cheaper to operate or cheaper to build.
For example, another company that springs to mind is ICON. They 3D-print houses. And, this is much better for the planet, because it turns out that 40 percent of all waste material in landfills is building rubble. Where, if you’re just 3D printing a house, there is no waste. It also turns out these houses are much better insulated; they use about 66 percent less energy than a typical stick-built house.
But that’s not the great reason to do so. That’s a climate reason. The societal reasons to be excited about this company in the U.S. is that the housing market is a little nuts at the moment. That’s because the U.S. has roughly about 3 million too few houses. You go and look across Africa, across Latin America, the whole world is tens, if not hundreds, of millions of houses short. If you can bring down the cost of construction significantly as you can, you can massively improve people’s lives around the world.
The problem with construction is that we have not been lucky to have massive productivity gains. Computer chips halve in price every two to three years. Houses do not halve in price every two to three years, because we don’t have massive productivity gains in how you construct them. The last time — and this is really funny — the last big productivity gain in house construction was about 60 years ago. It was electrification of the work; literally, electric drills and nail guns were the big productivity bump. The other recent one was when we took all those things and made them battery-powered.
Is the G — government — lagging, or an impediment to ESG?
No. Actually, it’s probably the other way around. People think about the carbon impact of buildings and think that we’ve kind of solved this problem. Put some solar panels on the roof and get this thing LEED-certified, and we’re good to go. It turns out that if you went and bought every piece of the best equipment on the planet, and the best retrofittable stuff to put into your buildings to make it more efficient, and you put those solar panels on the roof powered at 100 percent with clean energy, we would still only have solved about 47 percent of the problem. We haven’t even gotten halfway there.
And, by the way, many of those technologies actually are not making capex payback, since they’re too expensive right now. You wouldn’t actually go and buy every piece of the best equipment on the planet, because it wouldn’t be a good investment. So, I would basically just push back on the premise and say that, actually, we’ve got a long way to go. And then, we need to invent a whole bunch of new technologies to solve the other half of the problem.
But doesn’t that take commitment and investment from sovereign governments, including the United States?
Oh, absolutely. If you look, for example, at the infrastructure bill, across Europe, all of their COVID recovery plans have combined about $150 billion for energy-efficiency retrofits into buildings. In the U.S., the original version of that $2 trillion infrastructure bill had $400 billion in it for energy-efficiency retrofits in buildings and infrastructure. If you inflation-adjust that, that’s more money than the Apollo moon landings, which is kind of crazy. By the way, obviously, that bill isn’t the one that’s going through here in the states, but even the bipartisan one that is most likely to go through still has about $150 billion in it for energy-efficiency retrofits into buildings.
There’s actually a bipartisan imperative in Europe, America and Asia, because it just comes down to jobs, with everybody trying to get their economies to recover from COVID. So, if you take a million dollars and invest it in the coal or oil industry, on average, you create about four jobs. If you take a million dollars and invest in clean energy, solar farms, wind farms, you create five jobs. That’s great. But, if you take that same million dollars and invest in energy-efficiency retrofits into buildings, that $1 million creates 15 jobs.
By the way, these are jobs where you can take a coal miner and train them to replace windows on houses. And they can probably do that job in the current town they’re in.
Can your investments through Fifth Wall move the needle on technologically modernizing real estate?
Your point is well taken. What’s the point of running a fund if we can’t actually move the needle and get this industry to accelerate on pure innovation, and then also on climate stuff? That is why many of the companies we’re working with, [we have] a very critical eye on the ability of their technologies to scale globally and to have massive impact. I mentioned Turntide and that’s one company with one product that literally could save a quarter of the world’s electricity inside just real estate.
Another example on the innovation side might be some of our large corporate partners who, historically, may have been seen as backward-looking, but have used us as a way to entirely sort of reinvent themselves, and lean into forward momentum and innovation. And, a great example here, which is public: Lennar, one of the largest homebuilders in the U.S., that invested with us. They made a whole bunch of very close partnerships with portfolio companies like Opendoor, which is an ibuyer that helps you buy and sell homes much faster; with companies like Hippo that are next-generation home insurance; and other companies like VTS. Long story short, those partnerships for Lennar are valued at close to a billion dollars. And those partnerships delivered well over a billion dollars of top-line revenue.
What is your vision for ESG and Fifth Wall in trying to address these issues and bring them together under the proptech umbrella?
The vision here is to take existing technologies, bring them down the cost curve, and basically prove to this industry that being green is just good business. From an ethical point of view, we only have one planet. But, from a business perspective — you should check my math on this — buildings are worthless when they’re underwater or on fire. So, this industry as a whole probably has more of a vested interest in saving the planet than many others.
Philip Russo can be reached at firstname.lastname@example.org.