Harrington Starr FinTech Focus interview with Etienne Amic, Founding Partner of CommodiTech Ventures
How did you go from energy trader to “commoditech” venture capitalist?
I have been trading commodities for over 20 years. When you talk to most commodity traders about technology, they think of the IT guy in the back room who fixes their computer or network. I had two experiences that really opened my eyes to the profound impact technology was having – is having – on the industry.
The first happened when I was running the European Energy trading desk at J.P. Morgan (from 2010 onwards); we had acquired a very small business initiative called Direct Market Access (DMA) from RBS Sempra. Through an electronic platform, J.P.Morgan would provide hedge fund (HF) clients the ability to access high voltage power grids and high pressure pipelines and allow them to trade physical gas and electricity on this infrastructure. We were acting as an electronic broker in this instance, not as a principal. The technology itself was not particularly sexy but using it to build a prime brokerage operation at scale in energy was a new idea. The clients loved it: within 2-3 years the business grew from no revenue to a very significant number for our globalbusiness. As we invested in this idea, the team of sales people who served the bank’s HF clients had to be repurposed from selling transactions to offering a software solution empowering our clients. It struck me how some of the employees managed to make the transition easily and some simply could not.
The second technology disruption I was directly involved in came in 2015 when I was managing the London office at Mercuria. We had a team of around 10 short-term power traders selling the highly variable output of a portfolio of 4 GW of wind and solar assets in Germany. The traders would take “shifts” around the clock managing imbalances between the day-ahead hourly electricity price, which was the reference on which we bought the energy, and the intra-day power prices, which we received when we sold the energy by blocks of 15 minutes. We had all the risk in between. Our goal was to preserve our (small) margin by updating our weather models frequently and trading the revised output accordingly. It was a resource-intensive effort requiring speed – much more suited to algorithms than human labour. With a bit of focus and clever algorithms, we developed “robots” that were able to trade the portfolio automatically. Today, renewables management has become even more algorithmic than it was in 2015 and all sorts of assets are next in line for a full automation of their commercial dispatch. This is only the start of a very large movement, which will be accelerated by the Internet of Things (IoT). These two experiences have really shaped my perception of how technology has suddenly moved front and centre to the commodity business itself. It’s abundantly clear that clients want more market transparency, more control over the management of their assets and they want the corresponding software tools provided as a service. When this new reality struck me, I decided to leave my comfortable corporate existence and start two commodities technology companies: Enalgo and Vortexa.
Why did you start CommodiTech Ventures?
Like many good things, it wasn’t by design. About a year or so into building Vortexa and Enalgo, we started witnessing an explosion of commoditiesfocused technology start-ups, from data analytics following oil fundamentals to aspiring metals marketplaces. We were also receiving inbound calls from the ambitious founders of some of these companies saying they weren’t just looking for money—what they needed most was “strategic capital”: investors who truly understand the commodities markets and can help open doors, forge partnerships and advise on the relevance of their technology offerings. With all due respect, your typical VC simply does not understand how the physical commodities markets operate, or even their relative sizes. We quickly realized that a unique opportunity existed to provide early stage capital to the burgeoning commoditech industry — “smart money” underpinned by market expertise and an extensive industry network. It just made a lot of sense. As the great John Doerr said: “If you can’t invent the future, the next best thing is to fund it.”
How exactly do you define “commoditech” and how big is the opportunity?
In its simplest form, “Commoditech” is where technology – particularly sensors and algorithms – intersects with the commodity trading industry. At CTV we broadly classify the ‘technology’ into three main verticals:
1) Data and Analytics;
2) Trade Digitization, including digitization of trade finance; and
On the industry side, we consider the entire commodity complex to be in scope, from crude oil and refined products, to power, gas, freight, metals and concentrates, ores and agricultural commodities – even container shipping! Some initiatives can cross these dividing lines: for instance, there is a push to enrich commodity units with their production feedstock encoded as digital assets in a blockchain. The goal is to increase traceability and distinguish between the sustainable and the nonsustainable units in a trustworthy manner. Recording methane leakage and the amounts of chemicals used for fracking in the production of US natural gas is one such initiative; it allows to separate the cleanly produced gas from the rest of the pack – and to sell to utilities which are under shareholder pressure to only buy the former. There is a common misperception in money circles, at least today, that commoditech may be too small to qualify as an investible asset in its own right. However, when you consider that the underlying commodity industry produces $5 trillion of goods, is global in nature and impacts essentially every aspect of our modern life, you start to appreciate the enormity of the opportunity. There is also a whole secondary industry serving commodity supply chains which is itself on its own path to disruption. Whilst CTV is still in its infancy, we already have over 100 promising start-ups on our radar and we come across new companies every day. We are confident we could invest safely $150 to $200 million today and that number will be closer to $1 billion in 2-3 years, just extrapolating from the growth of companies raising funds. Commoditech is just becoming accepted as a concept describing a rapidly emerging industry but there is very little doubt in our minds that it will become mainstream relatively quickly – much like fintech or healthtech.
Q:What challenges does the industry face?
The greatest obstacle facing the industrytoday is cultural. Ours is a conservative industry, reticent to change and wary of doing things differently. It is somewhat understandable when you think about how much more efficient and competitive the industry has become over the past two decades — why change when things are working? But in today’s world of Amazon, Uber and AirBnB, tradition counts for very little. A large gap has opened between our experience as consumers and as commodity traders; we see entire swathes of the industry open to full-scale disruption. There is also a generational shift underway: the younger generation does not like making bids and offers via phone, recording trade details on a piece of paper or analysing supply and demand in Excel based on outdated information; they understand that building a service company can be as fulfilling and lucrative as being a trader. Excited by the opportunity, or frustrated by the status quo, they often end up being the founders of the start-ups themselves. On the other hand, it’s interesting to see how the commodities industry could learn from financial services—specifically, that of the large banks finally embracing fintech start-ups and seeking to collaborate, as opposed to compete, with these younger, more nimble companies. It’s already pretty clear that technology is going to turn the commodities industry upside down, so it behoves incumbents to start thinking differently, all the more so because they are much less protected by regulation than the banks are. As Andy Grove famously wrote: “Only the paranoid survive”.
Q: How does CTV help overcome these issues?
We do this in three primary ways. Firstly, we provide early stage capital to companies where conventional sources of VC may not be available, perhaps because your average Silicon Valley VC views the physical commodities sector as a black box. Breaking into the world of physical commodity trading can be daunting for a tech founder—we want them to view us as long-term, independent strategic partners. Secondly, we keep our industry partners informed of the latest digital trends and emerging technologies impacting their business and shaping the industry. Technology is not the enemy, complacency is. CTV’s team, its investors and advisors, have built up relationships for many years. One of our objectives is to help shape and influence the industry’s mindset towards technology. We are not outsiders seeking to “disrupt” or “revolutionize” the industry—quite the contrary in fact. Our goal is to effect positive (and necessary) change. Thirdly, we foster collaboration between commoditech start-ups and established industry players through formal strategic partnerships, beta testing trials, or informal introductions.
How do you differentiate yourself from competitors?
To be honest, a lot of people tell us CTV is the first of its kind. That said, we consider ourselves unique in the following respects:
First, we are not generalist venture capitalists. We are commodities experts first with diverse functional backgrounds— trading, sales, technology, operations and investments. We have better visibility into what products and technologies will gain traction in the industry. We can also check their progress easily from the clients’ perspective.
Second, we take a very hands-on role in what we do. We do not adopt a “spray and pray” approach, nor are we passive financial investors. Providing capital is just the first step. Given our own experience, not only in the industry but also in successfully building our own start-ups, we work closely with founders on everything from defining strategy to developing sales pipelines to choosing the right industry experts.
Third, we put our money where our mouth is. A large proportion of our LPs are former colleagues. They have invested in CTV because they trust us personally and because we have put a significant amount of our own wealth in CTV. The first question we ask when evaluating an investment is, “would I put my own money into this company at that valuation?”
Where do you see the most exciting investment opportunities?
At this point, we see the most activity coming from the “Data & Analytics” space given the proliferation of new technologies from satellite imagery to machine learning to AI, which are now finding their application points across commodity supply chains. Companies involved in those chains are also collecting more data themselves and the new phenomenon is that they are now open to selling them; that fuels an arms race to collect all these new streams on the cloud with the view of processing them as fast as possible. That said, this is arguably the most competitive segment from both an investor and a business perspective as the barriers to entry are lowest. The “Trade Digitization” segment is definitely the most mature of the three verticals, but we are seeing quite a number of start-ups emerging in the cloud-based ETRM/CTRM space: they offer attractive alternatives to historical solutions, which have been expensive and notoriously difficult to configure. In the “Platform” space, a number of exciting candidates across metals, gas & power and oil & refined products have appeared; here the focus is on estimating the pace of widespread market adoption as this is by far the largest determinant of value for these companies.