1Mby1M Virtual Accelerator AI Investor Forum: Heriberto Diarte, Co-Founder and Managing Partner at Catalyzer Ventures (Part 5)

Sramana Mitra: What business models are you considering in your investment thesis? Is it mostly recurring revenue, MRR, ARR type of stuff, or are you also foreseeing other types of business models?

Heriberto Diarte: We’re open. I want to take a step back because I didn’t mention this in the introduction. We focus on technologies for three industries we know really well. Energy, in particular, energy transition; industrials – industrial automation, Industry 4.0; and infrastructure that now is called PropTech or InfraTech. Those are the three areas that we know really well.

My partner was Undersecretary of Energy, so we know energy really well. I was with Schneider Electric. I was a CEO of industrial companies. I know manufacturing, and I’ve been President of a region of a large infrastructure company. We know infrastructure. So we focus on those. And inside those, we love this type of recurring revenue software model. But not only that, we’re happy to do hardware-only sales, where we just sell a product and that’s it.

And for example, we have a manufactured home business where they manufacture the home in a factory, they install it in two days on the site, and they sell the house, and there’s no ARR behind that. But they have already reached double the profitability of the industry, and they’re going to do two and a half times the profitability of the industry. And they sell these homes from the moment they put money to buy a piece of land to the moment they get their money back by selling the home.

At the moment, it’s 110 days, and they’re going to first target 97 days, and then 90 days from end to end. So they have almost two and a half times the profitability, and then they can do this in three months instead of two years. So the velocity of the money and the profit that they’re doing is great. And they’re not selling just cabinets. They’re selling a home. We’re happy to do that. And we’re also happy to do a hybrid where you sell a product that is a hardware, and then you need to maintain the hardware. Like GE sells turbines, but they make most of their money with the maintenance ongoing on the turbines. We’re happy to do those types of models as well, where you sell hardware and you maintain it, service it, and so on and so forth.

Sramana Mitra: Interesting. So, as you know, the history of Silicon Valley venture capital is that hardware is not their preference. Software is much more their sweet spot because they like the asset-light model. They don’t like capital-intensive asset building. They don’t like low gross margin businesses.

There are all kinds of arguments stacked up against the hardware model. Now, you talked about a prefab home company, and your company is buying land, building those homes rapidly, and selling those homes. So, explain the capital-intensive or non-intensive nature of this case study because I sense that there is financial engineering underneath that is non-equity engineering, yes?

Heriberto Diarte: Yes, but it’s very simple and very well known. So basically, they have a credit line for their projects. And they’re supposed to put 20% down so the lender is protecting themselves, and the company has to put 20% down. The company has a great velocity, because these homes are amazing. They are much better than the ones somebody can build because of the level of quality and the tolerances and everything, they’re perfect. And they’re super insulated. In the Sun Belt, they’re energy negative because they have solar and batteries, and they produce more energy than the energy they need. So they’re amazing homes.

So people like them, and something that we didn’t expect but it’s happening, about half of the homes are being pre-sold, that people want these homes. So they get a down payment from the buyer, from the future homeowner and stuff. And then also they have a credit with their suppliers. So what ends up happening is that in reality, even though they have to put 20% of equity into every project that they’re doing with the bank, in reality, they are putting only 10% because of how things get staggered. So with $10 million of equity, they can sell 100 million of those homes. And they have, let’s say, a 20% margin on the homes. With $10 million put down as equity, they get $20 million in gross profits, and they can do four of those per year. So you do the math. So it’s a pretty good business model.

So there is equity, there’s CAPEX sales, but there are loans because they’re being underwritten by the value of the land that they buy and by the value of the home that they’re building. And so it is actually an equity-light business model. Even though the numbers of the CAPEX are very large, it is equity-light.

Sramana Mitra: And in terms of the AI, it is in the design of the homes?

Heriberto Diarte: The AI was done in the design and manufacturability of the home, but after this was frozen, it’s all an execution game. The CEO of this company is a phenomenal automotive executive, and as you know, automotive is really efficient in building cars. And so he has this factory running like a dream factory, and it’s super efficient. It’s always on time. It’s always on quality. So once they figure out the basics, it’s an execution play.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator AI Investor Forum: Heriberto Diarte, Co-Founder and Managing Partner at Catalyzer Ventures
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