1Mby1M Virtual Accelerator AI Investor Forum: Heriberto Diarte, Co-Founder and Managing Partner at Catalyzer Ventures (Part 6)

Sramana Mitra: And what is your assumption when you make an investment like this? What are the trends? Is there a number that you are using to calibrate how much new home building is happening now in this format?

Heriberto Diarte: We studied this for one year. I helped this company launch many years ago, and the market is huge. There’s a huge need for housing in this country, and it’s not being fulfilled. When you can contract and build a home in three months, you have something nobody else has. They have sold homes to replace homes in Southern California in the Palisades fire, where people needed to rebuild their homes and said, “I don’t want to wait one year for a permit and two years to build a home.” 

And if you are building exactly the same home that you built in the past in 27 states across the United States; it can be of a different color or have a different countertop; but if the plumbing and the structure and the beams and all that is the same as something you built in the past, you get a statewide permit. So, you can go and build this anywhere in that state.

That’s incredible. So the door to door can be three to four months when you have this perfectly beautiful, luxurious home on your lot. So the market of construction is huge. So, yes, we underwrote that.

Sramana Mitra: Very interesting. Do you want to highlight any other portfolio companies? Maybe another one or two?

Heriberto Diarte: I’ll be happy to. Let me tell you of how our relationships and knowledge have helped us do a very different type of venture capital firm that has, I would say, an unfair advantage because many people don’t have these relationships, knowledge, and skill that we do. I’ll illustrate with an example.

When Christina, my partner, was the dean of Duke Engineering School, she hired this professor, and 13 years later, he comes to her and says, “Hey, I finally cracked the code of fluid optimization. I know how to optimize fluid flow anywhere in any system, and I think this is super valuable, but I don’t know what to do with it.” So Christina had a look, and she said, “Oh my God, this is amazing. So we should start a company, and the first use case is going to be for hydropower, how to optimize the production of energy in using water.” And so to make the story short, this was prototyped with the help of my partner.

The company was launched, we invested in this company, and they had five pilots. And it’s proven that by optimizing where you accumulate water, which valves you open and when, and which generators you run and so on, they can generate 10% to 14% more electricity with the same amount of water. And the reverse is true. They can generate the same amount of electricity with 10-14% less water. 

This is humongous value creation for that independent power producer because this is all going to the bottom line. It’s more energy they sell. It’s to the tune of, in one particular case, I’m talking about $5 million a year more in free cash flow. And this is all from some clever software that is optimizing the physical environment of water. So we’re looking for solutions like that.

Sramana Mitra: I understand you; this is based on relationships that you’ve had for a while. But when you went into the company, they already had the concrete ROI numbers figured out?

Heriberto Diarte: The ROI numbers– like what was the value of this company going to achieve when you put it on the ground? No, we had simulations and an idea. We didn’t know for sure. Now that we have the pilots, we know that in a complex system, it can generate 14%-15% more power. In a very simple system, it’s more like 4%-5%. So it depends, but now that we have it installed in hydropower plants, we’ve seen the value. And this is a huge market.

Sramana Mitra: Very good. I really like the investment thesis, and I like the way you’re going about it. It’s very concrete value addition, and it’s without burning too much capital, building companies without building too much capital, and really solving concrete problems. And I think that is the way venture in its old days used to be, and now we are more in a financial engineering type of venture capital business, and that’s very different. It’s highly speculative, it’s kind of like the Monopoly type of business now.

Heriberto Diarte: You know what people are telling us, even other VCs? “Hey, you’re a venture firm from the ’70s. You’re like a VC from the ’70s.” And yes, that’s what we are.

Sramana Mitra: And I like that kind of approach. Much more conservative, much more disciplined approach, and not so much these circular deals like, you buy my chips, I buy your data center. It’s not my cup of tea. I like bootstrapped businesses that solve real problems and generate sustainable profits. I like capital-efficient venture capital that solves real problems and builds companies that can exit at reasonable valuations.

So, I think we’re on the same page. So congratulations, and I’m sure you’re going to do some very interesting stuff. We’ll look forward to keeping in touch, and we’ll see what comes up that we can send your way.

Heriberto Diarte: Wonderful. Thank you, Sramana. It’s been great talking with you.

This segment is part 6 in the series : 1Mby1M Virtual Accelerator AI Investor Forum: Heriberto Diarte, Co-Founder and Managing Partner at Catalyzer Ventures
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