Gratitude in Greens and Blues

Understanding Biotic Regulation

The challenge of addressing climate change is extremely complex. Even reducing emissions from energy use—as deploying more nuclear will help us to do—doesn't ensure climate stability for future generations. Fortunately, there are things we can do now to better protect our current and future climate and, in appreciation of our investors, advisors and supporters, we are donating to a group whose insights around "biotic regulation" can make a big difference in how humanity fares.

It turns out that forests play a critical and pro-active role in climate change dynamics. Forests, and especially old-growth rainforests, can help to reduce the impacts of our planet's warming. The mounting levels of CO2 in the atmosphere are adding tremendous amounts of heat forcing: that is certain. What is less certain is how severely we'll feel those impacts. With healthy forests, we're much better off.

Emerging from the work of a group of atmospheric physicists, ecophysiologists, and biologists, is an awareness that, weather is not uniform and extreme weather events aren't being distributed equally. Forests, rather than being simply passive stores of carbon, are active participants in controlling weather, particularly the wind and hydrologic cycles. This means, where there are forests, the weather will be more regular, more temperature controlled and more normal.

How do trees and forests do this? They leverage physics, chemistry and their own biology to regulate weather. Through spreading canopies and networks of roots, trees collaborate in keeping the land cool and moist. This cooler air can generate cloud cover, which in turn generates rain and limits the penetration of sunlight, limiting heating impacts and droughts.

Trees can also use their ability to transpire—release moisture from leaves—to help increase the level of humidity in their vicinity, which can increase the air's moisture content and actually hasten rainfall. Clouds in turn reflect the sun's radiation back out into space, reducing heating in their areas despite the higher concentrations of CO2.

Forests, we have learned, have evolved on the planet for millions of years and they have adapted by being able to moderate their own climate. Trees use a number of physical mechanisms—rising warm air, denser cool air and the effects of condensation, to influence winds to suck moist dense cooler air from the seas onto the land and blow warmer air out to sea. Forests are not passive plants: rather, they can act as a massive biologic organism that can actually impact the physics in their environment to trigger rain. Not only is this good for them—giving them the fresh water they need—it is also vital to humanity.

Dr. Anastassia Makarieva, author of the Biotic Regulation substack, frequently discusses this complex blend of physical, chemical and biologic forces that form what she describes as a "biotic pump" that moves water from the ocean to the land. She has argued persuasively that forests play an active role. Further, that thinking that the primary value of forests is in their use as a store of carbon, is failing to recognize their vital function as a force that literally drives a large portion of the hydrological cycles of the planet. Dr. Makarieva’s writing helps readers recognize the problem of focusing climate efforts exclusively on the issue of carbon emissions and not paying attention to the proactive role of forests as a moderator of extreme weather and protecting them . . . from being actively leveled.

As important as nuclear power is to humanity's ability to reduce emissions, preserving forests is equally important as a way to better prevent extreme heating effects from causing damange to vital ecosystems and human systems. Protecting our natural forests and especially rainforests is key to lengthening the runway for maintaining cooler temperatures and ensuring there is continued rain—even as emissions drive higher global temperatures. Therefore, in addition to our usual year-end support of non-profit groups protecting our nuclear power assets (blue), this year we are donating to the Biotic Pump Greening Group (green), which is working to increase our understanding of the role that forests play in protecting their own ecosystems.

Learn more below:

BIOTIC PUMP GREENING GROUP

About

The Biotic Pump Greening Group Institute is a Brazilian-based non-profit scientific, technological, and innovation organization focused on promoting a paradigm shift in combating Climate Change, ecological restoration, and reforestation. Our core mission is to advance the study of the Biotic Pump Theory and develop innovative practices for ecosystem protection, contributing to the defense and preservation of the environment and the promotion of sustainable development. To achieve this, we support scientific research, design restoration projects, organize educational events, and foster scientific and political activism.

For more information, you can reach out to Carlos Nobre Camargo or Dr. Anatassia Makarieva. If you'd like an introduction, we'd be happy to make that.

Instituto BPGG - Biotic Pump Greening Group:

CNPJ: 59.958.061/0001‑09
Avenida Alfredo Ignacio Nogueira Penido, 335, Sala 706
São José dos Campos – SP
CEP: 12.246‑000
Banking information:

BRADESCO Bank Brazil
Swift: BBDEBRSP
Instituto BPGG - CNPJ 59958061/0001-09
Branch: 06012
Account: 000018678
Iban: BR78.6074.6948.0601.2000.0186.783C.1

Other Groups Working to Protect Rainforests

1. Restore established by Michael Kellett, which collaborated with the Biotic Pump team on organizing an "Embracing Nature's Complexity" conference in Munich in 2024.

2. Mongabay founded by Rhett Ayers Butler, one of the leading providers of ecological journalism, reporting on the state of forests, the often nefarious destruction being wrought on rainforests by corporations and the efforts and challenges of those who seek to protect them. Mongabay was the first big environmental news outlet that covered the biotic pump story, initially back in 2012, with more recent follow ups.

3. Amazon Watch, a 30-year old 501(c) organization, works together with and in support of the Amazon's Indigenous Peoples and allies calling for the Amazon to be free of oil, gas, mining, and all extraction and for the U.N. and Amazonian governments to protect the Amazon from deforestation for palm production or other destructive activities.

Groups We Support Working to Protect Nuclear

1. Mothers for Nuclear: Was started on Earth Day in 2016 by two moms who want to protect their children’s future on this planet. They were initially skeptical of nuclear, but through many years of questioning and working at California’s last remaining nuclear plant, they gradually changed their minds. Now they support nuclear as our largest and most hopeful source of clean energy, vital to addressing some of our world’s biggest challenges: climate change, air pollution, and energy poverty. Now, we have an organized way to share our stories and begin a dialogue with others who want to protect nature for future generations.

2. Stand Up for Nuclear: Works to advance nuclear energy worldwide by activating leaders, driving action, and fostering informed public engagement. Since 2019, Stand Up for Nuclear has grown the international movement, uniting citizens and organizations to champion nuclear energy as a key to securing our clean, abundant energy future. They strive to create a future where nuclear energy is embraced as a reliable and sustainable solution for a low-carbon world.

3. Californians for Green Nuclear Power: Is dedicated to promoting the peaceful use of safe, carbon-free nuclear power, and to keeping Diablo Canyon Nuclear Power Plant open, so it can continue in its important role of generating clean energy for the benefit of California’s economy.

July 17, 2025

The Trillion-Dollar Price Tag of Climate Inaction

Climate Damage Is Already an Economic Line Item—Just Not One We Recognize

By Ian Brusewitz and Valerie Gardner

Over just the past 12 months, the US has spent nearly $1 trillion on climate-related disaster recovery and infrastructure damage. That’s 3% of GDP — money that could have gone toward innovation, productivity, benefits, or debt reduction. Instead, it's being rerouted into extreme weather damage cleanup, reconstruction, and emergency response. According to Bloomberg Intelligence, this surge in climate-related spending has effectively become a "stealth tariff" on Americans: a hidden cost that shows up not as a line item, but in the form of higher prices, larger insurance premiums, and government spending that collectively erode household budgets and wealth without being labeled for what it is. The conversation around climate change often centers on long-term risk — but the reality is that US citizens are already paying an average of almost $3,000 annually towards covering the costs of our worsening climate, even if these costs are not specifically identified as such.

This economic burden isn’t theoretical — it’s already bleeding into the real economy in visible, destabilizing ways. Climate-related costs are no longer confined to isolated events or specific regions. Climate change is indifferent to boundaries, and its financial impacts are bleeding into housing markets, food systems, labor dynamics, consumer prices, and state and federal budgets. As these disruptions grow more frequent and severe, as last evidenced by the devastating fires in Los Angeles and deadly flash floods in Texas — no sector, geography, demographic, or business is immune. This suggests that as the capital allocations necessary for climate recovery grow, the environmental risks bleed increasingly into financial risks. Not only are our physical assets vulnerable, but so are our financial assets. This then raises the stakes of where and how to invest.

Insurance and Public Safety Nets Are Starting to Fray

As the economic footprint of climate disruption expands, the institutions we’ve historically relied on to manage risk are showing cracks. Insurance is becoming a visible point of failure in that equation. In 2024, Hurricane Helene hit Florida as the strongest storm ever recorded in the state’s Panhandle. Days later, Hurricane Milton followed. Combined, the two storms caused $113 billion in damage. Then came the devastating California wildfires in January 2025, burning through L.A. suburbs, which added another $65 billion to the total. The LA Times has since estimated total fire damage could exceed $250 billion, making it one of the costliest fire seasons in U.S. history. And, most recently, the devastating Texas floods — with damage estimated at upward of $22 billion — don't even account for the tragic loss of life from these events.

Historically, the federal government covered about one-third of climate-related disaster costs. That share has since dropped to around 2%, leaving municipalities and states to issue debt or delay recovery projects, and shifting more of the burden onto insurers and property owners. In 2023, insurers covered approximately 70% of the $114 billion in U.S. climate-related losses, according to the Congressional Budget Office. Because of rising costs, insurance premiums have doubled since 2017, including a 22% spike in 2023 alone. These increases aren’t reflected in the Consumer Price Index, which means that what we’re calling "inflation" may actually be something distinctly different. The question we can ask is whether or not people would make different choices if these embedded costs were more clearly labeled as a "Fossil Fuel Waste Damage Premium" or something similar. This lack of clarity and failure to accurately attribute these rising costs to what we think of as cheap fossil fuels means that we understate the full costs and consequences of our use of these fuels.

The "Tragedy of the Horizons" Issue

In 2015, former Bank of England Governor Mark Carney coined the phrase "Tragedy of the Horizons" to describe the problem that results from the fact that people want what's cheap for them today and are unwilling to pay more for something even if it is better for them or their children in the future. The same problem exists at every level in the investment world: financial actors operate on quarterly cycles, while climate impacts unfold over years or decades. This mismatch between how we invest today versus what we need for tomorrow means markets routinely discount the long-term consequences of inaction, prioritizing short-term returns over long-term stability, even when instability is well predicted. The result of this short-term orientation is a structural disconnect that undercuts our ability to invest in climate action and solutions, so as to limit the long-term damage we will inevitably have to pay for, before it gets really bad.

A decade later, this structural blind spot surrounding investing in climate solutions persists. At a recent Financial Stability Board meeting, a U.S. Treasury official dismissed climate concerns unless they posed an "imminent" financial risk. But that logic depends upon people not recognizing the growing annual Fossil Fuel Waste Damage Premium that they are already paying. In addition to revealing an utter failure to understand the real-world progression of climate impacts and looming tipping points, which are beyond "imminent," they are being expressed with disasters everywhere, even if these costs are economically masked and not clearly identified as climate costs. This disconnect is one of the clearest reasons capital hasn’t shifted meaningfully towards investing in the technologies that can enable the energy transition to the extent that we should. So long as people don't realize how expensive climate inaction actually is, human nature tragically rewards inertia, which means that both the damage done in the interim and the costs of solving climate change will continue to rise.

We’re Still Underestimating the Real Costs

Surveys from Yale’s Climate Change in the American Mind series show rising concern among Americans about climate change. Yet, far fewer people connect climate change directly to the rising costs of food, insurance, consumer products, or energy prices. This perception gap matters. When the public doesn’t see their rising costs as climate-driven, there’s less support for regional climate mitigation efforts, long-term adaptation investments, or even innovative clean energy investments that can help accelerate the energy transition, reduce the impacts of future extreme weather events, a hedge the rising climate risks to their overall portfolio.

While consumer awareness lags, markets have begun to price in climate risks. Bloomberg tracks a basket of 100 companies in insurance, infrastructure, and disaster response that have outperformed the S&P 500 by 7% annually. Capital is adapting faster than federal policy — and faster than public awareness. This divergence captures a core tension. While markets have begun reallocating capital toward climate adaptation — outpacing both federal policy and public awareness — the broader system still treats climate disruption as a distant risk, even though the costs are already embedded in household budgets increasingly squeezed by insurance premiums, rising costs, and disaster recovery bills not covered by insurance or the government. Climate impacts and costs are no longer theoretical or negligible. They are already large, compounding, and for many households, causing significant budgetary pain. And yet, despite the mounting data, policy and public sentiment lag. Yet, there is very little recognition of how these climate costs are escalating or communication to the public about the real price of our government's climate ignorance and inaction.

A Smarter Way Forward

The trillion-dollar annual cost of climate inaction isn’t a projection — it’s already here. It reflects not just extreme weather, but the fallout from underbuilt systems and delayed clean energy investment. We haven’t invested adequately in low-carbon technologies that can reduce and eliminate carbon emissions at scale and possibly even begin to repair the damage that has already been done to the climate. Investments lagged because investors doubted the need for these technologies as well as their commercial viability. Clean energy technologies that were seen as more expensive than fossil fuels were deemed less competitive in today's market and hence, not a good investment. But if we begin to factor in today's Fossil Fuel Waste Damage Premium plus the growing costs of not having those technologies — namely the ever-escalating costs of climate damage — then these clean energy solutions really start to seem attractive.

This is where next-generation nuclear becomes decisively appealing. Not only does it deliver clean, dense, reliable, and dispatchable power — but it generates power (and so earns money) without relying on the weather or being vulnerable to it, which is a growing risk to renewables projects reliant on the weather cooperating. As both a hedge against the systemic economic risks of climate disruption and as a source of long-term returns and near-term risk reduction, nuclear power offers a uniquely strategic return. If the Fossil Fuel Waste Damage Premium is now a recurring cost, the only rational move is to invest in the most scalable solutions that cut exposure to climate risk, preserve economic value, and secure a livable future.

References:

Bloomberg, “US Spending on Climate Damage Nears $1 Trillion Per Year,” by Eric Roston, June 17, 2025.

Bloomberg, “Carney’s Risk Warning Reverberates as Global Regulators Disagree Over Climate,” by Alastair Marsh, June 19, 2025.

Congressional Budget Office, “Federal Insurance and Disaster Spending”, September 2023.

Los Angeles Times, “Estimated Cost of Fire Damage Balloons to More Than $250 Billion”, by Sammy Roth, January 24, 2025.

MSN, “Texas Flood Damage to Homes May Cost Up to $22B”, by Michael Walrath, May 2025.

Nature, “Warming Accelerates Global Drought Severity,” by Solomon H. Gebrechorkos et al., June 4, 2025.

NOAA, “Billion-Dollar Weather and Climate Disasters”, 2024 Report.

Yale Program on Climate Change Communication, “Climate Change in the American Mind: Beliefs & Attitudes”, Fall 2024.

July 7, 2025

Nuclear Shipping Gains Traction as CORE POWER and Global Partners Push Forward ()

CORE POWER is among the key players driving nuclear shipping forward, from regulatory work to its Liberty deployment program...

Published by Ian Brusewitz in Advanced Nuclear, Energy transition, International Collaboration, NEWS, Nuclear innovation, Nuclear maritime propulsion, Portfolio Venture, Venture capital support for nuclear

July 7, 2025

CORE POWER Consortium Advances Floating Nuclear for Mediterranean Energy Security ()

CORE POWER, a Nucleation portfolio company, has joined ABS and Athlos in a new consortium to assess floating nuclear power in the Mediterranean...

Published by Ian Brusewitz in Advanced Nuclear, Carbon emissions, Climate change, Energy transition, International Collaboration, NEWS, Nuclear innovation, Nuclear maritime propulsion, Portfolio Venture, Solving climate, Venture capital support for nuclear

October 18, 2024

Amazon goes nuclear . . . !

Amazon has announced a signed agreement with Dominion Energy in Virginia to explore the development and construction of one or more small modular nuclear reactors to use to provide clean power to Amazon Web Services data centers. It is anticipated that Dominion will contract with X-energy to host X-energy's new high-temperature gas reactor at Dominion’s North Anna nuclear power station. This is intended to increase access to clean power for AWS, Amazon’s cloud computing subsidiary, which has escalating energy needs as it expands its services into generative AI. The agreement is also a part of Amazon’s path to net-zero carbon emissions.

Amazon Web Services has agreed to invest more than $500 million into advanced nuclear power, through three related projects, that will result in as much as 600 MW of new power generation at locations from Virginia to Washington state. In the process, Amazon is partnering with Dominion Energy, Energy Northwest and X-Energy to explore the development of an X-energy small modular nuclear reactor, or SMR, near Dominion’s existing North Anna nuclear power station.

Amazon, together with Energy Northwest, a consortium of 29 public utility districts and municipalities across Washington, will help fund the deployment of four reactors developed by X-energy totalling approximately 320 MW of new electricity generation. Additionally, Amazon also is making an equity investment into X-energy as part of an approximately $500 million fundraising round announced today by the nuclear technology company and they've signed a separate memorandum of understanding (MOU) with Dominion Energy “to explore innovative new development structures that would help advance potential [SMR] nuclear development in Virginia.”

[Read more at the sources listed below.]

Sources

UtilityDive: Amazon announces small modular reactor deals with Dominion, X-energy, Energy Northwest, by Brian Martucci, Oct. 16, 2024

CNBC: Amazon goes nuclear, to invest more than $500 million to develop small modular reactors, by Diana Olick, Oct. 16, 2024.

PR Newswire: Dominion Energy and Amazon to explore advancement of Small Modular Reactor (SMR) nuclear development in Virginia, Oct. 16, 2024.

Published by Nucleation Capital in Advanced Nuclear, Advanced Nuclear Customers, Corporate decarbonization, Energy transition, LINKS, Nuclear financing, Nuclear innovation, Public companies

October 15, 2024

Google makes world’s first SMR corporate purchase deal

Google's agreement to purchase energy from advanced nuclear reactors to be built by Kairos Power was, in almost every way, earth-shattering. This deal puts advanced nuclear on the energy "leaderboard" for the first time and sends an exceptionally powerful message out into the world—that the tech hyperscalers, a group of extremely sophisticated companies committed to decarbonization—are ready to commit large sums to obtain clean and reliable power from advanced nuclear energy providers. This will inform a whole host of other actors and force them to re-assess their energy options.

To better understand Google's reasoning for this agreement, we turn to the blog post written by Michael Terrell, Googles' Senior Director for Energy and Climate. He confirms right away, that Google's decision to sign the "world's first corporate agreement to purchase nuclear energy from multiple small modular reactors" is intended to "accelerate the clean energy transition across the U.S."

Google is building upon a history of pioneering corporate efforts to accelerate clean energy solutions, which started with agreements to purchase renewable electricity over a decade ago. Those purchase agreements have enabled Google to make claims of powering their operations with "renewable" energy but the reality is that for the last decade, Google's power was pulled from the grid like everyone else's and they could not access carbon-free power on a 24/7 basis. This disturbed them, because they knew that their claims were premised on fancy accounting, not reality, and due to the fungibility of electrons, their actual energy streams remained as dirty as eveyone else's.

Google now takes its first true step into truly managing its carbon emissions with this agreement to support Kairos Power's introduction of its advanced nuclear power system. This is a long-term agreement that enables Kairos to target building multiple initial units by 2030, followed by additional units by 2035. The agreement will enable the construction of up to 500 MW of 24/7 carbon-free power to a number of communities, which indicates that Google is probably planning to site these new reactors in more than one location, possibly co-located with newly-built data centers being planned to meet growing power demands from AI.

Terrell believes that this agreement, to put Google's purchasing heft in accelerating deployments of the next generation of advanced clean technologies, is important for two reasons:

The grid needs new electricity sources to support AI technologies that are powering major scientific advances, improving services for businesses and customers, and driving national competitiveness and economic growth. This agreement helps accelerate a new technology to meet energy needs cleanly and reliably, and unlock the full potential of AI for everyone.
Nuclear solutions offer a clean, round-the-clock power source that can help us reliably meet electricity demands with carbon-free energy every hour of every day. Advancing these power sources in close partnership with supportive local communities will rapidly drive the decarbonization of electricity grids around the world.

In other words, there is growing 24/7 energy demand and growing urgency to eliminate emissions and renewables are not up to the job. Terrell doesn't say that directly but it seems fairly clear that they recognize that they cannot run a rapidly growing 24/7 data center business with intermittent energy sources, even with fancy accounting.

While we don't get a lot of the financial details of this new agreement, whether they will be investing in Kairos or just helping to finance Kairos' journey through their first of a kind (F.O.A.K) build and out into their "nth of a kind" (N.O.A.K) build, Google's alignment of it efforts to develop and commercialize advanced clean electricity technologies behind Kairos is a formidable combination that promises to help Kairos overcome the remaining barriers for commercialization of its technology.

(From the DOE's Advanced Nuclear LiftOff Report.)

Google's deal with Kairos provides what many experts and the DOE see as a necessary ingredient to break the chicken and egg conundrum: an “orderbook” of reactors. This speeds up Kairos' ability to produce its novel reactors in the quantity necessary to lower costs and bring Kairos Power’s technology to market more quickly. Without out, FOAK pricing can be prohibitive to getting orders. Google, with virtually no other options, has bravely stepped to help scale what is likely to be the first of many advanced nuclear technologies coming to market.

This announcement further inflects the advanced nuclear sector and confirms what we have known all along: both traditional and next-generation nuclear technologies are necessary for us to reach 100% clean power and we'll need a very large and very diverse quantity of new reactors being produced and deployed at scale to fully meet all types of growing energy needs and to shift all demand from fossil fuels to clean energy sources.

Resources
_______________

Goggle Blog: New nuclear clean energy agreement with Kairos Power, by Michael Terrell, Oct. 14, 2024

Google Sustainability Report: The Corporate Role in Accelerating Advanced Clean Electricity Technologies, Sept. 2023.

Department of Energy: Pathways to Commercial Liftoff: Advanced Nuclear Commercial LiftOff

Published by Nucleation Capital in Advanced Nuclear, Advanced Nuclear Customers, Brilliant thinkers, Corporate decarbonization, Energy transition, LINKS, Nuclear innovation, Public companies, US technological leadership

September 18, 2023

Large Investors doubling down on Emerging Managers

Jessica Mathews, writing for the Fortune Term Sheet Newsletter, alerted us to the change just made by CalSTRS, one of the largest pension funds in the world. In "CalSTRS taps Sapphire Partners, with an office in Menlo Park, to manage its new emerging manager VC investments," we learned that CalSTRS has hired Sapphire Partners to manage its five emerging manager-focused funds, with $1.4 billion in assets. Sapphire will bring sole focus to CalSTRS' growing investment into emerging managers, a distinct asset class (of which we are a member). We are delighted to hear this news and applaud the decision and its rationale.

Though it may be obvious, when some of the largest and most successful investors in the world decide to redouble their focus on a certain asset class, there's usually a good reason for it. In this case, there are highly compelling economics—in the form of superior returns—coming from emerging managers. New managers, while they don't have an investment "track record" by definition, are often launching new funds because of some kind of significant shifts in markets for which they don't see viable options or for which they have a competitive advantage or discernable investment edge.

The challenge for LPs is being able to select which emerging teams to invest in, since there is a good distribution between top emerging managers and run-of-the-mill emerging managers, who have very little differentiation or specialization.

According to Beezer Clarkson, who leads Sapphire's fund investing business, a key piece for them is simply having an emerging GP being able to articulate why an entrepreneur would pick them as an investor to join a round and why an LP should be interested in their thesis as an investor.

According to David Zhou, in an interview published by Adam Metz of D.F.A. on his Substack, emerging managers regularly outperform. "My suspicion is that emerging managers have that chip on their shoulder. They have something to prove to the world. They’ll hustle for deals. When founders pick who they want on the cap table, they want people who care about them and their space."

We tend to agree. Nucleation remains the only venture fund focused on nuclear, especially the fission kind. And when you are the only fund focusing on the specific tech sector (namely advanced nuclear in our case) that a venture is in and you bring decades of experience, deep connections, plus expansive knowledge of the in's, out's, pro's, con's, competition, suppliers and regulators, history and a vision for what will be and a commitment to making it reality, the answer to these questions becomes apparent.

Nucleation Capital has completed eight quarters of investing, has made ten very promising investments and is starting its third year of operations. If you would like to receive a copy of our newly released Two Year Report, please send your request to us using this link.

Sources

1. TERM SHEET: CalSTRS taps Sapphire Partners to manage its new emerging manager VC investments

By Jessica Mathews
September, 13, 2023

When the California State Teachers’ Retirement System makes any kind of change to its portfolio, people pay attention.

With more than $321 billion in assets under management, CalSTRS is one of America’s largest public pension plans and therefore one of the world’s most important limited partners, with approximately $50 billion in capital strewn across private funds and, naturally, some of the world’s most influential private companies.

CalSTRS’ core private equity portfolio is littered with all the usual suspects: TPG, New Enterprise Associates, Thoma Bravo, Blackstone, and, as of 2021, Tiger Global, to name a few. But 21 years ago, the pension plan also began setting aside a small portion of capital to back first-time fund managers. It has hired out that responsibility to three third-party partners over the years: HarbourVest, Muller & Monroe, and Invesco.

Now, CalSTRS says that one of those partners—Invesco—is getting out of this line of business, so it is bringing on Sapphire Partners, the $3.6 billion LP arm of enterprise software-focused VC Sapphire Ventures, to manage five funds and $1.4 billion in assets focused on emerging managers. With the change, CalSTRS will, for the first time, have a fund class solely focused on emerging venture capital investors. (Invesco declined to comment for this story.)

“Standardizing one group to focus on venture—because it’s so specialized from an emerging manager standpoint—made a lot of sense for us,” Rob Ross, a private equity portfolio manager at CalSTRS, told Term Sheet in an interview. He added: “We just haven’t been as specialized as we should be, given the nuances of venture capital.” Ross pointed out that, while Invesco did make investments in emerging VC, PE, and growth investor managers over their 18 years working together, this will be the first time emerging VC managers will be singled out.

Beezer Clarkson, who leads Sapphire’s fund investing business, says that Sapphire will invest CalSTRS’ capital exactly the same way it deploys its own. Sapphire Partners backs VCs raising one of their first three funds, targeting a 3x net return for Series A funds and a 5x net return for seed funds. While Sapphire will look at both specialists and generalists, Clarkson says it’s important that a GP can articulate why an entrepreneur would pick them as an investor, and why she should be interested as an LP.

“I think the authenticity of that answer is the differentiator,” Clarkson says.

CalSTRS is currently investing out of its fifth fund, a $250 million fund from 2021, and Ross estimated there is approximately $80 million from that fund left to deploy. (CalSTRS filed with the SEC for a sixth fund vehicle in order to shift management responsibilities to Sapphire, though Ross clarifies this is not a new fund and CalSTRS has not set aside any additional capital at this time.)

The change at the pension fund will likely be a welcome one for first-time managers, as fundraising has been pretty dire for those just getting their start. As I wrote about last month, emerging managers are on track to raise less than they have in a decade, based on data from the first four months of the year.

Part of that has to do with risk. Emerging managers, by definition, have fewer than three funds, meaning they don’t have much of a track record to show investors. “Only about 17% of funds make it to fund four,” Clarkson says, citing data from PitchBook. Not to mention, the current market uncertainty has made price discovery more difficult, and LPs are being choosier across all their GPs.

“I think all LPs are being more selective than they had been in the past,” Ross says.

At the same time, a high-risk bet on a first-timer can turn into an enormous return. Cambridge Associates reported in 2019 that 72% of the venture industry’s highest-performing funds were run by emerging managers. (This is the most recent metric. Cambridge Associates didn’t respond to my request for updated figures.)

“There’s no guarantee it’s going to work out well. And because there are so many emerging managers every year, the challenge of picking the ones that will continue is extraordinarily hard—and that’s probably the nugget of why most LPs don’t do this,” Clarkson says.

For CalSTRS, returns for this class of funds have been strong so far. Here’s a look (I didn’t include the 2021 fund because it didn’t have a long enough track record to judge it fairly):

As it’s become more and more competitive for LPs to get exposure to top-performing funds, it makes sense for large-scale limited partners to be building relationships with promising investors earlier on. And there’s nothing preventing a pension plan or institutional LP from outsourcing most of the work. Just earlier this year, one of California’s other major pension plans, CalPERS, had said it was now working with TPG and GCM Grosvenor to deploy $1 billion into emerging manager funds.

2. SAPPHIRE Press Release: CalSTRS and Sapphire Partners Join Forces to Invest in New and Next Generation VC Managers

Sapphire Partners will assume management of the CalSTRS New and Next Generation Manager Funds, which includes managing available capital to make new investments into emerging managers focused on early-stage venture capital

WEST SACRAMENTO and MENLO PARK, September 13, 2023 / PRNewswire: The California State Teachers’ Retirement System (CalSTRS), the world’s largest educator-only pension fund with more than $320 billion in assets, and Sapphire Partners, the fund investing strategy of Sapphire, a specialized technology investment firm with over $11 billion in assets under management,⁽¹⁾ today announced a partnership to invest in emerging managers focused on early-stage venture capital. As a part of this partnership, Sapphire Partners will assume investment management responsibilities of five CalSTRS “New and Next Generation Manager Funds” existing funds, representing approximately $1.4 billion in assets under management.⁽²⁾ Sapphire Partners will also have capital available to continue making commitments to new and emerging venture capital managers.

“Emerging managers are critical to the venture ecosystem and an LP’s portfolio, and both CalSTRS and Sapphire Partners have long histories of supporting them on their journey,” said Beezer Clarkson, Partner, Sapphire Partners. “Sapphire believes we are well positioned to identify the next class of rising talent early and help them grow and scale their businesses.”

The announcement comes amid one of the most challenging fundraising environments in recent years, with 91% of emerging managers finding fundraising “difficult or very difficult” in 2023. With many LPs constrained on allocations, Sapphire Partners is excited to be an active and supportive partner for emerging managers seeking to fundraise in this environment and has invested in emerging managers since the strategy’s inception nearly twelve years ago.

“One of CalSTRS’ primary goals since the program’s inception in 2005 is to partner with diverse GPs that represent the demographics of California, and we know greater diversity is a natural byproduct of focusing on small emerging managers,” said Christopher J. Ailman, CalSTRS’ Chief Investment Officer. “This partnership with Sapphire aligns with our long history of finding diverse investment managers. We look forward to partnering with Sapphire on this important mandate.”⁽³⁾

Sapphire Partners has been an active Limited Partner since 2012, investing in early-stage venture capital (Seed to Series A) funds within the US, Europe and Israel, with, more recently, a focus on identifying managers Sapphire believes may become the “New Elite” in early-stage VC.

Managers may benefit from Sapphire’s industry insights, its experience investing in emerging managers, and its efforts to demystify the “LP Perspective” through OpenLP, a Sapphire-led resource for the VC community. In addition, the broader Sapphire technology investing platform, featuring a multibillion-dollar direct VC investing strategy, provides managers with market and industry insights from the investment and Portfolio Growth teams and a scaled firmwide infrastructure to tap into where relevant.

This partnership will allow Sapphire to expand its ability to support emerging managers while continuing to focus on established managers through its existing investment platform. Of note, approximately 60% of Sapphire Partners’ relationships began at the emerging manager stage.⁽⁴⁾ Since its inception, Sapphire and the New and Next Generation Manager platform have partnered with approximately 300 funds over their combined history. Today, approximately 70% of Sapphire Partners’ portfolio of existing managers have checkwriters from diverse backgrounds.⁽⁵⁾

About Sapphire Partners

Sapphire Partners has been investing in early-stage venture capital funds since 2012 and seeks to identify and support the “New Elite” managers across the US, Europe and Israel who are uniquely suited to invest in the next generation of technology category leaders. Through its underlying managers, Sapphire Partners has indirectly invested in over 3,200⁽⁶⁾ companies since inception. Sapphire Partners looks to partner with managers across their journey as a GP and is focused on adding value beyond its capital commitments through value-add services, industry insights, and its efforts to demystify the ‘LP Perspective’ through the OpenLP initiative. Sapphire Partners is part of Sapphire, a specialized technology investment firm with approximately $11 billion in assets under management across three distinct strategies and with team members across Austin, Menlo Park, San Francisco and London. To learn more, visit the Sapphire Partners website.

About CalSTRS

CalSTRS provides a secure retirement to more than 1 million members and beneficiaries whose CalSTRS-covered service is not eligible for Social Security participation. On average, members who retired in 2021–22 had 25 years of service and a monthly benefit of $4,809. Established in 1913, CalSTRS is the largest educator-only pension fund in the world with $321.3 billion in assets under management as of July 31, 2023. CalSTRS demonstrates its strong commitment to long-term corporate sustainability principles in its annual Sustainability Report.

Published by Nucleation Capital in Advanced Nuclear, Asset manager support, Brilliant thinkers, Capital reallocation, Climate innovation fund, Fund sustainability, Future of Energy, Investor activity, LINKS, Nuclear financing, Nuclear innovation, Solving climate, Venture capital support for nuclear