Transcript of Eleanor & Richard Seamans

Gino Borges:

The Journey to Impact series articulates and offers a behind-the-scenes look at what it means to be in the impact investing space: how our personal lives and our individual journeys lead to certain decisions and not others. In essence, the series really draws out the human component, realizing that there’s people behind the money, and there are people behind these investments. Richard and Eleanor are very adept and very familiar with this idea of essential services, essential technologies, and relating that back to the sustainable world that we’re all trying to create.

Richard and Eleanor are both the founders and Chief Investment Officer and Chief Executive Officer of Seaman’s Capital Management Group. They have an extensive background in terms of service work, particularly in the northeast of the United States.

What point did you both decide to make the switch to this world of investment that involves the multi-stakeholder model? How do you incorporate and engage the multi-stakeholder model?

Eleanor Seamans:

We don’t get to an important decision without there being a confluence of factors. In terms of the intellectual set of factors, this had to do with the macro picture. We began to sense that it was the beginning of the fossil fuel-based era, and we began to have concerns about what would emerge afterwards. History is filled with cycles. Even our individual lives’ are cyclic. I felt that we should begin to be primarily focused on sustainability at a global level when we had a scientist who came in from the country Georgia, outside of the USSR. He came to our office because his wife was ill. He wanted to find a way to bring a technology that he had discovered to an investment firm that would help develop it. At the same time, he wanted to be able to help his wife get the right care at Massachusetts General Hospital.

We assembled a group of physicists who came in to take a look at what his offering was. We assured them that whether we went forward with that or not, we would certainly help him receive the right medical attention for his wife.

At the end of the day, I didn’t understand what all the physicists had been saying. I asked Richard, “in one or two sentences, what does this actually mean?” He explained that energy could be free on the planet, indefinitely for everyone, based on the sun alone at a fairly competitive price.

I interpreted this as that the technology would be a military grade secret and we wouldn’t be able to move forward. As it turned out, that unfortunately was true. This scientist had found a way to change the melting point of a solid; I still don’t understand how that all works. But from that point on, we began to pay attention to the concept that you could find something that was simple and scalable, something that wasn’t already caught up in bureaucracy and multiple hands.  These were the difficulties of distribution that have had a significant impact on what we saw as the coming socio, political, and economic turmoil.

Gino Borges:

What is the timeframe you are referring to?

Richard Seamans:

Late 2007-2009.

Gino Borges:

How does that particular story turn into a pivot for Seaman’s Capital Management? How did it become a practice for you to create that platform?

Eleanor Seamans:

We began to look at other investments that were related to wind, solar, and water. There is an opportunity for technology to end up addressing a lot of the social ills. I don’t think we thought about it necessarily in terms of the commitment to financial investing because, for a long time, the financial metrics just weren’t there.

Gino Borges:

So, we needed time for the math to catch up with the technology.

Richard Seamans:

Absolutely. I’m an economic historian by avocation. I’ve been studying financial history. I’m a physicist by training, which essentially means I’m a mathematician. I gravitated that understanding fully to bonds – first municipal bonds and global bonds and then to resource equities in the late 1990s because I could see the prices of commodities and the ability to grow that.  The volumes here had been declining since 1980 when the commodity prices peaked. Plus, the world population of middle-class people was growing from 50 million people a year, and it’s now up to 140 million people a year. These people wanted better diets, better housing, and better infrastructure, all of which I viewed as a commodity. So in 1999, on a macro level, this change took some commodity prices rising from falling, and we predicted that would go on for about 14 years.

Turned out it lasted only 12 years; however, the light at the end of the tunnel, which turned out to be the oncoming train for investing in commodities, metals, mining, oil and gas, was the change in China’s approach to managing their own economy, which was announced in 2011 when they went from being an export-led economy to being a consumption-led economy. I looked at that and I said, “that’s the end of commodities.” Within the month we sold all of our base metals in 2012. We sold all of the oil and gas companies, and we sold lastly the mining companies in 2013. We knew that that was basically done.

It was in early 2013 when we saw a proprietary piece that showed that solar energy was competitive economically with conventional energy on a worldwide basis. I looked at the solar stock index and saw that the average solar stock was down 95%. I said, “Aha! I’ve seen this play before.” It looks like the commodities market did in 2001 when the average commodity stock was down 80%. The average oil and gas stock was down 90% and 80% respectively. We started with solar, moved from solar to wind, then to energy efficiency and clean transportation, to water and agriculture, to waste management and then to the technologies you need to make those happen. Of course, what most people don’t realize is that it actually takes 62 minor metals to enable all of these technologies which prove to be not-so-clean after all. Rather than saying clean energy, we say it’s really a new era of technologies.

Gino Borges:

How did that manifest into the establishment of a fund around essential technologies and services? How did you end up communicating this idea?

Eleanor Seamans:

My background and training is in education and sociology. We think in terms of the parts to the whole within any given matrix that we might be looking at. We look at what was unfolding in front of us and realized that this is going to be a very interesting time in history. We’re at a transformative time where the geopolitical structures that we’ve taken for granted in our lifetime will undergo massive change. We could see that a lot of the common sense assumptions about how the world was organized was going to be changing. We had a proprietary document that had been done as an OD study by a very large pharmaceutical company. It basically said that when the internet came into being and was well-integrated into everyone’s life. Any of the hierarchical bureaucratic organizations and structures in place (where it was assumed the power was held at the top in a few hands) would be given information on a need to know basis. But, essentially you had a very mechanistic approach to life where you went to work, and you only did what you were supposed to do. That was your basic definition of what they called in those days, the military industrial complex.

This means that there’s going to be a different level of skills spread throughout the entire organization. The whole definition of work, the expectations for work, the flow of communication is going to change. This will no longer be a situation where older people automatically have more knowledge than younger people. We’re going to begin to see a serious set of disruptive belief patterns, and the government will have to find a way to deal with this as well. We could do a lot of sidebars on this piece, but I think the most important thing was that we questioned the characteristics that people need. What is it in our larger natural environmental systems that need protection as we recognize our interdependence?

What are those essentials that people need in order to survive wherever they are? That led to us zeroing in on energy. As Richard said, we paid attention overtime. What emerged was that technology wasn’t just one simple sleeve. Technology was actually going to be embedded in every aspect of our life. When we first started out, we did not think of technology as an essential service in the same way that we thought about the needs of people to have vibrant communities. Then, we identified what was our expertise and looked for an intersection of our well-steeped expertise with investment opportunities that would be stable enough that we could feel comfortable in meeting our fiduciary responsibilities. It was a lot of work. In private equity, you do a tremendous amount of work. Most of it is in the  “this’ll-be-interesting-to-follow, but-no-thank-you” phase. It’s been a long journey with a lot of different pieces.

Richard Seamans:

I would call it a learning experience. After we sold everything, we basically returned people’s money. We kept our own money that we had made and a few other people chose to stay with us, too. We also kept our organization. We reached in our pockets and wrote a check every month to maintain the organization. We began experimenting with our own accounts. We were not going to risk anybody else’s capital at this point. We got into solar stocks and some of these things ripped. That index was up about 3x in about 15 months.

Then, of course, it was game over. We’re used to making it up and moving on. In the mining area, we made our money basically by seeing that there was gold and mineral in the ground, making a bet that serial entrepreneurs with whom we are co-investing could extract that and make a profit. Our call was whether those were the right commodities to be in and how to hedge those currencies, if needed. We thought we could start again with some of these smaller companies with the newer technologies. Some of those things took a little bit longer, so it didn’t all work out.

We kept moving on until we found things we liked. We needed more stability in these portfolios. The energy of efficiency was good. We took the buildings in the systems, companies like Johnson Controls and Acuity. Over time we morphed into realizing that the fastest way to energy efficiency is through the cloud. We kept continuing to adjust the portfolio in that way. We needed stability, so we added water, both in terms of utilities and infrastructure. Waste management was another very stable area. But, it took us a while to define what was working and what was not.

There were companies that paid dividends. We liked cash flow, but it turns out that to have a sustainable model, they actually have to earn those dividends which doesn’t really work if you pay them and keep borrowing. There were a lot of lessons learned. We actually wrote a piece in 2016 about lessons learned and how we arrived at our final product that represents these essential services and technologies.

Gino Borges:

How did you make the connection between energy efficiency and the cloud? What are you seeing in the cloud space that led you to say “I can satisfy my desire through and feel good about energy efficiency as a result of investing in cloud-based companies”?

Richard Seamans:

The start was finding that the acuities, like the Johnson Controls, weren’t working. What we found is that when people move from their own servers over to the cloud, there’s roughly a 70% energy efficiency savings. We began focusing on those particular companies. Something less than a quarter of the industry has moved onto the cloud. There’s growth here of at least 23% on a compound basis. If you get companies that are in areas that are growing at that particular degree, companies that are able to offer things in that space, things like Salesforce, Workday Service, RingCentral and so on, they are going to be very successful companies.

We model our portfolio after the global bond. We look for the free cash flow that these companies produce. On average in our portfolio, it’s about a 4% recash flow on enterprise value. That’s the capital. It’s employed both on the data and the equity at about 37%, or in bond terms, that would be a 4% coupon that doubles every two years. We just kept looking for companies that have those characteristics.

Eleanor Seamans:

We’re very research-based. We spend a lot of time researching. We also have a number of systems that give us some nice readings every day. We chose three that are based in different hypotheses so that they shouldn’t all be agreeing. It’s been an interesting journey. I feel particularly grateful because we have a number of friends, colleagues, and clients who are very steeped in their own expertise and happy to share. Being part of different communities or networks of people who are open and collaborative makes a really, really big difference.

Gino Borges:

One of the things I’ve learned from your group is that you have a pretty distinct profile criteria for the companies that you’re looking for, particularly in terms of the private placements. You have this criteria about proprietary technology cost, relative to the existing technology or the existing solution needs to be a fraction of what it is. Walk us through how you came to that conclusion and the why behind making sure that those metrics are in place before you say “yes” to something.

Eleanor Seamans:

That’s ideal, and we have to do a lot of work before we accept that something would not hit every single one of those benchmarks. We think of it in our own world as fairly bulletproof. It shows that we thought a lot about different scenarios and what it is that might impede something from being adapted or from remaining profitable. It’s a backboard, and we dig fairly deep. But, we don’t hit every single one of the variables every single time.

Gino Borges:

You obviously want to see certain cash at certain point. You want to see a proprietary technology at some level in likelihood to create some type of margin of safety, a moat of some kind, so you’re not wiped out because somebody else comes in. That whole element of cost is very educational.

Eleanor Seamans:

Before Richard unpacks that, our early co-investing with the serial mining entrepreneurs that Richard mentioned earlier was very place-based. We always plan to give 50% back to the local people. We knew from other work that Shell Oil has lost a huge percentage of their market share at a global level in the late 80s and early 90s because they hadn’t honored local culture. We dig really deep in the woods and dive on each aspect with the entrepreneurs in order to build out investments. It was an evolution really of boots-on-the-ground, making sure that you are participating in companies that had certain characteristics that we could be sure that they reached a place of stability in unpacking all the variables.

Richard Seamans:

It comes from our experience with the serial entrepreneurs. By the end of the 1990s, only the best had fortuitously survived. Because these companies were taking our research on commodity prices and currency prices, we were able to meet and deal with these people. We knew that we wanted serial entrepreneurs, people who had done this before. We made most of our money co-investing with probably a half a dozen people on two to five projects each. There are people who have just have an in. They put up their own money. They put in their own teams. We would know we wanted to have the same team.

The other part had to do with the change in the dynamics of the financial markets in mining. Some of these larger projects needed continuous access to capital over periods as long as 10 years.

With what happened in 2008, we realized the market is not going to be as continuous as they have been in the past. The other factor was the technology. We realized that the technology was evolving so fast. As we looked at it, we wanted to make sure that we made all of our money back and a return on that money basically within about three to five years before that next technology came over our back. That’s the reason that we created the tight ideal models that we did, which says what we want to have is an innovative technology that has a 5 to 10x cost advantage ideally over what it’s replacing to ensure it’s adopted. That’s proven proprietary, patented. We didn’t want the people to say “oh, I can find gold.” We want to know that you have the gold, to know you have the technology.

That is timely; it could be a great technology but might be invented for something else. If it’s not timely, then the stock point to work where you had a management team with the demonstrated ability to create shareholder value was all in it themselves. That means their own money, their own capital. We’re used to seeing that in the mining side with the technology that is simple and scalable across multiple sectors and multiple geographies. Being a bond guy, I know that if I get three or four different ways to win, the likelihood that I’m going to come out with a plus is much better. I just took that and applied it to the technology space that has a clear path to being cash flow positive in 18 to 24 months. We have great technologies with lots of money down the road, the Uber’s, the Lyft’s, Airbnbs, and so on. Being a cashflow guy, a bond guy, I want to see this, more up front and then a plan to monetize this through an IPO or a sale to a strategic. Those are our deals. With that being said, we’ve looked at hundreds of companies and only one actually hit all of those metrics.

Gino Borges:

You two are partners in social life and partners in business as well. How has that relationship evolved between you two? Sometimes there’s pressure on our relationships whenever there’s just not any direction, or worse, when we’re unsure about what our next step is. How do you navigate that individually but also as a couple?

Eleanor Seamans:

We each had separate businesses before we did this. I was in the consultancy part of the Society for Organizational Learning out of MIT. I had a pretty clear set of experiences as a consultant that I didn’t want to have again, should we have a business. We had originally put our businesses together in the same office space because we needed to move when Richard became the sole parent of three children; they came to live with us. In order for some of them to continue in the public education schools, we moved both businesses out of Boston into a suburban location.

It was really a gradual evolution where we could see what each person was doing on their own. Then from disparate sources, we began to have a unified voice over some of the social change that we’ve already referenced. We began to look at what it would take to really combine our expertise. We did that gradually.  Because our life was so richly textured to begin with and each of us has always had a separate discipline of meditation, we basically found early on that it was far more useful to hit a disagreement and say we’ll put that on the list. This meant that we’d each meditate on it separately and then compare notes so that we didn’t spend a lot of time in dialogue and all the intellectual aspects of anything that you could come up with. It’s not that hard to debate an issue from both sides of the table.

That’s been our ability to take a look at things and just move along. That said, there were points when we really felt as if it would take an exceedingly long time to have our everyday reality match what we had envisioned. We felt that we could see the beginning of a global sustainable society, but we thought it would be far more likely to come into being for our grandchildren in everyday life. At the beginning, we thought we can retire or we can look for other places where there’s a replica of what had made us successful the first time around in terms of people who have a similar value systems where you trust people and share collaboratively.

That really was our foundation to begin with. We’ll go back to our researching route, and we’ll leave the infrastructure in place. But, we didn’t keep all of the same people. We changed our approach to bringing in employees, and we explained to people that the chances were good that they would probably only be with us for a shorter period of time. But, we would do a lot to help them in terms of laying a foundation for their next career because we didn’t want people looking at us as a place where they could be for a very long time because we didn’t think that that would be true. It took a little while for Richard and I to agree because Richard thought more in terms of building a team that would stay with us all the way through. I thought more in terms of the fact that it was going to be so continuously changing that if you go through different stages of business development, the first thing you do in some stages is unpack in order to go to the next stage. We basically just worked our way through each piece as it came along.

We were just really fortunate that it started to move faster than we thought it would because the technology enabled things.

Richard Seamans:

I watched my father go into forced retirement at age 70. That wasn’t a good thing for him because he had a much too inquisitive mind.

One of the things that I think really helped here is that we both had our own accounts. It wasn’t like we were dealing from a pool of money; we could both go our own ways with our own pools to spend our own capital to do what it was that we wanted to do. As Eleanor said, we’ve just gradually evolved over time so that we always worked in the public markets first, because at the turns, those are what’s most bombed out. The private equities are never the best values at those points.

But then when you get to three or four years in the closely held companies in the mining area, where we made most of our money, it became the driving force. We’ve now basically crafted a team where we can drop management in. We brought on Bill Brady this year who’s done half a dozen startups in two turnarounds, a CFO of our water technology company, when management wasn’t able to deliver the sales to get this company developing along the lines of our expectations. We had our thumb on the money where he started as CFO. We were able to get new management and we’re now driving it that way. I can see that all of the money we’ve spent over the last half dozen years at that base is going to come back to us.

It was a belief that we were going to find things that could make a difference in people’s lives around water,  agriculture, and these essential services – to make things that are less expensive and more viable, giving a little bit more social stability in a real time of transition where everything is in transition because of the technology. Everything is being disrupted. The other factor was that I wasn’t going to let somebody else run my money when I wanted to be on that cutting edge myself.

Gino Borges:

Describe the landscape of essential technologies. Where are we in this nine-inning ball game with this particular strategy that you’re engaged in?

Richard Seamans:

At this point, it’s in water and agriculture. Water is the next most critical commodity. We’re trying to build a portfolio of the companies that we own, or are involved in, that can provide solutions across these areas. In terms of innings, I’d say we’re in the first inning. In the agriculture space, we’ve found that the nutrient value of the foods has declined 40% over the last 20 years. When people look at farmland (we were investors in farmland at one point) they think, it’s a 20 year life. We look at the farmland and say,  7 years.

The question is what can you do with this farmland? This is a big deal to get the nutrients back into the microbiome. Microbials – too many people want to offer that. It’s probably simple and scalable, but now I’ve got way too much competition. I’ve got nothing that’s proprietary or patentable, so we won’t go that way. But, that’ll be part of the inventory of the solutions. One company we have has the solutions in what we call a biologic. We can solve the methane issues for the cow and pig ponds. We can solve salt, nitrates and phosphates. Another water company we have looked at has solutions in metals and chemicals although we have declined them twice now because of management issues that.

We’ll find a way to get that “in” so we can take these multiple solutions across various systems and into the world.

Eleanor Seamans:

The definition of what is essential is probably beginning to evolve because when we first started, we weren’t worried about the electromagnetics of people being continuously assaulted.  It changes them and their lives by being always in electromagnetic field. That will be an incredibly important area as we go forward. We just have a lot of things on the back burner, but they have to come along, up into this model where we really think it will fit.

Gino Borges:

Water, energy, food and agriculture is pretty self-explanatory, but not a lot of people know EMFs. While it may be important to you and is important to me, how do you know that there’s actually a market there for something that may be important for you? Even if it’s not on people’s radar, there may be a great product to reduce EMFs. How do you navigate that?

Eleanor Seamans:

That’s where patience comes in. I don’t think that we are in the business of trying to change people’s belief systems or trying to educate because it’s just too richly textured in environment. But, a lot of people started to pay attention to this. In terms of a backdrop, when we interact with people who have knowledge about it, we ask them to share it, and then we build the library. We pretty much wait for it to build its own consensus reality so that there’s an awareness of the need. I really salute the people who are part of this because they do such an incredible job of educating people on climate change and being huge sources of positive change. We’re happy to participate in that. We’re very grateful to them for their water toolkit work and what not. But, we wouldn’t try to create a market. I think that enough people will come to the fore and recognize. Already you’re seeing people talking about the incidents of greater rates of cancer or childhood diabetes. As individuals, we need to be very responsible. I worry about some of the erosion of personal advocacy in face of some of the things that we’re seeing,

Gino Borges:

How do you know if the EMF issue is timely? There may be great technologies, but is it an essential service?

Richard Seamans:

I’ve got an answer for you in terms of a parallel. The water technology that we originally looked at was designed to treat the orange greening disease that caused $5 billion worth of damage to the Florida orange trees in the last few years. It turned out that the technology was too expensive for the farmers. Great technology, good result, but ultimately a no-go. Later, in November 2017, California came up with an air control regulation. It said that the farmers now had to begin to remediate the methane coming from the cow ponds. We knew that we had a technology that was one-fourth to one-eighth the cost of the anaerobic gestures that were currently being used and that they were going to begin to enforce this one year later – November 2018. They also had a program where they had set aside $260 million.

Once a technology was certified (ours was in the process), California would release up to $750,000 in grants to each of the dairy farmers for these installation. So that to us was the defining moment that this was going to go forward. But, exactly when? It took longer to get dairy curers to certify this. We thought this had been certified some nine months ago. It wasn’t. The question is now what to do? What we did is we said this is where the multiple sectors, or verticals, come in. It turned out to be agriculture in this idea of being able to get the water into the ground, with our treatment being 48% faster than the untreated water. You could save 15 to 20% of the water that was being used. That turned out to be the key first place to go. You have to have some regulation or some defining moment where these people begin to adapt and say “I’ve got a green light. I can go.”

Eleanor Seamans:

One of the things we haven’t talked about is our concern that whatever we’re investing in fit into the built infrastructure. For example, we always look for (although I think we take it for granted now) is distribution systems. Where is there already a distribution system that is in alignment with what it is that you’re investing in? Richard focused on it a lot in this call, the Acquion. When we talked about entering India, the question was what would be the distribution system that would handle well and make a difference rather than be something that was distorted and not able to be implemented in a sustainable, meaningful way. We’ve seen an awful lot of things come along that are enticing and standalone beautifully, but they basically do not fit into the built infrastructure and can’t be utilized. Again, it’s that application of paying attention to where you are in a cycle or a system. We wouldn’t try to push it ahead of time. Does this have momentum? Does this have roots if this happens?

Gino Borges:

One of the more interesting topics is this idea of the intersection between intellect and instinct when it comes to making your investments. Can you give examples where both are involved?

Richard Seamans:

The key to investing for me has always been three words: management, management and management. There is this wonderful technology. My instinct was, “wow!” This was the replacement for the RFID chips, which costs between 10 and 25 cents. These chips were going to be down around, one-and-a-half cents each. There’s that big thing right now in multiple areas of authentication and verification: great markets, multiple sectors, multiple geographies – check, check, check.. We started looking at the management team, a team that hadn’t worked together – never built a company.  They also had created a situation where they were going to have to exercise an option. I looked at that and saw there was not enough time to make that option happen. So, we just stepped aside.

Eleanor Seamans:

One of the things that comes to mind is that we did a lot of work on an opportunity to invest in a series of greenhouses; everything hit the metric. Intellectually, it was fine, but I felt uncomfortable. I couldn’t put my finger on it. First, you get a signal that you’re not comfortable. There’s a disturbance. It doesn’t feel right, which is not exactly a technical term. We just kept digging on down layer after layer. Then finally it came to the point where I recognized that on the management team, there was the potential for a really large learning opportunity. We had two people who were steeped in what they had done with a lot of serious technical and managerial experience.

The problem was that one was from the Netherlands and one was from the U.S. and they hadn’t worked together previously. That cultural difference, when in a shared role, where one didn’t have clear authority over the other one, meant that we might be putting our investors at risk while someone learned to sort out the nuances of language. One of the things over the years that we’ve learned is that language often times is assumed and that people think that they have the same definition of language when they don’t. In a financial decision-making role, in that task, talent, management space, it’s important to be very, very clear.  Once we identified that piece, I thought it was too small or too picky a piece. However, once I addressed it, I felt that it was enough to stop us. I felt as if I had found the right thing. We shouldn’t go forward, and we stopped.

Richard Seamans:

One company that I looked at and immediately resonated with me came out of the Metallurgical Labs. If you look at Metallurgy, basically they’ve had a 40% improvement in the strength of metals over the last 40 years. This was an improvement that was 2 to 5x for steel, aluminum, magnesium, and titanium. That resonated right away. This was the only company that checked all the boxes because it was led by a serial entrepreneur who had already created 3 different multibillion dollar metals companies. I recognize the MO right away from the mining guys I was used to seeing. This is one where the intellect and the instinct matched, and we invested.

Gino Borges:

Thanks to both of you, Richard and Eleanor, for sharing such a rich background on what you have been up to and where you guys are heading. There’s no doubt that you, first and foremost, have really thought your way and felt your way through this whole process. The journey obviously always hasn’t been clear, but the outcomes and the learning lessons are first and foremost.