Company Creations by Vargas Holding: Creating a Series of Decacorns and Unicorns 🦄

I previously wrote an article about the Venture Creation Model.

This refers to a business model where investors take the lead in creating companies.

In the biotech domain, Flagship Pioneering, Third Rock Ventures, and Atlas are well-known.

In the software domain, Idealab (partly also in Climate Tech), Betaworks, and Atomic are active. In this domain, names like Startup Studio, Ventures Studio, and Venture Builder seem to be used more often.

Some VCs in the software field engage in company creation without using the Studio category name. Sutter Hill Ventures, which created Snowflake, is famous. At Sutter Hill, they call company creation "Origination".

In the Climate Tech domain that I've been paying attention to recently, BXVentures, 1.5° Ventures, Wavemaker Impact, and Marble are starting attempts to create companies themselves while being VCs, using the name Studio.

Amidst this, there is a company that has been successively creating high-impact startups in the Climate Tech domain without using the Studio category.

It's Sweden's Vargas Holding.

What is Vargas Holding?

Vargas Holding is a company established in 2014 that calls itself an "impact company builder". It was created by two people: Carl-Erik Lagercrantz, who had a career in the IT and telecommunications industry, and Harald Mix, who came from a private equity background.

Vargas does what is called "company creation", and does it in domains other than biotech, particularly in the Climate Tech domain.

Their current portfolio consists of 4 companies, but the famous ones are probably the following 2.

Northvolt

Established in 2016, it is a well-known battery startup. As of January 2024, it has raised $8.8B (about 1.2 trillion yen) in funding, including debt. It is said to be a decacorn Climate Tech startup.

H2 Green Steel (H2GS)

Established in 2020, it is a company that manufactures green steel. It has raised $5.4B (about 760 billion yen), including debt. It has likely become a unicorn.

These two companies, which you will definitely hear the names of if you dabble in the Climate Tech domain, have a combined fundraising amount of about 2 trillion yen and have emerged from a single incubation company called Vargas. That's not all. Vargas has also created companies like Polarium (estimated market cap $641m) and Aira (estimated market cap $383 - 657m).

How does Vargas keep creating startups with big impacts one after another by having investors create them themselves? The real essence probably lies in the fine details of their approach, but from what can be found on the web, it seems to be summarized as follows. (Since it's only information available on the web, the level of abstraction is high.)

Method

1. Look at macro trends and create what should be

The two co-founders of Vargas apparently started in 2014 by understanding the macro trends that bring about major changes. One of those is decarbonization.

First, to address the energy domain issues they noticed in the telecommunications business, they launched Polarium. In the process, they realized that Europe was heavily dependent on Asia for batteries and thought, "That's not right," so they created Northvolt to build a supply chain like Tesla's in Europe. Similarly, H2 Green Steel was also started based on the idea that a new value chain needs to be created in the decarbonized era.

It could be said that being the starting point for creating businesses that society needs, and gathering the necessary people, technologies, and money for that purpose is Vargas' approach.

Of course, it's also necessary to look at immediate needs, but from the macro perspective of decarbonization and security, proactively creating businesses that the region or country needs seems to be the big direction.

2. Vertically integrate

The businesses Vargas undertakes often seem to adopt models that are large-scale projects and involve vertical integration. It could be said to be close to what is called a full-stack startup.

Because of that, the amount of money needed becomes large, but if successful, major transformations become possible, and there is also the possibility of dramatically lowering costs. Hadrian in the U.S. also seems to be taking a similar approach.

What is needed in that case is funds, and the ability to gather those funds is tested. So how do they gather funds?

3. Secure sales commitments early

Both Northvolt and H2GS gather customers first and raise funds based on those commitments. The buyers include Volkswagen and BMW.

This means they are progressing by using the track record of having "sold" to gather money, and making the product after gathering money.

In this model of Vargas, "selling before making" to enable large-scale fundraising seems to be one key point.

Making it after selling it, selling it before making it, and making it as if you had already sold it

4. Have customers buy the product and also invest

They not only acquire LOIs from customers but also engage in large-scale capital policies that include offtakers and suppliers. It is common for suppliers to become shareholders, but one characteristic of the companies Vargas has created is probably that offtakers are also included.

Generally, buying products with such green premiums attached is a risk taken by the purchasing side. However, by having them invest at the same time, equity upside can be provided, and for the offtakers, it can be seen as a transaction that may generate more profit than just purchasing the final product.

For example, the truck maker Scania is an offtaker of H2GS's green steel and has also become a shareholder (see table below).

From Five Lessons for Industrial Project Finance from H2 Green Steel - RMI

5. Utilize financing techniques

It may be something they can do precisely because it's in the decarbonization domain, but they have gathered money using various financing techniques such as government debt guarantees and mezzanine bonds. It's something they can probably do because they have Harald Mix, who is well-versed in finance.

They also involve financial institutions that are proactive about climate change countermeasures.

It's also suggestive that they say in an interview, "This is not venture capital, but industrial capital." I think this is also an expression of their determination to create an industry.

6. Don't take on too much technical risk

As for Vargas, they don't seem to be taking on too much technical risk. Northvolt uses lithium-ion batteries. Not all-solid-state batteries. H2 Green Steel also uses MIDREX, which was acquired by Kobe Steel. There don't seem to be many patents taken out under H2GS's name either.

Of course, additional R&D is necessary, so they have created facilities like Northvolt Labs, but they don't seem to be taking on too much technical risk.

Because they use heavier technologies, they tend to be lumped together as deep tech startups, but rather than "deep tech startups" that build businesses from a technology starting point, they could be called "deep tech startups" that gather technologies from a market starting point.

7. Proactively gather necessary personnel

Northvolt has even become a Harvard Business School case. The case author is Professor Serafeim, famous for impact-weighted accounting and such. This case includes an episode where Vargas' founders suddenly contact a former Tesla executive who had just quit and invite him to be a co-founder of Northvolt.

This movement seems a bit different from an Entrepreneur in Residence (EIR). EIRs are mainly for entrepreneurs to come up with ideas, but in company creation like Vargas, the idea comes first and they bring in the necessary founders.

Another characteristic is that experienced advisors are used by the investors to bounce ideas off of in the idea stage.

8. Involve and harmonize government authorities and industry

This is close to gathering people, but they seem to actively talk with government regulatory authorities and such from an early stage while involving the industry from early on. They seem to be progressing while harmonizing the players.

It's something they can do precisely because they are people who originally had networks, but I think by making it a big movement like that and setting up a system to be supported, they are able to make big bets.

Thoughts

Direction

I think the need for company creation increases the more difficult the domain, even in domains other than biotech and IT.

In fact, the Venture Creation Model and Startup Studios seem to be actively used when there are conditions like:

• Domains where entrepreneurs are scarce (biotech, enterprise)
• Regions where entrepreneurs are scarce (EU)
• Business formats that few people can do (vertical integration, policy relations)

In the U.S. and IT domains where there are many entrepreneurs, it may be possible to accelerate a large number of startups through accelerator programs on the premise of a large number of startups, and have some of them probabilistically hit. However, in Japan where the number of entrepreneurs is limited, and in domains that involve advanced technologies and domain knowledge, the number of attempts will inevitably decrease, and in the first place, there are few people who will try, so if investors don't proactively set things up and create companies through company creation, it may be difficult for them to be born.

In fact, in Japan too, I feel that the number of VCs aiming for company creation is gradually increasing.

Domain

If entrepreneurs emerge who want to take on challenges like vertical integration in such heavier domains, of course, I would like to support them with all my might if they do emerge, but on the other hand, it's also a fact that they don't easily emerge even if you wait for them to emerge bottom-up. Plus, it's not a domain you can easily do just because you want to. There probably aren't that many people who can talk to the government from the start, and at least capabilities like finance will be necessary.

In that sense too, I think an approach is needed where you create a prototype of an idea to some extent and gather people who can do it.

(And recently, I also heard about ARPA-E, and I think such "businesses that should exist in the country" should be discussed as themes and proactively created.)

Methodology

However, Vargas' way of doing things is just one example. I don't think it can be used in all domains.

For example, I think there is also the option of not vertically integrating in exchange for taking on more technical risk.

However, if we can accumulate know-how as Japan as a whole while referring to such overseas know-how, I think we can create a system that can generate startups that contribute to the country's industries.

Doing what needs to be done

If we can successfully create a Japanese version of initiatives like Vargas, I think many meaningful companies will be born.

I myself am not that knowledgeable about the technologies themselves or finance in each domain, but I have technologists and researchers close by, and I have some knowledge of how startups work. Plus, precisely because I am close to public institutions, I may be able to involve stakeholders like demand, supply, and the government (as long as I am involved in public work, my policy is to not hold shares in individual companies, listed or unlisted).

If so, while referring to Vargas' way of doing things, deciding on themes, finding technologies, finding people, and formulating that approach is something I feel I may be able to do.

Creating Japan's next industries in the decarbonization domain. I hope we can start discussions on such themes together.