Chase Lochmiller, CEO and Co-Founder of Crusoe

AI: The Transformational Opportunity of Our Lifetime?

We talk a lot about what AI can do, but not about the energy it consumes or the cost to operate businesses in this space.?

In 2022, data centers and data transmission networks were each responsible for approximately 1-1.5% of global electricity use, and 1% of energy-related greenhouse gas emissions. The growth in digital services over the next decade is massive with projections by the International Energy Agency (IEA) putting data centers on track to consume 8% of global electricity and 4.5 gigatons of carbon dioxide equivalent by 2030 (this is more than the annual emissions by many countries including Canada, Germany and France). With the expanding application of machine learning, AI, and other emerging technologies like blockchain, demand for data centers and data transmission networks will continue to grow rapidly for the foreseeable future.?

We invested in Crusoe Energy in 2019 because of these macro trends and the team’s expertise across stranded energy capture and AI, which are normally worlds apart. I’m excited to have Co-Founder and CEO Chase Lochmiller as our next founder in our Raise Less, Own More Series.??

Let’s dive deeper into their story.?

Our Partnership

Upper90’s began its relationship with Crusoe by providing credit to finance equipment used in their Crypto mining business helping fuel growth with less dilution. We have invested over $100M to date across several equity rounds and asset backed financing facilities. This includes Upper90’s latest commitment to finance NVIDIA H100 GPUs, helping the company scale its clean computing solutions.?

Crusoe is an inherently capital intensive business, requiring power generation and computer assets to operate efficiently. Chase was familiar with use cases for debt and approached Upper90 to figure out how he could utilize that tool for Crusoe rather than relying on equity alone. By being an early and flexible capital partner, we have been able to help the founders mitigate dilution and increase optionality on how to grow the company.

Harnessing Waste for the Greater Good

Chase's fascination with AI was born from his experience in quantitative trading, which is where I first met him. The computing resources required to train models and run simulations was something that stuck with him. He noticed the staggering amount spent on data centers, where the largest input was energy costs. This led him to believe that securing access to stranded energy was very valuable and that a world producing more data each day would mean that AI had the potential to revolutionize most businesses.

Chase's decision to venture into entrepreneurship was fueled by his desire to create something with an impact to many rather than being a successful quant trader for his entire career. He drew inspiration from mentors like Dan Tierney and Stephen Schuler of Getco, who found ways to bring technology to manual industries at the time like the Chicago Mercantile Exchange.

Crusoe's journey began with a focus on capturing stranded energy at lower costs, a challenging endeavor due to its intermittent nature and complex operating conditions in the field. Chase partnered with his high school friend Cully Cavness, who’s background in energy was highly relevant. Together they created a patented platform to capture wasted flare gas and repurpose it onsite to power computing infrastructure.

They have instilled a sense of responsibility that solves an environmental problem while maintaining a profit maximizing mentality. To-date, Crusoe’s utilization of otherwise wasted flared gas has reduced flaring by billions of cubic feet and in 2022 prevented methane emissions equivalent to removing approximately 170,000 gasoline-powered cars from the road.?

Initial Use Cases

Bitcoin mining emerged as the perfect application for Crusoe's initial infrastructure buildout since the largest input was energy costs and access to hardware. Additionally, bitcoin mining does not present the same strict requirements for latency / uptime as other compute tasks. The locked in gas supply solved item one, and access to credit for equipment financing allowed them to quickly get to profitability. Building the bitcoin mining business enabled Crusoe to develop its energy capture technology while also generating attractive profits. This same technology is highly relevant as Crusoe continues to develop Crusoe Cloud.?

Chase had always wanted to capture energy to do computationally intensive projects. He has focused much of his organization on cloud computing, starting in 2021, which is on track to do ~$70m in annual recurring revenue by year end 2023. Chase foresees a trend in specialized, verticalized AI solutions tailored to specific industries. Specialized AI models perform better in targeted niches, leading to the rise of companies focused on delivering industry-specific AI solutions, such as legal document review or content marketing.?

Crusoe's entry into the AI space is not a pivot but a natural extension of its mission, in fact this evolution of the Company has been in the roadmap since they raised their Seed round. The company plans to offer high-performance computing infrastructure specialized for AI applications, with a focus on GPUs and accelerated computing. By focusing on a narrow segment of the market, Crusoe aims to build a competitive advantage and drive down costs. In its initial phase, Crusoe Cloud is focused on operating out of existing partner datacenters, but Crusoe expects to build its own data centers in the near future that will be powered using the same stranded energy capture technology that it developed for the bitcoin mining business.?

Balancing Capital Allocation

In the startup world, the prevailing wisdom suggests that profitability isn't an immediate concern. However, Chase believes that businesses with significant capital expenditures (CapEx) should aim for profitability sooner than those without. Crusoe's success lies in its ability to efficiently allocate capital and maintain strong unit economics. You don't want to be over-levered and need to balance the equity to debt capital which hit many crypto miners during market downturn.

“Businesses that have CapEx involved really should be profitable sooner than businesses that don't have CapEx involved. I think there is this notion of, you don't need to be profitable as a startup. And I think it's different for every company, frankly…If you're a capital intensive business, you just have to be able to deliver a high return on capital invested, and your economics have to be sound enough.”?

In a capital-intensive business like Crusoe's, efficiently managing finances is crucial. Chase advises entrepreneurs to explore less-dilutive sources of capital, such as debt financing, to fund growth responsibly. He emphasizes the importance of aligning debt with reliable revenue streams, ensuring the business can meet its financial obligations.?

“The debt that I'm most comfortable with is when it's tied to a revenue stream. I have a high degree of confidence in this revenue stream, therefore, I have a high degree of confidence in terms of leveraging up that revenue stream with debt.”

The Power of Infrastructure

Chase believes that the AI industry will create numerous opportunities for infrastructure-focused businesses. Companies specializing in data center design, high-performance networking, and data management will play a crucial role in supporting the growing demand for AI.

While AI brings transformative capabilities, it also demands substantial energy resources. Crusoe Energy's strong position in providing energy-efficient solutions for AI infrastructure puts it at the forefront of supporting this burgeoning industry.?

Crusoe competes in this space predominately with the “hyperscalers” (AWS, Azure, Oracle, Google) and “Tier 2” providers (CoreWeave, Lamba Labs). The former group is quite cost prohibitive for everyone but the absolute largest customers and is not exclusively focused on the specific AI/ML segment that Crusoe focuses on. And while the second group is more similar to Crusoe from a market/product focus they for different reasons bring less attractive products to market because of strategic alignment with GPU manufacturers or a less comprehensive product.?

Efficiency as the Key

Crusoe Energy's ability to efficiently allocate capital, harness wasted energy, and adapt to new technologies positions it as a leader in the evolving AI and cloud computing landscape. As the demand for AI continues to rise, companies like Crusoe are well-positioned to play a pivotal role in shaping the future of computing.

AI represents a transformative opportunity that Chase Lochmiller and Crusoe Energy Systems are embracing wholeheartedly. Their journey from capturing waste energy to supporting AI infrastructure exemplifies the innovative spirit needed to thrive in this rapidly evolving landscape.?

With a focus on efficient capital allocation and specialization, Crusoe Energy is poised to make a significant impact on the AI ecosystem, and we’re thrilled to continue to be a part of that journey.?

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