This article summarises the different ways in which venture-backed companies, and their founders are all playing their part in contributing to the ‘E’ in ESG.
Our findings can be distilled into the 3 main points below:
About a decade ago, in 2011, Marc Andreessen coined the phrase “Software is Eating World” in a Wall Street Journal op-ed. In the article, he argued that “a dramatic and broad technological and economic shift [is underway] in which software companies are poised to take over large swathes of the economy.” The article itself was written a decade after the dot-com bubble – a decade during which the industry was traumatised – and in a way it marked a turning point in venture: the beginning of the epic run in VC backed software-first companies that indeed went on to eat so much of the world, penetrating and disrupting one industry after another, with no stop in sight.
Interestingly, 2011 also marked the top of another bubble, in cleantech investments. During the late 2000’s, certain VC’s jumped into cleantech investments head-first, believing it to be a new technology wave that would both generate outsized returns and concurrently save the planet. Yet, aside from a couple hits (like Opower, a SaaS platform for utilities) the VC’s found themselves humbled by a series of disappointing outcomes. An MIT study found that some $25B was poured into cleantech investments from 2007 to 2011, with half of the money being lost, and 90% of companies failing to return initial capital. Specifically, Series A investments made in 2011 produced a negative 77% IRR.
Most firms that are considered top-tier funds today, largely stayed on the side-lines during Cleantech 1.0. They considered the investment opportunities, dabbled in it, and concluded that the market was not ready – that business models were not mature enough, that they relied too much on consumers & companies selecting the sustainable option out of guilt or goodwill rather than price or quality, and that the industry was too dependent on potential government policy change & subsidies.
A decade on, what we are seeing is that these same top-tier venture capital firms are making some climate-related investments – not with a sole-purpose to save the planet, but because they are seeing real, sizable markets starting to develop, thus creating business opportunities that could generate outsized returns for their investors. We can broadly place the investments in one of two categories: either they are: i) sucking up the trillions of tons of CO2 already in the atmosphere (i.e., capturing carbon); or they are ii) slashing the amount of greenhouse gas being released (i.e., reducing emissions).
Capturing carbon
Starting with capturing carbon, the consensus among experts is that reducing emissions will not be enough to address climate change effectively, and that we will need to find ways to capture the carbon that is already in the air and put it back into the earth. One way to do this is through reforestation (carbon sinks). Other ‘low-tech’ efforts to capture carbon include adding industrial processes to cement kilns for separating out the carbon that would otherwise escape into the atmosphere via their tall, smoke-filled chimneys, and storing that carbon underground. But, perhaps more interesting are deep-tech initiatives to address capture. For example, Living Carbon is an early-stage company that manipulates arboreal DNA to make their photosynthesis more efficient and help trees grow 50% faster, and stronger -basically making the oldest direct air capture machines on the planet even more productive.
Looking at the issue from a different angle are companies that seek to measure the amount of carbon being saved from voluntary carbon-capture projects. For example, UK-based Sylvera uses machine learning techniques to analyse satellite imagery and lidar data to assess and rate the impact of carbon-reduction projects like reforestation. Sylvera can be seen as a typical data analytics and software company but positioned as a ratings provider in an emerging voluntary carbon reduction market. Similarly, further down the supply chain, Patch provides an API platform that allows companies to match carbon-capture projects, like the ones rated by Sylvera, to voluntary consumer purchases. Patch’s API makes it easy for companies to purchase carbon offsets and then give their own customers the option to do the same, thus reliably offsetting the carbon embedded in products they buy (potentially with trees that grow using Living Carbon technology). As such, software is enabling the processes and mechanisms that could make carbon capture market possible, and the market is starting to become sizable partly because consumers are demanding it. Indeed. today, a new Snapchat generation is demanding goods and services which are greener, from companies that pursue sustainability as much as authenticity in creating products that are same or better quality and no more expensive than their fossil fuel-powered alternatives. Software makes it easy to transform the click of an offset button into a chain of events culminating in the planting of a tree.
Reducing emissions
One can also reduce the carbon we are already emitting, either by improving existing processes for the creation of products, or by supporting renewable energy sources with better and cheaper technologies. Battery technology plays a big part in the latter, specifically large-format lithium-ion batteries which are used, not only in electric cars and transport, (representing around 16% of global greenhouse gas (GHG) emissions), but also in large stationary storage installations which complement wind and solar energy. Because the wind and sun are intermittent, i.e., the sun doesn’t shine 24 hours a day, and the wind doesn’t blow all the time – batteries are used to transform renewable energies into more reliable alternatives to fossil fuel for industrial and residential usage (currently representing 60%+ of GHG emissions).
In 2011, lithium-ion batteries were hardly used for such applications. Today, with the rise of electric transport and the emergence of stationary storage, lithium-ion batteries represent a $40B+ market today, expected to double in size by the end of the decade. This also means that there is now a sizable market of battery producers that need suppliers themselves. This bodes well for Sila Nanotechnologies, a company that uses nanotechnology to produce a better battery anode that increases batteries’ efficiency by making them last longer. Sila doesn’t intend to produce its own batteries but rather sell its technology to existing battery providers, a market which hardly existed a decade ago.
The growing demand for batteries has also imposed some stress on the battery supply chain, and the source of requisite primary materials. This has created new opportunities to solve such bottlenecks. For example, KoBold Metals combines machine learning techniques to find new, inexpensive sources of ethically-mined cobalt, a key ingredient for lithium-ion batteries. KoBold’s software models can predict the composition of land sub-surfaces in a statistically valid manner, and thus help guide better decisions on where to acquire land, and where to drill.
To the surprise of many, our food system is also a very large source of GHG emissions. Agriculture alone (think fertilizers, soil management, cow burps & manure) emits as much as the transport sector. Counting all emissions, from fertilizer manufacturing all the way to refrigeration, one study concluded that food is responsible for one third of all global emissions. Beef is a particularly carbon-intensive product if we consider its full life cycle, including the emissions from the crops that are needed to feed the livestock. So, over the past few years, thanks to advances in technology, a market has grown for alternatives to meat, like plant-based, lab-grown meat-replacements. Various companies are competing to provide the tastiest alternatives which can be sustainably and economically produced. For example, Black Sheep Foods produces a plant-based, lamb meat replacement which not only has great taste and texture, but also claims to save 14kg of CO2 emissions and >350 litres of water per pound of meat produced. Similarly, Eclipse Foods creates plant-based dairy products. Another company, Huel, takes a completely different approach, providing a variety of ready-made, easy-to-consume vegan food products – from pasta to cookies and energy bars – that are aimed to provide all the proteins you might otherwise get from traditional meat-based meals. Huel has seen outstanding growth, especially among a young, urban, working population that values time, price/calorie, and convenience.
Of course, meat is not the only food responsible for emissions. For example, coffee’s carbon footprint is as much as half that of beef’s, per kg produced. That is why Atomo has created a plant-based, factory-produced replacement for coffee beans which emit 93% less carbon per kg produced. In the realm of seafood, Forever Oceans is an operator of aquafarms. It uses more efficient biological processes as well as a set of sustainable aqua-farming techniques like deep-water enclosures and automated feeding systems that work with nature,to create sashimi-grade, protein-rich fish, without damaging the oceans.
Dematerialisation
As you can see from the above-mentioned companies, many top-tier Venture Capital funds are backing technologies which are directly addressing the climate issue by helping to reduce or capture carbon emissions…but ultimately the lowest carbon emissions will be from a product that was never produced! A business trip or commute replaced with Zoom, high-street shops replaced with websites & Stripe / Adyen, new hotels not built because Airbnb and the sharing economy leverage existing capacity, the plethora of SaaS companies that are providing online dashboards which replace paper reports, cameras and the associated photos/videos that no longer need to be processed, printed, and stored but rather get posted to Snapchat directly from the cloud: All of these are dematerialising the world economy and thus reducing the need for physical goods and the associated carbon emissions. Furthermore, software-driven companies are being created to reduce the production of new goods and to get more out of the existing ones. For example, Otrium has created an online consumer marketplace for reselling unused inventory to reduce waste in the fashion industry – an industry which is responsible for 10% of GHG emissions and 20% of global wastewater. Similarly, Rooser has created an online B2B marketplace to reduce the inefficiencies of the deeply fragmented European fishing industry, where it is estimated that half of the fish caught are wasted.
Dematerialisation may prove to be the most important impact of Tech on the climate – as software penetrates every aspect of the economy and replaces Carbon with ones and zeroes. Software has in fact been eating the Climate in a big way and will continue to do so [1].
Finally, we should mention the impact that venture-backed companies are having on the Environment by looking at the financial commitment some of its founders have made to help solve intractable problems. For example, the founders of Canva, who are in their mid-thirties and own 30% of the $40B company, have pledged to donate >80% of their wealth to climate action. When Personio, an HR software provider recently valued at $6B, was formed, it wrote into its shareholder agreement that it will allocate 1% of its capital to a foundation which addresses climate action and education. And Stripe’s founders who are in their early thirties, have led their $95B company in creating the Frontier initiative, which has enlisted some tech behemoths in a pledge to buy $925M-worth of captured-carbon between now and 2030, effectively creating a $1B market for carbon capture projects.
Conclusion
Naturally, we are thrilled that top-tier VCs are backing such amazing and altruistic founders. Yet, we must face the inconvenient truth that these sums, as large as they are, pale in comparison to the annual profits made by these same tech giants, not to mention the profits made by the oil and gas players; the actions of these founders are only small steps towards a very large goal.
As KPMG has noted in its report, Can Capital Markets Save the Planet, “Capital markets alone cannot resolve the market failure and market inefficiency associated with climate change. Rechannelling trillions of dollars of capital toward the technologies needed to power a low-carbon economy requires huge, concerted action as well as incentives…”
If you have any questions about the themes discussed in this article or TOP Funds – our Technology Opportunity Partners, please do not hesitate to get in contact with us: info@bedrockgroup.ch
Authors: Richard Rimer and Salman Farmanfarmaian, TOP Funds
References
[1] Another interesting tid-bit (via a16z) – In 1938(!), the thinker and inventor Buckminster (Bucky) Fuller, predicted that technological advancement will get to a point where it would be possible to do “more and more with less and less until eventually you can do everything with nothing.” He called this ephemeralization, a concept which is now known as dematerialization. No doubt we are still far from that point, but the vision laid out by Fuller can serve to expand the frontier of what we think is possible with technology. Unlike the Malthusian worldview that we need to reduce consumption and energy use to save the planet, an alternative mindset, consistent with the venture capital ethos, is about finding technologies that allow us to consume much more, with much less waste. The point is not necessarily to reduce energy use, but to dramatically increase the efficiency of production, and the amount of clean energy available, ultimately allowing us to consume more without depleting earth’s resources.
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