I Don't Get It: Climate Investing
Confession time: I don’t understand climate investing. Not because I don’t believe in global warming as the most important issue in the world and not because I don’t think saving the planet will take massive capital investment.
I don’t get climate investing because it feels like the things that matter (power generation, transmission, and storage) aren’t suitable for venture and the things that are suitable for venture mostly don’t matter (software). VCs can’t do project finance and the real hard science that has to happen doesn’t turn commercial within an 8-10 year fund lifetime.
And yet climate investing is the among the hottest, most hyped places to invest right now, second only to AI.
I’d been casting around asking smart friends to explain it to me. Meera was kind/patient enough to send me a very long voice memo which turned into an email exchange (interrogation) which turned into this interview.
She walked me through why this time might really be different, the places venture can make an impact and a return, and why (some) investors keep making the wrong calls anyway. I learned a lot so if you don’t get it either or you just want to hear from someone who really does, take a look.
-Yoni
The Basics
Who are you?
I'm an early stage investor at Redpoint, a multistage fund based in the Bay with a 20+ year track record of backing companies ranging from Snowflake and Stripe to Twilio and Guild Education. At Redpoint, I spend the majority of my time exploring opportunities that solve for the wellbeing of the planet and the people who inhabit it.
Call it ethically aspirational, but I believe that you can do incredibly well (financially) while also doing good.
Why are you investing in climate?
I can tell you all of the reasons why I care about the impact of climate focused companies (growing up with a hippy dippy dad, diving far too deep down the rabbit hole of our climate future (spoiler alert: it does NOT look good), etc.), but at the end of the day we as investors, candidly, have to gravitate towards where the returns are and I think it's an area of phenomenal business opportunity.
The Interview
Climate investing is one of the most famous flops of the 2000s. What’s different today?
With macro headwinds compressing spend everywhere, the need to invest in macro-insulated markets has never been more acute. With $369Bn earmarked for climate related spend as part of the Inflation Reduction Act, there are few categories with as much funding firepower behind them as climate. And the support extends far beyond earmarked funding with regulatory pressures ramping up across anything from commercial real estate emissions caps at the municipal level here in the US to required corporate reporting over in Europe. As investors we always question "willingness to spend," and climate adjacent categories have been given (thank you, Biden!) an unfair advantage.
How do you think about the right place for venture - distinct from energy investors or the government - in electrifying our future and reducing emissions?
When you give an investor a hammer (a virtually unlimited checkbook), every company looks like a nail. Yet, venture capital is one of the most expensive sources of capital — so no, it should not be used as the source of capital for any and all funding needs. I think there is a major role for the public sector and project finance players to play in the ecosystem. It will take a village to drive true sustainable transformation at a societal level. One of the greater challenges facing this category is the overall opacity associated with navigating and securing these sorts of financing options. It's hard, which is why so many have resorted to equity as the "easiest" option available despite this feeling incredibly challenging (if not impossible) to scale while retaining any essence of ownership in your company. If you have any ideas on how to unblock this, I am certainly all ears ;)
It seems like every week I hear about five takes on carbon offset marketplaces and metering/monitoring. Do you worry that 1) there's too many of them 2) they're selling snake oil 3) they're not close enough to the P&L to matter?
Yes, yes, and yes. We've seen a flurry of founders and investors flock to "easy to understand" or "easier to underwrite" categories. It's a compelling pitch at first blush. However, far too many have failed to critically unpack (i) the digitization opportunity (i.e.: how much of this can be automated through technology vs. services like in time, resource, and human capital intensity) and (ii) the purchasing justification (i.e.: is there regulatory pressure, business continuity risk, or cost benefits to implementation or is this more of a nice to have marketing pitch at risk of wallet compression in a weakening macro environment).
So, am I entirely disillusioned by the category? Actually no! I believe that there are sizable vertical specific opportunities (think apparel manufacturing, transportation, commercial real estate, etc.) that have the potential to yield multibillion dollar outcomes.
Are the things that can make money for venture even aligned with things that will make a real impact on the climate or are VCs making derivative bets that might profit from positive climate impacts rather than drive them?
New York cynicism ;) While transforming the ways in which we generate power will be critical to driving true emissions reductions, there are substantial roles for software, marketplaces, and financing solutions to play in that broader energy transition (bonus points for solutions that package all 3 together!). While we as venture investors are less apt to invest in deep tech solutions oriented towards power generation, the ecosystem of aligned capital efficient opportunities is growing.
We are moving towards a world that is far more decentralized when it comes to energy generation and transmission. Accordingly, the need for streamlining processes ranging from underwriting and procurement to assessment and monitoring has never been greater as the economies of scale afforded to the larger legacy players (i.e.: power plants) are diminished with the transition to smaller, disaggregated, less sophisticated operators (i.e.: micro grids, homeowners, and more). While there is a large and growing base of investors and operators excited to build this new distributed grid, they lack the connective tissue and, in many cases, financing required to make this a reality. Thus, there is a huge role for VCs to play in the establishment of a greener grid, be it in our backyards here in the States or across the world in emerging markets. There will be a multibillion dollar player who owns this space (a space that certainly has the potential to be a winner-take-most category). The question is just who.
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