“Inflection Point,” “New Frontier,” “Finally Getting Serious”- are some of the ways the carbon removal field has been described in headlines over the past few weeks. With Frontier Climate, Lowercarbon capital, and Climeworks all announcing big new infusions of money into the wicked problem of pulling CO2 from the air, it’s fair to say the field has entered a new stage.
At a recent panel at Columbia University, Carbon Direct Vice-Chair Nili Gilbert said that she believes there are currently over 1000 companies working on carbon removal. She also noted that of those that are vetted, only 5% will be invested in.
The online newsletter Climate Tech VC found that after the IPCC mitigation report identified a major need for carbon removal in April, over $2.2 billion has been invested into CDR.
Forty-five companies received funding, with $1,100 million flowing to climate tech, $920 million to carbon accounting and marketplaces, and $65 million to MRV (with the other $1b committed by Stripe et al. via Frontier).
Before all this happened, our co-host Susan Su said that if a startup has a good CDR idea, it will access funding. That has turned out to be very prescient in the months since that forecast.
On this episode we talk about some of the big deals that have happened in 2022, the technical aspects of different funding methods, as well as what VC can and cannot do for CDR companies. The group also discuss Adam Neumann’s much-publicized foray into the world of carbon credits.
There’s also one more piece of big news we can announce - Na’im Merchant will be joining us as a regular co-host! That means every month you can hear Radhika, Susan, and Na’im discuss the latest news in CDR Business.
Full Transcript
Announcer: You’re listening to Carbon Removal Newsroom, a weekly show about current events in the world of carbon removal, from technology and innovation to policymaking and job growth. Brought to you by Nori, the carbon removal marketplace.
Radhika Moolgavkar: Hello, everybody, and welcome to the May 26th edition of Carbon Removal Newsroom. I have with me, as always, Susan Su, who is a partner focused on climate investing at Toba Capital, and she also serves as a board member at the Carbon Business Council and a board advisor to the Environmental Voter Project. So, Susan, welcome as always.
Susan Su: Hey everyone.
Radhika Moolgavkar: And then joining us is Na’im Merchant. And the good news is he’s going to be here now every business week. So we are so happy that he could join because we love his perspective. And so he is a consultant who works with NGOs and startups on scaling of carbon removal. He also writes the Carbon Curve newsletter about the carbon removal industry and the new carbon economy. Naeem, welcome.
Na’im Merchant: Thanks so much. Good to be with you, Radhika and Susan.
Radhika Moolgavkar: Yeah, we’re so happy you’re going to be with us every month now. And then I am, as always, Radhika Moolgavkar, Head of Supply and Methodology at NORI. So I guess you guys are all out there kind of carbon removal nerds. And so you will know that this last year in all of 22 has been a huge year for carbon removal funding. There are words like inflection point, new frontier, finally getting serious, being thrown out. The online newsletter Climate Tech BC found that after the IPCC mitigation report identified the need for carbon removal in April, over 2.
2 billion has been invested into CDR. There are about 45 companies receiving funding with hundreds of millions flowing into Climate Tech, 920 million to carbon accounting and marketplaces, and 65 million to MRV, which is monitoring, reporting, and verification. And so, you know, before all of this happened, Susan, you predicted it. You said that if a startup had a good idea, it would access funding, and you were very, very accurate in that forecast. So I guess what I wanted to start with is this idea of, you know, has carbon dioxide removal funding arrived?
Are a recent Panel at Columbia University, the Carbon Direct Vice Chair Neely Gilbert said that over a thousand companies were working on carbon removal. Do you agree with that? And that she also said only 5% will be invested in. So does that make sense to you as well with the numbers we’re talking about now?
Susan Su: Yeah, I mean, I’m actually surprised that the number is only a thousand. I mean, I think carbon removal is just so incredibly broad, right? And there are so many different flavors of businesses. There are, you know, so-called venture scale or venture scale potential, you know, technology forward startups. There are sort of more infrastructure-y companies. There are... I don’t want to call them mom and pops because they’re still very technology intensive, but they might be like a project based company adjacent to oil and gas. So I just think there’s like so many different ways to do carbon removal, whether it’s technological, whether it’s nature based, whether it’s related to agriculture, which is, I guess, kind of nature based, but depends on whether you would consider agriculture nature or not.
I mean, I think there’s just so much in there that to me, a thousand is like probably just the way we think there are like a thousand stars in the universe that’s known to us, which is actually incredibly limited. And I do agree that there’s going to be a steep funnel in terms of the number that will be Now, I think it depends on what you mean by invested in. Do you mean that they’ll receive venture funding? Of course, that’s going to be incredibly small because that only applies to a certain sort of flavor of investment.
CDR business, or do you mean invested through government R&D dollars, or do you mean invested through corporate strategics? So I think there are lots and lots of good fits for financing for different types of companies. I think it’s incredibly early. So we’re like just starting to figure out, okay, what are the different types and what are the right financing instruments that fit with those types? Just for example, in my work, you know, sometimes I’ll, in the same day, I’ll talk to a startup that you guys have all heard of who are reading TechCrunch or who are reading Climate Tech BC, you know, one of these names that you’ll have heard of in One of those publications with that’s maybe been through YC or something or other tech star or something like that.
And then later that day I’ll talk to a company that I guarantee none of you have ever heard of that is working adjacent to oil and gas in Alberta and they figured out some really novel way to do one particular type of carbon capture at point source. For coal mines or something like that. And so those are like two very, very different types of companies. And I don’t see, you know, whereas, you know, maybe in a USV or an Andreessen Horowitz might be interested in the former, they probably wouldn’t be necessarily going for the latter.
And it doesn’t mean that Both aren’t viable technologies, but they just sort of have different learning curves and risk profiles associated with them. So my very long answer to those numbers don’t surprise me at all. And I think in order to be within that 5%, you actually just have to make sure that you have a good... Product market fit with your product being the financing product that you’re putting out to market and the types of instruments that are available to finance what it is that you’re doing.
Radhika Moolgavkar: So what about you, Naeem? Does the thousand CDR companies make sense to you? And it’s kind of, as you watch the field grow, where do you think the concentration is happening, the type of CDR company that’s growing the quickest?
Na’im Merchant: I agree with Susan. I think the number is probably higher than a thousand. It doesn’t surprise me at all that number was thrown out there. I last year put together a quick Google sheet of direct air capture companies, as well as Because research institutions and other organizations that are working on direct air capture directly, just based off a few hours of research and came up with somewhere between 50 and 80 companies. And that list hasn’t been updated in the last year. And that’s on direct air capture alone. And that’s not getting at all the companies that are stealth or that are just not particularly public.
You know, and I guess it depends how you define carbon removal or how broad of a definition you use with carbon removal. But I mean, if you think about it, a thousand plus companies submitted ideas to Elon Musk’s XPRIZE in that kind of first round. So certainly there’s more than a thousand. So totally conceivable in my mind. And it’s growing in a lot of directions. I think we’re seeing a lot of carbon marketplaces emerge. Interestingly, it feels like there’s more carbon marketplace type of platforms than permanent carbon removal companies that are actually operational, which is kind of interesting.
And there’s new interesting companies that are coming online that are claiming to be able to... Assess or apply a rating to carbon removal or carbon offset company. So we’re seeing like kind of different things in what we maybe would have traditionally thought of as a carbon removal company a year or two ago. You know, the field’s looking very different. And so I think it’s still just growing in so many different directions that I don’t, at least from my vantage point, doesn’t look like it’s consolidating in any one direction just yet or still early.
Radhika Moolgavkar: Do either of you in your work see particular excitement around types of capture or types of durability? I feel like in the last six months, it’s really, really been about industrial, or manufactured solutions, whether it’s in the ocean or through geological storage. But I’m curious what you both have seen and if you have a different perspective. Naeem, I’ll start with you and then I’ll move over to Susan.
Na’im Merchant: You know, I think we’re seeing some more engineered solutions for sure, kind of get more attention, get more funding than maybe six months or a year ago, which is a good thing. I’ve noticed that. Like I said before, I think a lot of platforms to help with discovery and funding of carbon removal projects through these marketplaces. And then I would say we’re also seeing direct air capture, ocean capture, other engineered solutions getting a lot more funding. So I definitely see that through my own work.
Radhika Moolgavkar: Susan, what about you?
Susan Su: I think the reason why we see a lot of emphasis on technology-driven solutions, and I’m not sure that I’m right about this, but this is just my guess, okay, is probably a couple of different things. One is that it’s very clear what asset you own, and so that sets it up to be... Easy to define sort of later ownership, but also to draw a boundary around what can and can’t be financed later when technology, if successful, when it reaches kind of that plateau of scale. I also think that people are really, at least in the early stage private equity space, people are really enamored with the idea of a learning curve, which can be extracted from technological advancement.
And so that’s another reason why we see a good amount of emphasis on these kind of technology-focused solutions. And there’s also, I think, a certain assumption of repeatability. And scalability, but as separate concepts. So scalability, the ability to grow really big, but also repeatability, predictability. Whereas, you know, I think when people look at nature-based solutions, if you look at the companies that have received funding, including Nori, that are using... You know, something related to the earth system, whether it’s soil or forests, there’s usually got to be a marketplace component kind of tacked onto it in order to make the business model make sense.
And so when you’re looking at the pure developers, like those who are just doing production of supply, I’ve noticed that those tend to be primarily technology driven because the IP is very, And that’s what makes sure that your equity has longevity to it. Whereas when it comes to a soil carbon solution or a forestry solution, what can you do to make that IP protectable? It’s going to depend on maybe some land ownership, but at the end of the day, it’s really kind of like the transactional platform that you build on top of it.
So I think that’s just kind of interesting. It’s almost like even when it comes to soil or forest or whatever, we’re still looking for a way to add a technology layer onto it, which is that transaction management, whether it’s software or software. I know we’ll talk about this a little bit later, tokenization and whatnot. So I think that’s kind of interesting. And I think it’s just because in early stage private equity, aka venture capital, we’ve got a hammer and we’re looking for a nail. And that hammer is very attuned to technology of one flavor or another, whether that’s hardware, deep tech, or software.
Radhika Moolgavkar: All right, yeah, well, certainly of the eight biggest CDR funding announcements right this year, of which I think they range from 30 million to up to 650 million for Climeworks, they were almost all exclusively manufactured solutions except for one, Pachama, which was, of course, as you said, Susan, a forestry carbon credit platform. So I’m curious, and NCX, which is a forest carbon marketplace. So I am curious what you guys take away when you look at that list and if there is, you know, anything that surprised you about the list or disappoints you about that list, or if it even shows us a trend for what maybe the next six months to a year will look like.
And Susan, I’ll start with you on that.
Susan Su: You know, a lot of these companies that are on the list, we’ve got a list of includes in, this is in alphabetical order, no, this is in descending chronological order, Pajama, Brimstone for Cement, Air Company, which does the vodka from captured CO2. Vodka, I think they started out with air vodka and then now they do like other types of consumables. Climeworks, Brilliant Planet, Heirloom, NCX and Watershed. I mean, I think that these are companies that have been around for quite a long time. Again, I think we’ve discussed this when we’ve talked about Climeworks previously, but this is not a new company.
It’s been 10 years plus in the making. Same with not 10 years plus, but same with Heirloom, Watershed’s been around for a little while, Pachama, et cetera. And so I think what we’re seeing is kind of emergence of a cohort of growth stage or what people consider to be valid at the growth stage of a carbon removal company. And I think that’s two things. One is... Wow, things are starting to mature here, even as these businesses themselves are still quite early. Two, look at who’s investing. We’ve got some really large growth equity and later stage funds.
Climeworks had GIC. I mean, you guys, GIC. Bailey Gifford. There are some really large growth Strategics in here as well, which usually tend to get involved at the later stages. JP Morgan in NCX. So I think what’s really interesting is that on the demand side for this type of deal, I think there’s a growing amount of demand. And on the supply side for the type of company that can supply this type of equity, we’re still... There still aren’t a ton. These are, these guys have been, these teams have been at it for most of them, at least five years, if not more since 2022.
So that would have been founding date 2017 or earlier. And we know that, and I know Naeem knows this really well, but many of the carbon removal companies that are kind of on the scene today, they’ve been founded in the last two years or even three years. And so there are just, this is rare air, I guess. There aren’t that many that are, you know, qualifiable for a Bailey Gifford or a GIC to invest in them. So I think part of what you’re seeing is that there’s an interest in Carbon removal ESG deployment at those stages.
Not a whole lot of assets. Not that these companies aren’t great. I’m not trying to steal their thunder in any way, shape, or form. But I think we’ll probably continue to see this sort of graduation. And it’ll be interesting, I guess, just to see how these rounds continue to evolve as our newer carbon removal companies, of which there are many, many Start to grow like will there be competition will these rounds stay this big will the bar get higher.
Radhika Moolgavkar: I’m not sure we’ll see name what are your thoughts.
Na’im Merchant: I wouldn’t add much more to what Susan said other than I think what strikes me, and I think Susan probably understands this a lot better than I do, but what strikes me is just the amount of funding that’s flowing to what are effectively carbon credit marketplaces Roughly equaling what’s heading towards these kind of hard tech carbon removal companies that have very resource intensive days ahead of them in order to get to the next level. And it makes me wonder if there’s this kind of mismatch between kind of what resources are really needed to drive carbon removal forward versus just kind of investments being made In areas that are familiar to folks around software and platforms, but aren’t really, I don’t know, going to drive down the costs of carbon removal, which is what we all want to see.
So it just struck me as interesting that I know there’s a lot more kind of thought that goes into this and maybe I’m applying, but the It strikes me there might be just a mismatch of how resources are being applied to where they need to go. Is venture capital ready for making these larger, longer-term investments in carbon removal companies? Are they there yet? That’s an open question for me.
Radhika Moolgavkar: Yeah, I mean, you need supply to have a marketplace. So it feels like maybe your intuition isn’t totally wrong that we definitely need to ramp the infrastructure to create that supply before we ramp the marketplaces to sell that supply. Except for Nori, of course, which is the best. Which actually brings us to my last part and this part of the program, which is carbon flow. Kind of a good way to end the segment because it touches on a lot of what we talked about. It’s Adam Neumann’s newest venture. Adam Neumann is, of course, from WeWork.
They just announced a $70 million funding round for his new company, Carbon Flow, or which, sorry, Flow Carbon, I believe. I got that wrong. Flow Carbon. And it’s a protocol that helps projects sell tokenized carbon credits to companies looking to reduce their carbon footprint. And the credits can then be traded on crypto exchanges, the company says. So it’s an interesting new model. We’re seeing a lot of tokenizing of the carbon removal credits. There’s Klimadao, there is Toucan. At Nori, we do a version of that, though it’s not exactly the same because we do our own methodologies and we have a different mechanism.
But we’re all in this crypto token carbon removal space. So Naeem, I’m kind of curious what your initial reaction was to this announcement. Personally, I was amazed that Adam Neumann got more funding, whatever it was for, but I’m curious what you’re thinking.
Na’im Merchant: I think it kind of reinforces my last point a little bit around just like where’s the money going and is it kind of strategic to kind of the outcomes we want to see with carbon removal. You know, I think it comes down to, you know, what problem are you trying to solve here? I don’t know that there’s a lot of, at least I can speak for more kind of engineered carbon removal companies. I don’t think they’re really just thinking of themselves like, gosh, I really wish we could tokenize our carbon credits faster.
That would really help us grow right now. I mean, Maybe, but like it just doesn’t seem to be solving a problem that feels pressing. It doesn’t feel like a hair on fire problem, at least for companies in the engineered carbon removal space. So it is, you know, I don’t know a ton about this, but I kind of get this sense that a lot of the kind of, you know, crypto Web3 oriented kind of initiatives around climate Are solving problems that don’t seem to be a really big issue for companies that are doing the really hard work of long duration carbon dioxide removal.
That’s my take on it.
Radhika Moolgavkar: What do you think of the argument that some people that I think a lot of folks in this space make? And again, to be very clear, Nori does something different and I’m not going to go into what Nori does, but One of the arguments that is made in this space is there’s additional transparency, which might help if you’re not talking about maybe carbon removal funding, but around the accounting around carbon removal. Does that argument resonate with you at all, Naeem, or you don’t think that...
Na’im Merchant: I think there’s maybe a benefit around greater transparency as it relates to... You know, forced carbon offsets that might have been kind of traded on, you know, or could have been available on an existing registry. Again, I don’t know that’s really a really kind of, again, not a hair on fire problem. It seems like if there’s a way that we can improve transparency around how these transactions are done, great. I don’t think that’s the main problem with a lot of the kind of forced carbon offsets or renewable offsets that are You know, that are kind of the underlying offsets that are being brought on chain here.
The problems are much deeper. And I think that when we start trying to figure out the transparency and the accounting of the movement of carbon credits and how the blockchain can help make that all work better, it just seems like it’s a small problem they’re fixing relative to, I think, the larger, deeper underlying issues that we see in voluntary carbon markets more generally.
Radhika Moolgavkar: Susan, what do you think of this announcement?
Susan Su: It’s hard to know where to begin. I think actually did a really good job of being pretty diplomatic and I think in a very neutral and balanced way, articulating a lot of the things that I think as well. It definitely feels like it’s a jump into optimization when we haven’t even like solved the zero to one problems yet. Like, honestly, supply is a really big problem. Just verification like is it real is a really big problem. There’s also some moral quandary challenges. None of that stuff has been solved yet. And I don’t know that like greater trust so that we can have so we can accelerate liquidity is the number one through 10 thing that we really need to focus on right now.
And I think But it’s fine. It’s fine. Go ahead. There are a lot of different things to work on. I mean, people are building all kinds of different technology for different parts of the global industrial ecosystem. And it’s not for me to judge whether your problem is where it sits in the priority stack if there are other people that are willing to not only finance you, but also work on smart people willing to put their Life, time, and energy into your endeavor. I think that’s great and more power to you.
I do think that in many cases, not just in climate tech and carbon removal, but in many parts of tech, we have these like certain keywords that sometimes get attached to a solution and they become kind of like these hype words that really help to Knock you into a different category, blockchain being one of them, where the inclusion of blockchain or Web3, I’m not saying anything super novel here, I think we all recognize this, but it can sometimes re-categorize your company or your project into a different investment tier. That unlocks different types of funding for you.
Crypto funds, for example, as well as certain generalist funds that have like a carve out for crypto and they’re looking for, they’re out there like seeking their nail. You know, it’s the hammer looking for its nail as well as in this case, you know, consumer, direct consumer participation through a token sale or through a DAO. So it’s actually in some ways a very clever way to suddenly Make yourself to merchandise your deal to make it, I think, qualified for different pockets of capital that maybe if you were just some sort of like a new type of Vera or something like that, nobody would pay too much mind.
I also, by the way, not to knock on blockchain, I happen to think that climate is also often or ESG is also often one of those labels, right? That gets, you know, the sticker gets stuck on the package and suddenly it gets merchandised in a different way and it unlocks these new pockets of spend, share of, you know, investor wallets. That, you know, maybe would have been off limits if it didn’t have that sticker on the package, so to speak. So I think maybe that’s part of it. I do also find there’s been like so much debate about this on Twitter since the announcement, but I do find that like there’s a founder named Chris Toles, who is the founder and CEO of a company called Yardstick.
And he had a great tweet. Y’all should follow him, by the way. He’s very, very knowledgeable. And he’s very sassy. But anyway, Chris had a great tweet where he was just like, look, you are a smart person. If you are as smart as you are and you still cannot understand how this all fits together and how blockchain and Web3 Facilitate carbon markets, then it’s probably not you. It’s probably it. And I thought that was just a very funny way to put it because I think we’ve all been there before where we’ve kind of like read all the documentation and we’ve kind of like turned the sheet upside down and tried to read it the other direction.
And we still don’t quite get it. And we all kind of go home thinking, it must be me. I must just not understand this. But actually, in some cases, it is healthy to question the necessity of the level of complexity that we see around what are some actually very basic questions that are still unanswered. So that’s kind of like what I think more broadly about this. But on the specific funding announcement around flow carbon, look, I think there was actually just this week, The all in podcast guys, so like Chamath, Calacanis, David Sachs, they had a summit and they hosted one of their panel guests was Bill Gurley of Benchmark fame.
Bill Gurley, one of the most well known and well respected investors in Silicon Valley, who’s been investing for multiple decades, really quite a legend. And he, you know, Benchmark invested in WeWork. And then they actually were able to offload. I think they did like a secondary sale before all the bad stuff went down. So they actually came out really, really well on their WeWork investment. And Gurley said of Adam Newman, look, like we always, we had a rule. We would never, ever, ever invest in real estate. And I walked out of that meeting and I said to myself and to all my team members, we have to invest in this guy.
So I think it’s really easy to look at like the very unflattering, for example, stock photos of Adam Neumann or to see his quotes or see some of the things that he said or like listen to the sound bites and think, wow, this guy’s really nuts. But there are a certain breed of entrepreneur, whether it’s Neumann, whether it’s Travis Kalanick or others who even, you know, Elon Musk, they really rub people the wrong way sometimes, but they also have An undeniable charisma that I think is incredibly intoxicating and powerful. And sometimes for those of us who have not met these people or were on the outside, we’re observing how in the heck did this guy come out of nowhere and then fail his way upward to raise $70 million?
There’s a lot of cult of personality around some of these entrepreneurs and they have, just how powerful they are as individuals actually drives a lot of that conversation. If somebody else that weren’t him went out to, and by the way, he’s not the CEO of Flow Carbon either, but maybe if the CEO by themselves or if somebody else, a different team went out on this exact same idea, Maybe they would have had a really different result. So I think part of the size of the round and the names involved really speak more to the very insidery nature of Silicon Valley relationships, as well as how undeniably charismatic and powerful some of these figures are, regardless of whether they It actually takes a special person to build a WeWork to the size where it could fail the way that it did, if you want to think about it that way, too.
So I think it’s important to separate that stuff from the fundamentals of the project that we’re evaluating when we are kind of onlooking and wondering how the heck did this happen.
Radhika Moolgavkar: Well, that is actually a nice then segue into what the other topic I wanted to hit today was kind of thinking about financial tools for CDR. And so Naeem, back in March, you wrote about three innovative funding mechanisms for carbon removal. So advanced market commitments, prizes and venture capital. So I think we’ve seen in the last few months in the last that all of these have played a significant role in CDR funding. So are you encouraged by how these non-traditional approaches are supporting the field? And what other institutions and investors do you think need to get involved to keep the momentum?
Na’im Merchant: Yeah, and I had the privilege to co-author that piece with two really smart people when it comes to innovative financing mechanisms, Johannes Lohmann and Max Bode. And in the piece, we review these kind of innovative funding mechanisms where we ultimately land is that while we need all of these mechanisms, whether it’s innovation prizes or venture philanthropy, advanced market commitments like what we saw with Frontier Climate, where a group of funders kind of get together and offer to purchase a quantity of a good that meets a certain predetermined set of criteria.
It is the most promising approach to financing carbon removal long term. You know, EMCs provide a clear pathway to a large market for carbon removal developers and thereby kind of help to unlock risk capital needed to rapidly deploy their solutions. I also think it’s worth flagging that there was also another great thought piece on advanced market commitments written recently by a friend of mine, Di Ellis, who offers kind of a hands on kind of boots on the ground perspective Of what it took to get advanced market commitments off the ground and scaling up access to HIV medicines in low resource countries in the early 2000s.
I don’t know that we really appreciate how hard it is to get funding mechanisms like this right. And so the more that we can kind of look to expert perspectives from folks like Johannes and Max and Dai and others from other sectors who did this in health or education or elsewhere. Could be really helpful in thinking about how to do this with carbon removal. And I can share something we can include in the show notes around dialysis recent kind of a couple pieces on AMCs. But to answer your question, I’m really Really encouraged by the role of innovative financing mechanisms in carbon removal this year.
You know, we had the catalytic grants by the Chan Zuckerberg Initiative earlier in the year, the Elon Musk XPRIZE milestone winners a few weeks ago, and then the launch of the Frontier Climate AMC. So all three innovative financing mechanisms that we talked about that article have been deployed this year. And now what we need is for that to happen more and more and more and kind of build on that each year. But so far, all of these efforts have been led by private entities. And that’s not typical of AMCs and similar financing mechanisms.
So it’d be great to see, over time, more involvement of local, state, and federal governments, as well as large bilateral, multilateral institutions in advanced market commitments. They’re the ones who are typically involved in this. And recognizing that carbon removal, It’s a global challenge that will generate global economic benefits. It’d be really cool to see institutions like even the World Bank and others like them to bring their thought leadership around how to crowd in more public sector participants and resources into some of these innovative financing mechanisms moving forward. So that’s kind of what I’d like to see or how I’d like to see this evolve over the coming years.
But this year so far, really encouraged by the progress in this area.
Radhika Moolgavkar: I think the Open Air Collective is kind of driving at some of that government involvement with their local state legislative action. But Susan, to turn to you a little bit in the specifically in the VC space, you know, what are what do you think are the strengths and kind of the limitations of venture capital as a tool specifically as it relates to kind of climate solutions and CDR? And do you think there’s any merit to critics who say that VC is squandering opportunities to build a better world? I mean, should that be their focus?
Susan Su: I think that, you know, I’ve heard some great investors that I’ve worked with in the past say one of the great investors Privileges of working in venture capital is that you do in part get to help make a reality the world that you want to see in the future, whether that’s and it’s a great responsibility to write whether that’s a new type of ad tech platform that’s going to change the way that we interact with political media for better or for worse, or whether that’s A new type of carbon removal technology.
So I think there is definitely a responsibility that shouldn’t be ignored there. However, I also think it’s really important. I feel like a lot of people do not understand how the venture capital business itself works. And this is totally normal because even if you’re a founder, even if you’re a founder who maybe is on their second company or Or more, the number of times that you’ve interacted with venture capital is probably still fewer than 10 times total. Whereas you might do a deal once every 12 months, or, you know, give or take, you know, as an operator, a VC does a deal maybe once a week.
And so you just really don’t see what those, you know, what it looks like that many times. And you also, there’s very little discussion, very little, you know, really accurate content to go and learn, like, how does the VC business itself work? And I think that’s really critical to understand if you’re going to evaluate its strengths and limitations as a tool to finance high-risk endeavors. Now, on the one hand, it’s a great fit for some of the climate tech solutions that we need to see in the world because it’s... You know, VC works really well where there’s a lot of risk and where there are few, you know, sort of clear metrics to be able to underwrite, especially very early stage VC.
On the other hand, venture funds raise money from limited partners who are outside funders, and they have to, in order to survive, there are startups as well, right? Or their businesses, and some of them are startups. They have to be able to continue raising money in a very competitive, increasingly competitive fundraising ecosystem from LPs, LPs who are sometimes institutions such as endowments or Public pension funds, sometimes from high net worth individuals, sometimes from corporations, a lot of different flavors of potential funders that they have to sell their product onto. And in order for them to be able to continue raising funds, aka survive as a venture business, they have to drive, you know, they basically have to do what they said that they were going to do, which is deliver those three to five X returns.
And so that’s, as a venture capital investor, that is your number one job. It is to hit those returns, fulfill your fiduciary duty to your LPs, not literally break the law of what you promised that you were going to do, what you promised to your investors that you were going to do. Your primary job is not to make the world a better place. And that is just the truth of it. We’re not out here to do that. Hopefully we get to do that as part of our actual job, which is helping LPs return and generate returns on their capital.
But that’s the critical thing to remember. And if you don’t do that, You don’t get to eat. And so if you are a VC who chooses only to, let’s say, if there’s like a mutually exclusive choice between building a better world versus delivering returns and you choose to build a better world, you won’t be in the running the next time around for fund two, fund three, fund four. A dirty little secret of the venture business is that 90% of funds don’t make it to fund three, fund four. So most of them die in those first one or two funds.
And actually the vast majority of venture funds return, deliver their best returns on fund one. And then they kind of get less good after that. I think it’s really... It’s kind of like, I’m not trying to complain here, but it’s like, nobody asks the VC for their perspective on all of this, right? And I think it’s just really critical to realize that it’s not always the best tool for every single job. Now, it is a really great, almost all purpose tool, but sometimes there are more specific ones for certain jobs that need to get done.
And as an operator, It’s really great to understand what the tools are, take the time to read up on them and know what’s a good fit for what you’re trying to do. And then the last thing I’ll say on this is I think it’s awesome that advanced market commitments, philanthropy, prizes, government matching grants, all of this stuff is coming into the mix. And the smartest founders know what that they’re constructing a portfolio and they actually know what all is out there. It’s actually really hard to know what all is out there because each group kind of just focuses on, you know, VCs just know about VC, government grant people just know about government grants.
There’s like not that much overlap and there’s not like one person or one, you know, group that you can go to that you can just be like, give me the playbook, tell me all the stuff that’s out there and I’ll pick and choose. Like nobody’s done that homework that I know of. So I think it’s actually a great potential competitive advantage for those founders, for those operators who are willing to slog through and really understand the diversity of the funding landscape that’s out there and what’s a good fit for them.
Radhika Moolgavkar: All right. Well, Naeem, last question for you today is, so you obviously have been deeply involved in the startup world of carbon removal. What have you learned about the kind of help A startup needs to get off the ground and kind of when in their development, early stage development, do they need it?
Na’im Merchant: That’s a great question. I think Susan would know this more deeply than I do, but I think when I engage with startups in the carbon removal space, I guess I could boil it down to three main areas of support that I think they need. I think first at the really early stages, they need some kind of risk capital to help them develop their solutions. And that’s where things like, you know, government grants or grants from philanthropies or venture philanthropies that can be mobilized quickly or, you know, the milestone awards from the XPRIZE competition that kind of fits into that category as that kind of early kind of stage help to kind of get to, you know, a bench scale or early pilot of their idea.
Another thing that comes up a lot in conversations with carbon removal startups is they need partnerships with universities, experts that you could find maybe at the DOE energy labs or other institutions that can help them kind of fill whatever other kind of technical gaps that exist as part of their kind of solution or how they pursue their solution. And being able to access that quickly and seamlessly, I think is valuable for them. And then finally, the other thing I hear from startups is that they need to see kind of a path to an accessible, predictable, transparent, multi-year procurement mechanism like Frontier Climate that can help them lock in other forms of financing along the way.
But they need to be able to point to something like that and point to a market that’s not just kind of You know, one-off spot purchases, but something that feels a bit more predictable, like I said, and transparent.
Radhika Moolgavkar: Susan, anything you want to add to that?
Susan Su: I think the, just to highlight that point, some of these types of financing actually layer together really nicely and they really unlock these other types for you. So for example, just in the way that raising venture capital can unlock venture debt because venture debt is predicated on, you know, part of the underwriting is driven by venture capital and the venture capital firms that back you. Something like an AMC is so critical because it becomes an earlier domino, so to speak, that gives a foothold to whether it’s debt financing. It probably wouldn’t really help much with project financing, but whether it’s debt financing or venture capital, which could then You know, maybe like unlock a different form of venture debt, et cetera.
So I think the grants, by the way, work in the same way. They can be very validating where, you know, many government grants operate on a match basis. And so when you’ve got the promise of, you know, a few million bucks from a DOE grant and, but it’s a match that just makes it a, That slightly de-risks other forms of capital to step in and provide just the match. They’re not kind of like in there alone. So a lot of this, I can’t emphasize enough, a lot of this just really works in concert.
And that’s why it’s very important to Poke your head up from time to time from the technology, from the day-to-day operations of the business itself, and really think about financing. I feel like, especially in this current market, there are, I’ve been thinking on software, you know, because a lot of my colleagues, most of my colleagues are investing in software. There’s been like so much discussion of what is going on with the markets. And then when it comes to climate tech, people are just like full steam ahead, acting as if nothing’s going on.
I think that’s like a really big miss. This is a huge opportunity to learn and become really, really good at the financing piece because it’s going to become, if not already, it’s going to become very, very important to the ultimate success of any company, whether climate tech or not. And so I really hope that founders don’t miss this opportunity to learn and become experts in the I know it’s boring and it’s not as cool as building actual solutions, but it is literally your job as a founder to make sure that goes well.
It could potentially be the number one job, especially in our current environment.
Radhika Moolgavkar: All right. Well, I don’t find it boring, Susan. I think it’s very interesting, but... We are at the end of the hour or half hour, a little more. And Naeem, can you kind of take us out of this episode with some good news? Because I think as always, we could use it.
Na’im Merchant: Yeah, we could really use it. Well, this exciting news just dropped this morning, but Salesforce and Microsoft announced at the World Economic Forum annual meeting in Davos that they are adding $300 million in commitments to fund carbon removal. As part of the First Movers Coalition. And the First Movers Coalition is a kind of coalition of companies that are pooling their purchasing power to help drive down the cost of decarbonizing hard-to-abate industries like aviation and shipping and steel and others. But it also includes funding innovative carbon removal technologies. So that’s another $300 million for carbon removal that wasn’t there yesterday.
And that’s on top of the NextGen carbon removal facility that announced last week, which is a collective of kind of corporate buyers as well, that announced last week it’ll be purchasing a million tonnes of CDR by 2025. So advanced purchase commitments with a focus on driving down the cost of carbon removal are gaining steam since the frontier climate announcement. And I think that’s a very, very good piece of news for the carbon removal space.
Radhika Moolgavkar: Well, I agree. I thank you both for being here today and look forward to talking with you in about a month. Until then, have a wonderful start to the summer and to everyone listening, hopefully you’ll join us next week for our science episode.
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