ESG start-ups - the rise of novel, not re-hashed, tech
Spend a day listening to VC pitches and you’ll see some interesting concepts and business models. Spend a day checking out ESG-focused VC pitches and you see things that can make a huge impact on this Earth. Here’s my experience of such a pitch session and a glimpse where tech and capital should be going.
A couple of months ago, I attended a local VC pitch event where ‘green’ startups were showcasing their innovations in ESG-related technology. I didn’t immediately write anything about it as I was still noodling about the event and content I’m developing for an executive book on the space.
That tardiness changed after a chance encounter.
I recently ran into an analyst colleague of mine. We got to talking about growing ESG regulations/reporting requirements and the challenges firms have in meeting these. I mentioned I was developing a manuscript on the space and asked what insights he had on things. What I wasn’t prepared for was this person’s reaction.
In short, he stated that companies don’t really need to change. They don’t need to modernize their plant and equipment, change their formulas/processes to emit less, use different/less packaging, etc. Nope! All these firms need to do is buy carbon offsets. He argued that to make all of those expensive capital equipment changes would waste shareholder capital and a better bargain could be made by just buying offsets.
For a person I used to view as somewhat forward-thinking, I was instead appalled. He spoke to me, not from a political slant, but from a capital or investment perspective exclusively. I know he has children and I wondered if everyone out there was so short-term and selfishly focused as he was.
I knew I needed to get this article (and the book) out asap.
This event (The Heritage Group Accelerator (hgaccelerator.com)) had a lot of the earmarks of a VC pitch event. There was a moderator, lots of structure, plenty of entrepreneurs doing TED-style talks, several way-out and some derivative concepts, and, several potential investors in the audience. I was there to soak up the ‘green-ness’.
What made this event extra interesting was that it was here in the heartland and not Silicon Valley. All of the pitches were about technologies that could make a difference in hard industries (e.g., manufacturing, oil & gas, building products, etc.). Nothing fluffy here.
The event had a keynoter, Duncan Williams of Numora Greentech. His talk shone a bright light on what VCs want to see today. The perspective was interesting as these investors know they’ll likely see 7-10 years of growth with their investments and they want these firms to be making a difference. More specifically, these investors want to see outsized value created by these innovations. What caught my attention were the metrics that these investors want their portfolio companies to achieve. Some of these included:
- Reduce carbon emissions by 0.5 GT annually when the company reaches maturity
- Gallons of water saved
- Gallons of water purified and PFAs removed
- Metric tons of carbon offset per $1000 investment
- Change in energy consumption yoy
- Reduction in amount of shipping materials used
- Transportation avoided
From the VC perspective, these companies could produce far more immediate carbon abatement results than what happens with the (re-) forestation efforts. Both kinds of changes (short and long-term) are needed but it is nice to see what kinds of initiatives are being done in both spaces.
I was also surprised to see a long list of other financial services firms who have created investment vehicles or entities to place bets in the ESG space.
The addressable market for green technologies is huge, too. It covers obvious spaces like transportation and renewables but there are also many other areas begging for solutions (see below).
The VC/investor perspective
All investors, even those targeting green technologies, are looking for an outsized return on that investment. These are not charitable endeavors.
To that end, investors want to see entrepreneurs who:
- Possess a compelling innovation concept
- Can scale this technology and its adoption at a massive rate
- Can make a big difference in the world’s environmental efforts
- Are solving substantive problems or creating high value solutions
- Are developing something that many firms will want to license (or pay a premium to buy the company outright)
Because investors are often looking for a ‘liquidity event’ in the 5-7 year timeframe, I suspect that last bullet point is quite important.
The ideas on display
I sat through the different pitches and they were all unique. Here’s a thumbnail sketch of each of them:
- Fracking water reclamation – When oil & gas firms frack an oil field, they use vast amounts of water and sand. That mixture is pumped into an oil-bearing stratum under high pressure. The tight sands/rock crack and a slurry of water, oil, natural gas, sand and other petroleum products are brought to the surface. This water could also contain large amounts of saline. The problem is what to do with this wastewater. Currently, much of it gets trucked great distances to be pumped into underground storage wells. If it’s saline it may get trucked for offshore disposal. One entrepreneur, working with a Texas university devised a way to purify the water using waste/excess natural gas at the wellhead. This solution eliminates fuel consumed by trucks and recycles the water.
- Recycling plastic packaging – The lead up to this solution was staggering when one sees the volume of plastic containers and packaging being produced globally each year. Unfortunately, almost all of this is a single use product with a miniscule amount (about 5%) getting recycled. The initial creation of these plastic products is a big consumer of petroleum-based feed stocks. This entrepreneur had some great methods for repurposing these plastics and making new packaging from them.
- Dealing with the coal ash problem – Massive piles/mountains of coal ash are all over the world. It’s a byproduct of the consumption of coal for heat and energy. Unfortunately, there aren’t a lot of uses for this stuff and you don’t want it getting in our waterways or soil as other undesirable elements can exist in this ash. This entrepreneur has develop a method to compact this material and mix it with concrete. This reconstituted product can act like aggregate within the cement mix. Once this ash is bound within concrete, it is stable and not an environmental threat. It also helps concrete makers avoid the cost of strip mining for aggregate. On a side note, I’ve seen a variation of this method used to handle the massive amounts of foundry sand generated annually. That waste material often contains small amounts of cast metal. That sand doesn’t get reused as even trace amounts of certain metals can contaminate subsequent castings. Using that sand to make mortar or concrete entombs these bits of metal.
- Batteries with fewer rare earth components – This entrepreneur reimagined battery technology so that the internal components could be made far more cost-effectively and with common materials. This solution already has three patents pending. If you’re into this, be sure and check out another company called PolyJoule. If these batteries get super cheap to make and rebuild, they can dramatically change the economics behind home solar power systems, EV car usage and more.
- Extending the life of infrastructure – Prior to this pitch, I never knew the enormity of the problem where rebar and other reinforcing metals are placed into concrete and then slowly corrode. As these structural items corrode, they weaken and eventually fail. Detecting some of these failures is often guesswork as the material may be deep within a structure. Extending the life of roads, bridges, building supports, etc. means less waste and creates safer assets. This inventor came with a new way of coating/treating this material that is very cost-competitive, simple and long-lived.
- A new kind of epoxy – I can’t say that I knew much about epoxies until this talk, too. And yet, different kinds of epoxy are used in a zillion products and product components. Because of the material’s hardness and durability when dried/cured, epoxies are used with snowboards, automotive parts, laminated forest products, and so many more items. Epoxies can be a binder, a finish and sealer to name a few uses. However, epoxies can use petroleum products and may generate undesirable off-gases. Enter the entrepreneur that designed a different formulation that is more eco-friendly.
The current crop of ESG software products are often limited to reporting on the carbon a company has already consumed. They focus on getting data out ERP and other systems and simply placing it into a spreadsheet-like tool. It’s just reporting and it doesn’t move the needle one bit in reducing a firm’s carbon (and other) emissions. As technologies go, these are pretty useless if not for their regulatory reporting capability.
But, it’s kind of nice to hear about technologies that aren’t about Finance, HR or ERP. I’m kind of worn out from hearing about still another method for allocating general ledger balances. And, these technology advancements above are massively underhyped and, as such, stand out from things like ChatGPT. I think we need to hear more of solutions like those above instead of creating more cryptocurrencies and NFTs.
Some of the above technologies are dealing with byproducts – a area that gets little focus from ERP vendors. That should change. Likewise, some of the above solutions are trying to change the ‘how’ something is made. They are challenging the core production process and coming up with a very different kind of solution. Some of these solutions are looking at repurposing something. At a time when we need to reconsider items like one’s reverse logistics methods, these efforts could be quite transformational.
I suspect many tech people who pooh-pooh, denigrate or ignore environmentally friendly solutions are actually forgetting that behind these are:
- Great innovations that required a lot of primary research in areas like chemistry, a specific vertical, production methods, access to raw materials, etc. These aren’t the simple, derivative copying of the functionality of a competitor’s software features and functions and putting them into your own product. That’s not pioneering work. But these new environmental solutions are more impactful.
- Transformative solutions but in ways that don’t appear in traditional business processes like procure-to-pay.
- Solutions capable of scaling across a large number of businesses and industries
- Radically new approaches for here-to-fore unsolved problems and hope for future generations.
I like these fresh, novel solutions and hope more investors (and tech analysts) appreciate them, too.