How can we save the planet and make money along the way (soft-tech edition)?

‍The basic definition¹ of sustainability is the ability to be maintained at a certain rate or level.

To echo Bill Gates’ book, How to Avoid a Climate Disaster ², each year we contribute ~51B tons (also said as 51 gigatons) of global emissions. To reach sustainability, we need to bring that number to zero.

In this post, I am going to lay out some ideas and framing for how soft-tech investors can maximize emissions-lowering impact while delivering venture returns.

Note: I will refer to startup solutions as Hard-tech and Soft-tech, roughly defined as:

• Hard-tech: Solutions that have physical components: Hardware, materials, chemicals, and biological sciences (e.g. living organisms), etc.
• Soft-tech: Solutions that do not have physical components: Software, data solutions, virtual marketplaces, machine learning, artificial intelligence, computer vision, etc. 

Here is a high-level market map that covers some of the current hard and soft-tech landscape:

Why invest now? What has changed?

In recent years, several emerging factors have increased the unicorn potential of sustainability investments:

• Tech innovation - A number of hard-tech solutions are now well developed, making them optimizable and cost competitive
• Corporate commitments to net-zero are real and funded​ - $130 trillion³ in assets (40% of the world’s private capital) is committed to climate neutrality by 2050​​
• Business leaders are taking action​ - Notably including, Breakthrough Energy - $15B, Climate Pledge Fund - $2B, Bezos Earth Fund - $10B​, Salesforce - $100M
• Real impacts from climate change - Climate events are yielding negative economic impacts and real dollars are being spent to mitigate the effects (e.g. ~$31B in economic expenses caused by the recent California winter storms)
• Lessons learned from ‘clean-tech 1.0’ fad and early investors​ - Failed early science-specific investments in prototypes with minimal scaling potential and market traction
• Public sentiment & policy tailwinds - The​ Inflation Reduction Act (IRA), supply chain and energy instabilities, ESG reporting requirements, ethical sourcing pressures, etc. 

Getting to zero

To gauge sustainability impact potential as venture investors, it is helpful to ask the following: 

‘What percentage of total global yearly emissions does this startup have the potential to address and/or unblock?’

Factoring in the solution’s timeline to hit scale is also important. For the best chances of saving the world, it’s crucial for investors to fund a spectrum of sustainability startups that will deliver emissions reductions in the short and long term. 
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Here is an example of looking at emissions reduction potential from a timeline perspective:

Hard-tech investors lens:
To bring the yearly 51B tons of emissions down to zero, we need venture investors to make some big bets on hard-tech solutions, such as long-term carbon storage, advanced farming robotics, and renewable energy technologies. These solutions require significant capital and many are years from hitting maturity and scale.⁴
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‍Soft-tech investors lens:
Venture is a 7-10+ year time horizon, and as we wait for some of these longer-term, hard-tech solutions to materialize, there is potential for soft-tech investments to deliver financial and sustainability results in the near-to-medium term. 

Three soft-tech investment themes for consideration:

1. Drive Efficiencies

There are tons of inefficient processes happening across industries. Removing these inefficiencies can lower emissions while often also increasing profit.
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Solution: Create a bunch of ‘tiny loops’
‍How can we leverage data and/or intelligent applications to identify and drive efficiencies?

A few examples that just make sense:

• Cutting out unnecessary processing and transit in supply chain (cutting energy cost and lowering emissions)
• Creating waste-to-value streams with upcycled goods (unlocking secondary revenue streams and lowering materials cost) 
• Shortening food distribution paths and avoiding spoilage (lowering fuel expense and increasing sellable units)
• Transferring excess energy/resources from one system to power another (lowering energy expense and/or eliminating the waste processing expense). A fun recent example illustrates a data center powering a pool 

Some solution ideas:

• Marketplaces to facilitate the secondary selling and usage of goods and materials 
• Intelligent applications to manage hybrid grids and identify opportunities for resource sharing within communities and the built environment
• Software to streamline supply chains and/or re-engineer product creation

2. Nature-Based Solutions

Nature-based solutions (NBS) are sustainable planning, design, environmental management, and engineering practices that weave natural features or processes into the built environment to promote adaptation and resilience.⁵

‍It isn’t the most enjoyable topic to think about, but we are going to need food security and  protection from weather events in the near term.
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Solution: Protect what we can now (and reap the immediate co-benefits)
How do we apply soft-tech solutions to decrease risk and accelerate investment in nature-based solutions like the ones below?
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Some examples of things to preserve or build:

• Existing mangrove trees - Break up waves & weaken hurricanes = less damage and lower mortality
• Existing forests - Process ~15% of total global emissions and preserve biodiversity⁶ 
• Urban vegetation/gardens - Lower energy costs⁷ and heat-related illness and mortality 
• Oysters - Break up waves (resulting in avoided flood damage) and, again.. we are going to need food. As a bonus they also filter our water (An adult oyster can filter 50 gallons of water a day).

Some solution ideas:

• AI and ML solutions that use geospatial imagery to verify the presence and health of an NBS and forecast sequestration 
• Financial vehicles that facilitate the pooling and deployment of large corporate capital into NBS
• Marketplaces to increase the efficiency of local food and agriculture economies

3. Optimizing hard-tech

We are beginning to see hard-tech sustainability solutions materialize (solar and wind, robotics, advanced farming, electric charging, etc.) and enter scale.
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Solution: Give cool hard-tech some love.
How can we enable hard-tech with soft-tech?
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A handful of maturing hard-tech that could use soft-tech optimization:

• Utility-scale and residential solar and wind
• Robots of all shapes and sizes
• Vertical and greenhouse farming + precision agriculture machinery and bio-fertilizers
• Batteries and energy storage solutions

Some solution ideas:

• Financial vehicles to enable enterprises to purchase renewable energy at scale
• Advanced AI to expand recycling tech (make the robots smarter) and unlock waste to value streams
• Machine learning solutions to optimize crop yield while lowering resource usage 

Here are some examples of startups that align with these investment themes:

So what are we at Madrona Venture Labs doing?

• We’re Building Domain Expertise: I (Kelci Zile) joined Madrona Venture Labs in the fall of 2022 to build out a sustainability investment thesis for the group.
• We’re Funding Teams that Reduce Emissions: We are actively looking to fund startups that are aligned with the themes outlined above. We made our first sustainability investment in Muir AI – A data fusion solution that identifies emission-slashing opportunities within supply chains. 
• We’re Incubating Sustainable Businesses: We are ideating with Madrona Ventures to identify sustainability opportunities and build teams to tackle them. We can draw on Madrona’s success in software (e.g. platforms, applications AI/ML), hardware (e.g. robotics, systems) and marketplaces and apply it to sustainability tech. 

Okay, go. But, faster.

The growth in sustainability investing is encouraging. Sustainability tech venture funding hit ~$70B in 2022, up by 89%⁷ from 2021 to 2022, compared to the macro venture industry, which was down by 31%⁹.This took sustainability tech venture funding from only ~5% of total venture funding in 2021 to ~15% in 2022. 

Rethinking the world we live in can unlock immediate and continued returns. 

Let’s build a utopia together, and stack some cash along the way. 

Want to build with us? Reach out.

Some parting inspiration:

One idea I am actively evaluating:

Hedge (literally) - ‘Invest in nature to protect your nest.' An investment (or insurance) vehicle that invests in nature to mitigate future climate damages

Here is what generative AI had to say about it: 

Prompt:  ‘Invest in nature to protect your nest’ - Midjourney

Read more from Madrona Venture Labs: Could generative AI supercharge climate innovation?

Citations

• How to Avoid a Climate Disaster: https://www.gatesnotes.com/My-new-climate-book-is-finally-here
• Oxford Languages | The Home of Language Data, https://languages.oup.com/
• McKinsey: How Big Business Is Taking the Lead on Climate Change
• Breakthrough Energy Ventures has made numerous investments in this space - Direct Air Capture (DAC) is one example
• https://www.fema.gov/emergency-managers/risk-management/nature-based-solutions
• https://www.wri.org/insights/forests-absorb-twice-much-carbon-they-emit-each-year
• https://www.epa.gov/green-infrastructure/reduce-urban-heat-island-effect
• https://www.holoniq.com/notes/2022-climate-tech-vc-funding-totals-70-1b-up-89-from-37-0b-in-2021
• https://www.barrons.com/articles/venture-capital-investing-tech-start-ups-51673456238