What makes a climate company? Investing in “Climate Economics”
When connecting with fellow climate investors and advocates (like the 700+ climate funds, incubators and accelerators I reached out to as part of creating our climate investor database), I’m always asked what exactly 4WARD.VC invests in. And after explaining focus on early stage climate companies in Europe, North America and Israel solving major real world problems (ie. not just the next carbon accounting software or carbon credits marketplace), they almost inevitably ask: “What makes something a “climate company?””
That is a great question and something every investor and organization has a different definition for. For many, it’s tons of CO2 captured or mitigated, for others, it’s some form of waste reduction or other obscure LCA (life cycle assessment)-driven metric.
Regardless, most funds have their own set criteria for what “qualifies” as a climate company worth funding. And while I appreciate this approach and believe it is important for tackling climate change, it is ultimately misses the point and overcomplicates the problem. Having an investment criteria of “at least one gigaton of carbon mitigation” or “> 200M tons of carbon capture” artificially creates barriers toward true economic and climate impact. It means that often only “moonshot” ventures get funded and that made up often projections trump proven impact.
The thing is, the numbers never lie
Any entrepreneur worth their salt is familiar with the term “unit economics” — for every unit sold, how much do you earn? What are your margins?
Positive unit economics + growth = profits
Negative unit economics + growth = losses
In the past, many in the venture industry advocated “blitzscaling” — often before working out the business model and unit economics.
“We’ll make it up in volume” was a common adage with companies like Uber, DoorDash, Blue Apron etc…
What they forgot is that with physical goods and services, your costs scale proportionally to your sales — ie. margins never really improve.
Past business lessons aside, the concept of unit economics works wonderfully (with a twist) when applied to climate companies.
That’s why I developed the concept of “climate economics” — a better way to thing about what makes a climate company.
What are climate economics?
As partner and syndicate lead at 4WARD.VC, there are many things I have going for me — an incredible network of climate investors and LPs for deal flow sharing, collaboration, expertise and industry connections, major reach and inbound with The Startup Tank Climate Investor Pitch Show and a strong community and platform with our various newsletters and our Slack communities for climate tech founders and for investors…
But, at the same time, syndicates have huge management fees (for more on the economics of venture, see this post) or big teams to handle in-depth LCAs or emission-reduction calculations…
We simply don’t have the resources to spend (or waste) on reporting and projected climate impact. And in a way, I view this as an advantage. It allows us to be nimble, flexible and fast when it comes to evaluating climate companies. It allows us to invest in the startups and founders changing the world without worrying that said solution to plastic pollution or massive fertilizer overuse doesn’t directly mitigate X megatons of carbon per year.
It allows us to rely on something much simpler: Climate Economics.
The question we ask ourselves is: “For every unit, service contract or new client etc…, does this make the world a proportionally better place?”
Does the company’s impact scale along with their revenues and bottom-line?
If it does, they’re a climate company and someone we’d consider investing in — as long as they meet our other criteria and thesis.
If it seems like a simple framework, that is because it is. It’s like that for a reason.
Move fast and break things — and pivot
In the world of startups, there is nothing more sacred than the lean startup model of build, test and iterate. Startups are CONSTANTLY looking to fail fast and improve from their mistakes and learnings.
So why should this be different with climate companies?
When was the last time a founder told you their vision for the world and business model and everything went “according to plan…?”
Slack was a video game, Airbnb was for air mattresses and Facebook was a hot-or-not app!
And that was with something as simple as software and web apps.
Hardware is a different beast entirely — much more challenging, much less predictable. And its implications are even less uncertain.
The Butterfly Effect
Who would have predicted the automobile would transform & gentrify cities, create suburbs, drive unprecedented economic progress and lead to climate change? Or that the “ultimate” clean energy (nuclear) would be shut down due to reactor failures and public outcries. Anyone predict that the iPhone would enable ride sharing and e-scooters — who’d actually increase, rather than improve the climate and traffic problems…?
Of course not!
That’s just it, we can never know. Our world is more interconnected and random than any of us (even a perfectly calculated LCA) can predict.
So, instead of seeking false “perfection,” I suggest we focus on progress.
Success or failure of a diet doesn’t come down to 100% adherence — it’s all about reducing the junk food and replacing it with healthy options, even if you enjoy an ice cream once and a while. It’s about doing what’s manageable and scalable to help move yourself (and our world) forward.
Which is especially true in the rocky world of startups — because things change, survival’s never guaranteed and pivoting is often the name of the game.
That’s why 4WARD.VC bets on stubbornly persistent, world-class founders tackling massive climate problems. If you’re too busy making the world a better place to have exact 10 year carbon mitigation targets and best-case scenario business projections, we’d love to chat (and possibly feature you on The Startup Tank as well :)
And if you’re an accredited investor or LP interested in learning more about our investor syndicate and the types of incredible companies we invest in, please visit: 4WARD.VC/syndicate for more details and to apply.