Originally published on Substack — March 24th, 2022
The world of venture capital is changing dramatically. Over the last few months I've spent a lot of time thinking and writing about the forces driving that change. The two most significant I've seen are the unbundling and the productization of venture.
The world continues to change more and more quickly. We're on internet time now. Venture capital is an industry that has been fairly stable for the last 50+ years. Now every year we see any number of forces that could dramatically change how capital is allocated to startups.
I've dubbed the people driving those changing forces as "renegades." These aren't just solo capitalists or startup funds. Any fund doing something new and disrupting the status quo in venture can be a renegade. One of my favorite things is to reflect on the impact these people are having. I'm young enough in my career that I welcome radical change. It shakes up the way startups get funded and how companies get built.
This is my second Renegade Spotlight after writing about Homebrew a few weeks ago. When I see investors executing on new ways of disrupting venture I want to think publicly about what this means for venture capital.
Side note: Sacca swears a lot more than I do so I want to preemptively apologize to my Mom for the bleeped naughty words since she may be the only person reading my stuff and I don't wanna offend my loyal readers. Thanks Mom!
The Renegade: Lowercarbon Capital
Chris Sacca is a fairly well known character in venture. Whether it’s the cowboy shirts, his seat on Shark Tank, or in particular his 250x return on his first $8M fund with investments in companies like Uber, Instagram, and Twitter. Chris is also famous in venture for walking away from the "empire building" that most venture funds today are chasing. Bigger funds. Bigger headcount. Broader platforms.
Chris retired from Lowercase in 2017 at the age of 41 as part of a promise he made as a 20-year old that whatever job he found he would become the very best at and then retire by age 40 and do something totally different. "I was starting to feel sad about letting my 20-year-old self down."
After four years Chris and his wife Crystal announced that they were building Lowercarbon Capital. This was already something the couple was spending a lot of their time on "in retirement" working 60 hours a week meeting with all sorts of climate obsessors. Lowercarbon was a way to weaponize those efforts to ensure the most effective execution of what they saw as a pretty big deal.
"The situation is much worse than it seems. The planet is warming faster than experts predicted. Rising temperatures fuel lethal heat waves, year-round fires, destructive storms, and epic droughts that are already killing thousands of people around the globe, displacing millions more, and sowing the seeds of famine, disease, and war. The bottom line is the planet is becoming unlivable. If you’re the quantitative type, well, we drew some samples, crunched a few numbers and, according to our exact scientific calculations: A lot of sh*t will be pretty f*cked up."
Tackling climate change by investing in startups is a contrarian approach in a lot of ways. Venture capital and sustainability have had a roller coaster relationship over the last 20 years. Some people have called climate investing "kryptonite for VC returns."
The Green Bubble
A quick history lesson. Investing in sustainable technology became all the rage around 2008. Venture funding flowing into categories like solar, biofuels, and battery storage exploded. Kleiner Perkins made a splash by raising $500M for a fund focused on "green technology."
But just as quickly as the pop happened you saw that capital get diverted away from sustainability with the total venture dollars invested dropping 36% in one year from 2008 to 2009. Some people list the diversion into green tech as one of the things that brought Kleiner out of the top tiers of venture funds.
A lot of VCs today started their careers in sustainability and clean tech like Mark Goldberg at Index or Jake Saper at Emergence. And most of them have scar tissue having watched lots of high profile failures that had raised millions of dollars.
But there are some key differences this time both in terms of feasibility and urgency. Speaking of the '08-'09 "Green Bubble," Chris Sacca makes it pretty clear what's changed:
"The issue was that it was just too damn expensive to start stuff back when they were investing. CapEx and OpEx were bonk. And so much of the stuff they wanted to build required handouts from lawmakers because the pricing just didn’t make sense. The firms that were pushing cleantech were staffing up with lobbyists to try to schmooze folks in Congress to get the subsidies they needed to have a snowball’s chance on a superhot planet.
So what's the most significant difference that climate tech has in their advantage this time? What's the tailwind that Lowercarbon is able to ride to be successful in a way that investors in 2008 could only dream of?
The Innovation: Markets Hold The Key
Last year Chris Sacca did an interview with Harry Stebbings. At one point Harry asked Chris a pretty direct question. "Are you going to make more money from climate than you are from tech?" And without missing a beat Chris said, "Absolutely. I'll get way richer from this. I have multiple companies in the portfolio right now that have the trajectory to become multi-trillion dollar companies."
Chris' answer is indicative of what I think the fundamental breakthrough is for Lowercarbon: Greed goes further than guilt.
"I want to sell to people who are acting out of sheer self interest. We have maybe 200 million people who will think about climate when they make a purchase decisions and I need to get 7 billion more. I'm not going to get all these people on the planet to pay a premium out of just consciousness. I just have to offer them a better product. Guilt and shame aren't going to cut it."
He said it this way when they announced Lowercarbon:
“This is what it all boils down to: We think that markets might actually hold the key to unf*cking the planet. A host of kick*ss companies will offer up sh*t that’s just plain better, and people and companies will buy it without ever stopping to think about carbon footprints.”
This is just such an insanely critical shift in thinking that is finally viable today and becoming increasingly so. There are only so many people who are going to drive electric cars or choose lower carbon-emitting supply chains or eat lab-grown meat because they feel guilty about negative climate impacts. But nowhere near enough to make an actual difference.
The only way we dramatically change the carbon footprint of mankind is by making the electric car, the lower carbon-emitting supply chain, and the lab-grown meat into the faster, cheaper, sexier, tastier options.
Climate Tech Investing Today
The good news is that people are already waking up to to the technological feasibility that can make a sustainable alternative the better option. Remember that 36% drop in climate funding back in 2009? Here it is in the context of the last decade or so.
2021 was a record smashing year for venture dollars invested in climate tech. Just the first half of 2021 saw $60B of investment flowing into climate. And we're just getting started.
Anyone who doesn't recognize the fundamental shift that climate change represents isn't paying attention. These are the biggest markets that exist globally. Transportation? Everyone that moves. Agriculture? Everyone that eats. 50 years from now we'll either be marveling at the way climate tech innovation changed the way we live and dwarfed the outcomes from investing in software and internet companies or we'll be wishing it had as we watch sea levels rise and large swaths of the planet become uninhabitable.
Peter Reinhardt previously spent 10 years building Segment which he recently sold to Twilio for over $3B. Now? He's building Charm Industrial, a carbon removal company. Few people understand the size of the opportunity in software better than Peter. But now he's pointed at something even bigger. “'The enterprise software market is around $460 billion in total' but in the climate transition '$3-10 trillion in EBITDA is up for grabs'. The markets at play are 10x+ bigger than software."
The folks at Lowercarbon are beating the war drums for an accelerated and critical opportunity in climate tech. The more I've read about them the more I've come to appreciate a few critical insights that make them a renegade.
New Sh*t Has Come To Light
Lowercarbon continues to sound the "why now" bell pretty effectively. While climate change is still a highly politicized issue in the US its becoming much more acknowledged globally and certainly has pretty uniform scientific acceptance. Every time Chris Sacca gives an interview he has the same key point:
“The problem is actually bigger than any of the most alarmist scientists ever imagined years ago. Ice is melting faster than predicted. Permafrost is releasing more methane, which is 25 to 84 times worse a greenhouse gas than carbon. Weather is warping more than the computer predictions guessed it would. It’s bad. I mean, as The Dude would say, “New sh*t has come to light, man.”
In other words? "We are at DEFCON: SUPERF*CKED.” It’s time to get to work.
Don't Be Afraid of the Science
The emphasis on urgency translates into their investing focus as well. A lot of venture funds "casually" wade into funding climate tech with the simpler solutions that are easier to understand. PwC found that the technologies with “80% of future emissions reduction potential received just 25% of climate tech investment between 2013 and H1 2021.” There is a big opportunity to invest behind the technologies that have the highest chance of making the largest impact in fighting climate change. Lowercarbon dives right into the science. Their team is filled with Fulbright Scholars, PhDs, and policy nerds.
There is a deeper, and important, debate about the types of things that are getting funded in tackling climate change. Chris Sacca has talked several times about how they deliberately work to be collaborative with other climate-focused ventures funds to increase the odds of success for companies tackling hard problems. One of those frequent collaborators is Breakthrough Energy, Bill Gates' climate fund. In Bill Gates' recent book, How To Avoid a Climate Disaster they talked about the judgement bar they use in determining what to invest in.
"At Breakthrough Energy, we fund only technologies that could remove at least 500 million tons a year if they’re successful and fully implemented. That’s roughly 1 percent of global emissions. Technologies that will never exceed 1 percent shouldn’t compete for the limited resources we have for getting to zero. There may be other good reasons to pursue them, but significantly reducing emissions won’t be one of them."
I've written before about a sort of natural selection around what startups may or may not survive. In climate tech this is an even more important debate. There is not only limited time but limited resources to build the most impactful solutions. In the not too distant future investors are going to have to face a reckoning of whether they're funding "feel good" climate-adjacent companies or genuine impact.
Greed Is Good
I laid this out pretty clearly above. Chris Sacca effectively articulates the idea that greed will go further than guilt. Another great point he’s made repeatedly is the idea of reversing a commonly held belief about our current energy economy.
"It’s becoming clearer than ever that powering our economy by digging up and burning old dinosaur bones is just too damn expensive. It’s straight up cheaper to power sh*t using the sun."
This is something any clean tech investor in 2008 would have killed for. It used to be that you had to convince people to take a crappier option because of a better climate impact (guilt.) It was always going to be more expensive. Today? Most people don't drive a Tesla because it helps the planet. They do it because it’s the fastest, sexiest option. You can make a quality and cost argument for sustainable tech in a way that’s never been possible before.
This is such a better principle to have in mind as people build climate tech. Don't rely on people's guilt because it will dramatically limit your TAM. Go find the greediest climate deniers out there and build a solution that they can't help but love.
We Have The People Power
I mentioned before how technological advancements have made some of these solutions cheaper and more accessible. But something even more powerful is a generation of highly trained people who have purpose-built their careers to build companies.
"We now have a generation of hardcore scientists who went to school knowing that they wanted to start a climate tech company. Those folks used to dig into this super geeky biophysics hoping one day they would be a tenured professor with some steady health insurance."
You can't overstate how critical this is. There are long lists of people who have taken huge pay-cuts to work in non-profits or academia because, for a long time, that was the only way you could tackle climate change. Now it's becoming increasingly more viable to build a company that doesn't have to be at the mercy of donors or politicians. They can tackle solutions head-on.
What Does This Mean For Venture?
Lowercarbon is demonstrating two key ideas when it comes to changing forces in venture.
The first? Lowercarbon is a whole new level of commitment as a specialist funds. There are a lot of people that believe specialist funds will struggle to generate the same massive returns that generalist funds can achieve. Having scientists, PhDs, and policy people on staff is a new way of doing things. I love thinking about innovative new org charts in venture, and Lowercarbon's is certainly unique.
Second? Stop thinking about climate as a niche market. These markets are bigger than anything we've seen before. And the implications are more dramatic. Heaven forbid we had ever had to do without a CRM but if Salesforce and all the others hadn't come along? We'd still have the cockroach of software: spreadsheets. We would make it through. But if we fail to adjust course when it comes to climate? Even the cockroaches may be in trouble.