VC Climate Investing in the Age of Decadence
In The Decadent Society, Ross Douthat writes about a pervasive phenomenon plaguing our time. The sensation he describes is a sort of comfortable weariness felt by the contemporary West that has hardened into a sclerosis of sorts, which can be felt across society. I’ve read Douthat sporadically over the years and his ideas occasionally resonate. In this latest book, he argues that a collective inertia is responsible for inhibiting fresh energy necessary for substantive creativity, and the ramifications are evident across the board: in business, science, medicine, politics, education and more. Most recently, as I have been diving into Cleantech and climate investing, I see strong connections between Douthat’s theory of decadence and venture capital’s engagement with sustainability as a vertical.
First, a bit on where VC stands relative to sustainability today. Andrew Beebe of Obvious Ventures argues in his piece on the “climate decade”, that Cleantech 2.0 is here, and more importantly, it’s here to stay (unlike Cleantech 1.0). VC activity in the space across the US and Europe supports this. Union Square Ventures published its first climate fund thesis this past January, Andreessen Horowitz has been building out early investments in the space in Patch and others, and Obvious Ventures’ third fund, announced last year, more than doubled in size from its second.
At a broader scale, the list of climate-centric funds across sizes has expanded significantly: As Beebe points out, TPG, KKR, Wellington, Breakthrough Energy Ventures, Fifth Wall, EIP, Congruent, G2VP, Prelude, DBL, Techstars, Moxxie and many more, have committed to investing in the space.
The excitement and subsequent commitment of investors and founders is not only heartening, but also necessary if we are going to rise to the challenge of global warming. But the societal predominance of “decadence” as Douthat describes it and the relatively short-term returns that VC is used to make me wonder whether VC is structurally inclined to invest in fluff rather than substance, of exactly the kind that Douthat warns against.
“It’s possible that Western society is really leaning back in an easy chair, hooked up to a drip of something soothing, playing and replaying an ideological greatest-hits tape from its wild and crazy youth, all riled up in its own imagination and yet, in reality, comfortably numb.”
- Ross Douthat in The Decadent Society
There are a couple characteristics that give me pause particularly:
Venture capital has a long gestation period (10+ years before returns are felt). But in the scheme of climate innovation timelines, particularly for development of carbon removal technology and other breakthroughs that could really move the needle, ten years is not that long. Because of this, venture will likely stay away from the most challenging but most important opportunities, because nobody wants to take on more risk than already incumbent. This brings me to the next point.
Venture capital is already by nature high risk / high reward. Investing in climate innovation means taking on substantial additional risk on top of the high risk that already exists. Most VCs will try to reduce uncertainty as much as possible by investing in companies that are climate adjacent rather than climate-centric—ones that don’t rely on hardware or science, and can fit into a comfortable SaaS model. In other words, Climate 2.0 will look a lot like Andreessen Horowitz’s investment in Patch and Breakthrough Energy Ventures’ investment in Pachama.
Most meaningful climate innovation will not only be high risk, but also capital intensive, which is a further deterrent for most VC.
Carbon offset APIs, particularly, represent exactly how VC climate investing embodies Douthat’s idea of decadence.
Briefly, carbon offsets allow individuals, businesses, governments, or whomever has the money to spend to pay for a promissory note to remove a certain amount of greenhouse gases from the air to compensate for emissions occurring elsewhere. Historically, offsets have centered on planting trees to absorb carbon from the atmosphere, but the term now applies to a variety of methods that theoretically bring the net carbon emission down to zero. Examples include buying cleaner-burning cookstoves in developing countries that reduce deforestation for firewood, or financing a wind turbine generator to displace fossil fuels on the power grid.
Carbon offset APIs and other SaaS products that relate to ESG are exactly what VCs like in climate investing (to learn more about what they are and how they work, read this and this). But these products are not really solutions to climate change, and they shouldn’t be advertised as such.
Carbon offset businesses enable us to continue living unsustainably without the guilt that the behavior is irresponsible, the contemporary equivalent of medieval indulgences granting the remission of punishment for sin.
Carbon offset software looks like a lot because it’s so buzzy, but it’s only buzzy because it’s easy. At some point, it will become embarrassing that this is how we are spending our resources to “combat” climate change.
Carbon offsets are low risk, precisely because they are not that innovative. Because VC likes to de-risk as much as possible, check writers will continue to shoot for low hanging fruit in climate change rather than take a bet on something that could actually bring meaningful change. It’s not the fault of VCs, it’s a structural impediment that has implications on the way VC can operate in this space. This paper published out of MIT dives deeper into this modular mismatch.
I’m not suggesting that we make the perfect the enemy of the good here, or give up venture investing in the climate space. It’s just that family offices and the rare risk-friendly funds may be able to do a lot more here than institutional VC. Any new attention the area receives is only positive; there are countless ways that VC can pick up all the ancillary bits to climate change that are super interesting and quite meaningful. But the actual solutions to climate change likely won’t come from VC money.