The Conversion of a Regenerative Skeptic

“Paper Bags”, 2007. (Chris Jordan)

Regenerative VC. Sounds like a beautiful ambition. But is it possible? That was where I started in 2019. 

As a young venture investor in the first significant wave of sustainability ("cleantech") investing in the early 2000's, the idea that venture investing could succeed at sustainability let alone go beyond it seemed borderline naive. A little over two years later I've come to see how "regenerative" is not just possible (and necessary), but the key characteristic that will define the iconic companies of our time. That is why I chose at the end of 2021 to join Dan Fitzgerald as a managing partner at ReGen Ventures alongside Rose, Tom, Parker, Alex and the rest of our team. 

When I first met Dan he had a vision for applying Regenerative ideas beyond just Ag. Like all great visionaries he could see it before there were even examples or evidence. My self appointed job was to challenge the vision at every step. Show me an example? But is that a company? Is that a startup? Can it be venture-scale? Will it grow at venture speed? Is there a clear market need?  Ok, and is that really regenerative?

To my surprise, the answers kept coming back "yes."  We found a subset across multiple geographies for sure, but the examples were compelling. And the more we looked the more obvious it became that "regenerative" wasn't a naive hope. It was how we could measure the best solutions. How we selected for those ideas that went beyond incremental. How we ensured that we were investing in companies and teams that could actually create venture scale outcomes.

Historically sustainability and climate have been about doing more with less. But scarcity is a tough sell. People innately don't want less. Just look at the size of our cars and houses. The environmental effort has struggled with this message for half a century. In investment circles it also leads to questions like "what are you trading off for sustainability?" The conventional perspective is that somehow there is a zero sum between profit and sustainability. 

What brands like Patagonia, Rivian, AllBirds, and increasingly most major brands understand is that sustainability IS valuable. That's why people now pay 39% more for sustainable brands and 70%+ of all shareholder initiatives are about ESG. It is great (and remarkable in these times) that the federal government has been able to pass something resembling a climate bill, but it's the box for a cake that’s already been baked. While some politicians battle frantically to preserve the fossil industry, the reality is economics alone are forcing a transition.  A decade ago I testified in front of Congress about the potential for innovation and the role government needed to play. I was wrong. We’ve gotten here anyway and much faster than I ever expected.

The technology now exists to produce the best products from a pure performance perspective and also the most sustainable products -- food from carbon dioxide, materials from waste, nutrients from fungi. Federal support will help bolster these capabilities and supporting infrastructure, but consumer markets and private investment are what sparked this wave and those forces are only increasing.

Regenerative is a step further. It is fundamentally about finding positive feedback cycles, generating more with fewer inputs, going beyond carbon neutral, and thinking more broadly than just climate. This will require investment.  Regenerative is the epitome of the J-curve. As the planetary problems we face become more acute, the most regenerative solutions will be the most needed, valued, and deployed.

The original premise of Cleantech VC was that enormous fundamental industries with trillions at stake had not been disrupted in decades.  What better place to apply modern technology?  But those industries also had enormous entrenched interests and path dependencies.  A few, like Tesla, had the ambition to reimagine whole segments from the ground up. It took insane guts, commitment, a lot of capital, time, and several near death experiences, but look at the reward.  And hasn't that always been what it takes to build venture winners? Look at Apple, Microsoft, Cisco, Genentech, Uber, Amazon, and myriad others. The through line is simple, if non-linear – venture backed companies take on fundamental reshaping of industries.  

Sure there are fund returners that work within existing systems, but the truly impactful companies, the truly iconic ones are those that reimagine a system. When you are investing at the earliest stages you have to look for the companies with truly iconic potential.  It's a simple math problem based on how few actually survive. 

But it's not enough to just reimagine a system.  Breakout companies figure out how to tap new sources of demand.  In most cases, for category defining companies, the appetite for a new product is not obvious at the beginning.  Otherwise 20 different venture firms wouldn't have passed on Apple or Amazon or Tesla or Impossible. The demand may not exist yet, but the logic for why a consumer will adopt does. The challenge is how to identify or redirect demand to a new product.

At ReGen it's that critical ingredient -- latent consumer demand -- that we feel must be there to drive true scale, impact, and return.  The problem may be obvious -- the climate is deteriorating faster and faster -- but that doesn't mean the market will demand giant machines to decarbonize the atmosphere.  In today's increasingly technocratic venture world too often it is technology without a market logic that gets attention and funding.

The question is why will the market choose this solution?  Beyond the fundamentals of product-market-fit, we see a product's regenerative capacity as part of the answer.  The emerging generation of consumers is demanding products that are better for them and better for the planet.  Thanks in part to Covid we have never been more aware that our global health is interlinked and our health as a species depends enormously on the carrying capacity of our natural systems. 

And regenerative just feels good.  That simmering sense of dread you feel when you buy that next Amazon product? That's knowing that the status quo is eroding our health and future.  What many brands have discovered is that when you deliver the opposite, a sense of purpose and value and contribution through your actions, you unlock new audiences, foster loyalty, and gain market share. It’s just better business.

Consumers have become the new activists. For a large and growing portion of the economy their way of standing up and being heard is buying better, healthier, more sustainable products.  That's why sustainable products are growing 7x faster than conventional alternatives.

Emerging consumer preferences put enormous pressure on suppliers to find better alternatives.  It is the reason that corporations representing $50 trillion of enterprise value have committed to not just climate targets, but in some cases targets that will force them to fully reinvent their business -- see Volkswagen, Maersk, EDF and myriad others.  For this reason you have seen massive capital commitments flow into the climate space.  Venture investors alone invested over $35 billion in climate in 2021.  That's more than the entire venture industry invested in all startups back in 2010.  Read that again. It’s an incredible indicator of what is to come.

Even more capital has been committed at other stages of the funding process from private equity (TPG, Temasek) to project finance (Blackstone, Generate). These conditions did not exist for cleantech a decade ago.  The robustness of the capital stack is a huge reason why this next period of climate/sustainable investing will be the most transformative we have ever seen.

And it is still very early. A number of people worry about the impact of the market uncertainty we are experiencing today.  If history is a good indicator (it is) then we still have quite a bit more to work out of the system before we work out the current economic turbulence.  The infusions of public capital into our system over the last 40 years (and particularly over the last two) have created overheated dynamics that still haven't been fully addressed.  

On its face higher inflation, higher rates, likely higher unemployment would seem challenging for climate solutions. The pace of investment in climate did slow in early 2022, like every sector, but notably it slowed less than any other segment.  While valuations were down as much as 80% in certain venture categories, climate valuations were actually flat or up in early 2022 (Pitchbook). Now with the passage of the Inflation Reduction Act more capital is certain to flow into the segment. To be sure, certain types of solutions will still struggle if further market upheaval occurs, but we are nearing the beginning of the next supercycle. We haven’t even begun to solve the problems that are driving this transformation. I would argue it has never been a better time to invest for the long haul in solutions that will restore our planet.

Many of the biggest industries may not shift soon.  Where oligopolies limit consumer power change will be slower.  Airlines for example will experiment with sustainable aviation fuel, hydrogen, electrification and offsets, but should not be expected to trade margin for growth in tightening markets.  In those markets where consumer preferences make and break success, you will see significant shifts.  Gen Z isn't going to wear petrochemical yoga pants if a healthy carbon-negative alternative is available at the same price.

Consumer pressure is real and persistent and forces shifts up the supply chain.  That won't change in a downturn, that will actually grow!  In tighter consumer markets the marginal consumers have all the power, and when you look closely at the emerging power and proclivities of the younger generation of consumers they are unrelenting in their demand for better products, better for the planet and better for them. 

Yoga pants may sound like the tail wagging the dog, but that market alone can catalyze adoption of carbon negative nylon (see Ozone Bio) or dyes (see Huue) which can outperform conventional alternatives and spread to almost every corner of the clothing world.

These preferences are spreading across almost every major industry and are forcing fundamental shifts in supply chains, traceability, agriculture, materials, mobility, carbon markets, and much more. That’s why we have invested in consumer driven companies like Hide which produces cow-less “leather” that is better than the real thing, Circe, Arkeon, Aigen, Meati and others. It’s also why we take a global approach across our three major categories: Food & Ag, Materials & Products, and Industrial Decarbonization. 

Rome won't be built in a day, but again that's the beauty of early stage venture in the beginning of a new cycle.  The scale of the problem and dearth of silver bullet solutions is both overwhelming and encouraging.  If you look at McKinsey's latest report on the climate crisis and what changes need to happen, the planet's 6 biggest industries need to be largely reinvented by 2035 to avoid even worst case scenarios.  In truth, many of those industries won't be able to change.  That doesn't mean we are doomed.  It means we need to reimagine.

The answers often emerge in lateral ways.  Instead of a linear decarbonization of something like shipping through slow replacement of ships with electric and hydrogen versions we will likely see products like Seabound that promise to decarbonize 95% of emissions without having to reinvent a ship, and which will produce a product (limestone) that's useful in other carbon intensive industries (cement). 

But the challenge of meeting these targets in many industries also highlights the importance and value of finding regenerative solutions in categories where we can.  For us at ReGen it is the critical filter that forces us to find and invest in category creating companies.  Venture has always been about non-incremental, step change innovations.  There are a lot of great companies today that are not regenerative.  We know that.  But what we are looking for is those companies that go beyond. We are looking for the founders that have the vision and courage to reimagine everyday products and industries, and the tenacity and pragmatism to deliver better ones. 

If you are doing something that matters, find us.