Redesigning venture capital (part III): A hypothesis

This article is part of the “Redesigning venture capital” series. Read part I (“The challenge”) here and part II (“A blueprint” here).

I recently published two articles about the challenge of redesigning venture capital. In part I (“The challenge”), I argue that the traditional venture capital model is severely limited in its ability to leverage the power of entrepreneurship to address the complex societal challenges of the 21st century. In part II (“A blueprint”), I outline how to develop a selection framework for a new asset class: the transformative entrepreneurship investment programme (TEIP).

In this article, I present my own hypothesis for what a TEIP selection framework could look like. I’m doing so as a reality check of whether we are indeed onto something or whether this is just more of the same. Feel free to be frank in your judgment. I’m also doing it to enlist you in helping us expand the list of (potentially) transformative initiatives. Please submit both your feedback and suggestions through Medium’s comment function.

 

What’s the ultimate goal?

My starting point is the IPCC’s scientific position that to avoid the most perilous consequences of a warming planet, the world requires “rapid, far-reaching and unprecedented” transformation of the socio-technical systems that form modern civilisation: National economies, regional transportation systems, infrastructure clusters, energy, industry supply chains, and cities.

While there are multiple definitions of the word “transformation,” what they all convey is that transformational change is not incremental but deep, structural, and irreversible. In other words, we must rewire almost all aspects of how societies operate: Technologies, values and social norms, materials extraction and use, institutions, education and skills, economic paradigms, policy and regulation, and financial flows.

 

How can we make sense of system transformation?

In my research, I have come across a plethora of analytical frameworks that conceptualise the idea of system transformation in different contexts (see part II). None of these struck me as particularly helpful in articulating, on an ex-ante basis, the system-transformative potential of an entrepreneurial initiative.

Then Kate Wolfenden, a systems innovation practitioner who has supported me in developing Transformation Capital, published an article about a simple dualism—system optimisation vs. system change. This typology strikes me as intriguing.

 

System optimisation vs. system change

System optimisation is the dominant paradigm in the climate action community. It’s the hope that we can keep our current version of capitalism, that all we need to do is infuse it with sustainable products and practices to achieve “green growth.” This is the domain of energy efficiency, grid management, food waste reduction, electric transportation, low-emissions construction materials, and sustainable consumer products. It is the world of traditional cleantech venture capital.

 

A typical conception of the cleantech universe—different sectors in which innovation is produced with the intent of optimising our consumption-based industrial economy. (Source: Cleantech East)

System change looks—and feels—very different. This is the world of new mechanisms for value generation, capture, and distribution; of markets with different agents, rules, and structures; of new digital, social, and institutional infrastructure; of civic capital and a new breed of utilities; and of new consumption and production paradigms.

It is also the world in which we establish boundary conditions for a system’s behaviour, e.g. through sufficiency mechanisms, emissions overshoot correction, resilience and conservation and antifragility protocols. It is not the world of traditional cleantech venture capital.

 

Transformative investment strategy

Let me now posit that an investment programme looking to enable system change invests in three areas:

  1. The catalysts that accelerate the system’s transition

A proposition of a TEIP Selection Framework focused on (1) transition catalysts, (2) the building blocks of a transformed system, and (3) system guardrails.

Such an investment programme would not only care about the WHAT (to invest in) but also about the HOW (to invest). This means that the mechanisms deployed in the investment process must be designed in a way that maximally supports the entrepreneurial initiative’s impact mission and avoids, as far as possible, unintended consequences and mission drift.

The programme would thus not use the cookie-cutting/one-size-fits-all approach typically deployed by venture capitalists (see part I). Instead, it would make full use of the mechanism toolbox, selecting those that are most appropriate, blending different instruments where useful, and replacing some, over time, as the investee grows and evolves (hat tip to Indy Johar).

The TEIP Mechanism Toolbox — to be evolved.

What would emerge from such an approach will almost certainly not fit any traditional category. It would look like a potpourri of initiatives and instruments, all with different business models, legal wrappers, risk profiles, and return expectations. It would associate with several identities—venture capital, impact investing, concessional capital, catalytic finance — and not be easily comparable to anything else. It would require that we dissolve the boundaries between for-profit and non-profit and between the private sector and the public sector. It would make people feel very uncomfortable. It would be messy—just like the world around us.

 

List of (potentially) transformative entrepreneurial initiatives

So what could this look in practice? Below are some examples of entrepreneurial initiatives that I believe fall into one of the above categories.

What patterns do you see? What unifying traits emerge from this list? What other entrepreneurial initiatives might fit in?


 

1) Building blocks

WINnERS
Many smallholder farmers in developing countries have no access to financial capital—one of the most important production factors in agriculture—because local banks do not assess them as being creditworthy.

WINnERS solves this problem by de-risking lending for local banks through a micro-insurance product underwritten by local insurance companies and backed by reinsurance companies such as MunichRe. The technology enabling this innovation is a big data solution that establishes causal relationships between climate-induced weather events and agricultural crop yields and can thus form the basis for parametric insurance products.

OpenSurface
Climate change is a complex problem. Addressing it requires interdisciplinary collaboration across large communities of thought and practice.

The mission of OpenSurface is to enable the next generation in digital MRV-driven land management, by linking what’s happening on the ground to tailored alerts or results-based payments, and creating accurate, timely, automated services for different stakeholders. Its platform embraces, integrates, and connects three disruptive technologies—IoT, DLT, and AI—with stakeholder-friendly, framework-compliant, and standardised processes. Catering to government and MLO partners, the initiative offers improved transparency, better incentives, and lower transaction costs.

Smart Commons by Dark Matter
The financial value produced by public goods is often captured and extracted disproportionally by wealthy individuals and organisations, e.g. through the appreciation of real estate benefiting from new public infrastructure. This often leads to suboptimal social and environmental outcomes whilst constraining the financing of sustainable and inclusive infrastructure.

The Smart Commons approach developed by Dark Matter solves this problem by democratising infrastructure investment. The approach focuses on leveraging digital ledgers and smart contracts to rewrite the conventional property deed.

 

2) Catalysts

Carbon Delta
In finance, risk metrics are usually backward-looking, i.e. based on historical volatility. Yet climate change is primarily a risk of the future and thus not currently baked into traditional financial risk metrics.

Carbon Delta has developed a data platform to calculate and report a forward-looking climate risk metric called Climate Value at Risk (CVaR). CVaR helps investors assess future costs related to climate change and understand what those future costs could mean for the valuation of securities.

Climate Policy Exchange
Multinational corporations have enormous influence on national and sub-national policymaking but are not effectively connected to local advocacy campaigns outside the country in which they are headquartered.

The Climate Policy Exchange solves this problem by connecting multinationals with local advocacy initiatives. The business model is based on charging multinationals an annual subscription fee.

Exaptive
The most tangible and pressing issues of the 21st century are complex problems. Addressing it requires interdisciplinary collaboration across large communities of thought and practice.

Exaptive develops software that enables such collaboration by allowing users to find non-obvious collaborators and new perspectives and ideas.

WaterBear Network
The root causes of climate change are society’s consumption choices, which are driven by values and norms. Documentary films are powerful means through which large audiences can be engaged on environmental issues, thereby shaping such values and norms.

WaterBear Network is an interactive multimedia platform dedicated to environment-oriented documentary films. The platform curates content for streaming and allows its audience to connect directly with active NGOs and projects related to the films.

InfluenceMap
Effective climate legislation is often undermined by lobbying from fossil fuel companies and other organisations with vested interests in retaining a carbon-intensive economy.

InfluenceMap addresses this issue by empowering investors, corporations, the media and campaigners with data-driven analysis, e.g. about the lobbying behaviour of corporations or the carbon intensity of investment portfolios managed by investment advisors.

 

3) Guardrails

Nori
The world is likely to overshoot the carbon budget in line with keeping global average temperature increase to well below 2.0˚C. Further, some economic activities will be difficult to completely decarbonise. This is why achieving a net-zero world economy by 2050 will likely require large-scale CO2 removal.

Nori enables the development of CO2-removal markets through a transparent and secure platform that connects CO2-removal suppliers with buyers, particularly for soil-carbon sequestration. The platform uses blockchain technology to facilitate payment, maximise transparency, and minimise the risk of double-counting.

PosAIdon
Investments in nature-based assets predominantly follow the single-asset paradigm and are typically driven only by financial risk/return considerations. One root cause is that there is no solid information about how different assets interact at the portfolio level and how much “natural capital return” an investment may create over its tenor.

PosAIdon’s deep-learning platform translates complex earth data and spatio-temporal analytics to build new value signals for investments into ocean and land-use systems. Transactions are based on tokenisation to enable fractional liquidation and trading and the term sheets are implemented digitally as smart contracts. This enables the efficient construction of strategic portfolios of cash flow-generating projects that build economic and ecological synergies at scale.

 


Legal Disclaimer: I have written and published this article in my capacity as a citizen, not an employee of any organisation. I am not regulated by any financial conduct or supervisory authority and neither is any organisation I currently work for. This article does not provide investment advice. The information about entrepreneurial initiatives presented above is for your general information and is not intended to address your particular requirements. No information, opinion or view expressed constitutes any form of advice or recommendation by me and readers should not rely on it in making (or refraining from making) any investment decisions. Readers should obtain appropriate independent and tailored advice before making any such decision. I disclaim all liability in relation to any arrangements made with the organisations behind the initiatives described above.
 
Location
Related Goal
Goal 12: Foster bankable green assets in cities
Articles you may be interested in
In The News
A new air and climate plan for Milan

The City Council of Milan approved the Air and...

A new air and climate plan for Milan
In The News
Meet the three EIT Climate-KIC innovators nominated for EIT Awards

Three innovators from EIT Climate-KIC’s community have been nominated...

Meet the three EIT Climate-KIC innovators nominated for EIT Awards
In The News
100 European cities take up the challenge to become carbon neutral by 2030

On Monday 13 June, the representatives of the 100...

100 European cities take up the challenge to become carbon neutral by 2030
In The News
The role of cities and regions in transforming wood value chains

Climate smart forest economies It’s a crucial decade for...

The role of cities and regions in transforming wood value chains
In The News
Glasgow City Region pioneering forest economy innovation to drive climate acti...

Scotland’s largest city region is actively tackling climate change...

Glasgow City Region pioneering forest economy innovation to drive climate action
In The News
Forging sustainable timber construction in Europe

EIT Climate-KIC and Built by Nature, announce an initiative...

Forging sustainable timber construction in Europe
In The News
EIT Climate-KIC launches new Circularity Thinking training programme

EIT Climate-KIC is launching Circularity Thinking courses to tackle...

EIT Climate-KIC launches new Circularity Thinking training programme
In The News
EIT Climate-KIC announces four winners of EIT Community Booster

EIT Climate-KIC selected four cleantech start-ups to be part...

EIT Climate-KIC announces four winners of EIT Community Booster
In The News
Science reveals last paths to stop irreversible planetary damage

Climate change is going to get worse, but curbing global warming is...

Science reveals last paths to stop irreversible planetary damage
In The News
EIT Community presents New European Bauhaus Ideation Awards winners

Supported by the EIT Community, the New European Bauhaus...

EIT Community presents New European Bauhaus Ideation Awards winners
In The News
EIT Climate-KIC joins forces with the Government of Ireland to stimulate clima...

The Ministry of Agriculture, Food and the Marine of...

EIT Climate-KIC joins forces with the Government of Ireland to stimulate climate innovation in the agri-food sector
In The News
Climate Lab: EIT Climate-KIC co-initiates hotspot for Vienna’s climate ambit...

Climate Lab in Vienna will give climate actors an...

Climate Lab: EIT Climate-KIC co-initiates hotspot for Vienna’s climate ambitions
In The News
Seven takeaways from the latest IPCC report

On 28 February, the IPCC Sixth Assessment Report (AR6)...

Seven takeaways from the latest IPCC report
In The News
EIT launches new Global Outreach website

The European Institute of Innovation and Technology (EIT) has...

EIT launches new Global Outreach website
In The News
EIT Climate-KIC and Amazon launch call for sustainable start-ups

Working on transformative, systemic innovation to accelerate a net-zero...

EIT Climate-KIC and Amazon launch call for sustainable start-ups
In The News
Votes open for the 2021 New European Bauhaus Ideation Awards – Audience Awar...

Do you want to support innovative solutions that integrate...

Votes open for the 2021 New European Bauhaus Ideation Awards – Audience Award
In The News
Brill Power’s new innovation radically increases battery life and storag...

Brill Power, supported by EIT Climate-KIC, has launched the...

Brill Power’s new innovation radically increases battery life and storage capacity
In The News
EIT Climate-KIC CEO Dr. Kirsten Dunlop gives TEDx Talk

EIT Climate-KIC CEO Dr. Kirsten Dunlop delivered a talk,...

EIT Climate-KIC CEO Dr. Kirsten Dunlop gives TEDx Talk
In The News
Putting theory into practice: EIT Climate-KIC Pioneer innovating the Greek mar...

To tackle complex climate challenges, we need a broader...

Putting theory into practice: EIT Climate-KIC Pioneer innovating the Greek maritime sector
In The News
EIT launches call for proposals to boost innovation in Higher Education Instit...

Unlocking the potential of higher education institutions for innovation...

EIT launches call for proposals to boost innovation in Higher Education Institutions
In The News
Dolomites forging climate resilience

The Italian Dolomites, a UNESCO World Heritage Site, are...

Dolomites forging climate resilience
In The News
People-powered resilience: Andalusia announces new climate action plan

The region’s climate action plan has been announced, with...

People-powered resilience: Andalusia announces new climate action plan
In The News
Built by Nature: new initiative to accelerate the transition to sustainable co...

The built environment accounts for close to 40 per...

Built by Nature: new initiative to accelerate the transition to sustainable construction in cities
In The News
The State of California and EIT Climate-KIC advance partnership for climate in...

Glasgow, 8 November – The California Governor’s Office of...

The State of California and EIT Climate-KIC advance partnership for climate innovation
In The News
COP26: UN Climate Change and EIT Climate-KIC partner to establish new Global I...

A new digital Global Innovation Hub has been launched at...

COP26: UN Climate Change and EIT Climate-KIC partner to establish new Global Innovation Hub
In The News
ClimateLaunchpad announces 2021 competition winners

EIT Climate-KIC’s ClimateLaunchpad – the world’s largest green business...

ClimateLaunchpad announces 2021 competition winners
In The News
EIT Cross-KIC New European Bauhaus launches Ideation – Deadline Extended

EIT Climate-KIC has launched a call for ideas on...

EIT Cross-KIC New European Bauhaus launches Ideation – Deadline Extended
In The News
Call for proposals: Scaling the New European Bauhaus Ventures

The European Institute of Innovation and Technology (EIT) has...

Call for proposals: Scaling the New European Bauhaus Ventures
In The News
Glasgow City Region in the race to resilience

Glasgow, which is hosting this year’s UN Climate Change...

Glasgow City Region in the race to resilience
In The News
Gipuzkoa’s quest for sustainability

Gipuzkoa, the smallest Spanish province located in the Basque...

Gipuzkoa’s quest for sustainability