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
Four EIT Climate-KIC innovators nominated for EIT Awards

Four EIT Climate-KIC innovators have been nominated to win...

Four EIT Climate-KIC innovators nominated for EIT Awards
In The News
EIT Climate-KIC selected to advise European Commission on sustainable finance

The newly created EU Platform on Sustainable Finance brings...

EIT Climate-KIC selected to advise European Commission on sustainable finance
In The News
bound4blue’s innovative wingsail technology gathers recognition across Europe

Cristina Aleixendri, Co-founder and COO of the Spanish start-up...

bound4blue’s innovative wingsail technology gathers recognition across Europe
In The News
EIT Climate-KIC and Glasgow City Region join forces, helping the region innova...

Home to one third of Scotland’s population and provider...

EIT Climate-KIC and Glasgow City Region join forces, helping the region innovate to become climate resilient
In The News
Cassetex from Bangladesh, Sosei from Uruguay and Carbon Craft Design from Indi...

More than 3,000 entrepreneurs from 56 countries participated in...

Cassetex from Bangladesh, Sosei from Uruguay and Carbon Craft Design from India win the seventh edition of ClimateLaunchpad
In The News
World’s biggest green business ideas competition now fully digital, free and...

The three-day Grand Global Final of the EIT Climate-KIC supported...

World’s biggest green business ideas competition now fully digital, free and accessible to all
In The News
Three cities building back better: Madrid, Milan and Amsterdam

EIT Climate-KIC will host a session at the 18th...

Three cities building back better: Madrid, Milan and Amsterdam
In The News
EIT Climate-KIC to work with Google on Impact Challenge

EIT Climate-KIC is delighted to announce that it will...

EIT Climate-KIC to work with Google on Impact Challenge
In The News
What role can finance play in the green recovery? EIT Climate-KIC and UNEP Fin...

EIT Climate-KIC, in partnership with the UNEP Finance Initiative,...

What role can finance play in the green recovery? EIT Climate-KIC and UNEP Finance Initiative ask leading thinkers to weigh in
In The News
EIT Climate-KIC supports European green recovery with €4 million for start-u...

EIT Climate-KIC is investing €4 million in nine climate...

EIT Climate-KIC supports European green recovery with €4 million for start-ups affected by COVID-19
In The News
The City Finance Lab calls on urban leaders to help build back better

Organised by sustainability expert South Pole, the competition for...

The City Finance Lab calls on urban leaders to help build back better
In The News
EIT Climate-KIC supported cities – Leuven, Milan, Valencia and Vienna no...

Twelve cities are in the final stage of the...

EIT Climate-KIC supported cities – Leuven, Milan, Valencia and Vienna nominated as European Capital of Innovation 2020
In The News
The climate emergency demands bold policy innovations – can cities d...

While the challenges of climate change and a global...

The climate emergency demands bold policy innovations – can cities deliver? 
In The News
EIT Climate-KIC joins circular economy side event at UN High Level Political F...

“Bold leaders are needed to drive a collaborative approach...

EIT Climate-KIC joins circular economy side event at UN High Level Political Forum on Sustainable Development
In The News
EIT Climate-KIC and Silesian Metropolis join forces to transform Europe’s la...

EIT Climate-KIC and the Metropolitan Association of Upper Silesia...

EIT Climate-KIC and Silesian Metropolis join forces to transform Europe’s largest coal region in the face of the climate crisis
In The News
Anders Wijkman represents EIT Climate-KIC at the International Society for the...

Speaking online at the inaugural Conference of IS4CE—the International...

Anders Wijkman represents EIT Climate-KIC at the International Society for the Circular Economy Conference
In The News
EIT Climate-KIC receives €8.4 million for innovation projects that stimulate...

Eleven climate innovation projects across Europe tackling COVID-19 related...

EIT Climate-KIC receives €8.4 million for innovation projects that stimulate job creation and support a post COVID-19 green recovery
In The News
CEO Kirsten Dunlop represents EIT Climate-KIC at Climate Policy Forum

On 25 June, EIT Climate-KIC attended the Climate Policy...

CEO Kirsten Dunlop represents EIT Climate-KIC at Climate Policy Forum
In The News
EIT Climate-KIC supported LOOP-Ports project wins prestigious sustainability a...

The LOOP-Ports project, led by the Fundación Valenciaport  and funded by EIT Climate-KIC,...

EIT Climate-KIC supported LOOP-Ports project wins prestigious sustainability award
In The News
EIT Climate KIC joins roundtable as Republic of Korea moves Green Deal forward

On 24 June, EIT Climate-KIC attended the 7th Green...

EIT Climate KIC joins roundtable as Republic of Korea moves Green Deal forward
In The News
EIT Climate-KIC shines at the GLF Bonn Digital Conference, the year’s la...

EIT Climate-KIC’s Director of Sustainable Land Use and member...

EIT Climate-KIC shines at the GLF Bonn Digital Conference, the year’s largest global digital conference on the environment
In The News
EIT Climate-KIC supported Climeworks raises over €67 million to expand its c...

Climeworks, the world leader in capturing CO2 from air,...

EIT Climate-KIC supported Climeworks raises over €67 million to expand its carbon dioxide removal capacities
In The News
EIT Climate-KIC supported Zeleros raises €7 million for the development of h...

EIT Climate-KIC supported Zeleros Hyperloop has completed a financing...

EIT Climate-KIC supported Zeleros raises €7 million for the development of hyperloop in Europe
In The News
EIT Climate-KIC is restructuring to deliver systems transformation for climate...

EIT Climate-KIC is restructuring to provide “systems transformation as...

EIT Climate-KIC is restructuring to deliver systems transformation for climate change