The Startup Playbook No. 13

Knowing Your “How”: Categorize Your Climate Tech’s Planetary Impact

Our last installment of The Startup Playbook examined the importance of classifying your climate action, as not every idea or solution is suitable for climate tech entrepreneurship.

If your climate-focused concept can become a scalable good or service consumers would actually pay for, only then is it appropriate to establish a climate tech startup. Sometimes, your chosen climate action could be more effectively applied through policy, non-profit advocacy, or investment. If climate tech entrepreneurship is appropriate, your next step as the founder is to categorize your climate technology. In other words, define what I like to describe as your “climate how.”

How will my climate technology contribute to a healthier planet?

Your answer to this question is critically important because not all climate technologies will directly contribute to decarbonization efforts. But let’s be very clear: This question goes beyond your technology’s environmental impact. There are other ramifications to consider, like your product’s design, go-to-market strategy, fundraising, and commercialization. The goal, after all, is to build an enduring company.

Since these categories were not declared on high, they could be sliced and diced in numerous ways. But, I propose three main buckets to categorize your climate technology:

  1. Decarbonizing technologies,
  2. Physical and digital infrastructure to support decarbonization, and
  3. Resilience-building tech for our planet’s systems.

Let’s dig in and review each to identify the big challenge each bucket presents.

Decarbonizing Technologies

These technologies, your classic climate tech types, directly contribute to the reduction of greenhouse gases by creating a technical method that (i) performs an existing operation in a low-carbon or no-carbon manner or (ii) introduces new means of reducing carbon in our atmosphere (i.e., carbon removal technologies).

Starting with the former, for example, solar panels didn’t invent electricity, but those beautiful panels are a carbon-free means to generate power. In time, the solar market’s growth should entirely replace coal-fired power plants and dramatically reduce our dependence on natural gas.

The operative word in that last sentence is “replace,” as in replacing existing technology with your newer, improved design. Battling incumbency is never easy, and it is crucial to understand from the onset what it means to replace an incumbent. Here are a few things to keep in mind:

  1. Your potential customers have a high-carbon product that works; it’s just high-carbon.
  2. Replacement is more likely if it happens without interruption.
  3. Sometimes, replacement may need to wait until existing, high-carbon capital equipment reaches functional obsolescence, which could take a while.
  4. Competing on cost and performance is as important as competing on environmental attributes.
  5. Your success may come at the expense of the incumbent industry’s failure. Understand what that means for the people behind those companies.
  6. Scaling will likely be capital-intensive. Your revenue should grow dramatically over time to justify the capital expenditure, but your margins could notably shrink if you’re building what will become a low-carbon commodity.

Carefully consider these items in the development of your technology and its go-to-market strategies. In doing so, it cannot be understated: Disrupting an incumbent industry that provides critical economic services (power, transportation, materials) is no small task. Difficulty isn’t a reason not to do it. Still, it is a reason to have an insanely good understanding of your incumbent’s industry and a detailed plan for how you’ll systematically change it.

Carbon removal technologies may seem like a way to avoid incumbent industries. But let me remind everyone of one key fact: carbon tech founders are creating a brand-new market. Market making is not easy, especially when the product you’re creating (i.e., the removed carbon) has a current price tag that does not align with customer expectations (think prices in the atmosphere, customers on the ground).

The challenges of establishing a new market may differ from replacing an existing incumbent, but they are equally enormous, if not more so. This is all the more reason to understand how your technology will integrate into existing supply chains, who will ultimately buy your product, and what you can learn from existing industrial companies in ancillary markets (i.e., energy and chemicals).

Physical and Digital Infrastructure

Equally crucial to the decarbonizing technologies are the physical and digital infrastructure that support them.

Electric vehicles don’t work at scale without a robust charging network and the software to manage it. Renewable energy will only grow if the transmission and distribution networks advance with it. Buildings can only become carbon-free if we have the right software to manage the various systems that make our modern offices, retail centers, and industrial complexes work!

Infrastructure is critical to supporting the rapid adoption of decarbonizing technologies. In some instances, the absence of infrastructure is holding us back. If, for example, a robust EV charging network was in place, eliminating the vulnerability and range anxiety folks feel when considering an EV, rapid adoption and expansion would probably happen quicker.

In this category, there are a few things worth considering:

  1. Infrastructure can be physical, digital, or a combination of both.
  2. Digital technologies (i.e., software) can have enduring margins, especially for recurring revenue businesses, but a physical infrastructure is equally appealing, especially if your projects allow for development fees upfront and long-term cash flows.
  3. Whatever type of infrastructure you’re building, you’re betting the technology will scale at a speed that supports the growth of your business.
  4. If that bet doesn’t pan out, you’re likely toast, no matter how good your solution is. The success of your company depends on the success of your bet!

It cannot be understated: your bet is everything. EV charging companies are placing bets on the pace of EV adoption and the habits of consumers (i.e., when and where they will charge). Now, we all agree the EV industry seems poised to eventually replace the internal combustion engine, but the pace at which it happens is very much up for debate. A slow roll-out may spell trouble for those climate tech companies betting on a faster one.

Resilience-Building Tech

If we’re going to decarbonize our planet, we should ensure we have clean air, abundant clean water, and sustainable waste streams. And we’ll need to tackle adaptation to address the damage we’ve already done in certain areas of the globe (such as coastal communities and draught-stricken regions).

This third bucket includes all those technologies that aren’t directly decarbonizing our planet but are still critical to supporting a healthy planet. Circular economy technologies are highly relevant in this category, as all the water technologies ensure we have an abundant clean water supply. These technologies create our big tent approach to climate, representing some of the most tangible ways to improve our environment.

A few critical considerations to keep in mind:

  1. These technologies may be tough to monetize. Clean air and water feel more like public goods than goods we want to purchase. Finding the right customers and understanding what they will pay is key.
  2. Technologies in this bucket may not be given the same priority as technologies that contribute to reducing greenhouse gases.
  3. Mandates are different, and incentives may not exist as they do for decarbonizing technologies. Learning curves may have other shapes if incentives aimed at reducing costs don’t exist.
  4. Customers may move at much different speeds. A direct-to-consumer circular economy company may be able to develop a much quicker sales process than a water tech company selling to public works departments. Consider the runway you’ll need to get to market and the level of interest you’ll garner from investors once they understand the characteristics of your target customers.

As these considerations suggest, building a technology in this bucket presents its own set of challenges. There are big total addressable markets here (hey, we all need clean air and clean water, and think about the cost of all the trash we produce!) and clear benefits to humanity (we do need that clean air and water). Founders must navigate these challenges carefully and ensure the capital they are raising is well-suited for the speed at which they will build their businesses.

Categorizing your climate technology is such an important step. It represents the beginning of a business plan because founders will need to understand how their climate technologies will fit into our rapidly moving global economy. Understanding the market you are entering and your role is critical to designing your product, your business plan, and your cash strategy – and ultimately to building an enduring company. Categorize carefully, and you’ll be well-positioned to scale!

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