Investing in deep decarbonisation: our approach

Editor’s note: This the second article in a three-part series talking about the why, what and how of our investment thesis. You can read Part 1 here.

We believe that the race to deep decarbonisation will require another industrial revolution, completely remaking the activities that support modern life. As with the first industrial revolution, these changes will be rooted in modern scientific techniques and developed by brilliant innovators. Just as importantly though, and in a mirror of the 1800s, the enormous scale and impact of these technologies will be driven by improved economics, making their adoption not just good for the planet, but inevitable for companies that want to compete and thrive.

These confluences of science and business, and of improving the economy while also respecting the planet, are what drive our investment thesis at Zero Carbon Capital. We see our work - to support the scientist-entrepreneurs that are building this future - as both a moral imperative and the investment opportunity of a generation.

So how do we go about this and what sort of companies do we want to back? We focus on three areas:

500Mt of hard-to-abate emissions reductions

To achieve deep-decarbonisation we need to tackle the big sources of emissions. Human activities generate greenhouse gas emissions equivalent to about 50Gt of carbon dioxide (mostly in the form of carbon dioxide itself, methane and nitrous oxide). To get to zero, we need to tackle the big problems, so addressing at least 1% of total emissions is an impact imperative.

We also believe that large emissions reduction potential will be associated with long-term outsized valuations. Our thesis is that companies that offer improved, emissions-free alternatives to existing industries will create enormous value. We don’t burn fossil fuels or farm our land for fun. We do it because it enables our modern lives. Without new low carbon approaches, the damage to the planet, the global economy and our way of life will be enormous.

In addition to the sheer scale of reductions, we prioritise opportunities where the investment is needed to be truly transformational - where there is no current solution and where the current level of investment does not look likely to produce one. At this stage, another dollar invested in mobility has less opportunity to change the game than a dollar invested in agriculture, the built environment or industry.

Source: State of Climate Tech 2021

Hard science innovation leading to real-world solutions

As we’ve noted, climate change is a problem rooted in physics, chemistry and biology, and it will require deep changes to most of the physical processes we use to support the modern world. So while software and services will no doubt underpin key aspects of the solutions we need (just as they do in every industry today), our focus at ZCC is on the companies that are generating the scientific insights that will remake the actual physical processes we use.

The companies we invest in produce IP and end-products that unlock specific opportunities of decarbonisation. They may use AI and other software tools to achieve this, but software is not their product. We’re looking for technologies that change the fundamentals of an existing industry - that remake it to be clean, more efficient and more valuable.

This also helps us build expertise in supporting hard-science companies. We are a team of scientists, and we like to understand the details of the science behind an innovation at a deep level, because we believe that helps us be better partners for our portfolio companies in shaping their future development and go to market strategies. Crucially we think the business model and science need to work hand in hand to drive maximum growth and impact.

Brilliant teams at the very start of their journey

When taking into account the previous two priorities, we don’t yet see the level of very early stage investment that is needed (especially here in Europe) to incentivise brilliant scientists to create the companies that are required to solve this problem. That’s why we focus on working with entrepreneurs at the earliest stages of their journey - from company formation through to seed stage.

Of course, going from zero-to-one is hard and while we are here to help, it’s the founding team that must do most of the heavy lifting. So we’re looking for founders with the right balance of technical brilliance, business understanding and capacity for growth to build a big, successful business; and that are fundamentally aligned with our mission to decarbonise the economy. Decarbonisation should not be a by-product of the operations of the startup, but fundamental to its existence and motivating every founder for its continued development.

When we see a brilliant team of scientist-entrepreneurs, driven by the desire to decarbonise the world of the future, and aligned with our belief in the value of combining science with business, we get very excited.

ZCF portfolio founders

The (investment) opportunity

Ultimately, when some people look at the transition that we need to fight climate change, they see only costs - a global P&L deeply in the red. That’s not how we see it. We are technology optimists. When we look at the scale and difficulty of the decarbonisation challenge ahead of us, we see hundreds of opportunities for science and technology to change the way we do things for the better. And in doing so to create a huge amount of value for founders, employees, communities and investors.