Some Climate Investors are Missing the Big Picture, but There is Still a Path Forward
Dan Gluck — May 2, 2022
Consider it official: The 2020s will be the decade when the impact of climate change really comes into focus. Record wildfires, endless droughts and changing weather patterns are all the proof we need, and by most estimates it is just going to get worse from here.
According to a 2020 report published by The Royal Society and the U.S. National Academy of Sciences, atmospheric CO2 concentrations are up more than 40% since the Industrial Revolution, with over half the increase occurring since 1970. Since 1900, the global average surface temperature has increased by about 1°C, melting Arctic sea ice, warming the oceans and changing local climates worldwide.
We’re already seeing this play out on the farm, where water scarcity is starting to hit home right as demand is taking off. The US’ great postwar push to deliver cheap, accessible calories to the masses has been a success, but where do we go from here when a warming planet makes production more challenging? When the world’s population hits 10B later this century, will we have enough food available to feed them? Will it provide the nutrition they need?
That’s what we’re investing in at PowerPlant – the companies that are solving these massive environmental and health challenges by developing sustainable, nutritious CPG products. And we’re watching the foodtech space closely and like what we see. It just isn’t the right time yet for most companies. Among many investment criteria, we need to see a clear path to commercialization, a great management team, and a scalable platform, like we saw with Beyond Meat early in its inception.
The reason for that is something I’ve noticed about this market – across climate and sustainability – that worries me, and it has to do with valuations. More and more, you’re seeing very large food tech companies closing these huge rounds at tech-like valuations. On paper that might look good, but I think that investors are missing the mark on a lot of these businesses because, at the end of the day, many of them are going to end up being regular consumer food companies. They aren’t going to be Facebook or Tesla, they’re going to exit at multiples between 2x and 5x like most other CPGs. Not the 20x-30x you can see in tech.
The result is easy to predict. Eventually everything reverts to the mean and many investors will be left holding the bag.
I get it. It is great that there is a lot of exuberance around sustainability, plant-based, alternative proteins and all the rest, and it makes sense that investors are interested in this market. But too many general tech investors are looking at it with a tech mindset and I’m not so sure that they will get the outcomes that they want. Sure, a company that is making, for example, plant-based burgers has to develop some original technology to do that, but it’s stretching the definition a little bit to compare that to something infinitely scalable like a Netflix or an Uber.
I’ve heard talk about one company doing around $17 million in revenue that’s valued at $700 million – if you want to make a 5x return on that you’re looking at a $3.5 billion outcome. To do that, these companies need to be scaling to a couple hundred million in revenue, and there are very few food companies that can do that. Some of the largest public food companies in the world are doing a couple hundred million in revenue; do we really expect to see that from a startup?
I worry that too many investors don’t understand that math and will pull back from these climate- and sustainability-focused investments when they don’t deliver tech-like returns. That would be a mistake, not only from a financial standpoint but also the fact that these innovations are too important to screw up.
We need to support these companies, but we also need to be realistic about why we’re doing it. That’s not to say that this is impossible. It’s important that investors not back down from these challenges; after all, it is in all our interest that this work. How can we kickstart those discussions among investors?