Some Climate Investors are Missing the Big Picture, but There is Still a Path Forward

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?