Why I Believe Fifth Wall’s Consortium Might Be Key to Solving One of the World’s Biggest Problems
Investing in climate tech makes ethical sense and it might be the best-returning category in venture capital history
From rising sea levels to wildfires, a lot of ink has been spilled in articles about the climate apocalypse and why it is businesses’ ethical imperative to decarbonize. As a result, we’re starting to see cracks in the traditional business façade against making investments in climate tech. Earlier this month, 40 of the largest companies in America signed a letter urging Congress and the Biden administration to do more. So, there is certainly movement in the right direction.
Decarbonizing our modern world is the right thing to do and a personal mission of mine. In addition to the ethical, normative arguments, I believe it’s also smart business. I’ve witnessed this first hand from my time at BMW i Ventures where I led the Sustainability investing practice, investing in companies such as Prometheus Fuels, Turntide, and PureCycle (NASDAQ: ROCH) and during my time at The Boring Company and Neuralink where I simultaneously led Finance and Operations for both companies.
From an investor perspective, my view is that climate tech might just become the best-returning category in the venture capital asset class. Meanwhile, the global real estate industry, responsible for 30% of greenhouse gas emissions, has gone unchecked with regard to its contributions to the climate crisis. Couple climate tech solutions with the global real estate industry’s massive climate change problem and I see an enormous potential upside for an up-and-coming batch of new entrepreneurs and companies — both in terms of returns, but also to help solve arguably the most pressing challenge of our generation.
In a 2019 opinion piece in The New York Times, Kara Swisher, one of the most respected tech journalists, predicted more investments in climate tech and shared that:
“…the world’s first trillionaire will be a green-tech entrepreneur.” — Kara Swisher
From what I know of Kara Swisher from her reporting, words matter. She’s had a front row seat for a couple of decades of tech development, she knows her stuff, and she isn’t one for hyperbole. If you’re still skeptical, let’s take a quick dive through Venture Capital 101. Good investments in venture capital typically follow a pretty standard playbook:
- Find a large market….
- That is being forced to change or transform by some new factor (e.g., new technology, regulatory pressure, new market forces).
- Invest in the companies best positioned to capitalize on that change.
If the market is large (1); and you pick the transformational trend right (2); then chances are that most investments you make in step (3) will do fine; and if you happen to hit the overall category winner you hit it out of the ball park.
Here’s a good example: Salesforce.com (currently at a ~$200 billion market cap)
- Find a large market: The Customer Relationship Management (CRM) industry was ~$20 billion in 2000
- That is being forced to change or transform by some new factor: The internet was allowing software to be delivered without the need for on-premise servers for the first time (SaaS was becoming a thing), meaning it could be sold much faster and cheaper than the on-premise incumbent.
- Invest in the companies best positioned to capitalize on that change: Salesforce.com was the first CRM solution built from the ground up to be delivered online — there WAS NO ON-PREMISE VERSION and their logo was even a “no-software” sign.
Or another one: AppDynamics (acquired by Cisco for $3.7 billion)
- Find a large market: The Application Performance Management (APM) market was ~$2.7 billion in 2014
- That is being forced to change or transform by some new factor: The rise of SaaS software (same trend as above!) meant that prior APM tools no longer worked for the new breed of SaaS applications being developed. Developers needed new tools.
- Invest in the companies best positioned to capitalize on that change: AppDynamics was built from the ground up for this new breed of applications — it didn’t even work for the old, on-premise monolithic apps.
Or, just to really beat the dead horse: Uber (currently at ~$90 billion market cap)
- Find a large market: The global taxi market was ~$300 billion in 2019.
- That is being forced to change or transform by some new factor: The rise of smartphones with internet connections and GPS meant that for the first time you could use software to directly connect independent drivers to ride-hailers; disambiguating the stranglehold that central-dispatch taxi services had on the market.
- Invest in the companies best positioned to capitalize on that change: Uber was built from the ground up for this mobile-first world; it didn’t have a central-dispatch, non-smartphone version.
So, the playbook works. But, let’s take a look at those market sizes. They are healthy — in the billions to hundreds of billions of dollars.
The key takeaway: it all starts with market size. If there isn’t a large market, it doesn’t matter if you win because winning a small market is like being crowned the tallest Lilliputian.
All of these businesses got to massive exits and huge venture capital returns in markets from ~$2.7 billion to ~$300 billion; but I believe it was the market size driving things from the start. If the market sizes were small, I think these exits would have been small too.
Historically, markets from ~$2.7 billion to $300 billion have been seen as large. Some of the most storied firms in venture capital — from Sequoia, to Accel, to Andreessen Horowitz — all cut their teeth in the enterprise Software market, which is currently around ~$460 billion in total. That’s pretty big — and their strong fund returns would attest to it being large.
But what if I told you there were much bigger markets…
The market is how big??
- The global Real Estate market is ~$9 trillion.
- Industry & Manufacturing is ~$43 trillion.;
- Transportation and Logistics is $6 trillion.
Each of these markets alone is 1 to 2 ORDERS OF MAGNITUDE larger than the markets that have driven such huge venture capital returns in the past, and combined we’re looking at a $58 trillion opportunity. And, each of these markets is a massive contributor to greenhouse gasses:
So, it’s no wonder that Morgan Stanley thinks “with potentially $3 trillion to $10 trillion of earnings before interest and taxes up for grabs, decarbonization could present a material economic and humanitarian opportunity.”
“Potentially $3 trillion to $10 trillion of earnings before interest and taxes up for grabs.” — Morgan Stanley
$3 trillion to $10 trillion of (earnings before interest and taxes) EBIT is up for grabs! To really stress the point — that’s EBIT, not revenue…
That’s roughly an order of magnitude more in EBIT (profit) than the enterprise software market’s annual $460 billion in REVENUE! Needless to say, this is a monstrous opportunity.
So, just to be pedantic — let’s run it through the VC 101 framework:
- Find a large market: Is $9 trillion to $58 trillion of annual market large enough?
- That is being forced to change or transform by some new factor: That is being forced by all of its stakeholders (regulators, their customers, and their investors) to decarbonize.
- Invest in the companies best positioned to capitalize on that change: …let’s go hunting for some startups.
So it’s with the breathtaking size of the market as a backdrop that I’m very excited to announce that I’ve joined Fifth Wall to co-head the Climate Tech fund. We plan to invest in companies that produce technologies that could help decarbonize the $9 trillion real estate industry, as well as the $49 trillion of opportunity in adjacent, but relevant, markets like transportation and manufacturing.
I’m excited to be making this announcement because Fifth Wall has built a consortium of 60+ of the world’s most sophisticated owners, operators, and construction industry corporations. The leverage we can bring to the startups we invest in to help get their products distributed and installed globally in this industry is massive, and truly difficult to match.
Most importantly, I’m excited to make this announcement not only because I like the Earth, or because I think we should be decarbonizing the world, but because I believe it’s good business. And, according to BlackRock, I’m not alone. BlackRock’s 2020 Global Sustainable Investing Survey reports that respondents (425 investors in 27 countries representing an estimated U.S. $25 trillion in assets under management (AUM) plan to DOUBLE their sustainable AUM over the next five years, and 89% ranked the environment as the “priority most in focus”.
Climate change is a collective action problem that calls for a collective action solution. The outcome — reducing emissions — is for the public good, but it also calls for major capital flow and the possibility of massive financial returns. We need all hands on deck and every last available dollar to pull this off. Even Bill Gates is calling for a fivefold increase in investment related to climate change.
If you’d like to learn more about why I joined Fifth Wall and the opportunity that awaits for the real estate industry to invest in and adopt climate technology, send me an email at email@example.com