Adapting to a new reality (2): Building our Climate Venture Platform
Introducing our Climate Venture Platform: Supporting our portfolio companies to apply a climate lens to their work
This blog is the second of a four-part series articulating our climate resilience approach at MCV. The first blog explains why, after years of investing in climate resilience solutions, we decided to expand our climate resilience focus into other parts of our approach, including our Venture Platform. In this blog, we dive into more detail on our process to incorporate a climate lens to our post-investment support.
Introduction
After years of investing in climate resilience solutions, we decided to continue to push the boundary and expand our focus on climate resilience into other parts of our approach. In particular, we realized we wanted to explore a post-investment strategy that embedded a climate lens, and started asking ourselves a few key questions: What would that look like? What does it actually mean to embed a climate lens to post-investment support, and what type of specific climate support would provide the most value to our portfolio companies? We set out to answer these questions and hypothesized that we could build a right-fit post-investment offering for our early-stage companies that would enable them to successfully navigate climate risks and opportunities and build more sustainable businesses over the long run.
In this blog, we lay out how we went about researching, exploring, and designing our Climate Venture Platform.
Our approach
Our first step was to do what we always do when developing our Venture Platform offerings: we reached out to our entrepreneurs for their thoughts. We also researched existing frameworks, support services, and learnings and conducted multiple interviews with ecosystem partners and other experts to explore how we might apply a climate resilience lens to our Venture Platform work.
We interviewed eight startups, seven of whom are in our portfolio: Kwanza Tukule, Ignitia, Wasoko, Meridia, Powered by People, Verqor, Turaco, and SunCulture (not a portfolio company). These companies were selected to:
- Ensure coverage of all three of our Resilient Future Thesis categories.
- Span a range of growth stages.
- Include companies with business models directly affected by climate change, who explicitly identify themselves as working in the climate space, as well as those for whom the link is less clear.
We covered a few different bases in our interviews. We made sure to explore what companies were already doing to mitigate climate risks (if anything), as well as ideas they had for the future. We talked about the impacts on both business and customers, and explored both the risks and the opportunities climate change presents. These conversations allowed us to get a detailed picture of the diverse ways our companies interact with the changing climate, without having to undertake a long-term research initiative.
Alongside these interviews, we undertook extensive desk research and explored resources through multiple climate-related working groups (such as the GIIN’s IRIS+ working group on Climate Adaptation & Resilience and the Climate Innovation for Adaptation and Resilience Alliance) to help build our own understanding of what type of support was feasible and exciting.
We also interviewed 15 ecosystem partners, including early-stage funds (like us) and much larger organizations working in the climate space. The ecosystem players we chose are all actively thinking about climate or operating in sectors that are highly exposed to climate change-related factors.
With all of this information, our team was able to analyze and discuss what it is that we’re in a unique position to provide when it comes to climate support.
What we heard
The climate interviews we conducted were hugely insightful and generated several insights — and a few surprises.
1 | Many of our portfolio companies don’t actively consider climate change in their work at present — and even those who do, have no effective way to assess the related risks and opportunities.
None of the companies we interviewed currently carry out any specific climate risk assessment, even when they clearly operate in the climate space and the exposure to climate risks could have a direct impact on their end users’ abilities to interact with their given product or service. In some cases this is because taking a climate lens feels more complex and less pressing than the other day-to-day challenges of running their business.
In other cases, companies don’t see the need for a climate risk assessment because they see any risks or changes to the end user environment or behavior as mitigated by close feedback loops between the end users and product design team (i.e. they are responsive to all changes in customers’ behavior including those related to climate). In these cases climate is not analyzed independently, but it can play a role in the background as an indirect cause affecting customer behavior.
Many of our ventures talk about “climate risks to business continuity” and “climate risk to customers” as if they are separate phenomena. Three-quarters of ventures answered “no” to the question of whether or not they see any risks to business continuity, but 75% of companies also highlighted climate risks specific to their customer base and therefore their own revenue streams. This separation between “risk to business continuity” and “risk to customers” was surprising to us. Companies clearly see some climate risk to their customers but do not make the link to business continuity, which suggests they might not adequately understand the full spectrum of climate risks.
2 | There is still no agreement on the definition of climate adaptation and resilience, or on what success looks like.
We heard from ecosystem players that climate adaptation and resilience is still a gray area when it comes to definitions and metrics.
“Our adaptation thesis is complicated because generally climate resilience is poorly understood.” — agriculture and food systems VC
With climate mitigation, we have a common understanding and shared goals around reducing greenhouse gas emissions (per the Paris Agreement). Nonetheless, according to the UN we’re not on track to reach those goals. We need stronger actions to bring greenhouse gas emissions in 2035 to levels consistent with the 2°C and 1.5°C pathways. Each year the world continues to break climate records in numbers, speed, and scale. Hence the need to strengthen our efforts on climate adaptation and resilience. However, there is a lack of harmonization across the climate investment space and a noticeable lack of consensus on what exactly is meant by climate adaptation and resilience.
The climate resilience space is complex and there is no one-size-fits-all solution. Different actors are testing multiple ways to define and measure it, more or less narrowly depending on their investment scope and reporting flexibility. Some are measuring resilience for specific regions and products, defining key performance indicators that are unique to each investment. Others are looking at the bigger picture, arguing that anything that makes farmers better off, like better income, is part of their climate resilience.
This lack of consensus around a definition also means that investors and other players are not yet clear on what the success metrics should be, which makes it hard to measure progress. Even for those whose business models directly link to climate change, one of the biggest challenges is how to measure and articulate climate impact. Not only is the space complex and consensus lacking, but many companies do not yet have the expertise to measure their climate resilience impact on end users, or tell their story in a meaningful way (which can be a major barrier to accessing climate funding).
3 | Companies not specifically tied to climate, environment, or natural resources do not see climate risk or opportunity as a key priority at their stage of growth.
Each company’s approach to climate change, and the related risks, is influenced by their business model and whether it is directly linked to climate, the environment, or natural resources. For companies where climate or natural resources are explicitly core to their model, the risks and opportunities were clearly identified by those interviewed. Others with business models not directly tied to climate may think about climate change as an ongoing event, but not something that will directly impact their business.
4 | Carbon credits seem to be a popular area for revenue diversification, but many do not have the deeper knowledge required to tap into this successfully.
Half of the ecosystem partners we interviewed mentioned carbon credits, and the carbon markets more broadly, as an area of interest for climate resilience impact. Some ventures operating in the climate space (e.g. in agriculture or renewable energy) are focusing on carbon as an avenue to develop extra revenue streams, but lack the expertise to make it happen. First, they need information to answer some key questions, like: Does it really make sense for us? What are the next steps? Who are the key players in the voluntary carbon markets? How can we measure, commercialize, and scale this kind of solution? For many startups, defining and launching an operational model to commercialize carbon credits seems to be a challenge.
What we learned
We generated four key learnings from our interviews and research:
1 | There is a need for a right-sized, contextually-specific climate risk and opportunity assessment tool.
Though our understanding of climate change shows that all companies are vulnerable to its impacts, there is a wide range of ways in which an individual company might respond to the changing climate. In several cases, the companies we interviewed did not see climate change as having any direct relevance to their day-to-day business operations. So we see a need for a right-fit climate risk or opportunity assessment to help businesses of different types and at diverse stages identify key priority areas within the climate space that are relevant to them. We also think it’s vital to make sure any assessment tool isn’t over-sized or out of context for the early stage of our ventures, but also still has enough detail to be useful.
2 | There is a need to support startups in understanding what climate resilience means, how their business can impact it, how to measure it, and how to tell the story.
The majority of our interviewees suggested that articulating the positive climate resilience impact of their product or service is a high priority. We believe it’s important to help our ventures develop the frameworks that can allow them to holistically and deeply understand how their product or service impacts the climate resilience of their customers. This impact will be stronger and more obvious for some companies than others, so this support needs to be adapted accordingly. In the future, we also see a possibility to help ventures test different mechanisms to strengthen that impact over time, through product development or customer acquisition strategies.
3 | Providing easy access to information and guides on carbon credits and other means of revenue stream diversification could be a huge value add.
The carbon markets are a key area of interest for early-stage climate companies, but very few of our interviewees had the knowledge or expertise to implement this kind of project. There seems to be a lack of knowledge about other revenue diversification options. As a Fund, we have good connections and deep knowledge in the sector, as well as the capacity to carry out research in the areas we know less about. We see a real opportunity to provide play books or guides to some of these alternative revenue streams.
4 | Creating consensus on the measurement of climate resilience will be one of the most important steps to drive greater impact.
Climate resilience is a perfect example of a systems change problem. The fact that we have gathered behind a clear definition of climate resilience and are developing a robust impact measurement and management framework for our investment work around it is a great start for our climate resilience work at MCV. But we see many opportunities for the development of impact in this space, which would stem from collaboration between like-minded partners, including donors and other investors, to align on a shared framework and come to consensus around measurement of climate resilience.
We also think it’s vital that this framework and any measurement tools are right-sized to the early-stage companies we support. One of our key takeaways in 2023 was the importance of meeting our portfolio companies wherever they are in their respective climate journeys — right-fitting our support to them rather than forcing them to meet specific standards or metrics that aren’t appropriate for their business and stage of development.
What we did
We were really excited to learn so much from these interviews and are hugely grateful to everyone who gave us their time and insights. Following the interviews, we also ran internal workshops to review our findings, gather feedback, and develop a proposal for where we want to take this work in the next three to six months.
One of the main priorities that emerged was the need to build a Climate Assessment Tool. We saw a range in levels of understanding of climate impacts across the startups we spoke to, and realized that an assessment tool could be a vital starting point before we develop other more specific offerings. We’ll be sharing an introduction to our tool, the tool itself, and our initial learnings in the next installment of this blog series.
