Exxon, Shell, Chevron, Total & stakeholder climate activism
The last weeks have seen the largest energy companies in turmoil. Through different paths, stakeholders have brought the climate change agenda to the board room of the “major” energy companies. These climate-conscious stakeholders seem capable of forcing some of the largest energy companies in the world to accelerate the pace of change in their transition towards a decarbonized economy.
Activist investor, Engine No. 1, whose nominee’s slate included the former CEO of Tesoro, recently managed to secure three seats in Exxon’s twelve-member board of directors. Engine No. 1 will now be able to push further its agenda consisting of “more significant investment in clean energy, to help the Company profitably diversify and ensure it can commit to (an) emission reduction target.”
What is particularly remarkable is that Engine No. 1 is a six-months-old hedge fund, which manages around $250 million in assets and owns a meager 0.02% of ExxonMobil, the oil and gas giant worth $250 billion.
A court in the Netherlands found Shell liable for its contributions to climate change and ordered it to cut its emissions by 45% by 2030 compared to 2019 levels.
Seven environmental groups, including Greenpeace and Friends of the Earth the Netherlands, also known as Milieudefensie, filed the lawsuit against Shell in April last year, on behalf of more than 17,000 Dutch citizens.
Campaigners argued that Shell was violating its international climate obligations and threatening the lives of these citizens by continuing to invest billions every year in expanding its oil and gas production.
The judge ruled that Shell’s current climate strategy is “not concrete enough and full of caveats,” adding that the oil major has a legal obligation to reduce its emissions in line with international climate goals.
Shell stated that it would appeal the decision.
At Chevron, most investors backed and obtained approval for an activist proposal calling on the company to reduce “scope 3” emissions associated with company operations. Scope 3 emissions are “indirect emissions resulting from activities of the organization, but occurring from greenhouse gas sources owned or controlled by third parties, such as other organizations or consumers, including emissions from the use of third-party purchased crude oil and gas.” Most of the emissions (over 80%) should fall within scope 3 emissions if the company operates in an environmentally prudent manner.
Chevron’s management had sought to exclude the scope 3 emissions reduction proposal from the agenda for the shareholders’ meeting by arguing that “it impermissibly seeks to impose prescriptive methods for implementing complex policies related to the Company’s strategy for addressing greenhouse gas (“GHG”) emissions.” It also tried to justify its position by explaining that “The Company believes that continued or increased fossil fuel production by the most efficient and responsible producers is not inconsistent with a decrease in overall fossil fuel emissions. If demand shifts to products from the most efficient producers, then companies like the Company could see an increase in their Scope 3 emissions while overall global emissions decrease. The Company does not support establishing targets associated with the use of the Company’s products (emissions related to the energy demand of consumers) as this would only shift demand to other (and likely less responsible) producers …”.
Other proposals at Chevron’s last shareholders’ meeting that failed to get enough votes were: to report impact based on a Net Zero 2050 scenario (like Repsol and other European majors); reporting on its lobbying activities; establishing an independent chair, and becoming a benefit corporation.
Total SE went through a rebranding exercise, now called TotalEnergies, “anchoring its strategic transformation into a broad energy company in its identity.” In tandem with this name change, TotalEnergies adopted a new visual identity, including a multi-color logo. Despite this announcement, 80% of its revenues in 2030 will still be coming from the oil and gas sales.
Energy in transition
Achieving the Paris Agreement goals requires a shift to investing in low-carbon energy transition solutions. I believe that point forward, all investments in the energy industry could be allocated 100% to renewables and batteries, although 100% renewable energy global supply may not be achievable even by 2050.
The green energy agenda has been part of the board decisions for all majors for a long time. They have been addressing climate change issues at different speeds, probably due to sunk costs. Also due to capture by what Prof. Clayton Christensen identified as limits to disruptive innovation: the company’s existing clients and current shareholders (I am thinking about you – pension fund counting on collecting stable dividends from energy companies).
There are plenty of investment opportunities in the green energy economy with attractive potential returns. Major oil and gas companies are well funded and will probably reconvert in time. As Jim Collins mentioned in his book “Good to Great,” not all companies transition from good companies to great companies. Similarly, not all oil and gas companies will succeed in the transition to being good energy companies, and far less will be great at it.
“RDS has made executive remuneration dependent on reaching short-term targets. In the 2019 Annual Report it was reported that the performance indicator ‘energy transition’ counts towards 10% in the weighting. The other 90% is linked to other, mostly financial performance indicators”.Case C/09/571932 / HA ZA 19-379
Investing in startups entails an emotional ride. That is why you need to have an investment framework to validate your decisions and curtail your emotions. I will recount the lessons learned in terms of risks, from an exit and the two bankruptcies of startups I had invested in. Although these startups were not all focused on creating social impact, the lessons translate well to any type of investment.
I consider my impact investment portfolio to be permanent capital, i.e., all the profits and exits within this portfolio will be reinvested into other social enterprises, a.k.a. socents. I would like these investments to be part of my legacy rather than my pension.
Even though the main driver for my investments is to achieve meaningful social impact, lurking the investor thesis for my portfolio is the sustainability of its assets. To accomplish such a goal, the companies I invest in need to endure and at, a minimum return, the capital invested. Successful exits pose the problem of needing to reinvest the proceeds. On the other hand, failed investments, i.e., investments that do not return the capital, break Warren Buffet’s Golden Investment rule of not losing money and reducing the available funds for future investments.
Any investment decision poses the classic dilemma of being prudent with capital allocation and accordingly targeting “safe” investments vs . ‘swinging for the fences‘. Unfortunately, this is a false dichotomy. Each investment may result in a permanent loss of capital. Even the “safest” companies – for the sake of debate, let’s call them US stock exchange publicly listed companies – make mistakes or fail to adapt. This generally results in substantial losses, abrupt changes in share prices, and occasional bankruptcies. Also, all the investments in an angel portfolio should be made swinging for the fences.
Outcome vs. process
I believe that you can learn from success or learn from failure; the critical part is learning. I must admit that like most human beings, I suffer from loss aversion and would prefer to learn from success cases.
As anticipated, I will recount the lessons learned from three investments. In hindsight, all three companies behaved like typical startups, as defined by Steve Blank, i.e., an organization formed to search for a repeatable and scalable business model. One ended up being acquired, and the other two in liquidation. As I will explain below, from my perspective, even the case in which I made a significant financial return on investment was a failure from the risk management perspective.
A valuable exercise for evaluating your investment decision, execution, and monitoring processes is to conduct a post-mortem analysis. For brevity, I will summarize some of the critical factors that resulted in different outcomes for these startups; nevertheless, the main lesson I have learned is that value is achieved and captured by consistently following and improving an investment process. This is more critical than understanding (if possible) what led to the different outcomes, mainly if we agree that the normal distribution for investments in startups is scaled against the investor. In successful VC portfolios, the Pareto principle 80/20 applies to their performance measured by return on capital).
I could swiftly get myself off the hook by arguing that outcomes (the risk of loss) are and will always be unforeseeable. Nevertheless, I am aware that I should have focused more on relentlessly identifying risks – defined as a range of outcomes – and seeking insights on the likelihood of such results. Had I done so, I could have had constructed a more resilient portfolio in terms of probability of distribution.
“Red flag” monitoring
Without giving names (please DM if you are interested in particulars), the following were the main factors that I should have identified and mitigated:
The fast exit
I joined other business angels in the seed round of a startup that raised more than US 750k for the go-to-market of a “smart” music sheet app. The app displayed the music sheet for several thousand tracks, listened to you as you played any musical instrument, and showed you where you made any mistakes. Moreover, the app could reproduce the rest of the musical instruments that would have played in any song. I was not convinced by the marketing strategy (which initially was b2b), but the addressable market seemed huge. The founders had resiliently worked for a couple of years on the product, and the fundraising secured could fuel the startup for a couple of years.
Three months after my investment, the founders announced that as a by-product of their efforts to launch in the US market, they had received an unsolicited acquisition offer from a US company that focuses on educational software. After less than one year and a half as an investor in this startup, we left with an IRR >30%. Like many other investors in this startup, I had hoped to remain invested longer and exited at a higher valuation. The founders accepted an acqui-hire and negotiated better terms for themselves as employees/shareholders of the acquiring company. I don’t think that I could have done better as a minority shareholder in terms of risks. I was well protected as an investor and got a ‘fair’ return. However, the feeling that founders have more options than the rest of the shareholders, and depending on their shareholding, can low-ball acquisition offers has stayed as a permanent lesson learned.
Together with other business angels, I invested in a French ad-tech startup that had been doing indoor tracking and advertising retargeting since 2011. Everything was going right, and in 2016 I had the chance to double down when the startup decided to raise it Series A. It successfully fundraised E 3m. from two well know VC funds. I jumped on this opportunity, dreaming about the upside, i.e., what it could become (launching in the US, secured funds for 18 months, etc.), rather than on the risks. Soon the problems started creeping in. The VCs pressured the founders to grow as fast as possible. After years of devoting themselves to the startup, the founders realized that they were now working harder than ever. Unfortunately, they were not as incentivized as before due to the dilution they had accepted in the funding round. The business was scaling, but so were its expenses. Prospects were good, but there was no sure win.
Being the lawyer that I am, in 2014, I alerted the CEO and founder to this privacy risk. I was swiftly dismissed with verbal assurances that nothing similar could happen to the French startup. I was told that if anything happened, the problem would be addressed if and when it arose (i.e., not a priority when growing at such a fast pace). In May 2018, the General Data Protection Regulation (GDPR) was enacted. The startup in which I had invested was chosen by the French data protection watchdog, the CNIL, to serve as a testing ground for its criteria concerning the gathering of user consent. The CNIL started an investigation that resulted in the suspension of the company’s activities until the CNIL had satisfied itself that the startup’s activities were GDPR compliant. This six-month suspension, coupled with the previously mentioned tensions between the founders/managers and the VC funds, resulted in a freefall of the revenues and ultimately led to the bankruptcy of the startup.
I learned the following: (i) investors have different interests for investing in a startup; don’t follow the marquee names blindly. (ii) regulations – particularly developing ones – can be fatal. (iii) governance conflicts can be particularly exacerbated when incentives are not aligned. (iv) don’t scale before having found market fit.
One founder, two projects
I decided to invest via a crowdfunding platform in one of the first startups in Europe producing spirulina at home. This startup had created a device to grow spirulina at home, similar to this one. I was aware that the founder had started a side project for the commercial-scale marketing of spirulina.I decided anyway to invest a minimum sum regardless, hoping to promote the consumption of spirulina.
Sometime after the startup had repeatedly struggled to achieve any significant traction, the founder decided to throw the towel. My lesson from this experience was to take the time to interview the founder and really understand their motivation for addressing the problem / estimate their resilience. Although there are plenty of Elon Musk, Jack Dorsey wannabees out there, most of the founders can’t handle running more than one startup at a time. Aside from potential conflicts of interest, devoting time to more than one project should be taken as a sign of non-commitment or possible failure due to lack of investment by the founder.
“Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One”Warren Buffet – Berkshire Hathaway CEO
Size of the Problem
Food systems: land use (particularly for agriculture), processing, packaging, shipping, consumption, account in aggregate for 25% to 33% of global anthropogenic greenhouse gas emissions. In addition, food systems are becoming more energy intensive, and increasingly so in emerging economies.
Agricultural emissions are a wicked problem, therefore any solution requires a systems approach to deal with it. About 24% of global emissions are attributed to agriculture. Within agriculture, 50% of the emissions relate to crops (soil management, tilling, fertilizers, crop rotation, draining, etc.), 25% concern live-stocks (feeding, associated methane emissions), 12% to manure management.
The environmental impact of food and agriculture are significant. According to Our Word in Data, half of the world’s habitable land is used for agriculture. 70% of the world’s freshwater is used for agriculture.
Policies – Market Reform – Incentives
Biden’s government has big plans to address climate change, including a prominent role for agriculture in the government’s push to lessen the sector’s carbon footprint. Biden’s plans include the possibility of paying pay farmers to curb their carbon footprint by implementing sustainable practices and capturing carbon in their soil and a carbon bank based on a cap and trade system. There is an Agricultural Resilience bill pending in the US Congress.
In the case of the EU, direct payments already exist. From 2015 onwards, the Common Agricultural Policy, introduced a new policy instrument, the Green Direct Payment. This ‘green payment’ is granted for implementing three compulsory practices, namely: crop diversification, ecological focus areas and permanent grassland. Furthermore, the EU rural development policy objectives directly concern the environment and climate change, and are:
- Restoring, preserving and enhancing ecosystems dependent on agriculture and forestry;
- Promoting resource efficiency and supporting the shift towards a low carbon and climate resilient economy in the agriculture, food and forestry sectors.
China produces about 20% of the world’s food. The government of China is still concentrated in promoting the efficiency in food production, by means of automatization, digital technology, etc. It is focused on feeding China, rather than on exploring new ways of farming sustainably. China still uses three times more pesticide relative to land size than the United States and Europe. It is to be expected that in the next years, China will increasingly focus on sustainable farming.
Ton of solutions
There is a great interest in the private sector for investments in green agriculture. Venture Capital investments in Ag Tech have recently accelerated. Since 2013, investment in AgTech increased by 900%. According to Crunchbase, 420 AgTech startups raised $5.15B in venture capital in 2020. This represents a 35% increase in venture funding focused on AgTech startups from 2019. In turn, VC fund AgFunder (probably using a much broader defintion) estimates that between $26-30bn. were raised by AgTech startups in 2020 from all different type of funding sources. Investments went into drones, packaging, soil management, fertilizers, etc. and a considerable part of these investments wasn’t necessarily climate focused.
The following are some of the most interesting AgTech that could contribute to the reduction of GHG emissions:
- Food waste technologies basically reduce crop loss or extend the shelf life of products (e.g., Apeel. Agrimetis, Marrone Bio, Certis USA, Redag Crop, Acidophil, Berkeley Biolabs, Naturex, S&W Seed Company, Lam International, Valent BioSciences, Gingko Bioworks, Naprogenix).
- Biochar produced from biomass (including its storage), zero-carbon fertilizers.
- Regenerative agriculture: farming practices that include no-tillage, covered crops, crop rotation, manure management, compost, planting perennials.
- Blue tech (everything ocean-related): aquaculture (feed, fish health, energy).
- Alternative proteins (Beyond Meats, The Scottish Salmon Company and Memphis Meats)
- Ag-biotech (Indigo Ag working with plant microbes to increase yields, PivotBio first in-field solution to biological nitrogen fixation).
“Agriculture comes out of nature, our standard for a sustainable world should be nature’s own ecosystem.”Wes Jackson
I have been working in the energy industry for over twenty years. This doesn’t make me knowledgeable; on the contrary, prior knowledge and my likely inability to identify my areas of incompetence, blind spots, and possible overconfidence, certainly heighten the risk of the Dunning Kruger effect being applicable to the forecasts and analysis included in this post. Thus, to attempt to counter my preconceptions, biases, and errors, I will rely on studies and the opinion of experts in the industry.
Electricity market in 2030/2050: demand and supply
According to IEA, the electric market size in 2030 could be 28,141 TWh vs 23,398 terawatt-hours in 2018. Demand for electricity is set to increase further as a result of rising household incomes, with the electrification of transport and heat, and growing demand for digital connected devices and air conditioning. Electricity demand is projected to grow at an annual rate of 2% per year on average until 2030. Most of the projected growth in electricity demand occurs outside the OECD. Demand in non-OECD countries is expected to at an average annual rate of 3.8%.
By 2030, hydro, wind, solar PV, bioenergy, geothermal, concentrating solar, and marine power in aggregate could provide nearly 40% of the electricity supply (or at least 30% according to IRENA). China is expected to lead the way, expanding electricity from renewables by almost 1 500 TWh to 2030, which is equivalent to all the electricity generated in France, Germany, and Italy in 2019.
IRENA projects that by 2050, the share of renewables in the electricity supply would grow to 90% from 25% in 2018. The remaining 10% of total power generation in 2050 would be supplied by natural gas (around 6%) and nuclear (around 4%). Notably, variable renewable sources like wind and solar would grow to 63% of all generation in 2050, compared to 7% in 2018. IRENA’s projections for the share of renewables in the electricity supply is one of the highest, neverthless there is a clear consensus among those that have created scenarios (IPCC, BP, Equinor, Greenpeace, DNV, Teske) on the important role that electrification powered by renewable energy sources has in the decarbonisation of the energy system.
For projects with low-cost financing that can tap high-quality resources, solar PV is now the cheapest source of electricity in history. Technology costs have fallen significantly and will continue to decline through technology innovation, competition and growing markets, and regulatory streamlining.
It has been noticed that the level of renewable energy ambition and potential investment, tends to correlate with the energy price level. It has been estimated that renewables could meet 80% of global electricity demand growth during the next decade and overtake coal by 2025 as the primary means of producing electricity. Solar PV could grow by an average of 13% per year, meeting almost one-third of electricity demand growth over the next decade.
I am a strong believer in market efficiency. Markets provide affordable solutions, but a sustainable future requires policy guidance. There is a need to focus on overall system design rather than the cheapest source of renewable energy. Furthermore, to avoid ‘Texas-type’ situations, grids too will have to be modernized, expanded, and digitalized.
Energy GHG emissions
Energy is the dominant contributor to climate change, accounting for around 60 per cent of total global greenhouse gas emissions.
The following is IRENA’s formula for decarbonation:
- Stabilised energy demand through increased energy efficiency and circular economy measures while maintaining economic growth;
- Decarbonised power systems with supply dominated by renewables to meet growing needs;
- Electrification of end-use sectors, with the increased use of electricity in buildings, industry and transport;
- Expanded production and use of green hydrogen, synthetic fuels and feedstocks to pursue indirect electrification;
- Targeted use of sustainably sourced biomass, particularly in place of high-energy-density fuels such as those used in aviation and other transport modes, or in greening gas grids.
Energy investments need to shift to low-carbon energy transition solutions if the Paris Agreement goals are to be achieved. I believe that point forward, all investments in the energy industry could be allocated 100% to renewables and batteries, although 100% renewable energy global supply may not be achievable even by 2050.
Decarbonised electricity could provide a platform for reducing CO2 emissions in sectors other than power, through electricity-based fuels such as hydrogen or synthetic liquid fuels.
As far as I understand the main drivers for the cost competitiveness of hydrogen are a reduction in the price of electricity by at least 50%, and a reduction in the cost of electrolyzers. Economies of scale, are expected to significantly bring down the costs in the hydrogen value chain.
As an investment opportunity, analysts are completely bullish on renewables and an electrified economy. Wunderkind Tesla’s share price is expected to increase by 500% by 2025. Even if renewables capture most of the future demand, possibly most of the optimism around renewables as an investment opportunity is unwarranted given that electricity consumption will only grow between 2-4% per year.
“I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that”Thomas Edison (1931)
Achieving social impact
An a priori to achieve social impact is to be able to articulate your business’s purpose clearly. Defining your Theory of Change is one of the variables that distinguish social-focused enterprises from others that are only engaged in purpose washing.
Your “theory of change” is composed of two elements: “change” wish is the vision of the social impact that your organization wishes to create, and a “theory” which should describe your core business inputs, outputs, processes, and outcomes, i.e., your idea for how you believe that you will make such change possible.
There are five steps in a continuous improvement model for implementing your theory of change:
- Set your objectives
- Test and validate your hypotheses with your stakeholders (lean startup methodology)
- Measure results
- Correct (if necessary) based on verified impact
Your social impact should scale at least proportionally (and, if possible, exponentially) to your growth. Achieving and scaling positive social outcomes will not happen by itself. Less so if it is not your company’s core business objective. In a nutshell, scaling impact is the process of increasing positive social impact to better correspond to the identified social need’s magnitude.
Companies that do not prioritize achieving their purpose as their primary goal, creating impact as their core business objective, may be successful (when measured by other parameters) but should not consider themselves social enterprises.
One of the shortcuts to achieving social impact is to work in networks and via alliances with other stakeholders that share your impact goals.
Finally, although an elusive concept, if you honestly try to scale your impact, you should measure your social impact. Your impact goals should be tracked and measured by relevant KPIs. Reporting such KPI and providing regular Investor Updates will allow you to refine your objectives and processes and ultimately achieving a more significant social impact.
“Human creativity is unlimited. It is the capacity of humans to make things happen which didn’t happen before. Creativity provides the key to solving our social and economic problems.”Muhammad Yunus, Founder of Grameen Bank
Below are some potential investment opportunities in the “green economy” according to Jigar Shah, who has been recently appointed by President Joe Bidden as head of the US Department of Energy’s Loan Programs Office.
These sections of the green economy have not yet reached Wall Street size (e.g., Next Era Energy) and there are no mature business models that have already proven to be as scalable as solar, i.e. they are not yet the ”rinse and repeat’ type of projects. Consequently, these types of opportunities may be attractive for early investors.
For each category mentioned below, I have added some examples of startups that have caught my eye either because they are representative of the category or simply promising.
Buildings / Weatherization
Buildings and their construction together account for 36 percent of global energy use and 39 percent of energy-related carbon dioxide emissions annually, according to the United Nations Environment Program. Globally, building operations (powering lighting, heating, and cooling) account for about 28 percent of emissions annually.
Retrofiting buildings for energy efficiency: Blocpower – has retrofitted more than 1,000 buildings in disadvantaged communities in New York City, with projects underway in 24 cities. BlocPower uses proprietary software for analysis, leasing, project management, and monitoring of clean energy projects that save customers between 20-70 percent on annual energy costs.
Designable (*) retrofits buildings and offers its clients the opportunity to buy (after personalization), apartments in sustainable buildings.
LED lighting accounts for approx. 15% of the lightning sales. It is expected that the transition to energy-efficient lighting would reduce the global electricity demand for lighting by 30-40% in 2030. Amsterdam Edge building is an example of digital technologies at the service of energy efficiency.
HVAC (heating ventilation air conditioner) retrofits.
Regenerative agriculture enhances and sustains the health of the soil by restoring its carbon content, which in turn improves productivity—just the opposite of conventional agriculture.
Regenerative agricultural practices include:
- no tillage,
- diverse cover crops,
- in-farm fertility (no external nutrients),
- no pesticides or synthetic fertilizers, and
- multiple crop rotations.
Food waste prevention
Avoidance – An estimated 1.3 billion tonnes of food, or roughly 30 percent of global production, is lost or wasted annually, according to the UN Food and Agricultural Organization (FAO).
Biodigesters process farm waste (animal manure & green waste) into free biogas for clean cooking and organic fertiliser for better crops and healthier soil.
Not mentioned by Jigar Shah, these two categories deserve to be added since they have an immense potential to contribute to climate change mitigation and wealth creation, in emerging markets:
Cooling as a Service
Future Pump (*)
“I am always optimistic. I am not sure how one could not be. We have the technology today to solve major problems around the world on food production, clean water, electricity access, waste, sewage, and other basic dilemmas. I am excited that my generation will be the one that sees the successful deployment of this technology to truly make the world a more sustainable place”Jigar Shah
(*) I am an investor
Innovation sits at the crossroads of different trends. Just think about the possibilities of combining nascent ‘small cities’ in emerging countries with community group buying.
The migration from rural communities to urban locations seems to be a global and irreversible phenomenon. If there is one country in which this is evident, it is China. Today China has 13 cities with over a 10 million population. There are literally scores of over 5 million. Every emerging market is following a similar pattern. Go check it for yourself here.
Community group buying is nothing new. I remember circa 2000 group buying a pram at Mercata.com for my daughter, who is now in university. For different reasons linked to competitors, consumers and suppliers, most of the group buying startups, did not survive the dot. com boom and bust cycle. The revival is probably linked to the exponential growth of social media (particularly group chat) and to the pervasiveness of smart phones.
Most of us are well familiar with the large Chinese e-marketplaces. Taobao, JD.com, Pinduoduo are successfully bringing the best of community group buying, ecommerce and marketplaces to large and smaller cities in China and will eventually will expand their business model to the rest of the world.
What we are normally not so familiar with, are the startups that are focusing on serving small cities. Some time ago, I was listening to a podcast about the challenges faced by Chen Ying, the founder and CEO of Shihuituan, a community group buy site that operates mainly in third tier cities and below in China, and I realized that most of the emerging markets could have their own Shihuituan even if Amazon, Jumia, Mercadolibre and the likes seem to monopolize all e-commerce.
This prompted my curiosity to search for startups in emerging markets that could support the following investment thesis, that I labeled as “The future of rural e-commerce“.
The criteria that I considered for selection were the following:
- Not an NGO but a #socent
- Not Alibaba, Shopify, Amazon, Flipkart, FB Marketplace, Mercadolibre, JIO, Jumia.
- Not basing its revenues on ads (OLX, Gumtree).
- Not Etsy, or handcraft sales equivalent. Sorry Gaatha and Someone Somewhere
- Targeting small towns and/or rural communities
- Focused on local clusters or just different business products and services being sold online.
- Secret sauce: aggregator (economies of scale, logistics) + localization (community leaders)
- Low risk of commoditization and competition on price only.
- Managed to overcome challenges such as illiteracy, lack of infrastructure (internet access).
- Operating in countries without hindrance from government. Government could help, but at minimum should not block (e.g. avoid possibility of being taxed to death).
After some research I came across Apperto (*). Apperto is a Latam app that I could characterize as a mix of Yelp and Groupon for relatively small cities. They are currently operating in small cities in Argentina and Mexico and have been inspired by Shihuituan.
Are you aware about any other startup creating “The future of rural e-commerce“? (please leave a comment).
(*) I am an investor in Apperto.
Interview with Gavriel Landau, CEO of Charm Impact (*)
What prompted you to launch Charm Impact?
Back in university, when I was in business school, I took an operations strategy course, in which, Michael Porter’s essay on the creation of shared values was presented. I strongly agreed with his view about different levels of corporate social responsibility (CSR) ranging from generic (not aligned with the business), to CSR focused on the value chain (e.g. UPS improving its methods for the delivery of parcels), to strategic CSR (e.g. Toms Shoes one for one business model: buy one, give one). I felt inspired by that lecture that taught me that you can create businesses that are sustainable, and are fully focused on doing good. It is possible to create a business model in which the bottom line is 100% aligned with the mission of doing good.
After graduating I went as an English teacher to Cambodia for 3 months. Upon my return, I joined Accenture where I worked for their financial and energy clients for 5 years. I left to work in two areas for which I am passionate> renewables, and high tech. I joined, as a project manager, a UK startup focused on solar peer to peer power for the UK market. Around that time, I met the founders of Solshare, which rekindled my interest in emerging markets and access to energy.
I then decided to devote myself to promoting a meaningful step-change to the efforts to bring energy to those without access to it in emerging markets. The key question that concerned me was – why doesn’t everyone have access to electricity? I soon corroborated that access to finance was one of the critical missing pieces. It was then that I decided to focus on helping the entrepreneurs and SMEs, that are promoting access to energy, who are building companies that are commercially viable but not yet of a scale large enough to be bankable. In addition, our preference is for helping those SMEs that are locally owned and operated and even better if they empower women either as part of the founding team or within their business operations.
What problem are you solving?
I could summarize the problem statement as “access to finance for early-stage clean energy entrepreneurs in developing economies”. This echoes well with the flavor of the decade, which is climate change. We have corroborated that people want to help fight climate change, but most of them do not know how to help. Furthermore, they do not acknowledge that their contribution (no matter how big or small), always makes a difference. We are at the frontline of this change. We have an invaluable opportunity to show people the power of their money. This can be done in two ways. First by showing them how they are financing and indirectly contributing to projects. Secondly, by helping channel people’s money into transparent companies focused on doing good, i.e., sustainable and conscious companies.
What is next for Charm Impact?
After our successful recent crowdfunding campaign, we are ready to scale. We will devote the next months to curating a community. We will continue to work on finding the right investors that want to contribute to a meaningful and impact-focused business. Once we have a large group of impact investors, the size and reputation of our investor community will attract similarly minded investors. Our current challenge is to keep the momentum, continuing to scale, and to grow and deepen the investor community. We will be hiring early next year. Our immediate need is to recruit investment associates (to help us with building pipeline, managing borrowers, credit scoring). Then we will have to redouble our efforts on marketing and branding. This may require bringing inhouse some of the tasks that we have currently outsourced. For the next year, our goal is to focus on better serving our investors, creating a vibrant community, fostering communication and engagement.
Which are your products?
Our core service is enabling crowdlending. One side of this service is looking for clean energy entrepreneurs in developing economies. We conduct due diligence and retain the most promising projects. The other side is selling this as an investment opportunity (i.e., for impact investment) for investors mainly located in developed markets.
We act as facilitators ensuring full transparency and traceability, diversification, and giving investors an opportunity to choose who they back with their money. We focus on business loans that help companies in emerging markets grow. The method is quite simple: we find interesting opportunities, then make a first loan to those SMEs. After they have repaid the loan, provided that their business and financials continue to improve, we offer additional fundings. We help these SMEs scale until they have reached a size when they can attract more capital than what we can currently provide. Besides loans, we are helping such SMEs create a credit history and a credit score that eventually make them bankable. In the future, we envision being able to connect them with business opportunities and to offer technical assistance beyond finance.
What is your business model?
We provide small scale loans to clean energy startups in emerging markets. The loans are high-risk due to a lack of credit scores, financial history, and the fact that the SME’s that we support are testing new business models in new markets. Addressing these challenges requires new business models and new ways of thinking. Most people think about the customers near the base of the pyramid as inherently risky. Some people think entire countries are too risky to invest in. We are challenging core paradigms of how we measure the success of our investments by facilitating a discussion on balancing risk, return and impact.
Our crowdlending model is based on a blended finance approach: we combine for-profit impact investments with grants and/or philanthropic capital. By embedding a blended finance model into our loans, we create a buffer for the investment capital, it becomes the senior tranche, and thus less risky for the impact investor. We also derisk by hedging the exchange risk for borrowers. In parallel, we help grow the available philanthropic capital. Once repaid, this capital is reused in future projects. By becoming reusable capital, its impact is leveraged, i.e. instead of being consumed, it is redeployed. Furthermore, this virtuous circle is fostered by the fact that the borrower is pushed to become profitable rather than depend on grants. In sum, our flywheel is based on the multiplier effect on capital.
Basically, it catalyzes private investment and at the same time, it creates an incentive for the recipient companies to be more financially sustainable. We contribute to making the connections among the stakeholders. At the core, we are in the business of creating a community willing to support energy entrepreneurs in emerging markets. This requires us to focus on encouraging and nourishing impact investors and finding grants and philanthropic to derisk the loans. We are fully concentrated on making this business model easy, repeatable, and overall scalable.
What is Charm Impact’s current greatest challenge?
Our thesis and prima facie findings are that people do not think about themselves as investors. Our minimum investment is 250 pounds to make the opportunity more available to people who may not usually invest in startups. In exchange, we create a lot of value for your money both economic and in terms of impact. We have embarked on a customer journey whose goal is to help them perceive themselves as investors.
There is also a gap between the perception of risk vs. actual risk on the ground. There are a lot of reputational factors that influence this perception. For example, people fail to distinguish between the risk of real borrowers vs. country risk. This holds back some investors from backing companies and these companies from being able to grow.
Are you satisfied with your rate of progress?
If we measure ourselves, based on the frame of the 17 global sustainable development goals, we are still quite far from where I would like the industry to be in terms of achieving universal energy access by 2030. Nevertheless, we have a role to play. Covid-19 increased global inequality and created a significant number of new poor people. We need to contribute to lowering uncertainty. We can solve energy poverty and help entrepreneurs. COVID has only made these problems more evident and acute. There is less money flowing from traditional financiers to the emerging market entrepreneurs that could help us meet the goal of bringing energy to everyone. COVID has just made evident that now there is even more need for alternative finance. We will strive to continue to be at the frontline of “building back better“.
“Real people, real business, that is what we focus on”
Gavriel Landau – CEO Charm Impact
(*) I am a shareholder of Charm Impact