Why invest in environmental startups? The answer to this question is not simple. It actually raises more questions. Do investments in these ventures produce lower financial returns in favor of environmental goals? Are policy makers and non-profits better equipped to manage environmental problems?
Despite this noise, we at the Cherokee-McDonough Challenge think there are many reasons to invest in this sector. We run an annual competition and accelerator in Raleigh, North Carolina, designed to identify, fund, and develop high-impact environmental startups. By providing select early-stage companies with $20,000 in Seed capital, office space, and mentoring, we hope to generate market returns and catalyze solutions to some of the world’s most pressing environmental problems.
So why do we believe this to be the case?
Reason #1: Big environmental problems create big business opportunities.
You have heard the barrage of doom-and-gloom: Global forests are disappearing. The ocean is acidifying. Greenhouse gas emissions threaten climate stability. Water supplies are increasingly constrained. Our blood and tissue are contaminated with dozens of potentially harmful man-made chemicals. Billions of people lack access to clean electricity and adequate sanitation.
These can either be sources of your own personal depression or invitations to create solutions. The latter might just mean that you have an idea for a new business.
Two North Carolina startups are doing just that. BaseTrace wanted to tackle water quality concerns in the growing natural gas fracking industry. They now produce DNA-based tracers that help establish where water contamination has occurred and who bears the responsibility. To address the significant greenhouse gas emissions from the firing of 1.2 trillion bricks each year around the world, bioMASON can now grow bricks at ambient temperatures—as compared to roughly 2,000 degrees Fahrenheit in conventional kilns—with specialized bacteria, similar to the natural processes that produce coral reefs and some sandstones.
Reason #2: Innovation is critical to a company’s success. The environment-business nexus is ripe for finding new products and solutions.
Jim Collins, best-selling business strategy author of Built to Last and Good to Great, has observed the following: “Of the 500 companies that appeared on the first [Fortune 500] list in 1955, only 71 hold a place on the list [in 2008].” Many factors play a role in this turnover, but one observation seems clear: if companies do not innovate, they will fall behind.
Two startups are innovating in order to change entire industries. Lyf Shoes has patented a process to facilitate the local assembly of custom shoes with sustainable textiles and no noxious glues. With over 90 percent of our shoes made outside of the U.S., their new ideas for manufacturing could bring needed jobs back stateside. Platinix, an advanced materials startup, is patenting a method to create efficient, durable catalysts that can replace platinum in many industries, such as the production of hydrogen gas—a clean burning fuel. Platinum is an expensive rare earth metal, and more than 95 percent of global supplies are located outside of the U.S.
Reason #3: Environmental startups have a built-in advantage over some other startups—relevance.
One way that startups grow into mature businesses is by solving a pain point in the market. Their new product or service has to be relevant. It must matter to the end user.
Given that roughly 70-to-80 percent of Americans consider environmental issues—for example, clean energy or green home cleaning products—to be important for financial, health, and ecological reasons, startups in this field have a clear opportunity to connect with customers on issues that matter to them.
With roughly 115 million residences in the U.S. and a multi-billion dollar residential retrofit market, new venture HomeWellness knows about relevance. They are packaging building science knowledge into smart software that helps homeowners to improve their home’s comfort, health, and energy efficiency—like Siri with a hardhat.
Reason #4: Environmental startups have another built-in advantage over some other startups: a strong mission.
As this popular TED talk about great leaders reminds us, the best marketing must communicate with customers about ‘why’ before discussing ‘how’ or ‘what’ when selling a new product or service. The right mission can make this easy to do.
Startup JouleBug does this by talking to end users about having fun while lowering energy bills. They have created an app that makes sustainable living social and simple by combining mobile gaming, social media and educational tools to create a ‘giant burrito of wonderment and awesome that’s free.’
Reason #5: Solving environmental problems also often improves individual and public health, two big personal and political motivators.
While not every customer ranks environmental matters as their top priority, most agree that protecting the health of their children, friends, neighbors, and fellow citizens is the right thing to do. The two topics are often very interconnected. In fact, most major environmental legislation in the U.S. places greater priority on human health than on, say, endangered species.
Many environmental startups find a business model to address major public health priorities. To help some of the 2.5 billion people that lack adequate sanitation facilities and suffer from poor drinking water quality, startup Sanitation Creations invented a waterless, odorless, toilet, and is testing prototypes first for U.S. applications.
In summary, we believe that investing in environmental startups can deliver the kind of strong financial returns that early-stage investors in other sectors tend to achieve. We assert that addressing environmental problems through private sector solutions—in contrast to, or hopefully in tandem with, policy or non-profit solutions can be one of the most effective means to that end.
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Christopher Wedding is the director of R&D and Sustainability for Cherokee where he focuses on investment opportunities related to clean energy, green building and other new initiatives. Dr. Wedding is also a lecturing fellow with the Nicholas School of the Environment at Duke University, an adjunct assistant professor of Strategy and Entrepreneurship at the University of North Carolina at Chapel Hill (UNC) Kenan-Flagler Business School, an ambassador for the Living Building Challenge and a fellow with the E3 Foundation. He has served as a key advisor for nationally recognized LEED Platinum buildings, published numerous professional articles and spoken at various national conferences. Since 2004, he has been a LEED Accredited Professional with the U.S. Green Building Council, and serves on its national Research Advisory Council. Dr. Wedding received a bachelor’s degree in Environmental Science from Western Kentucky University, where he was a Goldwater Scholar in math and science and the Honors Program Scholar of the Year. At UNC, he earned a master’s degree and a PhD focused on green real estate development, which combined studies in business, environmental science, and management, and city and regional planning.