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Sustainability

Climate Change

‘Gigacorns’: funding the world’s climate unicorns

25 May 2022 • by Salvatore Cantale in Sustainability

Venture capitalists are making risky bets on startups they think have the potential to play a role in the global fight against climate change...

Billion-dollar startups known in Silicon Valley as “unicorns” have proliferated in recent years as investors have increasingly paid lofty prices for shares in promising young companies.

Now, some venture capitalists are deploying their financial resources to find the first “gigacorn” — a startup that can cut one gigaton (that is, one billion tonnes) of carbon from the atmosphere every year, while being commercially viable.

Gigacorns were the focal point of a recent webinar that I led with Peter Lorange, Honorary President of IMD.

Our guest speaker was Christian Hernandez Gallardo, the co-founder of 2150, a venture capital firm investing in technology companies that seek to sustainably reimagine and reshape the urban environment.

The investor underscored the important role that gigacorns could play in the global transition to net zero, pointing out that the world was currently emitting 52 gigatons of CO2 equivalent every year. Emissions would need to fall by 45% by 2030 to be on track to reach net zero, according to the International Energy Agency (IEA).

There’s no silver bullet, said Hernandez Gallardo, underlining the importance of wholesale change to business practices.

“There’s no single tech that allows us to do that,” he added. “It has to be a broad [range] of technologies [all] at the same time. That means transitioning literally all the major industries of the world into sustainable technologies within a decade. When you put that into context, the enormity of the change is daunting.”

The world’s urban centers are big and bad, accounting for half the world’s population but consuming the vast majority of resources and emitting the majority of waste and greenhouse gases,”
- Hernandez Gallardo

The risk is that the scale of the problem breeds apathy towards developing solutions, or that gigacorns are simply dismissed as hype.

No startup has achieved this lofty goal, but venture capitalists are making risky bets on startups they think have the potential to become a gigacorn as they seek to play a role in the global fight against climate change.

Highlighting the scale of the challenge, Hernandez Gallardo pointed to Elon Musk’s electric automaker Tesla. In 2021, Tesla’s fleet of vehicles, energy storage and solar panels enabled customers to avoid emitting 8.4 million metric tons of C02 equivalent. A gigaton is one billion tons, so a gigacorn would be worth, in environmental terms, hundreds of Tesla corporations.

But even making a gargantuan environmental impact is not enough for a startup to be elevated to gigacorn status: they also need to be making an economic return.For these things to scale the technology needs to be on price parity with what it’s replacing. It needs to be economically viable for people to make the switch,” said Hernandez Gallardo, adding a small price premium might be accepted by consumers.

Ultimately, investors would need to take a longer-term view on realizing a return on their capital. But they have shown an incredible willingness to back future gigacorns, Hernandez Gallardo said, noting that he raised his fund with ease at the start of the pandemic even though market conditions were unfavorable.

“We’re seeing a massive deployment of institutional capital into climate [startups],” he added, saying he expected to generate large returns for his fund in a win-win situation for profit and planet.

“A company that can mitigate hundreds of megatons of carbon will carry a price premium as industrial groups need to either build or buy assets to help them reduce their CO2 footprint,” Hernandez Gallardo stated. “This is not a philanthropic fund, it’s a VC fund focused on decarbonization as the tailwind.”

When it comes to hunting these rarest of beasts, his VC firm 2150 throws its financial backing behind fledgling urban sustainability and efficiency companies. “The world’s urban centers are big and bad, accounting for half the world’s population but consuming the vast majority of resources and emitting the majority of waste and greenhouse gases,” Hernandez Gallardo said.

“The top 150 cities represent one percent of the world’s inhabitable land – all the rest is set up to feed and power them. It’s not a very optimized use of resources,” he said, adding that he thought “cities are where the climate battle will be largely won or lost”.

Hernandez Gallardo expressed optimism about the future of cities, noting that technology such as electric vehicles was readily deployable in urban centers while regulation was forcing real estate developers and building owners to improve the energy efficiency of their properties.

As an example, he cited the French parliament’s recently approved climate change bill that aims to green the economy through, among other measures, barring landlords from renting properties with poor insulation through a gradual increase in energy efficiency requirements. That’s in addition to the EU’s Emissions Trading System.

“We believe that making buildings sustainable was where we could have an outsized impact,” the venture capitalist said of his firm.

He put the spotlight on companies in his investment portfolio that he believes have the potential to become the world’s first gigacorn: those with scalable potential. These included Biomason, which uses bacteria to build concrete and cement, mitigating up to 95% of the emissions compared with traditional construction materials.

“We need more technology that is unsexy but impactful,” said Hernandez Gallardo. 

Authors

Salvatore Cantale - IMD Professor

Salvatore Cantale

Professor of Finance at IMD

Salvatore Cantale is Professor of Finance at IMD. His major research and consulting interests are in value creation, valuation, and the way in which corporations structure liabilities and choose financing options. Additionally, he is interested in the relation between finance and leadership, and in the leadership role of the finance function. He is the Program Director of the Business Finance program and the also co-director of the Driving Sustainability from the Boardroom program

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