At Stanford’s Energy Seminar on October 23, Mayfield Partner Arvind Gupta discussed key traits of successful planetary health companies and how entrepreneurs can create enduring businesses that help reverse the effects of climate change. Watch the livestream recording of his talk or read the transcript below:
Arvind Gupta:
I want to talk to you today about reversing climate change through capitalism, and those are two words that don’t often go together, I think. In fact, the only time they do go together is when you take out the reversing part. First, I invest in companies. I’m an investor now at Mayfield as a partner. Prior to that, as the founder of IndieBio, I invested in companies trying to reverse climate change, using capitalism as its engine. Prior to that, I was a designer, and I think that uniquely taught me to look at problems versus solutions.
As a design director, I always said the best problems lead to the best products, so really take the time to find worthy problems. And as I was making my transition from being a designer to being a venture capitalist, I thought, “Okay, well, what are the problems that are going to generate the best products in the world?” And climate change really is the thing that emerged from that question. Where else are you going to find consistent durable problems over time? With that, I did also write a book with Po Bronson talking about the early stages of that journey called “Decoding the World.” That’s me in a nutshell. The question is first: Why is this important? I know it’s a patently obvious question to many. Why is planetary health even worth talking about? And here you can see an animation of the temperature rise every year from the late 1800s.
Here you can see World War II is happening and really oil has become the battery of choice for the world, and what that is starting to do for climate change. You could see inexorable warming of the global average temperatures. Now, it’s really important to see, one, that this is a trend that’s happening over time, but what’s its effects? And it’s projected that more people will die from climate change in the next 50 years than disease, all diseases combined. That’s due to wars, translocations, things like that of that nature, and so even if you don’t believe this, let’s say you’re a climate denier, this is just an anomaly, it’s going to go right back down, sure. But if we can’t figure out how to make capitalism sustainable over time, then we’re going to have a real problem with keeping things more equal, and we’re going to have a bigger disparity between the haves and have-nots. We can talk about that a little bit more later as well. In any way, shape or form, helping to make capitalism sustainable is the problem of choice for me.
I talk about enduring planetary health businesses. Why is endurance or longevity important? Because dead companies don’t change the world, and so we need to build business models and build approaches in the marketplace that are sustainable for decades, not just to get in and get out as investors. And so these are some of the five-year charts of some recent planetary health focused companies. Granted, a lot of this was driven by the 2021 hype cycle, so it’s a little unfair of a chart, but it helped me make a point, which is we have to build businesses that succeed against other businesses that are not trying to make things sustainable. And really we have to beat those companies at their own game, which by the way, to give you the punchline, is totally possible. And in doing so, we have to look, okay, what are some lessons from CleanTech 1.0 that we can draw from that we can say, “Oh, okay, let’s not go there?”
Lessons from CleanTech 1.0
CleanTech 1.0 was a circa 2008 wave of companies that were really looking to replace oil as an energy commodity, and that was driven by excitement around biotech and hydrogen and other alternative fuels. And so I’m not going to go through all of these because in the interest of time, there’s a lot to discuss in this talk, and I promise not to keep you here until tomorrow, but in essence, the big takeaway is you can’t invest in high technology to make low price commodities. Low price commodities will never give you the margin that you need to put back into the business. That’s really what it comes down to, and I am excited to say that today is different. Today’s different than 2008, and it’s because we have a completely different social environment. We also have a completely different understanding of the problem that we’re trying to solve, so CleanTech was really driven by this idea that oil was going to go to $400 a barrel.
Climate tech, the wave that we’re in today, is driven by the idea that CO2 levels keep on rising. Those are fundamentally different problems, and so what’s interesting is when fracking was invented or became popular and widespread, the price of oil in around 2008 cratered, dropped to under 50 bucks, and that just basically decimated the clean tech sector. Now, the people that were really sad about that were the investors. When CO2 levels dropped, the companies that are still around are going to be the ones that drove that drop, and the people that are going to rejoice are society in general, so I think these are fundamentally different movements, and that’s what I want to really drive home, originating from fundamentally different places.
But every tech wave has an amazing silver lining. The busts have an amazing silver lining, which is CleanTech 1.0 drove the cost of enabling technologies down dramatically, especially solar cells and other fundamental units of clean tech. Here’s a great slide of different technologies and their associated costs over time. You could see they all fall dramatically. The rate at which it drops is called the learning rate. Technical term. You can see synthetic biology has had the most dramatic drop in sequencing costs, which is leading to all sorts of new data, allowing us to understand how to manipulate life fundamentally in much greater fidelity. There’s also, you could see photovoltaics or solar panels have dropped by more than 97%, ethanol, other, so there’s a lot of hope for me that this bedrock of technologies can go ahead and help us drive more innovation, which is going to be really important and very helpful because human desires are fundamentally unlimited.
The Hand of the Consumer
That is a truth we must accept if economics is a field of study, which is the study of scarcity. If we didn’t have unlimited desires, we wouldn’t actually have any problems with scarcity. And so Adam Smith talks about the invisible hand of the economy, it’s not invisible, man, it’s the hand of the consumer, and so where the consumer goes is where capitalism goes. To direct capitalism to be a better capitalism, we must go through the consumer, and this is an issue because this unlimited demand is creating five earths of pressure on one earth of supply. There’s a conundrum that’s happening in real time right now, which is going to get delivered on. Why? Because capitalism is short-term greedy, which is fine. Which is fine. Capitalism works great for innovation, it works great for a lot of things, so capitalism as a force is really supported by quarterly earnings and the decision makers making short-term decisions, which is changing interestingly enough.
Why? Let’s go back to the hand of the consumer. They want innovation, but they don’t want to pay for it. Enterprises have figured that out, and so there’s a lot of goodwill, brand goodwill, being put to work to generate real value by showing consumers that they are sustainable. This really complex chart on the right-hand side basically says that 25% of Fortune 500 companies have made climate goals. $38 trillion, 33 or $38 trillion of market cap have said, “We are going to be net-zero by some date in the future.” Now, those statements and those goals get translated into innovation through market forces, so this is the opening salvo, and again, I have hope that the voice of the consumer, the hand of the consumer, will guide us there. I think better capitalism, which is the same thing, will give people what they want without having to steal it from the future, and that actually creates a sustainable and scalable future for everybody.
Again, even if you don’t believe in climate change, what this does is it helps create more equality throughout the world in terms of living standard. And I’m a venture capitalist, so why do I care? Why do I care? Because you could make a lot of money by solving these problems. I already mentioned $38 trillion are being allocated, or not being allocated, but of market cap are looking at solving these problems. The entire world’s GDP in 20 years will be $100 trillion. There’s an opportunity. It’s going to double in another 20 years, so the takeaway here is, look, all of these sectors have to become sustainable, and so innovation is going to drive all of those waves, and the demand is on the other side, so feeding the world, building the world and powering the world, those are the three major activities through which all carbon flows through society. And those three major sectors are all becoming decarbonized in various ways, and I think one of the exciting things is it’s getting decarbonized through a huge variety of different ideas and products and companies. Again, it’s not this narrow area of activity, it’s a broad revolution in movement. Why is now different or how is this going to work? I’ve just given you a bunch of paradoxes. If I’m in the audience, I’m going, “Yeah, I don’t understand how that’s possible.” And so I’m excited also as a venture capitalist because there is a lot of innovation happening in multiple areas of science that can be leveraged and harnessed to solve these paradoxes.
Recent Scientific Advancements
I just want to give you a flavor of the breadth of what’s happening in the world today. In just biology, we have genome editing and CRISPR. That alone has spurred a huge amount of innovation. Microbial solutions, so methanotrophs… As a matter of fact, we’ll talk about this later, methanotrophs eat methane gas. They’ve evolved to use methane as an energy source. There’s carbon capture plants, trees, the best carbon capture source we have, so making those even more optimal. Redoing our agricultural systems to become more sustainable. These are all areas where biology has been innovating. And so I mentioned, this is a company that Mayfield’s an investor in actually called Windfall Bio, and they’re using methanotrophs to take waste methane emissions from dairies, from oil fields and landfills and using the methanotrophs to then create high quality organic fertilizer. How? Well, these methanotrophs, when they’re consuming the methane, they take nitrogen gas from the atmosphere, tear it apart and fix that nitrogen into the amino acids that it’s using to grow, and in doing so it becomes bioavailable.
That’s a way of really starting to take some of the problems that we have and turning them into solutions. The EVERY company is actually one of the first companies I ever invested in, formerly called Clara Foods; they are using synthetic biology to make egg whites without the chicken, so you could code egg whites, egg white proteins into yeast, and then have the yeast basically brew them. And then you could reconstitute those egg white proteins into a product and make them into things like macarons, meringues and others. Geltor’s another company that’s using synthetic biology to create animal-free collagens, and not just any animal-free collagens, human collagens for things like makeup. When was the last time you can get a human collagen for makeup? It’s not possible. UPSIDE Foods, many people have probably heard of cell-based meats or cultured meat, so UPSIDE Foods makes actual chicken without the chicken by growing the actual avian cells in culture and then reconstituting that into chicken breasts. They’re now being served at Bar Crenn or Atelier Crenn. That’s just biology.
Chemistry has huge advances as well. For carbon capture and storage, there’s a lot of applications using MOFs, using different types of CO2 to fuel electro chemistries. There’s also some of the advances in chemistry that can really help us think about sequestering large amounts of carbon like enhanced rock weathering and things like that. Other approaches similar to that. Direct air capture—if we can get better absorbents we can figure out how to actually remove some of the CO2 from the air, which is very hard to do energetically, so more advancements in these areas will turn that into a focus area that might bear real fruit. I can go on, but let’s just take a look at some of the companies that are also starting to commercialize these technologies like Twelve, using electrochemistry to take CO2 and turn that into plastics, fuels and other products. And they have a collaboration with Mercedes-Benz now, again, showing that there’s real economic interest in this, and it’s all being driven by enterprise.
I think that’s one of the big things that’s changed recently is enterprises have really woken up to how to address this. ClimateWorks is a company that is doing direct air capture. This is in Iceland. I’m married to an Icelander, so I know this company well and have visited them many times in the past years, but they’re looking at and figuring out how to best capture the CO2 and do this in an area that has got free… Well, very cheap energy, geothermal. Lithos is a company that is using olivine and basalt to do enhanced rock weathering, so when olivine and water come together, it is able to pull CO2 out of the atmosphere and then it makes its way all the way to the ocean where it goes down into the sea and get stored for thousands of years. This is the natural weathering… That’s the natural system that happens in climate today, it’s just doing it way faster.
Lingrove is a company that is making wood without trees by using flax instead with a bio resin. That’s a guitar. That top piece is not from a tree, it’s made with a resin and flax, so again, if we can leave our trees in the ground rather than cut them down, it’s a lot better for our future.
Physics, yeah, even physics has a ton of advancements recently that are driving things forward, so from quantum computing actually, which is interesting because I meet with quantum computing companies every once in a while and a lot of them talk for their first applications being coming up with new materials for climate change, for mitigating climate change. There’s incredible buzz about fusion and fission and other areas. Speaking of which, Commonwealth Fusion Systems recently raised $2 billion and is getting, from what we hear, closer and closer to actually creating a sustained fusion reaction.
I was talking to an investor about this, and it was an interesting conversation because I said, “Well, electrons are pretty cheap. We’re going to put a lot of investment into fusion to make pretty cheap electrons.” And their comment was really great, said, “Well, demand for these electrons are going to go way up. Continue to go way up. And so we need sources of those electrons that aren’t determined by the wind and by day and night.” And so this is a huge step forward once this is able to happen, but it’s no longer pure sci-fi. I think that’s the biggest thing for me that’s changed from even five years ago. There was a lot of buzz about the superconductor on Twitter, what was it, three or four months ago. I thought it was kind of funny, but it is a holy grail, and the idea of a superconducting wire to losslessly transmit electricity over long distances would have an enormous impact on our ability to mitigate climate change just for moving energy around. There’s a company called Unearthly Materials that’s working on that.
And then nuclear fission. Fission reactors. Good old-fashioned fission reactors coming back into finding new application areas. Here’s Radiant, which that is a rendering of something that it goes in the back of a semi so you can just drive it around. And so as the public starts to come to grips with the safety systems and as we believe that fission can become safer and the waste can be dealt with, it becomes a very viable alternative to creating electrons that aren’t dependent on intermittent sources. And AI advancements continue to go. The advancements in computation, especially in the past six months, as everyone here knows with large language models and AI is just truly an extraordinary pace of change and innovation. This has direct impact in climate technologies because we can start doing things like create digital twins of agriculture, digital twins of the national grid and figure out how to optimize how things are going and reducing waste. We can start looking at our waste chains and our supply chains and optimize all of those.
A Mayfield investment is Chemix, which is using AI to design batteries, better lithium ion batteries because they could search the entire space of mixing electrolytes very quickly and optimize it for very specific conditions. Another one’s AMP Robotics. This is a company that’s using vision to look through the trash, and as the trash gets… There’s robots, and you can create better and more pure waste streams that have higher value and that value can get turned over. Avalo is an AI company that is using AI to look at genomes, plant genomes, and in doing so, look at creating rice that doesn’t release methane and more tolerant species for drought and other conditions. Framework 44 is a company that’s getting incubated that is using LLMs to design better catalysts, MOFs in particular, to actually find, do the search space for converting CO2 and other chemicals into other higher value chemicals at a lower cost.
Sustainability Companies Are Really the Best Product Companies
The one thing you might notice through all of those is that all of these examples, all these companies, what’s common? They’re all deploying those technologies to mitigate climate change through products, through products that people use, whether they’re enterprise or consumer, but they’re products. Physical thing that gets sold. And so there’s three paths to market for any product. You could either be better, you could be cheaper, or you could be required by law. For venture, as a venture capitalist, I live in bucket number one. Bucket number two, cheaper products have a place in the world. They tend to be lower margin, and so different capital sources can fund those as they scale up. They just require a lot more capital upfront. And then required by law, that’s just a tough one to predict, and incumbents usually win those, which again, it doesn’t mean that’s bad… I think law is important. We should all be wearing seat belts, that’s a good law, but as a VC, I think we live in bucket number one.
And so I think this is really important. The best sustainability companies are really the best product companies, and I’m going to use Tesla as an example a lot, so please bear with me on that, but I just can’t think of a better example in history, and we’ll go over why. But just as a little anecdote to bring it home, our Subaru Outback died, and so me and the kids, I have two girls, six and eight, and we needed a new car, so we’re going to get a minivan because we were renting a Toyota Sienna while we were getting a new car. And it’s like an apartment on wheels, I don’t know if anyone’s seen one of these things, it’s like literally a box, a giant box on four wheels, and it’s super fun for them. And so Krissa, my wife, and I were talking, “Oh, we should just go test drive a Tesla. We’re trying to reverse climate change through our investing, might as well do it through our actions as well.” We get in the car, we go to the Tesla dealership and test drive a Y. It’s got seven seats.
And I’m driving and I leave the Tesla lot and I make a right and stomp on the accelerator and we shoot down the road like a rocket, and the girls in the back start screaming, “Tesla, Tesla.” And right there as a family, we made a product decision, not a sustainability decision. And I think it was a really important lesson for me as a VC in that moment, and so I think that’s where you see it, and there’s a lot of decisions that Tesla has made that make it the company that it is. And so if we’re trying to figure out how to make capitalism sustainable, and we know that it’s going through products and we know that those products are created and deployed by companies, the question we could naturally ask is: What are the common traits of great planetary health companies? Can we learn something that is common to them all and repeatable? And so as a partner at Mayfield, I talked extensively with the managing director, Navin Chaddha, who’s had decades of experience in the space, had my entire IndieBio experience for the past 10 years. And so we also looked at public company comps.
10 Traits of Great Planetary Health Companies
What do companies look like after 10 years in the public markets? Where do they evolve to? How does it go? Because if we need to build companies that stand that test of time, what can we learn? What follows is really a summary of 10 traits that are common to the real outliers in the past years in planetary health.
How KPIs Help Guide the Way
From those 10 traits, we can come up with these simple 10 KPIs that can help guide the way, and these change over time. What the right shape is changes over time, which we’ll get to in a moment, but ambitious goals. Do you have ambitious goals with clear milestones? Do you have a unique 10X product? Unique is really important, it’s really hard, like I said, to be 10X on everything, so what are you going to be uniquely great at? Tesla doesn’t have better range than a gas car, but that’s okay, that’s not the point. That’s not the value proposition. A massive TAM. And the 10X products help you understand that TAM. In other words, if you are 10X better than a substitute, that substitute is your real TAM. You might be able to grow it over time as you get better at other things, but then you could be very precise.
High gross margin potential. Fast cash flow is baked into the business model, so all businesses go through this loop, cash, inventory, accounts receivable, back to cash. The company that could do that the fastest generally wins, so if you can find ways of speeding that up, you’ll be in a better financial position to weather storms. Be a daily touchpoint for your customer, figure out how to become that. Again, look at your operating efficiencies, making sure there’s a direct relationship between you and the consumer, that you have a moat and that you leverage the capital that’s available for free. Let’s do a quick case study. Let’s just take these KPIs and take a look at two companies and see what they did. One on the left is Tesla, the one on the right is Beyond Meat. They’re both public companies, so you’re able to get some data on them and take a look.
Let’s go ahead and take a look at Tesla. Ambitious goals with clear milestones. Yep. Elon Musk always puts out very ambitious goals. He says Cybertruck’s going to be ready. He might miss some. He might, just maybe, but it drives the team. Do they have a unique 10X product? Yep. People love… And again, I say the quickness of Tesla, there’s something precise there. There’s a lot of reasons to love those cars, but there was something precise in their entry point with the Roadster. It was billed as faster. Massive TAM. Yep. Cars are 1.5 trillion. High gross margin potential. This has actually dropped since the last quarterly announcement, but the 13% industry average, Tesla is higher than that, and it’s rewarded in the public markets with a massive enterprise value to revenue multiple. Does it have fast cash flows? Yeah, it’s innovating. It’s okay. It’s not super-fast. Yeah, there’s a daily touch point. It’s fun, people talk about it. They had good operating efficiency early on.
Now, that’s dropped. The operating margin is 7.6%, so that is accurate, and I think that’s the… But there’s room. Because of that operating leverage, there’s room to fight a price war, which is what Elon has started, and he knows that everyone else has to create a loss-leader for them to stay in the EV business while they learn. There’s a direct relationship with zero spend. Such an important lesson there. Zero spend. The Giga Press makes production cheaper, but the Supercharger network makes switching costs extremely high. The Tesla Supercharger network, man, switching out of that, it’s so high that I think the government’s stepping in and helping to make it available to everybody. I didn’t know this, I looked this up, Tesla did actually receive a $465 million loan pre-IPO, which it fully repaid. I think it’s the only car maker that ever repaid its loan or something like that.
Let’s take a look at Beyond Meat. Tesla’s not bad on that list overall. Beyond Meat was the darling IPO in 2020-ish. ’19 maybe, ’18, something like that. June of ’19. Yeah, thank you. And it was also one of the only pure play planetary health companies you could invest in at the time besides Tesla. Are there ambitious goals with clear milestones? Yeah, there’s a stated goal of being better for the planet, but it’s not precise in its messaging. Not like Beyond 3.0 burger is coming in June. Is there a 10X product that people can’t live without? It’s red now. It was green, what, six years ago? It was green six years ago. There’s an important lesson here, which is it was green for vegetarians that had Boca Burgers, frozen patty Boca Burgers is what they were called. And the substitute product, Beyond was way better, but the market size for Boca Burgers was like $200 million at the most, $100 million, not $1 trillion. By being precise, we can get to actual market sizes and understanding what the total sales potential could be, and so to Beyond Meat’s credit, it’s done an amazing job of expanding the TAM of plant-based meats and burgers, which is now $5 billion. That’s a huge increase.
High gross margin potential—it actually had pretty good gross margins when it IPOed. The S1 showed it was at 26%; it’s now at negative 2%, which is killing the company. Why? Because it doesn’t have a moat, and so everyone comes in with a plant-based burger, so spending on advertising has to increase massively. Production has to spin up. There’s a lot of issues you have to solve, and so therefore gross margin goes way down. Is there a daily touch point or is there a fast cash flow? Yeah, it’s a daily habit, buying a burger, eating a burger. It’s a daily thing for many, many Americans. The operating leverage and operating efficiency for the reason that I just talked about is now a staggering negative 82% operating margin. That’s tough. It’s tough. There’s moat built into it. There is a weak moat, and that’s been the biggest issue I think with Beyond Meat.
10X Products Win
Getting to the end of this presentation, these are 10 principles, these traits can be used as principles to design enduring businesses. And it doesn’t mean that you have to have all of them maxed. That’s the wrong takeaway. There’s a shape to these… If you think of it as a graphic equalizer, what’s the shape at different time points in a company’s career arc? Questions later. And one thing to take away, 10X products win. If you could do one thing, if you just walk out and remember one thing, 10X product. Be unique, differentiated, and win on one dimension that you could own. And so for me, what gets me excited is actually this idea that using these common traits, using all those technologies I talked about and shared, this incredible diversity of innovation that’s happening right now can truly create a utopian idea of what a future is, which is better products that don’t take from our future.
Here’s some future work that we can do to think about how to push on some of these ideas. Is there a quarterback ranking where you could just boil this down into a score for a company? Is there a universal law or metric that can explain how climate tech adoption curves are happening? These KPIs, can we make them quantitative? What are the relative weights and what are new models for financing? I think that’s an important one. There’s different ways of getting to market, and not all of them need venture capital or should have venture capital. Not all of them can create venture returns, but they’re companies that need to exist. Thank you for listening. I really appreciate it. I want to say a special appreciation to Navin Chaddha from Mayfield, Po Bronson from IndieBio and Jocelyn Kinsey from DFJ Growth who all helped me revise and refine this presentation for y’all today, so thank you very much.
