Leveraging Innovation to Realign Capital with Social Goals

Today’s piece is about how entrepreneurs and investors can leverage three strategic frameworks to achieve stronger alignment of financial and social goals using global warming as a case study. Read on for more about:

• How Single Earth leverages goal tokenization in the fintech space. Thanks Merit Valdsalu for sharing your thoughts for this piece!

• Eavor’s partnership oil / gas players in geothermal

• Boox’s differentiation in packaging through post-purchase revenue potentiation

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Solving today’s most pressing social issues requires a combination of government sanctions and private sector realignment. Take climate change. Many government actions seek to create new legislation that can be used to sanction bad actors within capitalist markets who privately profit off of imposing a negative public externality on society at large. Examples include caps on emissions, carbon taxes and designation of protected areas. All of these look to constrain actions through law and penalty of negative actors. In the private sector, for both founders and investors, there are interesting opportunities to build, identify and leverage creative business models that help to proactively bring about a realignment of public social goals with private profit initiatives through incentivization rather than by merely sanctioning bad behavior. These businesses are very difficult to identify, but use their social alignment as an active competitive advantage to disintermediate other players in their market of choice. Innovative and socially-realigning companies that help profitably address the destabilizing social issues of our time will benefit from a positively reinforcing model that both creates a short-term competitive advantage from a unique incentive insight and also has an accelerating path to profitability and greater scale by benefiting from favorable regulatory catalysts. Whereas, incumbents that continue to try to profit off of social misalignment will face substantial regulatory headwinds and competitive dislocations as their agitated social issue comes under more scrutiny. The difference between these businesses in ten to twenty years time will be like drawing the star vs. triangle in Squid Game:

There are numerous paths to constructing business models focused on realignment rather than constraint. I think three particularly promising areas focus on Goal Tokenization, Stakeholder Conversion and Revenue Potentiation.

Goal Tokenization: Pegging Currency Value to Nature

Crypto summer highlights how subjective value in our traditional financial and monetary systems can seem when we begin questioning traditional economic assumptions. Why was cryptopunk #7252 worth over $5 million in its recent market sale? The buyer believed it to be worth that much and other crypto native individuals held mutual inter-subjective beliefs about its value. Why does the US dollar have value? Because the treasury prints money that it declares to have value and citizens of the US (and the world) share an intersubjective belief about the relative value of the dollar vs. other currencies.

Fundamentally, what is the purpose of a currency? Some classic answers include:

1. Store of value

2. Medium of exchange for goods and services

3. Unit of account

Because crypto can serve as both a currency and a framework for a network of composable applications, it has the unique ability to add a fourth answer to the question above: to incentivize and re-orient individuals around a particular goal.

On June 5, 1993, FDR took the US government off of the gold standard. Why not peg a digitally native currency to a scarce asset that can both store value (like gold) but also serve to actively encourage positive social behaviors? In The Ministry for the Future, science fiction writer Kim Stanley Robinson introduced the concept of a carbon coin that could save humanity from global warming and environmental degradation. This was probably the most impactful book I read over the last year and I highly recommend it, but the basic premise of the argument goes:

• Most government approaches to carbon reduction, focus on penalizing wrongdoing

• Our system is missing an incentive for doing the right thing environmentally at a grassroots level

• Fiat currencies only have value because governments, corporations and individuals agree that it has value

• Global governments should collaborate to introduce a global new currency, a “carbon coin” a blockchain-based store of value that is created each time one ton of carbon is removed from the atmosphere

• This would allow stakeholders to financially benefit from environment-saving measures, supercharging anti-warming efforts by introducing proactive financial incentives

• This currency would leverage the monetary system as a means of aligning finance with social incentives and give people the opportunity to bet on humanity with money that is based in our scarcest resource, nature

While this sounds like purely science fiction, one company in particular, Single Earth, is launching a similar concept through its MERIT Tokens. Single Earth works with landowners by paying them to preserve their forests, wetlands and other carbon-sequestering natural resources by rewarding them with a MERIT token (Single Earth’s cryptocurrency) each time 100 kg of CO2 is sequestered from their assets. Corporations and retail traders can invest in MERIT tokens to offset their carbon footprint and also benefit from the appreciating value of MERIT tokens over time as the world advances towards solving climate change at a global scale.

MERIT tokens help to tokenize pro-environmental goals by tying in carbon sequestration directly with appreciating currency value. What is the most widely held inter-subjective belief that can be most closely thought of as nearly objective and is held by most people in the world? Avoiding extinction, which is a precondition to assigning any value to anything else in the world, plus preservation of our species is coded into our genome through evolutionary processes. While individual people might disagree over the likelihood environmental destruction could cause extinction of our species today, as its severity becomes even more of a consensus view, MERIT tokens allow corporations, traders and other stakeholders to hedge against the potential impacts of global warming on their livelihoods. 2020-2021 has already been one of the most environmentally destructive years in the modern era in terms of natural disasters from floods in Germany to fires in California. Weather-related disasters are up five fold over the past 50 years. Avoiding extinction is a pretty intuitive investment thesis for market speculation as the climate crisis worsens:

I caught up with Merit Valdsalu, CEO & Founder of Single Earth, to learn more about how tokenization is enabling a shift in how we understand the value of nature:

“Value-creation is shifting — in the 20th century we valued nature for the raw material, in the 21st century its value is increasingly in sequestering carbon, being literally the lungs of the earth, and holding biodiversity. Tokenisation is the ideal technology for enabling this.”

Stakeholder Conversion: Enabling Oil Companies to Profit Off of the Transition to Renewable Energy

If a new technology is misaligned with the incentives of a well-funded incumbent, that player may have the means to hamper the proliferation of the new technology. These initiatives that may negatively affect proliferation of the innovation include political lobbying, regulatory connections, entrenchment in distribution and more. This is particularly the case for non-digital businesses with a substantial hardware component that has high startup costs that create meaningful scale advantages, like the energy infrastructure space. The key to accelerating the adoption of a new socially desirable technology is to convert the existing stakeholder into a proponent by allowing them to financially benefit from the roll out of that new technology. This effect is particularly strong if there are countervailing regulatory forces that threaten the core business of the incumbent and helping with the proliferation of this new technology proactively helps hedge the incumbent business’ existing assets.

Geothermal energy is a fantastic example that illustrates the potential for shareholder conversion. For those who are unfamiliar with it, geothermal energy leverages heat from geothermal steam generated deep inside the earth generated by magma and tectonic plate activity to generate electricity and energy inputs. The countries with the most volcanic and near-surface geothermal activity have historically relied on geothermal as one of their largest energy sources, like Iceland which has over 130 volcanic mountains and a plethora of geothermal hot springs. According to the IEA, Iceland has nearly 30% of its energy come from geothermal sources, a number which would be higher if it didn’t have 10,000+ waterfalls to also leverage as hydro power sources:

One of the largest constraints to geothermal proliferation has been that outside of heavily volcanized areas, exploration companies need to dig much deeper for geothermal sources which increases project cost and requires more sophisticated drilling equipment. However, geothermal has very high potential relative to other types of renewable energy sources when mapping it along key vectors of reliability (how often during a 24 hour period can the source be relied upon), availability (how prevalent is this source) and price (how cost and energy efficiency is this source).

According to a yearly study conducted by the investment bank, Lazard, Geothermal cost efficiency is greater relative to more sub-scale solar implementations and traditional coal and peaking plants but still lags behind wind and combined cycle plants:

Solar power struggles from reliability issues, e.g. it is highly dependent on local weather conditions and is also only available during the day, which makes it more difficult to rely on as a form of baseload power without substantial complementary investment in battery infrastructure. Wind is even more dependent on weather conditions and also suffers from an availability problem where some areas are naturally substantially more windy whereas others rarely see windy conditions (great plains of the Midwest vs. east coast USA for example). Hydro struggles from the worst availability problem because there are only so many areas with waterfalls large enough to create cost effective hydro power and while damming of rivers is an option, this poses other environmental costs and risks.

Geothermal is highly reliable as geothermal heat is constant underground throughout the day and automatically regenerates. It is highly available as long as you can drill deep enough, but until recently there have been technology constraints that have limited drilling abilities. Geothermal sources can also require up to 35x less surface land than other renewable energy sources which makes it more land efficient. While cost efficiency is middle of the road, I believe it is more important to solve for availability and reliability and as more investment flows into the sector, we will be able to improve cost efficiency over time. Moreover, innovative geothermal companies like Eavor are creating more scalable systems that are more cost effective than traditional methods of geothermal. The below video gives a great highlight of how the Eavor Loop works:

For readers who don’t have time to watch the video, the company’s Eavor Loop system is a buried pipe radiator that connects two drilled geothermal vertical wells with wellbores to create a closed-loop system where fluid is heated as it approaches these wells and powered through the loop by geothermal heat and turned into energy producing steam near the surface. The closed loop nature of the system makes it more efficient than traditional geothermal systems because it is self-perpetuating by creating a thermosiphon effect vs. relying on power to pump steam back to the surface in a traditional vertical well. Eavor Loop also does not rely on fracking like other geothermal systems do and therefore also has the potential to be more environmentally friendly. Because water is not being pumped back to the surface, the Eavor Loop is more available than other geothermal sources and can be deployed in more regions across the world.

Eavor recently raised a $40 million funding round led by BP and Chevron. You might be thinking, why is an oil company investing in a renewable energy company?

Oil and gas companies were actually some of the first businesses to explore geothermal back in the 1970s-1990s. The primary issue was a low hit rate on exploration where only 1 out of every 10 wells would actually yield successful energy producing assets. However, advancements in drilling technologies, scalability of closed loop geothermal systems (through Eavor) and the use of software that helps identify well assets with a higher hit rate have made geothermal a much better bet for oil and gas companies going forward. Oil and gas companies are very well positioned to lead a lot of the exploration and system development initiatives within the geothermal space because of their core competencies in drilling and natural resource excavation. Moreover, many of these businesses own select underperforming / abandoned oil well land with limited oil output that could be retrofitted as geothermal fields by tapping into geothermal heat sources. As oil and gas companies begin to expect more regulation that could impact their core industry, including carbon taxation, etc. that all could pose regulatory headwinds and as the cost of geothermal development goes down through innovations by leading players like Eavor, it creates a moderately strong incentive for oil and gas companies to apply their core competencies and knowledge in drilling into a renewable energy sector with a net zero carbon footprint. These incentives for geothermal could help convert oil and gas companies into partners on select environmental goals.

Revenue Potentiation: Leveraging the E-Commerce Shipping Box to Drive a Better Post-Purchase Experience

165 billion packages are delivered every year in the US which equates to the use of more than 1 billion trees. In each one of these packages, most retailers leverage a single use cardboard box that serves effectively no purpose besides the safe and undamaged transfer of that consumer product while in-transit. Cardboard box prices have increased 5-10% through COVID-19 due to supply chain crunches and these cardboard boxes represent purely a large cost center for retail companies trying to keep up in the new D2C retail landscape.

Boox, an innovative startup in the packaging space, is flipping the idea of boxes as a “cost center” on its head and is working with retailers to introduce reusable boxes into e-commerce supply chains but also help them capture revenue benefits by changing the traditional use cases of boxes. While a reusable box may have higher pure packaging costs per box vs. a cardboard box from a scaled manufacturer, there are other parts of the supply chain where they could actually reduce costs by:

• Reducing reverse logistics costs by leveraging Boox to simplify the returns process

• Reducing damage / loss from weather, water leakage, etc. that can destroy cardboard boxes (and the goods inside) that are less sturdy

• Reducing assembly costs at scale by requiring no tape / fewer manual human or machine-based  actions to assemble boxes

• Offering cost conscious customers a choice to have the renewable box cost passed onto them by educating them about the environmental benefit of their decision

More saliently, Boox views the box as more than just a “throw away”  but as a distribution channel to engage and delight the customer with branded post-purchase experiences to encourage greater engagement with the brand and subsequent repeat purchases. 

Through use of embedding a QR code in / on the box, Boox helps to turn the consumer unboxing moment into a distribution channel to generate more revenue for the company down the line by improving customer loyalty / satisfaction, driving more upsell opportunities and creating another digital distribution touchpoint. In this way Boox gives retailers the superpower of turning a cost center into a revenue generating opportunity.

Retailers’ box as cost center model is both expensive and an environmental liability, but by reframing the purpose of this boxing process that creates the environmental waste, Boox is able to incentivize retailers to switch to a more sustainable process that also creates additional potentially lucrative business opportunities for them.

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