Can software save the climate? As the extraordinarily inventive and technical minds behind entirely new systems, like the blockchain explosion, turn their sights on climate change applications, it is hard to know whether to sigh or cheer.
On the one hand, we most certainly need more inventors applying their unique skills, risk appetite and problem-orientation to the threat and opportunity posed by climate change. And there is reason to believe the transparency and efficiency of blockchain-enabled smart contracts could accelerate the development of carbon markets and support novel incentive systems intended to drive changes in behavior.
On the other hand, my decade plus of experience working at the intersection of complicated challenges and innovators has taught me that solutions to complex, long-term issues are unlikely to be moved by software alone. While the venture capital world has long cited Marc Andreessen's infamous position that software will “eat the world” (and in many ways it has), it is also true to state that software is unlikely to meaningfully and directly address structural challenges faced by modern society including related to clean energy, mobility, housing, infrastructure, and the like.
When it comes to innovation making a dent on generation-defining problems, software entrepreneurs - crypto specifically - are unlikely to move the needle alone. High impact innovation will require the invention and building of physical things, changes to policy and engagement by the public sector, and potentially more innovative forms of risk capital along the way.
In this interview, Derek Warnick and I discuss what it will really take for technology and innovators to make a dent on climate change. Derek is a serial entrepreneur and former company builder at Breakthrough Energy Investors. Derek is currently co-founder and CFO of Electric Hydrogen.
CB: I’d like to start simply with you sharing a little bit about how and why you've chosen to be a company builder in the climate space and, of course, a little bit about Electric Hydrogen.
DW: For me, energy and climate are the only things that have ever made sense for me to focus on. We all have a finite number of moments we are given in our lives and spending that time on anything other than averting the worst effects of climate change, to me, just doesn't make any sense. It also means that I get to work around some of the smartest people on earth with the most innovative and exciting technology out there in service of solving such a hard problem.
I also enjoy starting and growing companies. It's a lot of fun and when you have an opportunity to do that, and then to be able to come home and be not just be satisfied with what you’re working on, but also consider what your kids think about what it is you do, and know they can understand that your work and effort is toward something fundamentally good. That's something that really drives me on a much deeper level.
Now onto Electric Hydrogen. What we’re working towards now is engineering the end of fossil fuel dependency.
We are doing this through cutting edge, water electrolysis technology that allows us to create hydrogen by splitting water using renewable energy. This Green Hydrogen, as it is often called, can be used to decarbonize over 50% of global emissions that are very difficult to directly electrify.
Here’s how I see it: the world is built on oil and natural gas and that's how the entire economy is setup. That's because they're very energy dense liquid and gas energy carriers that are easy to transport and have, historically, been very cheap.
If renewable hydrogen was cheap enough, you could conceivably eliminate the need for oil and natural gas entirely, without requiring society to pay more and obviously, that’d be a game changer. We're a ways away from that, but that is the goal of what we're trying to do.
CB: That’s extraordinary and we could easily spend the whole time talking just about your company, however, I think it would be fascinating to frame it as a case study today around the question: why do we need to think differently about company building when we're talking about the size and scale and complexity of climate. We'll come back to that. You've been in this space for a while, so I’d like to start with you sharing a little bit about what's changed in the climate tech space since you started.
DW: I started in this space in the mid 2000s, so I think the biggest thing is that now people are much more focused on global scale than they ever were before. I think this allows people to swing bigger in some ways, and I think that there's a deeper understanding that there are a lot of requirements that are necessary.
You need technical feasibility. When you think about solutions and software, your mind can create whatever it wants and there's an opportunity to do almost anything. When you’re existing in the physical world like this, trying to solve a physical problem, there is a technical feasibility required that really does have constraints around it. And what you are doing needs to hit a price point that's probably already been defined in the global economy.
Most of the things that exist in clean tech and climate tech are trying to do something that has been historically dirty at a certain price point and trying to achieve that in a much cleaner way, without a cost penalty.
Previously, in what we see as the first phase of clean tech, it seemed to be more about making money with environmental impact as secondary priority. Now, it's fundamental to think: how can you change the world at scale. If you can do that, the market is certainly large to enable a great financial outcome.
CB: I assume that this shift has to coincide with a change in how your capital partners or other stakeholders are thinking about what it takes to build a successful business.
DW: Yes, I think that individual investors and large investment groups looking at climate tech are more comfortable with the time scales being fundamentally different than classic venture capital. Classic venture capital is constrained by what is termed the fund life cycle, and the timing where they need to harvest or monetize their investments, typically a total of seven years. That works fine if you're building a software company, where you take in money year one and four years later, you get sold or you IPO. I think in climate tech investing, you're seeing a lot of different funds that now have 10- or 20- or 30-year or even evergreen fund lifes where the individuals and institutions that invested in these venture capital firms are willing to wait longer. They know the problems are complex and they understand that it may take five or ten years for this to get to where it needs to go – and that’s okay.
Rushing innovation may lead to failure and for these solutions to scale, we must take the time that’s necessary to get there.
CB: I want to go back to an earlier part of our conversation where you highlighted the building of things and the technical risk component. I think you've said before that solutions to climate change aren't just physical solutions, but like steel in the ground solutions. Tell me a little bit about more about what you mean by this distinction and how it relates to the bigger question: “why do we need to think differently about company building when we're talking about the size and scale and complexity of climate?”
DW: The problem that we're trying to solve, and the solution that needs to solve it, probably need to mirror each other, or at least rhyme, so to speak. This problem - climate change - wasn't created through by the modern society that most of use see everyday, but instead by the global industries that sit behind our daily lives. Climate change is tied to factories and power plants and oil refineries (in some cases as large as cities), using millions of tons of steel and concrete, belching out nasty emissions that are not visible to us in our daily lives. If this is where the problem is manifested, the solution is probably going to have to look more like that in its scale and application. The first wave of solving the climate problem with renewable energy, with massive wind turbines and solar farms that cover thousands of acres, demonstrates the type of scale that's necessary.
At Electric Hydrogen, when I think about solutions such as green hydrogen or direct air capture, we need a similar scale and understanding of really complex industrial engineering challenges that are far different than just coming up with a solution on paper. Implementing these solutions can cost hundreds of millions or even billions. There’s no “app” for this.
CB: The other component that strikes me is that this area has high interaction with policy and government. Tell me how you think about that in building your company. What's the role in working with government or policy or regulators and how does that affect how you think about managing your business and its risk?
DW: While that is something on the top of everyone’s mind in this space, we’re building our company in a way that is not planning for sustained government support because people lose elections and governments can change focus under new administrations.
I think that if you realize that what can be given, can also be taken away, and if you build your business requiring a certain amount of government support, that can be tough in the long term. That’s not to say that government support is not important, I do believe that it is, especially as we move away from inaction. The first step is doing something positive and hopefully eliminating the support of fossil fuels is eliminating subsidies and things of that nature to reduce support for what we've come to realize are not the solutions for the future.
I believe things such as a national carbon policy and Biden’s Build Back Better plan here in the U.S. could really help accelerate positive action. The right way for government and industry to work together is to think about eliminating the barriers that stand in the way of building successful businesses that can solve the climate problem, and to apply some of the best practices for support that helped kickstart other technically ambitious spaces, such as the fossil fuel industry in the 19th and 20th centuries..
CB: I agree. I think that creating momentum by removing barriers versus direct subsidies per se contributes to more scalable sustainable businesses over the long run.
DW: The concept of government support gets a bad rap. I think it's important to realize that if this is done effectively, there can be a very, very large societal return, though it may in some cases, require some support.
In the early stages, hopefully, government support will not only lower prices for people on the products and energy that they use, but also help everyone live a better and healthier life over the long term. There's a reason to do this that is fundamentally good and should be viewed not as a handout but an investment in everyone's future. If it’s done correctly, it will be really powerful.
CB: At MassChallenge, we often talk about entrepreneurs solving massive challenges – hence the namesake –are building uncommon businesses that often require uncommon partnerships. Does this resonate for you? And what would you say to your peers out in the Community looking to have an impact in this space?
DW: I do feel that with particularly challenging problems, having strong and effective partners is fundamental. The ways that partners can be most helpful is thinking about the realization that almost any problem we're trying to solve has probably been solved previously, but maybe in a different space.
When we’re thinking about some of the problems that we have in trying to combat the worst effects of climate change now – implementing these large steel in the ground solutions at scale – society knows how to solve this. We’re using and burning the wrong types of fuels due to short term cost rather than investing in sustainable solutions with long term benefits. So, partnering with companies and institutions that have a track record in doing similar or adjacent things can be very helpful.
There's always something impactful from learning from great business leaders and organizations that understand how to get things done. That might be a little different than the classic Silicon Valley mindset, or at least the current Silicon Valley mindset of the lone software engineer that drops out of college and in their basement comes up with a solution all on their own defying all of industry. I think this is something where you need to be willing to think hard and question the norm about why something needs to be the way that it is.
Many solutions must be built using frameworks others have used before. This is where partnerships bring tremendous value.
CB: Thank you so much. Just to wrap this up, is there any role for software or blockchain to make a dent in climate change or missions?
DW: I think that there may be. I think that software and blockchain could support some underserved areas of climate, including carbon markets and the measurement and verification of emissions reductions. If you're going to eliminate a massive amount of emissions, or in the case of something like direct air capture, actually pull CO2 from the air and do something with it, you need to have robust procedures to prove that there is a long term value for those emissions reductions, abatements, or extractions from the atmosphere. While blockchain can support, we cannot neglect that physical, steel in the ground solutions must come first in order for there to be a role for software.