· 8 min read
Over decades venture capitalism has forcibly separated entrepreneurship from ethics, impact, and activism. Exploitation is made up for with CSR programs, the metric of success is The Exit, and the only route there is venture capital (VC). This monocultural complex has now been attempting, in the words a prolific investor in the space, to “Unf*ck the Planet” through climate capitalism. A few trillion dollars later, how are we doing?
The simplest climate metrics would indicate that we’re not doing well at all. Emissions, resource use, air and water pollution, biodiversity and habitat loss, waste production, and land degradation: all are on the rise with no inflection point on the horizon. Fires, floods, and extreme weather have become commonplace; inequality and the inability to adapt keeps growing. Investors will tell you that we simply haven't invested enough. That it's just a matter of directing more capital towards the innovations that will result in a turning point.
After decades working for high-growth startups and a few years deep in the climate capitalism ecosystem I began to question this logic. Over the past two years I have been carrying out a research exercise tracking the activities of the 160 most active climate venture funds and what they invest in. My findings so far lead me to conclude that the climate VC community is investing in the wrong things, using a mixture of shallow impact metrics and outdated thinking.
It is a mode of thinking that is neither driven by climate science nor by modern economic theory. It is instead driven by the same profit-focused mindset that prioritises financial gains over everything else. As such it should be treated with a high degree of caution and a very critical eye.
Modern economic thinking, such as that put forward by Donnella Meadows, Kate Raworth, and EF Schumacher indicate that what actually needs to be unf*cked are the economic and social systems we have come to accept as a given. This is not even generally contested by venture capitalists; most investors claim to agree. Homepages are emblazoned with sentiments that support system change, talking about creating “regenerative economies” (#), implementing “circular business models”, supporting “Earth’s vital systems” (#), and “redefining industries” (#) because our “economy is breaking the planet” (#).
As it turns out however, climate capitalism is broadly doing none of that.
This is because there is an irreconcilable incompatibility between venture capitalism of any kind with true climate progress. That's quite a claim, I know. But if true it means that we are squandering the energy and creativity of a generation of entrepreneurs, not to mention the capital being deployed. So it's worth investigating. This article is therefore the first in a series that will deeply explore this industry from a system change lens with the dual goal of explaining its flaws and proposing alternatives.
The first step is understanding what lies behind the infamous ‘profit motive.’
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“Profit motive” is a term that gets bandied about a lot because it underpins most venture-backed startups. But very few deeply understand what it really means.
The profit motive is not about a business being ‘profitable’ in the sense that it is financially sustainable in the long-term as opposed to being, say, a charity that relies on donations and grants. Being financially sustainable—being profitable—is a good thing. It guarantees independence and livelihoods. VCs like to use this argument a lot in defence of their investments: that capitalism and venture capital is the best way of taking care of people through the creation of profitable companies.
They are however after a different kind of profit. Not the profit that keeps a business running smoothly. But rather, the excess profit that startups are required to generate to pay back their investors. A return that is expected to be several orders of magnitude larger than the initial investment. In most cases this means that an entrepreneur needs to create a return on their early stage funding of a multiple of anywhere between 50 and 150 times the original amount. In other words, between a five thousand to a fifteen thousand percent interest rate. This expectation is put in place by investors when funding startups at their very earliest stages. This is the profit motive: the need to generate an outsized return on investment by extracting and retaining maximum amount of financial gain.
This puts an enormous amount of pressure on entrepreneurs to grow their companies exponentially and unnaturally rapidly, with short-termism being the dominant way of thinking.
This pressure does not arise from casual conversation. It is an expectation codified in the legal documents defining the investment terms, with investors demanding a variety of other things in return for their money like board seats, voting rights, and preferential shares. These legal tools are designed to give financiers the leverage needed to be able to oust the leadership should it look like things are not going their way or to force a sale that primarily, or exclusively, benefits the funders not the founders.
The same cannot be said about “missions”, environmental or otherwise. Expectations such as impact goals related to emissions, sequestration, regeneration, or other social benefits are not codified. I have not come across any major investor for example that threatens the removal of a CEO should they not meet impact targets or even if they completely pivot their business model away from social and environmental impact.
Slowly, the requirement of outsized financial returns, underscored by the threat of having your company forcibly taken away, tends to dilute the mission and regularly wins out over other priorities.
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A consequence of this is that founders who are willing to walk the talk and codify impact requirements into their company’s constitution are shunned by investors unless they show a willingness to compromise on values. Even merely being a B Corp (essentially just an elective certification) puts you at a disadvantage, making it harder to raise funding because the impact focus is not “flexible” enough.
Truth is that codifying impact is relatively straightforward nowadays with a variety of options including Public Benefit Corporations, Profit-for-Good companies, Golden Shares, Co-operatives, and Steward Ownership. The “problem” is that in these kinds of setups, profits for investors are capped. Not scrapped to be clear; in fact they can still be quite generous, as OpenAI’s cap of “just” 100x demonstrates. But nonetheless, the majority of such a company’s excess profits are either donated to adjacent causes or directly re-invested into the company to further amplify its existing impact.
It is therefore not surprising to find out that the majority of venture capital firms are themselves not codifying impact into their legal constitution. Out of the 167 most active climate venture funds for example, all are set up in the “normal” way, with only 13 even having B Corp certification.
As a result, we have a climate financing ecosystem that calls for system change while fully perpetuating and supporting the current system.
With the primary, or exclusive, motive of generating an outsized financial return.
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If you’re with me so far you might be thinking: So what? What does it matter if investors make an outsized profit and don’t actually further any system change as long as they are investing in climate startups? Isn’t that a win-win anyway?
No it isn’t.
Because investing in climate startups with the primary, or exclusive, motive of generating an outsized profit hides an inconvenient truth: you can’t invest in real climate solutions.
You can only invest in solutions which have the potential for outsized growth and financial return, as a result excluding the most impactful and the most certain climate solutions.
What this means in practice is that the vast majority of the money goes towards technological innovations in the energy, industry, construction, and transportation sectors (PWC 2024 report). These are sectors within which innovations are either immature or else fall foul to the efficiency paradox: that for example if you make a car more fuel efficient per mile, you will then drive it for more miles in total. Tragically, little to no money goes towards behavioural change for reducing food waste, increasing plant-rich diets, family planning and education, forest and degraded land restoration, or Indigenous people’s tenure. These are not a random list, they are some of the highest impact solutions according to Project Drawdown.
We urgently need to build systems designed to finance the climate solutions that stand the best chance of working, not the best chance of making a profit. To effectively and honestly implement climate solutions entrepreneurs need real alternatives to finance their ventures in an impact-first way.
We need to reclaim the notion of entrepreneurship from what it has become: a one-way high-speed highway towards billion dollar exits.
This article is part of a series on the topic of Reclaiming Entrepreneurship.
In the rest of the series I will explore what that means from a system-change point of view as well as from a hands-on perspective. We will start by looking at the consequences of venture capital to the climate and understand why impact capitalism refuses to invest in creating equality, be it of humans or other-than-humans. This will lead to understanding venture capital’s Achilles’ Heel, a leverage point we can use for genuine system change.
Finally we will look at reclaiming entrepreneurship as a force for positive impact through governance and finance. For those already too far down the VC rabbit hole, we will conclude with how to untangle your venture from them.
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