Stuck in the twilight zone: why today’s climate start-ups have an exit problem

What happens to a regenerative start-up ecosystem when it is missing aligned buyers??

The latest episode of Conversations on Climate , with Godefroy Harito and Jules Buker, set a personal record that I don’t think we’ll surpass for quite some time: our youngest guests so far. At just 26, these two co-founders of treeapp (along with their other co-founder, Leo Ng) are firmly Gen-Z, and naturally we came to talk about generational perspectives on climate and business. It was a great opportunity for me to ask the kinds of questions of young leaders I have been thinking about for a long time – and the answers (whether they were explicit or implicit) have left me with a lot of reflections.

The first thing that struck me is that there really is something different about this generation. I don’t want to reinforce stereotypes or generalise too strongly, but I got a real sense that I was talking to two climate-native young people, driven to think about our ecological crises from the understanding that they are fated to live the consequences for their entire lives. Sadly, that means they will experience some of the worst of it towards the end of the century unless we radically change course, and they were viscerally aware that there is no planet B. In person, it was clear why so much of the energy and urgency behind the climate movement is being generated by the young.

Have Gen-Z climate entrepreneurs gone beyond contradiction?

What was also striking was that they saw no contradiction between climate consciousness and the desire to make a great success of starting a business. In comparison to my conversation with Sam Baker , for example, they seemed very confident that climate change was the necessary background scenery for building their careers – and that there was little in the sense of a conflict (morally or practically) between Gaia and Mammon. Perhaps this is the simple optimism of youth; or perhaps there has been a true permeating in climate consciousness from Greta and the school strikers, out to young entrepreneurs fresh from business school.

I’m not going to unpack that as a moral problem today. It is easy to be messianic in the face of such a profound crisis as this; but after talking to climate VC Amory Poulden , we shouldn’t be snobby towards this new influx of people who want to make money in climate. It’s wonderful that they want to bring their talents and resources to bear on the problem of sustainability. Harito and Buker seemed to understand, as a matter of instinct, that if green start-ups aren’t going to make money then we aren’t going to move this mighty machine of global capital behind the transition.??

Nonetheless, I was left with one nagging question at the end of our conversation: what is the exit strategy for today’s climate start-ups??

A beginning in search of its end

I put this to Harito and Buker slightly differently, but the sense is the same: would you sell to Coca-Cola, or to Shell, or Facebook? It’s a tough question, but it’s also something of a false one.?

Here is the business reality as I see it. There are two types of dream nurtured by founders. The first is to create the next transformational business empire which will allow you to reshape the world around you for decades to come. This is the realm of the Zucks and Musks amongst us, for whom there is no real exit at all – only an ever-expanding horizon of opportunity and domination.

The second dream is more humble, and more realistic: identify a problem of manageable size; make something that fixes it; built it out until it clearly works; and then sell it on to the highest bidder.

The vast majority of founders are type 2 dreamers; and many people who start out as type 1’s find themselves ground down into type 2 realists over the years. There is nothing wrong with that because it simply recognises the world as it is. Many try their hand in the Colosseum, but few survive, and only a select few of those go on to become great names.?

The numbers bear this out. A report by Triple Point Ventures and Beauhurst found that, of the 781 start-up exits in 2021, over 93% (732) were acquisitions. Only 49 rang the bell on an IPO – and I would challenge you to name more than a couple of them. A trade sale is always the most likely successful outcome for any budding start-up.?

The trouble for something like treeapp, a business that is putting genuine sustainability at the heart of what they do, is that its natural buyers (firms that meet its rigorous green credentials, whilst also having the scale to acquire) don’t really exist yet. We are still in the dying years of the old giants. For all that some may be trying to move in the right direction, they are still the most polluting and destructive firms on the planet.?

Credit Kudos x Apple

For a time, in the early 2000s, it looked like Big Tech would be the answer. That dream has soured. Few look at Alphabet, Facebook (now Meta), or Amazon as the good guys anymore, on sustainability or any other measure (privacy, monopoly, public health, or your own personal poison of choice). When I read that Credit Kudos – an impact pioneer of open banking – was acquired by Apple last year, as one of the first big venture impact fund exits, it hardly felt like a safe pair of hands in terms of purpose.

Interestingly, Big Society Capital – one of the impact backers of Credit Kudos back in 2017 – seem to have had similar thoughts, at least according to this post entitled ‘What determines a successful exit for an impact start-up?’ As they delicately put it, the sale to Apple is ’the most complicated exit scenario from an impact perspective.’?

The case for selling out, as BSC see it, comes down almost entirely to scale. Apple have the heft and the platform to take Credit Kudos’ positive model and build it out. But scale, like power, tends to corrupt, as the history of Apple itself shows only too well. The other advantages listed – that it might mean Apple suddenly cares about impact, or that it will send positive market signals – strike me as of the ‘fingers crossed’ kind.

The case against is rather more realistic – that the buyer will put dollars above purpose, dilute exactly what made the business impactful in the first place, and the subsequent culture clash would hollow out the teams that drove the mission in the first place.

Of course, there will be times when an exit does manage to preserve purpose – through independent boards and the like – but as time goes on, cracks almost inevitably appear. A look at how the Ben and Jerry’s brand has fared since it was bought by Unilever shows that even the success stories have their struggles.?

The way out is through

The quandary for today’s entrepreneurs looking to build a different kind of business is that the nuts and bolts of the start-up lifecycle still operate according to the old playbook. It’s great that they are trying to drag the old version of capitalism into a sustainable tomorrow; but that tomorrow does exist yet, leaving them in an exit-less twilight zone.?

What we need is more of today’s truly sustainable cleantech start-ups to go all the way – to make it into the next giants, rather than sell out to yesterday’s giants. That first generation of regenerative mega-firms will then have the deep pockets, as well as the genuinely sustainable DNA, to buy up the saplings without diluting or extinguishing their impact.??

Ultimately, that future rests on all of us. If we want some of today’s climate start-ups to make it to elderhood, then we need to open our wallets and make them our destination of choice. That is how we make the sustainable start-up pipeline of tomorrow begin to arrive.?

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