After publishing my last article about Carbon Engineering – the Canadian firm founded by brilliant Harvard scientist, David Keith – I spent some time talking with three investors on the front line of climate change investing; they all recently became partial owners of Carbon Engineering by investing in its $68 million capital raise.
The investors run the gambit – one is the manager of a family office, the other is a technology-focused venture capital (VC) firm, and the other is a “strategic” investor.
Of the investors with whom I spoke, the family office manager’s thought process and reasoning resonated the closest with my own thinking. This article shares some of his insights and article two in this series looks at the perspectives of the VC and strategic investors.
First, to explain terminology. A family office is a legal entity whose task is investing the combined wealth of a single family or of a group of families. Some family offices, such as that for the Rockefellers, are investing wealth that was created generations before; some, such as Michael Dell’s, invest the wealth of recent generations of entrepreneurs. The wealth controlled by large family offices rival or exceed the assets managed by small to medium-sized hedge or mutual funds. Family offices are essentially unconstrained to a particular asset class, so can invest in such diverse areas as public or private equity or debt, mutual or hedge funds, cryptocurrencies, and real estate deals.
The family office investor in Carbon Engineering – we’ll call him John – is based in the Pacific Northwest, near Carbon Engineering’s home in Squamish British Columbia, and initially heard about the firm through media coverage.
I learned about the company when watching a TV show about climate change. I contacted them by phone and started talking with them back in early 2018. Our family office mostly does real estate deals, so investing in a cutting-edge technology firm was outside my comfort zone at first.
Despite the investment being an unusual one for his family, Carbon Engineering’s solution intrigued him because its focus on mitigating climate change, and because of the political palatability of its solution. Like me, John sees Carbon Engineering’s Direct Air Capture and Air-to-Fuel technology as a necessary transitional infrastructure solution that appeals to people across the political spectrum.
Right-leaning investors and politicians like the fact that Carbon Engineering uses technology to enable the continued use of oil. Left-leaning investors and politicians like the fact that Carbon Engineering already has a scalable plan to reduce atmospheric carbon.
While the psychological and political aspect of the investment struck him as intuitive, getting comfortable with Carbon Engineering’s technology took a hundred hours of reading about the topic of carbon sequestration and speaking to the firm about his questions.
I identified a few key risk points in the Carbon Engineering model and talked with the company’s Chief Technical Officer (CTO) about them. He did a great job of answering my questions in a straight-forward, intelligible way.
John was also impressed by the fact that the firm was using what I term a Novel Adaptation strategy. The company bases its solution on technology that is presently on the market, but which has been adapted in a proprietary way to allow for a novel application of that technology to solve a new problem.
Using a novel adaptation strategy reduces the technology risk inherent in a project a great deal because it is easy to find engineers and machinery suppliers that can work on and perfect the system.
Another factor that helped him get comfortable with Carbon Engineering’s technology was that it had been validated by large, technically sophisticated earlier investors (such as Bill Gates). He was also cheered by the fact that Carbon Engineering was not alone in its field, but had competitors, whose presence validates Carbon Engineering’s approach in some sense.
In terms of a catalyst for commercialization, he believes – like I do – that the company has the potential to move from the red into the green very quickly because of the pressure on oil companies to conform to restrictions set forth by California’s Low Carbon Fuel Standard (LCFS) and similar laws in other jurisdictions.
The applicability of Carbon Engineering’s solution to Enhanced Oil Recovery represents a big plus,” he admitted, “because this is a technology that is in demand now.
While he is optimistic about commercialization, John said that he is willing to be patient with this investment and is not thinking of it like flipping a condo block. He thinks that the long-term potential for Carbon Engineering is great, so is happy to bide his time and let the company commercialize its solution.
Regarding his investing approach, he told me:
Anywhere from 10-15% of one’s portfolio should really be invested by taking some calculated risk. The potential for return is really, really high and doing this is the only avenue to serious wealth creation.
I couldn’t agree more.
In my opinion, the only way for families to build and maintain wealth in this century will be to invest in a new paradigm. Intelligent investors take note.