In carbon removal, landing a major offtake agreement—like Microsoft’s purchase of 44,000 credits from Carba—is often seen as the holy grail. But what happens next? How does the money flow, and can debt financing bridge the gap between signature and scale?
In this episode of Reversing Climate Change, host Ross Kenyon unpacks the deal between Microsoft and Carba, a waste-to-value biochar company turning landfill-bound biomass in Minnesota into durable carbon removal.
With credits to be delivered over five years, Carba needed capital to ramp up production. Enter Structure Climate, which is financing the deal to help Carba meet its commitments—showcasing a compelling model for how debt finance can unlock climate impact.
Guests Andrew Jones, CEO and Cofounder of Carba, and Matt Schmitt, Founder and CEO of Structure Climate (where Ross serves as an advisor), walk us through the mechanics of the deal, the role of debt vs. equity, and what this means for the future of carbon removal finance.
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"Carba Announces 5-Year Carbon Removal Credit Purchase Agreement with Microsoft" announcement
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:07):
Hello and welcome. To the Reversing Climate Change
podcast. I am Ross Kenyon.
I'm a long time carbon removal and climate tech entrepreneur.
Today I'm very excited to be speaking with Andrew Jones, the
Co founder and CEO of Carba. Carba is a Minneapolis company
that works with waste biomass, turns it into biochar, and
(00:28):
prevents biomass from entering the landfill unnecessarily.
Carbon had the good fortune of landing A5 year 44,000 ton
carbon removal credit deal with Microsoft, which is a big deal.
Getting a guaranteed demand signal like a long term contract
with Microsoft is pretty much asgood as it gets in carbon
(00:49):
removal. These are serious people who
diligence carbon removal deals at Microsoft.
Microsoft broadly gets their pick at the litter, same with
Frontier, Google or others who are making these very large
carbon removal purchases. So getting that stamp, you have
to put it on your website, you have to tell people that
Microsoft is one of your customers.
Your parents know who Microsoft is as a customer.
(01:12):
That is a known quantity. Fortune 101 of the biggest
companies in the world is your customer.
It's a great sign for any company that is able to achieve
a deal with a customer like Microsoft.
Once you have guaranteed demand like that, it unlocks the
possibility of finance. So Karba has this deal for five
(01:34):
years and 44,000 tons of carbon removal credits.
And that doesn't mean that Microsoft bought all of those
credits up front. Often times these deals are
structured to have milestone unlocks.
Carpet would need to provide certain metrics of progress
during this time in order to continue the process.
(01:54):
In general terms. That's how I've seen it done in
other places. For other off takes, I imagine
that's similar for them, although I do not know.
I imagine that's similar in thiscase.
I think people don't always realize is that these big off
take agreements do not just meanthat companies get access to a
very large pot of money upfront.And so my other guest today is
(02:15):
Matt Schmidt, who is the CEO andfounder of Structure Climate
where I am an advisor. I've known Matt for a long time.
He served on Nori's board years ago.
I have really enjoyed my time working with Matt on what
Structure is doing here. The Structure is working on
innovative financing mechanisms for carbon removal and climate
(02:37):
tech companies. Because I'll just back up here
and I'm going to imagine that ifyou're a listener, maybe you
don't know much about equity versus debt financing for
startup companies. But if you've watched Silicon
Valley, if you're familiar at all with how equity works, is
that you sell a portion of your company.
You sell equity in your company to investors and they expect
(02:57):
most of their bets to fail, but the best that do succeed, they
expect to make large multiples off of could be 10X.
Ideally, it's closer to 100 and up from there.
Some of the big deals that you're familiar with, Angel
investors or a seed investors ofUber, for example, became very,
very wealthy as a result. The good thing about equity is
(03:21):
that there aren't terms on it. Typically.
It's not like you have to get them a return within five years
or there are penalties. Equity investing is a longer
term approach, or it tends to be, not always.
I mean everything I've said so far.
I can think of counter examples too.
In general that is pretty much how it works.
(03:42):
But debt is not like that. Debt has strict repayment terms,
interest rates, and there are often penalty clauses for for
failing to repay on time. That could result in the debt
converting into equity, or the interest rate going up, or both.
It's actually really hard to raise debt as a startup company
(04:05):
because lenders don't want to lend to startups that represent
enormous risk for a fixed return.
The benefit of investing in equity in a startup is that
there's a lot of risk, but the risk is also positive.
The risk could also represent unlimited returns, but debt
isn't like that. They're still making a bet on an
(04:25):
untested startup or fairly youngstartup, but at most they're
only going to make the interest rate or the interest rate plus
whatever penalty provisions are in the debt contract.
It's not like they can also makean unlimited upside in investing
in debt for this company. Oftentimes companies can't even
get debt. When young companies can get
(04:47):
debt, it's often times at usurious interest rates.
We joke about it in the show. It's closer to consumer credit
card amounts, 20% plus in some cases.
This might not look like a lot and it will probably only make
sense to you if you've bought a house or done.
This is a company where a 1% raise in your interest rate may
(05:07):
not look like a lot when you're financing a house purchase.
But when you add up how much that is every month and then you
multiply that out over the presumable 30 year duration of
an average mortgage, it represents huge amounts of
money. And so for companies that are
small like this, changes in interest rates matter a lot to
(05:29):
them. And so structure through various
ways of blending philanthropic capital as well as commercial
capital, are able to put together deals that are more
palatable to a company like Karba.
We also talked about why doesn'tMicrosoft or bigger companies
like this just finance these deals themselves.
That's another really good question that we get into.
(05:52):
If you've been dying to learn more about carbon removal
startups, climate tech startups,raising money, the difference
between equity and death, why you might want one in one
circumstance and another in a different circumstance.
We're going to get into all of that.
I hope you enjoy links to both Karba, the announcement
structure, climate, or in the show notes.
(06:12):
This show is paid for by subscriptions and if you love
what we're doing here, if you look forward to the next
episodes. If you could.
Please become a paid subscriber.It would mean a lot to me.
It really helps a lot. It's a good signal that there's
product market fit here. For the podcast.
It's $5 a month. You can do it on Spotify and I
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If you cannot afford to do that right now.
(06:33):
A great rating on Spotify, five stars or the same on Apple
Podcast, plus a review. Write some nice things about the
show. Also super valuable for getting
the show out to more people and helping it grow.
Thank you so much for listening and here is your show.
(06:54):
Matt and Andrew, I'm happy to beable to announce what you're
working on on the show and we will get into what we're going
to announce, but we should just start at the basics here.
So the announcement even makes sense.
I think if we go announcement first, it's not going to make
sense. So Matt, let's start with you.
What is structure climate? Yeah, Thanks Ross.
Structured climate provides project finance services to for
(07:16):
profit companies that are doing climate positive projects that
we work across tech technology verticals.
So anything that's that's good for the climate, let's let's
have a conversation. We focus on projects where there
are good reasonable off take terms, you know, there's a a
(07:37):
buyer for whatever is happening and where unit economics are are
maybe a little challenging and some of the conventional project
financing setups. And one of the main tools that
we used to be able to engage early and at a small level is
the the syndication or the the pooling of charitable and
(08:01):
philanthropic capital into loans.
So we take the tax advantage flexibility of this charitable
capital and put it into terms and structures for companies
like Karva that set them on a path to more conventional
financing as as they prove out. So our, our, our goal is to make
(08:25):
those first projects, you know, that much easier to get done so
that companies can spend that much more time focus on what
they need to do, which is already hard enough.
And so we're we're here to help.You're telling me that the most
generically named person in carbon removal has a financeable
project? Yes, the, we often find that,
(08:49):
you know, the the more boring a deal might sound on on the
outside, the more interesting itis to us.
But no, I, I think this is something that probably a lot of
a lot of climate companies face is that there are all sorts of,
of sources of friction in these deals or transactions or sales
that are completely unrelated tothe technology that's that's at
(09:13):
at the center of it or the service or the offering or, or
the product. And so if there are challenges
in, you know, timing of cash flows or procurement processes
from a corporate customer or your balance sheet or, you know,
your capital cost or loan to value, or you don't, you know,
you can't meet the debt service coverage ratio your bankers
telling you to meet or you're trying to use venture capital
(09:36):
dollars for concrete and steel. Yeah, let's, let's talk about
that. I mean, it's the, the way I like
to describe structures sometimes.
And, and maybe I'll, I'll give away my background in the Army
here, but you know, the technology companies like Carba,
like they are the tip of the spear And, and we, we need the
tip of the spear, but we also need the heavy wooden shaft that
(09:58):
connects to the tip of the spear.
And, you know, if you're fishingwith the spear or hunting or,
you know, performing the ceremony, whatever, like they're
all sorts of different tips of the spear.
That's great. Well, we're here to make them
all effective in whatever they need to do.
I'm not going to take offense tothat there.
There may be a lot of Andrew Jones's, but I'm a millennial,
(10:19):
so I'm a special snowflake. Oh.
God, I can just see you over. There, just waiting for your
chance, like shut up, Matt. That's my time, Matt.
I gotta get in there. Also, Matt, I don't think you
used a spear in in the army, didyou?
Otherwise, that was That was a very long time ago it.
Was a different. For a long time.
(10:41):
I guess you know a bayonet is a a type of spear, but yeah, it's
true. Please.
Save us Andrew, please tell us what carbon is.
Yeah. Well, I don't know if I can top
that, but yeah, Carba. So essentially, at our core with
Carba, we're a waste to value company.
We find waste and we figure out how to valorize it in the best
(11:04):
possible way with a very strong focus on climate.
So we're a carbon removal company as well.
And so it turns out there's a lot of value in the carbon
that's in waste if you can lock that carbon up and then sell the
resulting carbon credits. And so that's what we've been
able to do here. And there's a lot of sort of
variations on that theme that we're looking at.
(11:26):
But at its core, it's this premise of where are all these
pockets of waste in the world that aren't being utilized
today, They're low or negative value.
And how do we upcycle them, if you will, and convert a, convert
them into a product that's actually valuable, whether it be
carbon removal credits or some sort of carbon product?
(11:47):
Which waste stream did you discover was undervalued and
decide to dedicate valuable career time to solving?
Well our our beach head here, which is really exciting is
looking at waste, municipal woodwaste.
All right, you got to go back. You got to choose something more
army related I guess. Yeah, right.
I wasn't in the military. I wasn't in the military, but I
(12:11):
was a pyromaniac as a kid, so that actually might tie into
this. As a 12 year old, I used to make
carbon in my fireplace, which turned out to be biocharred and
know it at the time. And I would mix that with sulfur
and potassium nitrate to make a crude gunpowder, which I guess
makes me sort of of the vintage of Spears that Matt was Speaking
(12:34):
of. So I was making biochar before
it was cool, you know, when I was a wild tween or adolescent.
And you know, kind of Fast forward later in my career, I
got into chemical engineering and learned about how chemicals
are made and how you can, you know, transfer chemicals from
(12:54):
one state to the other and make and break chemical bonds.
And really got started in catalytic pyrolysis, how we use
catalysts to make it better and started CARBA to take advantage
of all the wood waste and agricultural waste and yard
debris that's out there. And so our first project here is
in Minnesota at a landfill site where we actually take wood
(13:18):
waste from the the area, which is diseased or, or degraded and
would otherwise burn or compost.And we could take that converted
into biochar through a pyrolysisor, you know, very similar to
what I did when I was 12 year old and suffocating a fire.
And we can take that black biochar, which is this stuff.
(13:39):
Ross It doesn't look like a giant turd.
You can cut that off. Thank you for fixing it.
Yeah. We, we could take this, this
black biochar which is now devoid of food value and we can
put it into environments where it has Co benefits.
And the first one we chose was alandfill because it turns out
landfills leach out a lot of chemicals.
(14:01):
They have odors, they have fugitive methane emissions.
We can reduce all of that by putting this into a landfill and
it the burial they're already burying soil.
So we can mix in with that soil and provide all these
environmental Co benefits as well as lock up the carbon in
the landfill. And so we have a big projects
that we're building out here in Minnesota.
(14:24):
The language I think is, is so interesting and, and can frame
up so much of the the thinking or discussion here and and that
is that, you know, sometimes even the language of Co
benefits, I think misses some ofthe mark.
We we like to talk about, you know, let's understand the
entire surface area of a project.
(14:44):
And So what Andrew's project represents is not just storing
carbon out of the atmosphere in a a way that that keeps it out
of those short term carbon cycles, but also means fewer
trucks on the road hauling soil and to maintain landfill cover.
It means fewer micro plastics and local water systems.
(15:07):
It means more revenue at the landfill that is able to receive
this wood waste that otherwise it it can't receive it.
It means fewer emissions in the air.
If you were kind of rogue, you know, just like wood chip piles
that turn into potential fire hazards.
And it's not that any one of those needs to be a strong
(15:30):
enough or convincing enough, youknow, case to say, let's get
this project funded. It's that we can pull together
capital interested in this project for all sorts of
different reasons. And that's and that's great.
That's like the, the projects like Andrew's have again,
there's like big surface area that, you know, their carbon and
water and air and jobs and resilience and local and you
(15:54):
know, all all these other thingstogether.
And so I just as as you look at projects, I, I would say the
language of talking about Co benefits I think often misses
the, the realities of what theseprojects can represent.
That's a good point. We, we certainly loss over it
when we just use one big word tocover up all of these very
(16:16):
immediate health impacts and other benefits here.
But who's the customer for this work, Andrew is, is the city or
the county or the state paying you to to do biomass diversion?
Is it something like that? Yeah.
I think long term we see this assort of a future waste
management lever. So right now we pay to get rid
(16:38):
of our trash, we pay to get rid of our recycling.
No, we don't pay to get rid of the CO2 because it's invisible.
It comes out of our tailpipe andand we don't see it.
But really that's kind of the the third arm of of the waste
that we produce. And I think long term that that
can be part of the conversation today we're we're funded by
(16:59):
carbon credit purchasers. So companies that are or
individuals that are trying to reduce their carbon footprint
hit their net 0 targets and purchasing carbon credits
directly from carbon or through marketplaces.
I'm really excited to announce for the first time that we have
sold a large off take to Microsoft, who is of course one
(17:22):
of the leading buyers and has a very rigorous diligence process.
And they were, you know, attracted to our solution, both
because of its carbon removal potential, but also the Co
benefits and the, you know, the the simplicity of the project
being completely Co located. And so this is a multi year
(17:42):
large off take agreement. We're super excited and, and
really thankful for the support that Microsoft provides to this
to let us get off the ground andreally show the world, you know,
how valuable this can be. And so part of this is learning
all the benefits that go along with our process.
And so we're doing some studies to get some real good real world
(18:04):
data in the landfill for, you know, to measure exactly all the
impacts that we're going to haveon the landfill.
Congratulations. That's amazing news and very
big. I think people listening and
would assume that if Microsoft is 1's customer, that you've
basically got it made and you probably don't need that many
other people like Matt flitting around.
(18:26):
I was going to say, pecking yourcarcass.
No, I'm sorry, I'm not going to roll that back.
I'm not a carcass yet. It's.
Actually, I mean, let me, let mecome at this from the Microsoft
side, right? Like I've, I've, I've known the
Microsoft team for years. Ross, you and I first met when I
was at Cargill and you were at Nori many, many years ago.
(18:49):
And Microsoft was, you know, they announced their, their
purchasing intent and I think 2020 not not too long after
Stripe. And I've, so I've, I've known
the team there at Microsoft for a number of years.
And we, we at, at structure actually maintain active
discussions with them simply because, you know, Microsoft has
(19:11):
a buyer, their, their finance team wants to buy carbon credits
just like they buy, you know, software subscriptions and
professional services and, you know, property services and
employee benefits and all that. Which is to say that they that
have contracts with the vendors that they want to source from
(19:31):
those vendors perform that service or deliver that product
and the Microsoft pays. And this is how, you know, the
transactions the world over happen in all sorts of different
industries. And in established industries,
there are all sorts of established financing mechanisms
to support those transactions. And so one of the ways that I
think about structures that we are bringing the the patterns
(19:54):
for those financing products to emerge in this new kind of
industry. And so as, as we talked to
Microsoft, they actually introduced us to the suppliers
that they that Microsoft wants to be able to buy from because
as much as they are doing to catalyze demand in this market
and a really you know, leaders here again, they are corporation
(20:17):
going through their corporate procurement processes and as a
publicly traded company, I mean they have certain compliance
requirements and. The more consistently they can
procure and and purchase, the more of that they can do.
And so having mechanisms to support that and not just their
everyday items, but also their kind of emerging areas like
(20:38):
carbon credits and so on, makes it that much easier, not just
for Microsoft, but then for the companies that want to follow in
the footsteps of what what Microsoft buys.
Why wouldn't they just cut Karbaa check?
What blocks deals from happeningin that sort of straightforward
way that we might expect from being consumers in other parts
of our lives? Yeah.
So this is where I, I, I think, you know, we all have
(21:00):
experiences with this. You know, if you're a, the
homeowner that has done some remodeling or if you're, you
know, at a company that's purchased services, whether
that's, you know, consulting or software development or so on
there, there might be some cash that you pay upfront to, to
retain services. But a lot of what it takes to
actually get done what you're aiming to get done takes takes
(21:21):
time. And then you want to make sure
that that was done appropriatelyand received.
And again, as corporate procurement processes work, they
have their own, you know, systems for moving from vendor
setup to invoice to pay and so on.
And you know, to, to pull an example from the auto industry,
you know, if, if Toyota places an order with a manufacturer for
(21:44):
a set of bumpers for a certain car, that company that makes the
bumpers can go buy the, buy the steel, the raw materials.
You know, they, they can make those bumpers using funds that
they can borrow against the value of that order, that
purchase order from a company like Toyota.
And so the, the fact is that, you know, just companies like
(22:07):
Microsoft managing capital at that scale, like to manage their
capital, which is to say they, they like to keep a hold of it
until they absolutely have to get it out the door to whatever
it is that they have, you know, purchased or, or committed to.
And so we enable the purchase ofcarbon credits to be like the
purchase of, you know, again, any of a number of other
(22:28):
standard kinds of corporate services or products or
something. I think I can layer on top of
that too, Ross. Like the, the way I see it is
someone like Microsoft, they want to be able to buy the
product, which is the credits. They don't want to fund the
project. They don't want to be product
developers or put in the capitalto, to make to bring a product
(22:50):
online. That's a very different ask and
very different sort of financialrisk profile and they have done
things like that, but it that's not a model that's scalable.
And so where structure comes in and why we partner with
structure and why it's such a valuable, you know, partnership
is structure helps us get these projects off the ground, whether
it's a folk or a nook, which I hate the term nook, I mean, come
(23:14):
on. But whether it's the first or
many of a kind, you know that weneed project financing and that
gets very difficult at the firstof a kind stage, less and less
difficult as you go on and you build out the model.
That's not something you can in really any industry rely on the
buyers to to provide the capitalfor.
(23:36):
And so that's where structure comes in play and that gives.
The. The buyers of credits, a lot of
confidence that these projects are going to get done.
You have, you know, the capital,you have the sites, you have the
partnerships, and you can make these projects go forward.
But yeah, there's a lot of partners that that there's a lot
of things that have to come together to make these things
happen, which is why they're so difficult.
(23:59):
I think it's such a good illustrative case because if
Microsoft cannot internally finance this in an effective
way, I think it just goes to show how needed specialists are
like structure essentially, because Microsoft has an
enormous finance team. I'm sure I don't know how many
people work over there and there, but it's 3 digits.
Is it possibly 4 digits of personnel that are doing these?
(24:21):
Yeah, I mean they they are quiteactive, but they also want to
spend their time and effort doing the things that they are
best at. So, you know, planning data
center infrastructure and cloud compute and, you know, their,
their products and services for their core customers.
And so, you know, just like they're probably not financing,
you know, I don't know a lot of landscaping services or, you
(24:46):
know, they're, they're all, all sorts of things that Microsoft
uses that they are not in the financing industry for.
And, and, and that's totally fine.
You know, it's just like we as consumers can go to grocery
store and and buy food without having to think about, you know,
the financing processes used to put in the food safety, you
know, measurement equipment and the standards and sort of how
(25:07):
all of the invisible pieces cometogether to make that food safe
to buy at that point of purchase.
We just were able to to purchasethat.
And so the more that we can get the right kinds of tools, the
right kinds of capital in for these projects, the more that
the buyers can focus on buying what they want to buy and then
go back to doing what they want to do.
(25:30):
Minds me mad of the the zone of genius, right?
You, you don't want to be operating outside of your zone
of genius or you're not effective.
And and so doesn't make sense for Microsoft to become a or, or
any, you know, tech company to become a carbon removal company
that or, or finance those projects.
Yeah, Everyone talks about how difficult, especially first of a
(25:51):
kind folk deals are. NOC is like end of a kind.
So just like 2 plus whatever deals.
It's obviously much easier to gothrough deals once the first one
has already happened. We've learned from it, we can
move on. But people often say that carbon
removal companies, even with a blue chip counterparty
potentially like Microsoft, cannot get debt financing for
(26:11):
deals because there's just no track record.
These companies don't have cash flow statements that go back far
enough in time that are credible.
You know, a commercial lender isnon concessionary.
Lenders are just not going to put money up for projects like
this, even with Microsoft on theline.
Is that still true? By the way?
I've heard some pushback on thatcharacterization.
Are you still seeing that, or isthat something I could have said
(26:32):
six months ago, but it's maybe less true now?
From what I've seen, it's even more more true now the so like
as structure, like I said, we work across tech verticals.
We talk with companies doing allsorts of different climate
positive things, so water waste would biodiversity, recycling
(26:55):
power, etcetera. And we specifically focused on
kind of the smaller scale of projects.
So think like sub 20 million, wesee a lot of demand in the
roughly like 3 to $8 million range.
And what we hear from the companies we talked with is if
they can get quotes to borrow from, from banks, even banks
(27:19):
that they have established relationships with, you know,
they're, they're getting rates north of 20% for.
Like consumer credit card number.
Yeah, right. It would be like, you know,
going to a car dealership and saying like, Hey, I, I know I
get an auto loan for, you know, 8%, but I'd like to put this car
in my credit card and pay like 23% or something.
(27:40):
And, and so, you know, the reason you can get an auto loan
for a lot less than a, a credit card rate is that if the car,
you know, if you fall behind on payments, they have a car they
can go get, whereas a credit card, you can pull out that
number for Nye upon anything. And so there's this kind of
trade off between the cost of capital and the flexibility of
(28:02):
the capital. And so cars and houses and
buildings and equipment and, youknow, things that can be, you
know, collateralized or repossessed or claimed.
I mean, there, there tends to bea lower cost of capital when
you're talking about a distinct thing that is believed to retain
its value. And there tends to be a higher
(28:22):
cost of capital when you the theborrower, the, the person
receiving the capital has more flexibility.
So start up founder can raise venture capital and you know,
can can do just about anything they want, which is why
investors at at those stages putin, you know, mechanisms to
manage the governance and the boards and decisions.
(28:43):
And like they, they build up a framework to bring the control
because the control is not around a tangible thing, but in
in real asset, you know, type projects, it is a a very
tangible thing. And so it's, yeah, I don't know,
there's, there's a like, I don'tknow how much to get into sort
(29:05):
of like risk return curve and, and financial, you know, one O 1
or theory or, or whatever. But it's like the it's one thing
to, to get the blueprints for a house.
You know, like you'd say that you're planning a housing
community and you're going to just cookie cutter every house.
You can, you know, design the, the blueprints once and, and use
(29:27):
them a bunch, but every house you build, like you need cash
for that. You need to cash to buy the wood
and the concrete and the, you know, to pay the people to move
the stuff around on on the ground.
Or it's like a, a kid that hearsa joke and shares a joke and
share that joke, you know, many,many, many, many times without
(29:47):
any additional cost. But like, if they're going to
run a lemonade sand, they need to buy the lemonade supplies.
They need to buy the, you know, the, the material.
So to make that happen and so we, sorry, Ross, I, I feel like
I'm, I'm wondering on the answerhere, but it's like the, the
companies that we talked to, they have customers that want to
(30:08):
buy whatever it is they can produce.
And so we're here to say, let's line up the the cash and the
capital that can be flexible enough to meet what your, you
know, project needs. They also probably don't want to
be on the hook in case, you know, knock on wood here.
Andrew Carba fails and fails to deliver.
(30:29):
If they had pre purchased, I imagine there's probably less
recourse. That risk is probably with the
buyer and they don't want that. Someone would lose their job
potentially if that happened, ifthey bought something that fell
through. Yeah, you're really sticking
your neck out, right and doing something that's not core to the
company as well. So yeah, I kind of look at it,
you know, from the entrepreneurial perspective, I'm
(30:52):
doing a climate start up and climate is tough, right, For all
the reasons we've said. I have a couple options.
How am I going to get this project off the ground?
I've got a project I can go to acustomer, I can try to get
prepayment. That's, you know, more and more
difficult as as this as this industry matures, I can go out
and try to get debt financing, which we mentioned is, is very
(31:16):
difficult that a lot of times these off take agreements aren't
bankable, meaning you can't leverage them necessarily for
traditional debt for a first of a kind, because that risk is
there because this market is is chaotic and not established.
And and or I can go out and get venture, you know, so equity
(31:37):
financing, you don't really wantto equity finance the capital of
your first of a kind. I mean, that's very expensive
capital. That's not a first of all, it's
not a very sustainable model, but also it's, it's a very
expensive model. I've heard you know Venture,
Matt, you correct me if I'm wrong, but I've heard Venture is
equivalent to taking like a 30% rate loan.
(32:02):
Yeah, that's kind of or or more.I mean it it it, it depends on
more than you're exact. And it comes with a lot of teeth
sometimes. Yeah.
And so it's so it's not cheap. So you don't want to do that if
you can avoid it, especially forcapital for people, it's a
little bit different. But and so then, you know, come
in structure, climate and Mat, they've got this alternative 4th
(32:24):
pathway, which is this is debt, but it's philanthropic debt, you
know, mixed with some private debt.
And he can talk about that more,but it's a way to get much lower
cost of capital that's now enabled us to do first of a kind
build outs. And we can touch on, you know,
DOE as well. But yeah, it's a it's a door
(32:44):
opening lever for us. And, and has really allowed us
to, to take advantage of, of, you know, building a first of a
kind new, new technology to really save the planet and save
and, and improve landfills and air and water, water quality.
Yeah. And you know, I, I, I want to be
clear that this is, this is not sort of the end all be all, you
(33:09):
know, solution for everything there.
There is absolutely a need for early stage venture capital.
And if, if you're a climate company getting started and you
know, you're figuring out your science or your technology or
you're figuring out your team, like equity financing is a great
tool for that. And, and really, I think a
helpful way to, to look at this is for anything that your
(33:31):
company can use, you know, everywhere, would you say your
IP, your talent, your, you know,science, look at equity
financing options. I mean that that's really where
you should be putting that kind of capital into play.
And then for anything where you're doing something specific
to a place or a customer or a set of materials or something
(33:55):
like that where it's like almostlike one time use capital.
So trucks, concrete, steel, etcetera, you, you have to pay
for those physical things, look at debt solutions.
And so the, the right kind of capital tool for the right kind
of job is, is really what we arehere to, to build.
And we find that a lot of climate companies really could
(34:18):
have don't necessarily have the awareness because they haven't,
you know, they haven't been forced to figure that out.
We're here to say, hey, let's get more smaller projects funded
faster with capital tools that are recognizable to more mature
markets and and sources of capital.
And that way, you know, across avariety of technologies, we'll
just we'll see the and show the commercial maturity that's
(34:42):
that's possible. Well, if this.
Particular type of debt financing is only for a smaller
subset of lenders. What kind of maniacs are
interested in deal flow like this?
How are you able to attract people that want to fund
projects like this? Matt, I imagine it could be a
difficult pitch. You know this is where.
(35:04):
Again, we we really focus on theentire surface area of the
project and so you know, to callout like what what Karva is
doing and and just a dig it intothe specifics of that a little
bit. So Karva needed needs is you
know, is using some project financing to put this first site
here into the site in Minnesota.And the loan that we syndicated
(35:30):
is, is made-up of a handful of what are essentially donors who
are providing the the capital that is being pooled into this
loan product with terms for Carba that can work for Carba.
And so in this case, the the primary donor that the main
anchor donors actually Eric Schmidt's Family Foundation,
(35:54):
they are an active grant maker in areas related to waste and
and water. And so this opportunity to not
only achieve impacts in in wasteand and water like what Parba is
is able to do, but also to utilize their rant making
capital as a as a proof point for building that credit
(36:16):
transaction history was was was really meaningful to them.
But then aside from that, you know, there are some local
donors that you know, have knownAndrew through other networks
and and like to support local entrepreneurs.
There's a local software companyis supporting this project
again, because it's, it happens to be in, in Minnesota.
Whether you're looking at this for, you know, Minnesota or
(36:40):
wastewater, carbon, climate, small communities, rural
economic development, you know, maybe you, you want to support
US manufacturing jobs or entrepreneurs that, you know,
went to EU University of Minnesota or they went to
Berkeley or, you know, have the last name Jones.
Like, I don't know, there can bea whole surface area for these
(37:01):
projects. And, and we're going to say
that's great. You know, all of this capital
can work together. And we're here to make it easy
for that capital to make projects like what Carba is
doing successful and and able toachieve the impact that they are
able to achieve. I love the idea of some analyst
or associate with their first job in VC pitching A thesis
(37:22):
correlating will people with last name of Jones to alpha
being like this is where the this is where we should be
investing right now, the Jones portfolio.
I'm all for it. I bet you are for you to oppose
it. I bet there's a correlation.
I don't know if there's a causation, but there might be a
correlation. That you mentioned that you see
these people as donors. Is it all concessionary capital
(37:45):
like that or are these people getting a return?
Are they? How are they seeing it and what
does it look like? Yeah.
No, great, great question. A couple of couple of terms that
I I think are important to lay out to understand the landscape
here. One is that this, this entire
concept of lending, you know, charitable or tax advantage or
(38:06):
philanthropic capital, all, all terms are basically the same
thing. This concept has been around for
decades, like it's, it's been something that's been part of
the tax code since the 60s, but only private foundations in, in
the tax code are, are able to utilize it.
And the biggest foundations, youknow, the ones that everyone has
(38:27):
probably heard of it, Gates and MacArthur and Ford and so on.
I've done this, you know, using the hundreds of millions of
dollars and it is, it is an active capital flow, you know,
mechanism for those types of groups.
What we are doing by providing services that pool the capital
(38:50):
is utilizing that part of the tax code, but also making it an
option for individuals. And in that want to, you know,
make a charitable contribution out of a donor advised fund or
had a, a liquidity event and, and want to, you know, put some
of that capital to work in this kind of find it project
financing. And when you look at the entire
(39:13):
landscape of charitable dollars and how they flow, private
foundations are only about 1/4 of the transactions out there
as, as, as measured by, by dollars.
And So what we're saying is, youknow, there's a whole whole
bunch of smaller projects that can utilize this kind of
capital. And there's a whole bunch of
capital that can, you know, thatloves these kinds of projects
(39:34):
for all sorts of different reasons.
And so we're here to facilitate that connection.
And so they are in the eyes of the IRS, they are donors.
You know, this is charitable or tax advantage capital that has
generated a tax deduction opportunity.
And yet because we bundle the dollars into a loan that
(39:59):
actually preserves the charitable capital so it it pays
back. And the donor at the end of it
can elect to receive their principal plus interests and and
put it towards other charitable causes.
So, you know, in, in the case ofthe Schmidt Foundation, for
instance, we've talked with themabout recycling this capital
(40:23):
into other projects like this, which they're they're great
with. But you know, the local software
company, they're probably going to find some other projects
happening in, you know, education or healthcare or
something in the Twin Cities that that they'll put that
capital to once once it gets repaid.
And that, and that's fine. Like that's we're here to say,
you know, if you want to supportthis project, here's a mechanism
(40:43):
by which that can happen. And when the project is done,
you know, thank you for your support.
And so it's the the preservationof the charitable capital that
really starts to make it a little bit different than kind
of how you might think about a donation in general.
Are there lenders in this loan who expect at least something
(41:05):
above the risk free rate for making a loan?
Or is it all sort of philanthropic capital at this
point? At the moment it is all
philanthropic capital. As Karba you know matures though
and this is kind of what we talked about with getting them
ready to move to more conventional sources of
financing. There are lots of you know
(41:28):
larger scale or mid mid market type infrastructure investors
that that finance landfill type projects or municipal projects
that are that want to see this kind of technology start to gain
traction. But because of the kinds of
investors they have and their capital requirements can't take
this kind of early risk. And so part of what structure
(41:51):
does is, is build that bridge that puts companies like Carva
on a path to really show or prove out their commercial
viability to any of a number of different types of other
investors. And so the catalytic or
philanthropic capital at the start can get replenished and
(42:13):
can stay at that that leading edge.
And that's where, you know, and again, we're we're building
this, this bridge to bankabilityor over the valley of death or,
you know, pick your metaphor here.
But the the point is, let's, let's meet the projects where
they are today using capital that is kind of the right cost
(42:34):
in the restructure for them today, but done in a way that
makes them recognizable. And so that the returns the, the
rates, you know that, that we talk about, it's, you know, we,
we have a lot of flexibility within that.
But generally think, you know, 5to 7%, five to seven years,
that's kind of where we aim to land because we're balancing a
(42:58):
couple of things. One is that we want the rates to
be low enough that the companieslike Carba have have enough
space and flexibility to do whatthey need to do while making the
rates high enough that they become a meaningful part of that
company's credit transaction history so that they can go to a
bank next time. And the bank might say, oh, you
(43:19):
like you got a really good rate on your first loan.
How did you do that? Like, well, here's a story about
how we did that and and that's fine like that, that's great.
You know, it's like, oh, well, you, you know, you borrow that
on these terms and paid that offGreat.
Here's you know, here's the offer that that we'd like to
make. So very.
Attractive thing to be able to offer a young company.
Andrew, when you were looking for financing for this project,
(43:41):
did you have many options? Are there a lot of people
floating around trying to provide this service or is it
pretty open? There's not a lot of options to
be honest. You know, we talked to to
venture Angel investors about equity financing and you know I
talked about that before. We also spoke to infrastructure
funds. There's even sort of blended
(44:03):
infrastructure funds that are kind of more venture style early
stage infra. But even that it's, it's
difficult in the climate space. But yeah, it's it's, we looked
at a lot of different areas to answer your original question.
And there's just not a lot of options, which I think is what
you see a lot of these climate companies struggling with, even
(44:25):
ones that have gotten VC fundingand have been able to build sort
of small pilots, they can't get to that next stage to really
prove out commercial viability. And they're the ones with, you
know, off take contracts with marquee customers, you know,
with, with great investors on their, their cap table.
You know, they've raised a, a, aton of money.
(44:45):
But if it's not the kind of capital that the investors
you're going to are, are lookingto get out and it's not the
right kind of capital for what you're doing, then then it it
becomes a hard a hard sell. And then and Andrew, maybe the,
you know, certainly I, I see this a lot, but I feel like
there are a lot of options that want to talk to you once you've
(45:06):
done something. And, you know, like once, once
you get started, once you're, you know, once you have that,
that first project or the first two or three, you know,
projects, then yeah, they, they would love to write the checks
to fuel that growth. And, and that's like, that's not
just Carba or biochar. I mean, we see that everywhere,
every every kind of climate project like this faces the the
(45:30):
same kind of challenges and likehow do you how do you start
something that is so new and when all of the capital that
might help you start wants to see it already having been done
before? This might go in bonus content
because it's a little bit eccentric or maybe naive, but
(45:52):
Minnesota is a very progressive state and I see it as a very
creative state financially too. In terms of policy, is there any
opportunity for carbon removal projects that intersect with
conventional city or county or state operations to have access
to municipal bonding? Is there any ability to have tax
(46:13):
advantage bonds working in favorof carbon removal at the state
level? Maybe down, down the road.
I, I think that you're better bet for it for right now, at
least for the next, you know, three 5-10 years would be to get
enough debt funded transactions such that the kind of bond
(46:35):
underwriters that are going to come in for really big deals
have feel like they have enough of a data set to start to price
it as something that that makes it appropriate to both the city
and the investors that they wantto attract.
And this is where, you know, it's like solar and, and solar
PVI think is, is such a great example of, you know, in the
(46:56):
last dozenish years as has really sort of become large
scale and boring and that and like, that's fantastic, right?
Like we want, we want that kind of technology to be financed at
a massive scale and financed by,you know, all of these like
pension funds that want, you know, 0 risk and and accept low
(47:16):
returns. Like that's fantastic.
And yet it took 50 plus years for solar to get there.
And you know, when Jimmy Carter put, put panels on the on the
White House in the 70s, like it wasn't because of the
spreadsheets had, you know, perfectly mapped out the, the
growth plan. It was because he wanted to show
what it looked like, you know, show that it could be done.
(47:39):
And that's really kind of part and parcel with our theory of
changes as we get more smaller projects started faster than
more people can see what climateprojects look like, and they can
start to think about what that means for their community, their
city, their municipality. Yeah.
Just to layer on that, I, it's, it's very clear to me that when
(48:03):
we demonstrate this at a commercial scale and show its
profitability in the numbers, itbecomes way more bankable.
And so we, you know, there are the, there are these early stage
infra funds that will take you from 2:00 to 10:00.
There are the later stage that will take you from 10 to 100.
You know, once you prove that out, it's, it's these, these
(48:25):
first of a kinds that are, are very difficult to to fund.
And that's, you know, I think a huge lever for Matt.
And I think, Matt, you also are hoping to get into sort of the
two to 10 and beyond stage as well and then kind of help us as
a company grow, grow that creditrating, grow that ability to
attract, yeah, that type of funding.
(48:46):
Exactly right. Yeah.
I mean we're, we're here as early as we can be and engaging
in a way that we believe we'll we'll have have you on that
path. And then hopefully we continue
to do our job well and and remain that that partner for you
as as you grow. And Minnesota kind of the, to
touch on that piece, Ross, like Minnesota is a great state for
(49:07):
this. I moved out of California to
come to Minnesota, which, you know, Californians thought I was
crazy, but I'm from here. So but it is a very progressive
state and we have a lot of policies, you know, pushing for
solar and and renewable and sustainability.
You know, Excel Energy, for example, has to be net 0 by
2030, which is only five years away.
(49:27):
And so there's, there's some really big levers and on the
municipal, municipal angle actually, sorry, I have a
cuckoo. Clock.
I love it if there's. Been cuckoo clock going off this
entire time. What's?
Funny about I I enabled an Alexaskill last night to to alarm me
at an hour because I was perpetually late to things.
(49:49):
So it I tried to disable it by putting do not disturb but it
didn't listen. So apologies.
You'll have to edit some of those Cougars out, Ras.
Not stay in it but anyways please.
Stay in it. So on the Minnesota angle, the
city of Minneapolis has actuallyfunded the first biochar
(50:09):
facility in in the US, maybe theworld funded by a municipal
funding source. I don't know exactly how the
money was appropriated. So the city of Minneapolis and
then the along with the cities of Lincoln, NE and Cincinnati,
OH, through a really competitiveprocess, got selected by Michael
Bloomberg's foundation to to implement these municipal level
(50:35):
biochar projects. So yeah, it's just like a, a, a
great example of like making it local, making it real, making it
tangible for people. And that, and that's a huge
growth area for us. So they're focused on biochar
that kind of line the streets orthe, the roadways that
landscapes on the side of the roads with biochar, this
(50:57):
municipal angle of waste aggregation and landfills and
burial. It is, you know, Corda, what
we're doing as well. And so it's it, it all ties
together. And I think Minnesota is a
leader there, and we're leaning into that for sure.
Are there green bonds that mightbe applicable to work like this,
(51:19):
or is this as far away as municipal bonds are?
Maybe again, the the challenge with that often comes in with
scale and costs for establishingcredit ratings and having the
data set to get the ratings doneand so on.
And there are certainly, you know, those kinds of financing
(51:42):
instruments for more establishedclean energy projects, solar,
wind, batteries, etcetera. What structural climate is
focused on is companies like what Carba is doing or, you
know, some of the other like small modular tech companies
where they have something that acustomer can see for themselves
(52:06):
and that that that the customer wants.
And the particular, you know, parts of the project are they
don't necessarily fit a a conventional scene, but there is
tax advantage capital that is willing to and wants to see this
kind of impact. So, you know, private market
(52:27):
transactions are what, hundreds of trillions of dollars, I mean,
kind of wrap wrapped together the whole bunch of numbers
there. And I don't, I don't want to
apply for a second that Phil andcloud Picker charitable capital
is, is, is anywhere close to that like, but it, it doesn't
have to be to get started. So these capital sources can be
really, really shallow, but by being shallow, they are also
(52:51):
really broad. And so that's again like how we
activate the entire surface areaand we get the capital that a
company like Carba is ready for and done in a way that again
puts them on that that path to growth.
You mentioned APRII, imagine that might be a new acronym for
(53:12):
People Listening. What is APRI?
Yeah. So Apri, since we're program
related investment and when I I mentioned the, the mechanism
that private foundations have been using for, for decades to
make these kinds of transactionshappen, that's, that's all
grouped under what the IRS callsa program related investment.
(53:36):
So there are a couple of tests that we have to meet to make
sure that this kind of capital tool is appropriate for how
we're aiming to use it. And we partner with five O 1C
threes that provide the syndication and the actual
handling and, and receipt of thedonations and the, the
(53:58):
charitable dollar. So makes it easy for groups like
the Schmidt Foundation to, to give grants.
And then that's the, the transformation point.
In this case, we've been workingwith the Venn Foundation Venn as
though at the intersection of purpose and profit.
They are also a local group herein, in Minnesota and they have
(54:19):
been a fantastic partner. They, they work with a whole
host of different, you know, impact areas, education and
healthcare, community developments, you know, and so
on. And so they've done some things
in water before, but nothing really so climate focuses as
(54:39):
this, but we are we are changingthat quickly.
Depending on your sort of exposure to impact investing,
you might hear terms like mission related investments or
Mr. is that's not established within the the tax code like
like PR is are, but you know, just can can again refer to a
(55:01):
type of investment where there might be some kind of impact
return in addition to a financial return.
Andrew, did your equity investors have any questions on
the PRI, like how did that go? No, I, I think they were, they
(55:21):
were excited about it because they saw the value, you know, to
them being equity investors, it's, it's a low cost capital
approach to get this thing done and get us to the next stage.
So I think it was it was welcomed with open arms.
I think not everyone had heard of the term PRI and we had to
(55:42):
explain it but. So Andrew Carver's not your
first company and I, I believe one of the donors that came in
to support this PRI was actuallyan Angel investor from a, a
prior company. Can you share a little bit about
that? Yes, actually, yeah.
I had a previous company before this that I built detection
(56:04):
equipment, actually some of the best detectors for pyrolysis
gases and and other sorts of things and ended up selling, you
know those assets off to Shimatsu Corporation out of
Japan. And so that was a successful
exit loosely related to what we do here.
And someone related to that company also invested in Karba
(56:26):
as an early Angel and then went on they have a foundation and
that foundation went on to invest through the PRI.
So it was a really interesting opportunity to invest sort of
private capital in an equity stake, but then also through a
foundation philanthropic capital.
(56:47):
Oh, that's interesting. Yeah.
And and this is where I think understanding the the landscape
of capital can become really important.
And you know, the groups like Schwab and Vanguard and Fidelity
are, are the largest 5O1C threesin the world just by assets
under management because they manage donor advised funds for
(57:09):
so, so many people. And there are lots of reasons
why someone might make a charitable contribution, you
know, whether that's for like tax efficiency or tax
streamlining. Certainly anyone who's
considering like a tax loss harvesting strategy can, can
(57:31):
look at this, you know, this, this kind of opportunity to get
a similar outcome. And so it doesn't have to be
someone that you know, is big into philanthropy or big into
charity. It's you know, if you have
dollars and a daft that are justsitting in the S&P and you want
something more interesting to dowith them like we've we've got a
(57:54):
bunch of projects that would that would love to get that that
kind of support. And at the other plug I'll give
too is, you know, if you're someone sitting with the
foundation or philanthropic capital or you want to just make
a donation, it's, it becomes catalytic capital.
So it's not like you're giving it away and it's, you know, it's
a traditional donation. It's actually a loan vehicle
that goes back and then you can reuse that for a catalytic for a
(58:17):
charitable purpose again. So the, you know, as Karba pays
these loans back, you get to reuse that capital, which is
incredibly catalytic and very different from just, you know,
donating the money traditionally.
Right. And the I, I, I do want to like
one thing I, I always want to emphasize or, or be clear on is
(58:38):
that there are, there are lots of areas where donations are
just a, a critical tool for a given issue.
And the lots of areas where you know, a, a, a donor that that
gives is, is absolutely what is needed and there is no mechanism
for return. I'm not.
Like we shouldn't, we shouldn't charge, you know?
(59:02):
Getting fed or whatever, but in in the theory of change.
Like the sooner that climate positive business models can
just become business models, thesooner we get the scale of
impact that we're all after. And so that's really our focus
is saying we can work across a wide variety of types of impact,
(59:26):
you know, water, waste, air, etcetera.
And one metric that we create across all of them is a return
on on capital. And so again, with the goal of
getting more conventional or or kind of, you know, fully
conventional financing systems in play for these climate
positive projects and impacts and really like accelerating the
(59:50):
path to commercial maturity for a wide variety of climate
technologies. Thank you so much for being
here. Congratulations on the big off
take, Andrew. That's amazing.
I'm happy that structure was able to participate too, and
make all this happen and tie it all together so neatly.
Really interesting to hear more about what it's like to be
working on debt financing, both as a project developer and then
(01:00:14):
also being on the finance side. Thank you for sharing both of
you really. Appreciate it.
Yeah. Thank you, Ross.
Thanks for having us. Appreciate it.
Hello and welcome. To the Reversing Climate Change
podcast. I am Ross Kenyon.
I'm a long time carbon removal and climate tech entrepreneur.
Today I'm very excited to be speaking with Andrew Jones, the
Co founder and CEO of Carba. Carba is a Minneapolis company
that works with waste biomass, turns it into biochar, and
(00:28):
prevents biomass from entering the landfill unnecessarily.
Carbon had the good fortune of landing A5 year 44,000 ton
carbon removal credit deal with Microsoft, which is a big deal.
Getting a guaranteed demand signal like a long term contract
with Microsoft is pretty much asgood as it gets in carbon
(00:49):
removal. These are serious people who
diligence carbon removal deals at Microsoft.
Microsoft broadly gets their pick at the litter, same with
Frontier, Google or others who are making these very large
carbon removal purchases. So getting that stamp, you have
to put it on your website, you have to tell people that
Microsoft is one of your customers.
Your parents know who Microsoft is as a customer.
(01:12):
That is a known quantity. Fortune 101 of the biggest
companies in the world is your customer.
It's a great sign for any company that is able to achieve
a deal with a customer like Microsoft.
Once you have guaranteed demand like that, it unlocks the
possibility of finance. So Karba has this deal for five
(01:34):
years and 44,000 tons of carbon removal credits.
And that doesn't mean that Microsoft bought all of those
credits up front. Often times these deals are
structured to have milestone unlocks.
Carpet would need to provide certain metrics of progress
during this time in order to continue the process.
(01:54):
In general terms. That's how I've seen it done in
other places. For other off takes, I imagine
that's similar for them, although I do not know.
I imagine that's similar in thiscase.
I think people don't always realize is that these big off
take agreements do not just meanthat companies get access to a
very large pot of money upfront.And so my other guest today is
(02:15):
Matt Schmidt, who is the CEO andfounder of Structure Climate
where I am an advisor. I've known Matt for a long time.
He served on Nori's board years ago.
I have really enjoyed my time working with Matt on what
Structure is doing here. The Structure is working on
innovative financing mechanisms for carbon removal and climate
(02:37):
tech companies. Because I'll just back up here
and I'm going to imagine that ifyou're a listener, maybe you
don't know much about equity versus debt financing for
startup companies. But if you've watched Silicon
Valley, if you're familiar at all with how equity works, is
that you sell a portion of your company.
You sell equity in your company to investors and they expect
(02:57):
most of their bets to fail, but the best that do succeed, they
expect to make large multiples off of could be 10X.
Ideally, it's closer to 100 and up from there.
Some of the big deals that you're familiar with, Angel
investors or a seed investors ofUber, for example, became very,
very wealthy as a result. The good thing about equity is
(03:21):
that there aren't terms on it. Typically.
It's not like you have to get them a return within five years
or there are penalties. Equity investing is a longer
term approach, or it tends to be, not always.
I mean everything I've said so far.
I can think of counter examples too.
In general that is pretty much how it works.
(03:42):
But debt is not like that. Debt has strict repayment terms,
interest rates, and there are often penalty clauses for for
failing to repay on time. That could result in the debt
converting into equity, or the interest rate going up, or both.
It's actually really hard to raise debt as a startup company
(04:05):
because lenders don't want to lend to startups that represent
enormous risk for a fixed return.
The benefit of investing in equity in a startup is that
there's a lot of risk, but the risk is also positive.
The risk could also represent unlimited returns, but debt
isn't like that. They're still making a bet on an
(04:25):
untested startup or fairly youngstartup, but at most they're
only going to make the interest rate or the interest rate plus
whatever penalty provisions are in the debt contract.
It's not like they can also makean unlimited upside in investing
in debt for this company. Oftentimes companies can't even
get debt. When young companies can get
(04:47):
debt, it's often times at usurious interest rates.
We joke about it in the show. It's closer to consumer credit
card amounts, 20% plus in some cases.
This might not look like a lot and it will probably only make
sense to you if you've bought a house or done.
This is a company where a 1% raise in your interest rate may
(05:07):
not look like a lot when you're financing a house purchase.
But when you add up how much that is every month and then you
multiply that out over the presumable 30 year duration of
an average mortgage, it represents huge amounts of
money. And so for companies that are
small like this, changes in interest rates matter a lot to
(05:29):
them. And so structure through various
ways of blending philanthropic capital as well as commercial
capital, are able to put together deals that are more
palatable to a company like Karba.
We also talked about why doesn'tMicrosoft or bigger companies
like this just finance these deals themselves.
That's another really good question that we get into.
(05:52):
If you've been dying to learn more about carbon removal
startups, climate tech startups,raising money, the difference
between equity and death, why you might want one in one
circumstance and another in a different circumstance.
We're going to get into all of that.
I hope you enjoy links to both Karba, the announcement
structure, climate, or in the show notes.
(06:12):
This show is paid for by subscriptions and if you love
what we're doing here, if you look forward to the next
episodes. If you could.
Please become a paid subscriber.It would mean a lot to me.
It really helps a lot. It's a good signal that there's
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It's $5 a month. You can do it on Spotify and I
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If you cannot afford to do that right now.
(06:33):
A great rating on Spotify, five stars or the same on Apple
Podcast, plus a review. Write some nice things about the
show. Also super valuable for getting
the show out to more people and helping it grow.
Thank you so much for listening and here is your show.
(06:54):
Matt and Andrew, I'm happy to beable to announce what you're
working on on the show and we will get into what we're going
to announce, but we should just start at the basics here.
So the announcement even makes sense.
I think if we go announcement first, it's not going to make
sense. So Matt, let's start with you.
What is structure climate? Yeah, Thanks Ross.
Structured climate provides project finance services to for
(07:16):
profit companies that are doing climate positive projects that
we work across tech technology verticals.
So anything that's that's good for the climate, let's let's
have a conversation. We focus on projects where there
are good reasonable off take terms, you know, there's a a
(07:37):
buyer for whatever is happening and where unit economics are are
maybe a little challenging and some of the conventional project
financing setups. And one of the main tools that
we used to be able to engage early and at a small level is
the the syndication or the the pooling of charitable and
(08:01):
philanthropic capital into loans.
So we take the tax advantage flexibility of this charitable
capital and put it into terms and structures for companies
like Karva that set them on a path to more conventional
financing as as they prove out. So our, our, our goal is to make
(08:25):
those first projects, you know, that much easier to get done so
that companies can spend that much more time focus on what
they need to do, which is already hard enough.
And so we're we're here to help.You're telling me that the most
generically named person in carbon removal has a financeable
project? Yes, the, we often find that,
(08:49):
you know, the the more boring a deal might sound on on the
outside, the more interesting itis to us.
But no, I, I think this is something that probably a lot of
a lot of climate companies face is that there are all sorts of,
of sources of friction in these deals or transactions or sales
that are completely unrelated tothe technology that's that's at
(09:13):
at the center of it or the service or the offering or, or
the product. And so if there are challenges
in, you know, timing of cash flows or procurement processes
from a corporate customer or your balance sheet or, you know,
your capital cost or loan to value, or you don't, you know,
you can't meet the debt service coverage ratio your bankers
telling you to meet or you're trying to use venture capital
(09:36):
dollars for concrete and steel. Yeah, let's, let's talk about
that. I mean, it's the, the way I like
to describe structures sometimes.
And, and maybe I'll, I'll give away my background in the Army
here, but you know, the technology companies like Carba,
like they are the tip of the spear And, and we, we need the
tip of the spear, but we also need the heavy wooden shaft that
(09:58):
connects to the tip of the spear.
And, you know, if you're fishingwith the spear or hunting or,
you know, performing the ceremony, whatever, like they're
all sorts of different tips of the spear.
That's great. Well, we're here to make them
all effective in whatever they need to do.
I'm not going to take offense tothat there.
There may be a lot of Andrew Jones's, but I'm a millennial,
(10:19):
so I'm a special snowflake. Oh.
God, I can just see you over. There, just waiting for your
chance, like shut up, Matt. That's my time, Matt.
I gotta get in there. Also, Matt, I don't think you
used a spear in in the army, didyou?
Otherwise, that was That was a very long time ago it.
Was a different. For a long time.
(10:41):
I guess you know a bayonet is a a type of spear, but yeah, it's
true. Please.
Save us Andrew, please tell us what carbon is.
Yeah. Well, I don't know if I can top
that, but yeah, Carba. So essentially, at our core with
Carba, we're a waste to value company.
We find waste and we figure out how to valorize it in the best
(11:04):
possible way with a very strong focus on climate.
So we're a carbon removal company as well.
And so it turns out there's a lot of value in the carbon
that's in waste if you can lock that carbon up and then sell the
resulting carbon credits. And so that's what we've been
able to do here. And there's a lot of sort of
variations on that theme that we're looking at.
(11:26):
But at its core, it's this premise of where are all these
pockets of waste in the world that aren't being utilized
today, They're low or negative value.
And how do we upcycle them, if you will, and convert a, convert
them into a product that's actually valuable, whether it be
carbon removal credits or some sort of carbon product?
(11:47):
Which waste stream did you discover was undervalued and
decide to dedicate valuable career time to solving?
Well our our beach head here, which is really exciting is
looking at waste, municipal woodwaste.
All right, you got to go back. You got to choose something more
army related I guess. Yeah, right.
I wasn't in the military. I wasn't in the military, but I
(12:11):
was a pyromaniac as a kid, so that actually might tie into
this. As a 12 year old, I used to make
carbon in my fireplace, which turned out to be biocharred and
know it at the time. And I would mix that with sulfur
and potassium nitrate to make a crude gunpowder, which I guess
makes me sort of of the vintage of Spears that Matt was Speaking
(12:34):
of. So I was making biochar before
it was cool, you know, when I was a wild tween or adolescent.
And you know, kind of Fast forward later in my career, I
got into chemical engineering and learned about how chemicals
are made and how you can, you know, transfer chemicals from
(12:54):
one state to the other and make and break chemical bonds.
And really got started in catalytic pyrolysis, how we use
catalysts to make it better and started CARBA to take advantage
of all the wood waste and agricultural waste and yard
debris that's out there. And so our first project here is
in Minnesota at a landfill site where we actually take wood
(13:18):
waste from the the area, which is diseased or, or degraded and
would otherwise burn or compost.And we could take that converted
into biochar through a pyrolysisor, you know, very similar to
what I did when I was 12 year old and suffocating a fire.
And we can take that black biochar, which is this stuff.
(13:39):
Ross It doesn't look like a giant turd.
You can cut that off. Thank you for fixing it.
Yeah. We, we could take this, this
black biochar which is now devoid of food value and we can
put it into environments where it has Co benefits.
And the first one we chose was alandfill because it turns out
landfills leach out a lot of chemicals.
(14:01):
They have odors, they have fugitive methane emissions.
We can reduce all of that by putting this into a landfill and
it the burial they're already burying soil.
So we can mix in with that soil and provide all these
environmental Co benefits as well as lock up the carbon in
the landfill. And so we have a big projects
that we're building out here in Minnesota.
(14:24):
The language I think is, is so interesting and, and can frame
up so much of the the thinking or discussion here and and that
is that, you know, sometimes even the language of Co
benefits, I think misses some ofthe mark.
We we like to talk about, you know, let's understand the
entire surface area of a project.
(14:44):
And So what Andrew's project represents is not just storing
carbon out of the atmosphere in a a way that that keeps it out
of those short term carbon cycles, but also means fewer
trucks on the road hauling soil and to maintain landfill cover.
It means fewer micro plastics and local water systems.
(15:07):
It means more revenue at the landfill that is able to receive
this wood waste that otherwise it it can't receive it.
It means fewer emissions in the air.
If you were kind of rogue, you know, just like wood chip piles
that turn into potential fire hazards.
And it's not that any one of those needs to be a strong
(15:30):
enough or convincing enough, youknow, case to say, let's get
this project funded. It's that we can pull together
capital interested in this project for all sorts of
different reasons. And that's and that's great.
That's like the, the projects like Andrew's have again,
there's like big surface area that, you know, their carbon and
water and air and jobs and resilience and local and you
(15:54):
know, all all these other thingstogether.
And so I just as as you look at projects, I, I would say the
language of talking about Co benefits I think often misses
the, the realities of what theseprojects can represent.
That's a good point. We, we certainly loss over it
when we just use one big word tocover up all of these very
(16:16):
immediate health impacts and other benefits here.
But who's the customer for this work, Andrew is, is the city or
the county or the state paying you to to do biomass diversion?
Is it something like that? Yeah.
I think long term we see this assort of a future waste
management lever. So right now we pay to get rid
(16:38):
of our trash, we pay to get rid of our recycling.
No, we don't pay to get rid of the CO2 because it's invisible.
It comes out of our tailpipe andand we don't see it.
But really that's kind of the the third arm of of the waste
that we produce. And I think long term that that
can be part of the conversation today we're we're funded by
(16:59):
carbon credit purchasers. So companies that are or
individuals that are trying to reduce their carbon footprint
hit their net 0 targets and purchasing carbon credits
directly from carbon or through marketplaces.
I'm really excited to announce for the first time that we have
sold a large off take to Microsoft, who is of course one
(17:22):
of the leading buyers and has a very rigorous diligence process.
And they were, you know, attracted to our solution, both
because of its carbon removal potential, but also the Co
benefits and the, you know, the the simplicity of the project
being completely Co located. And so this is a multi year
(17:42):
large off take agreement. We're super excited and, and
really thankful for the support that Microsoft provides to this
to let us get off the ground andreally show the world, you know,
how valuable this can be. And so part of this is learning
all the benefits that go along with our process.
And so we're doing some studies to get some real good real world
(18:04):
data in the landfill for, you know, to measure exactly all the
impacts that we're going to haveon the landfill.
Congratulations. That's amazing news and very
big. I think people listening and
would assume that if Microsoft is 1's customer, that you've
basically got it made and you probably don't need that many
other people like Matt flitting around.
(18:26):
I was going to say, pecking yourcarcass.
No, I'm sorry, I'm not going to roll that back.
I'm not a carcass yet. It's.
Actually, I mean, let me, let mecome at this from the Microsoft
side, right? Like I've, I've, I've known the
Microsoft team for years. Ross, you and I first met when I
was at Cargill and you were at Nori many, many years ago.
(18:49):
And Microsoft was, you know, they announced their, their
purchasing intent and I think 2020 not not too long after
Stripe. And I've, so I've, I've known
the team there at Microsoft for a number of years.
And we, we at, at structure actually maintain active
discussions with them simply because, you know, Microsoft has
(19:11):
a buyer, their, their finance team wants to buy carbon credits
just like they buy, you know, software subscriptions and
professional services and, you know, property services and
employee benefits and all that. Which is to say that they that
have contracts with the vendors that they want to source from
(19:31):
those vendors perform that service or deliver that product
and the Microsoft pays. And this is how, you know, the
transactions the world over happen in all sorts of different
industries. And in established industries,
there are all sorts of established financing mechanisms
to support those transactions. And so one of the ways that I
think about structures that we are bringing the the patterns
(19:54):
for those financing products to emerge in this new kind of
industry. And so as, as we talked to
Microsoft, they actually introduced us to the suppliers
that they that Microsoft wants to be able to buy from because
as much as they are doing to catalyze demand in this market
and a really you know, leaders here again, they are corporation
(20:17):
going through their corporate procurement processes and as a
publicly traded company, I mean they have certain compliance
requirements and. The more consistently they can
procure and and purchase, the more of that they can do.
And so having mechanisms to support that and not just their
everyday items, but also their kind of emerging areas like
(20:38):
carbon credits and so on, makes it that much easier, not just
for Microsoft, but then for the companies that want to follow in
the footsteps of what what Microsoft buys.
Why wouldn't they just cut Karbaa check?
What blocks deals from happeningin that sort of straightforward
way that we might expect from being consumers in other parts
of our lives? Yeah.
So this is where I, I, I think, you know, we all have
(21:00):
experiences with this. You know, if you're a, the
homeowner that has done some remodeling or if you're, you
know, at a company that's purchased services, whether
that's, you know, consulting or software development or so on
there, there might be some cash that you pay upfront to, to
retain services. But a lot of what it takes to
actually get done what you're aiming to get done takes takes
(21:21):
time. And then you want to make sure
that that was done appropriatelyand received.
And again, as corporate procurement processes work, they
have their own, you know, systems for moving from vendor
setup to invoice to pay and so on.
And you know, to, to pull an example from the auto industry,
you know, if, if Toyota places an order with a manufacturer for
(21:44):
a set of bumpers for a certain car, that company that makes the
bumpers can go buy the, buy the steel, the raw materials.
You know, they, they can make those bumpers using funds that
they can borrow against the value of that order, that
purchase order from a company like Toyota.
And so the, the fact is that, you know, just companies like
(22:07):
Microsoft managing capital at that scale, like to manage their
capital, which is to say they, they like to keep a hold of it
until they absolutely have to get it out the door to whatever
it is that they have, you know, purchased or, or committed to.
And so we enable the purchase ofcarbon credits to be like the
purchase of, you know, again, any of a number of other
(22:28):
standard kinds of corporate services or products or
something. I think I can layer on top of
that too, Ross. Like the, the way I see it is
someone like Microsoft, they want to be able to buy the
product, which is the credits. They don't want to fund the
project. They don't want to be product
developers or put in the capitalto, to make to bring a product
(22:50):
online. That's a very different ask and
very different sort of financialrisk profile and they have done
things like that, but it that's not a model that's scalable.
And so where structure comes in and why we partner with
structure and why it's such a valuable, you know, partnership
is structure helps us get these projects off the ground, whether
it's a folk or a nook, which I hate the term nook, I mean, come
(23:14):
on. But whether it's the first or
many of a kind, you know that weneed project financing and that
gets very difficult at the firstof a kind stage, less and less
difficult as you go on and you build out the model.
That's not something you can in really any industry rely on the
buyers to to provide the capitalfor.
(23:36):
And so that's where structure comes in play and that gives.
The. The buyers of credits, a lot of
confidence that these projects are going to get done.
You have, you know, the capital,you have the sites, you have the
partnerships, and you can make these projects go forward.
But yeah, there's a lot of partners that that there's a lot
of things that have to come together to make these things
happen, which is why they're so difficult.
(23:59):
I think it's such a good illustrative case because if
Microsoft cannot internally finance this in an effective
way, I think it just goes to show how needed specialists are
like structure essentially, because Microsoft has an
enormous finance team. I'm sure I don't know how many
people work over there and there, but it's 3 digits.
Is it possibly 4 digits of personnel that are doing these?
(24:21):
Yeah, I mean they they are quiteactive, but they also want to
spend their time and effort doing the things that they are
best at. So, you know, planning data
center infrastructure and cloud compute and, you know, their,
their products and services for their core customers.
And so, you know, just like they're probably not financing,
you know, I don't know a lot of landscaping services or, you
(24:46):
know, they're, they're all, all sorts of things that Microsoft
uses that they are not in the financing industry for.
And, and, and that's totally fine.
You know, it's just like we as consumers can go to grocery
store and and buy food without having to think about, you know,
the financing processes used to put in the food safety, you
know, measurement equipment and the standards and sort of how
(25:07):
all of the invisible pieces cometogether to make that food safe
to buy at that point of purchase.
We just were able to to purchasethat.
And so the more that we can get the right kinds of tools, the
right kinds of capital in for these projects, the more that
the buyers can focus on buying what they want to buy and then
go back to doing what they want to do.
(25:30):
Minds me mad of the the zone of genius, right?
You, you don't want to be operating outside of your zone
of genius or you're not effective.
And and so doesn't make sense for Microsoft to become a or, or
any, you know, tech company to become a carbon removal company
that or, or finance those projects.
Yeah, Everyone talks about how difficult, especially first of a
(25:51):
kind folk deals are. NOC is like end of a kind.
So just like 2 plus whatever deals.
It's obviously much easier to gothrough deals once the first one
has already happened. We've learned from it, we can
move on. But people often say that carbon
removal companies, even with a blue chip counterparty
potentially like Microsoft, cannot get debt financing for
(26:11):
deals because there's just no track record.
These companies don't have cash flow statements that go back far
enough in time that are credible.
You know, a commercial lender isnon concessionary.
Lenders are just not going to put money up for projects like
this, even with Microsoft on theline.
Is that still true? By the way?
I've heard some pushback on thatcharacterization.
Are you still seeing that, or isthat something I could have said
(26:32):
six months ago, but it's maybe less true now?
From what I've seen, it's even more more true now the so like
as structure, like I said, we work across tech verticals.
We talk with companies doing allsorts of different climate
positive things, so water waste would biodiversity, recycling
(26:55):
power, etcetera. And we specifically focused on
kind of the smaller scale of projects.
So think like sub 20 million, wesee a lot of demand in the
roughly like 3 to $8 million range.
And what we hear from the companies we talked with is if
they can get quotes to borrow from, from banks, even banks
(27:19):
that they have established relationships with, you know,
they're, they're getting rates north of 20% for.
Like consumer credit card number.
Yeah, right. It would be like, you know,
going to a car dealership and saying like, Hey, I, I know I
get an auto loan for, you know, 8%, but I'd like to put this car
in my credit card and pay like 23% or something.
(27:40):
And, and so, you know, the reason you can get an auto loan
for a lot less than a, a credit card rate is that if the car,
you know, if you fall behind on payments, they have a car they
can go get, whereas a credit card, you can pull out that
number for Nye upon anything. And so there's this kind of
trade off between the cost of capital and the flexibility of
(28:02):
the capital. And so cars and houses and
buildings and equipment and, youknow, things that can be, you
know, collateralized or repossessed or claimed.
I mean, there, there tends to bea lower cost of capital when
you're talking about a distinct thing that is believed to retain
its value. And there tends to be a higher
(28:22):
cost of capital when you the theborrower, the, the person
receiving the capital has more flexibility.
So start up founder can raise venture capital and you know,
can can do just about anything they want, which is why
investors at at those stages putin, you know, mechanisms to
manage the governance and the boards and decisions.
(28:43):
And like they, they build up a framework to bring the control
because the control is not around a tangible thing, but in
in real asset, you know, type projects, it is a a very
tangible thing. And so it's, yeah, I don't know,
there's, there's a like, I don'tknow how much to get into sort
(29:05):
of like risk return curve and, and financial, you know, one O 1
or theory or, or whatever. But it's like the it's one thing
to, to get the blueprints for a house.
You know, like you'd say that you're planning a housing
community and you're going to just cookie cutter every house.
You can, you know, design the, the blueprints once and, and use
(29:27):
them a bunch, but every house you build, like you need cash
for that. You need to cash to buy the wood
and the concrete and the, you know, to pay the people to move
the stuff around on on the ground.
Or it's like a, a kid that hearsa joke and shares a joke and
share that joke, you know, many,many, many, many times without
(29:47):
any additional cost. But like, if they're going to
run a lemonade sand, they need to buy the lemonade supplies.
They need to buy the, you know, the, the material.
So to make that happen and so we, sorry, Ross, I, I feel like
I'm, I'm wondering on the answerhere, but it's like the, the
companies that we talked to, they have customers that want to
(30:08):
buy whatever it is they can produce.
And so we're here to say, let's line up the the cash and the
capital that can be flexible enough to meet what your, you
know, project needs. They also probably don't want to
be on the hook in case, you know, knock on wood here.
Andrew Carba fails and fails to deliver.
(30:29):
If they had pre purchased, I imagine there's probably less
recourse. That risk is probably with the
buyer and they don't want that. Someone would lose their job
potentially if that happened, ifthey bought something that fell
through. Yeah, you're really sticking
your neck out, right and doing something that's not core to the
company as well. So yeah, I kind of look at it,
you know, from the entrepreneurial perspective, I'm
(30:52):
doing a climate start up and climate is tough, right, For all
the reasons we've said. I have a couple options.
How am I going to get this project off the ground?
I've got a project I can go to acustomer, I can try to get
prepayment. That's, you know, more and more
difficult as as this as this industry matures, I can go out
and try to get debt financing, which we mentioned is, is very
(31:16):
difficult that a lot of times these off take agreements aren't
bankable, meaning you can't leverage them necessarily for
traditional debt for a first of a kind, because that risk is
there because this market is is chaotic and not established.
And and or I can go out and get venture, you know, so equity
(31:37):
financing, you don't really wantto equity finance the capital of
your first of a kind. I mean, that's very expensive
capital. That's not a first of all, it's
not a very sustainable model, but also it's, it's a very
expensive model. I've heard you know Venture,
Matt, you correct me if I'm wrong, but I've heard Venture is
equivalent to taking like a 30% rate loan.
(32:02):
Yeah, that's kind of or or more.I mean it it it, it depends on
more than you're exact. And it comes with a lot of teeth
sometimes. Yeah.
And so it's so it's not cheap. So you don't want to do that if
you can avoid it, especially forcapital for people, it's a
little bit different. But and so then, you know, come
in structure, climate and Mat, they've got this alternative 4th
(32:24):
pathway, which is this is debt, but it's philanthropic debt, you
know, mixed with some private debt.
And he can talk about that more,but it's a way to get much lower
cost of capital that's now enabled us to do first of a kind
build outs. And we can touch on, you know,
DOE as well. But yeah, it's a it's a door
(32:44):
opening lever for us. And, and has really allowed us
to, to take advantage of, of, you know, building a first of a
kind new, new technology to really save the planet and save
and, and improve landfills and air and water, water quality.
Yeah. And you know, I, I, I want to be
clear that this is, this is not sort of the end all be all, you
(33:09):
know, solution for everything there.
There is absolutely a need for early stage venture capital.
And if, if you're a climate company getting started and you
know, you're figuring out your science or your technology or
you're figuring out your team, like equity financing is a great
tool for that. And, and really, I think a
helpful way to, to look at this is for anything that your
(33:31):
company can use, you know, everywhere, would you say your
IP, your talent, your, you know,science, look at equity
financing options. I mean that that's really where
you should be putting that kind of capital into play.
And then for anything where you're doing something specific
to a place or a customer or a set of materials or something
(33:55):
like that where it's like almostlike one time use capital.
So trucks, concrete, steel, etcetera, you, you have to pay
for those physical things, look at debt solutions.
And so the, the right kind of capital tool for the right kind
of job is, is really what we arehere to, to build.
And we find that a lot of climate companies really could
(34:18):
have don't necessarily have the awareness because they haven't,
you know, they haven't been forced to figure that out.
We're here to say, hey, let's get more smaller projects funded
faster with capital tools that are recognizable to more mature
markets and and sources of capital.
And that way, you know, across avariety of technologies, we'll
just we'll see the and show the commercial maturity that's
(34:42):
that's possible. Well, if this.
Particular type of debt financing is only for a smaller
subset of lenders. What kind of maniacs are
interested in deal flow like this?
How are you able to attract people that want to fund
projects like this? Matt, I imagine it could be a
difficult pitch. You know this is where.
(35:04):
Again, we we really focus on theentire surface area of the
project and so you know, to callout like what what Karva is
doing and and just a dig it intothe specifics of that a little
bit. So Karva needed needs is you
know, is using some project financing to put this first site
here into the site in Minnesota.And the loan that we syndicated
(35:30):
is, is made-up of a handful of what are essentially donors who
are providing the the capital that is being pooled into this
loan product with terms for Carba that can work for Carba.
And so in this case, the the primary donor that the main
anchor donors actually Eric Schmidt's Family Foundation,
(35:54):
they are an active grant maker in areas related to waste and
and water. And so this opportunity to not
only achieve impacts in in wasteand and water like what Parba is
is able to do, but also to utilize their rant making
capital as a as a proof point for building that credit
(36:16):
transaction history was was was really meaningful to them.
But then aside from that, you know, there are some local
donors that you know, have knownAndrew through other networks
and and like to support local entrepreneurs.
There's a local software companyis supporting this project
again, because it's, it happens to be in, in Minnesota.
Whether you're looking at this for, you know, Minnesota or
(36:40):
wastewater, carbon, climate, small communities, rural
economic development, you know, maybe you, you want to support
US manufacturing jobs or entrepreneurs that, you know,
went to EU University of Minnesota or they went to
Berkeley or, you know, have the last name Jones.
Like, I don't know, there can bea whole surface area for these
(37:01):
projects. And, and we're going to say
that's great. You know, all of this capital
can work together. And we're here to make it easy
for that capital to make projects like what Carba is
doing successful and and able toachieve the impact that they are
able to achieve. I love the idea of some analyst
or associate with their first job in VC pitching A thesis
(37:22):
correlating will people with last name of Jones to alpha
being like this is where the this is where we should be
investing right now, the Jones portfolio.
I'm all for it. I bet you are for you to oppose
it. I bet there's a correlation.
I don't know if there's a causation, but there might be a
correlation. That you mentioned that you see
these people as donors. Is it all concessionary capital
(37:45):
like that or are these people getting a return?
Are they? How are they seeing it and what
does it look like? Yeah.
No, great, great question. A couple of couple of terms that
I I think are important to lay out to understand the landscape
here. One is that this, this entire
concept of lending, you know, charitable or tax advantage or
(38:06):
philanthropic capital, all, all terms are basically the same
thing. This concept has been around for
decades, like it's, it's been something that's been part of
the tax code since the 60s, but only private foundations in, in
the tax code are, are able to utilize it.
And the biggest foundations, youknow, the ones that everyone has
(38:27):
probably heard of it, Gates and MacArthur and Ford and so on.
I've done this, you know, using the hundreds of millions of
dollars and it is, it is an active capital flow, you know,
mechanism for those types of groups.
What we are doing by providing services that pool the capital
(38:50):
is utilizing that part of the tax code, but also making it an
option for individuals. And in that want to, you know,
make a charitable contribution out of a donor advised fund or
had a, a liquidity event and, and want to, you know, put some
of that capital to work in this kind of find it project
financing. And when you look at the entire
(39:13):
landscape of charitable dollars and how they flow, private
foundations are only about 1/4 of the transactions out there
as, as, as measured by, by dollars.
And So what we're saying is, youknow, there's a whole whole
bunch of smaller projects that can utilize this kind of
capital. And there's a whole bunch of
capital that can, you know, thatloves these kinds of projects
(39:34):
for all sorts of different reasons.
And so we're here to facilitate that connection.
And so they are in the eyes of the IRS, they are donors.
You know, this is charitable or tax advantage capital that has
generated a tax deduction opportunity.
And yet because we bundle the dollars into a loan that
(39:59):
actually preserves the charitable capital so it it pays
back. And the donor at the end of it
can elect to receive their principal plus interests and and
put it towards other charitable causes.
So, you know, in, in the case ofthe Schmidt Foundation, for
instance, we've talked with themabout recycling this capital
(40:23):
into other projects like this, which they're they're great
with. But you know, the local software
company, they're probably going to find some other projects
happening in, you know, education or healthcare or
something in the Twin Cities that that they'll put that
capital to once once it gets repaid.
And that, and that's fine. Like that's we're here to say,
you know, if you want to supportthis project, here's a mechanism
(40:43):
by which that can happen. And when the project is done,
you know, thank you for your support.
And so it's the the preservationof the charitable capital that
really starts to make it a little bit different than kind
of how you might think about a donation in general.
Are there lenders in this loan who expect at least something
(41:05):
above the risk free rate for making a loan?
Or is it all sort of philanthropic capital at this
point? At the moment it is all
philanthropic capital. As Karba you know matures though
and this is kind of what we talked about with getting them
ready to move to more conventional sources of
financing. There are lots of you know
(41:28):
larger scale or mid mid market type infrastructure investors
that that finance landfill type projects or municipal projects
that are that want to see this kind of technology start to gain
traction. But because of the kinds of
investors they have and their capital requirements can't take
this kind of early risk. And so part of what structure
(41:51):
does is, is build that bridge that puts companies like Carva
on a path to really show or prove out their commercial
viability to any of a number of different types of other
investors. And so the catalytic or
philanthropic capital at the start can get replenished and
(42:13):
can stay at that that leading edge.
And that's where, you know, and again, we're we're building
this, this bridge to bankabilityor over the valley of death or,
you know, pick your metaphor here.
But the the point is, let's, let's meet the projects where
they are today using capital that is kind of the right cost
(42:34):
in the restructure for them today, but done in a way that
makes them recognizable. And so that the returns the, the
rates, you know that, that we talk about, it's, you know, we,
we have a lot of flexibility within that.
But generally think, you know, 5to 7%, five to seven years,
that's kind of where we aim to land because we're balancing a
(42:58):
couple of things. One is that we want the rates to
be low enough that the companieslike Carba have have enough
space and flexibility to do whatthey need to do while making the
rates high enough that they become a meaningful part of that
company's credit transaction history so that they can go to a
bank next time. And the bank might say, oh, you
(43:19):
like you got a really good rate on your first loan.
How did you do that? Like, well, here's a story about
how we did that and and that's fine like that, that's great.
You know, it's like, oh, well, you, you know, you borrow that
on these terms and paid that offGreat.
Here's you know, here's the offer that that we'd like to
make. So very.
Attractive thing to be able to offer a young company.
Andrew, when you were looking for financing for this project,
(43:41):
did you have many options? Are there a lot of people
floating around trying to provide this service or is it
pretty open? There's not a lot of options to
be honest. You know, we talked to to
venture Angel investors about equity financing and you know I
talked about that before. We also spoke to infrastructure
funds. There's even sort of blended
(44:03):
infrastructure funds that are kind of more venture style early
stage infra. But even that it's, it's
difficult in the climate space. But yeah, it's it's, we looked
at a lot of different areas to answer your original question.
And there's just not a lot of options, which I think is what
you see a lot of these climate companies struggling with, even
(44:25):
ones that have gotten VC fundingand have been able to build sort
of small pilots, they can't get to that next stage to really
prove out commercial viability. And they're the ones with, you
know, off take contracts with marquee customers, you know,
with, with great investors on their, their cap table.
You know, they've raised a, a, aton of money.
(44:45):
But if it's not the kind of capital that the investors
you're going to are, are lookingto get out and it's not the
right kind of capital for what you're doing, then then it it
becomes a hard a hard sell. And then and Andrew, maybe the,
you know, certainly I, I see this a lot, but I feel like
there are a lot of options that want to talk to you once you've
(45:06):
done something. And, you know, like once, once
you get started, once you're, you know, once you have that,
that first project or the first two or three, you know,
projects, then yeah, they, they would love to write the checks
to fuel that growth. And, and that's like, that's not
just Carba or biochar. I mean, we see that everywhere,
every every kind of climate project like this faces the the
(45:30):
same kind of challenges and likehow do you how do you start
something that is so new and when all of the capital that
might help you start wants to see it already having been done
before? This might go in bonus content
because it's a little bit eccentric or maybe naive, but
(45:52):
Minnesota is a very progressive state and I see it as a very
creative state financially too. In terms of policy, is there any
opportunity for carbon removal projects that intersect with
conventional city or county or state operations to have access
to municipal bonding? Is there any ability to have tax
(46:13):
advantage bonds working in favorof carbon removal at the state
level? Maybe down, down the road.
I, I think that you're better bet for it for right now, at
least for the next, you know, three 5-10 years would be to get
enough debt funded transactions such that the kind of bond
(46:35):
underwriters that are going to come in for really big deals
have feel like they have enough of a data set to start to price
it as something that that makes it appropriate to both the city
and the investors that they wantto attract.
And this is where, you know, it's like solar and, and solar
PVI think is, is such a great example of, you know, in the
(46:56):
last dozenish years as has really sort of become large
scale and boring and that and like, that's fantastic, right?
Like we want, we want that kind of technology to be financed at
a massive scale and financed by,you know, all of these like
pension funds that want, you know, 0 risk and and accept low
(47:16):
returns. Like that's fantastic.
And yet it took 50 plus years for solar to get there.
And you know, when Jimmy Carter put, put panels on the on the
White House in the 70s, like it wasn't because of the
spreadsheets had, you know, perfectly mapped out the, the
growth plan. It was because he wanted to show
what it looked like, you know, show that it could be done.
(47:39):
And that's really kind of part and parcel with our theory of
changes as we get more smaller projects started faster than
more people can see what climateprojects look like, and they can
start to think about what that means for their community, their
city, their municipality. Yeah.
Just to layer on that, I, it's, it's very clear to me that when
(48:03):
we demonstrate this at a commercial scale and show its
profitability in the numbers, itbecomes way more bankable.
And so we, you know, there are the, there are these early stage
infra funds that will take you from 2:00 to 10:00.
There are the later stage that will take you from 10 to 100.
You know, once you prove that out, it's, it's these, these
(48:25):
first of a kinds that are, are very difficult to to fund.
And that's, you know, I think a huge lever for Matt.
And I think, Matt, you also are hoping to get into sort of the
two to 10 and beyond stage as well and then kind of help us as
a company grow, grow that creditrating, grow that ability to
attract, yeah, that type of funding.
(48:46):
Exactly right. Yeah.
I mean we're, we're here as early as we can be and engaging
in a way that we believe we'll we'll have have you on that
path. And then hopefully we continue
to do our job well and and remain that that partner for you
as as you grow. And Minnesota kind of the, to
touch on that piece, Ross, like Minnesota is a great state for
(49:07):
this. I moved out of California to
come to Minnesota, which, you know, Californians thought I was
crazy, but I'm from here. So but it is a very progressive
state and we have a lot of policies, you know, pushing for
solar and and renewable and sustainability.
You know, Excel Energy, for example, has to be net 0 by
2030, which is only five years away.
(49:27):
And so there's, there's some really big levers and on the
municipal, municipal angle actually, sorry, I have a
cuckoo. Clock.
I love it if there's. Been cuckoo clock going off this
entire time. What's?
Funny about I I enabled an Alexaskill last night to to alarm me
at an hour because I was perpetually late to things.
(49:49):
So it I tried to disable it by putting do not disturb but it
didn't listen. So apologies.
You'll have to edit some of those Cougars out, Ras.
Not stay in it but anyways please.
Stay in it. So on the Minnesota angle, the
city of Minneapolis has actuallyfunded the first biochar
(50:09):
facility in in the US, maybe theworld funded by a municipal
funding source. I don't know exactly how the
money was appropriated. So the city of Minneapolis and
then the along with the cities of Lincoln, NE and Cincinnati,
OH, through a really competitiveprocess, got selected by Michael
Bloomberg's foundation to to implement these municipal level
(50:35):
biochar projects. So yeah, it's just like a, a, a
great example of like making it local, making it real, making it
tangible for people. And that, and that's a huge
growth area for us. So they're focused on biochar
that kind of line the streets orthe, the roadways that
landscapes on the side of the roads with biochar, this
(50:57):
municipal angle of waste aggregation and landfills and
burial. It is, you know, Corda, what
we're doing as well. And so it's it, it all ties
together. And I think Minnesota is a
leader there, and we're leaning into that for sure.
Are there green bonds that mightbe applicable to work like this,
(51:19):
or is this as far away as municipal bonds are?
Maybe again, the the challenge with that often comes in with
scale and costs for establishingcredit ratings and having the
data set to get the ratings doneand so on.
And there are certainly, you know, those kinds of financing
(51:42):
instruments for more establishedclean energy projects, solar,
wind, batteries, etcetera. What structural climate is
focused on is companies like what Carba is doing or, you
know, some of the other like small modular tech companies
where they have something that acustomer can see for themselves
(52:06):
and that that that the customer wants.
And the particular, you know, parts of the project are they
don't necessarily fit a a conventional scene, but there is
tax advantage capital that is willing to and wants to see this
kind of impact. So, you know, private market
(52:27):
transactions are what, hundreds of trillions of dollars, I mean,
kind of wrap wrapped together the whole bunch of numbers
there. And I don't, I don't want to
apply for a second that Phil andcloud Picker charitable capital
is, is, is anywhere close to that like, but it, it doesn't
have to be to get started. So these capital sources can be
really, really shallow, but by being shallow, they are also
(52:51):
really broad. And so that's again like how we
activate the entire surface areaand we get the capital that a
company like Carba is ready for and done in a way that again
puts them on that that path to growth.
You mentioned APRII, imagine that might be a new acronym for
(53:12):
People Listening. What is APRI?
Yeah. So Apri, since we're program
related investment and when I I mentioned the, the mechanism
that private foundations have been using for, for decades to
make these kinds of transactionshappen, that's, that's all
grouped under what the IRS callsa program related investment.
(53:36):
So there are a couple of tests that we have to meet to make
sure that this kind of capital tool is appropriate for how
we're aiming to use it. And we partner with five O 1C
threes that provide the syndication and the actual
handling and, and receipt of thedonations and the, the
(53:58):
charitable dollar. So makes it easy for groups like
the Schmidt Foundation to, to give grants.
And then that's the, the transformation point.
In this case, we've been workingwith the Venn Foundation Venn as
though at the intersection of purpose and profit.
They are also a local group herein, in Minnesota and they have
(54:19):
been a fantastic partner. They, they work with a whole
host of different, you know, impact areas, education and
healthcare, community developments, you know, and so
on. And so they've done some things
in water before, but nothing really so climate focuses as
(54:39):
this, but we are we are changingthat quickly.
Depending on your sort of exposure to impact investing,
you might hear terms like mission related investments or
Mr. is that's not established within the the tax code like
like PR is are, but you know, just can can again refer to a
(55:01):
type of investment where there might be some kind of impact
return in addition to a financial return.
Andrew, did your equity investors have any questions on
the PRI, like how did that go? No, I, I think they were, they
(55:21):
were excited about it because they saw the value, you know, to
them being equity investors, it's, it's a low cost capital
approach to get this thing done and get us to the next stage.
So I think it was it was welcomed with open arms.
I think not everyone had heard of the term PRI and we had to
(55:42):
explain it but. So Andrew Carver's not your
first company and I, I believe one of the donors that came in
to support this PRI was actuallyan Angel investor from a, a
prior company. Can you share a little bit about
that? Yes, actually, yeah.
I had a previous company before this that I built detection
(56:04):
equipment, actually some of the best detectors for pyrolysis
gases and and other sorts of things and ended up selling, you
know those assets off to Shimatsu Corporation out of
Japan. And so that was a successful
exit loosely related to what we do here.
And someone related to that company also invested in Karba
(56:26):
as an early Angel and then went on they have a foundation and
that foundation went on to invest through the PRI.
So it was a really interesting opportunity to invest sort of
private capital in an equity stake, but then also through a
foundation philanthropic capital.
(56:47):
Oh, that's interesting. Yeah.
And and this is where I think understanding the the landscape
of capital can become really important.
And you know, the groups like Schwab and Vanguard and Fidelity
are, are the largest 5O1C threesin the world just by assets
under management because they manage donor advised funds for
(57:09):
so, so many people. And there are lots of reasons
why someone might make a charitable contribution, you
know, whether that's for like tax efficiency or tax
streamlining. Certainly anyone who's
considering like a tax loss harvesting strategy can, can
(57:31):
look at this, you know, this, this kind of opportunity to get
a similar outcome. And so it doesn't have to be
someone that you know, is big into philanthropy or big into
charity. It's you know, if you have
dollars and a daft that are justsitting in the S&P and you want
something more interesting to dowith them like we've we've got a
(57:54):
bunch of projects that would that would love to get that that
kind of support. And at the other plug I'll give
too is, you know, if you're someone sitting with the
foundation or philanthropic capital or you want to just make
a donation, it's, it becomes catalytic capital.
So it's not like you're giving it away and it's, you know, it's
a traditional donation. It's actually a loan vehicle
that goes back and then you can reuse that for a catalytic for a
(58:17):
charitable purpose again. So the, you know, as Karba pays
these loans back, you get to reuse that capital, which is
incredibly catalytic and very different from just, you know,
donating the money traditionally.
Right. And the I, I, I do want to like
one thing I, I always want to emphasize or, or be clear on is
(58:38):
that there are, there are lots of areas where donations are
just a, a critical tool for a given issue.
And the lots of areas where you know, a, a, a donor that that
gives is, is absolutely what is needed and there is no mechanism
for return. I'm not.
Like we shouldn't, we shouldn't charge, you know?
(59:02):
Getting fed or whatever, but in in the theory of change.
Like the sooner that climate positive business models can
just become business models, thesooner we get the scale of
impact that we're all after. And so that's really our focus
is saying we can work across a wide variety of types of impact,
(59:26):
you know, water, waste, air, etcetera.
And one metric that we create across all of them is a return
on on capital. And so again, with the goal of
getting more conventional or or kind of, you know, fully
conventional financing systems in play for these climate
positive projects and impacts and really like accelerating the
(59:50):
path to commercial maturity for a wide variety of climate
technologies. Thank you so much for being
here. Congratulations on the big off
take, Andrew. That's amazing.
I'm happy that structure was able to participate too, and
make all this happen and tie it all together so neatly.
Really interesting to hear more about what it's like to be
working on debt financing, both as a project developer and then
(01:00:14):
also being on the finance side. Thank you for sharing both of
you really. Appreciate it.
Yeah. Thank you, Ross.
Thanks for having us. Appreciate it.
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