Building a green business: Lessons from sustainability start-ups

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Sustainability has become an imperative—for companies, as well as for the planet. A decade ago, reducing environmental impact was merely a “nice to have” for organizations. Today, leaders face ever-increasing pressure from employees, customers, and investors to act decisively on environmental issues. It’s now a necessity—as well as a genuine and enormous business opportunity.

There’s a problem, though: too many incumbents are lagging, perhaps unaware of the boom in climate technologies—or, more likely, unconcerned about it. Around the world and across all sectors, emerging climate technology companies are changing the game when it comes to how organizations can and should approach sustainability. They’re increasingly well funded, and, as one CEO told us, they’re “moving quickly and boldly. You can’t make small things in a small way—you have to think about making something massive.”

We’ve seen this pattern before—notably in the realm of digital disruption. Rewards often flow disproportionately to first movers or, at a minimum, to companies at the forefront of addressing the disruptive threat. So what can established companies do? They can understand what makes disruptors different, lay a foundation for taking action, and prioritize four imperatives:

  • set a “North Star”: a bold sustainability vision that sets them apart
  • double down on talent and culture
  • flex their operating model, with leaders role-modeling a bold experimental mindset
  • take an agile approach to risk capital, knowing commercialization of products and services won’t happen overnight

Incumbents hold numerous advantages over disruptors, from access to capital to deep institutional knowledge. While it can be difficult for incumbents to apply the playbook of the start-up world, it is possible. By learning what makes their emerging competitors tick, they can learn how to be faster, compete more effectively, and win.

Three eras of sustainability

It’s hard to imagine today, but until little more than a decade ago, sustainability was a niche issue for many organizations. Concern about the changing global climate—and the effect of human activity on emissions—had been gathering momentum and urgency over decades, but in 2011, just 20 percent of companies in the S&P 500 published sustainability or corporate social responsibility (CSR) reports. And while these reports paid lip service to sustainability, tangible action was rare.

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Then the wave accelerated. Greenhouse-gas reductions stemming from 1997’s Kyoto Protocol were implemented from 2008 to 2012 for select countries, and in 2011, the groundwork was laid for what would become the sweeping Paris Agreement, sealed in 2015. The rapid increase in public and investor awareness, coupled with the emergence of policies driving decarbonization, sparked immediate action: by 2013, the number of S&P 500 companies publishing a sustainability or CSR report more than tripled to 72 percent.

In the past five years, sustainability has emerged as a critical value driver. As it became apparent that existing efforts may not be sufficient to cap temperature increases, businesses began to recognize the opportunity of addressing the challenge. Organizations began adopting and promoting environmental, social, and governance (ESG) measures, and from 2020 to 2021 alone, the number of companies committing to science-based sustainability targets tripled. Finally, corporate newcomers fostering sustainability as a strategic lever to create value began to appear, and we started to see the rise of “climate unicorns.”

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This leads to today. If the first era viewed sustainability as an idealistic domain and the second era viewed it as a value driver, this third era views tech-enabled sustainability not only as a business opportunity but also as a necessity. Just as the emergence of the technology sector challenged incumbents to rethink their business models—or to have disruptors rethink them on their behalf—the rise of new companies driven by deep tech poses a significant threat to incumbents that are too slow to embed sustainability into their corporate DNA.

The threat of climate technology disruptors

We’ve long examined the way incumbents respond—and don’t respond—to disruptors. And we understand the dilemma they face: threats to traditional business models often don’t become truly visible until long after incumbents need to begin marshaling their forces, and it requires courage to take steps to emulate emerging threats by disrupting your own, still-profitable operations.

Yet that’s the inflection point many incumbents are at today when it comes to climate technologies. We see ten families of climate technologies as critical to meeting the net-zero challenge, including renewables, batteries and energy storage, building technologies, industrial-process innovation, and sustainable fuels.1Delivering the climate technologies needed for net zero,” April 18, 2022.

The good news for incumbents is most relevant technology is still at an early maturity stage—or even unproven. The bad news, however, is companies are beginning to capture the business opportunity of climate technologies by drawing on five building blocks (Exhibit 1):

Start-ups are drawing on five building blocks to win in tech-enabled sustainability.

1. Genuinely driven by purpose and passion

Climeworks, the Swiss company developing technology to directly and permanently capture CO2 from the air, was started in 2009 with “a small laboratory device and a bit of stubbornness,” CEO and cofounder Jan Wurzbacher told us. “But we wanted to build up a company which really has an influence—which makes something big—and climate change is one of the biggest, if not the biggest, topic humanity is currently dealing with. We really wanted to take the hard way and the long way and build up and enter a new industry over the next 30 years.”

This deep sense of purpose is common across disruptive start-ups in the climate technologies sector. For many, that belief helps early on, when funding is tight and technology is still being developed. Yet it can also persist long after those concerns have faded. “There’s an atmosphere of support,” Wurzbacher said. “Everyone really knows the greater cause for what we’re doing, and that’s very helpful. We have to be careful that we really stay disciplined in terms of what we plan and what we deliver versus our plans.”

2. Deep technological understanding with bold future aspiration

Succeeding in any industry requires deep knowledge, being a disruptor requires deep knowledge empowered by creative thinking, and being a start-up in the climate space requires not just knowledge and creativity but also deep technological understanding. In some respects, companies know the rules—and then break them. “We focused on making ethanol in the first instance—nothing fancy, nothing groundbreaking—but with a very, very novel process,” Sean Simpson, cofounder and chief scientific officer of LanzaTech, told us.

Both Simpson and CEO Jennifer Holmgren have acquired vast additional knowledge as LanzaTech has developed its process of producing chemicals and fuels, including sustainable aviation fuel. “My cofounder, the late Richard Forster, and I did a lot of reading,” Simpson said. “We were both biologists—we didn’t know anything about engineering. We approached biology with deep knowledge, but we also knew that no one had ever scaled gas fermentation. So that was the place that we had to bring smart people in.”

3. Transversal technology

Few disruptors work alone while trying to independently crack seemingly insurmountable problems. TAE Technologies, for example, collaborated with Google AI, using machine optimization and data science to achieve the major goals for its fusion platform. LanzaTech has married synthetic biology with bioinformatics and AI, as well as machine learning with engineering. And Carbon Engineering, which, like Climeworks, is focused on commercializing the direct air capture (DAC) of CO2, has combined DAC technology with hydrogen generation to deliver near-carbon-neutral synthetic fuels—and has partnered with LanzaTech.

Pulling in complementary technologies and collaborating with companies that fill gaps in specialized knowledge is a feature of start-ups in this space. While companies are highly competitive, there is a sense that they are together seeking to place big, bold bets—driven by a shared purpose of sustainability. “You have to bridge the gap between different disciplines,” said Michl Binderbauer, the CEO of TAE Technologies, which is developing commercial technology based on nonradioactive nuclear fusion power. He urges people to work in niche areas of expertise, arguing the combination of deep individual knowledge adds up to a process that “will work better in the end—higher quality and faster.”

4. Strong empowerment and risk-taking

One common belief among start-ups is that larger, traditional organizations struggle to empower disruptive technology because their organizations are, by default, risk averse. Binderbauer notes that academics also prefer situations with less risk. “They want predictability,” he said. “What drove people to us was saying, ‘You can do things here quickly that you couldn’t do in ten years in your academic job.’”

PsiQuantum cofounder and CEO Jeremy O’Brien said it “just didn’t compute at all” when people questioned why he would leave academia to start a company seeking to develop a fully functioning quantum computer. “The crazy thing to do would be to spend 20 years, crack the problem, and then decide—oh, I’m just going to stay in academia and not build a quantum computer because you can’t build a quantum computer in a university, right?” O’Brien told us. “I left academia to start PsiQuantum when my cofounders and I realized that we could leverage semiconductor manufacturing to build a useful quantum computer on a sensible time and money scale, a machine capable of creating world-changing advances in climate, healthcare, energy, and beyond.” PsiQuantum has received $665 million in investment capital to date and is valued at more than $3 billion.

For others, the risk is less personal and more systemic. Carbon Engineering—founded in 2009 by Harvard professor David Keith—is seeking to develop and commercialize technology to capture CO2 directly from the atmosphere. Its vice president of strategic development, John Bruce, said that while the science pointed Keith to the opportunity, the company is taking the risk that the world may not do anything with the technology. “Our biggest competitor is actually complacency and not addressing net zero,” Bruce told us. “I don’t think it’s a technology question. Can we remove CO2 at scale? I think we can figure that out between us and many other technologies. The question is whether we will pay for it as a society.”

5. Test-and-try mentality at breakneck speed

Binderbauer said because TAE Technologies’ purpose was to achieve “dramatic” rather than incremental change, it had to take a trial-and-error approach. “You don’t necessarily know everything up front,” he said. “You’re not designing for that. You have the vision of where you want to go: finding a solution to the generation of power that’s completely free of carbon and radioactivity in the space of fusion. That defined the product we were aiming for. But we then began a journey toward this fairly tight vision statement that actually ended up being much more rocky than I thought.”

It took a decade for TAE Technologies to evolve from running tabletop experiments to building something at scale, all the time working to convince investors of the merits of its technology and approach (today, the company holds more than 1,400 patents). Development also took years for Climeworks, with engineers predicting the project would be very difficult or even impossible—skepticism greeted with what Wurzbacher called “persistent optimism.” “We were a little bit like the two crazy guys,” he said of himself and cofounder Christoph Gebald. “Either you are full speed ahead or nothing.” There was also another motivator for Binderbauer: “There’s no better force than knowing we’re going to run out of money tomorrow if we don’t deliver. You earn the living for tomorrow by what you do today. That’s very different to an established company.”

Green business building: How incumbents can respond

Looking at the history of many climate technology companies may prompt an obvious question: What’s different now? For incumbents, the answer is almost everything. Not only is the technology increasingly advanced, but three other major factors have altered the competitive landscape.

First, the price of carbon is rising while the cost of renewables continues to fall, making sustainable energy solutions increasingly competitive (and, in some cases, cheaper than traditional energy). Second, public pressure to take decisive action to avert climate catastrophe demands real behavior change by companies—because actions speak far louder than words. And the third factor is driven by the first two: capital is pouring into the sustainability space.

This is why we believe incumbents are at an inflection point. Most have fallen behind new companies in the race toward tech-enabled value creation. They’re encouraged to act now or risk being left behind while others build competitive advantage and own the future. But where should they start? Our green business–building catalyst model recommends implementing a three-step approach that can be customized to each company’s circumstances (Exhibit 2).

A three-step approach can help incumbents keep pace with new companies in the race toward tech-enabled value creation.

1. Prepare: Clear the decks

Charting a new course often requires letting go of the past—or at least parts of it. While incumbents have access to capital and deep institutional knowledge of logistics, distribution, and infrastructure, their accumulation of processes, technology, and hierarchy often puts them at a disadvantage compared with start-ups. That traditional corporate mindset needs to change. Ensuring it won’t come back requires a new structure and processes that fully support your vision and team—which includes role-modeling a bold experimental mindset. “Bureaucracy allows you to run a 100,000-people entity,” Binderbauer of TAE Technologies said. “But sometimes you have to be a bit cavalier. I’m not saying you do rogue stuff, but you have to take risks.”

One factor that helps breed confidence around taking risks is having a deeply personal mission. Climate technology companies tend to take on bold objectives and—because it’s personally meaningful to them—ensure they get done end to end. Imagine a start-up wanting to change an element on its website. It’s usually as easy as a single person (or two) making the change.

Now imagine that process at an incumbent, where tasks are highly specialized and experts work on single small pieces in a chain of steps to get something done. Making that same website change may require marketing to check compliance with guidelines, legal to give input on wording, a product manager to submit a ticket, a tech lead to plan implementation and assign a developer, a front-end developer to write the code and hand it to an infrastructure team, the infrastructure team to connect it to the back-end code, quality assurance to test interdependencies, and so on. Minor changes end up taking months to implement because specialists are isolated from the bigger picture—the “why” of what they’re doing.

2. Set up: Create the right environment

You need a “North Star”: a bold sustainability vision that sets you apart and aims to put your agile, nimble new group in prime market position. It’s about identifying and harnessing the passion that drives start-ups, where traditional consideration of pure business fundamentals—whether a great idea actually has a clear path to commercialization—is often balanced by revolutionary zeal. After all, no one truly owns these sustainability spaces. “You’re anticipating a problem in the future with a fully new technology that no one has cracked yet,” Bruce of Carbon Engineering said.

That spirit extends to people: hand-select a cross-functional team of entrepreneurial digital and sustainability talent in a careful combination of internal employees and new (start-up) hires. Each member needs to be able to operate at speed—and independently, if appropriate—and be genuinely driven by purpose and passion around the vision you’ve set. “I constantly try to not only empower my people to take fast decisions—I expect them to do so,” said Carlota Pi Amorós, the CEO and cofounder of Spanish green-tech start-up Holaluz, where a team constantly implements ideas to reinforce the company’s culture. “It’s these small efforts that remind everyone how to act on a day-to-day basis. Every single person is expected to act as entrepreneurs and not to become employees, no matter how big or fast we grow as a company.”

3. Grow: Revolutionize the investment and partnership approach

Commercialization of products and services won’t happen overnight. “I believe in our technology, and we ended up hitting our development milestones on time. That said, I didn’t realize that we would need as much more work as we ended up needing,” said Talmon Marco, the CEO of H2Pro, an Israeli start-up developing cheaper hydrogen fuel produced by sustainable energy. When technology is immature, long development and product-testing times will inevitably delay any payoff until well into the future, which requires taking an agile approach to risk capital (for example, undertaking funding releases over time). “I like to say that the typical Climeworks shareholder counts a quarter as being 25 years and not three months,” Wurzbacher said. “That basis is just simply not given in the corporate world, in most cases.”

For incumbents, such time horizons may seem daunting—at least in isolation. One way to mitigate the higher risk of this approach and investment profile is through alliances and partnerships that may ordinarily not be considered. For example, auto manufacturers might collaborate to invest in something they all need, such as batteries for electric vehicles. By working together, they can share the risk and the costs associated with developing a core technology.

A shift in mindset is required to make this happen. Think of your current competitors as future allies. Who could bring essential strengths to build something that makes owning a fraction of a joint endeavor have a bigger value than a stand-alone effort? Who are the unusual allies from totally different industries that might become partners? And what funding, growth, and financing models exist beyond typical M&A or joint-venture structures?

Incumbents have inherent strengths that most start-ups simply can’t compete with. But it’s not easy to actively disrupt a successful existing business model. We believe the experience of emerging climate technology companies holds lessons for established companies. The challenge now is to act before it’s too late.

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