Red Tide at Night…

Running Tide, and the limits of the VCM

Marketing

The voluntary carbon market has always been an odd beast. We, as advisors, consultants, and occasional investors, are professional skeptics; One framing on the job of the capital allocator is that the function is to ask repeatedly why an investment will fail, then write checks into the opportunities with the least black marks. 

In the VCM, the answer is a question; Where does the budget for offset purchases live, really? The function of a company, specifically those companies which are or have been large purchasers of carbon offsets, is to generate a return for shareholders. One tactic to do so is to use the power of branding and virtue-signaling to attract clients and regulatory favor; This is called marketing. 

Marketing budgets are, to put it plainly, a terrible thing upon which to hang the existence of an industry; Marketing is neither building a thing or directly selling the same, but a nebulous in-between function. When budgets run thin, as in the 2022 correction in public markets, marketing is often first on the list to be cut. 

Going back to our question; Until this week, it’s been largely unclear whether offset purchases were considered a science / R&D budget item, which are sometimes insulated from macro-driven cuts, or marketing, which is decidedly not.

And then…. Running Tide announced it was shutting down. We wrote about them before, in what was the most blunt, and surprisingly widely-read piece on this site. Tl/dr, “This is bullshit financial engineering disguised as climate science, and profoundly irresponsible.” The whole piece is here, but you get the idea. 

Were we writing the same piece today, we’d add one more sentence; “Voluntary is not a business model.”

Signals and Noise

You’ll find no gloating here. While we disagreed with much about Running Tide’s governance, strategy, and science or lack thereof, we’re glad the company existed. The ocean as a vector for sequestration is underexplored and underfunded, and Running Tide did a tremendous job in mobilizing some of the world’s largest companies to spend money on climate change. This is a good thing and a service to the world. Also, we’ve worked at startups that went out of business, and wish the experience on nobody. 

Today, we’re thinking more about what the rest of the climate-tech ecosystem can learn from this event, and how to optimize and insulate business models in the VCM so that the industry can keep existing and building. 

You may be wondering, reasonably, if one startup leaving the market is really signal in noise, and therefore worth considering course-corrections for an entire industry. We think yes. Running Tide was backed by LowerCarbon, MCJ, Wells Fargo, and most of the other leading climate investors in the US, had contracts with clients like Microsoft and Shopify, and is purported to have raised as much as $70m. If this company, which appeared to be at commercial scale and well past the vulnerability of finding market fit can die, well…. 

Oil and Pipes

It is often a better business to own the means by which a product reaches the market than to produce the product itself. Producers have only a few ways out, middle-men can suppress prices on one end and raise them on the other, thus growing their margin. Standard Oil produced the literal fuel of industry, but only became the world’s most profitable company after starting to buy pipelines. 

Lesson for VCM builders; Never rely on listing your offsets on marketplaces. Approach clients directly, sell face to face, secure contracts for large pre-buys with 2-3 year lead times. Ask for exclusivity. Approach 2nd and 3rd tier clients with a managed-services offering to help them quantify scope 1-3 emissions, model out growth for 3-5 years, then sell the offsets to cover emissions. Go full-stack in a fragmented world. 

In fact, go further and own production as well. We are, at this point, curious as to whether pure-play offsets companies are viable at all. We doubt it. Instead, builders should focus on standing up other revenue streams, and adding offsets to increase revenue at scale. 

Example; Imagine Mast Reforestation reorienting as a software company, based on the sales of their proprietary drone-piloting, machine vision, and agronomy software platforms. Their work on drone-based reforestation-as-a-service can continue, along with bundling and selling the resulting offsets. 

That’s a very different company. A better one? Perhaps not. Certainly, the balance of headcount and resourcing would be very different, and the rollout of reforestation projects considerably slower. It’s not as mission-driven a business, and not as impactful if the current model succeeded at scale. But. 

The need to impress commercial clients in a competitive market would force the company to refine and improve their technological backbone, and to scale prudently in a resource-constrained environment. And steady, high-margin software revenue could fund an awful lot of trees. Great intentions are most easily funded through controlled revenue streams. 

Low Tide

In the social media statements announcing the shutdown, Running Tide laid blame at the lack of demand in the carbon offset market for their services. We have no insights here, and certainly believe that corporate budgets have rotated away from the sector amidst ongoing shortages. What they’re saying is rational. This doesn’t change the fact that offsets are still being bought, and as recently as last summer that Running Tide appeared to be one of the leaders in that space, with real revenue. What else happened?

Two sections above, we mentioned that Mast could strengthen their considerable tech backbone. This, we think, was the other issue with Running Tide. They had no technology edge or particular insights, and were best understood as a financial services enterprise. We’re not saying that the logistical challenges of attaching carbon to wood and stones, then sinking it in the ocean are easy, but it’s within the grasp of most enterprises centered around physical goods, and possessing a deep checkbook. 

This was a company based around procurement of goods, simple staging processes, and endless maritime logistics. It marketed itself, on the still-active website, as an “ocean technology company.” This was simple nonsense, and the other lesson for VCM climate builders; Practice ruthless self-awareness. 

The time when anything could be a tech company has come and gone, and is not missed. We’re back to basics, where the likelihood of success is dictated by the fundamentals of growing revenue, increasing margins, and thoughtful governance. 

Act accordingly. 

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