Mission Report: Circularity
“What Goes Around Comes Around”
-Benny Kim & Matt Witkin
Introduction
Since the inception of our fund, our investment thesis has focused on investing in technologies that forge a sustainable future. With energy and transportation making up more than half of the emissions here in the US, relatedly, more than 60% of climate venture investment falls within these two sectors (Sightline). M1C has been no exception with more than half of our portfolio falling into grid technology and zero emission mobility solutions. However, emissions don’t paint the whole climate picture. In order to truly build a sustainable world, we need to incentivise behavior change in consumption, modify how things are produced, and rethink supply chains to be circular.
This is where our ‘Mission Report’ comes in: designing a circular economy. Circularity is more than just an industry sector, it represents a paradigm shift in how we do business; rethinking our linear system to take less from our natural world, make better use of our resources, and turn waste back into value. This represents a trillion dollar opportunity - not in creating new goods and services but in preserving the value of the goods and natural resources already circulating our global supply chain. Driven by government regulation and tax subsidies, the rising costs of virgin materials, and public demand for sustainability, the circular economy has transformed from a niche business model to a business essential over the last few years.
There’s different takes on this theme (and even on the definition of “circular economy” itself), but it is primarily governed by three key principles:
Eliminate - Improve the efficiency of our system to reduce waste and eliminate pollution
Circulate - optimize our resources by keeping products and materials in play longer
Preserve - manage our finite resources and enhance our natural capital
Admittedly, investing in circularity can be a challenge as a fund focused on software forward climate solutions. However, we believe that there is often overlooked opportunity for impact and opportunity in the businesses that have an eye towards creating a more circular economy. With our focus on the intersection of software x sustainability, we see clear opportunity primarily within the first two principles: eliminate and circulate, which we’ll discuss in detail in this Mission Report. We’ll also dig into the third principle, “preserve”, to explore, and ask key questions as we open up the dialogue and shape our investment thesis.
Eliminate Waste
Single-use plastic water bottles, Keurig coffee pods, batteries, planned obsolescence and an “out of sight, out of mind” mentality - waste lives all around us. It’s pretty incredible how many items literally have the word “disposable” as part of the name (we got battery, plates, utensils, camera, gloves, napkins, vapes but you’re welcome to pile on).
Estimates show that around $2.6 trillion worth of materials are thrown away globally each year. This waste includes plastics (400 million tons), e-waste (54 million tons), slag from the steel industry (200 million tons) and food waste (1.3 billion tons) ending up in landfills or incinerated. Just to put this into perspective, the combined weight of all the humans on earth is about 420 million tons meaning we’re quite literally “worth our weight” in just plastic waste alone. Despite increased public awareness and major corporate commitments, the US is only recycling about 21% of recyclable materials as of 2024. One more fun stat - we throw away ~$60 million in gold and silver in just cellphones each year.
However, if this linear system of take-make-waste was designed in our systems and that means that it can be designed out. Where some see a mountain of trash, we see treasure and given our focus here at M1C, we see significant opportunities in tracking, managing, and eliminating this waste.
Food Waste
Food waste is the categorically largest slice of the garbage pie, totalling roughly $1 trillion of losses annually. What this means is that a third of the food meant for human consumption never even makes it to the plate. The extensive impacts of reducing food waste has been well documented; Paul Hawken’s “Project Drawdown” noted the outsized impact getting our food waste under control could have. From a carbon perspective, if the “Republic of Food Waste” was a real country, it’d be the third largest emitter of greenhouse gas emissions, equalling about 8-10% of global greenhouse gas emissions.
None of this should be news to climate tech investors or those who work in food systems. Food and agriculture have been the most popular areas of investment, after energy and transportation. In fact, food waste startups raised a total of $2 billion in funding in 2021, driven by the explosion of climate tech investing and the maturation of companies such as Full Harvest, Afresh, Too Good To Go and also a $110M Series D raise for Imperfect Foods. Despite recent market downturns, we still see a few key opportunities and are particularly excited about midstream solutions focused on food waste prevention.
One area of interest is in cold chain management, transporting goods from point A to point B while maintaining precise temperatures. A recent study by the University of Michigan found that half of the global food waste could be prevented with higher-quality refrigeration across our complex system. While its potential impacts are huge, it’s also an incredibly energy intensive sector. Coupled with air conditioning, refrigeration overall is about 15% of the world’s energy consumption. More broadly within the food supply chain, the advent of cheap IoT hardware and AI enables higher levels of transparency and optimization. Farm-to-fork traceability is no longer a niche food trend for high-end restaurants but instead a necessary endeavor as new regulations begin to take place like the EU Deforestation Regulation, the FDAs Unified Human Foods program, and the FSMAs more stringent Food Traceability rules.
Heavy Industry
Heavy industry is the foundation of our modern society, making up the cityscapes and supply chains that surround us. Industries such as steelmaking, cement, chemicals, fertilizers have fed our economic growth since the industrial revolution and yet have come at a high cost. Heavy industry accounts for about a third of global energy use and a quarter of our GHG emissions. Even within heavy industry, steel production is categorically one of the dirtiest and hardest-to-abate sectors in the industry. Part of it is due to the high energy consumption but steelmaking also generates tons of slag, toxic sludges, noxious gasses, and tons of wastewater. For every ton of steel, almost 2 tons of CO2 are released. In keeping with our previous comparison, if the “Nation of Steel” were a country, it’d be the fourth largest emitter of GHGs in the world, just behind our Republic of Food Waste. And yet, steel is an important part of our world’s expanding infrastructure, with global demand expected to increase by more than a third by 2050 according to the IEA. It’s even ironically embedded into our renewable infrastructure, going into solar panel fixtures, wind turbines, and transmission lines.
We wrote briefly about our investment in Deep.Meta in our Energy report but it’s worth noting here the waste side of the equation as well. Over time, as the company gathers more data from steel mills, their data flow will allow for further optimization and waste reduction within the steel production, first plant by plant and then improving upon industry standards.
Circulate Products
As we’ve discussed, we believe those creating the circular economy have a strong competitive advantage. Part of this advantage is driven by social or policy-driven aims to reduce waste. But we see the strongest business advantage for circularity focused business as simply having access to the cheapest inputs: the goods and materials already present in the economy. There are challenges – namely creating the supply chains to process these goods that lack the economies of scale that initially create the goods. Yet, we believe exceptional founders and startups can bridge this gap, producing the same quality goods with more efficient inputs and processes.
Many of the opportunities in the circular economy are going to come down to reuse or repair, starting from the beginning of the value chain in the design of products for circularity.
The fashion industry offers incredible opportunities for innovation, as it is a high-visibility sector of the economy that everyone interacts with, while also being one of the most linear. The stats are staggering: the fashion industry is responsible for 10% of global emissions and 20% of global waste water. Within the textile supply chain, less than 1% of goods are recycled into similar value goods, while 73% is simply discarded into landfills or incinerators. This waste will continue to strain those acting in a business-as-usual approach, with estimates showing that such businesses are at risk of losing ~3.5% of EBIT by 2030. Buoyed by these trends, the global sustainable fashion market has grown to $7.7 billion and is expected to reach $33 billion by 2030. As the market continues to mature, we see the technological advancements in supporting the circularity of the fashion industry, chiefly supply chain transparency and the adoption of marketplaces, as a major opportunity to create value.
We’re proud to have two companies in our portfolio already executing on this vision; Twice Commerce and reverse.supply:
Clean Energy Tech Recycling
The proliferation of clean energy technologies, such as photovoltaic solar cells, wind turbines, and EV batteries has been one of the biggest successes in our climate movement to date. Yet, it also poses one of the thorniest challenges. As these technologies reach the end of their useful life, we have yet to establish effective pathways to account for their waste, whether through pure disposal or dismantling to capture the useful materials inside.
Solar panels contain valuable silver, copper, and crystalline silicon, but can also contain hazardous materials such as lead and cadmium. To date, the disposal of solar panels has not been a priority - after all, the supply of disposable solar panels lags solar adoption by roughly the 30-year lifespan of the panels and solar adoption was quite limited in 1994. But as the earliest solar panels begin to reach the end of their useful lives, the circular supply chains for solar are starting to form. By 2030, the market for these materials is estimated to grow to $450M and is expected to grow to $15B by 2050, continuing to grow exponentially as it follows the exact curve we see in solar adoption today. While these materials will attract investment as solar manufacturers continue to look for the cheapest inputs to meet rising demand, regulations like those in Europe are providing a more formal structure requiring businesses to incorporate circularity of their solar panels and other e-wastes from their creation. We understand that the solar recycling market is still quite nascent as panels are just beginning to reach the end of their useful lives, but also see that this market will grow exponentially just as solar adoption has done.
Electric vehicle battery recycling offers a similar set of opportunities and challenges as solar panel recycling: low volumes today will soon give way to larger volumes and necessitate a sophisticated supply chain to efficiently recycle valuable components, while protecting against hazardous ones. But unlike solar panels, the end of life opportunities for EV batteries extend beyond dismantling and recycling. First, many healthy EV batteries outlive the larger vehicle and can have their components refurbished or repurposed directly in another vehicle. Additionally, batteries whose health has depleted beyond what is acceptable for an on-road vehicle still meet the technical specifications to have a second life in other applications, such as grid storage applications. Coordinating this complicated supply chain, having vision into battery health, and efficiently distributing used components is a multifaceted problem of which we are just starting to see gain interest as more used EV batteries enter the market.
Preserve Nature
This final section is a bit more complicated from a VC perspective and therefore one we’re still doing diligence on for viable opportunities. On one hand, the TAM of preserving nature could technically be seen as the largest, with more than half the global economy (~$58 trillion) reliant on natures’ services. On the other hand, the SOM is murky, with no clear understanding of who pays to preserve nature and how value can be captured. This has made it difficult to clearly identify the venture-backable investment opportunities, especially for a software-focused fund.
However, there are a few positive trends that lead us to believe it’s worth keeping an eye on. Recently policy tailwinds have aimed at creating a market for protecting our natural resources, particularly within the EU with significant commitments such as the recent announcement of the Corporate Sustainability Reporting Directive (CSRD) CSRD and the launch of the Taskforce on Nature-related Financial Disclosures (TNFD) back in 2021. These signs point to the creation of a biodiversity or nature credit market, closely modeled off the voluntary carbon market. We did a deep dive into the carbon market in a previous report (link here) and it is certainly not beyond reproach, especially with the recent news of closures at Running Tide and Nori, citing the downturn of the VCM as a major factor in their failure. What are the lessons learned from the VCM that can better inform the development of a biodiversity credit market? And is this the right market mechanism for funding conservation and the preservation of nature?
On the investment side, we’re seeing the first movers of nature-only thesis investors. Currently, one of the largest barriers to properly funding nature-tech that we’ve identified is the lack of standardized data frameworks. We’ve been tracking a few startups operating to standardize and better monitor nature data but haven’t yet seen any business models that lend itself to VC-style growth.
And so the question remains - will funding the preservation of nature move out of the hands of nonprofits and conservation groups into the hands of venture capital? Who will fill the $711 billion funding gap to reverse our biodiversity loss?
Conclusion
Without changing the underlying systems that enabled global warming, plastic oceans, and overcrowded landfills, we will never be able to move towards a sustainable planet. This future state that we envision will require a paradigm shift in how our economy uses its resources and optimizes our systems. In transitioning to a circular economy, we create new value and economic opportunity that previously was locked away in landfills or incinerated. This shift isn’t just an opportunity to right the wrongs of industrialization and growth but to better capture the full value of the goods and resources in circulation.
Onward!
