Jacoline Loewen Shopify Sustainability Fund YouTube Thumbnail.jpeg

One of the most exciting talks at the Mars Impact Week was between Stacy Kauk, Director of Shopify Sustainability Fund, and Alex Ryan, EVP of Client Solutions at MaRS. Stacy sketched out the broad vision of the e-commerce leader’s unique approach to investing in carbon reduction technologies.

It’s a call to arms for other large corporations to play a bigger role in kick-starting the carbon removal market. I’ve been with The Atmospheric Fund myself, which focuses on carbon reduction, and this talk struck me that Tobi Lutke, being an entrepreneur himself and not a paid CEO, really gets to the heart of the issues, starting with Shopify’s ambitious 100 year vision.

Prior to Shopify, Stacy was a practicing environmental engineer designing environmental protection measures and pollution prevention controls. That practical side of her views lends towards Shopify as a credible player to contribute to the carbon reduction goal. Shopify is also using their fund to offset their own carbon and is dedicating resources, which is a fresh approach to addressing carbon reduction.

Is this the way to go for impact funds of corporations? If you enjoy this snapshot of the talk, let me know your thoughts and opinions.

Here is the interview, which I have taken the liberty of editing for readability. Please enjoy:

Question by Alex Ryan, MaRS: Shopify is a company with 100 year vision. How does taking such a long term perspective influence your strategy and priorities?

Stacy Kauk, Director of Shopify Sustainability Fund: That’s a great question because at Shopify, we have a 100 year vision to be a company that sees the next century. If we want the next century to be worthwhile, we really need to take care of our planet. Our CEO, Tobias Lutke, started Shopify’s Sustainability Fund is to make sure that we’re investing in the most promising climate technologies and solutions out there. We want to make sure that we’re contributing to reversing climate change.

Question by Alex Ryan, MaRS: Can you tell us about the purpose and performance indicators for Shopify’s Sustainability Fund?

Stacy Kauk, Director of Shopify Sustainability Fund: It is a very unique approach. Back in September 2019, the big objective is to kick-start the carbon removal market by being a customer. That’s to provide that market signal on the demand side. There’s an observation that we made that in that the carbon removal market, it has a lot of solutions that are out there but we really just need to do something to get it rolling. The big objective at the beginning when the fund was launched, and eventually what we’re looking to do, is increase the supply of carbon removal into the market and then to eventually have that price come down. That’s the key we think into being successful in this space. Having that price come down and the supply of carbon removal increasing, what will happen is it will be more accessible to others and it will help those clean tech companies or those climate tech companies to scale.

Question by Alex Ryan, MaRS: Can you share a story where your fund was the first customer?

Stacy: We actually have a couple. To start with, most folks are aware of Carbon Engineering, based out in British Columbia. We’ve made a commitment to be their first customer and it’s two ways. We started back at the beginning of this year having detailed conversations with Urban Engineering. We’re really interested in learning about Ryerson’s Innovation Centre. We learned that they were setting up this “excellence in urban engineering” centre where they were going to be able to innovate, iterate and experiment with their process. They would then optimize technologies that they could then teach those learnings. We went to their first commercial facility and what we wanted to do was find a way to help support that activity. We’ve made a commitment where Shopify is actually going to purchase the carbon that’s captured from the atmosphere at the Innovation Centre. This is an example of Shopify Sustainability Fund supporting innovation and research and buying something that's not yet commercially available. We were able to find a rate to get involved that’s actually making a difference for that company.

Question by Alex Ryan, MaRS: Fantastic! Do you have examples where being the first company customer has led to further customers?

Stacy: Yes we do and that’s what we were looking to find out. The first year of our fund is a bit of an experiment. We weren’t sure exactly how it would roll out, or what we would find when we started to go out and explore the carbon removal space. We’re actually interested in a company we can buy, and we found a company called soil value exchange. They’re actually based out in Texas. They work with cattle ranchers to use regenerative grazing practices that improve the soil health and actually store more carbon dioxide in the soil. It’s been five years they’ve been working to get a customer. They have the ranchers that are taking the correct approach to increase their soil carbon storage. We decided to be that first paying customer to force the value exchange. They’ve now signed another company as their second buyer. It’s actually a much larger purchase than we made. Now their sales funnel is actually looking like a sales funnel should, with a lot of leads.

Question by Alex Ryan, MaRS: In your first year, the fund invested 76% of funds in carbon removal solutions. It is important to go beyond deficiencies offsets and temporary carbon removal, and would like your view.

Stacy: It’s a great question because we took a two-pronged approach with our fund. We have our Frontier portfolio, which you just mentioned Alex, that we spend about 76% that’s pretty interesting with 75% of our over $5 million on supporting those ground-breaking technologies that are actually pulling carbon dioxide out of the atmosphere and that also are looking to have more permanent and durable storage solutions. Then we have our Evergreen portfolio, which is the other quarter. Those are solutions that are available now, so there is supply to buy in the market today, but they don’t necessarily provide that long-term storage on geologic timescales of 10 years, 50 years. This is because we’re looking at more nature-based solutions, Lake Forest protection, tree planting, as well as soil carbon storage. We decided to focus on those carbon removal technologies that we ended up spending 75% of the fund. There’s a couple of different reasons.

One, we think that’s where the funding needs to go. That’s where we have to put out that signal in the marketplace that, hey, we know it’s expensive but we need to get it going. Those solutions are really expensive per ton today, but we’re still willing to buy them because we believe in the solutions. Our spend looks like 75% of these high cost solutions. It actually represents a small amount of tonnage when you do sort of the inverse analysis on how we spend our money. When you look at tonnage, we spent basically the inverse. 75% of our tonnage comes from the Evergreen portfolio companies. Whereas a small amount comes from our frontier portfolios. This matches the nature of the pricing. We thought it was really important to get out there, be those customers, to pay that high price, because we want to drive that demand and bring those prices down in the longer term. That these technologies can get deployed, that’s really interesting.

Question from the Audience: How do you measure success if you're willing to overpay, and not necessarily get the immediate carbon reduction returns on those early solutions?

Stacy: The return on investment question is really interesting. We also decided to connect our Sustainability Fund spend with Shopify’s corporate carbon footprint. Those are two separate commitments that we’ve made. We make a commitment on the carbon removal technologies where we said that we will spend at least $1 million of the $5 million on carbon removal. We’ve uncoupled those two commitments because it plays a key role in being that market signal. When we’re looking at how to measure the success of our investments, it’s actually more about the companies that we picked to support and their success. The key indicator for Shopify is do those companies move to the next technology readiness level? Do they have adequate capital now flowing to provide funding for their business to scale? Do they make it? Do they come out the other side?

Question by Alex Ryan, MaRS: When we spoke on the phone, Stacy, you mentioned to me that kind of willingness to make mistakes and not necessarily know how to get it all right up front. Could you share more about that philosophy?

Stacy: It’s founded in science and the scientific method and experimentation. When we’re trying to find solutions to solve such a gigantic issue that climate change really is, there’s value in disproving theories, there’s value in having companies scale because it is where the biggest opportunity to learn and to innovate. Hopefully, the best solutions will rise to the top and other forms of capital will come into play.

Question by Alex Ryan, MaRS: Just in that answer, you mentioned some of the issues and challenges that both those commercial ones that are near commercialization plus the earlier kind of ideation plays companies are facing. What are you seeing in terms of what are the barriers that make carbon removal difficult as a market?

Stacy: There’s a couple of underlying concepts applied and used throughout the past year as we explore how we were going to spend our first $5 million. We were talking with all these companies that were all at different places in their development. Capital really comes through as a consistent area that needs attention. If it’s too early, if it’s too risky, it’s not yet proven and some companies spend a lot of time trying to strike that balance between equity investment and dilutive funding. They are also spending a ton of time and resources on grant applications which is concerning. There’s pros and cons to both. At different stages in the game, companies need to focus on getting that funding so that they have the right partners by their sides and the right kinds of capital funding their company at the right time. I think that’s a huge consideration for these companies.

In terms of the carbon removal market, when you’re trying to raise capital the thing that really plays out on your side is regulatory and policy certainty. If you don’t have that, and your profit or your revenue is dependent upon future government policy, it’s going to be difficult to get that funding that you need because it’s something that’s almost beyond the control of these companies. It’s not like you can go and do research and prove that it’s going to work, if you don’t have that policy or regulatory framework to support a certain price on carbon, you’re going to have difficulty.I think that the voluntary market, which is where Shopify participates, we’re a capital expenditure fund.

Since we’re voluntary, we’re able to be that customer for those companies that maybe don’t have the regulatory certainty. We’re looking for companies that have figured out that product market fit and that plays into the carbon removal market. It’s not just about having an amazing scientific concept that you prove and it looks great. If you’re playing in the voluntary market, it’s still a business. Many of the companies out there who are buying carbon removal or buying offsets, they have different motivations.

For Shopify, it’s about kickstarting the market, finding the most promising solutions, driving down that price in the long term. There are a lot of other factors, like benefits on the social impact of the projects that are being funded, that should be considered as well. It’s a bit of a product market fit and at the end, a good story that people could understand.

Question by Alex Ryan, MaRS: You’ve chosen 10 sectors to invest in. Give us a bit of an insight into how you choose those sectors?

Stacy: We would not put all of our money behind that solution and say “it’s going to scale and it’s going to solve climate change.” That’s not true. That doesn’t yet exist. We came to the conclusion that we needed to support as many different solutions and technologies across these different verticals as possible. There’s a couple of reasons we really wanted to work with companies in a collaborative way. It provides “additionality” where if Shopify wasn’t involved, then something wouldn’t be happening. Where there’s definite impact from us spending our money with those companies, and we could learn along the way, experiment. If we’re going to develop our fund, we will have another $5 million to spend in 2021, and increase the impact each year and find a better way to spend, we need to learn along the way. Right now, we can’t pick a winner. It’s not going to necessarily be ocean solutions, it may not be soil, it may not always be trees. We wanted to be able to get deep knowledge and connection into each of those industry verticals. As we go year over year, we’re doing a better job picking out the companies that have the most promising solutions in all of the different sectors.

Question by Alex Ryan, MaRS: What advice do you have for entrepreneurs seeking investment in their company?

Stacy: We’ve talked with well over 75 companies from around the world, quite a few in Canada and the US. There’s a couple of things that I did touch on already. It’s really about knowing what you’re looking for in a partner or in your first customer from Shopify’s perspective. We’re not in it to just make a purchase because that’s not what it’s about. It’s not about price. It’s not about quantity. It’s about driving change. When companies are early on, there’s a temptation to take all the offers, to take all of the capital and to take all the customers. You should be discerning. I would recommend making sure you’re aware of what you’re getting into so that you don’t end up in a difficult situation where you’re not aligned, and the person with the money is making demands that are not consistent with where your business needs to go.

The other part that I touched on earlier that’s critical, is that regulatory policy support for how you’re going to generate your revenue. Maybe it already exists and you have got a slam dunk. This is excellent because then you’ll scale. If it doesn’t exist, is there understanding of what it will take to get that regulation or that policy in place from the government side? Where is your market going to be because it’s different around the world. You could figure out where your market is because we all share the same atmosphere. You can do the atmospheric carbon removal anywhere, and you can likely sell your credits globally, so it’s really important to have that full understanding of the landscape. It may go without saying, one last piece of advice, especially when you’re dealing with not a standard venture capital approach, we’re not going out for series As or series Bs. We have a straightforward approach. When you’re going out and looking for partnerships with other companies, like Shopify, we do not have a set list of specifics. There’s nobody else doing what we’re doing right now. It’s really important to know your business and to have your business plan ready. That’s one of my favourite questions, “OK, great, I’ve learned all about your company. You guys are awesome! But what can Shopify do for you?” It’s the companies that go, “Oh, we’ll have to get back to you.” That is the challenge. If you don’t really know what your barriers are to scale, if you don’t know what to ask for, it’s an issue. That’s the one big insight that I can provide.

Question by Alex Ryan, MaRS: To build on that, how does Shopify source technologies or ventures for a sustainability fund? What’s the best way for companies to reach out?

Stacy: For 2020, we decided to take an ad hoc approach. We built out a network and because it was the first year of our fund, it was quite clear which companies we wanted to get involved with right out of the gate. For 2021, we are developing our process for next year. We may go with an open RFP, we may do something entirely different, but right now, the best way to get in touch with us is through our website. You can sign up with an email environment at shopbuy.com. Another great way is to just leverage your network. If you have a contact at one of the companies we already work with, I’m always open to introductions.

Question by Alex Ryan, MaRS: Is there a target for the number of deals you planted?

Stacy: We’ve identified the 10 verticals. Basically, what we’re looking for is a reasonably even spread. We want representation in all of those areas. We haven’t found a company to support enhanced weathering and mineralization. That is something that’s evolving very quickly right now, especially in the academic setting and there are some field tests going on that are really promising. That’s one area that we will be focusing on and we’re really hopeful to do at least one deal there in 2021. In terms of number of deals per year, we have $5 million USD, and there’s a wide range of price points in our portfolio. We’d be talking over $700K USD per investment, depending on the technology. We take a varied approach. We don’t want one purchase in 2020 and that’s it. What we want to do is structure a deal that goes over many years, and supports a company with a guaranteed purchase in all of those years. We want a deep understanding of the company’s path to scale, and then to understand what they see the carbon price being in each year. Then we’ll get into the details of how much we’re willing to buy and what we need to be reached for things to continue. That’s the general structure. We’re quite flexible in the terms of number of deals.

We’re definitely looking to add new companies, and I’m hopeful that we’re around five new companies next year, especially in enhanced weathering and mineralization, but we’re open to others as well. Our focus is also on ocean based solutions, or soil solutions. We’re not looking to add more because, for us, it is about the impact that those companies that have vision. Their vision would be for the future for themselves, and what we really look at, is the vision for the removal potential at scale. What is that cost per ton and how that looks like once the company is successful.

Question by Alex Ryan, MaRS: Can you share what the size of the fund is now and expectation for the growth overtime?

Stacy: We started with a $5 million USD annual commitment. That’s a minimum and that actually ties really nicely with the previous question as we’ve also committed to have it grow each year because we expect Shopify’s revenue to grow. That’s our minimum spend. It’s really something to keep in mind because if we do find say we’ve spent our $5 million USD allocation for 2021, and something amazing comes along, it doesn’t mean that we can’t also support that company.

Is this the way to go for the impact funds of corporations? What effect will Shopify have as a leading, large corporation and trendsetter?

I’ve been involved in initiatives focused on impact and sustainability investing including my current involvement on the board of the $100m Atmospheric Fund.

Please let me know if you would like to discuss how the business community is looking at this emerging and important sector that I have a deep passion for. You can sign up for my newsletter or follow me across social media to get first access to my content.