The Time is Ripe - and Precious!
DNX is intensifying focus on sustainability innovation and climate tech
Since the beginning of DNX, we’ve had a desire and aspirational goals to make a bigger positive impact on the environment and to a sustainable, inclusive, and healthy society. A decade back, we started our journey in the first fund with a heavy focus on Cleantech investments. Over these ten years, we have seen some factors that significantly increase the relevance and urgency of intensified focus on sustainability in our investments forward.
Millenials + Gen Z on the rise
With the millennials getting into the economic wheel of society, they constitute new consumers and new decision-makers in organizational ladders. It is already clear millennials have much different buying needs and decision criteria than previous generations. To give one example, they care a lot more than previous generations about corporate-social responsibility and health. As a consequence, we predict even business decisions will be made on different values. In short, new buyers will need more transparency and confidence in what they select will support a sustainable society and environment ahead. Organizations will need to adapt to meet the new buyers’ needs.
ESG regulatory gap under the microscope
New governmental compliance rules and regulations (state or federal) have often triggered significant organizational changes in responsibility and accountability. Recently in the US, there is a rapid movement under the Biden administration towards addressing the bleeding issue of the country being behind on addressing ESG issues across industry (compared to the UK, EU, and other top GDP producing economies), and therefore, implementing financial regulatory controls in place. We expect a wave of changes in the pipeline. The new regulations will impact many industries, and organizations will seek cost-efficient and new solutions to meet the new mandates. There are many examples highlighted with increased media coverage of how the changes will affect the industry. There is also an increased fear and movement towards possible future “tax.”
Large corporates ramping up R&D
Large organizations are ramping up their R&D, as well as their spending on new tech, innovation, and cost efficiency, to be able to meet new demands and customer expectations down the road. They know it will come sooner rather than later. Big brand corporations are also assessing risks related to not being transparent enough or meeting the new generation consumer markets’ growing awareness and accountability needs from their providers.
The factors listed above intensified in 2021 as nearly ⅓ of Americans experienced a weather disaster during the summer. Climate changes have intensified storms, fires, hurricanes, and other natural disasters. As more families experienced it first hand, these catastrophes are no longer a foreign concept to many. More people have realized this is a near term issue that we all will have to face.
As of late, we have also observed various attempts of financial industries’ initiatives to support climate-friendly business. This kind of initiative may also be an important part of climate change.
The baseline is that no investing entity of any kind can avoid the changes coming. We embrace the changes and intensified urgency, and increase our pace. DNX cannot envision success forward without adopting these guidelines. We all have a responsibility for the future and need to make significant changes to elevate and meet the urgency.
Fortunately, the underlying technology and infrastructure have become affordable. “Dirty” and “clean” energy is now on par from a cost perspective.
In conclusion, technology, direct consumer impact & awareness, and regulations have come a long way. They all start to align, which means the time is ripe. The landscape has shifted, and the economic gap has whittled.
DNX’ First Chapter of Cleantech
DNX started to invest in climate tech from its very first fund (2011 vintage) over ten years ago. We invested in improving solar generation (Qbotix: automated dual axis tracking using robots), energy efficiency (Enlighted: 70% reduction in lighting bills using sensors), biochemicals (Glycos Bio: chemicals with gas and oil cracking), to name a few.
Those investments resulted in a lot of hard lessons learned. Some were due to a brutal price war in solar from China, lack of financing to install energy efficiency solutions, no carbon credits/ offsets, and the collapse of oil prices in 2015-16. Overall, we had to face the fact that the climate tech ecosystem had not developed sufficiently.
We also learned to invest close to the sectors that we have a great understanding of the landscape and product-market fit, a good network of investors, due diligence and GTM experts, and sectors where we know the sales cycles and buyer persona. We believe founders' experience and network should match the market as the Climate tech sector requires specialized knowledge, network, and experience. In addition, high technology risks need to be shared with government grants, corporate NRE, CapEx financing options, and possibly carbon credits. So investors and management should have good access to capital from various sources.
From our Fund I experience, we tweaked our investment approach in the following funds. In Fund II and III, we invested in vertical SaaS businesses that addressed Climate. A few examples are:
We led the Series A round in Iceye. Iceye has developed a synthetic aperture radar (SAR) satellite, and since our investment over the last four years, it has built a constellation of SAR satellites that can monitor floods. We were able to bring our network to bear and bring in critical executive hires (Jerry Welsh, CEO of Iceye US and Charles Blanchet, VP of Solutions) and key design customer/partner, Tokio Marine (DNX Corp LP) to further its vertical SaaS - Insurance Solution - business line. Iceye is now developing wind and fire solutions and climate-related catastrophe monitoring solutions. We predict the value of image processing in the fight against climate tech will only increase.
In Fund III, we invested in Zum, which was incubated in the DNX office in Hero City. Since our investment in 2019, Zum has led the charge in the electrification and digitization of school transportation. In 2021, Zum raised $130 million, led by SoftBank. Zum also launched the Net Zero Initiative, rolling out a fleet of electric buses by 2025 to promote a safer, healthier, more sustainable planet. In the meantime, Zum is offsetting 100% of the emissions for its entire fleet in 2021.
Also in Fund III, we led the investment in Zeroboard, Japan. Japanese enterprises, with help from consultants, used to have to collect and edit data laboriously and inaccurately in spreadsheets. Zeroboard provides a SaaS solution that instead enables enterprise clients to collect and aggregate carbon emission data for corporate sustainability reporting more easily, faster, and more accurately.
What’s Next?
We have just started the new chapter of an intensified focus on sustainability innovation and climate tech - as the consumers, government movements, and ecosystem has matured and is creating a great synergy, with urgency. You can look forward to several deep-dive blog posts on our investment theses in this area, in the near future.