Decarbonising the economy is a political goal and a commercial opportunity. How can circular startups benefit as well?

In this episode, Mark Windeknecht, Principal at World Fund, discusses the connection between decarbonisation and the circular economy. By examining the battery recycling startup Cylib, the food startup Planet A Foods and the consumer tech startup Faircado, Mark provides insights into the drawdown potential of different business models. As a considerable share of circular startups are asset-heavy, Mark touches upon the challenges and opportunities of financing the growth of these circular business models.

This episode is part of VC for Circularity – the Venture Capital Perspective on Circular Economy Startups.

Video Impression

People

Mark Windeknecht, Principal, World Fund
https://www.linkedin.com/in/dr-ing-mark-windeknecht-285412148/

Patrick Hypscher, Circular Business Strategist, PaaS Expert
https://www.linkedin.com/in/hypscher/

Chapters

00:00 Intro
05:35 Carbon Drawdown Potential as a Main Investment Criteria during the Due Diligence
10:36 The Case of Cylib: Superior Battery Recycling at Scale
13:30 The Case of Planet A Foods: Avoiding Deforestation by using Left-Over Food
18:27 The Case of Faircado: More Sustainable Shopping
20:04 Funding CapEx-Heavy startups: Assets, Equity, Venture Debt and Licensing
25:57 Regulation and Technology are the drivers: AI, IOT, Robotics, Physical AI, Quantum and more
28:15 Founders, have a Strong Business Case without Green Premiums
30:12 Regulation is starting to change markets

About

World Fund helps to decarbonise the global economy. As a climate tech VC, World Fund is driven by tackling the climate crisis and only invests in technologies with scalable businesses and significant emissions savings potential. World Fund supports startups from early to growth stage, focusing on Energy, Food and Agriculture, Manufacturing, Buildings, and Mobility.

Further Links

Carbon Drawdown Potential
https://www.worldfund.vc/knowledge/how-to-measure-the-climate-performance-potential-of-startups

Portfolio Companies:
https://www.cylib.de/
https://faircado.com/
https://www.ecoworks.tech/
https://planet-a-foods.com/

Transcript

[00:00:00] Intro

Mark Windeknecht: Of course, also World Fund, we want to do good, but we want to invest in the cases that are even convincing people that don’t believe in climate change. And the same way you should also approach your business. No green premium. Of course your intention is to do good, but don’t sell it as doing good. Sell it as a good business case, and that is the magic and the driving force for investors and that will help you with funding.

My name is Patrick Hypscher, and this is Circularity fm, the podcast about understanding, building and managing circular business models.

Patrick Hypscher: Welcome to, VC for circularity, the venture capital perspective on circular economy startups. In the last episode, we listened to Ellen Martin, chief Impact Officer of Circulate Capital. Ellen presented ways to solve the plastic problem in Asia and Latin America through circular business models. Today’s episode will be about decarbonization, asset heavy startups, and the role of technology and regulation.

But before we start, I have an offer for you. If you want to get the actionable one pager about this conversation, sign up for the Circularity fm Newsletter. You can find it at www circularity fm.

Patrick Hypscher: He studied mechanical engineering and energy and process engineering. He holds a PhD in electrical and computer engineering from the Technical University of Munich. He worked at Viessmann as digital innovation management associate. Before joining the seed fund Vito One. 4 years ago, he joined the World Fund where he is a principal and active in advisory board of five startups.

Welcome, Mark.

Mark Windeknecht: Thank you.

Patrick Hypscher: Mark, you have a strong background in engineering. If you look at your tech gadgets at home or any installations what’s your favorite product these days?

Mark Windeknecht: So my smartphone is definitely my favorite product. I’m spending way too much time with it productively and unproductively.

But when it comes to what I’ve designed and created myself, it’s actually my lamps I designed in our flat. So that’s my favorite product. So, I, I used my skills, I gathered at the university to design some nice lamps for our flat.

Patrick Hypscher: Okay, so can’t wait for your first venture around that topic, I guess.

Mark Windeknecht: Let’s see, what’s, what’s next?

Patrick Hypscher: Okay, it’s let’s play it safe and switch to the venture capital side. We want to talk a bit about, World Fund and your perspective on circular economy. But before we do so , who is World Fund?

Mark Windeknecht: So. World Fund is a leading climate tech investor in Europe. We want to invest in the leaders of decarbonization from Europe and in Europe because we, specifically think that Europe holds a strong potential to bring the already developed world leading climate technologies in Europe to the market. And we want to provide the catalytic finance for that. And that’s why we raised a very big first time fund so that we can allocate as much as possible capital to the companies.

Because the leaders in decarbonization will not necessarily be software company. Most of them will be hardware companies. And you can see that already in our portfolio. So hardware requires often deeper pockets and we want to provide our portfolio companies with a necessary capital, and we do that also multi-stage, not only seed and series A, but also want to guide our companies through the that so the financing gap in a series B and provide them with capital in the series B so we can allocate up to 30 million per company.

Having said that, if we see a leading decarbonization company, we don’t care in which sector it is in which te which technology they’re applying. We are totally agnostic there. But by design, most of the decarbonization technology is around energy, or energy related and it’s hardware.

But when you look in our portfolio, we’ll also see other things. You will see also moonshots, like in-space manufacturing, quantum computing, also alternative proteins.

Myself as an engineer that circled around the energy transition over the past 15 years, I was a bit surprised to see that we won’t get on energy transition if we don’t change how we eat. So. That is a crucial part of our investment hypothesis, food, agricultural land use. And we also have very deep knowledge in, in that field with my dear colleague Nadine. She’s a biochemist by, by training.

So we invest, one to 10 million initially, up to 30 million from seed to series B into the leaders of decarbonization. We have invested in 20 companies so far.

[00:05:35] Carbon Drawdown Potential as a Main Investment Criteria during the Due Diligence

Patrick Hypscher: You mentioned decarbonization as the common denominator and already sketched a few industries and examples. Do you have some kind of framework, how you compare them to each other?

Mark Windeknecht: Yes, our. When we talk about decarbonization leaders, we are talking about carbon draw down potential. We call it CPP, carbon Performance Potential. This is a methodology we developed four years ago now to differentiate and have a real science-based methodology to assess what is the drawdown potential of companies.

It’s basically two folded, it’s a top down. So we can look at industry top down and see where there are companies that can significantly decarbonize. And on the other hand, we do also, when we look at companies, do a bottom up assessment and see what is the additionality of that product or technology the company’s providing, and sum that up over certain markets so that we hit certain milestones in carbon draw down amounts so that we can really define the leaders in decarbonization. It’s a very high bar you have to met that before we can invest.

Patrick Hypscher: When you talk about the drawn down potential and the additionality, how do you conceptually calculate that? Is it some kind of benchmark analysis compared to the status quo or other technologies? So how can I be prepared when I start your due diligence process, at least mentally? Yeah.

Mark Windeknecht: Yeah. So we, we have a, you can find a methodology in our website. We published an article about that.

But let’s imagine you want to decarbonize the whole electricity production in Germany. Two years ago, the electricity production in Germany was responsible for 180 megatrons of CO2 emissions. And to, to come to a threshold that we would consider someone of decarbonization leader you have to outperform the decarbonization which is set into law by the regulation, right? Because we are increasing our share of renewables, we’re reducing our fossil fueled electricity production and against that trend, you have to significantly reduce the 180 megatons and that you are eligible to, to investment of world fund.

Normally that wouldn’t be possible only in Germany because the threshold is so high that you have to apply your product or technology, at least in Europe, often worldwide, that you hit our very high standards.

So solutions that are very much customized to specific markets won’t meet our threshold. But that gives you an idea of the business as usual is our decarbonization curve that we have in Germany. You can look that up. And everything that you add towards this decarbonization curve, for example, for for, for electricity that would be account for additionality and would be calculated and would be accumulated and that we can see that it is an, that is in significant drawdown potential. And that normally only functions when you go also to other markets because one market is not enough to to to reach that barrier.

Patrick Hypscher: So I will add the link to your, to your article on that one to the show notes for everyone who’s interested.

A last question on that one. So, what’s a realistic level of preparation from a startup? We say, okay, this is a good amount of data, amount of detail and what is like already, let’s say, too scientific, if this is possible at all.

Mark Windeknecht: We are not expecting a company to have done the calculation themself in full detail before they approach us. But what we would expect is to see what their additionality. That is something we would need. And then we together with a company in the process see if we’re getting to our threshold or not.

And of course, as much as possible, the done before is perfect, but we also guide companies to do the process. And especially when we know what is the additionality, because that’s often the hard part. When we know what’s the additionality, we easily can help to calculate the sum. The additionality, and that is often ingrained into the product and that is something that the companies know better than us. So that’s why we’re sparring. We have a in my opinion, one of the best head of impacts in, in, in, in, in Europe for this methodology. She’s very experienced here and together with her, we develop, then the specific drawdown potential of, of a company when we are in the process. And it’s a yeah, of course necessity to, to, reach our threshold. Other than that, we are not allowed to invest.

[00:10:36] The Case of Cylib: Superior Battery Recycling at Scale

Patrick Hypscher: Okay, let’s turn a bit to circular economy. And, and you already mentioned that some of your portfolio companies are active in the circular economy. So who are these portfolio companies that are related to circular economy?

Mark Windeknecht: So the most obvious one is Cylib. A battery recycling company from Aachen Spin of R WTH Aachen, they developed a new process to recycle lithium iron batteries. This process is significantly better than the existing process. You would think that battery recycling is a solved problem. It’s not. It’s definitely not. It’s it’s only that you are recycling parts of the whole valuable materials in the batteries. You just take normally out certain parts which are able to take out with with existing recycling technologies, but they’re normally not customized to lithium ion batteries. So a holistic end-to-end process in Europe. There are maybe two facilities doing that. And Cylib, even designed a new process, which is superior to the maybe one or two existing in Europe and retrieves over 90% of all the valuable materials in battery cells with a very high purity back so that we can close the loop and use them in new batteries.

So a perfect example of, an engineering challenge where we in Europe have a world leading technology, which we are now about to bring to the market. And as it was already shown in the public, they’re building one of the biggest battery recycling facilities in Europe currently in Dormagen. I was there two weeks ago. It’s huge. Big, big, big business and what that means in terms of CO2, I can exactly tell you because that is a something that we have calculated upfront to make it not very scientific, but it’s like roughly 80% less cO2 emissions, not talking about all the toxic solvent that normally used in the process. Normally not in a safe environment, but just from a carbon standpoint 80% less CO2 emissions for the material . And then in the next step also compared to the recycling methodologies we have at hand currently in Europe, it’s still even 30% decrease of C2 emissions. It’s a game changer in terms of battery materials.

[00:13:30] The Case of Planet A Foods: Avoiding Deforestation by using Left-Over Food

Patrick Hypscher: All right. So I would have a few follow up questions on that one. But before we do so, any other portfolio companies to, to get a bit of an overview. Yeah.

Mark Windeknecht: Sure. One where you wouldn’t have expect it is Planet A Foods. Planet A Foods is the company behind ChoViva. And meanwhile, in most of the supermarkets, you can buy ChoViva products in Germany. They are basically coconut free chocolate product, right?

So you can you can find them in the supermarket from Gron. You can find chocolate cakes without chocolate. And the chocolate substitute is from is ChoVIva and that is from Planet A Foods.

And how is that a circular company? They produce the chocolate alternative from leftovers from the food industry. So they’re closing the circle here. That is so totally locally sourced chocolate. That is a game changer in the food industry and you would expect that. Where’s there the carbon impact? Obviously it’s circular is, but where’s the carbon impact? The, Western Africa areas are used for cacao farming and strong deforestation is happening there and partly and in slavery like labor especially the low quality chocolate is produced. And that is something we can totally substitute here with a local product.

So the aim is not to substitute the whole chocolate, but to substitute the low quality chocolate, which is produced while deforestation is happening, and slavery like labor is happening. So that is, that is the climate angle here. And this is just the beginning. The company I think also holds the potential to produce even further products because of their very strong technology platform what the CTO Sara has built in her PhD thesis.

Patrick Hypscher: And, this is already interesting to look at decarbonization and circular economy together because in the case of Cylib the additionality seems to come from replacing harvesting virgin material and the emissions that come with a mining and processing virgin material.

And a bit similar, the case for Planet A Foods, which is also substituting a current way of farming and the negative external effects on the environment and the social aspect. So is this a pattern, you see also in other portfolio companies where let’s say decarbonization and circular economy overlap.

Mark Windeknecht: Yes, that’s a pattern we see in our portfolio. We have even one further. But decarbonization and circularity often goes hand in hand with topics you wouldn’t expect like planet a foods and sometimes topics, which are even a no brainer for a lot of people.

The climate impact is not that big because the materials are very, very good and there it’s more an environmental problem. We see the, the correlation and often it’s a bit hidden and sometimes things look very obvious, but they’re not. So it’s not the case. Yeah.

One example, it’s a controversial one, I know. But still, I want to make the point. We all know the discussion about plastic, right? Plastic is something we have to phase out, no question asked. But plastic is a very, very good material, so it’s really hard to substitute first. Second the carbon impact of plastic is high, but it’s not the biggest lever we are looking at. The bigger problem about plastic is the environmental problem in terms of that it’s not collected right. That it’s not processed right. Yeah. But it’s not the CO2 impact. It’s big. I don’t want to neglect that, but it’s not the biggest things we are looking at.

So that is something people overestimate. Yeah. And that is why, phasing out plastic bags definitely is a, is, was, was very good, but you always have to see what, what you’re replacing it. And to replace it with a other bag that emits 10 x of the CO2 emissions while produced, and it’s only used once then, then we haven’t gained anything.

Right? So this is like, like some things are hidden and some are, you think are obvious, but then when take a second look, it’s not, and that’s why we have all methodology to really pinpoint it right.

Patrick Hypscher: Yeah.

Mark Windeknecht: was also surprised doing the math the first time. But then okay. Yeah, it makes sense. Right.

[00:18:27] The Case of Faircado: More Sustainable Shopping

Patrick Hypscher: You mentioned there is a third example from your portfolio that has a link to circular economy. Can you tell us a bit more about that?

Mark Windeknecht: Yes. And I invite everybody listening to the podcast to install the extension in your Chrome browser because it’s an extension to your Chrome browser. And when you’re shopping for, let’s say, a book, which is easy, or you’re looking for a new sweater, this extension will show you where you can get that exact product not new, but used. So you directly are reducing the emissions by utilizing existing products better.

And this is what we’ve also learned, especially in the fashion industry. I. The best thing would be to use less, right? Because already the it there, it, it’s, it’s the biggest lever we have in the fashion industry would just to use less. And that is what we are addressing with Faircado. So Faircado is an extension of, of your browser and when you go shopping online, you easily can find pre loved alternatives and, and are directly guided towards them. And yeah, can save CO2 emissions and often also pay less for the same product.

So I think it’s a, it’s a win-win here again.

Patrick Hypscher: Interesting. Now I know what you mean by saying that your investment profile is pretty broad and you’re sometimes surprised what kind of companies come out of your methodology. Yeah.

Mark Windeknecht: Yes. .

[00:20:04] Funding CapEx-Heavy startups: Assets, Equity, Venture Debt and Licensing

Patrick Hypscher: Let’s go back to Cylib which is also a, a, a, good contrast to Faircado. One thing you mentioned at the beginning is also hardware.

Yeah. Also for you as world fund that this is something you’re not shy away from. How do you as a VC handle the investment in assets and facilities with their, limited scaling potential or different scale and CapEx KPIs?

Mark Windeknecht: Yeah, that’s a tough one. And, and of course we, we gained a lot of, we, we, we had experience before we started World Fund and we gained over the past four years, lots of experience.

And when you look into the exit landscape of hardware heavy companies in, Europe over the past 10 years, not much exit happens. So that circling back here means that there are not too many people having lots of experience about that.

But what we learned is, first of all scalability has several phases, right? Scalability can come with more small modular solutions where you can drive down the cost curve because you’re producing lots of these modules or modularized solutions. And then with every production step, as we have seen that in the battery industry, everything in the PV industry, you’re getting down the cost per model. This is one thing.

Often this is not the solution because you have to have the economy of scale. You have to build big things that you can’t modulize. For example, for Cylib, you building big recycling facility. There’s a minimum size you have to build to reach efficiencies. So you always have to see which is the right fit here. And for some application, the modular approach is the right fit, especially when one of the main inputs is renewable energy because that is something that you ideally produce directly or is co-located. But when you need big processes which are getting a lot, lot, lot more efficient with huge sizes, then of course you should approach it more, more more centralized. But that will also very much define your CapEx or your capital requirements. And for each capital requirements, you have to have the right financing strategy.

And that’s why we often say latest at Seed Round, you should get finance expert in your team that is also designing your further product roadmap due to the financing needs. This is very important. And there’s no silver bullet where you with the two types, you will always find solution. It’s, it’s very individual to the, to the case.

In the beginning you have to finance everything equity. You’re get some local grants. You often can get some local grants there. But in the end, you have to raise especially when your CapEx needs going into the a hundred millions. You need to be a good fundraiser.

It’s as simple as that.

And how can you persuade investors is often big markets and good margins, right?

It’s something where you should think of very early in your journey how much you will need and, how you can stack that.

You can access also, especially later stage, other capital pools. And I often see on LinkedIn literature and that people are referring a lot to venture debt . But it’s not that easy. And I, I’ve heard venture debt too much in the past.

You must be very much de risked for, venture debt. So, expect a lot of your capital coming from equity raise and get a finance expert onboard. How you can structure your product, your facilities, and so on. There are some tweaks, how you can save some money and grants is also very important leverage here.

Patrick Hypscher: And is there also the potential to tweak the business model a a bit? So there are ways where you license the technology to a manufacturer who is building these kind of facilities. But the investment then will come from customers who pay their license. Is this something that is possible or is it not attractive enough?

Mark Windeknecht: Definitely possible. And it’s the one of the holy grails because that makes scaling very cheap.

But reality looks a bit different often. The real reality is that with your first of all kind, normally you don’t have the perfect process you normally need. Let’s say third or the fourth you’re building, then you’re going asymptotic towards an optimum. And only then you’re ready to license. And this is something companies often underestimate. They say they build the first of a kind and then they can license. Yes. I’m wishing for them that’s, that’s working out. But it’s barely the case.

The case is that it’s really de-risk and optimize. You have to build certain plans and modulars and, and then you can talk about licensing. So using that as a shortcut is unfortunately not working. But definitely what’s happening after the first of a kind, your capital stack is changing so you can attract different capital pools afterwards because you’re very much derisked, but already planning on the licensing that’s not working.

First of all kind is a big milestone. It’s very important. And that will help you to unlock other capital pools, but it’s not help you with your business model in the beginning. Yeah.

[00:25:57] Regulation and Technology are the drivers: AI, IOT, Robotics, Physical AI, Quantum and more

Patrick Hypscher: Let’s move on a bit. So as you do have a engineering background and technology is a huge enabler for new innovation, and also for new companies in new markets. Have you seen some changes in technology that bring back topics and cases that wouldn’t have been interesting five to 10 years ago, but are quite attractive these days?

Mark Windeknecht: Yes, we, we see a huge acceleration of technology development because of the new tool set we have with IOT, AI so on and so on. There’s robotics, physical ai. Things are moving also in the hardware world very, very quick. And we see new things emerging here.

And the new things emerging are often guided by industry led research. So we can see that the demands of the industry are somehow matching what is coming out of the university, what is developed in the research. So this is matching. And where are the demands coming from? The industry they’re coming from also regulatory change. So I think two things are happening and connected.

This is regulatory change and this is the acceleration of technology development.

For example battery recycling, for example, new battery technologies. New absorption technologies, new use of AI to develop new materials, use of quantum to develop new materials. This is very much going hand in hand.

And the main driver in my opinion, is regulation. Especially in climate tech, this is a very strong sword. And you can see that, for example, for Cylib you can see that the demand for battery signing is very much driven also by the regulatory that you have to recycle your batteries. The extended manufacturer responsibility, and is also driven by the regulation that you have to use recycled materials in your batteries beginning 2031. This is a huge driver for these companies, so it’s really going hand in hand.

[00:28:15] Founders, have a Strong Business Case without Green Premiums

Patrick Hypscher: Okay, wonderful. Mark, we’re close to the end of our conversation, sadly. You already touched upon founder’s perspective and what’s happening or might happen in the next years, but yeah, to sum that up what’s your tip to circular founders applying for funding these days?

Mark Windeknecht: I think there are two things you always should have in mind. Of course, also World Fund, we want to do good, but we want to invest in the cases that are even convincing people that don’t believe in climate change. And the same way you should also approach your business. No green premium. Mm, of course your intention is to do good, but don’t sell it as doing good. Sell it as a good business case, and that is the, the magic and, and the driving force for investors and that will help you with funding.

If you’re banking too much on goodwill and green premiums, investor will shy away of an of invest. Most of invest, I don’t say every investor, but most of investors.

So have a really, really good business case and there’re really good business cases out there, especially in circularity. The new technology we’re talking about, ai, robotics will help a lot to ease things that weren’t possible in the past because a lot was very fragmented manually. That was ha hard to scale and I think I the certain trend in technology really helps to overcome these hurdles for circularity, and I’m very bullish here that we will see good companies emerging here in the next years or already there that can leverage the new technologies.

[00:30:12] Regulation is starting to change markets

Patrick Hypscher: Yeah, you already mentioned trends here and there. So to sum it up, what are the trends you see in circular business in the next three years?

Mark Windeknecht: Obviously the trends are making use of new technologies and developing new cases that wouldn’t have been possible and scalable in the past. So of course we use AI in our day-to-day business, but it also has a huge impact on industry, sorting materials, dismantling battery cells with robots and and so on. And maintenance of Blades of wind turbines. I think that there are lots of things you can do , and apply, to circular.

The second trend is that regulation that was put into place by the European Union and often were like in the 2030s and so on. We are getting there and planning is getting there. And you can see that regulation is now developing its force and I think that will also open up customers and new business case, even business case, nobody cared about in the past years will now be relevant for the customers because there is the emergency and the need. And often as we know, we invested in companies that have perfect setup for their, customers. It’s the return of invest within six months. The other six months, the customers profiting off their. Of their products, but there was not the urgency for the customers to do so. And now the regulation is coming into place. They are looking for solutions. So it might be also for a company already existing now, the right time to be in circularity.

Patrick Hypscher: Fantastic. Mark, the podcast is about spreading ideas, sharing learnings, but also connecting people. What kind of listeners should reach out to you?

Mark Windeknecht: Generally I’m curious and happy to spare whichever idea entrepreneurs have. Is it only ideation? Is it this seed stage? Series A stage, series, B stage. I’m very curious to learn about the ideas, help to navigate in certain investment topics, because that’s a totally different world and from the outside, not everything makes sense and what the investors are doing, but has some own logics.

So I’m also happy to navigate here. So whoever has strong ideas and is very much driven, is invited to reach out To me in the circularity space.

Patrick Hypscher: Wonderful. Mark. Thanks for sharing your experience.

Mark Windeknecht: Thank you for having me.

Patrick Hypscher: This was Mark Windeknecht, Principal at World Fund. This episode is part of our series. VC for circularity. If you want to get the actionable one pager about this conversation, sign up for the Circularity FM newsletter. You can find it at www dot circularity fm.

Let’s drive a profitable circular economy. And please don’t forget, the most abundant renewable resource is your imagination.

My name is Patrick Hypscher and this is Circularity fm, the podcast about understanding, building and managing circular business models.