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September 20, 2022
People are always inventing new climate solutions, but it is hard to go from an idea to a commercially-viable product. But we urgently need these technologies to reduce our greenhouse gas emissions, especially in heavy industries like steel manufacturing. Enter: Third Derivative, a climate accelerator with a mission to help climate start-ups bridge resource gaps to enter the market faster. Dan and Emma speak with Elaine Hsieh, Third Derivative’s co-founder and principal, and Erica Nemser, chief executive of Compact Membrane Systems, a company part of the Third Derivative portfolio that makes membranes to capture carbon from industrial activity. Elaine and Erica discuss how to bolster small companies, ways to address the lack of diversity in climate tech, and other avenues for federal support.
Show notes:
Briefing Series: Scaling Up Innovation to Drive Down Emissions
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Episode Transcript:
Dan Bresette: Welcome to The Climate Conversation. I'm Dan Bresette, executive director of the Environmental and Energy Study Institute. And with me, as always, is my cohost, Emma Johnson. Hey, Emma, how are you doing today?
Emma Johnson: Hi, Dan doing well, it's great to be back with you here. And this is our second episode of season four, which is really exciting. We're already off to a roaring start. Last episode, we covered food waste in schools in the Boulder Valley area of Colorado, which was an amazing episode to learn about the revolutions that can be made in school food for people, for the planet, for kids. And I would really encourage everyone to go and listen to that if you haven't already. But for this episode, we are heading into the world of climate tech and the role that private companies play in moving climate solutions forward.
Dan: That's right, Emma. Back in July, we held a special bonus briefing in our Scaling Up Innovation to Drive Down Emissions series. That briefing series highlighted four big impact climate technologies that if they were to get to scale, we would see some meaningful reductions in greenhouse gas emissions. We looked at green hydrogen, direct air capture, offshore wind, and electric vehicle infrastructure build out. But towards the end of that briefing series, we kind of realized that even though those were really interesting topics, we still had more ideas and more things to cover. So we came up with an idea to do a bonus briefing and that bonus briefing was all about start-up accelerators, and how those accelerators can help turn innovative ideas into deployable, scalable climate solutions. This podcast episode, episode two of season four, will build on that briefing as we dive deeper into how we can boost these technologies in a sustainable and equitable way to ensure that these solutions are supporting the just energy transition, and getting rid of the greenhouse gas emissions we really need to get rid of.
Emma: To get more into this topic, we will be focusing on a climate accelerator called Third Derivative, or D3, which was founded by the nonprofits RMI and New Energy Nexus in 2020. Using their inclusive ecosystem approach, which we will discuss more in our interview, Third Derivative helps to bridge finance and resource gaps so that promising climate tech startups can make an impact in the market faster. Today, there are over 100 startups that are part of the Third Derivative portfolio, addressing climate challenges across all major greenhouse gas emission sectors.
Dan: And we're joined today by Elaine Hsieh, Third Derivative’s co-founder and principal. We're also excited to have a startup that has been in the D3 portfolio since 2021. Erica Nemser is the chief executive of Compact Membrane Systems or CMS, a company that provides efficiency and processing solutions for hard to decarbonize industrial sectors like chemical manufacturing and hydrogen production. EESI held a briefing on green hydrogen back in April, so I'm really excited to get back into that topic as well. Elaine and Erica, welcome to the podcast.
Elaine Hsieh: Thanks so much for having us.
Erica Nemser: Thank you very much.
Emma: Elaine, I'd like to get started by talking about some of the basics, how and why did D3 get started?
Elaine: I love talking about our origin story. So in 2019, and up to early 2020, RMI, formerly known as Rocky Mountain Institute, felt that there were not a lot of good technical solutions for most of the critical emissions that needed to be abated to fight climate change. So while there could be solutions that currently worked, they may not be economical compared to other alternatives. So we needed to drive more critical technical solutions for especially the harder-to-abate sectors like cement, steel, chemicals, shipping, aviation, etc. And those make up actually the majority of our emissions. So not only that, but we also need solutions to be able to draw down carbon dioxide and other greenhouse gases from the atmosphere. Because even by IPCC estimates, if we can reach zero emissions by the year 2050, we still need gigatons of carbon removal afterward. And these technologies have been relatively hard to commercialize for a whole number of reasons. And until the last couple of years, it's been really hard for them to attract investment and support as well. And so one of the reasons why hard tech and hard sciences are hard to commercialize is because often the capital expenditure or the capex is extremely large, capital intensive industries, but they're the most climate impactful, potentially. And, for example, estimated for new battery chemistry, it takes about $2 billion to reach full commercialization. And then the development cycles can be really long, which does not suit well to a typical Silicon Valley VC model. And often it's really difficult to reach the customers. There are large incumbents that play regulated markets, etc. And it's hard for new entrants to just come in and meet the customers. So that's why we built Third Derivative. It's a new model for climate tech commercialization, to especially help these small, private start-up companies working on the world's most promising solutions. We're bringing together an entire ecosystem of players and an open collaborative approach to address these challenges.
Dan: Elaine, on the Third Derivative website, there's a lot of discussion about the inclusive ecosystem approach that your organization uses to rapidly find fund and scale climate tech globally. What is an inclusive ecosystem approach? And what are the kinds of results that you're seeing from following that approach in your work with companies like CMS?
Elaine: I really love answering this question, because it's really important for people to think about the importance of collaboration in an ecosystem orientation, because you can't do it alone. Right. So Third Derivative, as I said, was founded by RMI, which is a world renowned clean energy think and do tank and nonprofit, and New Energy Nexus, which is a global entrepreneur support organization. So we were built to “accelerate the rate of climate innovation” through an integrative model that specifically addresses barriers that typically impede promising climate tech solutions to help them scale at the rate that we need them. And so as I said, before, you know, climate tech startups, they typically have a lot of significant capital needs and longer paths to market than software startups favored by investors. They also rely on large, slow-moving, risk averse corporations as critical customers, deployment partners acquires etc. And they have to navigate this complex market regulatory and policy landscape that favors incumbents and challenges disruptors. So by creating a network with committed investors, global corporates, and the folks that are seamlessly integrated from the start infused with RMI’s market regulatory and policy insights, we can unite and align all the stakeholders needed to bridge startup gaps faster, supported by financing and insights to allow innovations to progress more quickly. So by using this integrative approach to solving the world's toughest climate and energy challenges, we're seeking to overcome the multiple valleys of death that so many promising startups fail to cross. We're helping them get the help that they need to essentially scale up. So in terms of the actual ecosystem itself, it's RMI, which brings almost 600 techno-economic experts with market regulatory and policy expertise globally. You've got New Energy Nexus, who was obviously founded us with RMI. And they're the world's leading ecosystem of funds and accelerators, supporting diverse clean energy entrepreneurs operating across 10 countries, including regions that are typically under resourced like Southeast Asia and Africa. We have 10 corporate partners that are multinational leaders representing numerous industries with really ambitious decarbonization and climate targets. We have almost 20 investor partners from around the world, representing over 7 billion in assets under management so far, and our ecosystem also includes 165 experienced mentors representing over 20 areas of expertise. And finally, so far, we haven't been in existence for that long, less than two years. And we've selected 110 startups in our portfolio, including Erica's at Compact Membrane Systems out of over 2000 applicants from about 100 countries, that creates a really rich ecosystem. And when you're open and collaborative, that makes it really inclusive.
Emma: Thanks, Elaine. It's amazing to hear about really the ecosystem is the right word to describe all of these different groups coming together. And we're excited that Erica is here to talk about being part of that ecosystem as one of the companies because Compact Membrane Systems was in the second cohort of companies with D3. So I'm curious if you can talk about what the status of the CMS was before you all joined with Third Derivative, and how did being a part of Third Derivative affect your ability to function and grow?
Erica: CMS fits in the ecosystem, as Elaine described focused on decarbonization solutions for hard to abate industries. As our name suggests, we make membrane separation technology in the package of solutions that go around that. Carbon capture is a big area of focus, and specifically point source carbon capture, meaning capturing the carbon that's emitted out of the smokestacks of heavy industry, whether that's hydrogen or cement or steel or other applications. The point of entry for us into this was olefin and paraffin separation, which is a high value molecule separation in the petrochemical space. And so when we came to Third Derivative, we had just started the work on building our demonstration plant for that application. And that was significant to us, because it was a major proof point for the technology, it took a lot of technology risk out, and as a foundation for the platform, then that technology step can move us forward into carbon capture. As Elaine mentioned, there are substantial numbers of valley of death. It's not just one valley of death, that seems long. It's getting through multiple of these stages, and one is demonstrating in the field. What we'd had not had at this stage and we came to Third Derivative is nearly the reach that we wanted to in the carbon capture space. Where Third Derivative was very helpful, was I always call it and being at the best cocktail party of all time, because Third Derivative is pulling these amazing groups of people together, as Elaine described from folks that are domain experts in their field, to investors, etc. So wherever our question was from, help us polish our pitch on this dimension to help us get smart on cement, we were able to find those folks and Third Derivative, which was really crucial. And I would say doubly crucial, because we were doing this during COVID. In a normal period in time, we could leverage our LinkedIn networks and start to meet people in places where they congregate, whether that's energy in Houston, or innovation on the West Coast. But at a time where no one was convening, and no one was taking meetings, how do you build out a network of potential customers and network of influencers, even folks that are deep domain experts that can opine on either a technical or a commercial aspect of significant value. So having Third Derivative, not just there in general, but there specifically during that time was a real accelerant for us. When you take a look at industrial decarbonization. There are places that do carbon capture now, but they're few and far between. And so when you talk about deploying, it's not just bringing a technology at scale. It's not just having the resources to do it. It's not just having a team. It's trying to do that against the backdrop of a market that is just now forming.
Emma: Thanks, Erica, it's helpful to hear you break down the challenges and opportunities and what it's been like to be part of D3. Elaine, one of the other things that's part of their derivatives mission is to help achieve an equitable climate future. And I'm really curious to hear from you what are some of the inequities that exist now within the climate tech sector and how you all are working to address those disparities. And Erica, for you, I'd be also curious to hear how CMS is thinking about equity in your work in this new market, in this really hard to decarbonize space.
Elaine: This is a huge issue just generally, I think, for tech. If you're an entrepreneur, especially those working on climate tech solutions, funding and access are based on who you know, and what they know. So if you have a limited worldview, you know, you're not really going to actually have the ability to find all the solutions that are potentially very impactful. So you know, currently, there are like four major innovation hubs in the world. So you've got the San Francisco Bay Area, you've got New York City, you've got Beijing, you've got Shanghai. And if you're from other parts of the world, your networks may not be as well connected enough to get the attention of potential funders or the resources you may need, or the community that could support you as you seek to get your idea into the world commercially. And in addition, there was an E2 report, I think they came out a couple years ago confirmed that white men dominate clean energy employment as a whole, like a significant domination in terms of that demographic. And the investment community is also largely dominated by white men. In the U.S. alone, it's like 70% of investors are white. So there's like a serious limitation in terms of how people are connected to each other and who they're networked with. And so it's a very limited view of what solutions are out there. So when everyone in your network looks like you, you're only hearing a fraction of the story, right, you're perpetuating a cycle of exclusionary investment that keeps wealth in the hands of the few who already had it. And then globally, the people most affected by climate change have the least access to resources to help solve the problems. So understanding people's more intimate direct experience with climate impacts can play a huge role in expanding our collective toolset. If we expand the ecosystem to bring in perspectives from other countries, especially, we actively seek to close these disparities of funding and access through Third Derivative’s startup portfolio and our ecosystem-based approach.
Erica: This is a great question to think about what equity looks like and I think about it on two dimensions, the outwardly looking beyond the walls of CMS and then the inwardly looking with our team. And when I look outwardly, I think one of the biggest challenges that Elaine alluded to is a differentiated impact on the environment that people live in across the globe. And you can even see that within the U.S., that folks that are exposed to pollution and effluent from plants, it's not evenly distributed, but across the socioeconomic spectrum within the U.S. or across the world. So one of the things that we do as a company that's processing and separating products is to reduce the amount of things that are emitted into the air, whether that's carbon dioxide or otherwise. And we see that this has the potential to have disparate positive impact on communities that have suffered from a higher level of emissions in their direct environment. So I think overall, what we're doing and what companies like us are doing, have the potential if deployed at scale, to have an overwhelmingly positive impact on the environment and the communities in which our technologies are deployed. Because they're deployed in places like steel manufacturing, like hydrogen manufacturing, like chemical plants, like refineries, those tend to be communities that have suffered the negative experiences of being surrounded by those manufacturing processes. When I look inwardly at CMS, and I say, how do we bring equity to the organization, obviously, a huge part of that is having a diverse workforce as Elaine mentioned. And it requires additional effort. And one of the things I learned being in the corporate world, before I came to CMS, and working on diversity and women's leadership efforts, is the talent is out there. If you keep going on the easy path where you've always hunted for talent, you may not find it, but that talent is there, those people are there, and they are capable. So we've expanded the sources for recruiting beyond just our local university, which has a great chemical engineering department. So it can absolutely surface up fantastic talent. But it's not necessarily as diverse as we would like. The other piece is not just having those folks in the organization, but giving them leadership roles. And I'm a big proponent of two things, one, giving people step up roles, but two, being very conscious of our unconscious biases, whether those are gender driven, racially driven, or otherwise. And recognizing that we have to actively work to avoid falling into traps. And a typical trap is, you know, you brought Elain that studies show that white men are more likely to be promoted on potential. And women and people of color are more likely to be promoted on performance, meaning they have to have shown they've done the job before you give them the job. Whereas men, you are more likely to promote on their performance of a previous job, even if they haven't done it. So where we take a very conscious approach to making sure into working towards promoting on potential across all people. And that probably goes to explain a little bit the gender impact that you mentioned in funding. I think in the last couple of years, we've seen women founders get something between 1 and 4% of all venture funding, which is an astronomically low number. But if you think about that, it's foundationally, doing something you've never done before, leading a company that's never existed, right? You're going to value someone's ability to do something on performance or potential. It's 100% potential. And that may be a place where, you know, we struggle as human beings, and we're on this journey together. So we're trying to do our little piece of it.
Dan: Erica, you mentioned a moment ago that you have about 20 people in your organization. And from what I understand you are part of the second cohort, you've been part of D3 for about a year, I think, is that about, right? About a year and a half?
Erica: Yes, about a year and a half.
Dan: And you made the point that a lot of that year and a half has overlapped with the pandemic. I'm curious how CMS has grown in your 18 months or so, with D3. What are some of the lessons that you've learned so far? What are the some of the points of progress that you look back on and sort of reflect on, perhaps that would have been harder to achieve without the support from D3?
Erica: I benefit from having an amazing, amazing team. So I would say the progress is very much down to the team. And a couple things really jump out when I say that. One is obviously the caliber of talent. Two is the ability of the team to focus and really drive technical progress that is meaningful to our customers. And I would say another piece of that is being able to speak their language. And this is one where Third Derivative has been particularly helpful. Where we started with our first application in petrochemicals. And so we've very much gotten into the groove of who are those customers, what's the language they like to speak in terms of not just the way they talk about the economic return, but the way they talk about risk and deployment in the field, etc. Walking through that same exercise to understand how steam methane reformer folks talk about clean hydrogen, for example, you know, was a very similar process. And that's been incredibly valuable. It's a different language when you talk about CO2, when you talk about co2 capture, and emissions abatement and avoidance and that whole discussion. It's unlike any other product, you know, I'll call it a typical product. When we go to market and we talk to customers, you talked about what's the value proposition, it's easier to use, it's faster, it's cleaner, it's better, it gives you more product with less waste or something like that. Right. And it's refining that value proposition. To develop that is a combination of a lot of business development work, a lot of analysis and modeling on the backside, and a lot of technology interface. And having a team that manages that interface is really crucial. When you talk about CO2 capture, you really are talking about getting to dollars per ton. So it's the ultimate commodity product, right? The CO2 itself with rare exceptions, it's not a valuable product, it's valuable by being avoided, and being captured. It's not valued in and of itself. And so the way that we talk about that is very different in terms of the ease of deployment, the existing technology, etc. And so I think that's been a really valuable journey to be on and one where Third Derivative has been helpful. And our team has learned a ton. I would say, if I had to do it again, it's always the same thing that I tell the team: talk more externally. And don't fear. People want to be perfect before they go out and have a conversation. It's okay to have first conversations be learning conversations and come to the conversation saying, we're smart. We know a lot about membranes, we know a lot about we know, but we don't know about this. Can you help us understand this.
Dan: That's such a cool insight. And you're right, so hard to go out and sort of be vulnerable in those sorts of early conversations, right? No one wants to look like they don't know. But obviously, it's hard to know. Elaine, I’m curious, from your perspective, how do you prepare companies to go out when they've reached that scale, and sort of stand on their own? And I'm curious if you've seen so far, your cohorts, to the companies that have been part of D3, do they continue to kind of carry forward that networking?
Elaine: It is a very selective process, we have a very rigorous practice process of selecting rockstar startups like Erica's. I mean, frankly, what she says is super true about understanding your market. Because a lot of the entrepreneurs that come into our portfolio, many of them are incredibly smart and very analytically driven. You know, I would say engineers, not necessarily entrepreneurs. And so they can speak, you know, so eloquently about the technical aspects of their solution. But if they don't understand the market, it is really hard to get investment or help. And so a lot of that bridging of gaps is necessary to sort of help people understand, you know, where's there an actual techno-economic case here? What is the most viable application? How do we actually create a pathway? What are the milestones you've got to hit? What does that roadmap look like? We need to do regular check ins and give you tailored support and all this kind of stuff that's necessary. So that's what a cohort goes through, where you know, there's access to all these different kinds of resources, right. But there's also this tailored support and regular check in process for us to make sure that they can hit and make progress through our programs. So we have an 18-month program. It's all virtual, we were founded during COVID. And so, you know, we're a global team that is serving, you know, startups all over the world through this pretty rigorous accelerator program. But it's not a cookie cutter, because we've got startups across every sector at very different maturity stages that need very specific kinds of help. So we have these regular check ins, tailored support, you know, we facilitate introductions. They also get access to all of our corporates and investor partners, all of our ecosystem programming, tools and resources, communication channels, all that stuff. But then after those 18 months, they become alumni. And their journey doesn't end with us, they're still part of our community. So they're going to continue to have connection and full access to our ecosystem of partners, our communication channels, all of our resources, all in the programming, etc. But the only difference is that they no longer get the regularly scheduled tailored support of our specific staff time just because we can't continue to grow the number of startups we have. So you know, they stay in touch and that community, frankly, of not just the partners, but also the experts and the other startups is a huge thing. A lot of our entrepreneurs, many of them are first time entrepreneurs, and they feel really alone. It is a very lonely life when you are a founder or you are an entrepreneur and when you have a community or family, essentially, of other people who may or may not be in your sector, but you're dealing with the same kind of maturity challenges, or you're wanting to support each other to say, You know what this is normal, going through this kind of like roller coaster of emotions, and also these kinds of challenges is very normal. And here's the perspective that I have. And here's what I did to help me through it. And here are some people that I talked to that could help me too, here are some other people. So it's really honestly that collaborative approach and that community building in that sense of we're all in this together, that actually really buoys the entire industry, and also all these different startups ability to continue to carry on and be successful. So the point here is that by staying closely tied to our ecosystem of partners, experts, and other startups, alumni basically get to continue to tap into the knowledge of the broader D3 ecosystem for community support and resources.
Emma: It's great to hear about the community support that you will have built. And at EESI, we're really interested in the federal support and the federal side of things, you know, how can Congress support some of this work? So thinking about federal policies and programs that are out there? How do they support your work, if at all? And are there ways that the federal government could support what you all do more either as an accelerator or as a private company? You know, what options do you see out there as possible?
Elaine: Broadly, I think any policy or program that includes incentives and/or funding for building out more sustainable infrastructure and investment is good, especially in critical but still nascent climate technology categories like carbon dioxide removal, hydrogen, etc. Generally, I would say accelerators naturally help solve a market failure. That's like our standard theory of change, right. And it would be good for society and government to support that. And most notably, obviously, the recently passed Inflation Reduction Act, which is just a monumental milestone, it's going to likely drive down the cost for commercializing more necessary climate technologies to direct pay from 45 Q and electricity credits will be useful for companies that don't have a lot of tax equity, or groups that don't have access to equity markets, right. And then the same is true for battery manufacturers, and hydrogen. These are all credits that startups can take advantage of.
Erica: For sure, the government's Small Business Innovative Research Program. CMS has benefited tremendously from SBIR grants, which are government agencies, like the Department of Energy, like the US Department of Agriculture, like the National Institutes of Health, setting aside research dollars, specifically for small companies, recognizing that innovation starts with small companies. And that's crucial. And I think it's one of the things that distinguishes research across a whole swath of domains in the U.S. from other areas, which is the substantial government focus on that. Pairing that now with, I would say, a focus on the valleys of death. As Elaine said, there's programs out there and Third Derivative has really stepped into a vacuum, which the government is starting to recognize. And it's not enough to say, I have shown that the science can work in the lab and that it's really valuable. For conservative, risk averse, capital intensive, deliberative industries, like heavy industry, which we all want them to be safe and effective, we don't want to hear about new technologies that were deployed that created any risk for anyone. That can be very long path and demonstrating in the field is a critical step of that. So the way that that gets done, and the resources to do that need to be a marriage of some sort between the industry that's deploying it, the investors who want to see the returns from deploying that technology, and to some extent, the government who is able to push these things when it's early enough in their development that those other sectors won't yet get involved.
Dan: Elaine and Erica, thank you so much for being guests on our podcast. It was really, really nice to meet both of you, and we wish you all the best of luck. Thanks for being such great guests.
Elaine: Thanks so much.
Erica: Thank you very much for having me.
Dan: Well, Emma, that was a really, really interesting conversation. Elaine and Erica have so much insight and experience to share with our audience. It was really, really cool to meet them hear about their awesome work. We could do a whole podcast season just on clean tech in the climate space and never run out of companies and entrepreneurs and innovators to talk with. As I mentioned in the intro, this podcast is sort of a follow up episode to our Scaling Up Innovation To Drive Down Emissions briefing series, which we held in April through June. And so this was a great way to come back to that issue, which is so interesting, and, as we talked about, such an interesting thing to talk about in the wake of the Inflation Reduction Act, all of those tax incentives and investments are going to make it easier for a lot of these clean energy startups to make it to market at scale. It's not going to be easy by any stretch and accelerators like D3 are going to be absolutely critical every step of the way. But getting some of these incentives, long overdue incentives in place was a really big thing. And so I'm really happy we had a chance to come back and talk with Elaine and Erica about all this today.
Emma: Yeah, I am as well, it was really interesting for them to break down all the challenges, but then all the opportunities that Third Derivative can make available through their work. So if you want to learn more about our work on climate technology and innovation, you should head to our website at www.eesi.org. Also follow us on social media @eesionline for all of our recent updates. The climate conversation is published as a supplement to our bi weekly newsletter, climate change solutions, go to eesi.org/signup to subscribe. Thanks for joining us and see you next time.
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