Hello and welcome. To the Reversing Climate Change podcast. I am Ross Kenyon. I'm a long time carbon removal and climate tech entrepreneur. Today I'm very excited to be speaking with Andrew Jones, the Co founder and CEO of Carba. Carba is a Minneapolis company that works with waste biomass, turns it into biochar, and prevents biomass from entering the landfill unnecessarily.
Carbon had the good fortune of landing A5 year 44,000 ton carbon removal credit deal with Microsoft, which is a big deal. Getting a guaranteed demand signal like a long term contract with Microsoft is pretty much as good as it gets in carbon removal. These are serious people who diligence carbon removal deals at Microsoft. Microsoft broadly gets their pick at the litter, same with Frontier, Google or others who are making these very large
carbon removal purchases. So getting that stamp, you have to put it on your website, you have to tell people that Microsoft is one of your customers. Your parents know who Microsoft is as a customer. That is a known quantity. Fortune 101 of the biggest companies in the world is your customer. It's a great sign for any company that is able to achieve a deal with a customer like Microsoft. Once you have guaranteed demand like that, it unlocks the
possibility of finance. So Karba has this deal for five years and 44,000 tons of carbon removal credits. And that doesn't mean that Microsoft bought all of those credits up front. Often times these deals are structured to have milestone unlocks. Carpet would need to provide certain metrics of progress during this time in order to continue the process. In general terms. That's how I've seen it done in
other places. For other off takes, I imagine that's similar for them, although I do not know. I imagine that's similar in this case. I think people don't always realize is that these big off take agreements do not just mean that companies get access to a very large pot of money upfront. And so my other guest today is Matt Schmidt, who is the CEO and founder of Structure Climate where I am an advisor. I've known Matt for a long time. He served on Nori's board years ago.
I have really enjoyed my time working with Matt on what Structure is doing here. The Structure is working on innovative financing mechanisms for carbon removal and climate tech companies. Because I'll just back up here and I'm going to imagine that if you're a listener, maybe you don't know much about equity versus debt financing for startup companies. But if you've watched Silicon Valley, if you're familiar at all with how equity works, is that you sell a portion of your company.
You sell equity in your company to investors and they expect most of their bets to fail, but the best that do succeed, they expect to make large multiples off of could be 10X. Ideally, it's closer to 100 and up from there. Some of the big deals that you're familiar with, Angel investors or a seed investors of Uber, for example, became very, very wealthy as a result. The good thing about equity is that there aren't terms on it. Typically.
It's not like you have to get them a return within five years or there are penalties. Equity investing is a longer term approach, or it tends to be, not always. I mean everything I've said so far. I can think of counter examples too. In general that is pretty much how it works. But debt is not like that. Debt has strict repayment terms, interest rates, and there are often penalty clauses for for
failing to repay on time. That could result in the debt converting into equity, or the interest rate going up, or both. It's actually really hard to raise debt as a startup company because lenders don't want to lend to startups that represent enormous risk for a fixed return. The benefit of investing in equity in a startup is that there's a lot of risk, but the risk is also positive. The risk could also represent unlimited returns, but debt
isn't like that. They're still making a bet on an untested startup or fairly young startup, but at most they're only going to make the interest rate or the interest rate plus whatever penalty provisions are in the debt contract. It's not like they can also make an unlimited upside in investing in debt for this company. Oftentimes companies can't even get debt. When young companies can get debt, it's often times at usurious interest rates.
We joke about it in the show. It's closer to consumer credit card amounts, 20% plus in some cases. This might not look like a lot and it will probably only make sense to you if you've bought a house or done. This is a company where a 1% raise in your interest rate may not look like a lot when you're financing a house purchase.
But when you add up how much that is every month and then you multiply that out over the presumable 30 year duration of an average mortgage, it represents huge amounts of money. And so for companies that are small like this, changes in interest rates matter a lot to them. And so structure through various ways of blending philanthropic capital as well as commercial capital, are able to put together deals that are more palatable to a company like Karba.
We also talked about why doesn't Microsoft or bigger companies like this just finance these deals themselves. That's another really good question that we get into. If you've been dying to learn more about carbon removal startups, climate tech startups, raising money, the difference between equity and death, why you might want one in one circumstance and another in a different circumstance. We're going to get into all of that.
I hope you enjoy links to both Karba, the announcement structure, climate, or in the show notes. This show is paid for by subscriptions and if you love what we're doing here, if you look forward to the next episodes. If you could. Please become a paid subscriber. It would mean a lot to me. It really helps a lot. It's a good signal that there's product market fit here. For the podcast. It's $5 a month. You can do it on Spotify and I will put the link in the show notes.
If you cannot afford to do that right now. A great rating on Spotify, five stars or the same on Apple Podcast, plus a review. Write some nice things about the show. Also super valuable for getting the show out to more people and helping it grow. Thank you so much for listening and here is your show. Matt and Andrew, I'm happy to be able to announce what you're working on on the show and we will get into what we're going to announce, but we should just start at the basics here.
So the announcement even makes sense. I think if we go announcement first, it's not going to make sense. So Matt, let's start with you. What is structure climate? Yeah, Thanks Ross. Structured climate provides project finance services to for profit companies that are doing climate positive projects that we work across tech technology verticals. So anything that's that's good for the climate, let's let's
have a conversation. We focus on projects where there are good reasonable off take terms, you know, there's a a buyer for whatever is happening and where unit economics are are maybe a little challenging and some of the conventional project financing setups. And one of the main tools that we used to be able to engage early and at a small level is the the syndication or the the pooling of charitable and philanthropic capital into loans.
So we take the tax advantage flexibility of this charitable capital and put it into terms and structures for companies like Karva that set them on a path to more conventional financing as as they prove out. So our, our, our goal is to make those first projects, you know, that much easier to get done so that companies can spend that much more time focus on what they need to do, which is already hard enough.
And so we're we're here to help. You're telling me that the most generically named person in carbon removal has a financeable project? Yes, the, we often find that, you know, the the more boring a deal might sound on on the outside, the more interesting it is to us.
But no, I, I think this is something that probably a lot of a lot of climate companies face is that there are all sorts of, of sources of friction in these deals or transactions or sales that are completely unrelated to the technology that's that's at at the center of it or the service or the offering or, or
the product. And so if there are challenges in, you know, timing of cash flows or procurement processes from a corporate customer or your balance sheet or, you know, your capital cost or loan to value, or you don't, you know, you can't meet the debt service coverage ratio your bankers telling you to meet or you're trying to use venture capital dollars for concrete and steel. Yeah, let's, let's talk about that. I mean, it's the, the way I like to describe structures sometimes.
And, and maybe I'll, I'll give away my background in the Army here, but you know, the technology companies like Carba, like they are the tip of the spear And, and we, we need the tip of the spear, but we also need the heavy wooden shaft that connects to the tip of the spear. And, you know, if you're fishing with the spear or hunting or, you know, performing the ceremony, whatever, like they're all sorts of different tips of the spear.
That's great. Well, we're here to make them all effective in whatever they need to do. I'm not going to take offense to that there. There may be a lot of Andrew Jones's, but I'm a millennial, so I'm a special snowflake. Oh. God, I can just see you over. There, just waiting for your chance, like shut up, Matt. That's my time, Matt. I gotta get in there. Also, Matt, I don't think you used a spear in in the army, did you? Otherwise, that was That was a very long time ago it.
Was a different. For a long time. I guess you know a bayonet is a a type of spear, but yeah, it's true. Please. Save us Andrew, please tell us what carbon is. Yeah. Well, I don't know if I can top that, but yeah, Carba. So essentially, at our core with Carba, we're a waste to value company. We find waste and we figure out how to valorize it in the best possible way with a very strong focus on climate. So we're a carbon removal company as well.
And so it turns out there's a lot of value in the carbon that's in waste if you can lock that carbon up and then sell the resulting carbon credits. And so that's what we've been able to do here. And there's a lot of sort of variations on that theme that we're looking at. But at its core, it's this premise of where are all these pockets of waste in the world that aren't being utilized today, They're low or negative value.
And how do we upcycle them, if you will, and convert a, convert them into a product that's actually valuable, whether it be carbon removal credits or some sort of carbon product? Which waste stream did you discover was undervalued and decide to dedicate valuable career time to solving? Well our our beach head here, which is really exciting is looking at waste, municipal wood waste. All right, you got to go back. You got to choose something more army related I guess. Yeah, right.
I wasn't in the military. I wasn't in the military, but I was a pyromaniac as a kid, so that actually might tie into this. As a 12 year old, I used to make carbon in my fireplace, which turned out to be biocharred and
know it at the time. And I would mix that with sulfur and potassium nitrate to make a crude gunpowder, which I guess makes me sort of of the vintage of Spears that Matt was Speaking of. So I was making biochar before it was cool, you know, when I was a wild tween or adolescent.
And you know, kind of Fast forward later in my career, I got into chemical engineering and learned about how chemicals are made and how you can, you know, transfer chemicals from one state to the other and make and break chemical bonds. And really got started in catalytic pyrolysis, how we use catalysts to make it better and started CARBA to take advantage of all the wood waste and agricultural waste and yard
debris that's out there. And so our first project here is in Minnesota at a landfill site where we actually take wood waste from the the area, which is diseased or, or degraded and would otherwise burn or compost. And we could take that converted into biochar through a pyrolysis or, you know, very similar to what I did when I was 12 year old and suffocating a fire. And we can take that black biochar, which is this stuff. Ross It doesn't look like a giant turd.
You can cut that off. Thank you for fixing it. Yeah. We, we could take this, this black biochar which is now devoid of food value and we can put it into environments where it has Co benefits. And the first one we chose was a landfill because it turns out landfills leach out a lot of chemicals. They have odors, they have fugitive methane emissions. We can reduce all of that by putting this into a landfill and it the burial they're already burying soil.
So we can mix in with that soil and provide all these environmental Co benefits as well as lock up the carbon in the landfill. And so we have a big projects that we're building out here in Minnesota. The language I think is, is so interesting and, and can frame up so much of the the thinking or discussion here and and that is that, you know, sometimes even the language of Co benefits, I think misses some of the mark.
We we like to talk about, you know, let's understand the entire surface area of a project. And So what Andrew's project represents is not just storing carbon out of the atmosphere in a a way that that keeps it out of those short term carbon cycles, but also means fewer trucks on the road hauling soil and to maintain landfill cover. It means fewer micro plastics and local water systems.
It means more revenue at the landfill that is able to receive this wood waste that otherwise it it can't receive it. It means fewer emissions in the air. If you were kind of rogue, you know, just like wood chip piles that turn into potential fire hazards. And it's not that any one of those needs to be a strong enough or convincing enough, you know, case to say, let's get this project funded. It's that we can pull together capital interested in this project for all sorts of
different reasons. And that's and that's great. That's like the, the projects like Andrew's have again, there's like big surface area that, you know, their carbon and water and air and jobs and resilience and local and you know, all all these other things together. And so I just as as you look at projects, I, I would say the language of talking about Co benefits I think often misses the, the realities of what these projects can represent.
That's a good point. We, we certainly loss over it when we just use one big word to cover up all of these very immediate health impacts and other benefits here. But who's the customer for this work, Andrew is, is the city or the county or the state paying you to to do biomass diversion? Is it something like that? Yeah. I think long term we see this as sort of a future waste management lever. So right now we pay to get rid of our trash, we pay to get rid of our recycling.
No, we don't pay to get rid of the CO2 because it's invisible. It comes out of our tailpipe and and we don't see it. But really that's kind of the the third arm of of the waste that we produce. And I think long term that that can be part of the conversation today we're we're funded by
carbon credit purchasers. So companies that are or individuals that are trying to reduce their carbon footprint hit their net 0 targets and purchasing carbon credits directly from carbon or through marketplaces. I'm really excited to announce for the first time that we have sold a large off take to Microsoft, who is of course one of the leading buyers and has a very rigorous diligence process.
And they were, you know, attracted to our solution, both because of its carbon removal potential, but also the Co benefits and the, you know, the the simplicity of the project being completely Co located. And so this is a multi year
large off take agreement. We're super excited and, and really thankful for the support that Microsoft provides to this to let us get off the ground and really show the world, you know, how valuable this can be. And so part of this is learning all the benefits that go along with our process. And so we're doing some studies to get some real good real world data in the landfill for, you know, to measure exactly all the impacts that we're going to have on the landfill.
Congratulations. That's amazing news and very big. I think people listening and would assume that if Microsoft is 1's customer, that you've basically got it made and you probably don't need that many other people like Matt flitting around. I was going to say, pecking your carcass. No, I'm sorry, I'm not going to roll that back. I'm not a carcass yet. It's. Actually, I mean, let me, let me come at this from the Microsoft side, right? Like I've, I've, I've known the
Microsoft team for years. Ross, you and I first met when I was at Cargill and you were at Nori many, many years ago. And Microsoft was, you know, they announced their, their purchasing intent and I think 2020 not not too long after Stripe. And I've, so I've, I've known the team there at Microsoft for a number of years.
And we, we at, at structure actually maintain active discussions with them simply because, you know, Microsoft has a buyer, their, their finance team wants to buy carbon credits just like they buy, you know, software subscriptions and professional services and, you know, property services and employee benefits and all that. Which is to say that they that have contracts with the vendors that they want to source from those vendors perform that service or deliver that product
and the Microsoft pays. And this is how, you know, the transactions the world over happen in all sorts of different industries. And in established industries, there are all sorts of established financing mechanisms to support those transactions. And so one of the ways that I think about structures that we are bringing the the patterns for those financing products to emerge in this new kind of
industry. And so as, as we talked to Microsoft, they actually introduced us to the suppliers that they that Microsoft wants to be able to buy from because as much as they are doing to catalyze demand in this market and a really you know, leaders here again, they are corporation going through their corporate procurement processes and as a publicly traded company, I mean they have certain compliance
requirements and. The more consistently they can procure and and purchase, the more of that they can do. And so having mechanisms to support that and not just their everyday items, but also their kind of emerging areas like carbon credits and so on, makes it that much easier, not just for Microsoft, but then for the companies that want to follow in the footsteps of what what Microsoft buys. Why wouldn't they just cut Karba a check?
What blocks deals from happening in that sort of straightforward way that we might expect from being consumers in other parts of our lives? Yeah. So this is where I, I, I think, you know, we all have experiences with this. You know, if you're a, the homeowner that has done some remodeling or if you're, you know, at a company that's purchased services, whether that's, you know, consulting or software development or so on there, there might be some cash that you pay upfront to, to
retain services. But a lot of what it takes to actually get done what you're aiming to get done takes takes time. And then you want to make sure that that was done appropriately and received. And again, as corporate procurement processes work, they have their own, you know, systems for moving from vendor setup to invoice to pay and so on.
And you know, to, to pull an example from the auto industry, you know, if, if Toyota places an order with a manufacturer for a set of bumpers for a certain car, that company that makes the bumpers can go buy the, buy the steel, the raw materials. You know, they, they can make those bumpers using funds that they can borrow against the value of that order, that purchase order from a company like Toyota.
And so the, the fact is that, you know, just companies like Microsoft managing capital at that scale, like to manage their capital, which is to say they, they like to keep a hold of it until they absolutely have to get it out the door to whatever it is that they have, you know, purchased or, or committed to. And so we enable the purchase of carbon credits to be like the purchase of, you know, again, any of a number of other standard kinds of corporate services or products or
something. I think I can layer on top of that too, Ross. Like the, the way I see it is someone like Microsoft, they want to be able to buy the product, which is the credits. They don't want to fund the project. They don't want to be product developers or put in the capital to, to make to bring a product online. That's a very different ask and very different sort of financial risk profile and they have done things like that, but it that's not a model that's scalable.
And so where structure comes in and why we partner with structure and why it's such a valuable, you know, partnership is structure helps us get these projects off the ground, whether it's a folk or a nook, which I hate the term nook, I mean, come on. But whether it's the first or many of a kind, you know that we need project financing and that gets very difficult at the first of a kind stage, less and less difficult as you go on and you build out the model.
That's not something you can in really any industry rely on the buyers to to provide the capital for. And so that's where structure comes in play and that gives. The. The buyers of credits, a lot of confidence that these projects are going to get done. You have, you know, the capital, you have the sites, you have the partnerships, and you can make these projects go forward.
But yeah, there's a lot of partners that that there's a lot of things that have to come together to make these things happen, which is why they're so difficult. I think it's such a good illustrative case because if Microsoft cannot internally finance this in an effective way, I think it just goes to show how needed specialists are like structure essentially, because Microsoft has an
enormous finance team. I'm sure I don't know how many people work over there and there, but it's 3 digits. Is it possibly 4 digits of personnel that are doing these? Yeah, I mean they they are quite active, but they also want to spend their time and effort doing the things that they are best at. So, you know, planning data center infrastructure and cloud compute and, you know, their, their products and services for their core customers.
And so, you know, just like they're probably not financing, you know, I don't know a lot of landscaping services or, you know, they're, they're all, all sorts of things that Microsoft uses that they are not in the financing industry for. And, and, and that's totally fine.
You know, it's just like we as consumers can go to grocery store and and buy food without having to think about, you know, the financing processes used to put in the food safety, you know, measurement equipment and the standards and sort of how all of the invisible pieces come together to make that food safe to buy at that point of purchase. We just were able to to purchase that.
And so the more that we can get the right kinds of tools, the right kinds of capital in for these projects, the more that the buyers can focus on buying what they want to buy and then go back to doing what they want to do. Minds me mad of the the zone of genius, right? You, you don't want to be operating outside of your zone of genius or you're not effective.
And and so doesn't make sense for Microsoft to become a or, or any, you know, tech company to become a carbon removal company that or, or finance those projects. Yeah, Everyone talks about how difficult, especially first of a kind folk deals are. NOC is like end of a kind. So just like 2 plus whatever deals. It's obviously much easier to go through deals once the first one
has already happened. We've learned from it, we can move on. But people often say that carbon removal companies, even with a blue chip counterparty potentially like Microsoft, cannot get debt financing for deals because there's just no track record. These companies don't have cash flow statements that go back far enough in time that are credible. You know, a commercial lender is non concessionary.
Lenders are just not going to put money up for projects like this, even with Microsoft on the line. Is that still true? By the way? I've heard some pushback on that characterization. Are you still seeing that, or is that something I could have said six months ago, but it's maybe less true now? From what I've seen, it's even more more true now the so like as structure, like I said, we work across tech verticals.
We talk with companies doing all sorts of different climate positive things, so water waste would biodiversity, recycling power, etcetera. And we specifically focused on kind of the smaller scale of projects. So think like sub 20 million, we see a lot of demand in the roughly like 3 to $8 million range.
And what we hear from the companies we talked with is if they can get quotes to borrow from, from banks, even banks that they have established relationships with, you know, they're, they're getting rates north of 20% for. Like consumer credit card number. Yeah, right. It would be like, you know, going to a car dealership and saying like, Hey, I, I know I get an auto loan for, you know, 8%, but I'd like to put this car in my credit card and pay like 23% or something.
And, and so, you know, the reason you can get an auto loan for a lot less than a, a credit card rate is that if the car, you know, if you fall behind on payments, they have a car they can go get, whereas a credit card, you can pull out that number for Nye upon anything. And so there's this kind of trade off between the cost of capital and the flexibility of
the capital. And so cars and houses and buildings and equipment and, you know, things that can be, you know, collateralized or repossessed or claimed. I mean, there, there tends to be a lower cost of capital when you're talking about a distinct thing that is believed to retain its value. And there tends to be a higher cost of capital when you the the borrower, the, the person receiving the capital has more flexibility.
So start up founder can raise venture capital and you know, can can do just about anything they want, which is why investors at at those stages put in, you know, mechanisms to manage the governance and the boards and decisions. And like they, they build up a framework to bring the control because the control is not around a tangible thing, but in in real asset, you know, type projects, it is a a very
tangible thing. And so it's, yeah, I don't know, there's, there's a like, I don't know how much to get into sort of like risk return curve and, and financial, you know, one O 1 or theory or, or whatever. But it's like the it's one thing to, to get the blueprints for a house. You know, like you'd say that you're planning a housing community and you're going to just cookie cutter every house.
You can, you know, design the, the blueprints once and, and use them a bunch, but every house you build, like you need cash for that. You need to cash to buy the wood and the concrete and the, you know, to pay the people to move the stuff around on on the ground. Or it's like a, a kid that hears a joke and shares a joke and share that joke, you know, many, many, many, many times without
any additional cost. But like, if they're going to run a lemonade sand, they need to buy the lemonade supplies. They need to buy the, you know, the, the material. So to make that happen and so we, sorry, Ross, I, I feel like I'm, I'm wondering on the answer here, but it's like the, the companies that we talked to, they have customers that want to buy whatever it is they can produce.
And so we're here to say, let's line up the the cash and the capital that can be flexible enough to meet what your, you know, project needs. They also probably don't want to be on the hook in case, you know, knock on wood here. Andrew Carba fails and fails to deliver. If they had pre purchased, I imagine there's probably less recourse. That risk is probably with the
buyer and they don't want that. Someone would lose their job potentially if that happened, if they bought something that fell through. Yeah, you're really sticking your neck out, right and doing something that's not core to the company as well. So yeah, I kind of look at it, you know, from the entrepreneurial perspective, I'm doing a climate start up and climate is tough, right, For all the reasons we've said. I have a couple options. How am I going to get this project off the ground?
I've got a project I can go to a customer, I can try to get prepayment. That's, you know, more and more difficult as as this as this industry matures, I can go out and try to get debt financing, which we mentioned is, is very difficult that a lot of times these off take agreements aren't bankable, meaning you can't leverage them necessarily for traditional debt for a first of a kind, because that risk is there because this market is is chaotic and not established.
And and or I can go out and get venture, you know, so equity financing, you don't really want to equity finance the capital of your first of a kind. I mean, that's very expensive capital. That's not a first of all, it's not a very sustainable model, but also it's, it's a very expensive model. I've heard you know Venture, Matt, you correct me if I'm wrong, but I've heard Venture is equivalent to taking like a 30% rate loan. Yeah, that's kind of or or more. I mean it it it, it depends on
more than you're exact. And it comes with a lot of teeth sometimes. Yeah. And so it's so it's not cheap. So you don't want to do that if you can avoid it, especially for capital for people, it's a little bit different. But and so then, you know, come in structure, climate and Mat, they've got this alternative 4th pathway, which is this is debt, but it's philanthropic debt, you know, mixed with some private debt.
And he can talk about that more, but it's a way to get much lower cost of capital that's now enabled us to do first of a kind build outs. And we can touch on, you know, DOE as well. But yeah, it's a it's a door opening lever for us. And, and has really allowed us to, to take advantage of, of, you know, building a first of a kind new, new technology to really save the planet and save and, and improve landfills and air and water, water quality.
Yeah. And you know, I, I, I want to be clear that this is, this is not sort of the end all be all, you know, solution for everything there. There is absolutely a need for early stage venture capital. And if, if you're a climate company getting started and you know, you're figuring out your science or your technology or you're figuring out your team, like equity financing is a great
tool for that. And, and really, I think a helpful way to, to look at this is for anything that your company can use, you know, everywhere, would you say your IP, your talent, your, you know, science, look at equity financing options. I mean that that's really where you should be putting that kind of capital into play.
And then for anything where you're doing something specific to a place or a customer or a set of materials or something like that where it's like almost like one time use capital. So trucks, concrete, steel, etcetera, you, you have to pay for those physical things, look at debt solutions. And so the, the right kind of capital tool for the right kind of job is, is really what we are here to, to build.
And we find that a lot of climate companies really could have don't necessarily have the awareness because they haven't, you know, they haven't been forced to figure that out. We're here to say, hey, let's get more smaller projects funded faster with capital tools that are recognizable to more mature markets and and sources of capital. And that way, you know, across a variety of technologies, we'll just we'll see the and show the commercial maturity that's that's possible. Well, if this.
Particular type of debt financing is only for a smaller subset of lenders. What kind of maniacs are interested in deal flow like this? How are you able to attract people that want to fund projects like this? Matt, I imagine it could be a difficult pitch. You know this is where. Again, we we really focus on the entire surface area of the project and so you know, to call out like what what Karva is doing and and just a dig it into the specifics of that a little
bit. So Karva needed needs is you know, is using some project financing to put this first site here into the site in Minnesota. And the loan that we syndicated is, is made-up of a handful of what are essentially donors who are providing the the capital that is being pooled into this loan product with terms for Carba that can work for Carba.
And so in this case, the the primary donor that the main anchor donors actually Eric Schmidt's Family Foundation, they are an active grant maker in areas related to waste and and water. And so this opportunity to not only achieve impacts in in waste and and water like what Parba is is able to do, but also to utilize their rant making capital as a as a proof point for building that credit transaction history was was was really meaningful to them.
But then aside from that, you know, there are some local donors that you know, have known Andrew through other networks and and like to support local entrepreneurs. There's a local software company is supporting this project again, because it's, it happens to be in, in Minnesota.
Whether you're looking at this for, you know, Minnesota or wastewater, carbon, climate, small communities, rural economic development, you know, maybe you, you want to support US manufacturing jobs or entrepreneurs that, you know, went to EU University of Minnesota or they went to Berkeley or, you know, have the last name Jones. Like, I don't know, there can be a whole surface area for these projects. And, and we're going to say that's great. You know, all of this capital
can work together. And we're here to make it easy for that capital to make projects like what Carba is doing successful and and able to achieve the impact that they are able to achieve. I love the idea of some analyst or associate with their first job in VC pitching A thesis correlating will people with last name of Jones to alpha being like this is where the this is where we should be investing right now, the Jones portfolio.
I'm all for it. I bet you are for you to oppose it. I bet there's a correlation. I don't know if there's a causation, but there might be a correlation. That you mentioned that you see these people as donors. Is it all concessionary capital like that or are these people getting a return? Are they? How are they seeing it and what does it look like? Yeah. No, great, great question. A couple of couple of terms that I I think are important to lay out to understand the landscape
here. One is that this, this entire concept of lending, you know, charitable or tax advantage or philanthropic capital, all, all terms are basically the same thing. This concept has been around for decades, like it's, it's been something that's been part of the tax code since the 60s, but only private foundations in, in the tax code are, are able to utilize it. And the biggest foundations, you know, the ones that everyone has probably heard of it, Gates and MacArthur and Ford and so on.
I've done this, you know, using the hundreds of millions of dollars and it is, it is an active capital flow, you know, mechanism for those types of groups. What we are doing by providing services that pool the capital is utilizing that part of the tax code, but also making it an
option for individuals. And in that want to, you know, make a charitable contribution out of a donor advised fund or had a, a liquidity event and, and want to, you know, put some of that capital to work in this kind of find it project financing. And when you look at the entire landscape of charitable dollars and how they flow, private foundations are only about 1/4 of the transactions out there as, as, as measured by, by dollars.
And So what we're saying is, you know, there's a whole whole bunch of smaller projects that can utilize this kind of capital. And there's a whole bunch of capital that can, you know, that loves these kinds of projects for all sorts of different reasons. And so we're here to facilitate that connection. And so they are in the eyes of the IRS, they are donors. You know, this is charitable or tax advantage capital that has generated a tax deduction opportunity.
And yet because we bundle the dollars into a loan that actually preserves the charitable capital so it it pays back. And the donor at the end of it can elect to receive their principal plus interests and and put it towards other charitable causes. So, you know, in, in the case of the Schmidt Foundation, for instance, we've talked with them about recycling this capital into other projects like this, which they're they're great
with. But you know, the local software company, they're probably going to find some other projects happening in, you know, education or healthcare or something in the Twin Cities that that they'll put that capital to once once it gets repaid. And that, and that's fine. Like that's we're here to say, you know, if you want to support this project, here's a mechanism by which that can happen. And when the project is done, you know, thank you for your support.
And so it's the the preservation of the charitable capital that really starts to make it a little bit different than kind of how you might think about a donation in general. Are there lenders in this loan who expect at least something above the risk free rate for making a loan? Or is it all sort of philanthropic capital at this point? At the moment it is all
philanthropic capital. As Karba you know matures though and this is kind of what we talked about with getting them ready to move to more conventional sources of financing. There are lots of you know larger scale or mid mid market type infrastructure investors that that finance landfill type projects or municipal projects that are that want to see this kind of technology start to gain traction. But because of the kinds of investors they have and their capital requirements can't take
this kind of early risk. And so part of what structure does is, is build that bridge that puts companies like Carva on a path to really show or prove out their commercial viability to any of a number of different types of other investors. And so the catalytic or philanthropic capital at the start can get replenished and can stay at that that leading edge.
And that's where, you know, and again, we're we're building this, this bridge to bankability or over the valley of death or, you know, pick your metaphor here. But the the point is, let's, let's meet the projects where they are today using capital that is kind of the right cost in the restructure for them today, but done in a way that
makes them recognizable. And so that the returns the, the rates, you know that, that we talk about, it's, you know, we, we have a lot of flexibility within that. But generally think, you know, 5 to 7%, five to seven years, that's kind of where we aim to land because we're balancing a
couple of things. One is that we want the rates to be low enough that the companies like Carba have have enough space and flexibility to do what they need to do while making the rates high enough that they become a meaningful part of that company's credit transaction history so that they can go to a bank next time. And the bank might say, oh, you like you got a really good rate on your first loan.
How did you do that? Like, well, here's a story about how we did that and and that's fine like that, that's great. You know, it's like, oh, well, you, you know, you borrow that on these terms and paid that off Great. Here's you know, here's the offer that that we'd like to make. So very. Attractive thing to be able to offer a young company. Andrew, when you were looking for financing for this project,
did you have many options? Are there a lot of people floating around trying to provide this service or is it pretty open? There's not a lot of options to be honest. You know, we talked to to venture Angel investors about equity financing and you know I talked about that before. We also spoke to infrastructure funds. There's even sort of blended infrastructure funds that are kind of more venture style early stage infra. But even that it's, it's
difficult in the climate space. But yeah, it's it's, we looked at a lot of different areas to answer your original question. And there's just not a lot of options, which I think is what you see a lot of these climate companies struggling with, even ones that have gotten VC funding and have been able to build sort of small pilots, they can't get to that next stage to really
prove out commercial viability. And they're the ones with, you know, off take contracts with marquee customers, you know, with, with great investors on their, their cap table. You know, they've raised a, a, a ton of money. But if it's not the kind of capital that the investors you're going to are, are looking to get out and it's not the right kind of capital for what you're doing, then then it it
becomes a hard a hard sell. And then and Andrew, maybe the, you know, certainly I, I see this a lot, but I feel like there are a lot of options that want to talk to you once you've done something. And, you know, like once, once you get started, once you're, you know, once you have that, that first project or the first two or three, you know, projects, then yeah, they, they would love to write the checks to fuel that growth. And, and that's like, that's not
just Carba or biochar. I mean, we see that everywhere, every every kind of climate project like this faces the the same kind of challenges and like how do you how do you start something that is so new and when all of the capital that might help you start wants to see it already having been done before? This might go in bonus content because it's a little bit eccentric or maybe naive, but Minnesota is a very progressive state and I see it as a very
creative state financially too. In terms of policy, is there any opportunity for carbon removal projects that intersect with conventional city or county or state operations to have access to municipal bonding? Is there any ability to have tax advantage bonds working in favor of carbon removal at the state level? Maybe down, down the road.
I, I think that you're better bet for it for right now, at least for the next, you know, three 5-10 years would be to get enough debt funded transactions such that the kind of bond underwriters that are going to come in for really big deals have feel like they have enough of a data set to start to price it as something that that makes it appropriate to both the city and the investors that they want to attract.
And this is where, you know, it's like solar and, and solar PVI think is, is such a great example of, you know, in the last dozenish years as has really sort of become large scale and boring and that and like, that's fantastic, right? Like we want, we want that kind of technology to be financed at a massive scale and financed by, you know, all of these like pension funds that want, you know, 0 risk and and accept low returns. Like that's fantastic.
And yet it took 50 plus years for solar to get there. And you know, when Jimmy Carter put, put panels on the on the White House in the 70s, like it wasn't because of the spreadsheets had, you know, perfectly mapped out the, the growth plan. It was because he wanted to show what it looked like, you know, show that it could be done.
And that's really kind of part and parcel with our theory of changes as we get more smaller projects started faster than more people can see what climate projects look like, and they can start to think about what that means for their community, their city, their municipality. Yeah. Just to layer on that, I, it's, it's very clear to me that when we demonstrate this at a commercial scale and show its profitability in the numbers, it becomes way more bankable.
And so we, you know, there are the, there are these early stage infra funds that will take you from 2:00 to 10:00. There are the later stage that will take you from 10 to 100. You know, once you prove that out, it's, it's these, these first of a kinds that are, are very difficult to to fund. And that's, you know, I think a huge lever for Matt.
And I think, Matt, you also are hoping to get into sort of the two to 10 and beyond stage as well and then kind of help us as a company grow, grow that credit rating, grow that ability to attract, yeah, that type of funding. Exactly right. Yeah. I mean we're, we're here as early as we can be and engaging in a way that we believe we'll we'll have have you on that path. And then hopefully we continue to do our job well and and remain that that partner for you
as as you grow. And Minnesota kind of the, to touch on that piece, Ross, like Minnesota is a great state for this. I moved out of California to come to Minnesota, which, you know, Californians thought I was crazy, but I'm from here. So but it is a very progressive state and we have a lot of policies, you know, pushing for solar and and renewable and sustainability. You know, Excel Energy, for example, has to be net 0 by 2030, which is only five years away.
And so there's, there's some really big levers and on the municipal, municipal angle actually, sorry, I have a cuckoo. Clock. I love it if there's. Been cuckoo clock going off this entire time. What's? Funny about I I enabled an Alexa skill last night to to alarm me at an hour because I was perpetually late to things. So it I tried to disable it by putting do not disturb but it didn't listen. So apologies. You'll have to edit some of those Cougars out, Ras.
Not stay in it but anyways please. Stay in it. So on the Minnesota angle, the city of Minneapolis has actually funded the first biochar facility in in the US, maybe the world funded by a municipal funding source. I don't know exactly how the money was appropriated. So the city of Minneapolis and then the along with the cities of Lincoln, NE and Cincinnati, OH, through a really competitive process, got selected by Michael Bloomberg's foundation to to implement these municipal level
biochar projects. So yeah, it's just like a, a, a great example of like making it local, making it real, making it tangible for people. And that, and that's a huge growth area for us. So they're focused on biochar that kind of line the streets or the, the roadways that landscapes on the side of the roads with biochar, this municipal angle of waste aggregation and landfills and burial. It is, you know, Corda, what we're doing as well. And so it's it, it all ties
together. And I think Minnesota is a leader there, and we're leaning into that for sure. Are there green bonds that might be applicable to work like this, or is this as far away as municipal bonds are? Maybe again, the the challenge with that often comes in with scale and costs for establishing credit ratings and having the data set to get the ratings done and so on. And there are certainly, you know, those kinds of financing instruments for more established clean energy projects, solar,
wind, batteries, etcetera. What structural climate is focused on is companies like what Carba is doing or, you know, some of the other like small modular tech companies where they have something that a customer can see for themselves and that that that the customer wants. And the particular, you know, parts of the project are they don't necessarily fit a a conventional scene, but there is tax advantage capital that is willing to and wants to see this
kind of impact. So, you know, private market transactions are what, hundreds of trillions of dollars, I mean, kind of wrap wrapped together the whole bunch of numbers there. And I don't, I don't want to apply for a second that Phil and cloud Picker charitable capital is, is, is anywhere close to that like, but it, it doesn't have to be to get started. So these capital sources can be really, really shallow, but by being shallow, they are also
really broad. And so that's again like how we activate the entire surface area and we get the capital that a company like Carba is ready for and done in a way that again puts them on that that path to growth. You mentioned APRII, imagine that might be a new acronym for People Listening. What is APRI?
Yeah. So Apri, since we're program related investment and when I I mentioned the, the mechanism that private foundations have been using for, for decades to make these kinds of transactions happen, that's, that's all grouped under what the IRS calls a program related investment.
So there are a couple of tests that we have to meet to make sure that this kind of capital tool is appropriate for how we're aiming to use it. And we partner with five O 1C threes that provide the syndication and the actual handling and, and receipt of the donations and the, the charitable dollar. So makes it easy for groups like the Schmidt Foundation to, to give grants. And then that's the, the transformation point.
In this case, we've been working with the Venn Foundation Venn as though at the intersection of purpose and profit. They are also a local group here in, in Minnesota and they have been a fantastic partner. They, they work with a whole host of different, you know, impact areas, education and healthcare, community developments, you know, and so on. And so they've done some things in water before, but nothing really so climate focuses as this, but we are we are changing that quickly.
Depending on your sort of exposure to impact investing, you might hear terms like mission related investments or Mr. is that's not established within the the tax code like like PR is are, but you know, just can can again refer to a type of investment where there might be some kind of impact return in addition to a financial return. Andrew, did your equity investors have any questions on
the PRI, like how did that go? No, I, I think they were, they were excited about it because they saw the value, you know, to them being equity investors, it's, it's a low cost capital approach to get this thing done and get us to the next stage. So I think it was it was welcomed with open arms. I think not everyone had heard of the term PRI and we had to
explain it but. So Andrew Carver's not your first company and I, I believe one of the donors that came in to support this PRI was actually an Angel investor from a, a prior company. Can you share a little bit about that? Yes, actually, yeah.
I had a previous company before this that I built detection equipment, actually some of the best detectors for pyrolysis gases and and other sorts of things and ended up selling, you know those assets off to Shimatsu Corporation out of Japan. And so that was a successful exit loosely related to what we do here. And someone related to that company also invested in Karba as an early Angel and then went on they have a foundation and that foundation went on to invest through the PRI.
So it was a really interesting opportunity to invest sort of private capital in an equity stake, but then also through a foundation philanthropic capital. Oh, that's interesting. Yeah. And and this is where I think understanding the the landscape of capital can become really important. And you know, the groups like Schwab and Vanguard and Fidelity are, are the largest 5O1C threes in the world just by assets under management because they manage donor advised funds for
so, so many people. And there are lots of reasons why someone might make a charitable contribution, you know, whether that's for like tax efficiency or tax streamlining. Certainly anyone who's considering like a tax loss harvesting strategy can, can look at this, you know, this, this kind of opportunity to get a similar outcome. And so it doesn't have to be someone that you know, is big into philanthropy or big into
charity. It's you know, if you have dollars and a daft that are just sitting in the S&P and you want something more interesting to do with them like we've we've got a bunch of projects that would that would love to get that that kind of support. And at the other plug I'll give too is, you know, if you're someone sitting with the foundation or philanthropic capital or you want to just make a donation, it's, it becomes catalytic capital.
So it's not like you're giving it away and it's, you know, it's a traditional donation. It's actually a loan vehicle that goes back and then you can reuse that for a catalytic for a charitable purpose again. So the, you know, as Karba pays these loans back, you get to reuse that capital, which is incredibly catalytic and very different from just, you know, donating the money traditionally.
Right. And the I, I, I do want to like one thing I, I always want to emphasize or, or be clear on is that there are, there are lots of areas where donations are just a, a critical tool for a given issue. And the lots of areas where you know, a, a, a donor that that gives is, is absolutely what is needed and there is no mechanism for return. I'm not. Like we shouldn't, we shouldn't charge, you know? Getting fed or whatever, but in in the theory of change.
Like the sooner that climate positive business models can just become business models, the sooner we get the scale of impact that we're all after. And so that's really our focus is saying we can work across a wide variety of types of impact, you know, water, waste, air, etcetera. And one metric that we create across all of them is a return
on on capital. And so again, with the goal of getting more conventional or or kind of, you know, fully conventional financing systems in play for these climate positive projects and impacts and really like accelerating the path to commercial maturity for a wide variety of climate technologies. Thank you so much for being here. Congratulations on the big off take, Andrew. That's amazing.
I'm happy that structure was able to participate too, and make all this happen and tie it all together so neatly. Really interesting to hear more about what it's like to be working on debt financing, both as a project developer and then also being on the finance side. Thank you for sharing both of you really. Appreciate it. Yeah. Thank you, Ross. Thanks for having us. Appreciate it.