What are venture studios and how can they help with climate innovation?

We don’t just need more dollars flowing into climate innovations – we need them flowing towards the best talent, ideas, and companies. But how do we do that?

Typically, we support innovation by investing in a range of ideas and seeing what the market ultimately says. For instance, many VC funds tend to take a “spray and pray approach”. They invest in many companies so that if any companies in their portfolio underperform, they can still return capital to their limited partners. Addressing climate change will indeed take many shots on goal but we need as many of them to work as possible. In other words, we need a high win-loss ratio. When policymakers and economists discuss the trillions of dollars needed to go towards climate, it is implied that these dollars will flow towards ideas that have staying power in the market.

Just like we need more dollars flowing into climate, we also need new innovation models that improve our accuracy. Climate venture studios can help move capital and talent towards higher impact ideas, and faster, with lower risk. Go to any startup or climate meetup, and people will be talking about studios. There is restlessness with the current climate solution set, coming from a growing population of builders and experts that want to create, rather than wait to find the best climate solutions. However, the venture studio asset class is still nascent.

Studios are mainly distinguished by how they source and test new business ideas.

Accelerators and funds are built on the belief that they will eventually find enough good entrepreneurs to build a portfolio. Over time, they create a large enough investment pipeline, composed of ideas that they find in the market. If the right ideas come to them they can deploy their capital, but if not, they struggle to meet their mandates.

Studios take a different approach. Through a mixture of partnering with universities, industry experts, corporations, and other organizations, they proactively build new companies. Studios are often distinguished by the relentless building and testing of hypotheses. They develop a range of business ideas and rigorously assess them until they find the right mix of team and product. Indeed, there is a lot of trial and error, but it takes place within a controlled environment, and there are short timelines from when an idea is born to when a decision is made to build or abandon it. Figure one provides an overview of how the process could work.

When it comes to climate, many ideas require more implementation than innovation - e.g., renewable energy and energy efficiency technologies have been around for a while and now need to be deployed at scale. However, we are still waiting for innovation in many other areas, including customizing solutions for developing countries and low-income communities.

Though the venture studio asset class is still young compared to funds and accelerators, the preliminary results are promising. To date, in aggregate studios outperform other models in terms of returns. This is not to say that studios are not risky, far from it. However, their testing methodology is in essence a de-risking mechanism that if done correctly, minimises the chances of a bad idea getting into the market.

There is no single formula for launching studios, but we think there is a high-level rubric we can use as a guide:

1) Compile the talent - Here, we don’t mean the solo-preneur. Innovation must be co-creative and collaborative. This means bringing together a patchwork of industry experts, technologists, designers, investors and more. We need multi-disciplinary teams not just to build new ideas, but to ensure that we are vetting them from every angle, and doing so quickly.

2) Partner up - Research laboratories, universities, corporations, and other organizations producing R&D are sitting on decades’ worth of intellectual property. These are not the only sources, but they are good starting points. Partnering with these organizations ups the chances of accessing and executing the best ideas.

3) Build stage gates - Studios will be as successful as their ability to test and abandon the wrong ideas. Operating teams need to have repeatable, transparent criteria that tell them when an idea is not promising anymore. The quicker you eliminate ideas, the faster you find ones that will be a fit for the market. In this regard, we need to see studios as a vehicle for improving impact outcomes, component four.

4) Embed impact and equity in every process: Ultimately, any climate innovation needs to contribute to the larger effort of making sure that humanity can continue to survive in a scalable, equitable way. Equity and justice are as important to the climate innovation equation as the technology itself. Studios allow us to prioritize these principles from day one. The alternative is that we sit back, and hope entrepreneurs and their investors will do so, which has historically not been the case.

Studios are not a replacement for other organizational models supporting entrepreneurs. We still need venture capitalists and accelerators. However, studios are an important complement to the innovation ecosystem, and we need more of them. They can help us take just that much more agency over our future.

When capital providers are searching for ways to support the climate innovation ecosystem, they need to give more credence to studios. If they are looking for efficient use of their dollars that can have an outsized impact and want to intentionally catalyze the creation of new climate solutions, they should consider the studio model.

The New York Times recently opined that the Inflation Reduction Act was in effect a great experiment on the US economy. Globally, the unprecedented amount of capital going towards climate innovation is part of an even larger experiment that is just beginning. We need this experiment to produce more successes than failures, which will require us to rethink how we create new climate innovations. Both the opportunity, as well as the risk, are too great.

We would also like to thank Stephen Joyce for his support in designing the diagrams used in this article.