Founded in 2000, venture capital (VC) firm Emerald Technology Ventures was among the first VCs to recognize the potential of sustainability investing, well before the terms “ESG” and “green investments” became mainstream.
In an interview with McKinsey’s Gisa Springer and Harry Forbes, Emerald’s founder and current managing partner, Gina Domanig, offers insights into Emerald’s journey. She discusses the fund’s experience in bridging the gap between start-ups and corporations, its approach to prudent business models, and its ability to navigate economic cycles without excessive cash burn.
Gisa Springer: What inspired you to found Emerald Technology Ventures as a sustainability-focused fund?
Gina Domanig: In the 1990s, I was working at a large Swiss industrial company where we performed a substantial amount of scenario analysis as part of our M&A activity, and we saw a massive shift regarding climate change. I knew there would be many opportunities for sustainability in the industrial sector and that incumbents did not have the capacity to capture them on their own. After I left that company in 1999, I joined a sustainability investing company and launched the VC wing of it.
Harry Forbes: Since founding Emerald, you have seen a lot of new green technologies, such as smart-sensor technology and biological pest management. From your perspective, is there a certain technology, such as solar or carbon capture, utilization, and storage [CCUS], that is changing how people think about sustainability investing?
Gina Domanig: In the case of solar, it used to be subsidy-driven but then developed its own stand-alone economic value, with no need for support from the government. This strengthened its value proposition. Corporations saw this trend as an encouraging signal to invest in sustainable-energy solutions.
Meanwhile, CCUS, direct air capture, and hydrogen (for most applications) aren’t there yet, but as these technologies continue to innovate, we will likely see the cost curve decrease dramatically as well. VCs can fund these companies at the point where their breakthroughs become economically competitive and environmentally impactful.
Gisa Springer: In your experience, what distinguishes industrial technology venture capital from general venture capital?
Gina Domanig: Emerald has seen many corporations try to pivot to develop or invest in green technologies. They understand they cannot rely exclusively on their own R&D capacity to drive their business goals. The type of tech that corporations need to adopt to achieve their climate commitments may have nothing to do with their core business. This is why we use open innovation1 as a way to look at a new idea from the corporation’s perspective. For example, if a food company makes a sustainability commitment for wastewater, it may need to bring in technology from an external partner, such as a start-up. The corporation can either be the start-up’s customer or partner to access customers. This duality is what sets the industrial technology VC industry apart from more general VC, because start-ups often require corporate collaboration to access established market channels.
Harry Forbes: How do you navigate the delicate balance between protecting intellectual property [IP] and fostering collaboration between corporations and start-ups?
Gina Domanig: Companies have a natural tendency to protect their IP and technology. When first collaborating with start-ups, corporations had unrealistic expectations about IP. For example, they might have thought they had first right of refusal to buy the start-up or could gain ownership of IP if the start-up did not deliver on milestones. To address these concerns, at Emerald, we created a structured framework that ensures clarity in IP ownership end to end.
For instance, a US corporation we’ve done many investments with no longer asks for exclusivity. Instead, it asks for an 18-month head start, meaning the start-up will not supply the product on a commercial basis to any competitors during that time. Meanwhile, we as investors see that the corporation has incentives to move fast, and the start-up benefits because it can continue with testing, piloting, and fine-tuning technology.
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Gisa Springer: What process and criteria do you use for selecting and nurturing potential future green unicorns?2
Gina Domanig: When one of our sector specialists, who are experts in their fields, says a start-up has potential, we have a deal team look at the company’s financials, management, and other pertinent factors to assess its viability and suitability for investment.
We prefer early commercialization because it gives us insight into whether management has a functional business model and a successful go-to-market strategy. We typically have a four- to five-year timeline to exit, but we can also invest for longer. We’ve had successful exits after 12 years. Other times, we exited so quickly that an employee stock-ownership plan wasn’t even in place. With different windows of opportunity, we react based on what is attractive.
Harry Forbes: How do you think sustainability start-ups and investors can succeed in today’s complex climate?
Gina Domanig: It helps that we have been through these cycles before, such as during the recent special-purpose acquisition company [SPAC] trend or the boom in the mid-2000s.3 Since then, people have become more realistic and have come to understand that they cannot take $200 million to achieve breakeven. At Emerald, we dramatically pulled back on investment during the SPAC years because we felt that valuations were too high. Now that they are lower, we have doubled our investment pace.
Gisa Springer: What advice would you give to the next generation of green founders and VCs?
Gina Domanig: While our primary goal is to create a more sustainable future, we must also acknowledge the business aspects of our efforts. It’s easy to deploy capital; the hard part is getting it back. It can be challenging to know what the economic cycle is going to be when you need to raise your next fund. Understanding a start-up’s ability to generate cash and breakeven is key. In our experience, companies can be more successful when they address both their economic viability and their potential to drive transformative change in the world.
