Born to die

Hey there,

Everything that lives dies eventually, just on varying time scales. Forgive the stark intro. Perhaps I’m opening this way because I wrote this while listening to a lot of metal. But it’s also germane to today’s topic, namely Running Tide, an ocean-based carbon removal company that ‘went under’ last week. We’ll do two things today: 1) explore what happened 2) expand on what it does and doesn’t mean for carbon removal and climate tech.

OPINION

Whether we’re discussing a venture-backed business that raised more than $50M in capital or a laundromat on your block financed with a mix of bank loans and someone’s personal savings, the modal assumption about the long-term business outcome should be the same: The business will die.

Businesses die for all kinds of reasons. Sometimes, the reasons are described complexly. But the throughline is that they run out of money. Many factors can subsequently also be blamed for their demise. Perhaps it was a good idea, but the ‘market’ wasn’t ready for it (it was too early). Perhaps the folks at the helm didn’t execute well. Perhaps the business grew too quickly. Perhaps it was never strong foundationally to begin with. Perhaps it got sued, laws changed, or another product or innovation came along to render its core products obsolete.

The story of why Running Tide sank doesn’t have to be complicated. Over an email exchange, an unnamed climate investor (not one of Running Tide’s) distilled it as follows:

This is tautologically true. But it’s also overly simplistic for the purposes of what we try to accomplish in this newsletter, i.e., lean into complexity in order to learn. So let’s do just that, namely, unfurl more layers of this story as we lay wreaths on the grave of one of the earlier big names in carbon removal. 

Running dry

At the end of last week, Running Tide, a carbon removal company we’d covered previously, announced it was winding down operations. This came as a bit of a surprise to many, including me. At least that this happened so soon. Various articles last year announced the company had raised $54M in venture funding (granted, much of this was raised in 2021 and 2022) and that the company had sold 12,000 tons of carbon removal to Microsoft. These are typically signals that a company is doing OK; they’re the types of signals companies blast out in order to signal they’re OK. Hence, there wasn’t much indication to the outside eye, including mine, that the company wasn’t doing well.

So, what gives?

In citing why the company shut down, Running Tide noted the following in a LinkedIn post:

In other places, Running Tide also cited a lack of demand for its product, namely carbon removal credits. Both reasons are understandable. Running Tide’s approach to carbon removal was capital-intensive. As we described in writing about the business ten months ago, they were focused on removing carbon in three different ways:

• Gravitational: Sinking woody waste biomass to the bottom of the ocean

• Chemical: Adding alkalinity enhancement to improve the ocean’s ability to uptake CO2

• Biological: Growing algae to remove CO2 as well via photosynthesis

All of this requires a lot of money to do at scale. You have to hire boats. You have to source materials. You have to run complicated logistics operations. You have to pour a lot of money into research and development. You have to build hardware systems to measure what’s happening in the open ocean, a notoriously cruel environment in which to build anything. You have to hire smart people with niche skill sets and compensate them for their time to do all the above. 

In carbon removal, you also need to attract buyers who are willing to pay you for work you’ll deliver in the future. You need buyers who are sufficiently patient and catalytic to pay you upfront for the product (carbon removed), even if you’ll only deliver years down the road. There aren’t that many organizations or players in the world willing to play that role, especially not for a product that doesn’t really help the company beyond offering reputational benefit. Clearly, Running Tide was able to find one such customer (Microsoft). I imagine they were close to inking deals with several other parties over the past few months. But orchestrating everything we laid out in this paragraph and the one that precedes it in tandem introduces complexity that’s exponential rather than simply additive.

So yes, all those things are hard. Still, these factors tell an incomplete story of why the company folded. For one, on the demand front, there is demand – at least to some degree – for carbon removal from other companies: 

• This week, Frontier, the advanced market commitment for carbon removal, signed a $49M deal to buy carbon removals from Stockholm Exergi based on their BECCS approach (bio-energy with carbon capture and storage).

• Last week, Swiss Re inked a pre-purchase agreement for 70,000 metric tons of biochar carbon removal from Carbonfuture out to 2030 and beyond.

• Three weeks ago, Ørsted agreed to sell Microsoft an additional million tonnes of carbon removal over ten years from its Avedøre Power Station, also a BECCS plant.

You get the idea – these types of deals happen. So, I wouldn’t say it’s fair to say Running Tide folded because there wasn’t sufficient demand for carbon removal in general. As is often the case in the death of any business, there wasn’t sufficient demand for its specific product, for its carbon removals. 

Now, that doesn’t mean Running Tide’s carbon removals were inherently ‘bad,’ either. What we see in carbon removal, whether in the deals cited above, the U.S. government’s support of direct air capture projects, or other capital flows, is a high degree of preference paid for carbon removal methods that are easier to measure and don’t depend on modeled scenarios, and that don’t necessarily carry secondary environmental risks. Of the few major buyers there are for carbon removal, they are primarily optimizing for certainty and minimized risk. Most carbon removal pathways that depend on the ocean don’t satisfy those criteria. If you look at the ‘leaderboard’ data of carbon removal deliveries to date, managed by CDR.fyi, while Running Tide is on there, all nine other leaders bury biomass underground or operate BECCS plants.

It makes sense that a lot of early carbon removal buyers and policymakers are spending their money on less risky credits because doing so carries less reputational risk. But that doesn’t mean those pathways are necessarily ‘better.’ Especially when we consider long-term scalability.

Straight to the source

To get more perspective on all of this, I sat down with Jordan Breighner over a coffee on Monday. Jordan was an integral team member at Running Tide, so his perspective on all this is probably most worth listening to. 

One thing he said that stuck with me was:

The carbon removal 'complex' as it exists today is making choices. The known risks with many carbon removal approaches that get funded today are that they may not scale to considerable volumes or that they may never cost much less than $100 per tonne. The unknown risks with Running Tide's approaches to carbon removal were multivariate, but Running Tide was focused on better understanding them to help assuage buyers' fears. That sucked up a lot of capital.

When I pushed him to identify any execution missteps, Jordan humbly granted:

My read here is that Running Tide spent too much money too quickly trying to do too many different things, trying to satisfy buyers who were wary of how novel a lot of it was. Running Tide was perhaps (much) more ambitious than anyone on the buy side of the carbon removal market (not to mention regulators) was ready for. Jordan also noted that, in hindsight, he'd have pivoted to focus on ocean alkalinity enhancement more and faster rather than advancing the tripartite removal pathway approach. That's another way of saying they could have simplified things, spent less money less quickly, and homed in on the removal pathway for which there's (now) more appetite among the (small) set of buyers out there.

I'm not here to adjudicate on whether buyers are right or wrong, on whether they should throw a bit more caution to the wind. Many other people have well-articulated concerns about Running Tide's approaches in general. However, the outcomes we get in 5-10 years will be based on what we collectively optimize for today. The current carbon removal market trajectory may well yield less scale in favor of more immediately credible carbon removal credits. It may also yield less ambitious research and development spending on carbon removal pathways – whether enhanced rock weathering, alkalinity enhancement, iron fertilization, soil carbon sequestration, or other – that are harder to measure directly and depend on model outputs. Because, well, as evidenced by Running Tide's fate compared to biochar or DAC players, doing the novel R&D doesn't necessarily win you anything.

Again, all of this is OK. The Running Tide team took on a ton of risk, tried something very difficult, and have a lot to show for it, even if it doesn’t seem like it. There’s research they did that I’m sure will prove valuable elsewhere. The hardware they built can be spun out and be useful elsewhere. Every person who worked there learned things that will be valuable to them for the rest of their life. All those things may seem more intangible right now, but they’re also what ultimately build the world, even if it’s on the second, seventh, or umpteenth try.

Sink or storytell

Jordan also noted that Running Tide could and should have controlled their narrative more successfully:

Jordan’s hinting at a few things here. For one, carbon removal is uniquely policy-dependent. Carbon removal is fundamentally a product that exists to deal with negative externalities (greenhouse gasses in the atmosphere) that have never been priced, even if they should and could be. No one has ever had to pay to pollute the atmosphere. As a result, there was never any market for a product that offers the opposite, namely a reduction of pollution that’s already accumulated. This market had to be seeded by governments and the early-moving companies that formed Frontier, an advanced market commitment with more than $1B to support those nascent carbon removal companies with revenue, knowing they’d want to buy this product in the future. Absent support like the $180 U.S. tax credit for carbon removal and Frontier, there’d be little to report on in carbon removal.

It’s also worth underscoring that storytelling is why that tax credit and Frontier exist. It doesn’t matter that the IPCC has said for years now that the world will require carbon removal to combat global warming. If other people hadn’t taken that call from the IPCC and gotten busy doing convincing storytelling, no one would be building carbon removal.

Carbon removal, as a whole, has done a pretty damn good job at storytelling. So much so that while carbon removal as an industry didn’t exist five years ago, today, there are hundreds of carbon removal companies, an advanced market commitment with more than $1B to support those nascent companies (Frontier), and a bevy of policies and subsidies in different countries to pay companies that remove carbon from the atmosphere. 

Still, as evidenced by Running Tide running out of it, the amount of money to go around for carbon removal companies shouldn’t be overestimated. All carbon removal companies still compete against each other to convince potential investors, buyers, and policymakers that a) their carbon removal approach is worthwhile and b) they’re one of the better companies at said approach.

The amount of demand out there for carbon removal is ultimately still relatively shallow, even if there is some. What’s perhaps most concerning about Running Tide’s folding is that it went out of business even as one of the few companies that had already delivered a sizable amount of ‘real’ carbon removal to Microsoft. Said differently, despite the fact Running Tide could deliver carbon removal volumes that ranked them in the top 5 of all deliverers, they couldn’t drum up enough demand to secure the type of financing required to scale beyond that.

Yes, carbon removal companies can get seven and eight-figure deals from a cadre of a few dozen buyers. That supports five to six-figure removal volumes. Maybe even seven figures. But who is coming in to spend hundreds of millions of dollars? Or hundreds of billions of dollars down the line, which is what’ll be needed for gigatonne removal volumes annually? Who will come in with PPA-type purchases rather than a series of one-off purchases, even if they’re large? Global governments are the only entities I can imagine making those types of purchases and supporting the scale of R&D needed to make it all possible.

Jordan framed the problem as follows:

The net-net

There are three main takeaways for me in all this:

For one, and this holds for all climate tech companies, to achieve maximum impact, you first have to survive. Then, you have to scale. To do all of that well, you have to do many things. But one of those is to tell the right story. At the risk of putting it bluntly again, if you're a carbon removal company, the onus is on you to sell carbon removal credits that, at minimum, don't strain credulity and, ideally, inspire confidence. Behind the story, the math also has to pencil. Otherwise, you will run out of money and die. No one else is coming to save you.

Secondly, I don't think the death of Running Tide is that worrying for carbon removal in general. I wouldn't worry about the health of the carbon removal industry more than I would about climate tech as a whole; climate tech companies are going out of business in droves in general. This is the norm. Plus, carbon removal is still in its first market cycle. Not its third or fourth. A few, if not many, deaths at the outset are normal.

Thirdly, I do think it's worth worrying about whether the carbon removal industry is set up to do what we want it to. What is the purpose of the carbon removal market? Is it to satisfy software companies' carbon liabilities? Or to scale to gigatonnes of carbon removal? As Stafford Beer once opined, "[there's] no point in claiming that the purpose of a system is to do what it constantly fails to do." Instead, he coined the axiom "the purpose of a system is what it does."

Do we want to remove gigatonnes of carbon from the atmosphere? Or do we prefer to ensure we can measure each tonne removed directly, cover corporate reputational risk, and avoid unknown risks to ecosystems that climate change may well decimate anyway? In aiming for the former, Running Tide ran aground.

Memento mori! & have a nice weekend ahead.

— Nick