In 2011 the legendary VC Marc Andreessen wrote an 0p-ed in the Wall Street Journal titled “ Why software is eating the world”. The last decade has proved that Marc was categorically correct. Not only is software eating the world, but it’s doing so at faster speeds than ever imagined. Software has found its way into just about every business in the modern world. While we are still in the very early days of cloud computing — relatively speaking that is — software applications are proliferating at an increasing velocity;
“More and more major businesses and industries are being run on software and delivered as online services — from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.”
This was written at a time when software investors generally under appreciated both the quality and growth duration of the business model. That is certainly not the case at the present — mean listed software valuation has tripled from 5x EV/NTM revenue in 2012 to over 16x today.
Standing on the shoulders of Andreessen’s writing, I believe that sustainability will be doing all the eating at the metaphorical dining table of the next decade. Co2 for entrée anyone?
We are in a climate emergency that needs to be reversed, and if it is not, then the science suggests that global warming will increasingly wreak havoc on people’s livelihoods and communities, and in doing so, the global economy. The idea that we must better protect our environment is not original. Nor is ESG investing. The flow on effects of what this means though is worth spending a moment to contemplate.
The corollary of this point is that every business and consumer (and they are becoming one and the same from a purchasing needs point of view) has to become a sustainable one — much like every business regardless of size in some way or form has in the last decade become a software business. Industry and innovation has enabled the incredible world we live in, but the tipping point has arrived, and it will be industry that needs to be the ones to ensure that humans can continue to inhabit earth with the same utility upon which we do today
Today Allbirds rings the bell on the NASDAQ — ticker aptly adopted as BIRD. The fashion industry alone dumps 2.1 billion tonnes of carbon dioxide into the atmosphere every year. That equals 2X the amount of pollution generated by every car currently in use in America. Most of what we wear on our bodies today is made from plastic. Plastic comes from oil, and oil comes from fossil fuels.
This needs to change. And it will.
Starting with a humble natural wool (and extremely comfortable) shoe, Allbirds now uses a variety of natural materials such a Eucalyptus fibre and sugar cane foam (aptly named SweetFoam) to produce its array of shoes and clothes — from lounging around the house to high performance running gear, Allbirds has you covered. You can in fact make a very easy case that Allbirds is not merely a clothes company at all, but a materials innovation company disrupting how clothes are made. They are fundamentally shifting how carbon particularly is measured in production (as well as full life cycle) and driving change in the industry by open sourcing (or collaborating as the case is with Adidas) the materials along the way for others to benefit. They have set out to drive change deep into the supply chain and in doing so become the industry standard bearer on sustainability practices.
When it comes to successful innovation, there is no better framework than Clay Christensen’s “Jobs to be done” — that is, what job is being fulfilled for the consumer and their struggle for progress for your innovation to be a success. In the case of Allbirds, it is more than simply clothing their customers. It is enabling them to contribute in some small way to ensuring their children can enjoy the planet in the same way that they did, and making them feel good about it — through comfort, or style or performance — and in doing so, creating a brand customers don’t just align to, but they love. The best in class NPS in the high 80s backs this up. We all know the power of brand love in driving cheaper customer acquisition and huge lifetime values. This is the holy grail of consumer businesses.
Allbirds are not alone in this vision or innovation– Tesla’s job is far greater than simply getting the driver from A to B or more broadly mobility; Impossible Meats job is more than to feed a hungry customer. The job is far more important than that. The job is to ensure that the planet we live on not only survives, but thrives in the coming decades, AND importantly give consumers a choice to pro-actively participate in this without compromising quality of lifestyle.
Everyone agrees on the importance of becoming sustainable. That’s not where the argument lies. The argument of many is that the early adopters of these more sustainable products and processes are merely virtue signalers. This view states that the incumbents will eventually catch up and overtake these ‘upstarts’ by leveraging and utilising their market position.
Those that make this argument in my mind miss two fundamental points. Firstly, that this shift to ‘sustainable’ is both unavoidable and massive — much like on-premise servers to the ‘cloud’ has and will continue to be, to play out the software analogy. Just like the migration to the ‘cloud’, it is not so easy to simply just lift and shift — it can be akin to swapping out a plane engine while flying, particularly in fast growing technology businesses. It will be much the same for large consumer incumbents. Serious sustainability practices will take legacy players take years to not only put in place but perfect, and so you can’t underestimate just how hard it will be for them to simply to ‘catch up’ in a race long after it has started. Look at the EV industry as a wonderful case in point — some suggest competitors are more than 6 years behind Tesla in their technology.
To lean into the 7 powers framework that we use to heavily here at TDM, do these incumbents have either the process power or cornered resource to up end their entire value chain and compete with those brands that have from the start authentically built from the ground up. Even if they did, the innovators possess a significant counter position within their model, that if replicated, will in the short term lead to a disruption of the incumbents core business. The laggards in this shift will in fact die, and the long term winners will be those that have from day one included sustainability in their DNA. Like cloud, the new businesses that are built in this environment of sustainable-first will only increase in velocity, and only further highlight the distance the incumbents have to travel to meet the increasing consumer demands. It will and has to become a virtuous up-cycle of sustainability. In turn, like software, a whole new market of enablers and tools will emerge, growing and building in this ‘sustainable native’ ecosystem, only further increasing market velocity.
The thematic outlined is not just attributable to consumer goods, but every business. Much like software has become, sustainability is now pervasive, whether they like it or not. It starts with the consumer, as that is where the most powerful voice lies. But it will, and is, encroaching on all industries. And, we need it too. Future generations are relying on it being just so.
Just to test the zeitgeist, direct your attention to any legitimate news service on any given day, and without fail there will be a story in relation to funding of sustainable technology at the small end of town (every tier one Australian VC has at least one alternative meat company in their portfolio) or ESG responsibility of large corporates, like BHP recently committing to selling its coal assets within the next two years. The graph below gives a wonderful visual representation of the increased mentions in US earnings transcripts of both “environmental sustainbilty” and more broadly “ESG”
According to the The Economist, investors poured more than $500bn in 2021 into the “energy transition” (shorthand for decarbonising everything from energy and transport to industry and farming), twice as much as in 2010. ‘Climate tech’ now makes up about a tenth of new investments made by Sequoia Capital (full and very insightful article here.) The investment required to decarbonise the planet is estimated to be more than $US30 trillion ($41 trillion), presenting people with a rare opportunity to invest in companies that will be involved in the race to net zero. My bullish view is not alone;
“Climate change is the next major mega-trend, and we believe it represents the biggest investment opportunity since the internet,” James Tsinidis of Munro Partners was quoted just last month.
While our investors hats are now firmly on, lets dig a little deeper. Much like the discussion in regard to the continual perceived inflated prices in software, the quote from Marc Andressen rings true for software as it does sustainable-first companies;
“But too much of the debate is still around financial valuation, as opposed to the underlying intrinsic value of these new companies. My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy”.
Replace software with sustainable-first — this is in our mind going to hold true in the coming decades.
It is well documented as to the often perceived stretch valuations of the likes of Tesla (16x EV/ NTM revenue compared to other car manufacturers that trade between 7–10x earnings), or Beyond Meat trading at c10x forward revenue, To be invested in these businesses, you need to believe that the shift is not just to ‘sustainable’, but it is that this shift is going to be both dramatic and that the long term winners are those that have an authentic DNA to put their sustainable practices at the heart of every decision that is made — they have to be ‘purpose native’. You need to believe that their current adoption and growth rates can and will continue for far longer than any of their peers have ever seen because of this in-built advantage. It is a high bar indeed, but one perhaps that is inevitable given what is at stake.
When assessing growth opportunity, investors always quite correctly speak to TAM, but when looking at the businesses that have changed the world, it is their ‘vitality’ — that is their ability to expand their TAM over time — that ultimately gets underappreciated. Square, Amazon or Shopify— generational companies that continue to find ways to evolve — to find new customers that they never knew existed and importantly find ways to monetise them. Our thinking on vitality was originally framed by BCG in a wonderful set of blogs linked here
You need to believe that in fact these sustainable-first companies have the greatest chance of becoming the next generational winners — that indeed their growth duration is synonymous with what halted the current emergency — that they find ways to leverage their brand and their process power to become much more than they are today and to not just change consumer habits, but to force a change on how the entire consumption ecosystem functions from the supply of materials to how manufacturing occurs.
If this is the case, and you believe that this has to happen for the world to be fully functional in 50 years, then in actual fact, at current prices, you could make a fair argument that these generational sustainable-first companies may well be currently great value for investors. Will Allbirds become the next Nike, and compound at c25% for decades? I don’t know, but I do know they are much more likely to than any other early stage challenger. Let’s hope the world does not eat itself before sustainability gets its chance to chew on some C02.
Ed and TDM have been invested in Allbirds since 2019. Ed is also the co-founder of Australia’s leading eco friendly coffee community — Tripod Coffee