Driving Ocean Sustainability by Investing in the 'Circular Economy'
New York-based Closed Loop Partners is focused on building the “circular economy.” The firm is "reimagining the current linear system, in which billions of dollars are spent annually to landfill valuable commodities, to create circular supply chains that reduce costs, generate revenue, and protect our environment.“ Investors include some of the world’s largest consumer goods companies, as well as many family offices interested in investments that provide both strong financial returns and tangible social impact.
Danielle Joseph manages the venture fund at Closed Loop, and will be a speaker at SeaAhead’s Global Bluetech Summit in October. Focusing on waste reduction and supply chain efficiency within food, packaging, plastics, textiles, apparel, and electronics waste streams, she invests in sustainable consumer goods companies, advanced recycling technologies, and other services related to the circular economy.
SeaAhead caught up with Joseph recently to learn more about how bluetech is woven into her investment strategy, and about how sustainable investments can make a positive financial and environmental impact on companies and municipalities alike.
Closed Loop Partners focuses on investing in and expanding the "circular economy" — tell me a little about what that means. What is the importance of the circular economy, as opposed to the linear economy, in the pursuit of a sustainable future?
The circular economy is a way of talking about resource efficiency. The idea of a linear economy is that you extract some material from the ground and make something from that material. Once you’re done using that material you discard it into a landfill, and you call it waste. The idea of the circular economy is that the energy and resource inputs which you’ve used in the entire supply chain, through the extraction, making, and using, are actually still valuable at the end of the first life of the product or resource. Why discard those materials and resources when you could reincorporate them back into the supply chain in the form of a new feedstock? In the case of reuse, just reuse that product over and over again.
Tell me a little about your investment strategy and process. What are some of the main attributes that you look for in the ventures that you invest in — and what are some of the telling signs that a company will be successful?
We focus primarily on seed and pre-seed-stage investments. Average checks for us are around $100,000 to $250,000. We’re looking for companies where they are solving a problem. Resource efficiency in the circular economy is not just an environmental benefit to companies and users, but it is also solving a need. It could be an inefficiency in a supply chain that leads to shrink, where you’re actually losing product throughout the supply chain. For example, if you have 100 pounds of cherries that you are shipping to market and only 50% of those are actually usable by the time they get to the retail store shelves, then that is a problem in the supply chain. If we keep 100% of the cherries fresher for longer and ensure they all reach retail in good enough condition to all be purchased by consumers, then we have a supply chain efficiency and circular economy solution where we reduce waste. We are also solving a problem and creating an economic benefit for the stakeholders in the supply chain. That’s really what we are looking for— companies that are solving for a circular economy solution to reduce waste from some material stream while solving some economic problem within the supply chain as well. Those are two really important things because then the increase in sales of a company is directly tied to the intended impact they’re creating. That is really important to us. We think that sustainable and viable business models must be economically viable as well.
What are some of the major challenges that you see bluetech and other kinds of sustainable startups confronting?
I think one of the challenges in bluetech is this challenge of the commons, because the ocean is not vertically integrated within a single supply chain. Many different people and different stakeholders use it for their own means. We need to figure out how to create products and services that solve stakeholders’ problems in that ecosystem. We need to figure out where stakeholders are willing to pay for a solution that might benefit them directly, but will also benefit the larger ecosystem. I think that you see actually some similarities in some of the circular economy companies that we looked at as well.
Because we're now talking about circularity and tying in resources at the end of one life into the beginning of another life cycle, we’re often pulling together multiple stakeholders that aren't used to working together. For example, we work with waste management companies and large multinational brands that don't typically talk to one another. Figuring out how to have those conversations, show the value creation, and talk different languages between those different parties is important and also a challenge. It’s something that some startups encounter as a challenge, and it’s something that we're very aware of as we try to play a mediating role in that ecosystem.
Closed Loop Partners has investors such as Amazon, Coca-Cola, and Walmart. What is the role of these investors in the venture process?
Those corporates and multinational brands are not direct investors into Closed Loop Ventures at this time. They are direct investors into Closed Loop Fund, which is our debt vehicle. In Closed Loop Ventures, we leverage those relationships for both diligence purposes and for supporting our portfolio companies. If we think that those multinational brands will be potential buyers or customers of portfolio company products, then we will make those introductions. Those multinational brands obviously have very long and complex supply chains. Many of the companies that we invest in through the ventures are the types of companies that can support the support greater efficiencies in those supply chains of corporate partners.
You’re working towards circularity in specific verticals: recycling, textiles and apparel, and food and agriculture. How does bluetech fit into these verticals and into the circular economy?
One of the major resources that we are pulling out of the ocean today is food-related and fish-related, which fits under our food and agriculture vertical. We have actually collaborated with SeaAhead on diligence around some fish-related companies and bringing transparency into that market. We are also very aware that a lot of plastics, packaging, and waste products end up in oceans. This often results from areas where recycling infrastructure doesn't exist.
Even in a New York City, there are plastic bags and general litter on the streets. Whenever litter is on roadways or in cities close to oceans, then it will end up in oceans. That includes a significant amount of small format plastics—straws, cups and plastic bags that contaminate our oceans. Coming up with better solutions with either alternative materials to plastics or improved collection mechanisms for plastics to reduce waste in our waterways or oceans will directly influence the health of the blue economy.
When you look at an emerging category like bluetech — where new technologies are working to improve giant traditional industries like shipping and fishing — what are some of the major factors that can affect companies getting to critical velocity?
Whenever you're creating a new industry category such as bluetech, cleantech, or the circular economy, there's a there's definitely a learning curve around “what does it mean?” Tying that learning curve into what people already understand is really important. I think that SeaAhead is doing a good job of defining what the blue economy is and being a thought leader in that space, as well as helping to bring many different stakeholders — such as from the shipping [industry] then from the fishing industry and from ocean industries — together to redefine and restate some of their shared goals, as well.
Sometimes coming up with a new category name is important for that. Aligning all of those different stakeholders on the terminology so they can talk to each other, where as they might not have been able to communicate as effectively before. I think that building that ecosystem is really important, and SeaAhead is an important component of that. I think for companies it's really a question of knowing their audience and knowing how to talk to that specific audience.
How does Closed Loop Partners facilitate connections in the circular economy? How important is it to bridge its various stages?
There is a lot of cross-sector collaboration within Closed Loop Partners between the venture fund, debt fund, private equity fund, and the Center for the Circular Economy. This means there is a lot of leveraging of knowledge as we are on the forefront of what is going on in the industry. It is really helpful for me, while doing diligence on companies, to know what’s going on with brands, the waste industry at large, what China is doing, and how that influences market dynamics related to commodity prices. How the new projects that the Center for the Circular Economy is working on will leverage a lot of the insight that Closed Loop Ventures has from looking at what innovations are coming up through new companies. There is a lot of cross collaboration there, and Closed Loop Partners broadly also acts as that kind of hub. Whether a company is trying to better understand their own supply chain or coming up with innovations that can help create a less wasteful product line or business, they come to us.
A good example of that is how the Center for the Circular Economy runs pre-competitive collaborations. The first of which is the NextGen Cup Challenge, which is a collaboration between Starbucks, McDonald’s, The Coca-Cola Company, Nestlé, Wendy's, Yum! Brands and WWF, figuring out the next generation of recyclable or compostable hot and cold coffee cups. It is important to have that kind of consortium because if Starbucks alone changed their coffee cups, the volume of coffee cups that are compostable wouldn't be enough for waste and recycling facilities around the country to start pulling that material out and processing it. You need to reach some critical mass in order for the waste ecosystem to see some value in actually pulling it out. It is essential for us to get major producers of coffee on the same page and testing all of these new products, so that they can together come up with a suite of solutions that can be used in the industry.
Is the circular economy superseding the linear economy? How will the circular economy affect profitability in the linear economy?
Today, the circular economy is not superseding the linear economy. We are still in the early days of this. A goal is that we would supersede the linear economy, and that there would be no waste produced from any operations. That would be an ideal state of the world, and I don’t know if, or when we would get there. It is an audacious goal.
I see the circular economy as additive from an economic value perspective rather than subtractive to the linear economy. Let’s say you have a supply chain and are producing widgets, but today you are losing 40% of your widgets because you can’t sell them. This often happens for textiles, and they have an enormous waste and cost center for apparel brands. If you can reduce that 40% overproduction in your supply chain, then you should have higher margins at the end of the day. In the same way, if after the consumer uses the product they can either resell the product or recover the product at a base material level, then that is a new revenue stream for that consumer or brand. It could even be a new revenue stream for that line of business. In the circular economy we look out for possible encroachments on the sales of virgin plastics, cotton, or other virgin material sources. We are actually seeing that virgin producers are interested in getting into this space. They recognize that if they want to be a part of a solution or new revenue streams, then they have to broaden the scope of their business model. They will not just extract out of the ground, but they will also recover materials that fit into their ecosystem.
Teddy Mayle is an intern at SeaAhead. This interview has been edited for length and clarity.