Top Three Investment Picks for 2024

Our top three investment picks in the private markets are Xpansiv, Groq, and Runway. We believe all three are well-positioned to ride the strong secular wave in Climate Tech and Artificial Intelligence.

Xpansive

Environmental  commodities,  encompassing  carbon  credits, renewable energy certificates, weather derivatives, digital fuels, and water rights, represent a burgeoning category of commodities traded on global markets. Governments worldwide are imposing constraints on companies contributing to environmental pollution, driving the need for trading pollution rights, that is environmental commodities. Startups facilitating the purchase, sale, and exchange of these environmental commodities are poised for significant growth. For instance, the voluntary carbon credits market is projected to expand from $2 billion in 2021 to $10-40 billion by 2030, per Shell and BCG. Additionally, the compliance carbon credit market has surged to $850 billion in 2021, demonstrating a 2.5-fold increase from 2020, per Shell and BCG. Moreover, the global renewable energy certificate market is projected to reach

$103.2 billion by 2030, at a CAGR of 27.2% between 2021 and 2030, per Allied Market Research, offering further opportunities for startups in the ESG commodities marketplace, and positioning them as valuable companies.

Prominent purchasers of carbon credits include industry leaders such as Airbus, Shopify, Swiss Re, Microsoft, and UBS. Moreover, Frontier, a demand aggregator founded by Stripe, Alphabet, Shopify, Meta, and McKinsey, commits $1 billion worth of permanent carbon removals. Additionally, NextGen, a joint venture between South Pole and Mitsubishi Corporation, has entered the scene as a demand aggregator, disclosing pre-purchases of approximately 200,000 tons of CO2 removals.

Xpansiv, a California-based global marketplace specializing in carbon and ESG commodities, is strategically positioned for robust expansion. The company secured $125 million in its latest series D round, raising its post valuation to $2 billion, a 43% increase from its prior round. This reflects investor confidence in the startup’s considerable potential. Having facilitated the trading of over $1.3 billion worth of carbon credits in 2021 and 2022, Xpansiv has solidified its status as the preferred carbon credit marketplace. Recognized by CB Insights as a leader in carbon offset marketplaces, the company boasts support from prominent investors such as BP Ventures, Goldman Sachs, S&P Global, Blackstone, and Hyperplane Venture Capital, further establishing its platform’s credibility. Recent strategic collaborations with Puro Earth, a Finland-based carbon credit marketplace, and the Johannesburg Stock Exchange have enhanced Xpansiv’s carbon credit capabilities. Additionally, partnerships with industry leaders CME Group and S&P Global Commodity Insights enable Xpansiv to deliver data analytics on environmental commodities, solidifying its position as a premier hub for environmental market data.

Groq

The rapid proliferation of LLMs and the escalating demand for high computing power have created a significant supply- demand imbalance for AI chips. Regulatory support, exemplified by initiatives like the CHIPS Act, is poised to propel chip startups forward. AI semiconductor revenue will soar to $67.1 billion by 2024, per Gartner. The AI chips market, currently dominated by Nvidia, will need additional players to keep the supply chain at an optimum level to meet the expected burst in demand. For instance, if ChatGPT queries were to scale to a tenth of Google Search, an annual investment of approximately $16 billion in chips would be required to sustain operations, according to a report from Bernstein Research.

NVIDIA, the incumbent leader in the AI chips market, can only meet roughly half of the existing AI chips demand, highlighting a substantial supply gap. AI could empower semiconductor companies to capture 40-50% of the total value from the technology stack, per McKinsey and Company.

California-based Groq is strategically positioned to capitalize on the soaring demand for AI chips. Groq’s chips boast the capability to run 70-billion-parameter enterprise-scale language models at over 100 tokens per second, presenting an estimated speed advantage of 10x-100x compared to alternative systems. The startup’s robust partner ecosystem, including Meta, Samsung, and Entanglement AI, reinforces its credibility in the industry.

Runway

The generative AI revolution initially focused on textual applications has witnessed significant progress with startups such as OpenAI, Cohere, and Anthropic. Advancements continued with text-to-image applications, where startups like OpenAI, Stability.ai, and Midjourney further solidified their credibility. As we enter the next phase of generative AI, emphasizing video creation and editing, there exists a substantial opportunity for emerging startups in this domain to craft distinctive value propositions.

Video generation and editing are complex processes that are poised to be streamlined through text-to-video solutions. The relentless demand for video content creation, tight project delivery schedules, a surge in VFX-intensive content, and the need for rapid releases, pose significant challenges. This is intensified by the expanding content volume on streaming platforms like Netflix and Amazon Prime, evident in the increase from 334 movies in 2020 to 449 in 2022 in the US and Canada, as reported by Statista. The text-to-video AI market is projected to reach around $900 million by 2027 at a CAGR of 37.1% between 2023 and 2027, per MarketsandMarkets, further underscoring the vast opportunities within this burgeoning industry.

New York-based Runway, a distinguished generative AI platform exclusively dedicated to delivering cost-effective and time-efficient solutions for video creation and editing, is emerging as the ChatGPT equivalent in the realm of video generation. The company’s most recent funding round, a $141 million Series C-II round, propelled the company’s valuation to $1.5 billion, marking a remarkable 200% increase from its post-Series C valuation of

$500 million in December 2022. Testimonials from customers underscore Runway’s efficacy, particularly a significant reduction in video editing time from hours to mere minutes at a fraction of the conventional cost. With an extensive array of over 30 tailored AI tools, Runway emerges as the quintessential, all-encompassing multimedia content creation suite, positioning itself as a game-changer in the industry. The company’s well-funded business model and strategic foresight, backed by notable support from industry giants such as Google, Salesforce, and NVIDIA, serve as definitive indicators of its burgeoning influence in the market**.

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Key Takeaways from COP28

In an unprecedented move, more than 190 governments at the COP28 climate summit in Dubai reached a historic agreement that marks the first instance of a collective global aspiration to phase out the oil era. The pact’s long-term implications point towards a transformative shift in the energy economy, driven by incremental policy adaptations and evolving investment patterns. Here are three major takeaways from a number of private companies that stand to benefit:

Scaling Technology is Key

Central to the agreement was the emphasis on accelerating zero- and low-emission technologies, including renewables, nuclear power, and carbon capture and storage. Current technologies could account for 90% of the required greenhouse gas (GHG) reduction. However, to limit global warming to 1.5°C, these technologies need rapid scaling by 2030. Overall, the role of technology and start-ups stood out at COP28, making its strongest presence ever at the summit. With dedicated events at the Technology and Innovation hubs and a special village start-ups, climate tech’s visibility was unprecedented.

Carbon tech, for instance, is a major focus area. Natural carbon sequestration methods, like improved land management and reforestation, are the predominant techniques currently employed for carbon removal, removing an estimated 2 billion tons of CO2 from the atmosphere annually. This is insufficient given that global CO2 emissions have continued to climb, reaching a record of 37.49 billion tons in 2022. Further, a report from the University of Oxford highlights that the contribution of new technology-drive carbon removal methods is just 0.1% of the total removed annually. This stark difference between emissions and removal capacity underscores the potential for growth in carbon capture technologies. The expansion and enhancement of carbon capture and storage (CCS) and direct-air capture (DAC) can not only improve our ability to reduce atmospheric CO2 but also create opportunities for economic advancement within the green technology sector. With these technologies in their infancy and underutilized, there’s a vast opportunity for development and scale, presenting a promising landscape for investment and innovation in climate change solutions.

Need for Heightened Focus on Decarbonizing Built Environment

The pivotal role of the built environment in global carbon emissions - accounting for nearly 40%, per the World Green Building Council - was a central theme at this year’s conference. The International Energy Agency estimates that retrofitting buildings for energy efficiency could cut global carbon emissions by 6.1 gigatons by 2050, underscoring the urgency to decarbonize this sector. The Buildings Breakthrough initiative, launched by France, Morocco, and the UN Environment Programme at COP28, encapsulates this urgency and aims to make clean technologies and sustainable solutions the most viable and attractive option globally by 2030.

From a VC investment perspective, the built environment represents a massive and yet largely untapped market. The built environment is one of the world’s largest asset classes ($40 trillion in the US, per Shadow Ventures). Historically, this sector has been slow to embrace technology due to its highly fragmented nature with over 50 entities involved in the construction of a single building project. This fragmentation has traditionally stifled innovation and technology integration. However, this fragmentation is gradually reducing, paving the way for greater technology adoption. As a result, VCs are realizing the vast potential in this space. From green cement to waterproof wood, VC-backed companies in the built environment are now among one of the hottest topics in climate tech. In 1H23, climate-tech firms in this sector closed over $1.8 billion in VC deals, per Pitchbook, marking it as the segment’s strongest half to date.

Several start-ups are poised to capitalize on this trend. Concrete. ai, a data science company founded in 2020, is revolutionizing concrete production with significant cost savings and reductions in embodied carbon. Mosaic, launched in 2018 and valued at

$280 million, offers an innovative full-stack construction project management platform. New Jersey-based Logical Buildings, a smart building software and solutions company, has raised $13.5 million, with its latest Series D round in December 2021. BlocPower, established in 2014, leverages proprietary software for clean energy projects in urban areas.

Carbon Trading Ecosystem Needs to Evolve

While negotiations at COP28 failed to yield an agreement on carbon credit sales, the importance of a robust carbon market ecosystem remains paramount. In 2021, the voluntary carbon market quadrupled in value, per data from Ecosystem Marketplace. Further, their State of the Voluntary Carbon Markets 2023 report identifies a concentration of demand toward high-integrity and high-quality voluntary carbon credits despite their higher price, meaning buyers are willing to pay more for quality.

As the market continues to expand and attract more stakeholders, the need for sophisticated tools and platforms to facilitate these transactions are becomes important. Against this backdrop, startups specializing in carbon credit marketplaces, as well as those offering accounting and management services, are strategically positioned to benefit. Notably, numerous governments are imposing stringent limitations on corporate contributions to environmental pollution. In response to this regulatory landscape, environmental commodities have emerged as a viable avenue for the buying and selling of pollution rights, presenting a lucrative business opportunity for startups offering marketplace, accounting, and management platforms for environmental commodities.

Carbon  credits  stand  as  the  preeminent  environmental commodity, with influential organizations like Frontier, backed by industry giants Stripe, Alphabet, Shopify, Meta, and McKinsey, committing a substantial $1 billion to permanent carbon removals. Moreover, NextGen, a collaborative venture between South Pole and Mitsubishi Corporation, demonstrated commitment by pre- purchasing approximately 200,000 tonnes of CO2 removals. Furthermore, leading corporations such as Airbus, Shopify, Swiss Re, Microsoft, and UBS have made multimillion-dollar investments in carbon credits. Embraced by over 60 countries, carbon credits, facilitated through cap-and-trade mechanisms, fundamentally reshape economic incentives, propelling a substantial reduction in emissions.

California-based Xpansiv, the world’s largest carbon offsets marketplace, stands as a stalwart player primed for persistent growth. Facilitating the trade of over $1.3 billion worth of carbon credits in 2021 and 2022, Xpansiv accounts for more than 40% of voluntary carbon market trade by volume. Amidst the rapid growth of the environmental commodities market, startups specializing in software solutions for the accounting and management of environmental commodities are positioned to capitalize. Persefoni, an Arizona-based SaaS startup, is poised for significant value as it provides a climate management and accounting platform. Watershed, a California-based enterprise climate platform, stands to gain from the increasing adoption of tech-driven carbon removal. In the realm of carbon solutions, Patch, a California-based startup, addresses the needs of diverse sectors including e-commerce, carbon accounting, travel, fintech, shipping, logistics, and crypto by offering comprehensive solutions encompassing removal, estimation, and education about carbon emissions. Meanwhile, Cloverly, a Georgia-based startup, contributes to the space by developing an application programming interface specifically designed for carbon offsets**.