Q13: People & expertise: What people do we need to run the business? What core expertise must the business develop and own?
Here are the core business functions of each company:
- Land Acquisition (“buy good land”)
- Identify what land to acquire, what species/mix to plant, and cost/value of each project
- Reach out to landowners
- Negotiate pricing and terms of sale
- Conclude sale/purchase
- Transfer ownership and title
- Recruit and incentivize broker channel partners
- Land Development (“prepare and plant the land”)
- Prepare newly acquired land
- Coordinate service providers/contractors
- Procure seedlings/saplings for planting
- Plant land
- Manage projects during Devco holding period
- Work with carbon offset registries and verifiers to obtain offset certification
- Finance & Investor Relations (“raise capital, keep investors happy; negotiate bank debt/project finance”)
- Develop LP pipeline
- Prepare LP materials
- Raise capital
- Update investors
- Maintain relationships with project lenders
- Negotiate financing terms for each project
- Project Acquisition (“buy good projects”)
- Identify what projects to acquire, and cost/value of each project
- Reach out to promising project owners
- Negotiate pricing and terms of sale
- Conclude sale/purchase
- Transfer ownership and title
- Project Management (“manage projects”)
- Onboard newly acquired projects
- Manage land maintenance and carbon recertification
- Manage insurance requirements/risks
- Finance & Investor Relations (“keep investors happy; maintain capital adequacy; manage dividend/yield; public company compliance”)
- Raise capital from public/private markets
- Manage 1031 exchanges for project acquisitions
- Calculate timber NAV
- Forecast and pay dividend to shareholders
- Manage public company compliance
- Projects (“get offsets from good projects at good prices”)
- Identify what projects to negotiate carbon offtake agreements with
- Price, negotiate, and conclude each carbon offtake agreement
- Monitor each project for compliance and performance
- Finance (“make sure we have enough capacity to put offsets to and a good credit rating”)
- Manage put/collar transactions for offset pricing risk/capacity
- Manage offset trading and buy/sell decisions
- Manage cash flow
- Obtain and maintain an investment-grade credit rating
- Commercial (“make sure there are corporate buyers for the offsets we buy”)
- Source and work with corporate compliance and voluntary buyers
- Negotiate short and long-term offset purchase agreements
- Aggregate buyers into pools to sell blocs of offsets
- Technology (“buy/partner/build software and tooling, develop & manage product roadmap for the group”)
- Design architecture for group
- Maintain interoperability of tools and common data models across companies
- Product management
- Internal IT & IT procurement
- Science & Research (“make sure our claims are backed by science, publish research on land use and forestry”)
- Measure and validate the carbon impact of the group’s activities
- Publish peer-reviewed scientific research & papers on the group’s activities
- Develop models to measure the impact of climate change on projects
- Corporate Development (“only the paranoid survive”)
- Maintain intelligence and reporting on competitors, potential competitors, and the carbon markets
- Explore new compliance markets and voluntary markets
- Talk to everyone, cover the market
- Policy & Government Relations (“work with regulators in existing compliance markets; help accelerate new compliance markets and standards”)
- Liaise with regulators in each market the group is active in or has an interest in
- Translate regulatory standards into operational guidelines for group companies
- Work with regulators to understand ambiguities and recommend improvements to standards
- Lobby for new cap-and-trade/compliance markets
Q14: Tooling: What software or other tooling do we need to run the business? Is there an opportunity to develop superior tooling or processes and sell them to the industry for profit?
Another way of asking this question is “where are the large categories of marginal costs to which we might apply software and/or process innovation?” As best I can tell, those categories are:
- Land identification: The process of identifying land to acquire for forestry projects seems fairly manual and ad hoc. Could we combine satellite imagery and data science to lower the marginal costs of identifying promising plots of land for Evergrow?
- Land acquisition: Once we’ve identified promising plots of land, we need to figure out who owns that land, contact them, and negotiate a sale. Could we use software to accelerate this – e.g., by scraping land registries/databases and using marketing automation software to contact landowners en masse? Could we create a pricing model that uses software to inform our pricing negotiations (like Opendoor) vs using humans? If there are real estate listings for barren land and real estate brokerages who deal in it, could we integrate with them?
- Land preparation: It’s unlikely that the land we acquire will be 100% ready for new tree planting. More likely is that the land will require clearing and other modifications to support a new forest. Are there ways software can lower the costs here – e.g., by using satellite data to create plans and minimize on-site inspections?
- Project development & planting: Once prepped, we need to plant our land. This is a large logistical effort, involving transplanting tree seedlings or saplings from a nursery to the site, and taking care of the trees in their infancy. Could we use technology to improve this process – e.g., by using machine learning models to predict what trees will be the most successful on our land? Or perhaps we could write software to coordinate and optimize the logistics of planting and land development. Another possibility is using sensors and satellite data to monitor trees remotely once planted to save on time spent examining each tree.
- Project management & maintenance: Given how long we plan to hold the land for, any gains on the cost of managing and maintaining land are hugely valuable because they compound over time. For example, could we use software to completely automate the property tax filing and payment process? Or how about centralizing our operations and maintenance team in a single, remote monitoring facility, who rely on sensors and satellite imagery to monitor tree health, and only dispatch site visits when something looks wrong? Even a 1% annual cost saving (as a percentage of NAV) is meaningful here.
- Offset certification: The process of getting the initial registry and ARB certifications for an offset project is long and expensive. Could we use software to shorten this process and/or lower the costs? For example, could we automatically generate submission packets based on the data we have collected during the land acquisition and planting process?
- Offset verification: We’ll need to recertify our compliance with the forestry offset protocol every few years. I’m told that pure remote and satellite verification isn’t acceptable to ARB at the moment, but could we substitute or supplement part of the recertification process with it?
- Offset sales: The fact that many CCO sales are brokered points to a high marginal cost of sale. Could we lower this, whether by selling CCOs on subscription? I also wonder what software carbon brokers use to sell CCOs and manage their business. If such software exists, perhaps we could integrate with it and use brokers as a sales channel. Alternatively, if it gave us a distribution advantage and lowered our marginal cost of sale, we could consider writing it ourselves.
- Financial reporting: Each of Devco, Holdco, Offco, and Mco will have their own sets of investors and/or financial stakeholders, so we’ll need to track NAV, pricing exposure, cash flow, and more on a daily basis and report on accurately across the group. How can we do this using software instead of people?
I’m aware of some skepticism that software can lower the marginal costs of producing a unit of offset and/or timber, given that it involves a lot of physical work like preparing land and planting trees. I do not expect us to ever be able to take these marginal costs to zero. Nor do I think we need to. All that we need to do is (i) have our NAV and offset sales scale non-linearly with our costs to produce and sell them, and (ii) have each new project be cheaper to identify, develop, and sell than the last. This is the measure of marginal cost reduction and seems very achievable based on the current state of the industry and recent advancements in satellite imagery, remote sensing, etc.
Last, a large portion of the marginal costs in the model are the costs of financing, particularly (a) the interest rate on bank debt on new projects, (b) Offco’s costs of obtaining and maintaining its credit rating, (c) Offco’s cost of obtaining and maintaining adequate offset buying power, and (d) Offco’s transaction costs in selling offsets. The way to lower these costs is to (i) work with banks to encourage more project lending in forestry and especially reforestation, (ii) build up a track record of successful projects and returns, thus creating competition among investors and other parties to invest or otherwise participate in Evergrow.
As I mentioned in a previous post introducing the Devco/Holdco/Offco model, I think over time we expect the forestry market to mature, such that Devco has high competition for good projects. This is similar to how the renewable energy industry developed and would be a great thing for the planet. In that post, I mentioned that I think we need to start Devco anyway, because we need to seed the market, as not enough developers are working on reforestation projects today to make Evergrow viable. But going through this exercise has given me another reason. Unless we develop projects ourselves, we won’t have the opportunity to learn where the marginal costs of developing reforestation projects are. By internalizing those costs ourselves, we have a strong incentive to lower them. My hope would be that we eventually license or open-source our software and playbook for reforestation development to any developer who wants to use it, in exchange for some combination of a license fee, a ROFO on their projects for Holdco and Offco, and access to their project data on an anonymized basis. This way, we lower the marginal costs of reforestation for *everyone* and build a moat around Holdco and Offco.
Q15: Ecosystem & partners: What partners do we need to run the business? What is the ecosystem like in this space?
Here are the players in the Evergrow ecosystem, with notes on how we approach or work with each:
- Landowners: Landowners are a critical partner for Evergrow, because they own the thing we need to start any project: land. Particularly valuable are those landowners sitting on the largest and most forest-ready plots. My sense is large timber landowners are already aware of the carbon markets, but smaller landowners who own bare land are not, likely because most project developers so far have focused on improved forestry management projects (which require existing forests) vs reforestation or afforestation. I expect to need to do a fair amount of landowner education and marketing, which is why using software to figure out where the most promising land is located and who owns it is useful because it lowers the marginal cost of building up a pipeline of new landowners. A key risk is that even though we may be willing to pay a market-clearing price to a landowner for their land, they may have non-financial reasons for owning their land – e.g., sentiment, recreation, scenery, housing, etc.
- Carbon Project Developers: Carbon project developers are partners to Holdco and Offco and competitors to Devco. To this end, it’s important to Holdco and Offco to develop relationships with carbon project developers with a view to acquiring their projects and serving as their offtaker respectively. However, this distinction may not matter to carbon project developers, who might view all of Evergrow as competitive to them so long as Evergrow is affiliated with Devco. In the early days, this is unlikely to matter, given that we hope to build up a proprietary pipeline of land for reforestation projects using our own methodology and so are unlikely to run into each other in a competitive bid for land. However, as the market matures and (we hope) more carbon project developers shift their attention to reforestation and afforestation, this will become increasingly common. Ultimately, it’s more important to Evergrow to have great projects in Holdco and Offco than it is for Evergrow to be the best forestry project developer, so I view having successful partnerships and good relationships with carbon project developers as a long-term necessity for Evergrow.
- Forestry Service Companies: Forestry service companies help evaluate land for forestry, develop models for timber growth, and assist with project development and management. To the extent we are able to have these companies provide their services the way we want them to – e.g., by using our software and methodologies in the field – then there is no reason for us to handle this in-house, unless we think the cost savings are greater than the marginal costs we’d inherit in doing so.
- Timber Companies: I suspect we are unlikely to encounter timber companies like Weyerhauser much in the early days, because they seem primarily focused on traditional timber investing and harvesting and have little use for barren or newly planted land. However, as projects mature, it is likely they may want to acquire projects from Holdco, particularly if such projects are located geographies or contain timber species that are complementary to their existing portfolios.
- Institutional Investors: We’re going to need institutional investors to back each of Devco, Holdco, and Offco. Devco has an immediate need for institutional investors to invest in its fund, which in turn provides equity capital for projects. Holdco needs institutional capital when it acquires its first projects and/or as part of an IPO. Offco needs institutional capital or an institutional counterparty to serve as a counterparty for its CCO collar, and possibly to anchor its CCO buying pool as well. Likely investors are large family offices and endowments with a double bottom line mandate or conservation bent, who will be drawn to Evergrow not only by the potential for large returns not correlated with the stock market but also the potential to sequester large amounts of carbon from the atmosphere.
- Banks: We’ll need banks to serve as project lenders for Devco projects, which will mean getting them comfortable with Offco as an offtaker and the carbon markets in general as a source of cashflow. In an ideal world, we would help catalyze an entire industry around reforestation project finance, thus helping all developers fund do more reforestation projects (and growing the market for Holdco and Offco in the process). The key with banks is to always have more of them than we need at any given moment so that we can run competitive processes for financing rounds and syndicate to multiple lenders for large projects.
- Offset Buyers: Depending on how successful we are in setting up Offco as a CCO buyer through a collar with a financial counterparty, offset buyers (i.e., companies under the CA cap-and-trade mandate) are either critical or not so important. In either event, in an ideal world, we would have a group of offset buyers who pre-commit to buying blocs of offsets from Offco at a pre-determined price each year. Having a direct relationship with offset buyers is also important because it gives us a window into future demand for offsets and allowances, and long-term, I think the market for abatement financing is interesting.
- Carbon Brokers: Carbon brokers work with offset buyers and project developers to sell blocs of offsets, often taking a large cut of the transaction (I’ve heard up to 20%). Depending on the spread between the offset purchase price that Offco negotiates and the prevailing CCO price on the market, it may be feasible to work with carbon brokers, but it will always be better to have a direct relationship with the buyers themselves.
- Carbon Registries & Exchanges: We’ll need to work with carbon registries (e.g., the American Carbon Registry) to obtain certification for each of our projects. We may also list our verified CCOs on ICE so that they are liquid.
- Offset Verifiers: We’ll need to work with offset verifiers (e.g., SCS Global Services) to verify our offset projects and their carbon reductions every ~2-3 years to remain in compliance with the ARB protocol. This is a fairly manual process involving a site visit, and offset verifiers are independent 3rd parties.
- Timber Buyers: While it will be several decades until we have timber for sale, it would be nice to have a pipeline of timber buyers waiting to buy our timber.
- Regulators: We should maintain a friendly relationship with the ARB, as well as legislators and regulators in other markets that have cap-and-trade systems already (e.g., the EU) and those that are considering it (e.g., Oregon). While we can’t expect special treatment as a result of these relationships, given how new cap-and-trade is, I’ve found there’s a lot of room for interpretation and clarification in some of the protocols, so being able to do this quicker and push the envelope on new approaches will be helpful. Also, the more we can help new cap-and-trade programs get set up, the more we grow our own market.
- Researchers & Academics: When we sell a carbon offset, we’re making the claim that we have sequestered 1 mtCO2e. It’s very important to me that this be true. Therefore, I think we need to engage with the scientific community, be open with our data, and publish peer-reviewed research showing the efficacy of our projects. Also, the more we can get the scientific community bought into our approach, the more likely future cap-and-trade programs will have offsets included in their design, which expands our market.
- I should make sure to talk to several people in each of the ecosystem categories listed above.