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I’m kicking off climate change as one of the themes I will write about on Scatter Brain. Today’s chat is about carbon credits. The next chat later this week is going to be about solar energy.

There’s an entire generation of startups across the globe that help companies and individuals track, calculate, and reduce or offset their carbon footprint by offering carbon credits that finance what are broadly called green projects.

I talked to Patch’s CEO, Brennan, who is working on a marketplace for companies to buy carbon credits themselves or enable their customers to buy them by embedding climate actions in their products. Patch connects the buyers to vetted climate action projects across technologies and geographies.

Reflections on tech-enabled property management

After working in product and engineering for three years at Sonder, Brennan believes people tend to over-index on building software to minimize cost rather than drive guest experience.

Brennan told me, “Cost minimization is a capped upside (as costs go to zero) versus revenue maximization, which technically has no cap. Many R&D investments are applied equally across these two categories, which doesn't make sense.”

“To win loyal customers who want to pay a lot to cover your costs, you need to focus on de-commodifying your product. Roofs over heads are hard to differentiate, but you can do that with location and experience.”

Overview of corporate sustainability initiatives

To prevent negative climate impact and become less carbon-intensive, companies need to measure carbon emissions and take the necessary actions to reduce them.

“Companies should be taking action to reduce their emissions, from switching energy sources to renewables, engaging with sustainable suppliers, to using less carbon-intensive materials,” he said.

“Being upfront and transparent about climate plans and progress is important.”

Carbon credits: “Several organizations are actively working on solutions that avoid, reduce or remove carbon from the atmosphere. These range from enhancing trees’ ability to sequester carbon to machines that suck carbon from the atmosphere. Carbon credits help neutralize emissions that are not yet being reduced. When done in tandem with internal reductions, contributing to these solutions via carbon credits can help companies get closer to net zero.”

The need for a marketplace: “There's a huge demand for carbon credits but also a huge inefficiency in how these buyers and sellers find each other. Some suppliers are sold out for years, while others can't find a sale”, he told me.

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Product strategy

I wondered why Patch hadn’t gone with a traditional marketplace product approach. They were API-first and wanted to embed their experience into other interfaces.

Brennan said, “If we want to get a billion people to do something, we must build it into the fabric of digital processes we've already built. Embedding sustainable actions into businesses will be essential to reaching global climate goals. We started with creating an interface that the computer can understand and augment our existing systems of record, which have been created over the last several decades, from inventory management systems to payment facilitators.”

He believes the source data from those systems can be used to understand the carbon associated with actions and allocate capital to compensate for it.

Product evolution

“Our goal is to drive activation energy on an individual level to zero. We realized that not every customer type has an appetite for an API as an interface. We now have three different mediums to take action in”, he said. “In addition to the Patch API, we have a dashboard that looks more like a traditional marketplace. We also host a checkout offering, which enables people to transact in merchant checkout flows.”

This expands their target audience and ties back to his point about activation energy.

“We work with two world’s top 10 most prominent private equity firms, who use our dashboard offering to buy carbon removal projects.”

Estimating carbon emissions

Patch works with carbon accounting partners who focus on helping companies understand their emissions, Brennan told me.

“Patch is not doing the estimating but rather serves as the unifying gateway for companies to access all carbon accounting partners. Instead of integrating with different providers, our customers only need to integrate with us to get estimates on a wide range of activities.”

Demand side

The user experience of the buyers of carbon credits varies based on the interface they use.

Dashboard experience: “Typically, buyers have a set of requirements, from a monetary budget to a price per tonne of carbon they’d like to spend to the geography they would like their investment to help support. They use the dashboard to filter and build a portfolio of projects”, he told me.

API experience: “There is a lot of variability in the case of our API customers. They show their end-users a handful of projects, photography, and descriptions.”

Patch sees its job as aggregating the supply and making it available to customers. Depending on the interface their customers choose, they may or may not have control over what they expose to their customers.

Carbon credits are offered in past and future vintages. Some projects have already created a positive impact and are now recouping the capital. Some projects will be removing carbon in the future and are collecting capital in advance to implement.

I asked Brennan about the post-purchase work Patch does.

“Once the transaction is made, we continue inventory management. We act as the intermediary, holding capital back until proof of work is delivered. I equate our buying experience to Domino’s pizza tracker. We have integrated with supplier systems to understand where the orders are in that value chain.”

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Supply side

When Patch started, leads were about 90% outbound and 10% inbound, but the supply growth quickly became mostly inbound.

Vetting: “We do diligence and understand what is happening on the ground with projects. Every project has to provide scientifically-reviewed documentation demonstrating a positive impact. We surface external ratings and analyses available for each project.”

Editorial judgment

Patch has been a neutral marketplace so far.

“As market-makers, we see our role as elevating as much information as possible to all participants.”

Regulatory changes: “The Federal Trade Commission released guidance that a company cannot make a climate action claim unless the action occurs within a two-year window on either side of a purchase event,” he said. “I expect that we will be pulled in more to help people understand what they should buy and how and what rules apply to their purchase. We view education as a core part of our service, so we will likely apply a new logic layer to the dashboard and the API as these regulations evolve.”

Intermediary’s responsibility: “If a company buys carbon credits in 2022, but the action does not happen between 2024 and 2020, the company cannot make a climate claim. The question is, who is liable?”

Business model and incentives

Brennan said they have always wanted to couple the way they monetize with the impact they create.

“We use a take rate model to take a percent of the gross merchandise volume. The more money spent on climate action, the more revenue we generate.”

They are incentivized to increase the volume.

There’s an ongoing debate around fraudulent climate offset projects and lax verification standards.

Setting up guardrails: “We ensure buyers have contextual information about projects and developers to help make informed decisions. I’d also highlight the importance of keeping actors in the market separate to avoid conflicts of interest,” he told me. “Much like you would not want a doctor getting a cut of the medicine he’s prescribing; I think keeping these entities (rating agencies, accounting firms, marketplaces) independent of one another is a crucial guardrail we need to get right as the voluntary carbon market grows.”

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The bottlenecks in climate action today

Brennan believes there is too much zero-sum thinking in climate action, resulting in conflicting opinions about allocating resources.

“Patch is encouraging society to do both today: reduce emissions and increase the removal capacity as fast as possible. Investments in both need to increase if we are going to achieve broader climate goals.”

Patch is in favor of more comprehensive and consistent standards.

He said, “Companies are slow-rolling acting on climate commitments because they’re worried the wrong move will get them a greenwashing label. Many standard-setting bodies provide guidelines for carbon credit purchases, but we lack a north star. Industry regulators, like the SEC, can help provide this clarity so companies can act confidently and quickly.”

Building a venture backable business

Market size: “Carbon markets are positioned to grow from single-digit billions today to 100s of billions in the next two decades.”

Appeal to investors: “The combination of a fast-growing market, an asset-light model, and a network effect business like our marketplace puts us in the top decile of venture bets.”

He said, “Our ability to grow is limited by market trends rather than our ability to disrupt an existing market. Market creation almost always rewards a full-out sprint as long as the market has enough of a head start on the business.”

He got the order of magnitude of opportunity wrong when they first started. He believes much of the foundational infrastructure still doesn't exist, and that Patch is well-positioned to provide it.

Pride as the CEO

Team: “The first is the amazing group of 60+ people we've assembled. These are by far the most talented people I've worked with, and in another life, there's a high likelihood I'd be reporting to many of the folks on this team,” Brennan said.

Impact: “Over 75% of the companies buying carbon removal on Patch had never done so before, and we're seeing that number increase over time. This tells me that Patch is growing the voluntary carbon removals market, inching towards putting a dent in climate change.”

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