In carbon removal, landing a major offtake agreement—like Microsoft’s purchase of 44,000 credits from Carba—is often seen as the holy grail. But what happens next? How does the money flow, and can debt financing bridge the gap between signature and scale?
In this episode of Reversing Climate Change, host Ross Kenyon unpacks the deal between Microsoft and Carba, a waste-to-value biochar company turning landfill-bound biomass in Minnesota into durable carbon removal.
With credits to be delivered over five years, Carba needed capital to ramp up production. Enter Structure Climate, which is financing the deal to help Carba meet its commitments—showcasing a compelling model for how debt finance can unlock climate impact.
Guests Andrew Jones, CEO and Cofounder of Carba, and Matt Schmitt, Founder and CEO of Structure Climate (where Ross serves as an advisor), walk us through the mechanics of the deal, the role of debt vs. equity, and what this means for the future of carbon removal finance.
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Full Transcript
Ross Kenyon: Hello and welcome to the Reversing Climate Change podcast. I am Ross Kenyon. I'm a longtime carbon removal and climate tech entrepreneur. Today I'm very excited to be speaking with Andrew Jones, the co-founder and CEO of Carba. Carba is a Minneapolis company that works with waste biomass, turns it into biochar, and prevents biomass from entering the landfill unnecessarily. Carba had the good fortune of landing a five-year, 44,000-ton carbon removal credit deal with Microsoft, which is a big deal. Getting a guaranteed demand signal like a long-term contract with Microsoft is pretty much as good as it gets in carbon removal.
These are serious people who diligence carbon removal deals at Microsoft. Microsoft broadly gets their pick of the litter, same with Frontier, Google, or others who are making these very large carbon removal purchases. So getting that stamp, you have to put it on your website, you have to tell people that Microsoft is one of your customers. Your parents know who Microsoft is as a customer. That is a known quantity. Fortune 100, one of the biggest companies in the world, is your customer. It's a great sign for any company that is able to achieve a deal with a customer like Microsoft.
Once you have guaranteed demand like that, it unlocks the possibility of finance. So Carba has this deal for five years and 44,000 tons of carbon removal credits. And that doesn't mean that Microsoft bought all of those credits up front. Oftentimes these deals are structured to have milestone unlocks. Carba would need to provide certain metrics of progress during this time in order to continue the process. In general terms, that's how I've seen it done in other places. For other offtakes, I imagine that's similar for them, although I do not know. I imagine that's similar in this case. What I think people don't always realize is that these big offtake agreements do not just mean that companies get access to a very large pot of money upfront.
And so my other guest today is Matt Schmitt, who is the CEO and founder of Structure Climate, where I am an advisor. I've known Matt for a long time. He served on Nori's board years ago. I have really enjoyed my time working with Matt on what Structure is doing here. Structure is working on innovative financing mechanisms for carbon removal and climate tech companies. Because — I'll just back up here — I'm going to imagine that if you're a listener, maybe you don't know much about equity versus debt financing for startup companies. But if you've watched Silicon Valley, if you're familiar at all with how equity works, it's that you sell a portion of your company. You sell equity in your company to investors and they expect most of their bets to fail, but the best that do succeed, they expect to make large multiples off of. Could be 10X. Ideally it's closer to 100 and up from there.
Some of the big deals that you're familiar with, angel investors or seed investors of Uber, for example, became very, very wealthy as a result. The good thing about equity is that there aren't terms on it, typically. It's not like you have to get them a return within five years or there are penalties. Equity investing is a longer term approach, or it tends to be, not always. I mean, everything I've said so far, I can think of counterexamples to. In general that is pretty much how it works. But debt is not like that. Debt has strict repayment terms, interest rates, and there are often penalty clauses for failing to repay on time. That could result in the debt converting into equity, or the interest rate going up, or both.
It's actually really hard to raise debt as a startup company because lenders don't want to lend to startups that represent enormous risk for a fixed return. The benefit of investing in equity in a startup is that there's a lot of risk, but the risk is also positive. The risk could also represent unlimited returns, but debt isn't like that. They're still making a bet on an untested startup or fairly young startup, but at most they're only going to make the interest rate, or the interest rate plus whatever penalty provisions are in the debt contract. It's not like they can also make an unlimited upside in investing in debt for this company. Oftentimes companies can't even get debt.
When young companies can get debt, it's oftentimes at usurious interest rates. We joke about it in the show. It's closer to consumer credit card amounts, 20% plus in some cases. This might not look like a lot, and it will probably only make sense to you if you've bought a house or done this in a company. A 1% raise in your interest rate may not look like a lot when you're financing a house purchase. But when you add up how much that is every month and then you multiply that out over the presumable 30-year duration of an average mortgage, it represents huge amounts of money. And so for companies that are small like this, changes in interest rates matter a lot to them.
And so Structure, through various ways of blending philanthropic capital as well as commercial capital, are able to put together deals that are more palatable to a company like Carba. We also talked about why doesn't Microsoft or bigger companies like this just finance these deals themselves. That's another really good question that we get into. If you've been dying to learn more about carbon removal startups, climate tech startups, raising money, the difference between equity and debt, why you might want one in one circumstance and another in a different circumstance — we're going to get into all of that. I hope you enjoy. Links to both Carba, the announcement, and Structure Climate are in the show notes.
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Matt and Andrew, I'm happy to be able to announce what you're working on on the show, and we will get into what we're going to announce, but we should just start at the basics here so the announcement even makes sense. I think if we go announcement first, it's not going to make sense. So Matt, let's start with you. What is Structure Climate?
Matt Schmitt: Yeah, thanks Ross. Structure Climate provides project finance services to for-profit companies that are doing climate positive projects. We work across technology verticals. So anything that's good for the climate, let's have a conversation. We focus on projects where there are good, reasonable offtake terms — you know, there's a buyer for whatever is happening — and where unit economics are maybe a little challenging in some of the conventional project financing setups. And one of the main tools that we use to be able to engage early and at a small level is the syndication, or the pooling, of charitable and philanthropic capital into loans.
So we take the tax advantage flexibility of this charitable capital and put it into terms and structures for companies like Carba that set them on a path to more conventional financing as they prove out. So our goal is to make those first projects that much easier to get done so that companies can spend that much more time focused on what they need to do, which is already hard enough. And so we're here to help.
Ross Kenyon: You're telling me that the most generically named person in carbon removal has a financeable project?
Matt Schmitt: Yes. We often find that the more boring a deal might sound on the outside, the more interesting it is to us. But no, I think this is something that probably a lot of climate companies face, is that there are all sorts of sources of friction in these deals or transactions or sales that are completely unrelated to the technology that's at the center of it, or the service or the offering or the product. And so if there are challenges in timing of cash flows, or procurement processes from a corporate customer, or your balance sheet, or your capital cost or loan to value, or you can't meet the debt service coverage ratio your banker's telling you to meet, or you're trying to use venture capital dollars for concrete and steel — yeah, let's talk about that.
I mean, the way I like to describe Structure sometimes — and maybe I'll give away my background in the Army here — but the technology companies like Carba, they are the tip of the spear. And we need the tip of the spear, but we also need the heavy wooden shaft that connects to the tip of the spear. And, you know, if you're fishing with the spear or hunting or performing the ceremony, whatever, there are all sorts of different tips of the spear. That's great. Well, we're here to make them all effective in whatever they need to do.
Andrew Jones: I'm not going to take offense to that. There may be a lot of Andrew Joneses, but I'm a millennial, so I'm a special snowflake.
Ross Kenyon: Oh God, I can just see you over there, just waiting for your chance, like, shut up, Matt. That's my time, Matt. I gotta get in there. Also, Matt, I don't think you used a spear in the Army, did you?
Matt Schmitt: Otherwise — that was a very long time ago. It was a different [unclear]. For a long time, I guess, you know, a bayonet is a type of spear, but yeah, it's true.
Ross Kenyon: Please. Save us, Andrew. Please tell us what Carba is.
Andrew Jones: Yeah. Well, I don't know if I can top that, but yeah, Carba. So essentially, at our core with Carba, we're a waste-to-value company. We find waste and we figure out how to valorize it in the best possible way with a very strong focus on climate. So we're a carbon removal company as well. And so it turns out there's a lot of value in the carbon that's in waste if you can lock that carbon up and then sell the resulting carbon credits. And so that's what we've been able to do here. And there's a lot of sort of variations on that theme that we're looking at. But at its core, it's this premise of, where are all these pockets of waste in the world that aren't being utilized today? They're low or negative value. And how do we upcycle them, if you will, and convert them into a product that's actually valuable, whether it be carbon removal credits or some sort of carbon product?
Ross Kenyon: Which waste stream did you discover was undervalued and decide to dedicate valuable career time to solving?
Andrew Jones: Well, our beachhead here, which is really exciting, is looking at waste — municipal wood waste.
Ross Kenyon: All right, you got to go back. You got to choose something more Army related, I guess.
Andrew Jones: Yeah, right. I wasn't in the military. I wasn't in the military, but I was a pyromaniac as a kid, so that actually might tie into this. As a 12-year-old, I used to make carbon in my fireplace, which turned out to be biochar and I didn't know it at the time. And I would mix that with sulfur and potassium nitrate to make a crude gunpowder, which I guess makes me sort of of the vintage of spears that Matt was speaking of. So I was making biochar before it was cool, you know, when I was a wild tween or adolescent.
And kind of fast forward later in my career, I got into chemical engineering and learned about how chemicals are made and how you can transfer chemicals from one state to the other and make and break chemical bonds. And really got started in catalytic pyrolysis, how we use catalysts to make it better, and started Carba to take advantage of all the wood waste and agricultural waste and yard debris that's out there. And so our first project here is in Minnesota at a landfill site where we actually take wood waste from the area, which is diseased or degraded and would otherwise burn or compost. And we could take that, convert it into biochar through pyrolysis — very similar to what I did when I was a 12-year-old and suffocating a fire.
And we can take that black biochar, which is this stuff, Ross. It doesn't look like a giant turd. You can cut that off. Thank you for fixing it. Yeah, we could take this black biochar, which is now devoid of food value, and we can put it into environments where it has co-benefits. And the first one we chose was a landfill, because it turns out landfills leach out a lot of chemicals. They have odors, they have fugitive methane emissions. We can reduce all of that by putting this into a landfill. And they're already burying soil, so we can mix in with that soil and provide all these environmental co-benefits as well as lock up the carbon in the landfill. And so we have a big project that we're building out here in Minnesota.
Matt Schmitt: The language, I think, is so interesting, and can frame up so much of the thinking or discussion here. And that is that sometimes even the language of co-benefits, I think, misses some of the mark. We like to talk about, let's understand the entire surface area of a project. And so what Andrew's project represents is not just storing carbon out of the atmosphere in a way that keeps it out of those short term carbon cycles, but also means fewer trucks on the road hauling soil to maintain landfill cover. It means fewer microplastics in local water systems. It means more revenue at the landfill that is able to receive this wood waste that otherwise it can't receive. It means fewer emissions in the air if you were kind of rogue, you know, just like wood chip piles that turn into potential fire hazards.
And it's not that any one of those needs to be a strong enough or convincing enough case to say, let's get this project funded. It's that we can pull together capital interested in this project for all sorts of different reasons. And that's great. Projects like Andrew's have, again, this big surface area — there's carbon and water and air and jobs and resilience and local and all these other things together. And so, just as you look at projects, I would say the language of talking about co-benefits I think often misses the realities of what these projects can represent.
Ross Kenyon: That's a good point. We certainly gloss over it when we just use one big word to cover up all of these very immediate health impacts and other benefits here. But who's the customer for this work, Andrew? Is the city or the county or the state paying you to do biomass diversion? Is it something like that?
Andrew Jones: Yeah. I think long term we see this as sort of a future waste management lever. So right now we pay to get rid of our trash, we pay to get rid of our recycling. We don't pay to get rid of the CO2 because it's invisible. It comes out of our tailpipe and we don't see it. But really that's kind of the third arm of the waste that we produce. And I think long term that can be part of the conversation. Today we're funded by carbon credit purchasers. So companies or individuals that are trying to reduce their carbon footprint, hit their net zero targets, and purchasing carbon credits directly from Carba or through marketplaces.
I'm really excited to announce for the first time that we have sold a large offtake to Microsoft, who is of course one of the leading buyers and has a very rigorous diligence process. And they were attracted to our solution both because of its carbon removal potential, but also the co-benefits and the simplicity of the project being completely co-located. And so this is a multi-year, large offtake agreement. We're super excited and really thankful for the support that Microsoft provides to this, to let us get off the ground and really show the world how valuable this can be. And so part of this is learning all the benefits that go along with our process. And so we're doing some studies to get some really good real world data in the landfill, to measure exactly all the impacts that we're going to have on the landfill.
Ross Kenyon: Congratulations. That's amazing news and very big. I think people listening would assume that if Microsoft is one's customer, that you've basically got it made and you probably don't need that many other people like Matt flitting around. I was going to say, pecking your carcass. No, I'm sorry, I'm not going to roll that back.
Andrew Jones: I'm not a carcass yet.
Matt Schmitt: It's — actually, I mean, let me come at this from the Microsoft side, right? Like, I've known the Microsoft team for years. Ross, you and I first met when I was at Cargill and you were at Nori, many, many years ago. And Microsoft announced their purchasing intent in, I think, 2020, not too long after Stripe. And so I've known the team there at Microsoft for a number of years. And we at Structure actually maintain active discussions with them simply because Microsoft is a buyer. Their finance team wants to buy carbon credits just like they buy software subscriptions and professional services and property services and employee benefits and all that.
Which is to say that they have contracts with the vendors that they want to source from, those vendors perform that service or deliver that product, and then Microsoft pays. And this is how the transactions the world over happen in all sorts of different industries. And in established industries, there are all sorts of established financing mechanisms to support those transactions. And so one of the ways that I think about Structure is that we are bringing the patterns for those financing products to emerge in this new kind of industry.
And so as we talked to Microsoft, they actually introduced us to the suppliers that Microsoft wants to be able to buy from, because as much as they are doing to catalyze demand in this market — and really, you know, leaders here — again, they are a corporation going through their corporate procurement processes, and as a publicly traded company, I mean, they have certain compliance requirements. And the more consistently they can procure and purchase, the more of that they can do. And so having mechanisms to support that, and not just their everyday items but also their kind of emerging areas like carbon credits and so on, makes it that much easier, not just for Microsoft, but then for the companies that want to follow in the footsteps of what Microsoft buys.
Ross Kenyon: Why wouldn't they just cut Carba a check? What blocks deals from happening in that sort of straightforward way that we might expect from being consumers in other parts of our lives?
Matt Schmitt: Yeah. So this is where I think we all have experiences with this. You know, if you're a homeowner that has done some remodeling, or if you're at a company that's purchased services, whether that's consulting or software development or so on, there might be some cash that you pay upfront to retain services. But a lot of what it takes to actually get done what you're aiming to get done takes time. And then you want to make sure that that was done appropriately and received. And again, as corporate procurement processes work, they have their own systems for moving from vendor setup to invoice to pay and so on.
And, you know, to pull an example from the auto industry, if Toyota places an order with a manufacturer for a set of bumpers for a certain car, that company that makes the bumpers can go buy the steel, the raw materials. They can make those bumpers using funds that they can borrow against the value of that order, that purchase order from a company like Toyota. And so the fact is that companies like Microsoft managing capital at that scale like to manage their capital, which is to say they like to keep a hold of it until they absolutely have to get it out the door to whatever it is that they have purchased or committed to. And so we enable the purchase of carbon credits to be like the purchase of any of a number of other standard kinds of corporate services or products.
Andrew Jones: I think I can layer on top of that too, Ross. The way I see it is, someone like Microsoft, they want to be able to buy the product, which is the credits. They don't want to fund the project. They don't want to be product developers or put in the capital to bring a product online. That's a very different ask and a very different sort of financial risk profile. And they have done things like that, but that's not a model that's scalable. And so where Structure comes in, and why we partner with Structure and why it's such a valuable partnership, is Structure helps us get these projects off the ground — whether it's a FOAK or a NOAK, which I hate the term NOAK, I mean, come on — but whether it's the first or many of a kind, we need project financing, and that gets very difficult at the first of a kind stage, less and less difficult as you go on and you build out the model.
That's not something you can, in really any industry, rely on the buyers to provide the capital for. And so that's where Structure comes into play, and that gives the buyers of credits a lot of confidence that these projects are going to get done. You have the capital, you have the sites, you have the partnerships, and you can make these projects go forward. But yeah, there's a lot of partners, there's a lot of things that have to come together to make these things happen, which is why they're so difficult.
Ross Kenyon: I think it's such a good illustrative case, because if Microsoft cannot internally finance this in an effective way, I think it just goes to show how needed specialists are, like Structure, essentially, because Microsoft has an enormous finance team. I'm sure — I don't know how many people work over there, but it's three digits. Is it possibly four digits of personnel that are doing these?
Matt Schmitt: Yeah, I mean, they are quite active, but they also want to spend their time and effort doing the things that they are best at. So, you know, planning data center infrastructure and cloud compute and their products and services for their core customers. And so, just like they're probably not financing, I don't know, a lot of landscaping services — there are all sorts of things that Microsoft uses that they are not in the financing industry for. And that's totally fine. It's just like we as consumers can go to a grocery store and buy food without having to think about the financing processes used to put in the food safety measurement equipment and the standards, and sort of how all of the invisible pieces come together to make that food safe to buy at that point of purchase. We just were able to purchase that. And so the more that we can get the right kinds of tools, the right kinds of capital in for these projects, the more that the buyers can focus on buying what they want to buy and then go back to doing what they want to do.
Andrew Jones: Reminds me, Matt, of the zone of genius, right? You don't want to be operating outside of your zone of genius or you're not effective. And so it doesn't make sense for Microsoft to become a — or any, you know, tech company to become a carbon removal company, or to finance those projects.
Ross Kenyon: Yeah. Everyone talks about how difficult, especially first of a kind, FOAK deals are. NOAK is like Nth of a kind, so just like two plus whatever deals. It's obviously much easier to go through deals once the first one has already happened. We've learned from it, we can move on. But people often say that carbon removal companies, even with a blue chip counterparty potentially like Microsoft, cannot get debt financing for deals because there's just no track record. These companies don't have cash flow statements that go back far enough in time that are credible. You know, a commercial lender — non-concessionary lenders are just not going to put money up for projects like this, even with Microsoft on the line. Is that still true, by the way? I've heard some pushback on that characterization. Are you still seeing that, or is that something I could have said six months ago, but it's maybe less true now?
Matt Schmitt: From what I've seen, it's even more true now. So, like I said, as Structure we work across tech verticals. We talk with companies doing all sorts of different climate positive things — water, waste, wood, biodiversity, recycling, power, etcetera. And we specifically focused on kind of the smaller scale of projects. So think like sub-$20 million; we see a lot of demand in the roughly $3 to $8 million range. And what we hear from the companies we talk with is, if they can get quotes to borrow from banks — even banks that they have established relationships with — they're getting rates north of 20%.
Ross Kenyon: Like consumer credit card numbers.
Matt Schmitt: Yeah, right. It would be like, you know, going to a car dealership and saying, hey, I know I can get an auto loan for 8%, but I'd like to put this car on my credit card and pay like 23% or something. And so, you know, the reason you can get an auto loan for a lot less than a credit card rate is that if you fall behind on payments, they have a car they can go get, whereas a credit card, you can pull out that number for nigh upon anything. And so there's this kind of tradeoff between the cost of capital and the flexibility of the capital. And so cars and houses and buildings and equipment and things that can be collateralized or repossessed or claimed — there tends to be a lower cost of capital when you're talking about a distinct thing that is believed to retain its value.
And there tends to be a higher cost of capital when you, the borrower, the person receiving the capital, has more flexibility. So a startup founder can raise venture capital and can do just about anything they want, which is why investors at those stages put in mechanisms to manage the governance and the boards and decisions. They build up a framework to bring the control, because the control is not around a tangible thing. But in real asset type projects, it is a very tangible thing. And so, yeah, I don't know, I don't know how much to get into sort of risk return curve and financial 101 or theory or whatever.
But it's one thing to get the blueprints for a house. You know, like you'd say that you're planning a housing community and you're going to just cookie cutter every house. You can design the blueprints once and use them a bunch, but every house you build, you need cash for that. You need the cash to buy the wood and the concrete and to pay the people to move the stuff around on the ground. Or it's like a kid that hears a joke and shares a joke and shares that joke many, many, many, many times without any additional cost. But if they're going to run a lemonade stand, they need to buy the lemonade supplies. They need to buy the material to make that happen. And so — sorry, Ross, I feel like I'm wandering on the answer here — but the companies that we talk to, they have customers that want to buy whatever it is they can produce. And so we're here to say, let's line up the cash and the capital that can be flexible enough to meet what your project needs.
Ross Kenyon: They also probably don't want to be on the hook in case — knock on wood here — Andrew, Carba fails and fails to deliver. If they had pre-purchased, I imagine there's probably less recourse. That risk is probably with the buyer and they don't want that. Someone would lose their job potentially if that happened, if they bought something that fell through.
Andrew Jones: Yeah, you're really sticking your neck out, right, and doing something that's not core to the company as well. So yeah, I kind of look at it from the entrepreneurial perspective. I'm doing a climate startup, and climate is tough, right, for all the reasons we've said. I have a couple options. How am I going to get this project off the ground? I've got a project. I can go to a customer, I can try to get prepayment — that's more and more difficult as this industry matures. I can go out and try to get debt financing, which we mentioned is very difficult, in that a lot of times these offtake agreements aren't bankable, meaning you can't leverage them necessarily for traditional debt for a first of a kind, because that risk is there, because this market is chaotic and not established. And/or I can go out and get venture, you know, so equity financing.
You don't really want to equity finance the capital of your first of a kind. I mean, that's very expensive capital. First of all, it's not a very sustainable model, but also it's a very expensive model. I've heard — you know, venture — Matt, you correct me if I'm wrong, but I've heard venture is equivalent to taking like a 30% rate loan.
Matt Schmitt: Yeah, that's kind of — or more. I mean, it depends on more than your [unclear]. And it comes with a lot of teeth sometimes.
Andrew Jones: Yeah. And so it's not cheap. So you don't want to do that if you can avoid it, especially for capital — for people, it's a little bit different. But and so then, you know, comes in Structure Climate and Matt, and they've got this alternative fourth pathway, which is, this is debt, but it's philanthropic debt, you know, mixed with some private debt. And he can talk about that more, but it's a way to get much lower cost of capital that's now enabled us to do first of a kind buildouts. And we can touch on, you know, DOE as well. But yeah, it's a door opening lever for us, and has really allowed us to take advantage of building a first of a kind new technology to really save the planet and improve landfills and air and water quality.
Matt Schmitt: Yeah. And I want to be clear that this is not sort of the end all be all solution for everything. There is absolutely a need for early stage venture capital. And if you're a climate company getting started and you're figuring out your science or your technology, or you're figuring out your team, equity financing is a great tool for that. And really, I think a helpful way to look at this is, for anything that your company can use everywhere — would you say your IP, your talent, your science — look at equity financing options. I mean, that's really where you should be putting that kind of capital into play.
And then for anything where you're doing something specific to a place or a customer or a set of materials or something like that, where it's almost like one time use capital — so trucks, concrete, steel, etcetera, you have to pay for those physical things — look at debt solutions. And so the right kind of capital tool for the right kind of job is really what we are here to build. And we find that a lot of climate companies don't necessarily have the awareness, because they haven't been forced to figure that out. We're here to say, hey, let's get more smaller projects funded faster with capital tools that are recognizable to more mature markets and sources of capital. And that way, you know, across a variety of technologies, we'll just see and show the commercial maturity that's possible.
Ross Kenyon: Well, if this particular type of debt financing is only for a smaller subset of lenders, what kind of maniacs are interested in deal flow like this? How are you able to attract people that want to fund projects like this? Matt, I imagine it could be a difficult pitch.
Matt Schmitt: You know, this is where, again, we really focus on the entire surface area of the project. And so, to call out what Carba is doing and just to dig into the specifics of that a little bit — so Carba needed, needs, is using some project financing to put this first site here into the site in Minnesota. And the loan that we syndicated is made up of a handful of what are essentially donors who are providing the capital that is being pooled into this loan product with terms for Carba that can work for Carba. And so in this case, the primary donor, the main anchor donor, is actually Eric Schmidt's family foundation. They are an active grant maker in areas related to waste and water. And so this opportunity to not only achieve impacts in waste and water like what Carba is able to do, but also to utilize their grant making capital as a proof point for building that credit transaction history, was really meaningful to them.
But then aside from that, you know, there are some local donors that have known Andrew through other networks and like to support local entrepreneurs. There's a local software company that is supporting this project, again because it happens to be in Minnesota. Whether you're looking at this for Minnesota or wastewater, carbon, climate, small communities, rural economic development — you know, maybe you want to support US manufacturing jobs, or entrepreneurs that went to the University of Minnesota, or they went to Berkeley, or have the last name Jones. Like, I don't know, there can be a whole surface area for these projects. And we're going to say that's great. All of this capital can work together. And we're here to make it easy for that capital to make projects like what Carba is doing successful and able to achieve the impact that they are able to achieve.
Ross Kenyon: I love the idea of some analyst or associate with their first job in VC pitching a thesis correlating, well, people with the last name of Jones to alpha, being like, this is where we should be investing right now — the Jones portfolio.
Andrew Jones: I'm all for it.
Ross Kenyon: I bet you are.
Andrew Jones: For you to oppose it — I bet there's a correlation. I don't know if there's a causation, but there might be a correlation.
Ross Kenyon: You mentioned that you see these people as donors. Is it all concessionary capital like that, or are these people getting a return? How are they seeing it and what does it look like?
Matt Schmitt: Yeah. No, great, great question. A couple of terms that I think are important to lay out to understand the landscape here. One is that this entire concept of lending charitable or tax advantage or philanthropic capital — all terms are basically the same thing — this concept has been around for decades. It's been something that's been part of the tax code since the 60s, but only private foundations in the tax code are able to utilize it. And the biggest foundations, you know, the ones that everyone has probably heard of — Gates and MacArthur and Ford and so on — have done this using hundreds of millions of dollars, and it is an active capital flow mechanism for those types of groups.
What we are doing by providing services that pool the capital is utilizing that part of the tax code, but also making it an option for individuals that want to make a charitable contribution out of a donor advised fund, or had a liquidity event and want to put some of that capital to work in this kind of [unclear] project financing. And when you look at the entire landscape of charitable dollars and how they flow, private foundations are only about a quarter of the transactions out there, as measured by dollars. And so what we're saying is, there's a whole bunch of smaller projects that can utilize this kind of capital. And there's a whole bunch of capital that loves these kinds of projects for all sorts of different reasons. And so we're here to facilitate that connection.
And so they are, in the eyes of the IRS, they are donors. This is charitable or tax advantage capital that has generated a tax deduction opportunity. And yet because we bundle the dollars into a loan, that actually preserves the charitable capital, so it pays back. And the donor at the end of it can elect to receive their principal plus interest and put it towards other charitable causes. So in the case of the Schmidt Foundation, for instance, we've talked with them about recycling this capital into other projects like this, which they're great with. But the local software company, they're probably going to find some other projects happening in education or healthcare or something in the Twin Cities that they'll put that capital to once it gets repaid. And that's fine.
Like, that's — we're here to say, if you want to support this project, here's a mechanism by which that can happen. And when the project is done, thank you for your support. And so it's the preservation of the charitable capital that really starts to make it a little bit different than kind of how you might think about a donation in general.
Ross Kenyon: Are there lenders in this loan who expect at least something above the risk free rate for making a loan? Or is it all sort of philanthropic capital at this point?
Matt Schmitt: At the moment it is all philanthropic capital. As Carba matures though — and this is kind of what we talked about with getting them ready to move to more conventional sources of financing — there are lots of larger scale or mid market type infrastructure investors that finance landfill type projects or municipal projects, that want to see this kind of technology start to gain traction, but because of the kinds of investors they have and their capital requirements, can't take this kind of early risk. And so part of what Structure does is build that bridge that puts companies like Carba on a path to really show or prove out their commercial viability to any of a number of different types of other investors.
And so the catalytic or philanthropic capital at the start can get replenished and can stay at that leading edge. And that's where — and again, we're building this bridge to bankability, or over the valley of death, or, you know, pick your metaphor here. But the point is, let's meet the projects where they are today using capital that is kind of the right cost and the right structure for them today, but done in a way that makes them recognizable.
And so the returns, the rates, you know, that we talk about — we have a lot of flexibility within that, but generally think 5 to 7%, five to seven years. That's kind of where we aim to land, because we're balancing a couple of things. One is that we want the rates to be low enough that companies like Carba have enough space and flexibility to do what they need to do, while making the rates high enough that they become a meaningful part of that company's credit transaction history, so that they can go to a bank next time. And the bank might say, oh, you got a really good rate on your first loan. How did you do that? Like, well, here's a story about how we did that, and that's fine. That's great. It's like, oh, well, you borrowed that on these terms and paid that off. Great. Here's the offer that we'd like to make.
Ross Kenyon: So very attractive thing to be able to offer a young company. Andrew, when you were looking for financing for this project, did you have many options? Are there a lot of people floating around trying to provide this service, or is it pretty open?
Andrew Jones: There's not a lot of options, to be honest. You know, we talked to venture, angel investors, about equity financing, and I talked about that before. We also spoke to infrastructure funds. There's even sort of blended infrastructure funds that are kind of more venture style early stage infra. But even that, it's difficult in the climate space. But yeah, we looked at a lot of different areas to answer your original question. And there's just not a lot of options, which I think is what you see a lot of these climate companies struggling with. Even ones that have gotten VC funding and have been able to build sort of small pilots, they can't get to that next stage to really prove out commercial viability. And they're the ones with offtake contracts with marquee customers, with great investors on their cap table. They've raised a ton of money. But if it's not the kind of capital that the investors you're going to are looking to get out, and it's not the right kind of capital for what you're doing, then it becomes a hard sell.
Matt Schmitt: And Andrew, maybe — certainly I see this a lot, but I feel like there are a lot of options that want to talk to you once you've done something. And, you know, once you get started, once you have that first project or the first two or three projects, then yeah, they would love to write the checks to fuel that growth. And that's not just Carba or biochar. I mean, we see that everywhere. Every kind of climate project like this faces the same kind of challenges. And, like, how do you start something that is so new when all of the capital that might help you start wants to see it already having been done before?
Ross Kenyon: This might go in bonus content because it's a little bit eccentric or maybe naive, but Minnesota is a very progressive state and I see it as a very creative state financially too, in terms of policy. Is there any opportunity for carbon removal projects that intersect with conventional city or county or state operations to have access to municipal bonding? Is there any ability to have tax advantage bonds working in favor of carbon removal at the state level?
Matt Schmitt: Maybe down the road. I think that your better bet for right now, at least for the next, you know, three, five, ten years, would be to get enough debt funded transactions such that the kind of bond underwriters that are going to come in for really big deals feel like they have enough of a data set to start to price it as something that makes it appropriate to both the city and the investors that they want to attract. And this is where — you know, it's like solar, and solar PV I think is such a great example of, in the last dozenish years, has really sort of become large scale and boring. And, like, that's fantastic, right? Like, we want that kind of technology to be financed at a massive scale and financed by, you know, all of these like pension funds that want zero risk and accept low returns. Like, that's fantastic.
And yet it took 50 plus years for solar to get there. And, you know, when Jimmy Carter put panels on the White House in the 70s, like, it wasn't because the spreadsheets had perfectly mapped out the growth plan. It was because he wanted to show what it looked like, show that it could be done. And that's really kind of part and parcel with our theory of change — as we get more smaller projects started faster, then more people can see what climate projects look like, and they can start to think about what that means for their community, their city, their municipality.
Andrew Jones: Yeah. Just to layer on that, it's very clear to me that when we demonstrate this at a commercial scale and show its profitability in the numbers, it becomes way more bankable. And so there are these early stage infra funds that will take you from 2 to 10. There are the later stage that will take you from 10 to 100. You know, once you prove that out, it's these first of a kinds that are very difficult to fund. And that's, you know, I think a huge lever for Matt. And I think, Matt, you also are hoping to get into sort of the two to 10 and beyond stage as well, and then kind of help us as a company grow that credit rating, grow that ability to attract, yeah, that type of funding.
Matt Schmitt: Exactly right. Yeah, I mean, we're here as early as we can be and engaging in a way that we believe will have you on that path. And then hopefully we continue to do our job well and remain that partner for you as you grow.
Andrew Jones: And Minnesota — kind of to touch on that piece, Ross — Minnesota is a great state for this. I moved out of California to come to Minnesota, which, you know, Californians thought I was crazy, but I'm from here. So, but it is a very progressive state and we have a lot of policies, you know, pushing for solar and renewable and sustainability. You know, Xcel Energy, for example, has to be net zero by 2030, which is only five years away. And so there's some really big levers. And on the municipal angle — actually, sorry, I have a cuckoo clock.
Ross Kenyon: I love it if there's been a cuckoo clock going off this entire time.
Andrew Jones: What's funny about it — I enabled an Alexa skill last night to alarm me at an hour because I was perpetually late to things. So I tried to disable it by putting do not disturb, but it didn't listen. So apologies. You'll have to edit some of those cuckoos out, Ross.
Ross Kenyon: No, that stays in. But anyways, please. Stay in it.
Andrew Jones: So on the Minnesota angle, the city of Minneapolis has actually funded the first biochar facility in the US, maybe the world, funded by a municipal funding source. I don't know exactly how the money was appropriated. So the city of Minneapolis, and then along with the cities of Lincoln, Nebraska and Cincinnati, Ohio, through a really competitive process, got selected by Michael Bloomberg's foundation to implement these municipal level biochar projects. So yeah, it's just like a great example of making it local, making it real, making it tangible for people. And that's a huge growth area for us. So they're focused on biochar that kind of lines the streets or the roadways, the landscapes on the side of the roads, with biochar. This municipal angle of waste aggregation and landfills and burial — it is, you know, Carba, what we're doing as well. And so it all ties together. And I think Minnesota is a leader there, and we're leaning into that for sure.
Ross Kenyon: Are there green bonds that might be applicable to work like this, or is this as far away as municipal bonds are?
Matt Schmitt: Maybe. Again, the challenge with that often comes in with scale and costs for establishing credit ratings and having the data set to get the ratings done and so on. And there are certainly, you know, those kinds of financing instruments for more established clean energy projects — solar, wind, batteries, etcetera. What Structure Climate is focused on is companies like what Carba is doing, or, you know, some of the other like small modular tech companies where they have something that a customer can see for themselves and that the customer wants. And the particular, you know, parts of the project — they don't necessarily fit a conventional screen, but there is tax advantage capital that is willing to and wants to see this kind of impact.
So, you know, private market transactions are what, hundreds of trillions of dollars — I mean, kind of wrapped together a whole bunch of numbers there. And I don't want to imply for a second that philanthropic [unclear] charitable capital is anywhere close to that. But it doesn't have to be to get started. So these capital sources can be really, really shallow, but by being shallow, they are also really broad. And so that's again like how we activate the entire surface area, and we get the capital that a company like Carba is ready for, and done in a way that again puts them on that path to growth.
Ross Kenyon: You mentioned a PRI. I imagine that might be a new acronym for people listening. What is a PRI?
Matt Schmitt: Yeah. So PRI is program related investment. And when I mentioned the mechanism that private foundations have been using for decades to make these kinds of transactions happen, that's all grouped under what the IRS calls a program related investment. So there are a couple of tests that we have to meet to make sure that this kind of capital tool is appropriate for how we're aiming to use it. And we partner with 501(c)(3)s that provide the syndication and the actual handling and receipt of the donations and the charitable dollars. So it makes it easy for groups like the Schmidt Foundation to give grants. And then that's the transformation point.
In this case, we've been working with the Venn Foundation — Venn as though at the intersection of purpose and profit. They are also a local group here in Minnesota and they have been a fantastic partner. They work with a whole host of different, you know, impact areas — education and healthcare, community development, and so on. And so they've done some things in water before, but nothing really so climate focused as this, but we are changing that quickly. Depending on your sort of exposure to impact investing, you might hear terms like mission related investments, or MRIs. That's not established within the tax code like PRIs are, but, you know, it can again refer to a type of investment where there might be some kind of impact return in addition to a financial return.
Ross Kenyon: Andrew, did your equity investors have any questions on the PRI? Like, how did that go?
Andrew Jones: No, I think they were excited about it because they saw the value. You know, to them, being equity investors, it's a low cost capital approach to get this thing done and get us to the next stage. So I think it was welcomed with open arms. I think not everyone had heard of the term PRI and we had to explain it, but…
Matt Schmitt: So Andrew, Carba's not your first company, and I believe one of the donors that came in to support this PRI was actually an angel investor from a prior company. Can you share a little bit about that?
Andrew Jones: Yes, actually, yeah. I had a previous company before this where I built detection equipment, actually some of the best detectors for pyrolysis gases and other sorts of things, and ended up selling, you know, those assets off to Shimadzu Corporation out of Japan. And so that was a successful exit, loosely related to what we do here. And someone related to that company also invested in Carba as an early angel, and then went on — they have a foundation, and that foundation went on to invest through the PRI. So it was a really interesting opportunity to invest sort of private capital in an equity stake, but then also, through a foundation, philanthropic capital.
Matt Schmitt: Oh, that's interesting. Yeah. And this is where I think understanding the landscape of capital can become really important. And, you know, the groups like Schwab and Vanguard and Fidelity are the largest 501(c)(3)s in the world just by assets under management, because they manage donor advised funds for so, so many people. And there are lots of reasons why someone might make a charitable contribution, you know, whether that's for like tax efficiency or tax streamlining. Certainly anyone who's considering like a tax loss harvesting strategy can look at this kind of opportunity to get a similar outcome. And so it doesn't have to be someone that, you know, is big into philanthropy or big into charity. If you have dollars in a DAF that are just sitting in the S&P and you want something more interesting to do with them, we've got a bunch of projects that would love to get that kind of support.
Andrew Jones: And the other plug I'll give too is, you know, if you're someone sitting with a foundation or philanthropic capital, or you want to just make a donation, it becomes catalytic capital. So it's not like you're giving it away and it's a traditional donation. It's actually a loan vehicle that goes back, and then you can reuse that for a charitable purpose again. So, you know, as Carba pays these loans back, you get to reuse that capital, which is incredibly catalytic and very different from just, you know, donating the money traditionally.
Matt Schmitt: Right. And one thing I always want to emphasize or be clear on is that there are lots of areas where donations are just a critical tool for a given issue. And lots of areas where, you know, a donor that gives is absolutely what is needed and there is no mechanism for return. Like, we shouldn't charge, you know, for getting fed or whatever. But in the theory of change, the sooner that climate positive business models can just become business models, the sooner we get the scale of impact that we're all after. And so that's really our focus, is saying we can work across a wide variety of types of impact, you know, water, waste, air, etcetera. And one metric that we create across all of them is a return on capital. And so again, with the goal of getting more conventional, or kind of, you know, fully conventional financing systems in play for these climate positive projects and impacts, and really accelerating the path to commercial maturity for a wide variety of climate technologies.
Ross Kenyon: Thank you so much for being here. Congratulations on the big offtake, Andrew. That's amazing. I'm happy that Structure was able to participate too, and make all this happen and tie it all together so neatly. Really interesting to hear more about what it's like to be working on debt financing, both as a project developer and then also being on the finance side. Thank you for sharing, both of you. Really appreciate it.
Matt Schmitt: Yeah. Thank you, Ross. Thanks for having us. Appreciate it.
