Carbon removal only has a few exits. Today’s guest was involved in two of them, and he’s bringing his lessons.
Jim McDermott is the founder and CEO of Rusheen Capital Management, LLC, an investment firm that makes a few early-stage bets and works with companies much more closely than most investors do. He's had a long and storied career in energy and as the founder and CEO of Stamps.com.
Jim shares his lessons from exiting 1PointFive and Carbon Engineering to Occidental Petroleum (who also just bought Holocene, another direct air capture company). He lays out his case for alternatives to the classical venture approach, and proposes a new philanthropic model he believes has a chance of filling in carbon removal’s (in)famous demand gap.
Listen in to lessons for entrepreneurs during tough times and Jim's predictions for direct air capture and the carbon removal sector as a whole.
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Listen to the RCC episode with Lisett Luik from Arbonics
Resources
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Rusheen Capital Management, LLC
"Why Oxy’s Acquisition Of Holocene Signals A Maturing Carbon Removal Industry" at Forbes, by Phil de Luna
Full Transcript
Ross Kenyon: Before we begin, I’d like to share a few words from our sponsor, Arbonics. Thank you, Arbonics, for sponsoring Reversing Climate Change. You helped make this show possible. I’m so grateful to you and you deserve it. I don’t like taking sponsorship from people whose companies I just don’t believe in, I don’t want to work with. And thankfully I don’t have to, because there are companies like Arbonics that are willing to come and support Reversing Climate Change. If you don’t know about them, they’re doing amazing forestry projects in the Baltic states in Europe. Europe has over 14,000,000 hectares of underused land. A lot of it’s abandoned or low quality, not a lot is happening on it. It used to be forest, but it was cleared for farming as farming intensified. And then a lot of that farmland was later abandoned as the global food system moved towards lower cost producers.
The land just wasn’t worth tending, and certainly not tending in a way that we would respect as a regenerative and carbon sequestering process. It was just underutilized, maybe unloved. Arbonics uses technology to help landowners even find this land, and once they do have it, how to restore it back into carbon removing, biodiverse forest. If you care about carbon being removed and you want to see Europe return to the forested continent that it once was, you should be looking at Arbonics. Go talk to them. I had Lisett Luik, their founder, on the podcast. The link is in the show notes if you’d like to listen to it. We talk about a lot of the tricky issues that surround durability and carbon removal, and how does forestry fit in. It’s a very thoughtful episode. I really like talking to her.
They made it really easy to pitch Arbonics on doing some business together, because I want to see their work be successful restoring biodiversity and making forestry, especially good forestry, profitable again. Man, that is a game changer, and so important if you can pull it off. Thank you again, Arbonics. The link to check out Arbonics’ website is in the show notes. You should listen to the show if you haven’t heard it already that I do with Lisett. It will teach you quite a lot about how they think and what they’re doing. And now we will fade back in to the rest of the show. Thank you for listening. Here it is.
Hello and welcome to the Reversing Climate Change podcast. I’m Ross Kenyon. I’m a longtime carbon removal and climate tech entrepreneur. I’m going to introduce my guest. There haven’t been that many exits in carbon removal, and Jim McDermott’s thumbprint rests upon several of them. Before I get into Jim’s background, if I could just ask you please become a paid subscriber to the show. It’s 5 bucks a month, gets you ad free listening. You can do it through Spotify. It’s really convenient, there’s bonus content, and it helps make the show sustainable, which is very important. I’m sure to you listening you want the show to continue. That’s how you help. Thank you so much for doing so.
If you can’t afford to do that right now, but you still want to show your support, a great rating — five stars on Apple Podcasts, as well as a review, very important. And also on Spotify, you can only do ratings there, but five star rating on Spotify, hugely helpful. Thank you.
And in any case, let me tell you now a little bit more about Jim. There’s so much to say about Jim. We don’t even talk about it on this show, but I remember seeing his company’s commercials on TV all the time when I was a kid. He’s the founder and CEO of Stamps.com. Do you remember Stamps.com? I have such a clear memory of the commercials airing on TV. That was Jim, very cool. And from there, he made his way into private equity and the energy business. And just going through his LinkedIn, his background is deep. He is involved in many companies. He sits on the board of many companies that he invests in. He’s seen some big deals.
He’s on the board of Carbon Engineering, which was sold to Occidental Petroleum, which we talked about in the episode. We refer to it as Oxy. He was also the founder, CEO and board member of 1PointFive, which also sold to Oxy. He founded Avnos, which is a big direct air capture company that also produces water. Carbon Ridge — I don’t know if you’ve been seeing what’s happening with decarbonizing maritime vessels. So much of it takes place inside of his company. Rusheen Capital Management, LLC. Rusheen invests in these companies, but it’s also involved in identifying early talent and proofing out some of the ideas. And just, it’s almost like a little incubator, a little venture studio. It’s higher touch than a lot of what you see elsewhere in venture.
We talked about what it’s like to exit several companies in carbon removal and to be involved in those processes. There’s not actually that many examples of companies that have exited. One of the other big deals that just happened was Holocene, also sold to Oxy. And if you’re sensing a pattern here, the specific pattern is that Oxy is buying direct air capture companies. The other pattern is that oil and gas companies will likely be the exit route for at least some sets of companies within carbon removal. This is a trend to keep your eye on. It depends on how you view it too. This could be a really great thing because it allows the industry to run things in reverse. If you’re skeptical of it, it’s because they are greenwashing and you shouldn’t trust them at all. I will leave it up to you to make up your mind on that.
So Jim has a lot of experience here. He has great advice for companies that are project developers within carbon removal who are facing turbulent times. Listen to Jim, I hope you enjoy. Thank you so much for your time, and here is your show.
I’m happy to have you here. You have the distinction of having two full exits in carbon removal, which is — is there anyone else that has that record? Is there anyone else that can rival your status in that way?
Jim McDermott: I don’t know. We don’t spend the time bringing it out, but I think it’s fairly unusual. Well, I’ll put it to you this way: no one’s ever told me that they’ve sold two [unclear]. The guys at Holocene just had an exit, so [unclear] has got one under his belt. But I think — and I’m super excited for him — but I think at this point, yeah, two is the limit.
Ross Kenyon: [unclear] is coming for you. I think he’s going to take you down, Jim.
Jim McDermott: I look forward to that. I very much look forward to that.
Ross Kenyon: What’s the process like of exiting a company in climate tech or carbon removal? It’s fairly rare, as we’ve mentioned, and I think everyone is looking forward to what their company statuses will be like in this new administration and in the future beyond it. What’s it even like to set a company up for acquisition like that?
Jim McDermott: I don’t think it’s all that different from any company that you’re building, you know, respecting the health of the planet or any business. It’s fundamentally being able to position the company in a way that a buyer believes that ultimately under their, you know, I mean, their single ledger ownership, things are going to continue to grow. And I think that probably the biggest difference is, because climate is emerging, there aren’t as many sort of established cash flow stories as you likely see in other markets. So a big part of understanding, and, you know, when something acquires, is kind of what’s the cost of capital and what is that technology development side going to look like, you know, from today forward. And I think you have to spend a lot of time really thinking about how you’re going to drive down cost and how that’s going to impact the overall growth of the business, because there’s still a lot of cost reductions required in these markets. So successful acquisitions usually are predicated on a lot of development to date, followed by a real credible story on how cost is going to get reduced over time.
Ross Kenyon: With regard to Oxy, who bought 1PointFive and Carbon Engineering at least partially from you, and then also Holocene — what goes into an M&A or an acquisition strategy for an oil and gas major? How did they decide, of all the companies in direct air capture, that they want these particular ones? How does that process even work?
Jim McDermott: I think only once you get to a certain level of success as an entrepreneur do you even base that decision. So I think that the way the successful oil and gas companies are prosecuting is that they’re first taking a very broad look at the landscape with respect to which technologies they think are most likely to work, and which technologies are most likely to work in the regions and areas and climates in which they operate. So if you’re, say, a Canadian oil and gas company, you have a different set of criteria for where you might put a DAC plant in Canada, because the operating environment is different than, say, if you’re only in the Permian Basin.
So I think what you see is the good companies do a very judicious look at all of the available technologies, and then they usually select one. In the case of Occidental, I think that they’ve been clear, and Vicki has said, that they believe in a liquid based sorbent approach. There are solid sorbents, there are [unclear] absorbents, there are electrochemical processes. So they make their own decision about which one they think is most likely to operate well and within the context of their operating envelope. Then I think once they make a platform acquisition, what you then see is a lot of focus on process flows, and breaking down those process flows to see where individual technologies can be purchased to increase the efficacy or the [unclear] across this [unclear].
And frankly that’s it. If you look at Holocene, that’s very clear. It’s when Oxy then said, look, we have a liquid sorbent branch and we’re pursuing it, we’re driving costs out of it. The technical approach that Holocene was utilizing — I believe that Oxy believes that that will help drive down their total cost of capture, and that’s why they did it. So you see acquisitions first at platform level, then followed by tuck in acquisitions that drive on particular pieces of their system level engineering.
Ross Kenyon: Does this surprise you, that we haven’t seen more acquisition deals at this stage of maturity for carbon removal?
Jim McDermott: No, actually. I believe that there will be, but that said, I believe that there’s going to be a huge wave of them coming in, say, late ’26, ’27, ’28. And that’s because when you look at the progression, the technology readiness or the TRL levels of the guys who actually have money, who are progressing through, most of them are going to be in a situation that around late ’26, early ’27, ’28 they’re going to have commercial level products ready to go. And I believe a bunch of oil and gas and, frankly, large manufacturing players are [unclear] buying things. And so it’s just that they’re not quite there yet.
Ross Kenyon: I’m wondering how many carbon removal companies might be able to make it that long. I think if they have big offtakes that are able to be financed they’ll be OK, but the buying environment by then could be very different.
Jim McDermott: I think that one of the major questions that every board and every CEO that’s in the direct air capture business is asking themselves right now is: do I have enough money on my balance sheet today to get out to the ’26, ’27 time frame? And I will tell you, Ross, I have very high conviction that — you know, I think we were keeping track of somewhere north of 150 companies that have been funded in DAC. I think that the die off rate between here and ’26 is probably 80 to 85%. I think a lot of companies are going under, and that’s — I mean, that’s part of the natural venture capital cycle where a lot of things fail. It’s being really exacerbated, I think, by a lot of, from the chilling effect right now in the US, you know, from a political level.
I think a lot of people are looking at it and saying, OK, if this isn’t working right now, or I don’t have ample capital to get myself through the next 24 months, maybe I’m just not going to get any more money. Which is, I think, for people who are focused on which technologies they care about, maybe a terrific buying opportunity for folks on the long side of the equation. And on the other side, it may be a situation where stuff that was working is just not going to happen. You know, it’s going to die in a month.
Ross Kenyon: Sounds like a lot of the die off rate is just a response to macroeconomic conditions that are beyond the control of these individual technology developers. They might have great technology, they might not have an offtake in hand, or be able to survive, and that puts them in a very dependent position. It almost seems very unfair to be at the whims of such global, world historical moments that maybe are responsible for your business success or failure. I feel like a lot of this is luck or timing, in a way that people that are successful entrepreneurs sometimes highlight that luck played a big role in their success. And I think we’re seeing that a little bit now here too.
Jim McDermott: Without question. Without question. I mean, I think it is — so any [unclear], this can be a fearful situation, because you’re trying to think and create something that’s never been done before. I think that there will be plenty of people in this sector who, in retrospect, had great technology and just got treated unfairly because of the winds in their capital markets. And then there will be some folks who survive and make it through with maybe not the best technology and ultimately get to an exit or become part of a larger entity. I think, you know, having been in this business since the early 2000s, I watched this cycle in software where, over and over again, people with inferior technology solutions won because they either got themselves into a large, well capitalized company or they basically had better financial backing.
So again, I don’t think this is something that’s discrete and we’re focused on in climate. I think it’s just the way the natural thing works. And good entrepreneurs, I think, recognize those cycles, prepare themselves for the ups and downs that invariably come. And so I think it’s both luck; it’s also skill, in the sense that one of my favorite [unclear] is: just because you’re paranoid doesn’t mean they’re not out to get you. And running paranoid in climate about the fact that the capital [unclear] swings can be pretty severe is the hallmark of a good entrepreneur.
Ross Kenyon: If they have to stay alive until, you know, second half of 2026 for some of these deals, or maybe even beyond that, I imagine they’re going to be cutting costs, going into cockroach mode, just trying to stay alive. And the old line for this is that companies don’t get sold, they get bought, right? And I imagine it’s going to be a buyer’s market. If you expect 80 to 85% of companies to fold under themselves, that sounds like a buyer’s market to me.
Jim McDermott: I think it’s a buyer’s market, maybe, and here’s why. Because there aren’t that many energy companies to buy. So, you know, look, let’s say as a fun exercise, out of 150, let’s say 20% survive, right? So you’ve got 30 companies that come out the other side, 20 to 32 companies, right? Well, there’s only, you know, I mean, 15 or 20 major oil and gas companies, and they’re all going to want to own their own technology and they’re all going to want to control their own destiny. If you’ve got one of the better answers, I actually think all you really need is 2 people to compete, if acquisition is sort of in the offing. So I’m not totally sure. I think it might be a buyer’s market if you’re not one of the winners. But I think if you’re one of the winners, it feels a lot like a winner take most situation to me.
Ross Kenyon: For the folks who make it out into the ’26, ’27 time frame, do you have any advice for companies that might hear this podcast, be concerned with these predictions, and want to set themselves up for future success for acquisition?
Jim McDermott: Couple pieces of advice. The first thing is, right, we’ve seen this — we saw this a lot last year. There are times in markets where raising capital, like, definitions of success don’t move backward. There were a lot of companies that we saw last year that were like, well, I had a huge step up in the last round, I was doing a huge step up now. And then the answer, I think, to a lot of people is that you should take money to survive sometimes. And I think we’re in an environment like that, where just, you know, doing a flat round, it’s not a bad thing, because it means you’re going to be around and a lot of other people don’t make it across the chasm. That’s one.
And two is, I think, define very carefully how you’re sort of chunking through your milestones, and make sure that the milestones that you’ve defined yourself are ones that people outside your company care about, right? Because we’ve seen over and over again situations where people sort of define metrics and then they hit them and then they say, but no one cares. And they’re like, well, that’s because you didn’t ask anyone. So I think if you’re thinking about, oh, well, maybe this is ultimately going to end up in the hands of someone just sort of further up the food chain from me, then it accrues to you to spend some time thinking about what’s their process, how did they think about things. And don’t try to overlay your preconceived notions about what value is. Go listen to the buyers. And very concretely, large oil and gas companies operate on stage gates, and it behooves you to go learn how they run their stage gate processes.
Ross Kenyon: Can you tell us a little bit more about how that works? I imagine that’s a new term for many people listening.
Jim McDermott: Stage gate is really just a process, when you’re doing a very large engineering project, that basically you set up a series of milestones. And then when you get to that stage gate, you sit down as a group and you look at all of the various things — generally speaking, it’s commercial, technical, regulatory and financial — and you say, how do we reach the defined stage gate to move beyond this? So, like, one of the stage gates that you often see is basically: do you have a commercially viable price for what you’re about to do, right? The second one often is: can you get it financed, right? So oftentimes when you reach a stage gate, what happens with your stage gate is they start with [unclear], what’s the pricing on the project? And the first stage gate is ±50%. The second stage gate, the cost is ±25%, and the third one is ±10. And so when you move through stage gates — and every corporation has their own stage gate process. So if you’re thinking about how am I willing to fit into an acquirer’s potential, you know, business [unclear], educating yourself on stage gates is really important.
Ross Kenyon: With regard to flat and down rounds, do you think entrepreneurs and founders should feel the amount of shame that they typically feel around those events? I know it’s good to stay alive, but oftentimes they don’t get announced as loudly as maybe they should. Even just staying alive though is a success, especially in a volatile, strange market that is still very undefined like ours is.
Jim McDermott: Oh yeah. No, I don’t — I don’t think that, particularly hardware markets, because so much of hardware can be driven by the cost of the hardware when they deliver in the hardware, because, you know, supply chains are global. There’s a lot of — I mean, there’s currency movements, there’s tariffs, there’s all sorts of things that are sort of exogenous to your activities that can make your life hard. So I think what we try to counsel everybody that we work with is like, just be conservative in terms of how much money and how much time they think it’s going to take. Because you can’t really control — like, for instance, you can’t control, say, that the Trump administration decides they’re going to put 145 percent tariff on something. It’s not within your control.
What is within your control is to anticipate that there might be a significant price increase while you’re trying to build your first unit, right? Can you pick 145? No, but you could make the assumption of, hey, in a reasonable market, or in, you know, a low turbulent market and low volatility market, it’s going to be $100 to build something, and plan for it might be 125, right? But no, I don’t — shame. Shame is, I think, a valueless emotion when it involves clean tech, which is, there are just so many moving parts that you just need to stay focused on, like, you know, what can I control? What can I not control? And how do I keep moving forward?
Ross Kenyon: One of the long running jokes as a founder is that, you know, when times are good, your board and VCs backing you will say we don’t care about profitability, just grow as fast as you can. And then exogenous forces will bear down upon you, interest rates will change, and they’ll say cut expenses, it’s all about profitability. Like, how fast can you make this work? And getting jolted around like that is a very common experience. It is out of your control, and that you might try to be expanding as fast as possible, then get caught out and then almost get in trouble for doing so. I think it’s really tough to be in a spot like that.
Jim McDermott: I agree. I mean, but that’s — I agree that that happens. I don’t agree that that’s necessarily good board management, or people acting the way that they should. Because when you get into a climate investment — and, you know, we talked about this in the past — one of the things that you really have to do is understand that you’re involved in a very long time horizon game. It means this is not, you know, I’ve taken a million bucks and I get up a product, I’m on the Internet on AWS, and it’s up there running and someone wants to acquire it in 18 months. Like, it’s just not a thing. And so when you invest in a climate or hardware play, you need to have your head around maybe 7 to 10 years. And during the seven to 10 year period, it’s almost a guarantee that there will be one or two cycles as you’ve described, right? And so the idea, well, all of a sudden everything is moving the other direction while you’re trying to prosecute a seven to ten year plan, is not realistic. And insofar as your board or your investors are sort of all of a sudden lighting up to that, that’s as much on them as it is on the entrepreneur.
Ross Kenyon: Rusheen has an interesting business model. To me it seems like you have founded or co-founded several companies. It almost seems like you incubate talent and then you send off these young, or not always so young, entrepreneurs off on their own company journeys here. How do you think about this? Why do you do it in this way? It strikes me as somewhat unusual. Maybe it’s not, but why do business in this way?
Jim McDermott: Three — well, three reasons. [unclear]. I always say, you know, people used to ask, what do you do? I say, well, I’m an entrepreneur and I’m an operator with money. I’m not a venture capitalist. I actually come from the operating side, and I firmly believe that operating, and good operators, are the people who drive things. Money is not — money is, it’s true, necessary but insufficient. So I think you start from the operator side.
And the second reason we do this is that in looking back at all of the investments we made at USRG, which is the first private equity firm [unclear], one of the things that emerged was, in almost every case where we’ve done really well, we’ve been involved very early. Sometimes we come up with the idea ourselves, other times a founder would come in and we’d work with them surely from inception. And so looking back on our track record, it became apparent that we’re better early stage people than we are late stage project guys. Now, I know how to do power plants, but I realized in my 50s that I should focus on what I’m good at, which is starting [unclear].
And then the third thing is that, having built a publicly traded software company early in my career and having been in the energy business the rest of the time, the amount of attention and time that’s required to be a hardware company, or something that is in — we’ll call it the climate space — relative to a software company, it’s just orders of magnitude more. So you can’t have, like, a spray and pray, which is thinking of, you know, put 150 investments out and then just start seeing the chain survive, which does work — in fact, [unclear] a lot of guys have done that. That does not work in hardware. And so our model is go in early, do a few things, and then work very hard on them until they start to really catch, so get, give air under their wings, or whatever analogy you want to use. And then after that we tend to step back and don’t play such an activist role. But it means that we can only do, you know, two or three things a year, but we really focus on it, which means I’m not running a $10 billion fund, because I can’t. My operating leverage is, you know, putting up 150 bets a year is not — it’s just not. We have not found that it works.
Ross Kenyon: Does your experience lead you to think that the capital allocation model for climate tech and carbon removal is also insufficient in some way? This maybe isn’t purely idiosyncratic to you personally. Maybe it’s a sign of a larger dysfunction or inappropriate application.
Jim McDermott: Yeah. Actually, that’s really a perfect segue. One of the things that we have found at Rusheen, and that I’m hoping that the world will come around to — but at least my view on this is that there’s probably a better capital model than a 2 and 20 closed end 10 year fund for climate. And the reason that that’s the case is that most investments take much longer than a typical software or life science. There may be some life sciences that fit, but they tend to be 7 to 10 years. Every really successful company we’ve had has been at least seven years in the making, which is a long — I mean, as an example, Carbon Engineering started in 2009 and the exit was in 2021.
Ross Kenyon: Wow.
Jim McDermott: Right. So that’s the biggest. And there were many years where David and the guys were — and in fact, they were backed by Bill Gates, who really has no [unclear] — and what that allows him to do, or people like him, right. So the fundamental problem is that the 2 and 20 structure requires you to turn the money so quickly that oftentimes you exit when the slope of the curve is still pretty steep, or you end up trying to do things to make the slope of the curve, the value curve, steeper, that are really suboptimal for the long term outcome of a company. And so I think a much better model would be a [unclear] or perpetual capital vehicle, where you basically take in capital and you invest it and you don’t really have a time to [unclear], other than as long as the company’s continuing to build and grow and add enterprise value, you just stay with it.
Ross Kenyon: Why did venture capital end up in the 10 year closed fund model as the Schelling point? Like, surely there’s other ways of doing things, but it’s just the default for everyone. Why?
Jim McDermott: Yeah, I’ll tell you why. So the history of venture capital is largely the history of Silicon Valley, right? And venture capital is very, very good for a software model. And the reason is it’s asset light — you know, you don’t need a lot of capital assets to do what you’re going to do. And it can be very efficient with the [unclear], and the marginal distribution cost of the next unit is 0. I put it on AWS on the Internet and I served it up, and there’s more likes, more, you know, CPMs, all the rest of that. So that model has been by and large where people make the most money over the last 25 years. So what does venture capital like? Venture capital likes large end markets, they like category, and they like, you know, big demand, right?
So when you look at energy or energy transition, it looks like it’s all of those things. It’s a really big end market, really critical, we’ve got to have it. The problem with it is that it’s largely infrastructure based. It involves changing infrastructure, involves hardware. And so when the idea to start to invest in that started to emerge, all of the very large capital allocators — the CalPERS, the CalSTRS and others — looked to their most successful venture managers and said, could you — like, I loved being in Kleiner 5, I did really well; I was in Benchmark, I killed it. So, hey guys, we want some energy exposure. And my managers, being who they are, they were like, so you want to give me a bunch of money that I can go manage. And so they did that.
And the problem with that was that many of the people who came into the first couple waves — and continue to do this — have a fundamental orientation towards software, which is anathema to how you prosecute a hardware business, much as an infrastructure business. And so you got a lot of people raising money. They’ve told their LPs that, you know, something’s going to happen. And the LPs have been acclimatized to the idea of short time frames because of software. So when they don’t see that in energy, they start to think, oh, well, maybe it isn’t working. So what does the GP do? They kind of try to speed up the cycle, and then you get a mismatch. You get a mismatch in how the [unclear] should really occur versus what’s been advertised.
Ross Kenyon: Have you had much success speaking with co-investors or potential co-investors and LPs, and trying to reframe how they should be approaching climate investments? Like, are you able to pull them out of that way of seeing things?
Jim McDermott: In certain instances, yes. And what I would tell you is where you’ve seen a lot of people doing quite well is within a lot of the [unclear] in family office environments, right. So it’s, you know, an intergenerational wealth, someone has made a lot of money doing something. And because their default position is that they’re quite wealthy, they’re willing to take longer time horizon views on kind of what can be successful. And so their view is, look, if I have — like, as an example, if I make an investment and it takes me 10 years, if the compound annual rate of return is, you know, 0 for a long time, but then it takes off and it goes to 25, and my, you know, from beginning to end is 15 or 20%, I’m happy to wait.
The problem with that model when you’re dealing with a pension fund is the pension fund has much nearer return needs. They have retirees who need money now. And so it’s been a very tough market to convince the — we’ll call it sort of a traditional LP base — that this is a model that they should pursue. It’s been much easier, I think, for people who have relationships with family offices and some of these sort of longer dated intergenerational wealth managers. What I think would be incredibly interesting is if we could build a model whereby it was available to the general public to do this sort of thing. And I mean, we’ve actually spent a fair amount of time thinking about ideas like that.
Ross Kenyon: In a way, like an open ended fund, like a mutual fund kind of approach, something else?
Jim McDermott: Yeah. I think one of the areas that we’ve been investigating and thinking about is — I’m going to give you just a quick thought experiment. I gave a speech to Stanford, an ultra high net worth conference at Stanford in 2019, where a bunch of very wealthy — they’re called ultra high net worth families — come, which each have a net worth of more than 30 million. And they said, we’d like you to come up with some ideas to think about how to invest in climate. And what I came up with was the idea that most families spend between about 1 and 3 1/2% of their [unclear] net worth on insurance. So they’re insuring, you know, homes, cars, business interruption, you know, [unclear], hurricanes, all sorts of things, because they have a lot of assets and they’re wanting to make sure that if something bad happens, they can do that.
So the thought exercise that we went through, we said, well, how many families are there globally? At that point, just about 400,000 families globally that have a net worth in excess of 30 million. And I said, well, how much capital would it take, equity capital would it take, to build enough direct air capture plants to get from the 420 parts per million that we’re at today down to 180? How many physical plants would that take? And then, based on the learnings that I amassed from my time at Carbon Engineering and at 1PointFive, came up with that number.
And then we said, if all of those 400,000 families were to effectively donate a percentage of their net worth on an annual basis for the next 30 years — because this is kind of 2020 to, it’s the 2050 target that you see people talk about a lot — what percentage of their net worth would they need to, effectively, tax themselves? And it turns out that it’s about 10 basis points. And a basis point, for those of you who don’t know, is — there’s a hundred basis points in every one percentage. So 10 basis points is effectively 1/10th of a percent. So if 1/10th of a percent of all net worth for the top 400,000 people globally was — you did it every year on December 31st and got a tax deduction to do it — you’d have enough capital to build every direct air capture plant necessary to take us from 420 parts per million to 180.
That’s a model I think is interesting, because it essentially says to people, you insure all sorts of things. Isn’t it worth some percentage of your net worth to insure — again, I mean, to future proof the climate — so that all of this wealth that you want to hand out to future generations, it allows them to live in a world in which things aren’t completely out of control.
Ross Kenyon: It’s an insurance based argument, and I liked it. Have you socialized it much? Do people like it?
Jim McDermott: Yeah, I actually have, and I have 5 or 6 groups I’ve done a lot of business with sort of think about that. And I think it’s — I think it’s also a prong that potentially has a mass market reach. I mean, one of the ideas that I often think — I learned not too long ago that Selena Gomez has 635,000,000 followers on the Internet. And I don’t really know Selena Gomez well; when I saw her on, you know, whatever the thing, Only Murders in the Building, with Steve Martin there and Martin Short.
But I’ve often thought to myself, what if all of these people who have all this social attention were to say to their audience, what if you guys all — I mean, just to give you a sense, again, if you have $100 million worth of net worth, I’m talking about 100 grand a year. That’s nothing. It’s literally — it’s like, people, if you’re going to be $100 million and you’re growing it at 10% a year, you’ve made 10 million bucks, and you divide that by 365 days a year — just the market movements are like an order of magnitude larger than what — I mean, it’s just, it’s literally a rounding error.
But what if Selena Gomez got on a platform and said, I’m going to commit 10 basis points of my net worth, and then I’d invite you, all of my followers, to participate? And I’ve also done that calculation, which is, the median net worth in the United States is about $125,000. And there’s about 40% surveyed, people in our country say that they’re deeply concerned about climate and would make a financial decision based on that idea. See, that’s like, you know, 100 million — 100 million people — and $125,000 times 10 basis points, it’s about $2.3 billion per year. So if you were to do that, you’d be the largest climate fund, like, by any measure. You would dwarf what Bill Gates and the guys at Breakthrough Energy Ventures are doing. Dwarf.
So the idea is this. Could you create something where the retail, small retail participation rolled up into a larger [unclear] and then directed at perpetual climate problems? It is an interesting idea.
Ross Kenyon: It is an interesting idea. It’s also intriguing to me that you have highlighted DAC in this. Granted, you are a very longtime direct air capture person, but why are you obsessed with direct air capture of all the different pathways? Now, seems like you’re still thinking about direct air capture, you’re still very much engrossed in it. Why DAC?
Jim McDermott: One simple reason. If we were to magically turn off all carbon emissions tomorrow — and again, I’m not going to do it in megatons, I’ll do it in parts per million, because I think most people know about 410 parts per million.
Ross Kenyon: I like that way too, personally.
Jim McDermott: Yeah. Otherwise it gets a little arcane in the math, because it’s volumetric. But assuming that, that’s about 3 PPM per year. If we were to turn that off tomorrow morning, so 0, which is where most of the capital has been invested the last 25 years — wind, solar, [unclear], the rest — you still are, by any measure, 140 PPM too high.
So really, if you want to do 3 divided by 140, rough math is 97% of the carbon that’s causing the problem is already out there. So it’s a legacy problem. So we need to go back and pull out the carbon that is the legacy of 150 years. And even if we were to eliminate all the new [unclear] emissions, the inertia — like the physical inertia that’s embedded in that 97% — is going to make the problems that we’re having today, and that are accelerating, continue for some indeterminate time, depending on who you read; I think it’s probably 100 years. So we have to be in the direct air capture business. Not to say that there shouldn’t be any other things, but we have to be in the direct air capture business, or we’re not going to see the benefit that we’re all [unclear].
Ross Kenyon: Relative to enhanced weathering or some of the other things that are happening in carbon removal, you’re still so focused on direct air capture. It sounds like — that isn’t a criticism either. I’m sure you have good reasons, I just want to hear more of them.
Jim McDermott: I believe in enhanced weathering. I mean, I believe in all of it. I’m very much in the all of the above about it. But I still believe that as a matter of efficiency, direct air capture plants are — you could, you know, 100 acres, you can take 1,000,000 tons out per annum. I challenge you to make that equation work at any scale of that nature without land use, water use — there’s a whole bunch of other things. I think of it this way: we spent 100 years using mechanical and chemical engineering to get ourselves into the problem that we currently have. I believe that the way back out is with chemical and mechanical engineering. I believe that nature will fix the problem, but not in a time frame that will be acceptable to most people. But if you say I have 1000 years to fix the problem, just let the trees grow, it’s fine. But if you’re worried about 50 to 100 years, you need a chemical solution, and DAC is the best.
As a parenthetical thing, I follow very closely with David Keith and the guys in geoengineering and, you know, aerosol, stratospheric aerosol injections. I very much believe that that probably will be used, and I think of that as the Tylenol of climate change, which is, we’re probably going to have to take some Tylenol to keep the fever down, but we’re going to have to continue to use direct air capture and other mechanisms to reduce the CO2 over time, and maybe to bring it all the way back to where we’re starting. And I think that the financial mechanism to make that latter piece work is much closer to a perpetual capital model than it is a 2 and 20 closed 10 year fund.
Ross Kenyon: Can you explain more what a perpetual capital model is? I think that’s probably also a new term.
Jim McDermott: Yeah, a perpetual capital model is pretty simple, and it’s the way that a family, an intergenerational family, works. So it simply says, as I make profits, I simply just continuously roll them back into the vehicle to make more and more and more and more, and faster. So let’s say, you know, I’m the patriarch of a family and I buy a building. Well, when the debt pays down on that building and I have lots of free cash flow, if I have a perpetual view on real estate, I just buy another building. And I never — and I never sell. And if you look at how, as an example, some of the biggest real estate empires in the world have been built, is that the family just, you know, when interest rates go down, they refinance the building, they buy another building, and they just keep building forever.
I believe that that’s the model that will have to be used for direct air capture assets and other carbon removal assets and the technologies that go into them. Because we have to look at this as if this is a 100 year problem, and we need to have 100 year or longer time horizons in terms of how we allocate capital and how we measure progress. That as long as we’re making progress and [unclear] and moving the ball forward, then effectively there’s no distribution, we’re just going to grow forever, right?
And if you look at the way that — if you want to think of — I think of carbon assets as a form of national wealth, or of global wealth. If we want to build the global wealth [unclear], we need to view it as if it’s not just a one and done thing, which is, you know, CalPERS puts in their money and takes it off and then they go allocate it somewhere else. If you say no, everybody who’s invested in this is simply saying, I’m going to keep my capital in this lane forever, right? And that’s why a smaller amount is important, because you would never say to someone who’s reasonable, hey, give me 10% of net worth and I’m going to put it in something you can never take out, because you might need the money. But if you get a large enough group of people with a small enough commitment, that equals a large number. And then once that number is into that mode, it compounds and grows in perpetuity.
And that, in my opinion, is how we’re going to generate enough carbon wealth, carbon removal wealth, to just — you know, I see a world when I’m long gone where there’s thousands of carbon assets removing carbon in all forms, that they’re owned effectively for the public good, in perpetual trust. And by the way, there’s example in this, Ross. I mean, you have families in England and people set up perpetual trusts for the benefit of the family. I’m just saying let’s port that model [unclear], like the whole world.
Ross Kenyon: Interesting. Well, I hope that works. It would certainly be better than the pressures that one faces when one takes venture dollars. I have a question about the future of DAC. One of the old debates I used to hear a lot about — I hear less about it these days, I wonder if it’s been settled, and maybe I missed it — but do you suspect that the future of direct air capture is distributed or centralized?
Jim McDermott: Centralized.
Ross Kenyon: Centralized. I sort of figured you probably went that way, the oil and gas, big is beautiful.
Jim McDermott: Big is beautiful. Now, I will say I think that the construction of those centralized plants is modular manufactured, not stick built. So small is beautiful in terms of the building blocks, but the actual configuration of the plants, larger is much better. And that should — it’s like basic unit economics, because if I can centralize all of that collection in a single spot, the shared services, whatever they are, the electricity, the water, all the rest of that, are better distributed across, now, 200 than say 20. But the manufacturing will be modular, and in that respect small will be beautiful.
Ross Kenyon: What do you think will happen in the fight between electrochemistry, liquid and solid sorbents? What broad pathways here do you think are going to be the big winners?
Jim McDermott: I think — OK, so I [unclear]. I think all of them have their limitations. I think some of the limitations are greater limitations than others. I believe in liquid sorbents, but I believe that one of the great rate limiters will be how water is consumed and [unclear] or used in process. So I think one of the great limiters, potentially, of liquid challenges is the amount of consumption of water. People are working on that, definitely working on that. I think solid sorbents are interesting but require considerable [unclear] heat. People are working on that.
I’m talking my own book here. I very much believe in moisture swing. We’re investors — very early investors — in a company called Avnos that basically produces water as a byproduct of its direct air capture, rather than consumption. And I think that there are limited places where electrochemistry will work. I will tell you that we, having built what — invested in creating — is now the first or second largest desal membrane company in the world, have real questions about ocean based stuff, not because of the electrochemistry, but because of the amount of physical water that needs to be moved. Again, the electrochemistry works for sure. So that’s a long way to the answer, but I think all of them work. All of them have distinct limitations. I think water and electricity consumption are the two big ones. They’re probably the most problematic. So I think it’s probably like [unclear]. If you put it down, those would be mine too. Those are my 2 bets, yeah.
Ross Kenyon: We’ll see. If someone was listening and they work at a family office, or they’re part of a family that has intergenerational wealth in this way, do you want them to get in touch with you? Are you ready for them to knock on your door?
Jim McDermott: Absolutely. Jim.McDermott@rusheen.com — J-I-M dot M-C-D-E-R-M-O-T-T at R-U-S-H-E-E-N. Yeah, I’m very interested in those types of conversations if people want to have them.
Ross Kenyon: Thank you for being here, Jim. I love being able to ask all these questions of you. You held your own. Thanks for teaching me all of those things.
Jim McDermott: Thanks a bunch for having me, Ross. I really appreciate it.
