Hi, this is Dan Morrell, host of Skydeck.

In this episode, we’re going to be highlighting an episode of another HBS podcast: Climate Rising, which focuses on what businesses are doing, can do, and should do to confront climate change.

This episode of Climate Rising features a conversation between Professor and host Mike Toffel and Sanchali Pal (MBA 2018), founder and CEO of Commons, an app designed to help consumers make more climate-friendly purchasing decisions by allowing them to track and offset the emissions of everything they buy.

And in this excerpt, Toffel and Pal talk about Common’s business model, the market opportunity, and what she’s learned about launching a climate venture.

READ MORE

Mike Toffel: So let's talk a little bit about the business model. So you're clearly a multi-sided platform where you sit in the middle and there's companies that you're getting information from and that you're highlighting. There's estimates based on these different climate models that you mentioned. You have users on one side and then you have carbon offsets providers on another, and you're bringing these folks all together and you're funded as you mentioned a moment ago as a startup. So they have faith in your growth and in your profitability. Where do you get paid in this milieu of players?

Sanchali Pal: A great question. Yes, we are a for-profit company, we are VC funded and therefore we do have a business model that will get us to profitability. We make money when users buy offsets. So currently the primary service we provide that customers want to pay for is if they want to offset their footprint, the average subscriber pays between 25 and $30 a month. Because it's proportional to their own emissions based on their spending data they could be spending less or more in any given month, so people who emit less might pay as little as $10 a month. For instance, students who have lower credit card purchases or people who have large families or high carbon footprints might be spending hundreds of dollars a month. We actually do have customers who spend thousands of dollars a month if they have very high carbon footprint lifestyles. So that means it's kind of an interesting business model for an app. Most apps, maybe you pay 2.99 or something a month for a digital subscription.

We're not providing a digital subscription, we're providing a subscription to an actual product, although it's invisible, in the real world and that means that the amount that people are willing to pay is much higher. We take a 19% fee on that transaction for curating and evaluating the offset projects and helping customers figure out automatically how much to buy. But that's baked into the $25 a ton that users pay. So right now, that's how we make money and actually for an app of our size it means that our revenue model is pretty interesting. Because most apps don't make money until they have millions of users and we get to make money earlier with a higher value subscription model. As we look forward, we are interested in also aligning our business model with people actually reducing emissions, not just offsetting them. So when people make choices that are lower carbon, for instance switching to green utilities or switching to a bank account that doesn't invest in fossil fuels. That could also be an opportunity for Commons to make money.

It's not something we do yet, but also once we can prove that we're successful at helping people make these low carbon switches that's definitely something we're interested in.

MT: Got it. What percent would you say the average user who does offset is offsetting? Are they opting in to 100% or 50% or 10%?

SP: The average user who's offsetting right now is offsetting about 75% of their footprint and that means you can set a max for yourself when you're subscribing. So you can say I'm willing to offset my footprint, but only up to 20 bucks a month. So whatever that means, I just want to cap it at 20 bucks a month. So when the user subscribes they let us know what their max willingness to pay is, and then we show them every month what percentage they offset. So sometimes that might be 100%, sometimes it might be 80%. On average, the maximums are the limits that folks have set on their subscriptions cover 75% of their emissions.

MT: Wow, that's really interesting. So in a way $25 strikes me as low actually, but let's imagine that that were the social cost of carbon. Which I think is probably a couple of times higher than that, but let's imagine that for argument's sake. That means those folks are kind of opting in to a carbon priced world where they're recognizing this externality of carbon emissions, which are, as you mentioned, sort of a liability that currently people are not being charged for. But they're opting into a system where they're like, "No, no, I want to pay. I want to pay my fair share." Is that the right way to look at it?

SP: Yes, that's exactly how I think about it. I mean, I think that's what gets me excited about this is that consumers are voluntarily opting into a carbon price, and as an economics major that's very exciting. We're very interested in sort of testing right now if folks could opt into the social cost of carbon, would they do that? It's obviously a higher price, people can buy offsets for as little as $3 a ton on the open market, perhaps of questionable quality. But $25 a ton is a reasonable price, it's still not the social cost of carbon as you pointed out. What could be really amazing as the Biden administration has set the cost of carbon at $51 a ton, maybe the true social cost of carbon is over $100 a ton. But if we could allow users to opt in to a carbon price, I think that could be a really interesting step in the direction especially as there's broader consumer awareness of helping individuals advocate with their dollars for carbon taxes that ultimately maybe companies should be paying.

In the cases when companies are paying them, then the customer sees that their own offset subscription is less expensive and that's true in the app today. If they're buying from these brands that have taken responsibility of their emissions, their monthly offset cost is lower, which is a really interesting incentive as well. But otherwise that they can actually pay the carbon cost themselves I think is super interesting. Because the ultimate best case scenario would be if carbon cost was baked into the economy from the start, and we all saw the carbon cost of items and those carbon costs were paid for by the producers.

MT: Right. It strikes me that perhaps the closest analogy to what you're doing in the marketplace in the US are these opt up electricity deals that in many places around the country you can opt up from whatever proportion of the grid electricity is renewable, you can opt up to 50% or to 100% green as in the Boston area there's many programs like that. It seems like that those folks would be the same folks because they're similarly saying in some cases I'm willing to pay more. Sometimes it's actually not even costing more nowadays, but it seems like that's a market. Do you know how large that market is? Is that your near term addressable market?

SP: I think that's a really interesting way of getting at the target market. I think you're right, that's one of the few programs that exist that's similar to this and I do know that over half of Americans have the option to opt into green energy through their utility provider. I don't know what current rates are today, but this is actually the next action that we're building into the app as well this month is guidance for customers regardless of where they live in the US on how they can opt into green energy. For many folks, it's available through their utility provider. For other folks actually who live in deregulated utility markets, they can just switch utilities entirely from one that's not using renewable energy to one that is. Or if none of those options are available to you, you could switch to community solar or buy into renewable energy credits. So that's an interesting recommendation I think that we can make to folks and hopefully a good opportunity to partner with utilities one day as well.

MT: Yeah, super interesting. we haven't talked much about fundraising on the podcast. But since we have an entrepreneur-founder in front of us, I wonder if you can talk a little bit about what are the basics of that process? So you figure we need some capital in order to invest in the app and pay salaries of folks. How do you figure out how much you want to seek? And then how do you decide who to go to ask and what's the pitch process look like?

SP: As I mentioned I'd never worked at a startup, I'd never worked at a tech company before besides my internship at Tesla. So a lot of this was brand new. Luckily I took great courses at HBS that started to prepare me for this process, including Founder's Journey where we actually wrote a case about the early days of starting this company. But raising money, first I mentioned we got some grant funding to get a prototype off the ground. I think when I first raised that grant funding we got about $30,000 from MIT and HBS business plan competitions and I thought that, okay, I'm going to use this to do my user research and save most of it. Once I write a PowerPoint deck with my pitch idea and I have it all thought out, I'm going to pitch a bunch of investors and then I'll get my pre-seed funding and then I'll get to build my product and pay myself a salary. But it didn't work out that way.

I went out and pitched with just a deck and some user research, and I got no's from everyone. So I pitched 10 investors, all of them said no. Actually, one of them said maybe but you really need to go build a prototype of this and test it with some users. So I went and did that. I used the $30,000 to pay a developer to work with me for a few months to build the first prototype of the product and tested it in Apple's beta testing platform TestFlight with about 30 users over three months. That first MVP of the product got me a bunch of really interesting learnings and some really interesting information on retention rates and user interest that I was able to then go pitch to investors in the spring of 2019 and I also applied to a bunch of early stage incubators, including Techstars and Y Combinator. Luckily that time around I had a lot more success. I also targeted investors who had much more consumer experience.

The first time around I went to a lot of investors with more impact and energy experience, and none of them had much experience with an app-based business model, the kind that I was proposing. So it's very hard for them to evaluate the idea, whereas actually more traditional tech investors who knew not very much about climate knew a lot about app-based business models and were able to evaluate the idea. So I actually got into Sequoia's early stage accelerator and the summer of 2019 moved out to the Bay Area to start that accelerator with my first million dollars in pre-seed funding.

MT: Yeah, and what's next in the funding journey? Are there benchmarks you're trying to hit to show to Sequoia or others that this is a viable journey? Or do you have a long ramp? Do you have a short ramp?

SP: We just raised our Series A at the end of last year, and Sequoia was also in that round. What was exciting about that, was it was based on our retention and unit economics being very strong. So we were showing that we had customers who really loved the product, who were willing to pay for it and were sticking around when they did. What we have to figure out now with this next stage is growth. How can we make this market as big as possible? Can we really scale to the hundreds of thousands and millions of users we're looking for to make this a successful business model? So that's what we're in the midst of experimenting with now. Luckily, we've raised enough to be able to work on that for a little while. So right now our team is trying a bunch of different growth experiments as well as experiments on the value proposition. We talked a little bit about how we're shifting our positioning to appeal to a broader audience, going beyond carbon tracking for the folks who maybe that's not their first interest.

But they want the more practical guidance on how do I actually spend my money? So starting there with the value proposition.

MT: Interesting. So for those interested in finding out for themselves about Commons, how do they do that?

SP: You can go to the App Store on iOS or to the Play Store on Android and Search Commons to download the app. It's free to use, and you can also follow us on social media at the.commons.earth, on Instagram or on TikTok.

MT: Great. I downloaded the app last night in preparation for our conversation, and it's got a really intuitive interface so I applaud you and your team for that. It's very obvious what's going on and how to plug in, and it's an easy onboarding experience.

SP: Thank you, that's wonderful.

MT: What advice do you have for those who are thinking about getting into business and climate, who are just getting started in their journey? Or might be in a vertical where they're in the space but want to look to see what else is out there?

SP: I think that what's really exciting about climate is that no matter what you've done before, you probably have experience that will be incredibly valuable in the new climate economy. Everything we do today are things that we're going to have to figure out how to do in a lower carbon way going forward. Whether that's building and deploying software or construction, apparel, food, no matter which sector you're in, it's part of the climate economy and we need to shift all of our jobs to become climate jobs. So whether you're working at a big company or a small company, there are probably ways that you can start to influence the emissions of the company that you work at. Whether that's through advocacy as an employee for benefits or for resources that can help you live more sustainably. Or whether that's on the operational level for you as a manager or a director, the teams that you manage or influence. How can those products or services be delivered in a way that's lower carbon and that is going to be successful in the new world that we're moving towards?

So one is, I would say just have the confidence that what you're doing is important and the way that you do it matters. Our labor is a really important resource that we have, and we can think about deploying in a way that will support a climate friendly economy and then also, I think let yourself be guided by the things that you're passionate about. I hear a lot of people who are excited about moving into climate and want to do an analysis of what's the highest impact thing that they can do so that they can make a decision. So they're like, "Well, I believe that concrete is the most important choice that we need to make, and so I need to work in concrete." Well, that's not true. I mean, there's a lot of things that are really important and if you're passionate about food or you're passionate about media. There's a really unique influence that only you can have by focusing on the things that you're passionate about. So I would focus more on that rather than taking a quantitative approach to deciding where to play.

MT: Yeah, that's super interesting. Great. Well, thank you so much for spending time with us. It's always a pleasure to talk to folks who are building new things in new ways, and especially exciting when they're HBS MBA alumni. So thank you for joining us.

SP: Thank you so much for having me.

To listen to this full conversation, search for Climate Rising wherever you get your favorite podcasts.

Post a Comment