🌍 The Swedish Model and the Swiss Mammoth

In conversation with the CEOs of Vargas and Climeworks


We Zoomed around the world to chat with “Europe’s Elon Musk” and the “DAC Mammoth” at the SOSV Climate Tech Summit. Both Vargas’ Carl-Erik Lagercrantz and Climeworks’ Dr. Christoph Gebald lead European high-capex organizations pulling on demand levers to accelerate the deployment and cost-down of climate technologies. Both also partner with governments to fund significant infrastructure buildouts. And both have Grade A accents. The European model marks a strong contrast with the usual Silicon Valley VC model. [Both interviews have been edited lightly for length and clarity. Watch the full videos with Sophie & Carl-Erik and Kim & Christophe.]

Carl-Erik Lagercrantz @Vargas Holding

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Vargas remains one of the best kept secrets in climate tech, with three climate gigacorns under your belt – Polarium, Northvolt, and now H2 Green Steel - raising almost $9B to boot. You started your career in IT and telco, then started Vargas with your co-founder in 2014. What was the impetus behind that moment?

When my partner Harald Mix and I kicked off in 2014, it was about understanding the very large and important transformational macrotrends. We wanted to make sure that we were deploying capital, as well as founding companies from scratch, that could really make change.

We started out with Polarium, which is a high-end power backup application company with lithium-ion batteries for the telecom infrastructure sector. We started it from scratch together with super strong individuals, including the CEO Stefan Jansson. We wanted to make a difference in sustainability and electrification specifically in the telco industry’s power backup technology. Importantly, we then wanted to do a lot more with this same methodology – starting from scratch with the right individuals and making a very thorough, in-depth validation of the opportunity, not being an investor but actually being an initiator, and then putting the right team together in order to capitalize on the opportunity.

Shortly after Polarium, we started to realize that the lithium-ion battery production value chain was totally based out of China and South Korea. I came back from one board meeting, and I thought, hang on a second, this ain't right. This was way back before a lot of the geopolitics and wars, but the risks around the supply chain was evident. From a European perspective, there was no value chain at all supporting electrification within transportation and other verticals, including power backup for the telco sector. I saw that Tesla was integrating up the value chain because they clearly saw the same need to build out their own U.S. supply chain in order to conquer the world on electrification.

So I reached out to Peter Carlsson, today the CEO of Northvolt, and we founded that company based on that discussion. The idea was to build the world's greenest, most competitive battery manufacturing setup. We knew that if we took a total greenfield approach, there was an opportunity, and we've continued to build that company in close collaboration with a lot of other partners. That was the model – setting up greenfield, doing the in-depth validation, and launching with the right team.

That’s the same way we did it with H2 Green Steel. It was the same thinking of, hang on a second, there's a new value chain that needs to be set up. We needed hydrogen-based steelmaking with electrolyzers at scale in order to build the world's biggest and lowest-carbon value chain for steel. I had a deep conviction around this not just being sustainable, but also actually located where you have the most renewable power that’s priced adequately.

Building from the ground up in hydrogen, steel, and battery storage is no small feat – you need incredible resources to do so. How is Vargas structured to be able to bring partners to the table and truly build greenfield industrial newcos?

We're super light-footed because we work with a lot of highly experienced industrial advisors. For every new venture that we look at, we combine the best of the intelligence and resources that we believe are important for this specific task. I think that it's very hard to have in-house resources taking a general approach to investments – we go much more surgical than that. When we decide we have an idea, we want to do it greenfield. That means we don't want to have too much legacy thinking, and we want to come in fresh to the opportunity. We want to bring the generalists together with specific, superior, in-depth competence. If you were only partnering with people who only have experience from a certain industry, you would never be able to build a brand new industry.

From a historical approach of industry building, transformation or disruption to an industry very rarely comes from within. And unfortunately, many times, it comes too late.

You can't build in these greenfields without partnerships and government relationships. But internally you need incredible talent. You're were able to tap into both with Peter Carlsson and his lessons from Tesla. How do you unlock the capabilities of someone like Carlsson, and make Vargas the most attractive place for talent?

First, I want to answer on the topic of making it happen from an industrial perspective. We have a firm belief about collaboration across the value chain, meaning that we bring together from the start the customers, the technology suppliers, and industrial co-partners. You need to align the interest across the value chain.

But many times, the battery, green steel, or whatever it might be is too capex heavy and outside of what they normally do. So it’s super important to align interests in combination with aligning with the regulatory framework and being an enabler for the politicians and societal change. A lot of times the regulatory framework needs the enabler to make it happen. We are an enabler.

In two cases, we are lighthouses for making the transformation happen, and it's like a snowball that just keeps rolling. When policymaking kicks in, the demand side is even stronger and the technology supply wants it to happen more, and suddenly the scale game kicks in. The cost of the technology goes on a downward slope, and the cost of the product is suddenly on par with the existing value chain of each industry.

Your second question was about attracting relative competitiveness. And I think here it's very clear that if you want the relevant competence, you need to be super strong on your purpose. We want to make sure that we are aligned with what society wants. We want to drive change, we want to be a disruptor. We don't want to be taking the middle road. We want to go all the way and prove the point that society needs you. In order to do that, you have to be bold and brave. And we are a place where you can be bold and brave.

You've mentioned society so many times here in the Vargas model. Tell us more. How are you explicitly incorporating society into these companies that you're building?

I firmly think that it’s in our DNA to be well-aligned with societal needs. A lot of Silicon Valley is about being counter. Being disruptive is very important, but I like to work with and not against. I like to work with society and be an enabler for regulators or industrial partners.

I also want to be super open with our customers. You need to be closer than a normal buyer/seller relationship to make things happen much faster. From a Swedish perspective, we are very good at building large, export-oriented global companies, and I like that collaborative approach. Some people think that it's too much collaboration and not enough decision-making, but I don't think that collaboration is about slowing down, it's about aligning interest and being fast to take action.

Another aspect of this is the total focus on competitiveness, because if you truly want to build a next-generation industry, you have to have both the sustainability angle and the competitiveness angle. You always have to have this combination in mind.

Do you think this collaborative greenfield approach can be replicated outside of Sweden and Europe to other geographies?

It’s definitely transferable. One of the predominant decision factors going forward for industries will be energy - having the power you need to build your value chain. Continuous production of renewable power, such as hydropower, has really great value. I love wind and solar but it’s intermittent and for really large-scale industrial ventures you want that constant production of power.

The other side of winning ties in development is the demand side. We rely on demand as validation rather than pointers from government or incentive schemes. That should be part of the agenda if you want to build long-term sustainable production platforms and value chains. If you’re an industrialist, you want to clearly understand the demand side and make conclusions based on the competitiveness rather than incentives from regulatory authorities.

What do others get wrong (or right) about capitalization of innovative hard tech companies?

If you’ve got to deploy a lot of capex, you have to have a clear model. You start out by triangulating yourself into the most competitive position - the lowest CO2, lowest cost of energy, and most efficient logistics - during the validation phase. If you can get to global competitiveness where there’s constrained supply, there will be strong demand for many, many years to come.

Then you come to how to fund this multi-billion investment or factory. If the appetite from capital looking at this reads it in the same way you do, they may be interested. But unless they see the demand side come forth, they won’t invest, because this isn’t venture capital. This is industrial capital, which needs long-term demand to unlock equity, then senior to mezzanine debt. Once you put demand into the equation of financing, you have a long-term financing model to put that big capex item into the right place and location.

Dr. Christoph Gebald @Climeworks

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What's the role of carbon removal and specifically direct air capture in the climate solutions toolkit?

The role of carbon removal is unifying in our journey to net zero. Climate science assumes that we can get to net zero with a 90-10 approach, where 90% is through reduction. But since we’ve already emitted too much carbon, there’s a part that has to be removed from the atmosphere. This is the remaining 10%. That's the role we’re playing as, which is at the moment still a small industry. In order to get to 10%, we need to get to ~12 to 15 Gigatons annually removed from the atmosphere by 2050.

You and Jan started Climeworks before carbon removal was making any headlines. What were the early days of your journey like?

We started 1.5 decades ago in 2007 when we began our research on capturing CO2 from the air. Jan and I were, and still are, avid mountaineers. The mountains are very sensitive environments - a couple of degrees of temperature change can make huge changes (the difference between water and ice can be a degree Celsius). We could visibly feel the change. What was once upon a time on the map was no longer in reality.

This is when we decided we wanted to do something about the rising CO2 emissions in the atmosphere. We were trained as engineers, and as engineers, you're always thinking in closed cycles - whether it’s energy or materials. We approached air capture in the same way. As humans, we emit CO2 into the atmosphere but we're not taking it back. So we don't have a closed carbon cycle for all the CO2 that we’re dumping into the air. It felt like a huge topic that we wanted to devote our time on, and started getting promising results in our university research. At that time, unfortunately, almost no public funding was available for air capture so  we had to start the company early on and find investors whose equity helped pay for our salaries and research.

You both saw the writing on the wall for a carbon removal industry long before demand scaled. What do you think were the inflection points from research to now demonstration and commercialization?

There were a couple of really important points. In 2014, we moved from lab to environment. This was the very first time we put the machine in the atmosphere, for not only a day of testing, but throughout the year to collect data. 2017 was our next milestone, when we commissioned our first commercial plant in Switzerland capturing and supplying CO2 for a greenhouse and Coca Cola for beverage carbonation. Those were the early markets to get it going.

Then in 2018 what really put a lot of wind in our sails was when the IPCC released their Special Report on 1.5 Degree warming, where for the very first time, the scientific community communicated that carbon removal from the atmosphere is needed in order to achieve climate targets. All modeling scenarios leading to 1.5° assume carbon dioxide removal on a massive scale. This report really triggered a lot of momentum over the last four years.

The 1.5° target assumes a magnitude of 10 to 15 gigatons removal by 2050. Your target at Climeworks specifically is one gigaton by 2050. What needs to be true in order to get to that scale?

Our mission is to start a mass movement for carbon removal. Air capture is not getting to gigatons if it stays one company doing it. We need a whole ecosystem to sink capture, just like the early days of renewable energy. There were so many things required to scale solar 1,000x in the last 20 years. It wasn’t one company driving that scale-up, but a whole ecosystem including policy, feed-in tariff programs, technology OEMs, and most importantly a supply chain committed to solar technology. A supply chain that is actively producing parts and components to be used specifically in solar plants.

In air capture right now it's still the other way around. There’s a supply chain, but we’re asking them to produce parts according to our specs. There are no suppliers out there producing pumps, heat exchangers, or fans optimized for air capture.

What are some other critical barriers, especially around demand and regulation?

If you have a market, everything else will fall in place. At the moment, carbon removal is a new technology and new market. So in the startup risk matrix, we end up in the top right, where we have both new markets and new tech. The trigger to get things going is when you can show that there’s a market for your products. Once we can show CDR is as a service that people and companies want to buy, we can convince investors to put money on the table to build the infrastructure.

This is the scale-up journey that we’ve taken - where market triggers investment, which triggers infrastructure build-out, which triggers more market. We're seeing this already with the first plant that we built in Iceland, Orca, which created more market interest than the plant could serve. Based on that customer demand, we were able to raise funds to build the next plant. Now I'm confident that the next 10 years can be financed by the private market. After this decade, we need a compliance market for air capture to scale from million tonnes to gigatons per year.

Let’s dig deeper into the climate capital stack. What are the different financial mechanisms available for building these large projects?

At the moment, we’ve been equity financing our assets and then refinancing them from market activity. Over time, the air capture industry needs to transition from equity financing to standard project financing but that won't happen overnight. There are currently no standards on how to do diligence for air capture plants. We’re building infrastructure and giving investors the chance to do diligence and get to know this industry. Hopefully the future capital stack will include some combination of equity and debt, especially from asset managers who are prioritizing decarbonization.

Switching gears from financing to go to market, Climeworks pioneered a B2C model for direct air capture. What was the thinking behind that?

I was meeting so many people and realized many of them were desperate to act themselves and interested in contributing. That was the thought that triggered the B2C model. I wanted a vehicle to democratize climate actions and give people a chance to act if they wanted to. We wanted to start this mass movement and engage people in this new field. Today we have more than 16,000 climate pioneers removing CO2 from the atmosphere.

A few weeks ago, Climeworks and Carbfix announced the world's first full chain certification methodology for DAC. How do you think about MRV and standards in carbon removal?

Standards are critical for carbon removal since you can’t see or smell CO2, and then we're putting it in the ground. So the only thing that creates the product for the market is the standard. There’s no broadly accepted definition of carbon dioxide removal or negative emissions.

We hope that with the standard we put out, we’re able to inspire future standards, especially around durability and additionality. If you take carbon from the atmosphere, you better make sure it stays in the ground for a very long time. It also has to be additional where the removal wouldn’t have happened otherwise. On top of that, we should be using renewables for air capture and in turn help catalyze more investment in renewables. We’re hoping to open-source this standard to help move the public definition in the right direction.

Special shoutout to SOSV for making these conversations possible. Missed the event live? Tune into Day 1 and Day 2 here. And, massive thanks to Claire Yun for bringing these interviews to light in written form.

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