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BOSTON — Are we on the cusp of a revolution in recycled and reimagined consumer goods, known as the “circular economy?” A new wave of venture capitalists and entrepreneurs believe so. They’re determined to help consumers and businesses discard a throw-away mentality across the entire product lifecycle, from the design phase to packaging and consumption — a shift that Harvard Business School research suggests could become a multi-trillion-dollar business opportunity.
Think about repurposing Apple iPhones, reselling Prada leather handbags, buying pricey facial serum in recycled plastic jars, and renting — rather than owning — gaming consoles and vacuum cleaners. And that’s just the beginning.
“While we are living in wildly uncertain times, there is one thing that everyone can line up behind. Nobody likes waste,” circularity investor Michael Smith told The BiGS Fix in an interview. “Everyone wants government, business, or their own lives to be as efficient as possible.”
Smith’s circularity-focused venture capital firm, Regeneration VC — which counts Leonardo DiCaprio as a strategic advisor — exemplifies a new breed of venture capital firms betting on profitability by addressing consumer materials and their greenhouse gas emissions. Buoyed by shifting consumer demand and the anticipation of a new regulatory landscape, these investors support startups that help major consumer brands curb their emissions and, in some cases, comply with regulations, ensuring that environmentally conscious consumers stay loyal.
HBS scholars who have studied this issue agree that it’s possible to do good for the Earth and profit by adopting this circular model.
To that end, Regeneration VC invests in companies that innovate consumer product design (such as containers and packing materials), consumer use (products and brands), and reuse (logistics).
“We saw a lot of passion from consumers on wanting to buy things that are more environmental, wanting to get their purchases in line with planetary considerations,”
said Smith, who performed as a top-tier DJ and owned TV stations before he and partner Dan Fishman cofounded the firm.
That surge in capital comes as today’s entrepreneurs increasingly recognize the urgency for disruption. Many are motivated by the growing environmental consciousness among Gen Z and Millennial consumers who want to fight climate change with practical, systematic approaches, but don’t always find enough options to do so.
“You can't just tell people, ‘Go rent stuff; it’s better for the environment,’ without providing the necessary supporting services,” said Yael Shemer, cofounder and chief commercial officer of Tulu, one of the firms backed by Regeneration VC. “We need the infrastructure to follow suit. I advise other entrepreneurs to view circularity as a framework rather than just a goal. The more we integrate circular practices into existing supply chains and the lifecycle of products, the greater the impact we can achieve.”
Beyond recycling: Circulating every material and every product
What is the circular economy that these investors and consumers are so keen on?
It is the opposite of today’s linear economy — the market system of extracting raw materials for consumer products, manufacturing the products (among other things), then consumers buying the products, using them, and throwing them away.
Of course, many people love to recycle, reuse, and even compost. A circular economy model, however, circulates every material and every product for as long as possible to extend its lifespan. It could, for example, entail new ways to recycle plastics or waste to transform consumer packaging. In turn, this model could reduce emissions at every stage of a product’s life cycle, from extraction to manufacturing to transportation to consumption and waste.
In most of the world, the opposite is happening.
More than 100 billion tons of materials are extracted from the Earth each year, a little more than 7% of which is reused or recirculated, according to the recent Global Circularity Gap Report. Material consumption has tripled in the last half-century, the report found, generating about 70% of global greenhouse gas emissions.
Consumer demand is creating a major business opportunity
Intuitively, it might appear that manufacturing longer-lived consumer products would be bad for business. However, HBS Professor George Serafeim and Shirley Lu, an assistant professor at the school, estimate that a transition to a circular economy is a multi-trillion-dollar market opportunity, driven by consumer demand. Serafeim has written extensively about this ongoing paradigm shift, which “has remained elusive” and is still undercapitalized.
Increasingly, companies and investors recognize that they can extend a product's useful life without harming a business model, according to Serafeim and Lu. This can take different forms. One approach is the product-as-service model, where consumers lease a product. Serafeim and Lu also highlight the secondhand iPhone market, which makes up 80% of the 300 million phones in the used phone market.
“Identifying the consumer as a temporary owner of a long-lived asset opens up opportunities to engage customers,” Serafeim and Lu wrote in a 2023 paper, based on a May 2023 Catalyst Circular Economy Conference organized with Harvard Business School’s Digital Data Design Institute.
The BiGS Fix, in conversations with investors, founders, and other experts, found more examples of business leaders and entrepreneurs who see opportunity in a circular economy. For instance, some industrial suppliers of plastics and other materials commonly used in everything from beauty product jars to shipping materials are quietly deploying venture capital in research and development projects or promising startups.
But unlocking these opportunities is rarely easy. Few circular economy models have matched Apple's scale and financial success in selling secondhand iPhones, according to Serafeim. During the 2023 circular economy event, Marcelo Claure — former CEO of Sprint and Softbank International — explained how Apple's iOS operating system is critical to ensuring that a secondhand iPhone maintains value. The system, he said, allows a consumer to bring their information to a new device and receive over-the-air updates.
Regulatory changes are adding to pressure for circularity
Some business leaders who are passionate about the environment and sustainable practices are getting involved by supporting relevant legislation and regulation.
Europe now leads the way on the regulatory front, with efforts to both advocate for and regulate the circular economy. In the United States, regulations are changing to a lesser extent, although more companies will be required to report their value chain or life cycle emissions — called “Scope 3” emissions — in the years to come.
Big consumer brands — and B2B brands — are listening
For additional evidence of surging awareness of circularity among consumer-focused businesses, look at the anti-plastics movement — especially consumer-facing campaigns designed to decrease the use of single-use plastics, by companies ranging from Starbucks to Marriott International.
“Once people were seeing a turtle with a straw in its nose and the oceans full of plastic, people were like ‘this is crazy, right?’” Martijn Lopes Cardozo, a venture partner at Regeneration VC, told The BiGS Fix. “As a result, those [consumer goods companies] have become very, very protective of their brand, and really feel they need to step up and make external statements and set goals for themselves on what are they are going to do about this.”
Here are examples of startups in each phase of the life cycle of products:
Circular business startups in each phase of the life cycle:
Design: Cruz Foam sells a combination of natural materials that can be used for packaging, as a replacement for Styrofoam, and that is compostable. More than 70% of the proprietary combination is agricultural food waste that comes from byproducts of farms in the U.S. Midwest, according to company CEO and cofounder John Felts. This effectively diverts waste from landfills, where otherwise, it would produce harmful methane emissions that would contribute to global warming.
“The era of businesses depending on oil-based materials such as expanded polystyrene or expanded polyethylene foam for packaging is coming to a screeching halt,” Felts told The BiGS Fix. “These materials pose significant environmental hazards, and there is a growing consumer demand for more sustainable alternatives.”
Cost is one of the most critical circular economy issues to address because some products that start very high-end have trouble scaling and growing, Felts said. Cruz Foam has achieved cost parity with certain types of packaging, he said.
The foam is named after the company’s headquarters in Santa Cruz, Calif., which focuses on research and development. Commercial production of the foam takes place at a facility in Greensboro, N.C., and the company partners with foam converters, distributors, and manufacturers in locations including Southern California, North Carolina, Massachusetts, and Paris, France.
Established in 2017, the company has completed Series A funding.
Consumer use: New York-based startup Tulu specializes in offering residents of multi-family buildings on-demand access to lockers that contain a curated collection of rent-ready household appliances such as vacuums and irons, gadgets, and other goods from brands such as LG and Bosch.
Now in more than 30 cities — including New York, London, and Amsterdam — Tulu operates a physical and digital platform in medium- to large-sized apartment buildings and student housing, where residents are more likely to value experiences over material possessions, want to fight climate change and protect the world’s natural resources — and have landlords who will cater to their preferences.
“We believe every product in the world can become a service,” Yael Shemer, Tulu‘s cofounder and self-described “environmental entrepreneur,“ told The BiGS Fix. “For it to become the default, we need to create frictionless services that compete with the convenience of the linear economy.”
Collaborating with major players such as Bosch has been key to scaling Tulu’s circular solutions, Shemer told an audience at an Ikea-sponsored event at 2023 Climate Action Week in New York City. She also stressed the importance of working with landlords, specifically those who are keen to appeal to their target audience‘s lifestyle.
Underscoring Shemer‘s point, Charleston, S.C.-based Greystar, which manages and operates more than $300 billion in real estate assets that include multi-family buildings in 249 markets, touts its partnership with Tulu on its company blog. Greystar says it now offers the service in 40 residential and student housing sites — with more than 20,000 householders — in cities such as London, Manchester, Liverpool, and Dublin.
The landlord positions the Tulu service as another perk of living in its apartment buildings, alongside other tenant amenities such as a fitness center or landscaped garden.
Reuse: For anyone who has felt frustrated when their waste operator appears to combine all their previously separated recycled items, Greyparrot introduces the idea of “waste intelligence.”
Greyparrot uses AI remote sensors to help recycling, regeneration, and waste companies — including government and commercial operators — track discarded matter to hunt for recyclable or circular materials. These waste analytics are helping to track collection, transfer, sorting, and recycling. According to the company’s website, it is tracking 25 billion waste objects in 89 categories.
In context, the United States has about 3,000 open landfills and another 10,000 closed ones. For decades, the U.S. exported its waste (including recycled waste) to other countries, such as China. However, China stopped accepting outside waste in 2017.
BiGS Learning Center: Dive deeper into the circular economy
https://hbr.org/2023/06/how-ai-will-accelerate-the-circular-economy