23rd Nov 2019

The ‘circular economy’: we’re investing in a sustainable future

At MMC Ventures we’re making an exciting, emerging theme — the ‘circular economy’ — a priority for understanding and investment. The circular economy, which involves maximising value from resources and minimising waste, presents both an economic opportunity and moral imperative.

At MMC Ventures we’re making an exciting, emerging theme — the ‘circular economy’ — a priority for understanding and investment. The circular economy, which involves maximising value from resources and minimising waste, presents both an economic opportunity and moral imperative.

Below, we explain how circular systems differ from traditional, ‘linear’ economies. Drawing on discussions with leading entrepreneurs and industry experts we describe how novel, circular business models are enabling new category leaders — and highlight an inflection point in circular activity. We explore how emerging technologies, consumer expectations and investment are catalysing circular activity, while limited proof points and transition risks are inhibiting progress.

If you’re an early stage company drawing on circular ideals, or moving an industry towards a circular future, get in touch to see if we can accelerate your journey.

Our future is circular

In a circular economy:

waste in minimised and the greatest value is obtained from resources for as long as possible.

Contrast the circular economy with traditional, linear economies in which resources are harvested, used and discarded — ‘take, make, break’.

As well as reducing waste and increasing value, moving towards a circular economy can decouple global economic growth from the finite supply of resources. Circular ideals also enable companies to service increasing growth in a context of scarce supplies.

One theme, many business models

Certain ways of reducing waste, including recycling and reuse, are well understood. But there’s much more to ‘being circular’ than recycling. Novel business models are reimagining how consumer and corporate services are developed and deployed. Indeed, some of today’s most successful companies, such as Airbnb and Uber, succeeded by applying a circular model (resource sharing). Accenture and others have highlighted circular models including:

  • Circular Supplies: Resources that have been used for linear lifecycles are substituted with renewable, recyclable or biodegradable input materials. This should be particularly of interest to companies that deal with scarce commodities.
  • Resource Recovery: Recover and reuse outputs from one process as inputs for another. Doing so increases the economic value of resources across lifecycles.
  • Product Life Extension: Extend resource lifecycles through repairing, remanufacturing, upgrading or re-marketing. Through product life extension, resources that would usually be wasted can remain economically positive while keeping materials out of landfill.
  • Sharing Platforms: Increase utilisation of goods and services through shared access, use and ownership. Sharing platforms are particularly well suited to companies whose resources are poorly utilised.
  • Product as a Service (PaaS): Maximise asset utilisation by selling capacity, instead of products, to multiple users — through pay-for-use or lease arrangements. PaaS differs from the traditional buy-to-own model for productive resources, such as manufacturing assets, and increases productive value. PaaS is particularly impactful for high value, low utilisation assets.

Consumer expectations and investment are driving adoption

Interest in the circular economy has hit an inflection point, doubling in the last twelve months (Fig. 1):

In the last three years, circular initiatives have risen in priority for many companies.

“The circular economy has become a top theme for many CEOs.” (Consultant)

“Corporations have targets now. The pressure is there.” (Corporate Executive)

“Over the past couple of years organisations have tried tapping into the circular economy. Now they’re becoming more sophisticated in their thinking about it.” (Consultant)

The visibility of circular initiatives, as well as their significance, is growing (Fig. 2).

Fig. 2: A BP advert highlighting circular economy (Source: BD/ David Kelnar)

Our discussions with entrepreneurs, consultants, company executives and academics revealed key drivers and inhibitors of interest and adoption. Drivers include:

  • Consumer expectations: Consumers are increasing concerned about sustainability — and voting with their wallets. Awareness varies geographically, with greater consciousness in Europe than the US, but is rising globally. Concern about plastics has catalysed consumer expectations and government action regarding sustainability. Extensive media coverage regarding the vast quantities of plastics disposed of in landfill and the world’s oceans has raised consumers’ awareness and scrutiny of companies’ outputs. “Sustainable packaging is no longer a choice.” (Retail consultant)
  • Climate change: Global focus on climate change is pushing considerations of sustainability to ‘upstream’ industries such as oil & gas and metals & mining. Resource use in extractive industries is emerging as a new area of focus. Action by upstream industries can be particularly impactful on value creation and waste reduction. While companies in these industries are under varying pressure, their customers — such as automotive and electronics manufacturers — are receiving increasing pressure from consumers, pushing pressure upstream. While forward-looking companies are engaging in initial projects, the emergence of the circular economy in these industries remains in its infancy.
  • Regulation: Government engagement and regulation are catalysing circular economy activity. In 2015 the European Commission adopted the Circular Economy Action Plan (CEAP), which included measures to stimulate Europe’s transition towards a circular economy. In 2018, the European Commission adopted additional initiatives focused on waste, including: an EU target of recycling 70% of packaging waste by 2030; the reduction of landfill to a maximum of 10% of municipal waste; and prevention objectives requiring member states to tackle food waste and marine litter.
  • Greater investment: The investment community is attaching growing importance to the circular economy. Investors’ appetite for investment in circular economy companies is growing. New funds, partly or wholly focused on the circular economy, are emerging — including our own MMC Greater London Fund, Blackrock’s new Circular Economy seed fund, Circularity Capital’s fund, and Close Loop Partners’ fund.

Technology is catalysing change

Emerging technologies are enabling the circular economy and accelerating progress towards it. A previous paradigm shift, mobile computing, enabled marketplaces and the sharing of goods. Current technologies, such as machine learning, reduce waste and improve efficiency by enabling assets to be repaired before they fail and by optimising their utilisation. New materials and processes enable more goods to be recycled and recovered.

Ultimately, the greatest opportunities will result from redefining sector value chains rather than optimising downstream components.

Beyond their direct benefits, emerging technologies are exciting companies, which perceive an opportunity to gain long-term competitive advantage by taking advantage of new solutions.

Limited proof points and financial pressures are inhibiting progress

Adoption of circular ideas is nascent. Inhibitors include:

  • Limited proof points: Companies lack evidence of the positive financial impact of adopting circular ideals at scale. Companies rarely have frameworks to assess how circular activities are impacting performance or compare returns with investment in linear models. Companies also lack exemplars of best practice.
  • Financial pressure: While harmful externalities associated with a linear economy may not immediately be punished by markets, the short-term cost of investing in alternative practices frequently will be.
  • Transition risk: Most companies have ‘linear economy DNA’. Evolving a company’s processes and culture towards circular ideals creates transition risk. “Many large corporates really see this as big business opportunity, but don’t really know how to tackle it.” (Corporate executive).

We’re backing circular economy disruptors

At MMC Ventures, we’re backing exceptional founders who are building companies contributing to our circular future. In some cases, ‘circularity’ will be explicit in a company’s goals and business model. In others, companies will incorporate circular elements or move existing industries towards a more circular future.

We’re putting our money where our mouth is. With the launch of our new £52m Greater London Fund, whose backers including the London Waste & Recycling Board (LWARB), we’re committing to deploying a significant proportion of the Fund into circular economy businesses.

In future blogs, we’ll be breaking down sector value chains to identify priority areas for investment.

At MMC Ventures, we’ve already made several investments into transformational circular economy companies, including:

  • Gousto, an AI-powered recipe kit company — and now one of the UK’s fastest-growing scale-ups — that is eliminating food waste;
  • Senseye, a predictive maintenance company that uses cutting-edge technology to extend the life of industrial manufacturing equipment;
  • QFlow, an environmental data management platform that’s reducing the environmental impact of construction;
  • Unmade, a pioneering fashion-tech company that’s reducing waste in the fashion supply chain by enabling ‘demand-driven’ creation.

Beyond investment, we’ll be contributors to this important movement. As a fund we seek to catalyse support for, and participation in, the move to a circular future.

If you’re an early stage company helping us move to a circular future, get in touch to see if we can accelerate your journey.

Special thanks to Wesley Spindler (Accenture), The Ellen MacArthur Foundation, Kevin Eckerle (NYU Stern School of Business) and The London Waste & Recycling Board (above views are our own).

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