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Episode
111

Zach Stein

Co-founder of Carbon Collective

Ep
111

Collectivizing Our Climate Change Actions Through Sustainable Investing

May 17, 2022
With
Zach Stein
56:09

Collectivizing Our Climate Change Actions Through Sustainable Investing

What if you could invest your retirement fund into companies that are sustainable and working towards solving climate change? That’s hitting two birds with one stone and exactly what Carbon Collective does. One of Carbon Collective’s founders, Zach Stein, joins us today to educate us on the world of sustainable investing and why this matters so much in the world we live in.

In this episode, Zach shares his entrepreneurial journey creating Carbon Collective with his co-founder, James, with whom they’ve known each other since they were four year old. This is one of the main reasons they’ve cultivated a strong co-founder relationship, and he gives great advice on how to make this happen for you and your co-founder(s). He also talks about the importance of being vulnerable with your team along with sharing his highly suggested book recommendations for entrepreneurs and early stage founders. There is so much to be learned from Zach, so listen to this episode to hear what he has to say.   

Zach’s key lessons and quotes from this episode were:

  • “How does the world change? How does the status quo change?," and the only answer I've really found out is when enough people say, "I'm going to break from the status quo." When enough people do that, that's when the world starts to change.” (27:14)
  • “Talk is cheap. And often, that's seen as a bad thing, but it means talk is the cheapest place to ideate on something. Make sure you've thoroughly talked through something before you actually start building.” (36:51)
  • “An effective co-founder relationship and just an effective team, it is not tension-free. Tension is actually really important. You just never want to let it sit.” (38:43)
  • “A small effective team can do so much more than a large ineffective one.” (43:36)

In this episode, we also talked about:

  • The impact of sustainable investing in addressing climate change  (9:06)
  • How Carbon Collective works (19:23)
  • Important entrepreneurial lessons Zach learned (34:29)
  • Finding the right co-founder (38:22)
  • Vulnerability and team culture (45:59)

Transcript of the episode

Maiko Schaffrath  00:00

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You are listening to Impact Hustlers, and I am your host, Maiko Schaffrath. I have made it my mission to inspire the next generation of entrepreneurs to solve some of the world's biggest social and environmental problems. And for this reason, I am speaking to some of the best entrepreneurs out there who are solving problems such as food waste, climate change, poverty, and homelessness.

My goal is that Impact Hustlers will inspire you, either by starting an impact business yourself, by joining the team of one, or by taking a small step, whatever that may be, towards being part of the solution to the world's biggest problems. 

In today's episode, I speak to Zach Stein, the co-founder of Carbon Collective. Carbon Collective is a platform that enables individuals to invest their retirement funds into sustainable companies, companies that are part of the solution to climate change rather than part of the problem.

Pension funds are actually covering about $35 trillion in investments, yet most people know very little about how their pension fund is being invested. And in most cases, funds are invested in companies which are responsible for disrupting the environment, which are part of the problem, and the money is still flowing into these companies through pension funds. 

So, Carbon Collective is aiming to perform better than an average index fund. It's not just a more sustainable alternative, but also so far a better performing one and one that seems to constantly perform better. The goal, really, is to bring a low fee option as well into the landscape of investment funds.

One space in startups I'm most passionate about is when a big social or environmental problem gets combined with a real customer problem, and it just overlaps so nicely. So, even if I don't care about climate change, your product is still great. I should be using it. It has better returns, and it is easy to use, etc., so let's talk about that. Zach, thanks for joining me on the show.

Zach Stein  03:38

Maiko, thank you so much for having me.

Maiko Schaffrath  03:41

Great to have you. So, go ahead.

Zach Stein  03:43

Yeah, great introduction. One thing that I'll clarify is, in the world of investing, as much as people like to say there is no guarantee of outperformance or future returns, we at Carbon Collective take the long view of, say, over the next 10, 20, 30 years, what type of strategy is likely to outperform.

We believe one that divests from fossil fuel companies and those industries dependent upon it and gives those share to the companies that are building solutions to climate change that are rapidly growing will likely outperform over that period of time, and we want to drive as much impact as we can, so excited to dig in deeper together on all of that.

Maiko Schaffrath  04:23

Let's do that. Yeah, big disclaimer over this whole episode. None of this is investment advice. None of this is any kind of prediction of future returns, so we'll make that very clear in the beginning.

You've got to talk to the experts to get your investment advice, not to me, for sure. So, let's dive into this. I would like to find out, first of all, what got you into dedicating your life or at least a big portion of your life to pensions and sustainability. Why is this something that you care about? Why are you working on this problem?

Zach Stein  05:01

Totally. So, on Jan. 1, 2020, my co-founder and I who, we've known each other since we were four years old, we set out with a broad white board of, we wanted to build better tools that could enable individuals to collectivize our climate action, so to drive both to solve for some of that emotional loop, because we so often get stuck when facing climate change emotionally just at the peak of anxiety, but the solution and how you should resolve that action doesn't come in, but then also in terms of actual impact. It is the collectivization of individual impact that are actions that change the world, and so that's what we needed to do. 

We started exploring what was going to be the right way to do that. We interviewed 120 people in and around our network. We used The Mom Test as our Bible, as you've said, so definitely shout out to that group for early product discovery.

What we ended up seeing was that investing, both with pension funds, your retirement accounts, and just also generally putting cash in the stock market, people kept hitting this wall, where they said, "I have this sense, and I know these climate scientists are telling us that we have to invest our way into solving climate change." 

And for us, climate change is the number one issue of our time. We have to build our way into it. If we don't do that, it doesn't matter how many trees we plant. It doesn't matter how many machines we have sucking carbon out of the atmosphere. If we don't build our way to a society that doesn't run with fossil fuels, then we're not going to be able to solve this existential issue. 

And so, there's this natural link between them, but what Wall Street broadly was offering under the guise of sustainable investing was not whatsoever aligned with the world that we need to build too. It was instead taking the world that we have today and cutting out some of the worst of the worst companies.

It's just a less bad version of that world today. So, we set out to see, okay, the only way that we solve climate change is we actually have to massively scale sustainable investing, and we can get more into this.

But sustainable investing and the way that it's being told is not actually at all aligned with what a sustainable world looks like. It's kind of a broken system. And so, we wanted to come in and help offer solutions that make total sense as an investment, because your retirement fund isn't charity, but to drive with a clear theory of change as much impact as possible.

Maiko Schaffrath  07:28

Got it. And let's dive a bit deeper into that. First of all, I'd like to make clear to listeners how powerful pension funds actually are in the world of investment and in making a difference in this discussion and climate. 

In terms of climate change, a lot of the focus in the last decades has been on you've got to change your consumption, you've got to buy sustainable fashion, you've got to reduce your waste, and things like that. Nothing of that is wrong, obviously.

But then, there [are] some really big levers that we have as consumers and individuals that sometimes don't get talked about as much. First of all, how you invest your money, and to the point of what you're solving, it doesn't mean you have to be a millionaire. 

You may have a 401(k) or you may have EISA here in the UK, where either your employer or yourself, you're investing for your pension, you're saving for your pension, and you're quite unaware of where this money goes and how this money is part of the problem or part of the solution.

And then, I think the third one I'm passionate about is really, how do you actually spend your time? Do you work for a company, in the worst case, for some of the worst polluters, oil companies? Or do you dedicate your career towards impact-driven companies?

But yeah, we're here to discuss the investment element. I'd like to understand from you, how big can the impact of pensions actually be part of the solution to climate change? Is that quantifiable? Can you give us a rough idea?

Zach Stein  09:06

I can definitely give you a rough idea on how to think about it. So, let's take a step back and talk about, broadly, what needs to happen for us to solve climate change. And when I say solve climate change, what I mean is for our civilization to reach a place where we are no longer emitting greenhouse gases to operate, so to move ourselves, to move goods, to create new things does not result in adding gases that warm our atmosphere.

Basically, what is that? We stop burning stuff for energy. We gather it from the sun, we use wind turbines. There [are] many solutions on what that is. 

For us to reach that world, there is a lot of complication on that, but it can be distilled to be very simple. Over the next 30 years, we need to dramatically wind down investments in fossil fuels while dramatically winding up investments into climate solutions.

Now, there are multiple, very well laid-out plans of how do we get from today to that world where we are no longer emitting carbon to run our civilization, and one of the biggest things in the way is investment for that. 

So, estimates range from $5 trillion to $9 trillion is the amount that we as a globe need to be investing annually into building that world and that transition, so that is our mission. If we do not do that, again, it doesn't matter how many trees we plant. We're still going to be emitting too many emissions for us to avoid that. So, that is the playing field that we are operating at. 

Now, how does your pension connect into that or your 401(k)? When you own shares in a company, there [are] a few things, there [are] a few tools of power that you have there. One is voting. The stock market is a weird form of democracy.

These are publicly traded companies, which means as a shareholder, you get a vote on what to say. There [are] two schools of thoughts about how we can use those votes within that. 

One is that we should go to the worst actors and try to pressure them to change their business model. We should get ExxonMobil to become a solar company. We don't think that that's a very effective strategy, even though it feels really good.

We're taking it to the enemy. David's fighting Goliath. We think that that strategy is much better used on trying to reduce demand for fossil fuels. So, instead of running a campaign trying to get ExxonMobil to do something, let's run a campaign getting Walmart to put solar panels on all of their superstores.

That is an economically viable smart thing for Walmart to do. We're not trying to say, "Change your fundamental business. Walmart become a solar company." We're just saying, "Change how your current company has power." That's number one. 

The second thing here is that the cost of capital matters. CEOs and boards care about the share price for their company, because when a company's share price does better, it makes it cheaper for that company to borrow money or it enables them to sell more stock, which allows them to expand their business.

So, when more people are buying and holding a stock, and this is particularly true in a pension fund, because you're not touching that for 30 years. If anything, you're just going to be contributing to it more. You're effectively removing those shares from the stock market, because they're just sitting there from the actively traded supply, and it's that actively traded supply that dictates the price of the share. 

So, the more of a climate solution company that we are all holding, that's not being actively traded, the lower the supply will be. And if that company has a really good quarter, its price will go up, and it will enable it to borrow money more cheaply, and expand faster.

This is something that fossil fuel companies have been doing, because they pay very high dividends, so it makes sense for them, from a tax perspective, often to sit in a retirement account, because you don't pay taxes on those dividends until you retire.

They've been able to take advantage of this fact that their supplies of actively traded shares is overall reduced. So, that's something that we very much need to reverse and what we're working on.

Maiko Schaffrath  13:17

Got it. And the second question that comes up probably quite quickly, you give some examples on your website, you can obviously think about things like, okay, we've got the oil companies out there, we've got Shell, ExxonMobil, etc., and we've got renewable energy companies that are part of the solution.

That's maybe relatively obvious, but other than that, what is the framework that you apply to your companies or to the companies that you let users invest in? What is a good company and what is a bad company, and how does that relate maybe to existing frameworks out there like ESG, for example?

Zach Stein  13:59

That's such a good question. When we first started exploring what Carbon Collective could be, we explored ESG really heavily, and what ESG is, it's an acronym that stands for Environmental, Social, and Governance. It's a way for analytics companies to evaluate a company across these three ethical parameters. 

They'll go and look at ExxonMobil and fill out a hundred 1 to 10 ratings on environmental stuff related to the company, greenhouse gases, water use, pollution, how they work with trash, etc. They'll do the same thing on social issues and the same thing on governance, which is how is the board run.

They'll then average all those scores together. You get a single E, a single S, and a single G score, and then you'll average that together to get a single ESG score. 

To give ESG its due, what it's trying to account for is the fact that the world is really complicated and that especially ethics, there [are] a lot of different ways to look at ethics and saying, "Alright, let's try and simplify that down into a single score."

What it means, though, is it often dilutes what people actually most care about, and it's often a way for funds and different things to include companies that really don't make sense ethically, especially when we look at some of the big issues that we have like climate change. 

There are many ESG funds and many even portfolios that are climate impact portfolios, still have more fossil fuel companies in them than climate solutions companies. And so, to us, that doesn't align with what we have to do to solve climate change which is, again, to massively wind down investments in fossil fuels and massively wind up investments and climate solutions.

To us, and this is a way that we make sense and we find it helpful for others, to be a sustainable investment, you have to align with that fact. It's as simple as that. 

With our strategy, we said, "Okay, let's look at the overall stock market from that lens." We just focus on the US right now. If we look at the entire US market, about 20% of them are companies that are technologically dependent upon fossil fuels for their long-term business.

This is oil companies, but it's also petrochemical companies or cement companies or steel companies where, right now, for them to exist in that world that we talked about where we're not emitting carbon, they either need some breakthrough of technology that doesn't exist yet or they need to switch their business model and their core business entirely. 

So, we divest from that 20%. We do not think it makes sense financially or ethically to own that 20% of the market. That's the wind down investments and fossil fuels. We then give its share, so we divest. We then reinvest that 20% into the companies that are building solutions to climate change. So, this is more than just solar and wind, but things like batteries and electric cars. 

What we do is we go out, we say, what are the solutions to climate change? We use independent sources like Project Drawdown, Rewiring America, the IEA, to say, what is the climate solution? Then, we look back and say, which publicly traded companies are building a climate solution?

We then filter out those who generate more revenue from products or services that are dependent and are built for the fossil fuel industry. We use revenue as an indicator, your last year's revenue as a future indicator of where you're going to be investing as a business. 

We don't use climate commitments or anything like that, because talk is really cheap, and then just broadly hold those companies weighted by market cap. We're not trying to pick which solar company is going to win and lose. That is our climate solutions collection. We reinvest in that 20%. Then, the remaining 80% of the stock market, these are the companies whose core business doesn't need to change to meet that world. They can exist in a world not run by fossil fuels which means that, to us, it's upon us as shareholders to get them to move there as fast as possible. This is where we want to engage. 

We have that example like Walmart, or I talk about Coca-Cola a lot. For greenies like me, Coca-Cola is not an environmentally-friendly company. But in the world where we solve climate change, Coca-Cola can still sell me a brown, sugary, bubbly beverage that uses the secret recipe.

It's just doing so with 100% renewable energy delivered on a fully electrified or green hydrogen-powered fleet, and they are protecting instead of abusing their watersheds. 

Those are all issues around their core business, which means that it's going to be much easier to get them to change, and that's where we should be engaging and driving as much impact as we can with those type of companies.

With that strategy, we're able to build portfolios for our client where you're still getting very broad diversification. You're going to get a similar level of risk and reward as you would for a generic index-based portfolio where you're investing across the whole stock market, which is a very smart way to invest, invest with that with low fees, but with a clear theory of change of why every piece of that is in there.

Maiko Schaffrath  19:03

So, as such, would the pensions that are invested through you be somehow actively managed? You hinted to a broader spectrum almost like an index fund approach. How do you actually invest? Is it more of an index fund approach or is it more of an active one?

Zach Stein  19:23

We are closer to the passive more index-like approach in which we are not buying and selling stocks based upon what's happening in the market. We take broad ethical filters like what I described, and then after that, we let the market dictate what the price of those companies should be. We just use the market caps for them with a few simple rules applied. 

We're not coming in trying to beat the market or actively do it. We're trying to apply some of the best of passive or index-based investing, but with that eye on the prize at what is that world in which we solve climate change. We're trying to bridge that gap and do so in a way where you're not going to pay more in fees than you would for a generic online investment provider in terms of both the management and fund fees.

Maiko Schaffrath  20:18

We spoke about the extremes, of the oil companies, of certain ESG standards at the moment that may even classify a certain oil company with a relatively high ESG score and group them into an ESG fund, because they have certain social policies or employment policies, or they are improving on certain elements of their business, but overall, they still have this negative impact. We spoke about that.

We spoke about the companies that are really prioritizing change and being part of the solution. 

And then, you said we also need to basically incentivize this big bucket of companies that [are] somewhere in the middle, like the Coca-Cola example, and I think that's where sometimes maybe things get a little bit more complicated, because how do you make the judgment of whether Coca-Cola is really one of the better companies trying to make a real change and taking things seriously? 

You said you're looking at previous revenue and how they're investing it back into making the transition, but what I'm getting to is, you certainly can't be completely idealistic and say, "Unless you're 100% carbon neutral by next year, putting all your money towards that, we can't invest in you," so you have to make some trade-offs. How do you think about, those trade-offs and selecting the right companies that are taking these things seriously?

Zach Stein  21:57

Yeah, so in that broad 80% of our portfolios, which we call the low carbon economy, we make a few changes. For example, we don't invest in big banks, because of their financing of fossil fuel extraction. Again, we both ethically do not want to hold them.

But then, also, from a financial perspective, we could very likely be in a fossil fuel asset bubble, and we do not want to be holding those companies when the debt stops being paid on time. 

So, we make some of those tweaks. We don't hold meat-producing companies and things like that. We don't hold Berkshire Hathaway for the same reason. But to your question, we don't actually want to get as in the weeds as that, because we think it's actually distracting from the overall eye on the prize. We take that step back, and we ask about a company's business model.

What sector is it in? And does that sector, its underlying business model, can it exist in a world where we solve climate change? Or is there some fundamental flaw in reason? 

Like right now, in cement and steel, you actually have to have coal. You have to have fossil fuels involved in it. We don't have a replacement for that. Some are coming. In Sweden, there's a really interesting steel plant that is using hydrogen there, and so we would love to re-include a company like that, after that point, likely include it in our climate solutions with that.

But that is the distinction that we are trying to make, and we're trying to zoom all the way out and say, let's be honest, the world that we live in is run on fossil fuels. 

Fossil fuels built our civilization that we have. And so, given that lens, how do we take this world that we have today and get it to transition as quickly as possible? And so, when we use the example of Coca-Cola, we're not saying, "Who's greener, Coke or Pepsi?," and making an investment decision on that.

We might make a decision on what type of voting we do or what type of campaign that will run on a shareholder resolution that we will pressure them on there, of where do we think we can maybe get the biggest bang for our buck with that, but we're not coming in and making an actual investment decision on that. 

Because regardless of who is greener, Coke or Pepsi, in the world where we sell climate change, Coke or Pepsi are likely to be around. And so, it's actually on us to get them to stop using fossil fuels and align their business with climate change as fast as possible, which means that we want to be owners in both of them.

Maiko Schaffrath  24:29

And then, you use your voting powers to basically be part of the change. That's right?

Zach Stein  24:34

That is where we want to engage. Other companies will say, "No, you should own oil companies," for that same reason. We disagree. We don't think that that is a very effective strategy. Instead, we want to use the consumers of fossil fuels, but again, who can switch without us saying, "You have to get out of this business."

Maiko Schaffrath  24:52

Got it. Before we move into your entrepreneurial journey and your experience and some difficult lessons learned in your journey, I'd like to talk about one more point that I'm keen to cover is the power of individual investors versus institutional investors, so to say the professionals in the market. I think what we've seen, it's quite a bit of a different type of investing and space. 

But, over the pandemic, we've seen really interesting developments in the public markets where groups of retail investors were suddenly pumping up stocks like GameStop, for example, battling with big established institutional investors, and I think it taught us the lessons probably about the power of individuals and all this.

How do you see that? And especially with Carbon Collective, was it always clear that you were going to focus on individuals? Is there a real reason to say they have massive power, or was it a debate for you to say, "You know what? Maybe should we be focusing on more institutional investors, help them make the better decisions that are better for the climate"?

Zach Stein  26:09

Yeah. We'll talk more about the entrepreneurial journey. When we ended up saying that we wanted to build a climate investing company, we did so with the understanding that, for us to solve climate change, we have to redefine sustainable investing.

And so, we said, "What is going to be our best path to doing that? How can we set us up for the highest likelihood of the greatest, or not even the highest likelihood, but for the greatest impact that we could have? Let's aim for that, and that's only going to be bottom-up." 

We asked ourselves this a lot. and this came out in those interviews that we started doing, where there's often this reaction of saying, "Well, F you. I'm one person. I was born into a world run by fossil fuels. It's all corporations and governments that did this. Why should I do anything about climate change?"

On an emotional level, that reaction makes a lot of sense. There's certainly lots of truth within that. Where I get caught up in that and where I still haven't found a good answer to is saying, "Okay, but how does the world change?

How does the status quo change?," and the only answer I've really found out is when enough people say, "I'm going to break from the status quo." When enough people do that, that's when the world starts to change. 

I think an easier thing to think about is plant-based meat. Here, you had those early adopters who said, "I'm going to buy this, before it's really tasty, before it's really cheap." And now, we're seeing it just take off more and more and more, and it makes it easier and easier for others to do that.

To that, I think if you have a theory of change, I think that's a really important one on how should the individual and how, as individuals, should we do this. 

It's almost an act of faith with this, so I think that when we look at climate actions, it's really important to prioritize, and happy to share how we think about that prioritization. But when it comes to your investing, as individuals, we have great power.

We have not only power to change exactly where our dollars are held, but we need to change the underlying narratives around investing. Again, that happens from a bottom-up way, where right now, it is seen still broadly in the higher investing world that it is smart to hold fossil fuels, that it is a necessary evil in a comprehensive portfolio, and it is charitable to invest sustainably. We still get that. 

People say, "I'm in for Carbon Collective. I know I'm going to be accepting a few percentage points worse of returns per year, but that's okay," and there's a sense that, "I am wearing my heart on my sleeve, and I'm just taking one for the team here," and that's just not true.

I was born in 1989. I'm 32. If you had divested from the S&P 500 from 1989 to the present, you would have made more money than if you had held fossil fuel companies, and that's a long time. And that includes a decade, where we saw the investment advisors' argument where fossil fuels are very important as a counter-cyclical that when the rest of the market goes down, they tend to go up. 

During the 2000s, from that whole decade, the S&P 500 was basically flat by the end of the decade, and the fossil fuel industry in the US went up 350% over that time period. And yet, still over that broad, more zoomed out, it was a worse investment.

So, it's those types of narratives that's a really key part of how investment decisions are made is that these global heuristics that we have, they prop up. If everyone thinks that fossil fuels are a smart investment, more people will on them, and it becomes a self-fulfilling prophecy. 

The stock market has a really weird way of predicting the future, that when enough people do something, and it actually makes that future happen in that, because it changes the narrative itself.

And so, that's where individuals are so important here, that it's upon us that the more of us as individuals who adopt this and get behind it, that actually, the better position we will be to pressure institutions and go up market. Carbon Collective will be successful. 

I think as an entrepreneur, it's really helpful to imagine, alright, what does the world look like in which we're really successful? And so, I think something like this would be true, which is a group of students is pressuring their endowment to divest from fossil fuels. Right now, that's where it ends.

It says "Stop investing in that." We know to solve climate change. It's not just divest. It's reinvest. What are you reinvesting in? If Carbon Collective or companies that have taken a similar approach to Carbon Collective, if that's the answer, say, stop investing in this and start investing in that, that's going to be really powerful, and you don't get that from trying to convince really rich people or money managers of how to change their investments.

You do that from that bottom-up, and that's how you create real lasting power.

Maiko Schaffrath  31:23

Hi, it's Maiko here. I want to interrupt this episode briefly to make you aware of two exciting things that are going on here at Impact Hustlers.

First of all, if you are a founder solving social and environmental problems, and you're looking to connect to like-minded founders like yourself, you're looking to learn from some of the most experienced entrepreneurs, experts, and investors in the world, and you want some support and actually fundraising for your startup, we've built the Impact Hustlers Community. 

We are now about 100 entrepreneurs and founders, and we're growing every month, with more founders from all over the world joining us, and we're really here to support each other. Our goal is to build the most supportive ecosystem for impact-driven founders. So, if you're a founder, head to impacthustlers.com/community to learn more. 

And if you're not a founder, but you want to work for impact-driven companies, we have also recently launched something really exciting for you, and that is the Impact Hustlers Talent Collective.

This is a group of some of the most ambitious and talented individuals in the world that want to use their talent to make a difference in the world and work for some of the most innovative impact-driven companies. If you're keen to join the Talent Collective, this is all free of charge, obviously.

You can submit your application to the Talent Collective on impacthustlers.com/jobs, and what will happen as a result is that companies will start approaching you through our Talent Collective and share job opportunities with you. 

We'll also share our Weekly Jobs Update with you where you see relevant jobs in the field of impact, including from all the previous podcast guests, so you will actually see opportunities from companies that have been covered here on the show and also companies that are members of our Impact Hustlers Community.

So, go to impacthustlers.com/jobs If you're looking for a job, or if you're a founder and need some support, go to impacthustlers.com/community. Okay, let's get back to the episode now. 

Got it. Really, really good perspective there. Let's shift gears a bit into your entrepreneurial journey. While Impact Hustlers is all about celebrating solutions to some of the most pressing social and environmental problems, and I hope we just did that and understanding the space and celebrating the great work you've done, I'm always keen also to cover some of the most difficult and hardest lessons learned and some of the most painful things in your journey.

And if I was to ask you what was the single most painful thing in your entrepreneurial journey, not just at Carbon Collective, you've been an entrepreneur for bit, what comes to mind? What is it that has been really painful but educational experience, maybe so to say?

Zach Stein  34:29

I think that especially as a younger entrepreneur and interacting with older people and things like that, there were a number of times when I didn't listen to my gut. I worked with an early co-founder for a different business, and he was a much older fellow than I and had been in the world of tech and things like that for a long time.

He pushed us into a few decisions that just were very reactive and non-strategic and ended up creating so much more headache than if we had directly addressed some of the issues upfront. I knew it felt wrong, but I just didn't have the confidence to be able to say, "What are we doing? This isn't working." 

And so, I think now, especially with my co-founder, we've known each other since we were four years old, one of the things I'm proudest of is the ability that we've created to think strategically.

He's an engineer by training, and at our past company, he talked about this a lot, but it didn't really sink in where an ultimate team is you can release ego and actually have this collective mission of, "How are we coming to the best idea?," when we're doing of high level strategy. He uses the analogy of BattleBots of, it's actually really important to strongly argue an idea. You don't get there through, say, being tepid or something like that. 

No, we use phrases like, "Okay, let me make a strong pitch for this." And then, it's really important to say, "Okay, let me make the strong counter-pitch," and we'll ask each other that. It's things like that that we found to be really, really helpful of always, how are you pushing that expansive, the creativity in that, but then also bring the realm of argument as just a tool that we are engaged in together and not saying, "This is my idea, and I need to defend it"?

And that has been one of the most satisfying things to have built is this system for critical decisions-making, because talk is cheap. 

And often, that's seen as a bad thing, but it means talk is the cheapest place to ideate on something. Make sure you've thoroughly talked through something before you actually start building. And so, ego is, again, what gets in the way so much in that.

And so, the more that you can tab and create that culture, and I'm happy to go through some examples, I think that you can avoid so much pain and unlock much better ideas and also have your team feel much more aligned about it.

Maiko Schaffrath  37:27

You brought up some really interesting points, and I'd love to zoom in on that, and I think it's also related to just co-founder due diligence, and I'm quite interested in that. Obviously, now, you have a great functional co-founder relationship with a person that you've known pretty much all your life, which is great.

Not every founder may be in a position to do that and start a company with their childhood friend that they really know in and out. With the previous co-founder, do you feel like you didn't do your due diligence enough when you first decided to be co-founders? What would you have done differently?

Let's say, I know somebody for one or two years, and it feels okay and feels right. What should I be doing to challenge, "Okay, is this the right co-founder for me and for the business"?

Zach Stein  38:22

Totally, it is one of the hardest questions. It's not like working with my childhood friend has been all roses and butterflies. Even this week, we had something come up. An effective co-founder relationship and just an effective team, it is not tension-free. Tension is actually really important. You just never want to let it sit, is the thing. 

And so, what I've been so proud of is our ability to to increasingly shorten the cycle from something happens, then expression, and then resolution with that, and then building in a better system for moving on and having that.

So, I think when evaluating who you're looking for in a co-founder, I can speak from what I found to be so helpful is really making sure you have aligned values. For James and I, what's been incredibly helpful is we will often, especially if we have a problem, we'll read the same books at the same time. 

The two of us will be able to digest this primary material, so it's not like one person being like, "We should apply this system," etc., but it's a process of, alright, we were able to name that this is a problem and not necessarily jump into solution but say, "Okay, we're going to investigate it together and then collaborate on what the building is of that," while further defining what are our shared collaborative values.

Because if you have those, then you can always drop back on and say, "Hey, I thought that this was really important to us as a team." I think that if you have that, because a co-founder is a marriage. I'm married romantically, and I spend an equal amount, if not more time, on building systems and building up my relationship with James and how we operate together, and it is one of the best investments I have ever made with that. 

And so, I think an expectation that it's just going to work, you either will lead to a lot of conflict or a lot of siloing, and you're not actually acting as co-thinkers and co-creators in this. It's like you've got the tech and I've got the business which, for some people, really works, but I think that there's a really deep understanding of, what are your strengths? What are the other person's strengths?

And then, what are your values? And one of those values, I believe, should be open communication with that and a commitment to that type of self-improvement and vulnerability. If you don't have vulnerability, it's not going to work. It's just not. You can't build trust without vulnerability. In good teams, you need vulnerability, and you need trust. That's what keeps teams together.

Maiko Schaffrath  41:22

Hmm, so many valuable points there. I mean, to be honest, if I'm very transparent, this is almost a little bit like a therapy session here, because I'm learning so much from you here. Impact Hustlers is my second company. Before that, I started the company called Real Changers with a co-founder, and we're still friends. It's all good, but there [are] so many mistakes that we did that you just brought up. 

The importance of friction that you brought up [is] a really big theme that you opened my eyes a little bit there, because we were both individuals that were really harmony-loving, let's say. I'm like that. I love harmony, good energy, and stuff like that, and he was like that, and that resulted sometimes in the friction not coming up, but being under the covers, sometimes us not having the difficult discussions about the business, and the weaknesses, and things like that, and solving problems. 

I think, yeah, it's wrong to assume that you should always [have a] harmonious relationship with your co-founder, almost like same person. No, you shouldn't. You should be putting yourself under a shared mission, as you say, and fight for the mission, but also challenge it from different perspectives. So, so valuable. Thanks for sharing that. Yeah.

Zach Stein  42:51

Yeah. If I could plug a couple of books that we found really helpful, because we had to go through this on our past company. Our tech wasn't working. Our team, our morale was really low, and it was clear that James and I, this was our first time really doing this to our team, and we had some amazing engineers with us who I think were relatively underwhelmed with our management as leaders. 

And so, one book that was really valuable was The Five Dysfunctions of A Team. This is by Patrick Lencioni. All of his work, I would highly, highly suggest for any entrepreneur that is getting to that stage of, "I'm building a team. How do we manage the team dynamics?," because teamwork is everything. A small effective team can do so much more than a large ineffective one. 

And so, again, it walks through how vulnerability is so important within that, because if we don't have vulnerability, if we don't know each other's backstories, we don't know what makes each other tick, then we will often fall into when something happens, we'll label the other person.

We'll be like, "Oh, well, Maiko, he's just lazy," instead of being like, "Oh, you have like a sick relative and a kid at home, and there's all this stuff going on. It's winter, and you have seasonal affective disorder, and okay, we can build all around that, and I can see you're not lazy." I have context for it all. 

We so often give ourselves context like, "I was really tired that morning," but we are very quick to label others, personality-wise. And so, especially on a team, the way that you combat that is vulnerability and making sure. We have a fully remote team at Carbon Collective, and one of the things that we do very deliberately is every team member, right now, it's 30 minutes every two weeks, I think we'll probably bring it to an hour every four weeks, it's on your calendar, has a one-on-one with every other team member with that, and it's very deliberate. 

We're remote. There's not the time to have lunch or be in the office or things like that, and there's no agenda. It's not like a supervisor being like, "Tell me about your experience here," although I sometimes do that, which I really try not to, but it's for our individual members to build that vulnerability by sharing about their lives and connecting as people, and that is such a worthy investment.

Because when you then get into that place of, "Now, we're ideating as a company," you have that trust there already, and it's so much easier to let go of the ego in that, because you're like, "Oh, I know Maiko cares about me and sees me for who I am. I don't have this attachment to my idea of this worth here. I can just engage as a true thought partner and come up with the best idea," but it all starts with vulnerability and trust.

Maiko Schaffrath  45:48

Love it. And how does that translate from the vulnerability and trust between co-founders into actually building a team culture? How's that relationship between the two, from your perspective?

Zach Stein  45:59

You have to model it. You have to model it. We just had a thing happen this week, where one of us, we didn't show up in a way that we aspired to a team-wide meeting, and we modelled the apology and the explanation and talked about the system of what we're going to do in the future for the whole team and explicitly said, "This is the type of vulnerability that we are trying to show here." Shit happens. Life happens. You can't control that, but you can control communicating about it. 

And so, that's what we really focus on is, whatever is going on is fine. It will not be fine if you don't communicate effectively about it, early and often about it. And so, that's what we found to be really effective, and I think that just feels rational and right to people. We're not saying, "Keep it to yourself," or, "That's not professional," or things like that. But we've seen that that's been able to be, I think, a pretty clear line. 

People love structure. We all love knowing the balance and what is the cultural expectations there, so I think as founders, it is upon you to make those expectations really clear and then always be reinforcing them by doing as you do, including what you say, not do as I do.

We, in our past business, I came up with 10 ethical things that we're doing as a company and made the poster that no one read and all of that, none of that. There's another thing in these books that came out, which is something only sticks in people's minds, this is especially in teams, once it's been said six times. So, pay really close attention to the phrases that you use. 

One of them that we really try to deliberately use, especially in times of tension, we really try to train ourselves as a team is, "What I'm hearing you say is," because people don't need to be right. Your team members, they don't need to be right, and they're actually okay being wrong or not having their idea, but people do need to be heard, and so much of people arguing is not feeling like the other person actually hears their idea.

And so, they just say, "Again, I'm going to repeat it in a different way. I'm going to repeat it a different way," then the other person is like, "Well, you're not listening to me, so I'm going to repeat it in a different way." 

And so, instead taking that time to stop and just say, "Alright, Maiko. Can I try saying what I think I hear you saying, and you correct me if I'm wrong?" Having that, and this is what we do and so aspire to is when I hear our team members do that to each other, that's the ultimate success, because that's how we're staying in the realm of ideas and avoiding that ego and of people not feeling heard.

Maiko Schaffrath  48:57

Love it. We've got very little time left, but I tried to ask you two more questions. I think I could go on for a long time, but one is a bit more practical business validation-focused. You mentioned The Mom Test earlier. I'd like to just cover in a few minutes how you've actually, well, what is The Mom Test for those that don't know? And then, how have you actually applied it when you developed the business?

Zach Stein  49:26

Yeah, so we were introduced to The Mom Test by we set up this really elaborate mockup of what we had an idea of what Carbon Collective could be as a product. You click through things, and there were slides, and we get to the end of the interview and the guy's like, "Alright, this is fine, but you really need to read The Mom Test," so we're like, "Okay." 

The Mom Test, it is a method of interviewing people to get them to best evaluate whether they would actually use something that you want to build, and it's all about digging for past behaviors. That is the best predictor of the future.

They call it The Mom Test, because instead of you asking your mom and saying, "Mom, would you use this?," and her saying, "Well, of course, honey. You're amazing," you'd actually be able to dig and see and have her not lie to you, frankly, because we all love to complement each other. 

We don't like to be assholes. We don't like to shoot down ideas, so just saying, "Would you use this?," is not very effective as a product evaluation tool. So, we interviewed in a Mom Test style where, again, you're just asking questions to find a previous action, and you want to see, did someone do something or not and why, and follow that thought thread with that, because previous action is the best predictor of future. 

We found that to be very, very helpful in our process of discovery for Carbon Collective, and it was investing that was this place, again and again, people are going to be like, "The world that I'm investing to retire into, I want that to be matched in my retirement account, but it also is not charity. It can't be a stupid investment."

And so, we heard about people telling these stories again and again of digging into their ESG-focused portfolios or looking at those options and just feeling really lost and confused and often angry and that, to us, was a really clear indicator that there was something missing here and something better needed to be built.

Maiko Schaffrath  51:26

Got it. Yeah, for anybody that's listening to this, check out The Mom Test by Rob Fitzpatrick. It's one of the most valuable entrepreneurship books, I think, that there is for early stage entrepreneurs and also amazingly best-selling. He's actually gone on to write a book about writing books, and he managed to write the book in a way that is so valuable. It's not a massive book. It's very practical. 

There [are] too many boring big business books that talk a lot and don't actually say anything or say very little. So, this one is not one of them. I can really endorse that as well. Get it if you haven't heard of it. Thank you so much, Zach. I really appreciate you joining. One last question as we close. How does the world look like in 10 years if Carbon Collective succeeds?

Zach Stein  52:24

In 10 years, we have Vanguard and Fidelity and BlackRock rolling out strategies that look very similar to Carbon Collective's in the same way. We actually see Vanguard as a great example company. When they came out with their index funds in the 70s, it was crazy. Everything else was actively-managed, very expensive mutual funds. 

It was only once they were able to build up, again, a bottom-up movement of enough folks, is that, now, all of those companies have passively-managed, index-based options. We think the same thing needs to happen and is going to happen in sustainable investing. And so, success for us, that's what that will look like. One of the realms of success, that's what that would look like.

Maiko Schaffrath  53:10

Amazing. Thanks, Zach. I really enjoyed this conversation. We could have recorded another 10 podcasts with your experience and your insights and the way you formulate things, so thanks so much. I really enjoyed this.

Zach Stein  53:22

Thanks so much for having me, and would love to come back for another 10.

Maiko Schaffrath  53:26

We'll do it. We'll do it. Thanks, Zach. I really hope you enjoyed today's episode and learned some valuable lessons from today's guest. I want to share two things with you. First of all, if you're a founder and you're solving a social or an environmental problem with your company, there is something that we've launched recently to support founders like you and to introduce you to more founders that are like-minded and that are solving very difficult problems in the world, and that is the Impact Hustlers Community. 

It is a community of over 100 founders that solve problems like climate change, education, the crisis in health care, and really pushing the boundaries on what's possible. And what we do as a community, we connect to each other, we run mastermind groups where you can connect to other entrepreneurs and founders.

We bring experienced investors, entrepreneurs, and experts in to run workshops and ask-me-anything sessions, and you can also connect to others in our online community. And we have something for those of you that are actually fundraising. We have an investor matching tool where you get introduced to relevant investors based on the startup that you're building. 

But, it may be the case that you're not a founder, and you just want to be part of the change, and you want to join some of these companies that you've learned about here at the Impact Hustlers podcast, and we've got something for you as well. We've recently launched the Impact Hustlers Talent Collective. 

This is a group of some of the most ambitious individuals in the world that want to make a change and an impact with their careers, and you can join the Talent Collective, obviously completely free of charge. You can apply to it, and we will introduce you on a regular basis to companies recruiting people like yourself. You'll get access to exclusive job opportunities from companies that have been on the podcast but also beyond that. 

So, make sure that you go to impacthustlers.com/jobs if you're looking for jobs in the social impact space. Even if you're not actively looking right now, you should still sign up and be part of our Talent Collective. And if you're a founder, don't forget, go to impacthustlers.com/community. Okay, thanks very much for listening and bye. See you at the next episode.

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