From 2006 to 2011, the VC crusaders who rode the internet wave applied the same investment formula to pursue disruptive market opportunities in clean energy. […]
Overcoming the valleys of death for successful investment in Climate Tech
From 2006 to 2011, the VC crusaders who rode the internet wave applied the same investment formula to pursue disruptive market opportunities in clean energy. Investors poured some $25 billion into cleantech start-ups only to lose over half of that as the bubble burst. Venture capitalists experienced massive write-downs and the scar tissue is still raw.
Cleantech 2.0: Climate Tech
Some of the challenges from the cleantech bubble remain – clean technologies continue to carry inherently deep technical risks and long development cycles that do not align with traditional VC exit expectations. In addition, experimentation and commercialisation of clean technologies is still very capital intensive. Nonetheless, the market has evolved with plenty to suggest this time might be different.
Know-how decreases deep technical risk:
Cleantech companies are leveraging technical and sector-specific experts to assess industry-specific risks, while using parallel innovations in software to build large energy businesses primed for high-profile exits that provide both VC-quality returns and significant impact in the industry.
As people increasingly seek to align their work with their values, top-tier technologists, investors and operators turn their focus to the climate ecosystem.
Climate-tailored investment vehicles suit long development timelines:
Patient-capital funds and investment vehicles are increasingly matching technology maturity cycles with fund lifecycles. For example, Breakthrough Energy Ventures has an extended fund life to give game-changing technologies time to mature.
There is also more pre-venture non-dilutive funding and support coming from government-funded programs, accelerators, incubators and philanthropic organisations help derisk technologies before VCs invest.
Increased collaboration across investment funds – both tech funds and CVCs like Future Energy Ventures – generates financial and strategic value e.g. through sharing due diligence, initiating pilots or investing in follow-on rounds.
Diversification and technological progress reduce capital intensity:
Cleantech companies now diversify their capital stack to include later-stage institutional investors that help manage the sector’s capital intensity as firms scale.
Technological advances have also lowered the cost of renewables, reducing capital intensity for climate tech. For example, solar costs have dropped 90% in the last decade, and solar and wind are often the cheapest form of power, followed by batteries.
What else is different this time?
Climate crisis is a reality felt by all and the effects of climate change – whether by flood, fire or freeze – are becoming more apparent. The number of extreme weather disasters have grown 5x over the last decade.
Climate Tech is more than energy since it involves decarbonization of all industries and functions, no longer just a matter of modernising the energy industry.
Public consciousness has heightened. 70% of the global economy has committed to net zero, demand from public markets and institutional investors for ESG has doubled in the past 5 years and corporate decarbonisation commitments are becoming the norm. Solving climate change is a megatrend amongst billionaires (think Bill Gates, Jeff Bezos and Elon Musk) who want to change the world.
Europe’s scaling challenge
There are many reasons why the investment outlook for Climate Tech is different to the cleantech bubble and Europe has the potential to play a leading role in this revolution. With the International Energy Agency estimating that around half of the technologies needed to get to net zero have yet to reach the market, cleantech innovation is key if the EU is to realize its ambitious targets of becoming climate-neutral by 2050. Deploying mature technologies like solar and wind will not be enough, the next generation of cleantech to decarbonise heavy-polluting sectors such as steel, cement and aviation is needed.
The EU has a high-quality supply of cleantech innovation waiting to be scaled and investment has grown 7.5x over the last decade, primarily driven by seed funding. But it severely lacks scale-up capital and support, preventing many of these start-ups from reaching commercialisation stages of their technologies. With EU cleantech scale-ups only attracting 6.9% of global cleantech growth capital, promising ventures are seeking scale in North America or Asia.
To take full advantage of the climate technology boom and achieve the climate-related goals its citizens, politicians and institutions demand, European corporates and investors must come together and find a way to solve the scale up problem. Future Energy Ventures is the bridge between energy corporates and innovative start-ups, filling the investment gap for climate tech pioneers and driving collaboration to generate value for all.
Carolina Soto – Investment Manager, Future Energy Ventures