Managing Director of Clean Energy Ventures, a VC firm investing in companies commercializing disruptive clean energy technologies.
With total annual investment in climate tech expected to reach $6.4 trillion by 2023, it’s easy to forget that the sector has stealthily endured valleys and peaks since it became a distinct investing class in the early 2000s. Today, as the market experiences volatility across all sectors, especially technology, it raises questions about how to avoid the pitfalls that plagued CleanTech 1.0 when investors abandoned promising startups, leaving them to languish in the “valley of death.”
These five reminders will help investors navigate the likely waves of bear market territory and convert every company and product into a climate-driven solution.
1. It won’t happen overnight.
It’s easy to be buoyed by the speed with which the climate tech sector is growing right now, but over the past 20 years, I’ve seen how new technologies need time to commercialize.
Whether it’s software or hardware, an efficiency play or a deep tech experiment that can be catalytic to decarbonize a major industry, giving companies the time and money to “get it right” is critical. More time means more opportunity for validation, which leads to higher chances of success. Investors need to avoid letting their excitement overshadow reality or overreacting to every market change. Steer clear of obsessing over the ticking clock and accept that time is the most valuable currency. Respect entrepreneurs by aligning on reasonable timeframes to achieve milestones.
2. Match money to momentum.
Scores of new investors are clamoring to add climate companies to their portfolios, and in the process, they’re driving up valuations to seemingly stratospheric levels. With so much capital entering the sector, investors need to be diligent about addressing valuations for early-stage companies. While some of these companies could be the next multi-billion dollar Tesla—or achieve an attractive return in a corporate trade sale—statistically, 90% of them will languish, sell off their intellectual property for low returns or shut down completely.
Fair, not low, valuations also help founders. Nothing is more challenging than living up to unrealistic expectations of investors who have overvalued your company.
3. Past performance is no guarantee of future results.
The old guard of investors who have been around since the early 2000s need to put aside their biases about the failures in the past. We are in unprecedented times in more ways than one, and we need a fresh approach and perspective.
Carbon accounting, a sector off the radar in the 2000s, is today a potential multi-billion dollar market. The days are long gone when corporations could simply state a carbon emission goal without accounting and verification. Stakeholders today—regulators, investors and even customers—are demanding real-time, load-matched “additionality” emissions accounting from companies and their suppliers, supported by clear long-term plans to reduce climate impact. Carbon accounting will require the development of new measurement software, carbon credits trading regimes and investments in new carbon mitigation technologies.
Expect to see the ecosystem experience a ripple effect from new markets. Investors with the ability to stay agile in the midst of such fluctuations will remain standing.
4. Destigmatize capital-intensive sectors.
In the first wave of climate tech, capital intensity was historically seen as a major hurdle for venture capital investments, especially in clean energy. While a bias against these types of investments remains, investors must remember that today’s market is very different.
Manufacturing-related technologies—battery manufacturing, low-carbon cement and minerals recovery—can, in many cases, scale enough with grant and venture funding to secure customer agreements for purchasing output from their new plants, thus easing the ability to obtain financing to scale. A prime example is the massive funding for battery manufacturing by age-old auto OEMs such as Volkswagen and Toyota, validating battery suppliers such as LG and Samsung and even the Department of Energy and the European Union.
These strategic and government sources, combined with private equity and sovereign funds, represent a new acceptance of risk where deploying massive amounts of capital in the billions is necessary for their business models. It’s high time for hardware and critical infrastructure to see more capital-intensive deployments significantly moving the needle toward decarbonization.
5. Bring all hands on deck.
Earth has a 50% chance of reaching a 1.5 degree Celsius warming threshold in the next five years. To reach climate targets at the rate we need, a broad range of participants from a wide range of sectors and geographies need to converge to close the gap to net-zero. From utilities, oil and gas, cement and materials, automotive, minerals and mining and retail, all sectors are welcome to join the largest ever open invitation for which deployment of an estimated $150 trillion will be needed by 2050.
From this point onward, investors must realize that the climate crisis touches each and every sector; nothing is off-limits. That’s why I’m seeing even the oldest sectors—including steel, chemicals and building materials—getting a makeover with new approaches to reduce emissions. Even the building blocks of industry, cement and concrete are experiencing a second wind as investors today begin to back carbon utilization technologies to bridge the “valley of death” and decarbonize incumbent industries.
Every company is a climate company.
It’s no secret that adoption rates for technologies addressing climate change are increasing faster than we’ve seen in decades. Companies big and small are making net-zero commitments, adopting new emissions monitoring solutions and figuring out how to understand the carbon footprint of their supply chains.
The truth of the matter is that every company needs to become a climate company. And in order to make that a reality, investors need to back the technologies that will enable us to live more sustainably—returns that I could argue are more valuable to all of us than pure financial gain.
The information provided here is not investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.