The growing momentum behind climate tech as investors see more opportunities for a return
ROUTE TO MARKET Venture capital firms are essential in helping innovative companies that are too unstable for later-stage investors HEAVY INDUSTRY Bold investors could look at commodity-driven industries for potentially big gains KEY QUOTE We have seen venture capitalists stepping up investments in energy transition stories in a big way
Andrew Beebe of Obvious Ventures, a San Francisco-based early-stage venture capital firm focusing on investments in “world-positive” start-ups, is not waiting around for governments or large corporations to solve the climate challenge. “The next phase will be led by innovators,” he says. The established industrial players may “Show up and step up with their capacity but innovation does not come from Detroit,” Beebe adds, referring to the historical heartland of the automotive industry in the United States. “It comes from [people like] Elon Musk.” Since its establishment in 2014, Obvious Ventures has backed companies including sustainable home construction company Plant Prefab; Enbala, a distributed energy resource management software provider acquired by energy technology company Generac in 2020; and Proterra, the electric bus manufacturer that listed its shares on Nasdaq last year. As a growing number of investors search for the next Elon Musk and Tesla—now one of the world’s most valuable companies with a market capitalisation approaching $1 trillion—new records are being set for venture capital investments in the climate tech sector. According to figures from consultancy PwC’s 2021 State of Climate Tech report, over $60 billion was raised by more than 600 start-ups in the first six months of 2021 compared to just $430 million in 2013. In the 12 months through June 2021, the total amounted to $87.5 billion, up more than 200% on the previous period. PwC notes that 14 cents out of every venture-capital dollar is now going to climate tech, which includes technologies to decarbonise agriculture, energy, industry, transport, buildings alongside carbon accounting and offsets. 
“We have seen venture capitalists stepping up investments in energy transition stories in a big way,” says Thomas Kießling, chief technology officer at Siemens Smart Infrastructure. Aside from helping start-ups scale up with early-stage investments, Kießling says venture capital investors also have a crucial role to play in identifying new and disruptive technologies. The innovation coming out of start-ups will be key to the energy transition. The International Energy Agency (IEA) estimates that almost half of all global CO2 emission cuts required by 2050 will come from technologies that are only at the demonstration or prototype stage. Driving investor interest is a combination of factors. The costs of wind and solar power have fallen sharply, as have those for technologies like battery storage, demonstrating their economic viability. Governments and corporations have increased commitments to emissions reductions while consumers and employees are increasingly insisting that companies become sustainable as the sense of urgency about the need to address climate issues becomes acute. The current venture capital investment frenzy comes after a first boom of investments, now known as Cleantech 1.0, that began in the mid-2000s and ended badly. At that time, investor enthusiasm outpaced technological maturity and policy frameworks, the global financial crisis of 2008 made financing, in general, more difficult, and the competitiveness of start-ups suffered as natural gas prices tumbled and cheap solar panels from China flooded into the market. According to a 2016 report from MIT Energy Initiative, venture capital firms spent over $25 billion funding clean energy technology start-ups from 2006 to 2011 and lost about half of that. GOING MAINSTREAM The consensus is that climate tech investments will be more resilient this time around, having learned the lessons from a decade ago. While raising funds for start-ups is never a simple task, much more money is also now available to back companies seeking to scale up. “What used to be called cleantech, and is often now called climate tech, has become mainstream not only in venture capital investments but in investments in general,” says Simon Bennett of the IEA. “The nature of the energy transition means that you need to have a ready pipeline of technologies to come through in order to sustain capital inflows over time, but you would probably expect to see continued growth punctuated by some bubbles bursting,” Bennett adds. “I don’t think this is immune from hype and some crashes, because in some ways this is inherent to competition and finding what works.” Alongside long-time climate tech investors, venture capital investors with strong experience backing digital start-ups are moving into climate tech and large investors with substantial financial firepower are also setting up decarbonisation-focused funds. Corporations are investing in start-ups through their own venture capital outfits to keep a closer eye on technological innovations and to do so more cheaply than they could in-house. US investment giant BlackRock partnered with Singapore sovereign wealth fund Temasek last year to create “Decarbonisation Partners” with a mission to set up late-stage venture capital and early growth private equity investment funds focused on accelerating decarbonisation. Canadian investor Brookfield Asset Management announced an initial closing of $7.5 billion for its Global Transition Fund. Helping to set the tone was Breakthrough Energy Ventures, launched by Microsoft founder Bill Gates in 2015, which has pledged to provide “patient” capital with a 20-year investment horizon to account for the longer time frame that may be needed to fully deploy new technologies in sectors of the economy with high greenhouse gas emissions. This is double the typical period for venture capital investors—indicating they are willing to wait longer for returns. The group has raised over $2 billion in capital to support entrepreneurs building companies to reduce emissions from agriculture, buildings, electricity, manufacturing and transportation. The fresh capital is welcome. “One of the missing pieces we had in Europe before was large, late-stage financing,” says Martin Kröner of Munich Venture Partners (MVP). While there was sufficient money for seed and early-stage financing, the lack of later-stage financing meant there were some early exits, he says. Founded in 2005, MVP is setting up the €250 million Green European Tech fund, which will focus on developing the business model of invested companies to ensure they are sufficiently precise and scalable, something Kröner says was often lacking in the first wave of climate tech investments. MVP’s investment portfolio includes Eletrochaea, which has a proprietary process to produce renewable methane at an industrial scale, while past investments have included Sonnen, the household solar battery storage company bought out by oil major Shell in 2019. ECONOMIC OPPORTUNITY Both the veterans and newcomers to climate tech investments highlight the potential for attractive returns. A greater or full decoupling of global emissions from economic growth represents “a huge economic opportunity”, states Valerie Shen of G2 Venture Partners (G2VP), a spin-off from Silicon Valley venture capital firm Kleiner Perkins, one of the early players in climate tech investment. G2VP is in the process of deploying a $500 million sustainable tech fund closed in 2021 after raising $350 million in 2017. Its portfolio includes Arcadia, a digital renewable energy company, and solar tracker producer Sunfolding. Shen says that venture capital firms have a critical role to play in helping companies to scale up that have great ideas and technology but are not stable enough yet to be funded by later-stage investors. She stresses that G2VP does not finance early-stage research and development or “science experiments”. After identifying critical trends the firm is “proactive in going out find a company in that [sector] that already has strong business fundamentals,” she says. The investment vetting process is exhaustive and involves talking with companies and their customers, regulators and technology providers. The size of the firm’s investments “are usually a couple of million, if not tens of millions, Shen explains. Reducing carbon emissions is not important only for its impact on the climate, but makes good economic sense, stresses Laura-Marie Töpfer of Extantia, a Berlin-based venture capital provider. With carbon prices on the rise, “It will be very expensive if you do nothing, so there is a real connection between carbon emission savings and the commercial success of a company,” she says. Extantia is aiming to back the next generation of “gigacorn” companies that are developing technologies with the potential for cutting over one gigatonne (Gt) of CO2 emissions per year. Töpfer adds that these companies are also certain to be “unicorns”—the term describing privately held start-ups with a valuation of at least $1 billion. She says the focus on technologies that “address a big enough problem” means that certain sectors are off the group’s radar for investments, such as e-scooters and car-sharing apps. Extantia gigacorn candidate companies include H2Pro, a firm developing more efficient and cost-competitive technology for producing green hydrogen and Betteries, a start-up focused on second life for used electric vehicle batteries. 
ASSET-HEAVY INFRASTRUCTURE Siemens’ Kießling says venture capital investors are increasingly looking to invest in asset-heavy infrastructure and are shying away from hardware after losing money on solar technology a decade ago. On the other hand, private equity investors seeking higher returns than those now offered from wind and solar plants are moving into earlier stage ventures, making investments that would have typically been considered the domain of venture capitalists. Since venture capitalists are strong in software and private equity investors have experience in the asset ownership side, they are leveraging off their respective expertise and co-investing, says Kießling. He notes that one early, but promising trend sees venture capital and private equity investors financing start-ups that provide service models involving infrastructure. One target for investments has been start-ups applying the power purchase agreement (PPA) model for electric charging depots in cities. The local public transport company purchases power for its charging depot through a PPA from a company that supplies the charging and other infrastructure as a service, including power upgrades, grid connection, maintenance and ancillary and other services. While people are looking to invest in big solutions to address climate risk, it is also important to know, “If a company is one that can be successfully financed by venture capital or whether it will require too long or too much Capex,” says Kröner. One way to facilitate investments of venture capitals is through less Capex-intensive business models that are more focused on solutions rather than products, he says. MIND THE GAP PwC highlights a funding gap—and the potential for higher returns on investments—in sectors where investments are lagging the potential for emissions reductions. The largest gap can be found in the built environment, PwC says, which has received just 4% of funding in the period from 2013 through the first half of 2021 while accounting for 21% of greenhouse gas emissions. On the other end of the spectrum, mobility and transport have received 61% of funding during the same period while accounting for 16% of emissions. Not surprisingly, the sector also boasts the highest number of climate tech unicorns. Hard-to-decarbonise commodities like concrete and cement currently represent 8% of global greenhouse emissions and iron and steel another 6-8%. PwC advises,“As markets in maturing climate technologies continue to scale, investors looking for ten-times to 100-times returns and beyond should look at these relatively nascent technology areas, where multiple unicorns do not yet exist to crowd out the market.” Beebe of Obvious Ventures says the decarbonisation of industry is just getting started. “There’s every reason not to like steel and concrete,” he says. “They are commodity, low-margin businesses and not where venture capital traditionally invests, but the opportunity is huge.” •
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Heather O’Brian