VC investment in climate tech is growing rapidly.
Investor enthusiasm soars amid improved infrastructure, new federal leadership, and business models that better align with venture economics.
Sustained investment in new technologies is needed to prevent the worst effects of climate change.
In his annual New Year's Day post, Union Square Ventures co-founder Fred Wilson said investing in climate technologies over the next decade will be like investing in the cloud in the 2010s.
The previous week, USV followed in the footsteps of Amazon, Bill Gates, Chris Sacca, and Robert Downey Jr. by announcing a new fund that will invest in startups focused on solving the climate crisis.
And they're far from the only ones.
On AngelList, investment in climate tech reached new highs in 2020 in both deal volume and capital raised.
Overall, VC investment in climate technologies hit a record high of $16.4B in 2020, according to Pitchbook data.
Improved Infrastructure
This isn't the first time venture capital has flowed into climate tech. Between 2006 and 2011, VC firms poured over $25B into climate tech—and lost more than half of it, according to a PricewaterhouseCoopers report.
The reasons are myriad, and include the 2008 financial crisis, China's rising solar industry, and—perhaps most crucially—a lack of infrastructure to support these clean technologies.
A lot has changed since then.
Source: RamezNaam.com
Armed with better technology, energy companies have optimized infrastructure, radically lowering the cost of renewable sources of energy like wind and solar. The price of solar energy, for example, plunged from $21 per watt in 1980 to $1.03 per watt today — making it cheaper than natural gas.
"Innovation is what's driving down the cost of these renewable energies," explained Ramez Naam, an angel investor who runs a cleantech syndicate on AngelList. "Incremental tech advancements have allowed factories to produce solar panels, batteries, and wind turbines that are more efficient and use less resources. Learning-by-doing and R&D have allowed renewable energy sources to reach economies of scale."
A proliferation of accelerators, incubators, VC firms, and government programs supporting climate technologies is also moving the industry forward, while global initiatives like the Paris Climate Accord and more frequent severe weather events keep climate science firmly in the public eye.
Informed Investing
Arnav Mariwala, co-founder of HighTide Intelligence, says the most important change in climate tech investing in recent years has been a more rational approach by VCs and founders.
"The first wave of climate tech startups weren't suited for venture capital investment," said Mariwala, whose startup consults on the impact of rising sea levels."They were highly technical, required a lot of capital upfront, and had longer go-to-market times because you needed a ton of R&D."
Mariwala sees more promise in today's venture-backed climate tech startups because they leverage existing capabilities that don't require large infrastructure build outs. Recent examples include Sunlight Financial (valuation: $1.3B), which offers financing for solar system projects, and Aspiration ($1B), an online bank that helps customers eliminate their carbon footprint.
VCs are also evaluating climate tech startups on longer time horizons and waiting for companies to prove their technologies, Mariwala said. For larger investments, they're using special purpose acquisition companies (SPACs), which funded climate tech companies to the tune of nearly $4B last year.
Furthermore, investors are also considering environmental, social, and governance (ESG) factors in their decisions, creating a $1B market for ESG data.
The influx of capital and reduced barriers to entry has helped generate a diverse array of new venture-backed climate tech companies. PwC estimates there are 43 cleantech unicorns, with money flowing into startups working on everything from clean manufacturing and cellular agriculture to carbon capture and wildfire prevention.
Source: Pitchbook
Federal Support
New federal leadership is also driving investor enthusiasm. President Biden announced plans to invest $2B in climate science over the next four years, in an effort to achieve net-zero emissions in the U.S. by 2050.
Investors believe this will lead to more public-private partnerships, greater involvement from the U.S. Department of Energy, expanded access to federal lands, and less red tape for climate tech companies.
"Biden will create a lot more momentum for both investors and entrepreneurs," said Chinmay Adhvaryu, founder and CEO of early-stage startup EarthLab AI, a firm that collects geospatial data to help fight climate change. "Creating incentives and regulations around climate change is what will ultimately move the needle."
Identifying New Opportunities in Climate Tech
The climate tech boom is still in its early stages. Decarbonization and carbon offset technologies in early development are expected to account for more than a third of future emission cuts.
For investors that translates to many opportunities—if they know where to look.
"I tell people to look for stuff that sounds boring, because that's usually what drives the biggest impact," Mariwala said. "It can be something simple like retrofitting gas heaters in buildings. Solving most climate issues is really about fixing the current way we do stuff."
Adhvaryu points to two areas fertile for investment: carbon sequestration (removing pollutants from the atmosphere) and adaptation (adjusting to the new climate reality).
"Most of our infrastructure, supply chains, and agricultural systems were built when we didn't have to worry about climate change," Adhvaryu said. "Increased investment there can avoid failures like we saw in Texas during February's freeze."
Climate tech investing can help save the planet. If you're interested in investing in climate tech, consider using AngelList. LPs on AngelList can invest in hundreds of climate tech companies through Rolling Funds led by accomplished GPs. Climate tech Rolling Funds currently raising capital include:
Climate Capital
FootPrint Coalition Ventures
MCJ Collective
Planet + Capital
Possibilian Catalyst
Prithvi
Sustainable Food Ventures
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