There is no question about it: climate technology is once again the hottest sector for investments. Over the past few months alone, entrepreneurial activity and investment interest in climate tech have soared at an astounding rate: 1,400 investors globally have deployed more than $40 billion across more than 600 deals according to a new report from Climate Tech VC. This is more than double the capital deployed in the year before. We saw 7 major verticals emerge across companies in this space:
Energy (nuclear, hydro, geothermal, energy storage, energy management software, HVAC and building energy efficiency)
Food & water (alternative proteins, regenerative farming, crop health and yield optimisation, water reuse and purification)
Mobility (EV charging infrastructure and electric mobility, ridesharing, zero-emission planes and urban transport, battery technologies and recycling)
Consumer (sustainable bio-based packaging, sustainable textiles, circular economy commerce solutions)
Climate (monitoring and remote sensing, climate risk and insurtech, climate intelligence and insight platforms)
Carbon (carbon removal technologies, CCUS, carbon offsetting tools and markets, carbon tracking and accounting platforms, green supply chain logistics platforms)
Source: Climate Tech VC
Out of these sectors, Mobility, Energy, Food & Water accounted for about 90% of total 2021 climate funding. If the climate tech interest feels familiar, that’s because it is. We have been down this road before ten years ago, and things did not bode well. A decade ago, when the world was just beginning to understand the challenges behind making the energy transition, the innovation ecosystem was still too nascent. Investors bet too heavily on early stage clean energy startups, and didn’t account for deep technical risk, long development timelines, and the capital intensity typically associated with cleantech investing.
What happened in Cleantech 1.0?
Since 2006, Silicon Valley venture capital firms bet heavily that the energy sector was ripe for disruption. That year, cleantech (as the clean energy sector was then called) start-ups attracted $1.75 billion in VC investment, dwarfing the hundreds of millions of dollars raised in previous years. Rising fossil fuel prices and growing consumer awareness suggested a sizable market for solar panels, lithium-ion batteries, wind power, and biofuels.
But just 5 years later, by the end of 2011, the cleantech sector underwent one of the worst boom-and-bust cycles in the history of technology investing. Of the $25 billion that investors placed in cleantech firms from 2006-2011, more than $12.5 billion (over 50%) was lost during what is retrospectively known as ‘Cleantech 1.0’. The resulting carnage scared an entire generation of investors away from the sector.
Solyndra, a high-flying startup manufacturing cylindrical solar tubes, received $500 million in federal loan guarantees but filed for bankruptcy in 2012. The company shut down, and concluded that it could not manufacture its solar modules at scale in a cost-competitive way. Micro-concentrator solar power firm Sopogy collected more than $35 million in venture capital and strategic financing, only to eventually shut down its operations in 2012.
What went wrong?
There are many explanations for why cleantech startups flopped and VCs pulled out from the sector. Changing economic conditions certainly played a role, including the financial crisis in 2008, the resultant decline in oil and natural gas prices, and a glut in solar panel manufacturing capacity in China (causing the price of panels to plunge). Cleantech investments gave investors a dismal risk/return profile, and companies that developed new materials, chemistries, or processes, never achieved manufacturing at scale, finally being branded as the poorest performers in an investor’s portfolio.
Shift in green investments
Now that more scalable and potential profitable innovations spring up, investors are returning to the fray to fund technologies that combat climate change. These have become known as ‘Climate Tech’ solutions. At first glance, cleantech and climatetech seem to be the same as both terms address technologies that attempt to achieve environmental sustainability. For the nuanced differences between the two, here’s a comparison chart:
Source: Clean Energy Ventures
Though both terms are used interchangeably, they are not synonymous. What we understand to be ‘Cleantech 2.0’, or ‘Climatetech,’ only surfaced around 2018, after the 2015 Paris Agreement, as environmental issues were back at the forefrunt of international discussions. While cleantech predominantly included a limited number of clean energy technologies, climatetech also encapsulated all technologies and processes tackling the global climate and food crisis such as agtech and building automation, geo-engineering.
We see 2 main trends that have paved the way for climate tech startups to thrive commercially in a way that was not possible in the last round. Firstly, renewables (especially solar and wind energy) are now price-competitive with fossil fuels. For comparison, electricity from solar power was over four times more expensive than electricity from natural gas on a levelized basis in 2009.
Secondly, there is a clear fundamental shift in how governments, companies, and consumers take climate change much more seriously today then they did ten years ago. Hundreds of the world’s largest corporations - from Amazon to Ford - have publicly committed to reducing their net emissions to zero in specified timelines.
Climate tech investments today
According to Pitchbook’s Institutional Research Team, the climate tech sector has shown an impressive investment performance in 2021.
Following the 2019 pandemic, we can see from the chart that venture capital fund volumes have been rising at an accelerated pace, especially in 2021 alone.
Even with all of these positive trends, climatetech startups will still have to face the dreaded valleys of death, just as their counterparts in other sectors. In contrast to SaaS startups who just have to survive a single valley, climatetech startups, especially those with a hardware product offering, have to cross multiple valleys before smooth-sailing their way to success. As more and more novel technologies surface in the climate tech ecosystem, so does their potential to combat climate change when equipped with sufficient funding.
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ARTICLE WRITTEN BY: CHANDNI JAGA
Chandni Jaga is a Ventures Associate (Sustainability) at Plug and Play APAC.
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