Climate technology has one of the greatest successes of recent years. Investors are expected to sink $1.5 trillion to $2 trillion a year by 2025 in a wide variety of startups that promise to improve everything from travel and commuting to agriculture, construction and more. Oh, and they will either reduce CO2 emissions or remove carbon dioxide from the atmosphere while making a profit.
Many investors – and companies – have been here before. A decade ago, the cleantech boom collapsed. The recession lasted longer than many expected, natural gas prices plummeted as fracking caused inventories to rise and demand for the products of many cleantech startups failed to materialize. Some companies folded; others were sold at a loss. Investors generally did not do well.
But that didn’t stop everyone. The Paris climate accord in 2015 showed that governments, which had caused much of the cleantech boom and then accelerated its decline by withdrawing aid, had not completely turned their backs on the problem. Some investors also stuck with it, knowing that some bets would pay off even if there were no public incentives.
And some of those bets have indeed paid off. Battery technology startups, many of which were founded from the ashes of past failures, have become investor darlings, fueling an industry today worth $40 billion and growing at 18% per year. They have solved some of the great scientific and technical challenges and their path to commercialization is clearer than ever before.
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However, not every company will succeed in meeting its objectives. The recent downturn will only make it harder for those on the fringes to sustain. “There is a belief that countries and companies only care about the climate when things are going well,” said Christian Garcia, partner at Breakthrough Energy Ventures.
Still, climate change isn’t slowing down, so things may be different this time around. “Like all things, the climate is cyclical – but it’s on a geological cycle. The climate doesn’t stop changing just because of a recession. That means the need for solutions will only grow,” said Andrew Beebe, managing director at Obvious ventures.
“No sector in the startup world can be recession-proof,” said Rajesh Swaminathan, venture partner at Khosla Ventures. “That said, there is now a strong sense of urgency around climate risk.”
Pae Wu, General Partner at SOSV and CTO at IndieBio, agrees: “With a downturn comes a more finicky market, so new entrants will have to set a very high bar, but this comes just at a time when we need any solution have what we need. to address the magnitude of this problem.”
So are they leaning more bullish or bearish over the next few years? What should a climate technology founder do when faced with tighter climate timelines and potentially tight funding rounds? We asked some of the leading investors in the space to share their perspectives on the industry and what founders can do to get through the lean times.
We spoke with:
Given the magnitude of the climate challenge and the efforts of governments to address the problem, is climate technology recession-proof or is it just as vulnerable to market forces as something like SaaS?
Pae Wu: The US political will on this front is limited, so it will be the private sector’s job to keep momentum and development going if US politics fluctuate again. Business pressure to act can contribute to government exerting influence to continue its efforts, especially in the field of R&D. It could just be called something else, such as food security, energy independence, or supply chain resilience.
I suspect that the EU’s commitments are more resilient and, coupled with their willingness to introduce regulation to boost innovations, I expect continued developments in climate technology.
With a downturn comes a more finicky market so new entrants will have to set a very high bar, but this comes just at a time when we need every solution we can get to address the magnitude of this problem.
Everyone has to get out of the lab. It’s time to prove. It’s time to show off your technical works. Andrew Beebe, MD, Clear Enterprises
Amy Burr: The pandemic has been challenging for all sectors, but investment in climate technology has not slowed down due to its importance, both at the individual level and at the corporate social responsibility level. Therefore, I expect the sector to remain immune during a stronger economic downturn.
Christian Garcia: I’d say it’s just as vulnerable if not more vulnerable to a recession. There is a belief that countries and companies only care about the climate when things are going well. Headwinds in financial markets are certainly impacting climate investment in general, and as technology is the key driver for venture capital, headwinds are sure to spill over into other sectors as well.
Rajesh Swaminathan: No sector in the startup world can be recession proof as the source of capital from LPs slows down if the public stock markets take a hit for a long time. In this environment, we need to think more about how to deploy the right capital for climate technology. We should also use what we have learned from cleantech 1.0.
That said, there is now a strong sense of urgency around climate risks. Climate technology is getting pledges from LPs, governments, family offices, asset managers and corporations, and many new VC funds have entered the market over the past year.
The sector, with the exception of solar and perhaps lithium-ion batteries, is still early and in a different league from SaaS, which has enjoyed huge valuations in both the public and private markets over the past decade.
The solutions we need to deploy, the pace at which we need to move, the broad range of technologies we need to mitigate risk, and the “instigators” we need to support, all provide compelling tailwinds for climate investment, despite the broader market challenges.
Andrew Beebe: Like all things, the climate is cyclical – but it is on a geological cycle. The climate doesn’t stop changing just because of a recession. This means that the need for solutions will only increase.
That said, we expect valuations to fall from the 2021 highs, and we don’t expect some of the more fantastic tech to fall. So while demand continues, there will of course be casualties.
Many investors advise their companies to save cash, delay hiring, and so on. What are you telling your climate technology portfolio companies right now?
Pae Wu: Focus on a sustainable business – get to the basics. you can’t buy your way to scale now. We’re thinking more and more about capex efficiency and green premiums are just not on the table.
Amy Burr: Most of our sustainable portfolio companies have recently raised significant amounts and are in excellent shape or are now increasing. That said, everyone is aware of the potential for an economic downturn and what that could mean for their individual businesses. All startups are smart about making sure they make wise choices with their money.
Christian Garcia: It’s important for businesses to survive this downturn, so it’s important to conserve cash. As such, we’ve guided companies to extend the runway as much as possible without sacrificing major milestones. That said, in “hard tech” you can’t easily cut corners without sacrificing technical progress and milestones. It is important to demonstrate commercial viability and to be able to finance your roadmap.
Rajesh Swaminathan: One size isn’t for everyone: Climate tech companies are different from most other VC investments in some ways. Together with our founders, we focus on several key areas.