360 views on tech #50: Eight lessons from the first climate tech boom and bust

Published in

360 Capital

Sent as a

Newsletter

7 min readJan 10, 2023

👋 Hi there and happy new year ! This is the 50th edition of 360 views on tech, a weekly newsletter curating the most insightful news of the week and putting to the fore the latest trends.

🍕 Food for thought

Eight lessons from the first climate tech boom and bust

by Christopher Wan, Madeline Shue, Aia Sarycheva and Sakib Dadi — Bessemer Venture Partners

The need for climate tech investment has accelerated due to the European energy crisis, fueled by dependence on Russian oil and gas, and amplified by climate change.

Such surges might trigger flashbacks of the CleanTech 1.0 boom and bust from 2006–2011, during which over 50% of the $25 billion invested by venture capital firms was lost by 2015.

The essential challenge remains — any VC fund looking into climate tech should evaluate how to concile its limited time horizons and specific return profiles. It’s only natural that all climate startups cannot meet this bar.

However, we believe it’s important to balance realism with enthusiasm. ClimateTech 2.0 offers new opportunities as it builds on energy innovations of CleanTech 1.0, such as solar and biofuels, and extends them to sectors like consumer goods, agriculture, and transportation.

Below are 8 lessons from Clean Tech 1.0 to shine light on Climate Tech 2.0 companies.

1. Avoid relying exclusively on altruism to scale

During CleanTech 1.0, what consumers cared about ultimately was price, which is why the broad commercialization of fracking in the mid-2000s took over clean energy solutions.

The best climate technology companies will provide solutions that are both greener and deliver ROI to customers, instead of relying on altruism.

Startups could either offer green products at the same price as traditional options, or provide additional benefits unrelated to the environment to justify a premium price. For ClimateTech 2.0, this applies to carbon credit companies.

2. Innovate on business model to tackle challenging sales motions

ClimateTech companies often face challenges when selling to slow-moving legacy industries. One solution is to innovate their business models to make it easy for customers to purchase or use their products.

CleanTech 1.0 case study: Solar

Residential rooftop solar provider SunRun succeeded through a business model innovation where customers had a clear incentive to switch to solar.

SunRun entered into power purchase agreements (PPAs) with customers: they purchased power from SunRun at a fixed rate which was lower than rates charged by utilities. Then, Sunrun would sell any excess energy to utilities.
SunRun also acquired debt from banks to fund solar panel installations, meaning customers did not need to pay for installation.

Regarding ClimateTech 2.0, there needs to be similar win-win business incentives for prospective customers as they take on edgy technology.

3. Leverage the regulatory environment as an advantageous tailwind

Government policies, including monetary levers like direct funding and tax credits, and non-monetary levers like carbon emissions restrictions, can play a central role in the success of climate startups, particularly in Europe given the current context with Russia.

While these policies can strengthen customer demand and help companies reach attractive unit economics, the companies that will ultimately succeed will be those that can achieve attractive unit economics at scale without relying on permanent government funding.

4 . Beware of supply chain shocks

Given the global scope of supply chains for renewable energy assets, climate companies are particularly sensitive to exogenous events or actors that fundamentally change the nature of the supply chain.

CleanTech 1.0 solar panel companies attempted to innovate by using alternative materials due to the high cost of silicon. However, they ultimately failed because the price of silicon decreased due to the influx of inexpensive Chinese solar panels on the market.

ClimateTech 2.0 case study: Rare earth metals

Today, we still need to be cautious of companies relying on supply chain trends. For example, China dominates the supply chain for rare earth metals, used in climate technology such as batteries. Some battery and electric vehicle manufacturers have tried to reduce their dependence on Chinese cobalt by turning to nickel. But Chinese companies have started investing in nickel as well.

This is not about throwing hands up in frustration, but rather having contingency plans, especially in the absence of internal or domestic production capabilities — using software with predictive models for instance.

5 . Invest in engineering problems, not science experiments

One primary difficulty with venture investing in climate tech is that we need to invest in companies building products that actually work, both from a technological and economic standpoint.

This is why strong ties between universities with corporations, venture capital and other financing prepares a smooth transition from innovative technologies to business needs.

🔴🟠🟡 At 360 Capital, we bridge this gap thanks to our partnership with Politecnico di Milano where we invest in promising technical projects. Our recent investment in Energy Dome solves the engineering problem of renewable energy storage by using CO2 against climate change.

💡6. Be wary of long investment horizons and financing risk at each stage of the company’s lifecycle

Climate tech companies often have longer return profiles than traditional VC-backed companies and must raise capital at various stages, from R&D to pilot to development to deployment.

CleanTech 1.0 case study

Analysis has shown that failed CleanTech 1.0 companies were unable to successfully transition from the pilot phase to the development phase, a crucial juncture that determines the injection of growth capital.

In contrast, successful CleanTech 1.0 companies were able to secure additional financing throughout their development, with revenues typically surging between the Series B and C stages. Keep in mind these companies took an average of 11 years to IPO, and required over $1 billion in funding across their lifetimes.

Zooming out, investing in climate requires both an abundance of patient capital and a clear path to exit. One reason the CleanTech 1.0 bubble burst was due to a lack of late-stage equity financing to fund exits.

ClimateTech 2.0 case study

Today, the financing risk for climate companies is not as pronounced as it was 15 years ago. What’s essential is to think critically about what sort of capital is necessary for different stages of development, amidst growing options for energy startups: grants, business angels, accelerator programs, and venture capital for companies who have demonstrated some early scale through pilots or traction.

The current exit path is also supported by greater involvement from strategics in climate startup investing to meet their own decarbonization goals. These initial bets may eventually lead to acquisitions as these startups mature.

7. Opportunities for better data as IoT and robotic technologies move down the cost curve

Better data will be essential in meeting environmental, social, and governance (ESG) goals, improving automation and efficiency, and generating new revenue streams. ClimateTech 2.0 offers new opportunities for companies that can effectively leverage cheap IoT sensors, robotics hardware and applications of AI/ML in the pursuit of simultaneous decarbonization and industrial process automation and efficiency.

ClimateTech 2.0: Maturation of IoT and robotics technologies unlocks opportunities for decarbonization across industrial verticals

Today, robotics equipment and sensors have become cheaper and manufacturing barriers have decreased, making it more cost-effective to manufacture hardware.

Just as importantly, industrial IoT companies have adopted successful SaaS business models by offering hardware-as-a-service with data monetization. This allows them to transform capital expenditures to operating expenditures, and many can achieve margins of 50% or higher with sustainable, recurring revenue streams as they scale.

💡 8 . Drive value through software that facilitates the deployment and operations of renewable energy assets

CleanTech 1.0 focused on the development and early commercialization of technologies in the energy generation, storage, and efficiency space. While many of these were focused on hardware, some of the most successful companies in this period were software-focused, providing insights and encouraging climate-conscious actions.

ClimateTech 2.0 case study: A climate software startup boom

While deep climate tech will continue to be a key area of focus for ClimateTech 2.0, we’re equally excited about opportunities for software to measure and mitigate emissions, facilitate carbon trading, and manage the growing array of renewable energy assets.

We believe that the next wave of software companies will find success in concentrating on a sectoral basis, tackling hard-to-measure and hard-to-decarbonize sectors, such as industrials and transportation.

Just as vertical software companies succeeded by bringing expertise and targeted solutions to specific sectors, vertical climate software companies will provide industry knowledge, sector-specific data moats, and product layering to build full-stack solutions for emissions and energy matters involving different industries.