An overlooked economic opportunity: missing the case for climate tech

By Alicia Hernández & Fernando Lelo de Larrea

Artificial intelligence is capturing the attention, enthusiasm, and commitment from the venture capital world. Amateurs and seized investors alike are mesmerized by the exciting promise of an unknown, more comfortable world, supported by free, human-life intelligence. We are all attracted to these futures, these sci-fi-like utopias that make life easier, free of friction, discomfort, and struggle. More so if it is accompanied by drama, larger-than-life characters, and speculation. Yet our biggest challenges are not solved through the “globalization of comfort”, but through the most human features of our unique intelligence: “dispassionate, deliberative thought grounded in ethical commitment and responsible action”, citing Brian Cantwell Smith, author of “The Promise of Artificial Intelligence”.

Climate change, deforestation, habitat loss, plastic pollution, water scarcity, air pollution, and the loss of biodiversity are just some examples of the issues urgently demanding solutions, which, more often than not, will not be completely appetizing short-term economic opportunities. Our experience in the startup and venture capital ecosystem has taught us an important lesson: the solutions we need for the climate crisis, the startups that our planet is in desperate need of, and the entrepreneurs that will lead the decarbonization pathway, will often be disregarded in favor of more “appealing” business models. From novel apps that use AI to facilitate daily functions to innovative online marketplaces for goods and services, these sexy, “feel good” solutions are more attractive than climate technologies to both entrepreneurs and investors. It is no secret that in 2023, funding for climate tech start-ups decreased to levels last seen five years earlier (PwC, 2023), demonstrating the constant hesitancy of investors in this sector.

However, the climate crisis at hand requires that we invest in what is indispensable, rather than what is appetizing. According to data from the Net Zero Economic Index, “the world achieved a decarbonisation rate of just 2.5% in 2022, which means a year-on-year decarbonisation rate of 17.2% is now required to limit average global warming to 1.5°C above pre-industrial levels”. That’s seven times faster than at present. At Rumbo Ventures we are deeply convinced that climate-tech is just as appealing, if not more, than other technologies. Investing in climate technology represents a triple bottom line for growth: for the planet, people, and profit. Recently, Bloomberg NEF reported that the transition to a net-zero emissions world opens up an investment opportunity that totals almost $200 trillion by 2050 — or nearly $7 trillion a year.

Here is our attempt to push this narrative forward and make sure that investors and entrepreneurs are both aligned in prioritizing startups that are not only good for the planet, but also represent an unprecedented economic boom.

What makes other endeavors more attractive than navigating the challenges of the climate-tech sector?

We can start by defining the common obstacles that investors and entrepreneurs see in climate tech. The issue is clear, though: we are missing the case for both investing and scaling climate technologies. There are certain conditions that make climate tech less obvious than other technologies like fintech, edtech, and other more conventional business models, leading us to let a major economic and environmental boom fall through the cracks. CTVC wrote a recent article that summarized this comparison: “In addition to crossing a valley of death when getting ready to raise their first round, startups building in essential industries such as energy, water, agriculture, mobility, and waste have more valleys of death greeting them down the road than a typical SaaS startup” (CTVC, 2022). These challenges are not simple tasks to tackle:

Long-term horizons

VC funds are usually torn between the extended development timelines of these solutions and the demand for quicker returns. Climate tech ventures often require substantial time and resources, leading investors to favor shorter-term opportunities. From the entrepreneur’s perspective, it can be difficult to embrace patient capital in the climate-tech sector, understanding that it is not just an investment of time and resources in groundbreaking projects, but a commitment to develop a sustainable and resilient future.

High upfront costs

Navigating the landscape of climate technology also involves dealing with the formidable challenge of high upfront costs, posing a shared hurdle for both investors and entrepreneurs. For entrepreneurs, securing the necessary capital to fund research, development, and initial deployment can be daunting, especially when compared to more traditional sectors. The extended timeframes for technology maturation and market adoption further compound the financial strain. Simultaneously, investors face the risk of prolonged returns on investment and uncertainty surrounding regulatory frameworks, deterring some from committing to the patient capital required in the climate tech space. In the end, the key to bridging this gap can be in deploying innovative financing models, risk-sharing mechanisms, and collaborative efforts to create a conducive environment for such impactful solutions to thrive and flourish.

Market competition

Market competition in the climate tech sector also presents a dual challenge for both investors and entrepreneurs. Entrepreneurs can find a competitive landscape where breakthrough innovations vie for attention and adoption, requiring substantial effort and resources to really make their solution stand out against others. This heightened competition can challenge the rapid market penetration needed for financial viability. On the investor side, selecting promising ventures amid a crowded field demands astute decision-making, as backing the right technologies is pivotal for success. Additionally, the emerging nature of some climate tech markets means that predicting winners and losers is inherently challenging, posing risks for investors seeking returns within shorter timeframes. And let’s not ignore that many investing teams also face the lack of technical profiles in their team, which increases hesitancy about “unknown” technologies to even higher levels.

Technological risks of developing and scaling new climate technologies

The next challenge comes with inherent technological risks, posing a shared obstacle for both investors and entrepreneurs. Entrepreneurs face the complexities of pioneering untested solutions, encountering technical hurdles, and dealing with uncertainties in the scalability of their innovations. The longer development cycles characteristic of climate tech amplify these troubles. For investors, the risk of technological setbacks or unforeseen obstacles in the deployment phase can translate into delayed returns and heightened uncertainty. Successfully managing technological risks demands a commitment to rigorous research and development, strategic partnerships, and a willingness to weather the uncertainties intrinsic to cutting-edge innovation. Once again, for entrepreneurs, finding the resources for such endeavors can be paramount.

So, should we just give up and stop investing in climate technologies? Is there even a business opportunity?

We absolutely cannot. From IEA research, we know that most of the reductions in CO2 emissions through 2030 come from technologies already on the market today. But in 2050, almost half the reductions come from technologies that are currently at the demonstration or prototype phase. Major innovation efforts must take place this decade in order to bring these new technologies to market in time. (IEA, 2021).

While the investment landscape in this field may present numerous challenges, entrepreneurs and investors should not be discouraged. Instead, they should recognize that climate tech presents a tremendous economic and environmental opportunity. While the high upfront costs, fierce market competition, and technological risks may initially appear as barriers, they should be seen as catalysts for innovation and transformative change. Investing in climate tech not only aligns with the global call for urgent action but also represents a compelling economic opportunity:

• Global demand and market opportunities: The escalating global demand for sustainable solutions to address climate change creates expansive market opportunities for climate technologies. In terms of investing, McKinsey reports that from 2019 until the end of 2022, private-market equity investors launched more than 330 new ESG and impact funds, with the cumulative assets under management in these funds growing 3x, from $90 billion to more than $270 billion. In addition, the same source reports that, over the last two years, there has been a remarkable increase in the number of companies committing to science-based targets, surging more than fourfold and reaching nearly 2,000 by 2022. Also, 140 countries have either proposed or established net-zero targets, collectively covering almost 90 percent of global emissions (UN Net Zero Coalition). The growth and appetite for climate-tech is clearer than ever.
• Policy and regulatory drivers: Government policies and regulations that incentivize the development and adoption of climate technologies play a pivotal role in fostering a conducive environment for businesses in this sector. The U.S. has led efforts by signing into law very large investments in climate action, including more than $50 billion in climate resilience, through initiatives such as the IRA (White House, 2023). European countries are in a similar position and we can also see how Latin America is also starting to grow in terms of incentives for issues such as e-mobility.
• Innovation and job creation: The necessity for continuous innovation to transition to a low-carbon economy propels research and development in climate tech. This innovation, coupled with the need for sustainable solutions, not only drives economic growth but also fosters job creation across various industries, contributing significantly to the economic boom. According to LinkedIn’s 2023 Global Green Skills Report, between 2022 and 2023, the share of green talent in the workforce rose by a median of 12.3% while the share of job postings requiring at least one green skill grew twice as quickly — by a median of 22.4%. In addition, the share of auto workers with EV skills (a subset of green skills) rose by a median of 61% between 2018 and 2023.
• Global investments and financing: There is a growing recognition among investors that climate tech offers attractive long-term investment opportunities. Consequently, there has been a surge in funds dedicated to climate-related projects, creating a substantial pool of capital to support the growth of the sector.

A call to action

Okay, here’s to hoping that as an investor or an aspiring entrepreneur, you feel more encouraged about the opportunity that the net zero transition represents. We are not only talking about environmental and social benefits, as in reality, it represents an economic opportunity previously unseen at this scale. To better act on it, there are some things that we can start with as investors, and key players in the field:

• Learn and educate as a team: One thing that we have embraced at Rumbo is the constant pursuit of knowledge. Learning reduces fear of the unknown, it gives context to the many meetings that we have with awesome entrepreneurs and their cutting-edge proposals. Staying informed about climate tech trends, regulations, and emerging opportunities is crucial for making informed investment decisions, and to make sure that we are not swaying away from the path to net zero.
• Diversify portfolios: Diversification is a critical strategy to de-risk climate-tech funds, providing a means to navigate the inherent uncertainties and risks. When we diversify across various sub-sectors and technologies, we can spread risk and enhance the resilience of our investments. Different facets of the climate tech sector, such as renewable energy, carbon capture, sustainable agriculture, and nature-based solutions, offer unique opportunities and face distinct challenges. Investing in a range of these solutions allows for a strategic balance between high-risk, high-reward endeavors and more stable, quicker-return investments. This also requires that our deal flow is representative of diverse technologies and that we avoid feeling seduced by more of the same or more of what every other fund is investing in.
• Embrace a long-term perspective: The transformative nature of these technologies often requires extended timelines for development, market adoption, and ultimately, returns. As much as we accept the urgency of climate technologies, we also need to embrace this fact. Understanding that the impact of climate tech solutions may unfold over years rather than quarters is fundamental. A patient approach is not merely a strategic choice but a recognition of the profound, lasting changes these investments can bring to both the environment and the economy. While the allure of quicker returns in other sectors may be tempting, acknowledging the unique dynamics of the climate tech sector highlights the potential for substantial rewards over the long haul.
• Provide the support that startups really need: Climate companies are facing unique financial needs, and their deeptech & hardware components require alternative & complementary solutions. From providing SPVs and helping startups build their ecosystems in early stages, to leading project finance and private equity rounds in late stages, VC funds need to become more flexible in order to be the investors that startups really need. At Rumbo Ventures we are developing the capabilities and liaisons to support companies with all their climate finance needs.

In conclusion, despite challenges like long-term horizons, high upfront costs, market competition, and technological risks, investing in climate tech is a transformative opportunity for both investors and entrepreneurs. By acknowledging the urgent need for action, embracing a long-term view, and diversifying portfolios, we can not only navigate but also take advantage of these complexities. At Rumbo Ventures we believe that these challenges should be catalysts for innovation, not barriers. Let’s prioritize investments that contribute to a resilient future, recognizing that the net-zero transition is not just an environmental and social imperative but an unprecedented economic boom.