Part 2: How to Organise to Invest: Partner Smart and Skill-up Right
The Why and How of Venture Investing in Climate Tech
In part 1 of this Essay, we spoke about the importance and challenges of Venture investing in Climate tech. We will now attempt to share some ideas on how a Venture firm can configure itself differently. Accel Partners uses the term “Prepared Mind” for its thesis-based approach to investing. Think about our thoughts below as a “Prepared Org” view for a VC firm investing in climate tech. In this part 2, we cover the theme of collaborations and end with 4 broad-brush strategic thoughts to consider.
A) Collaborate in many ways, some old, some new:
“If you want to go fast, go alone, if you want to go far, go together” — African proverb
- Partnerships for expertise:
Our taxonomy of the climate tech space has about 600 line items. That may mean as many as a few thousand technology ideas — not to speak of a much larger number of specific technology innovations which may need specific expertise. The head hurts already ;)
The good news is there are many organisations — think tanks or incubators/accelerators — who offer their expertise, with kindness and fairness. Some names include Rocky Mountain Institute, World Resources Institute, Good Food Institute, International Solar Alliance, Third Derivative, Elemental Excelerator, Indiebio, and many more. Many academic institutions have units focusing on climate-positive efforts.
It would be imperative to find your own kind of partnerships that enable regular learning, investment assessment, and portfolio support. Let us find those giants and stand on their proverbial shoulders!
2. Partnerships with engaged corporates and corporate VCs:
Much of climate tech is about B2B solutions. Many large corporates will play a pivotal eco-system enabler role and in parallel travel their own net-zero journeys. Those net-zero journeys will need the innovation muscle of start-ups. Corporates will have deep relevance to start-ups in many ways — early customers and design partners, pilot implementations, partners in capital deployment, mentoring and expertise for scale-up, and potential acquirers.
VC firms would do well to catalyse these synergies for their portfolio by working closely with like-minded corporates and establishing mutual wins. This could take the form of inked MOUs, bringing them in as LPs, loose alliances, demo days. Many Corporates have VC arms, with a deep focus on climate-positive investing and collaboration, those could be natural partners.
As a reference point, Energy Impact Partners does growth stage investing, with corporate engagement being at the core of their approach.
3. Inter-firm partnerships — need for public goods:
If ever there was a need for natural adversaries to collaborate deeply, it is in climate-positive efforts. It is obvious, that many times individual firms won’t be able to create assets that they need to move fast, and have a higher impact. We present here some obvious and some controversial ideas for joint efforts or public goods:
Obvious topics. We just need to operationalise at pace:
- Regulatory/policy expertise and policy framing support
- Pooled together hardware accelerators, maker facilities, testing labs
- Industry-standard methodology of impact measurement
- Dramatic reduction in information asymmetry around a long list of topics — the how/what of grants, lists of topic experts, lists of amenable corporates, et al.
Not obvious, almost impossible. We take inspiration from the open source movement — Collaboration, Transparency and Freedom. Imagine a scenario where a VC firm open sources its evaluation methodology, its investment thesis, its beliefs and assumptions, its comprehensive risk/reward spreadsheets. And does this in a way, that other market players are free to not only use them, but build on top of those, improve and distribute freely, under a creative commons. Sounds crazy. Probably is. But you never know, maybe some other crazies get inspired and meet us midway :)
B) Here are 4 strategic thoughts to consider:
- Launch joint funds with the best in the world. There are many high-quality developed market climate funds. Partnerships with such funds could be a shot in the arm. It could be a mainstream fund doing a side vehicle in a partnership, it could be a team of new fund managers finding sponsorship from a global firm.
- Indian fund gets access to expertise, brand name legitimacy, global connects
- Global climate fund gets distribution in India rapidly, local connects, speed
We expect (and hope) at least 10 such funds will be set up in the next 18–24 months.
2. Pick specific areas to go deep: A t-strategy if you will, for investments that are more profound technology innovation led. Pick a couple of technology-driven segments to develop deep expertise. In all other areas, apply the follow-a-lead strategy — align with someone who gets it, let them lead the technical assessment, and invest alongside. Sometimes those lead investors could be much smaller funds but with focused expertise. There is a long list of specialist global investors, who are looking to invest in specific themes and are geography agnostic.
3. Build regulatory and policy expertise. Policy is a lot more integral to climate investing than general investing. Expertise in the full spectrum of policy thinking will be required — all the way from the impact of geo-political and macro forces, to on-ground implementation at the state level, to tax and rebate implications. Whether as a group of investors or individually or leveraging think tanks. Climate VCs also have the onus to shape the policy narrative, in a way that policy engages with and supports innovation. In our view, this is perhaps the number 1 “new” area to build organizational strength.
4. Before we go, one last (incendiary) thought: Need for a shift from transaction and momentum driven to much deeper fundamentals and research-driven investing (this may sound like a general rant, but it really isn’t, read on!). Given all of climate tech is nascent, it will have higher volatility. Small policy shifts, sudden openings in the market, and the possibility of a technology breakthrough — are all volatility triggers. Many such events may not play out on a secular basis over the longer term. The ability to distinguish — what is transient, what is the flavour of the season, what is on short-term artificial steroids vs. what are secular, genuine tail-winds, which technology solution has longer-stronger legs, what will be the shape of the market 5–10 years forward — this ability will require fundamental thinking across multi-domain problems and system thinking. This ability will also give the biggest boldest wins.
Climate tech investing will need VC firms to be imagined differently, with a different set of skills, and capabilities, whether inside or through partnerships. The worst you can do is to continue with the status quo. And the best arguably, is to chart a new path, deliberately and relentlessly. While only a few of the ideas above are intended to be prescriptive, our hope is that all of them serve as thought starters and ignite more discussions.
Part 3 of this Essay will focus on climate tech financing, and speak to the challenges, opportunities, and ideas on how to organise to overcome some of the challenges.
