[Podcast] How to Pick Climate Tech Winners
This podcast wrap-up will be quite different. Usually, our episodes are about some technical topic where we can opine with some degree of confidence. However, it’s difficult to write something generalized about venture investing because it can be so qualitative and subjective, plus different VCs find success with a variety of approaches. So instead of claiming that this is the “right way” to do climate tech, I’ll simply highlight what we found interesting about Brooke Porter’s approach at his firm G2VP.
This post is part of a Climate Now podcast series on the intersection of transportation and energy. I encourage you to listen to the full episodes yourself, as well as Climate Now’s other content. It’s chock full of science and data and nitty gritty stuff that often gets glossed over.
The importance of Wright’s Law.
This theory holds that for every doubling of units manufactured, the cost decreases by a constant percentage. The solar industry’s version of this is Swanson’s Law, which empirically has the cost of solar decreasing 20% for every doubling of capacity. Brooke pointed out that successful climate tech companies tended to ride this curve instead of competing against it. For instance, Tesla focused on a modular lithium ion battery cell that was already manufactured at scale for laptops, and then scaled it by a mind-boggling multiple. On the flip side, the newfangled solar companies from the first cleantech wave tried and failed to substitute proven silicon wafer manufacturing with their new chemistries and processes.
Investment filters
G2VP invests in growth stage companies, so unit economics is key. They also focus on products will are likely to be commercialized in a reasonable timeframe, say the next five years. As a result of this approach, Brooke claims that 80% of their investments return initial capital or more, while 20% will not. Although the returns of an individual investment may not be as outsized as those of a more speculative VC, this batting average results in fund performance which can stand its ground when compared to any generalist venture fund.
Old ideas + new environment = promise
This is something I learned during my time at Schmidt Futures — truly novel ideas are exceedingly rare. Most of the time, an idea has been tried in the past, but there is a new trend or capability that finally makes the idea practical. The classic example is AI — today we are largely using derivatives of techniques devised in the 1980s, but the combination of computing power and massive datasets generated at the turn of this century finally made these techniques powerful.
In the climate tech space, Brooke raised the example of Pivot Bio, which tweaks microbes to better fixate atmospheric nitrogen into usable fertilizer forms. The rise of synthetic biology tools made this approach feasible only recently.
How to pick the winners
Get the trend right, figure out early applications that make sense, then pick the winner in this category. In the case of autonomous vehicles, G2VP could see there was inexorable momentum, but focused on highway driving as the most likely early application. Because of higher speeds on highways, lidar solutions for this purpose would need to be designed to see further than conventional lidar at the time. They then vetted dozens of companies before landing on Luminar.
Great entrepreneurs look around the corner
In Brooke’s view, Tesla is a market leader not because it developed a desirable electric car, but because Elon Musk anticipated the need to build out the ecosystem around the vehicle. This includes over-the-air updates (which enables faster iteration cycles), the Supercharger network (which creates peace of mind for the customer and a moat for the brand), and the direct-to-consumer model (which enables Tesla learn more from their customers — although some might argue about how receptive they are to customer quality complaints). Other OEMs are all still struggling to implement all three of these innovations.
Any other EV startups that aim to compete meaningfully with Tesla need to find similar innovations. For example, Rivian’s approach to scale their charging business line relies heavily on cultivating anchor demand from the Amazon delivery vans.
