[Climate Tech Series #1] Introduction to Climate Tech

Published in

Eurazeo

14 min readAug 30, 2023

✍️ At Eurazeo, we’ve been committed on Climate for many years. We are one of the only players in the Private Equity & VC space who has committed to achieve zero net carbon by 2040, in alignment with the Science Based Targets initiative.

On the investment side, we have been investing in Climate for more than 10 years, especially through our Venture and Growth practices. We have been able to see the ups and downs and the recent tremendous growth of the space.

In the last few years, we have entered a new era for Climate tech: the rising awareness around climate change, the government support and the better clarity we have on the new emerging opportunities have spurred a wave of investments into the venture capital markets. We share with you today our understanding, learnings, and vision on this as-hype-as-important investments sector.

We have written a series of six articles on the following topics :

✅ Introduction to Climate Tech (this article)

➡ Renewable energy deployment

➡ Smart Grids

➡ Electrification of Mobility

➡ Carbon markets

➡ Carbon capture

Wishing you an insightful reading,

Raphaël Cattan, Alexandre Dewez, Maryam Mahla, Charlotte Pratt & Henri Courdent.

PS: You are a climate company at Seed or Series A, operating in Europe and curious about how Eurazeo can help you ? Please reach out on Linkedin or drop us an email at rcattan@eurazeo.com, adewez@eurazeo.com or mmahla@eurazeo.com

📌 Defining Climate Tech

2022 was a tough year for venture capital, with Q3 global funding decreasing by 53% yoy. But in the midst of this gloomy outlook, climate remains a silver lining: **1 in 4 dollars of VC funds** deployed in 2022 went to Climate Tech, with an increasing number of dedicated funds and new GPs investing in the space.

This growth is timely and much needed: The Intergovernmental Panel on Climate Change (IPCC, or GIEC for French readers) recommends that at least investments in climate action should be multiplied by a factor of 3 to 6 annually to limit global warming to 1.5°C. This means that investments in climate transition should increase to about 2.2–4.5 trillion per year by 2030. **This represents a huge opportunity for private investors and entrepreneurs willing to contribute to the effort and seize the opportunity.

But what does Climate Tech exactly mean ?

If one refers to its strict definition, Climate Tech is understood as technologies that are explicitly focused on reducing GHG emissions, or addressing the impacts of global warming :

directly mitigate or remove emissions
help us to adapt to the impacts of climate change
enhance our understanding of the climate

Climate Tech is therefore very heterogeneous: it addresses various technologies, a large variety of sectors (primarily those who are the most carbon emissive today such as Energy, Mobility, Food, the Built Environment, New Materials and Industrials), of business models and of types of companies, from deep tech to software and tech-enabled models. It also encompasses companies which scale of impact is very different: carbon management softwares, charging stations and green cement don’t have the same scale, ambition and timing of impact.

📌 Overview of Climate Tech activity

A couple of numbers to summarize the growth of this trend in the last few years:

Inflow of liquidity: +$40bn have been invested in 2022 worldwide, only a 3% decrease compared to 2021 despite market slowdowns and 28% of the total VC investment for the same period. The decrease is mainly due to Growth deals while early stage activities are on a positive dynamics.
Fast growth: If the amounts invested haven’t changed much, the number of deals have gone from 600 to 1000 according to CTVC.
A healthy ecosystem: Climate Tech count both a high capillarity of investments and a high rate of new company creations (Seed & Series A deals accounted for 60% of all deal count in Q4 21) but an ability finance companies as they mature. A big number of Climate Growth funds (Lightrock, General Atlantic) have been raised in the last few years and still have dry powder to invest.
Building on the shoulders of giants: Climate Tech did not start in 2020 and there are already more than 50 climate unicorns spread across countries and sectors. From Enphase, Sunrun and Sonnen in the solar space to Sunfire in hydrogen and Northvolt in batteries, previous successes are building a factory for talents with strong sectoral expertise.
U.S. are leading the way but Europe is attractive: a majority of Climate Tech funding is going to the U.S. while Europe is performing better than Asia in this regard. The $391bn Inflation Reduction Act (IRA) should accelerate U.S. VC investments but American funds investing in European Climate Tech testifies of the breadth and quality of the opportunities in Europe.

📌 Why is 2022s’ Climate Tech different from 2000s’ Cleantech ?

From 2006 onwards, Cleantech experienced a first boom that ended in a big failure. Between 2006 to 2008, $25b were invested and recorded a 50% net loss (Cambridge Associates). For example, Solyndra, a high-flying start-up manufacturing cylindrical solar tubes, had received $500 million in federal loan guarantees but filed for bankruptcy in 2012. Without taking into account the acquisition of Nest by Google, the net IRR is estimated between -25% and -50% for cleantech investments.

Among cleantech investments, those on materials and hardware performed the worst, leading investors to turn to software : while software accounted for 20% of investment in 2006, it represented more than 55% in 2014 (the remaining 45% being equally split between Hardware and Material/Chemical) (MIT Energy Initiative).

Are today’s conditions different ? We think so but that does not mean risks have disappeared. We’ve summarized in the table below the reasons for Cleantech’s failure and assessed the current environment.

We think we are today strong in terms of technology readyness, availability of capital and awareness for the need and pace of change is now much higher.

Sustainability is now top of mind for consumer and in board rooms. However, it does not mean economic rationale have disappeared. Climate solutions can be more expensive or must-have if regulations impose it, but they must be on cost parity or better than existing solutions for the rest of the market.
Climate Tech also encompasses a much broader scope than Cleantech. Whereas cleantech were mostly focused on new technologies development, many Climate companies using on-the-shelf technologies built in the last 20 years that is productivized into a business model ready to scale.

We’re however still careful about

the risk/rewards ration in capital intensive businesses where the investment horizon can be long, the cycle of financing is still not complete at every step of the journey and where delays on the revenue line can have strong impact on cash
Companies that rely too much on a potential ability to charge a “green premium” or expensive carbon credits spending to reach positive unit economics
Sensitivity to supply chains risks, especially on topics such as batteries, EV, ebikes, rare earth metals and chemicals.
Valuations at entry vs. exits in EBITDA multiples by strategic acquirers.

📌 Climate Tech: 4 layers of heterogeneity

1. Sectors — Heterogeneity in Climate Tech sector’s maturity and liquidity.

Climate tech covers a variety of sectors with heterogenous in the maturity and liquidity of sectors. Looking at Climate-tech sectors breakdown by investment stage (CTVC), not all sectors have the same maturity and their access to liquidity evolves over time.

While few years ago transport was clearly dominating, mobility is not the main climate vertical anymore with new areas emerging in the climate space. In particular, sectors associated with high consumption or issuance CO2 such as energy, industry and the built environment are peaking up. They’re however still lagging way behind in terms of funding dynamics as investors remain cautious on these sectors which are probably the hardest to disrupt for new entrants.
Energy has seen a significant uptake since Q4 2021, driven by mega rounds for nuclear fusion companies in the US.
Carbon and climate management have become hype with a boom in 2022, especially with the rise of big rounds for carbon accounting and offsetting solutions. Yet R&D-based technology such as carbon capture remains an early- stage activity with Seed & Series A share of investments accounting for 75% of deal count.
Growth stage funds are also pouring money in the most mature sectors such as Transportation and Energy, where late stage deals (Series B+) make up 40% of deal count activity. As perspectives for micro-mobility and electric vehicles markets become clear, VC money is pouring in at significant levels.

2. Impact — Heterogeneity in Climate Tech technology’s impact and adoption

Climate tech relies on technology and innovations which adoption at scale will help reducing significantly greenhouses gaz (GhG) emissions. However, not all Climate Tech’s companies are equal in impact. PwC estimates that technologies addressing 85% of CO2 emissions receive only 52% of funding deployed between Q3 2021 and Q3 2022.

Before blaming the finance industry for this gap, one might ask whose responsibility it is to develop the technologies with the highest emissions reduction potential, and what incentives are in place for the private sectors.

Also, the differences in impact between different investments can be measured in several ways:

By potential of reduction of CO2 emissions: while solar power, wind power, carbon sequestration in agriculture and preservation of forests can reduce the equivalence of more than 3 Giga tone of Co2 per year, contribution of geothermal and biofuels use in Transport would be below 1 giga tone (IPCC 2022).
By efficiency: If technologies above are all viables, they do not benefit from the same cost of production, implementation, and adoption. For instance, sequestrating carbon in agriculture would cost more than $100/ ton of CO2 reduced. On the other hand, solar panel technology shows the greatest ROI with the ability to contribute to reducing CO2 emissions by 7 Gt by 2030, including 2.5 Gt < 20 USD per ton.
By time: finding solutions to reduce CO2 emissions now has more value than in ten years from now, even if this at a lower scale today.
By context: depending on where they are used and what they replace, not all technologies have an equal impact. Buying a 2-ton Tesla in China or Germany and charging it on the grid where electricity is coming from carbonized source of energy have a less impact on carbon (but will nevertheless improve air quality in cities). In the same way, installing solar panels in France or Sweden is much less impactful than in Germany because the grid is less carbonated in the formers than in the later.

3. Models — Heterogeneity in Climate Tech model’s design

Climate Tech is an investment trend, but it gathers under its umbrella very different businesses: software companies providing strong UX and fluid workflows; tech-enabled operations focus on deployment and roll out and industrial/deep tech companies solving complex engineering problems enabling them to access established distribution channels.

Software is usually seen as the typical use case for VC investments thanks to relative absence of technological risk, ability to grow quickly with to network effects, asset-light model, and high potential valuation even before profitability. Software are particularly useful in the climate space to provide users, whether B2C or B2B, actionable data to leverage and act on reducing or adapting to carbon emissions. Software plays are particularly interesting in the climate space to take long-term bets on a trend which is set to grow but for which market timing is still uncertain, as cash consumption can be better managed.

Our portfolio company Breezometer (software API providing accurate and real-time data on air quality — now part of Google) has focused on gathering large data sets and building extremely accurate measurements way before air quality was a priority topic, building strong barriers to entry and taking market leadership.

While software are usually necessary to provide insightful data points, they cannot alone solve the climate equation: they cannot accelerate market trends, solve operational bottlenecks and deploy tech solutions on a wide scale. Tech-enabled operations models are key to do that. Although they require strong management skills and important investments to reach scale, they can deploy faster than traditional players, get tech solutions directly in the hands of the customer because of their direct go-to-market and innovate on business models to unlock demand.

Our portfolio companies 1KOMMA5° (installer of solar panels, EV charging and heat pumps) has been extremely fast in taking market leadership just 1 year after its creation through a buy & build play, deploying its connected solar systems in thousands of homes

Deeptech or industrial companies are the ones turning a climate-friendly technology into a business. Deeptech involve a significant science/tech risk while industrial companies present more challenges on the industrialization and the scaling of their technologies. The breakthrough we need in the medium-term will come from these companies but VCs in Europe often lack the technical expertise to assess the tech risks and the opportunities of these companies. More money on deep tech and industrials is needed in Europe along the whole financing scale to generate a healthy ecosystem. Successful companies here must be able to be competitive based on pure economics rather than “green premium” and need to have a clear vision of their go-to-market to attract VC money.

Our portfolio companies Sunfire (electrolyzer for renewable hydrogen industrial projects) has since 2012 demonstrated progressively the efficiency and the economics of its technology while keeping its solutiosn modular to address as many use cases as possible

4. Applications — Heterogeneity in application’s market fit.

A good way for visualizing the discrepancies in level of market fit between various Climate Tech applications is to positon them on the Gartner Hype curve. For those not familiar with this curve, it is the graphic representation of the maturity lifecycle of new technologies and innovations divided into five phases: Innovation Trigger, Peak of Inflated Expectations, Trough of Disillusionment, Slope of Enlightenment, and Plateau of Productivity.

Please note this is our subjective version of the “Climate hype curve”. It is based on our vision of the level of market fit of most wide spread Climate Tech applications.

No matter the place on the curve, all are interesting investments form a VC perspective but you just need to keep in mind the differences in terms of level of competition (highest for peak part of the curve in terms of new actors), pace to commercialization (highest to the right part of the curve) and R&D importance (strongest in the left part of the curve).

We feel most VC plays have been done in car sharing, micro-mobility, wind and energy management. This does not mean nothing will happen in this space but that the potential for innovations in this space is more limited.
On the “slope of enlightenment”, we think after a first wave of innovation in the 2015–2017, the markets dynamics for solar and smart grids are now quite strong and market is mature. To do investments in the space, one must bet on aggressive growth and ability to take market share quickly to ride on the growth of the market.
The hype around sectors such as EV, charging or carbon accounting has been high in 2020 and 2021. There are some very good companies in the space but the market tend to become quite saturated while the timing and the size of these markets must not be overestimated.
On the other hand, topics which VCs had tend to avoid are now back on the map: carbon capture, nuclear, biofuels and modular construction are finding their way to VC money, including generalists VC.

📌 Drawing the map of climate tech investors

If climate tech is a heterogeneous sector, the nature of its investors is also very disparate. However, we can draw a typology and identify patterns in their investment thesis.

Generalists investors with or without a dedicated fund: traditional Venture Capital players may look to invest into Climate as they understand the significance of this opportunity. Some of them have raised a dedicated fund on this topic. Eurazeo has for instance a dedicated Smart City Fund for investments related to Energy, Mobility, Logistics, Building, Industrials & Climate.
Climate-only investors: these funds are dedicated to the climate. They have the right to look at all sectors, but the activity of their companies must have a positive impact on the climate.
Climate sector-specific investors: these investors are specialized in a single climate-related technology (energy, carbon removal).
Impact : impact funds commit to helping businesses creating positive social and/or environmental outcomes. They have a double bottom line approach.
Deeptech : deep-tech investors are naturally looking at climate technology as they are usually hardware & innovation intensive.

We have drawn a non-exhaustive mapping of European and French funds that invest in the climate :

As suggested by CTVC, the role of specialized climate funds is vital for the ecosystem as it is upstream. Specialized funds therefore play a particularly necessary role as first believers in this category where R&D and time to market can be long. For example, 55% of investors in the nascent Carbon category (CO2 capture & removal) are climate-only funds.

Downstream, generalist funds make the model sustainable and deploy significant resources for the growth stages.

📌 Eurazeo Venture and Growth’s track record on Climate

At Eurazeo, we have been investing in Climate since 2012 and are very bullish on this trend. We believe that start up have an edge for tackling the Climate challenge thanks to their ability to innovate, deploy new solutions at scale and fast, and show impressive velocity in the execution that will be key for adoption of greener models and assets in our economy.

Both our Venture and Growth teams are investigating the space from Seed to pre-IPO, particularly our Smart City Fund dedicated to the strongest emitting sectors such as Energy, Mobility, Logistics, Building and Industrial Tech.

Here are some examples of nice success stories that we have backed at Eurazeo