Climatetech & Fintech: Converging into the 2020s
Authored by Picus Capital x FinTech Collective
In this article, we are defining “climatetech” as technology solutions across software and hardware applications with the goal of emitting less GreenHouse Gases (GHGs), removing GHGs emitted, avoiding emissions with offsets, and/or better understanding existing emission profiles via reporting and new data sets.
The “inconvenient truth” for climatetech investors is clear: historically, businesses promising advances in diminishing humanity’s ecological footprint have been about access to hardware products, with investors deeming them as capital-intensive relative to typical VC-favored capital-light business models. As shown below, climate ventures received growing amounts of VC funding from 2006 to 2008, dropping following the 2008 financial crisis but overall, continuing to climb back up until 2011. During the “cleantech 1.0” era, as the initial investment boom between 2006 and 2011 became known, venture funds committed more than $25b to climatetech companies. However, after many regulations and business models did not evolve as widely expected, the value of the previously invested capital into climatetech companies was reduced to half by 2011, with the biggest losers being hardware-first and materials businesses. This boom-bust cycle sowed mistrust toward the space in the minds of some investors and resulted in a slowdown of venture investment in the years following 2011.
The past five years have told a different, more promising story. A combination of regulatory tailwinds and a renewed sense of global urgency have led to the biggest influx of private capital yet — VC investment more than doubled between 2017 and 2018, reaching an all-time high of more than $50B in 2021. In contrast to the cleantech 1.0 environment, much of the infrastructure that climate solutions rely on from a hardware perspective has been built by now: renewable energy products, Electric Vehicles (EVs), desalination solutions, among many others are lower in cost and more prevalent than ever. In addition, software technologies are now key in enabling the creation and scale of decarbonization solutions.
Throughout the evolution of this new environment, the fintech aspect of climate technology has come to the forefront: when looking at the outperforming business models in climatetech historically, the winners share a common theme — each of them was able to tackle the “capital question” efficiently to become massively successful and impactful companies. In Germany, D2C Enpal was able to leverage an innovative capital solution to provide solar components to consumers via a subscription model, powering more than 30,000 homes and achieving a $2.4b valuation this year. In the US, Aurora Solar provides aerial imaging of locations for solar renewable projects, integrating sales automation workflows and generating value by enabling solar developers to finance projects more accurately.
With this in mind, climatetech and fintech will undoubtedly continue to be intertwined in the near future, and there exists significant opportunity in capital-light fintech solutions that can help tackle the operations of existing infrastructure to create efficiencies in payments, capital formation, asset management and insurance. We have seen — and expect to continue to see — several promising business models at this intersection, especially in the built environment and electric mobility infrastructure spaces, both of which will be further analyzed below.
With the continued worsening of global warming, there has been increased awareness around the carbon footprint of physical assets, and the Inflation Reduction Act (IRA) includes a significant amount of funding for renewable energy resource development and tax cuts for building retrofits and replacements. Fintech startups can play a unique role in enabling developers to utilize these incentives efficiently and procure the capital necessary to accelerate the transition to more environmentally friendly buildings.
Within the electric mobility infrastructure space, as EVs continue to grow in popularity, ensuring seamless energy monetization and managing EV charging payments and optimization are areas where fintech startups can incrementally contribute, often going to market with a useful software solution for consumers or businesses but ultimately planning to monetize through adjacent payments and lending opportunities.
Decarbonization of physical assets
The built environment refers to all human-made surroundings, from buildings and parks to neighborhoods and cities, along with their supporting energy systems and industrial infrastructure. Much of the built environment powering our daily lives was built decades ago and remains highly reliant on systems and physical assets from an era when environmental emissions were an afterthought. For instance, it is estimated that real estate drives 39% of global emissions, with 11% of these generated by manufacturing of materials used in buildings, while the rest is owed to buildings themselves and the energy generation powering buildings. As such, solutions pushing to “electrify everything,” and transitioning the world of physical assets to “greener” solutions are at the forefront of green innovation. And it’s not just about fixing something broken — the issue of energy-intensive buildings is only going to get more complex and significant. As the world’s population continues to grow and developing countries accelerate their industrialization, “clean” real estate solutions need to be developed, offered in an accessible manner, and integrated into development plans to pave the way for progress.
Three buckets of solutions are therefore offered to “decarbonize” the built environment and reduce the environmental impact of physical assets: (i) consume less energy altogether, (ii) consume energy more efficiently to perform the same with less, or (iii) consume energy produced with a much lower carbon footprint, from renewable sources. While developed countries and mega-emitters like the U.S. and China arguably may be able to curb their impact through the first lever, the latter two buckets are likely to make more economically sustainable progress. Enter: the indisputable need for innovative solutions at the intersection of fintech and climatetech to drive the decarbonization of the built environment.
In the form of IRA incentives to support this transition, the US government has committed billions of dollars to directly subsidize the development of renewable energy resources as well as billions in the form of tax cuts allowing businesses and individuals to retrofit or replace older assets with new, more environmentally friendly technologies. Both of these courses of action are dependent on technologies with embedded fintech functionalities. Unfortunately, the disbursement of IRA capital to transition U.S. power to 100% carbon pollution-free electricity by 2035 (as laid out by the Biden administration) will likely be highly manual and cumbersome, causing further bottlenecks in the process and slower deployment overall. Fintech-enabled solutions will be important in smoothing out these investments. In terms of tax subsidies to refresh and update carbon-intensive assets (such as HVAC systems & heat pumps), bridging the gap between capital earmarked in government legislation to capital actually spent at the level of businesses & consumers is a distinct challenge.
In the world of venture and startups, some of the most promising business models we’ve seen are climatetech asset platforms with tax rebate calculation, access, and financing embedded into their service offerings. A value proposition able to transition consumers to greener assets while simultaneously making them an ROI-positive argument and facilitating their access to financing is particularly powerful. Demonstrating the energy transition doesn’t need to be purely altruistic and can have genuine positive financial sense is a real “unlock” that can transition a climatetech business from niche to mass market success. As an example, Palmetto Solar, a marketplace connecting homeowners to solar project partners and offering direct financing options, has raised over $620m (latest Series C round of $375m) with early participation from East Coast VCs Lerer Hippeau and Greycroft. Similar to German multi-billion dollar home electrification startup Enpal (mentioned above), Palmetto leverages fintech product functionalities to allow individual homeowners to finance solar installations with little to no cash upfront. Democratizing access to capital- intensive solar assets, Palmetto has also monetized by improving sales and installation workflows on the asset contractor side.
Banyan Infrastructure, a software platform purpose-built to streamline renewables infrastructure financing, announced their $25m Series B in March 2023. The platform was built with the recognition that it’s often difficult for risk-averse investors to move quickly in providing financing to the relatively new, hardware-intensive world of clean tech. Banyan’s solution brings digital organization, transparency and monitoring to previously siloed counterparties, thereby promoting faster deployment of investor capital for renewables assets.
On the development and construction side, we also see a promising opportunity for fintech solutions supporting green developers by streamlining their procurement of public/private capital while integrating these activities into traditional business workflows (sales, vendor management, installment, etc.). On top of the need for cleaner energy solutions, there persists a need for great technology and software solutions that streamline business activities for built environment developers, commercial and residential alike. These workflow accelerators rely on embedded finance functionalities sitting side-by-side with clean energy ones.
Odyssey, which announced its $15m Series A in May 2023 and has raised more than $20m to date, is another platform demonstrating the support embedded financing can provide to renewables developers. The offering connects commercial financiers to the world’s largest network of renewable energy companies, providing curated sourcing, efficient screening and advanced analytics that track compliance, monitoring performance and minimizing operational risks. By increasing project-level data transparency and streamlining the diligence process, the platform unlocks investment dollars into developed and emerging economies alike.
Electric mobility infrastructure
Greenhouse gas emissions from transportation account for ~29% of total US GHG, making it the largest contributor of the group, according to the US EPA. Outside of real estate and building infrastructure, transportation and specifically automobiles are critical in the US consumer’s everyday life. As of the end of 2021, there were over 278 million licensed automobiles in the US, according to the Bureau of Transportation. Not coincidentally, electric vehicles are a major area of innovation with climate technology. As the hardware matures across major automobile players, we see an increasing opportunity on the operating and fintech side to broaden its access and impact on the environment.
One emerging area where we’ve seen promising fintech business models being built is within the electric mobility infrastructure space — specifically within distributed energy resources (DERs) for electric vehicle assets and payment infrastructure for EV fleets. Growing adoption of electric vehicles in the US — expected to account for 40–50% of new vehicle sales in the US by 2030 — has and will continue to increase the viability of business models built on top of EV infrastructure.
Newer electric vehicle models often allow for bidirectional charging — enabling businesses and consumers to gain additional value through the usage of extra energy stored in their electric vehicles’ batteries. The Department of Energy’s recent Vehicle-to-Everything Memorandum of Understanding supports the growing interest in this space and highlights commitments for V2X (vehicle-to-everything) installation training and national laboratory testing. Continued consumer and business adoption of bidirectional charging for their electric vehicles, however, will require efforts to ensure stored energy is available to take advantage of vehicle-to-grid (V2G) and that the monetization process is seamless. Fintech startups can aid in the payment flow of on-demand energy use by EVs.
For example, Fermata Energy, a bidirectional charging startup that raised $40m last year in a funding round led by The Carlyle Group, allows users to generate revenue or reduce home and building energy costs using excess energy from their EVs. The company’s platform enables users to sell energy back to the grid, use discharged energy to smooth out building energy usage, and access backup power if there is a blackout.
Another example is Bluedot, an EV charging payments startup that recently raised a $5m Seed round, and allows electric vehicle drivers to find and pay for electric vehicle charging. The company now has over 120,000 charging points, and primarily generates revenue through fintech offerings: users can choose to sign up for a Bluedot card that offers 20% back on charging expenses and 5% cash back on automotive-related expenses. The company also enables owners and operators of EV fleets to track spending, set budgets, and receive billing through a centralized platform.
Fintech innovation for EV fleet management can also take the form of charger-specific software with embedded payment and banking opportunities. One example of this is SWTCH, a smart charging management startup that raised a $10m Series A last year led by Aligned Climate Capital. SWTCH helps property managers and workplaces deploy and manage electric vehicle chargers on their properties, aiming to become the operating system for EV charger management. The company offers a SWTCH Charge Card for drivers as a payment option and incorporates a wallet too. As the EV ecosystem grows, we see the intersection of software and fintech solutions emerging to serve different stakeholders across the value chain with differentiated products and services.
Key Considerations
As climate change becomes increasingly top of mind, fintech applications that are mission critical for progressing climatetech in the forms of capital formation, insurance, and payments are also growing in opportunity set and interest. Given the current market condition, four main evolutions are pushing for further consideration of financing questions within climate:
- The changing interest rate environment and macroeconomic pressures have made access to cheap capital difficult for startups to get funded. As of mid-2023, interest rates are at their highest levels in years across Europe and the US. Startups requiring debt partners and lenders to finance energy assets or those offering financing platforms themselves will face a tough environment to generate healthy margins.
- “Tech-first” corporate lenders who have historically provided capital to newer businesses have themselves seen major challenges, restricting the pool of available debt capital. Silicon Valley Bank (SVB), for example, was a strong lender in the climatetech space before its 2023 bankruptcy, financing over 1,550 climate clients with $3.2b of committed capital. Although SVB has resumed lending, their loan book will likely contract, potentially leading to more challenging access to capital for startups.
- A massive influx of capital in climate is promised by global tax rebate programs, inevitably favoring businesses that are able to take advantage of these opportunities while simultaneously avoiding the risk of becoming excessively rebate-dependent. In the US, the IRA is estimated to lead to $400b in subsidies and investments to accelerate renewable energy infrastructure, while Europe’s Green Deal Investment plan offers €250b in green subsidies.
- Regulatory mandates for reporting — in March 2022, the SEC revealed plans to standardize ESG reporting disclosures for publicly listed companies, while the EU formally adopted the European Sustainability Reporting Standards on July 21, 2023. As policy and reporting continues to evolve and improve, we see the need for innovation to help enterprises calculate the value at risk from climate-related changes.
Combining these three factors, it is clear that the next few years of climatetech investing will be shaped by (i) difficulty accessing private debt capital at attractive cost, (ii) increasing pressures to achieve high profit margins early on in capital-intensive businesses, (iii) a massive capital influx in the form of tax rebates, grants, and subsidies expected to dramatically spur innovation and development, and (iv) regulatory mandates for reporting and businesses’ abilities to measure value at risk.
Concluding thoughts
We expect there to be significant opportunities in climatetech innovation both on the hardware and software side into the next decade, especially among businesses that are able to sustainably scale alongside a rapidly expanding market and revolutionize the way financial services are delivered to end users and businesses. So far, we are already seeing promising early-stage founders building software in residential and commercial energy monitoring and EV payment workflows and charging processes. We expect there to be many more verticals of existing infrastructure that can benefit from clean energy and adjacent software.
The most successful climate-fintech startups to date have tackled the “capital question” efficiently, and we think new startups building at this intersection will need to consider how to allocate their capital in a high interest rate environment, somewhat offset by shorter-term government incentives. Incentives from programs like the Inflation Reduction Act or the European Green Deal investment plan can bring new startups and business models to life and fuel the growth of players already building in the space. That said, it is important to recognize that while these incentives can provide an advantageous starting point, they should not be the foundation of a company’s business model. Dependence on subsidies and rebates can be a slippery slope, and startups should strive to create sustainable models that can deliver value and remain profitable without these external factors.
In this vein, a factor of opportunity we’ll continue to observe closely is the longer-term role governments and multinational institutions will take on as the climate sector matures. It is clear that productive, public-private working relationships are necessary for the climatetech industry to continue to make progress. VC-funded startups can play a critical role in bridging the gap between promised government incentives and accessible, transferable funds and credits that can be utilized in practice. Though the relationship between tech leaders and lawmakers can be contentious, we must recognize that the public and private sectors have collaborated successfully in the past and will need to do so moving forward. That being said, the manner in which governments will be required to support climatetech innovation is left to be determined.
Looking into the future, will the climate sector mirror the characteristics of financial services, eliciting active and ongoing regulation through federal and state bodies, or will private sector actors serve as the central decision makers in the space?
This article was co-authored by Picus Capital & FinTech Collective and we are always actively looking to connect with current or potential founders building within climatetech and fintech. If you are curious about how we can support you in the early days of your venture journey, please reach out via email or LinkedIn!
💚 Julian (julian.roeoes@picuscap.com), Carlos (carlos@fintech.io), Kate (kate@fintech.io), Grace (grace.missakian@picuscap.com), Clementine (clementine.gazay@picuscap.com), Louden (louden@fintech.io)
References
https://energy.mit.edu/wp-content/uploads/2016/07/MITEI-WP-2016-06.pdf
https://www.svb.com/globalassets/trendsandinsights/reports/the-future-of-climate-tech-2023.pdf
https://www.banyaninfrastructure.com/
https://www.odysseyenergysolutions.com/
https://www.energy.gov/media/272592
https://www.wsj.com/articles/silicon-valley-bank-gets-back-to-lending-albeit-at-slower-pace-88e65b28
