Now is the Time for Investing in Breakthrough Science to Solve Climate Change
Climate VC is hot, especially compared with the rest of the market. Depending on the source and how you categorize, the amount invested last year was either steady or almost doubled compared to the historic high in 2021. Meanwhile, overall VC investment decreased by about a third during that time. Climate VC now accounts for 15–20% of all VC investment, rising from just 7% five years ago.
That’s good news considering how urgently we need this innovation. It’s generally agreed that emissions must be reduced by >40% before 2030. For some carbon-emitting segments, not only do we need to find the best new technologies, but we need to develop, test, and iterate products for the real world. Then, they must be scaled rapidly to replace the majority of existing equipment, all within the next 5–10 years. It’s a huge challenge, but I don’t want to dwell on the negatives. When I started my career focused on energy efficiency and renewables fifteen years ago, reducing carbon emissions was just an added benefit. Most of these new technologies have a strong return on investment while also improving reliability, market competition, and energy independence.
The opportunity is massive. An estimated $2–4 trillion of total investment is needed each year by 2030. Most of the required investment will be for the deployment of mature technology (e.g., project finance), but assuming a ratio of 50:1 for VC suggests a $40–80B per year investment is needed. The total addressable market for climate investing is something like the oil industry plus all utilities and much of the manufacturing sector and heavy industry. The progress of solar and wind power over the last decade shows what is possible. Cost for these technologies has been reduced by 70–90% since 2010 and the market has grown from almost nothing to $500B per year. Investment into these technologies now surpasses that of all upstream oil and gas. Batteries and EVs have made similarly dramatic progress, but for use cases like hydrogen and synthetic fuels, building heat, manufacturing, cement, and carbon capture, the most promising technologies, enabling tools, and business model innovations are still at an early-stage fit for VC.
Probably the biggest, most often-cited reasons for the surge in climate VC investment are the Inflation Reduction Act (IRA) and the war in Ukraine. CTVC did an excellent analysis (chart below) estimating the impact of the IRA on climate technology costs and found a 40% average reduction. Notice this includes mature techs like solar and wind but also much more nascent tech like hydrogen and carbon capture. Less talked about but similar to the IRA, the European Commission is repurposing $290B of covid relief funds also in support of climate technologies (although the details are very much TBD). Meanwhile, the cost of competing incumbent energy sources has been high and volatile due to the war. Altogether, The Economist estimates that despite higher prices for many critical metals and minerals used for climate technologies, decarbonizing has been accelerated 10 years due to the combined effect of these developments over the last year.
Climate VC was on an upward trend even before 2022, with a roughly 45% CAGR from 2015 to 2021. Large corporations and governments around the world, including China and India, have been setting increasingly aggressive goals to decarbonize. There are currently 83 climate unicorns. Perhaps this is a modest number compared with the rest of VC (>1000 unicorns), but encouragingly, the number per year has been increasing while the time to reach a $1B valuation has decreased to 4–7 years.
Perhaps most importantly, there is a renewed interest in investing in breakthrough science and hardware innovation. During the first major wave of climate VC enthusiasm (roughly 2000–2007, often called Cleantech 1.0), investors aggressively pursued hardware innovation like biofuels and new manufacturing approaches to solar PV as well as a few success stories like Tesla. A bubble burst spectacularly alongside the larger financial crisis in 2008–9, inflicting particularly large losses for capital-intensive hardware investments. The reaction until just recently was a strong aversion to hardware while overall climate VC fell to less than $2B per year, about 40% of the peak. The remaining climate VCs kept the sector alive, but software alone was never going to solve climate change — no amount of IoT, SaaS, blockchain, or even AI/ML will decarbonize aviation, building heat, or cement.
I haven’t seen good data to prove/quantify this shift back into hardware and breakthrough science, but just five years ago it would have seemed impossible to me that investors would be competing for growth-stage deals in EV manufacturing, carbon capture, long-duration storage, and green hydrogen. There are important lessons learned from the last time around, and the foundation is clearly much stronger today than it was 15 years ago:
- These innovations are often a smart mix of hardware and software — e.g., previously known concepts being made practical when integrated with cheaper/better software controls and advanced manufacturing, often in a modular package.
- Startups are working with strategic corporate partners that are much more actively engaged — i.e., forming JVs to reduce CapEx for developing, testing, and manufacturing compared with doing all of this in-house. They also provide another option to exit, often pre-revenue — i.e., through acquisition, rather than relying solely on an IPO.
- Government policies and programs like the IRA, DOE Loan Programs Office, ARPA-E, etc. boost hardware innovation in particular, clearing the way for new technology deployment as described above.
Prime Movers Lab has always focused on breakthrough science, and we are not afraid to support hardware innovation. It’s our specialty! We support only the most passionate and talented entrepreneurs ready for that extra challenge, and the payoff, when it works, is commensurately large. In the last five years, we’ve made 15+ investments worth over $350M that could be categorized as climate-focused. Now feels like a good time to share a primer on this investment area along with some discussion of our strategy. In future blogs, we will take on topics like:
- Mapping the landscape of climate investment areas
- Surveying investments today and considering how this has evolved over time — i.e., where have the unicorns with a $1B valuation come from? What are some opportunities areas that maybe deserve more attention?
- Describing what kind of startups we are looking for — What makes for a good climate investment, especially in hardware? How can we measure/compare the impact of these early-stage climate investments?
Please comment and let us know what you would like to see discussed more. Especially for those who have worked on energy, renewables, and climate even longer than I have, please don’t hesitate to add to the conversation. Let me know if I’ve missed or mischaracterized something important. There’s no time to waste and we should all get smarter together in this exciting time.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
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