Jun 17, 2022
The Investors Putting Billions Into Climate Tech Don't Plan to Stop Now
Bill Gates is worried about a dark period ahead for the global economy. “We’re going to go through a winter period for a number of years,” he warned a room full of go-getting green entrepreneurs last week, lamenting at a TechCrunch event that their success had come up against bad timing.
Silicon Valley is bracing for an economic nosedive, and those working in clean energy and green tech might have a foreboding feeling of déjà vu. Fifteen years ago, venture capitalists started special funds to invest in the sector—only to disappear when markets soured.
In recent years, there’s been another boom in climate tech, with billions of dollars pouring into companies devoted to renewable energy and emissions reduction. Now, as markets spiral, industry veterans argue that there is enough actual money being made and a broader, deeper set of financial backers to avoid repeating history. “There’s too much vested interest to go back to clean tech 1.0,” says Bill Lese, a managing partner with Braemar Energy Ventures.
During that first wave, solar power, wind energy and electric cars were too costly and unproven; Tesla needed a government loan. This time around, renewables are cheaper than fossil fuels and investors tout “the Tesla mafia,” a crop of companies from alums of the electric carmaker. A decade ago, Peter Gajdoš, the climate lead at venture capital firm Fifth Wall, worked for Richard Branson's Virgin Green Fund, an investment vehicle that then held $220 million, one of the largest at the time. Now Gajdoš works for a firm targeting twice that amount for a single fund. It invests in companies working on updates to smart grids, industrial motors and cement production.
According to BloombergNEF, a clean energy research group, climate tech startups raised $53.7 billion in 2021, including enormous piles of cash for electric scooters and fake chicken producers. Unlike the earlier boom, this influx includes big asset managers and corporations backing solutions for the climate crisis to hit their ESG goals or out of some moral compunction. That has brought huge financial commitments that still haven’t been invested, missing from the first clean tech rush. “This is fundamentally different,” said Jim Kapsis, a veteran of the clean tech pioneer Opower who runs advisory firm the Ad Hoc Group. “There will be deals that don't get done. Probably, like the rest of the market, they were deals that shouldn't get done.”
There’s also a prevailing sense the sector could excel while others making apps, cryptocurrency tech or business software falter. Gas price sticker shock and the war in Ukraine have put a premium on renewable energy sources.
That’s not to say climate tech is immune to damage. In May, stock market investors began pulling money from ESG equity funds. Venture capital funding in the sector slowed at the start of 2022, even before economic tailwinds, according to a recent report from Pitchbook. Investors are advising climate startups to be more conservative with their cash. They talk about “right-sizing” and “a flight to quality”—euphemisms for funding rounds and company valuations more in line with business realities. “The VCs will drown some of their own children,” says Kapsis. Although he adds that he hasn't heard of any layoffs or down rounds in the sector yet.
Voyager Ventures, one of the newer climate-focused funds, which raised $100 million in April, has backed startups working on energy efficiency software and carbon-free production of nickel, a material whose price has swung wildly. Volatility in energy markets has only underscored the value of its portfolio, particularly in Europe, says Voyager co-founder Sarah Sclarsic. “The macro trends just point in this direction,” adds her partner Sierra Peterson. The partners say they haven’t changed their strategy despite the recent downturn.
There was little talk of changing course or right-sizing at the TechCrunch event this week. In the afternoon, the investor Gajdoš led a session titled, “Why the Next Big Entrepreneur Must Come from Climate Tech.”
Offstage, he said that many of his limited partners backers fleeing tech were still allocating money to climate funds, driven by corporate and government pledges to curb emissions. Some LPs are tapping the brakes, but not nearly as hard as they did during the prior clean tech bust.
Besides, he believes the sector now operates outside of regular market cycles. “Climate doesn't care about inflation. The oceans are warming up. The forests are burning,” Gajdoš said. “These problems are still there, and someone needs to solve them, which creates opportunities.”
Mark Bergen writes the Cleaner Tech newsletter about the intersection of climate and technology.
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