INVESTMENT IN CLEANTECH IS WARMING UP ONCE AGAIN
February 8, 2023
Game-changing technologies have been at the forefront of tackling some of the most pressing global challenges. However, an often-overlooked aspect of these solutions is the underlying capital that has played an integral role accelerating their commercialization and go-to-market. More specifically, venture capital (VC) investment – private equity that firms or funds provide to early-stage companies considered to have strong growth potential – has had a particularly strong influence in supporting some of the fastest-growing industries, such as biotechnology, computers, and semiconductors. Indeed, many of the companies and household brands that define the high technology industry – such as Alibaba, Apple, Facebook, Intel, Google, Microsoft, and TenCent – were originally venture-backed. As a result, following the COVID-19 pandemic, the federal government has made an effort to harness venture capital in supporting breakthrough technologies, such as a needle-free vaccine, in preparation for future crises.[1]
Similarly, investment into clean technology has become a prominent part of the modern VC landscape. Clean technology, or cleantech for short (often synonymous with climate tech), has been ripe with high-growth companies seeking to reduce negative environmental impacts through significant energy efficiency improvements, sustainable use of resources, or environmental protection activities.[2] Certainly, we need to continue to develop technologies that increase energy efficiency and reduce fossil fuel demand, expand low-carbon methods of generating energy that can replace fossil fuels, and remove existing carbon from the atmosphere.
However, cleantech has had a hot and cold relationship with venture capital over the years, with VC funds that invest in the sector experiencing a series of boom and busts. In this post, we will explore the ill-fated “cleantech bust” that lasted from the mid-2000s to the mid-2010s, discuss lessons learned from this experience, and analyze today’s cleantech investment environment.
Cleantech 1.0
In the mid-2000s, venture capitalists – newly awakened to the potential risks of global warming – sought to invest in cleantech opportunities. During this era, known today as “Cleantech 1.0,” VC firms invested nearly $23 billion into cleantech.
PitchBook data show cleantech VC investment shot up from $400 million in 2004 to $4.6 billion in 2008. However, the Great Financial Crisis (GFC) erased many of the gains made by the sector and the VC climate began to cool, with investments in clean tech falling from $3 billion in 2009 to $1.4 billion in 2013 (see Figure 1).
Figure 1: US VC cleantech investment, 2004 - 2013[3]
Inflated optimism around consumer behavior, unscalable technology, and supply chain setbacks were among the reasons for failure during Cleantech 1.0. However, bad luck may also have played a role in the decline of cleantech investment during this era: for instance, the rapid fall in the price of natural gas due to expanded fracking in the United States and the broader financial pressures faced during and in the wake of the GFC were both contributing factors. However, some well-publicized failures also helped bring about a cooling of both government subsidies to the sector as well as VC investment.
One such example was the California-based solar panel startup Solyndra. This was the first cleantech company to get government-backed financing under the Obama administration in 2009, receiving a $535 million federal loan and a $25 million tax break from California's agency for alternative energy. Solyndra's federal loan came from a program created in 2009 to provide funding for companies developing "commercially available technologies."[4] The company claimed it would use the funds to invest in its technology that used cylindrical panels to generate solar energy. However, nearly two years later, the company filed for bankruptcy, laid off all its employees, and shut down all operations. After more than four years of investigation, the Inspector General Office concluded that Solyndra officials used inaccurate information to mislead the Department of Energy (DOE) in its application for the federal loan guarantee. The report also highlighted that a startup as high-risk as Solyndra should not have been considered for such a large loan guarantee from the federal government. Ultimately, this example highlights how inexperienced management flush with cash from government and private investors made a series of mistakes that reflected their lack of understanding of the market and the nature of the competition.
Massachusetts Institute of Technology (MIT) researchers partly attributed the difficulties of Cleantech 1.0 to the disconnect between venture capitalists and climate tech startups, many of which were still largely in the research and development stage.[5] Many investors in Cleantech 1.0, in their hurry to deploy capital into the “next big thing,” funded technologies that technologists had struggled with for decades. Most venture capitalists were used to the high returns they enjoyed from software investments, which typically materialized within a three- to five-year timespan; however, climate technology by its nature requires long-term capital with a heavy focus on research and development. Cleantech solutions generally leverage so called “deep tech” – technology based on substantial scientific or engineering challenges.[6] Therefore, unlike the software that underlies many venture-backed startups, deep tech solutions generally take significant time and capital to develop.
By the early 2010s, it was clear that these cleantech investments were faltering, and the enthusiasm for all things cleantech began to wane considerably in the VC community. Before long, social media and its myriad applications had emerged as the new frontier for these investors.
Cleantech 2.0?
VC investment has begun flooding back into cleantech companies a decade after the industry saw private financing for the sector dry up.
In 2021, climate tech startups in the US raised roughly $40 billion across more than 600 venture deals – a current record.[7] But overall cleantech funding in the first three quarters of 2022 was nearly twice that of all of 2021 (see Figure 2), representing more than a quarter of every venture dollar invested. In fact, cleantech has remained around 20-30% of all US VC funding since the start of 2018, according to PriceWaterhouse Cooper’s State of Climate Tech 2022 report.[8]
Figure 2: Share of global VC funding going toward climate tech start-ups
It is worth noting that this growth in cleantech VC activity occurred even despite recent declines in VC funding more generally. VC-backed companies raised $37 billion in Q3 2022, down 37% from Q2 2022 – due to a confluence of macro factors including market volatility, inflationary pressures, rising interest rates, a global energy crisis, a war in Europe, and the onset of a “crypto winter.”
There are reasons to believe that, despite these broad pressures, cleantech will continue to attract VC funding, including generational shifts and a changing regulatory environment: the millennial and Generation-Z cohorts are promoting a more climate-conscious lifestyle;[9] and this cohort is beginning to influence the policy landscape in places like the United States.
For example, on August 16, 2022, the Biden administration signed the Inflation Reduction Act, which pledges $369 billion in climate investment over the next decade. The biggest chunk of money from the legislation goes to clean energy with $128 billion in tax credits over the next decade reserved to help businesses shift to greener power sources such as solar.[10] The Act funds research into areas such as eco-friendly jet fuel, thereby curbing emissions from air travel; and provides $60 billion in grants and tax credits for clean-energy investments and projects to clean up pollution in disadvantaged communities.[11]
The outlook among cleantech investors today appears positive. Abe Yokell, Co-Founder and Managing Partner at Congruent Ventures believes that cleantech will emerge as a bright spot in an otherwise gloomy environment. Yokell stated that, “As tech and crypto retrench amidst the economic downturn, climate tech investing will emerge as a relatively predictable safe haven for entrepreneurs, tech refugees, and investors. The inevitable impacts of climate change, alongside the recently passed Inflation Reduction Act, will create the conditions/precedent for a long bull run across the climate tech landscape.”[12]
Wider macro trends from both a public and private sector perspective suggest a positive outlook and steady demand for cleantech.
Top cleantech trends
Diving deeper into cleantech investment, there are sub-sectors within cleantech gaining more traction than others. In particular, there has been significant venture activity within mobility (e.g., electric vehicles); energy (e.g., solar); and food, agriculture, and land use (e.g., regenerative agriculture) (see Figure 3).
Figure 3: Share of climate tech venture investment by sector (Q3 2021-Q3 2022)
In 2021, despite the pandemic, investments showed a strong demand for mobility technology. In the US, autonomous driving, EVs, and micromobility in particular, drove nearly a third of the total deal count combined (1,677).[13] Three companies – Rivian, Lyft, and Waymo – managed to raise more than $1 billion in VC. The former two made their successful debuts in the stock market.
Comparatively, the energy sector has managed to raise in nine months what it raised in all of 2021. The sector is likely riding a wave of interest in new technology that appears to combat the rising costs of commodities like oil and gas. Two of the top five deals of 2022 were in this sector, led by a $1 billion investment in an electric vehicle charging infrastructure company.[14]
Another trend to note is, in the US alone, capital invested in agriculture technology grew from $2.5 billion in 2020 to $3 billion in 2021. This is significant given that food systems contribute one third of global greenhouse gas emissions from land use, on-farm emissions, and pre- and post-production. Beyond capital infusions, partnerships with large agribusinesses have also helped startups scale. For example, Bowery Farming, an indoor farm leveraging smart technology, partnered with Albertsons Companies to expand its produce and accelerate its position as the largest US vertical farming company.
A final trend worth noting is the growth of the carbon capture sector. After modest investment for many years, overall funding in the first three quarters of 2022 nearly doubled that seen in all of 2021. Although there were comparatively fewer deals in 2022 (30) than in 2021 (54), deals are increasingly later-stage and larger on average (roughly $0.9 billion in 2021 versus $1.6 billion in 2022).[15] This growth has been driven by policy commitments and projections of the future size of the carbon market. Carbon capture utilization and storage will need to be a part of the solution to limit global warming to 1.5°C of pre-industrial temperatures as set forth by Paris Agreement goals.[16] These technologies could scale to remove larger quantities of carbon dioxide than natural based solutions without the need for widely debated carbon markets.
Despite these trends, the flow of investment to each cleantech sub-sector is still not commensurate with each sector’s contribution to the flow of greenhouse gases into the atmosphere. For example, although the built environment (e.g., buildings, cement) accounts for 17% of global emissions, venture investment in this sector only represent 4% of global climate tech venture investment (see Figure 4).
Figure 4: Share of global emissions and climate tech venture investment by sector[17]
Ultimately, however, the cleantech market remains small compared to the overall level of emissions reduction needed to meet the Paris Agreement goals.[18] The Conference of the Parties (COP) 27, in which world leaders met in Egypt for two weeks of climate negotiations in 2022, was a signpost of global efforts convening around consequences of climate issues. However, there are a number of promises that continue to fall flat – for example, the conference achieved none of the promises made at COP26. Perhaps this signifies future opportunities and the urgency to mobilize private capital to channel capital into impact-driven opportunities that attempt to solve these challenges.
Concluding remarks
In summary, the cleantech sector does not come without its challenges. Timelines for companies to scale are longer, specialized talent is in short supply, technologies are rapidly evolving, infrastructure is lagging, and inflation and supply-chain pressures are increasing the cost of operations.
That said, compared to Cleantech 1.0, more patient capital from early-stage private equity investors might deliver future breakthroughs. In other words, long-term strategic plans are necessary to kickstart investment into technologies such as carbon-removal that will be pivotal to achieving global climate targets. Although the outcome of Cleantech 2.0 remains to be seen, it is critical for investors to study the lessons from the past to ensure history does not repeat itself.
[1] Taylor, Nick Paul. “Vaxxas Raises $24M to Fund Needle-Free COVID-19 Vaccine Trial.” Fierce Pharma, December 6, 2022. https://www.fiercepharma.com/pharma/vaxxas-raises-23m-fund-needle-free-covid-19-vaccine-trial.
[2] TechInsights. “Clean Technology,” n.d. https://www.techinsights.com/technical-capabilities/overview/markets-served/clean-technology.
[3] “VC Cleantech 2013 Report.” PitchBook, December 12, 2013; It is important to note that the full effect of the financial collapse took some time to appear in the data given the lag of private market data relative to public markets.
[4] Fehrenbacher, Katie. “Why the Solyndra Mistake Is Still Important to Remember.” Fortune, August 27, 2015. https://fortune.com/2015/08/27/remember-solyndra-mistake/.
[5] Temple, James. “How VCs Can Avoid Another Bloodbath as the Clean-Tech Boom 2.0 Begins.” MIT Technology Review, November 30, 2020. https://www.technologyreview.com/2020/11/30/1012660/venture-capital-clean-tech-boom-biden/.
[6] “The Future of Climate Tech.” SVB, 2022. https://www.svb.com/globalassets/trendsandinsights/reports/future-of-climate/svb-future-of-climate-tech-report-2022.pdf.
[7] Purdom, Sophie, and Kim Zou. “$40B 2021 Climate Venture Recap.” Climate Tech VC, January 28, 2022. https://climatetechvc.substack.com/p/40b-2021-climate-venture-recap?r=340dl.
[8] “More than One Quarter of All Venture Capital Fiunding Is Going to Climate Technology, with Increased Focus on Technologies That Have the Potential to Cut Emissions.” PwC, November 3, 2022. https://www.pwc.com/gx/en/news-room/press-releases/2022/state-of-climate-tech-report-2022.html.
[9] Pauletti, Jacopo. “Gen Z and Environmental Issues: How to Earn Young Consumers’ Trust.” Forbes, June 1, 2022. https://www.forbes.com/sites/forbescommunicationscouncil/2022/06/01/gen-z-and-environmental-issues-how-to-earn-young-consumers-trust/?sh=66a9b4cb33ab.
[10] Yarmuth, John A. H.R. 5376 - Inflation Reduction Act of 2022 (n.d.). https://www.congress.gov/bill/117th-congress/house-bill/5376/text.
[11] Vaidyanathan, Gayathri. “Biden Signs Historic Climate Bill as Scientists Applaud.” Scientific American, August 17, 2022. https://www.scientificamerican.com/article/biden-signs-historic-climate-bill-as-scientists-applaud/.
[12] Bannon, Maren Thomas. “Sustainability and Climate Tech Predictions for 2023.” Forbes, December 13, 2022. https://www.forbes.com/sites/marenbannon/2022/12/13/sustainability-and-climate-tech-predictions-for-2023/amp/.
[13] “Mobility Tech Report.” PitchBook, May 10, 2022. https://pitchbook.com/news/reports/q1-2022-mobility-tech-report.
[14] Grabow, Jeffrey. “Here’s What a Q3 2022 Decline in Venture Capital Investment Means for Entrepreneurs and Investors.” EY, October 26, 2022. https://www.ey.com/en_us/growth/venture-capital/q3-2022-venture-capital-investment-trends.
[15] Cox, Emma, Will Jackson-Moore, Leo Johnson, and Tarik Moussa. “Overcoming Inertia in Climate Tech.” PwC, 2022. https://www.pwc.com/gx/en/services/sustainability/publications/overcoming-inertia-in-climate-tech-investing.html.
[16] The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century.
[17] Cox, Emma, Will Jackson-Moore, Leo Johnson, and Tarik Moussa. “Overcoming Inertia in Climate Tech.” PwC, 2022. https://www.pwc.com/gx/en/services/sustainability/publications/overcoming-inertia-in-climate-tech-investing.html.
[18] The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016. Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century.