How VCs can avoid another bloodbath as the clean-tech boom 2.0 beginson November 30, 2020 at 9:00 am

Together, these trends have eliminated the technical risks from big parts of the clean-tech sector and set the stage for the development of major new markets. And little of this has been lost on investors.

From 2013 to 2019, early-stage investments in clean tech leaped from about $420 million to more than $16 billion, according to the PwC report. That’s three times the growth rate of venture investments into artificial intelligence, itself a booming market in recent years.

A number of venture capital firms dedicated to climate change have emerged during the last few years, including Breakthrough Energy Ventures, Congruent Ventures, Energy Impact Partners, G2VP, Greentown Labs, Lowercarbon Capital, and Powerhouse.

The field is also drawing heavy investment from generalist venture capital firms like Softback, Founders Fund, Sequoia Capital, Y Combinator, and the two firms most closely associated with the first clean-tech boom and bust, Kleiner Perkins and Khosla Ventures. Union Square Ventures is raising a dedicated climate fund of $100 to $200 million, the Wall Street Journal reported earlier this month.

And corporations themselves have launched their own funds, including Amazon’s Climate Pledge Fund, Microsoft’s Climate Innovation Fund, and Unilever’s Climate & Nature Fund.

Emily Kirsch, founder and chief executive of Oakland-based Powerhouse, says that Biden’s arrival in the White House could immediately boost the market for electric cars, batteries, and charging infrastructure. During the campaign, the president-elect pledged to sign a series of “day one” executive orders, including ones that would raise fuel economy standards and steer hundreds of billions in annual government spending toward clean power and vehicles, she notes.

COURTESY: POWERHOUSE

The administration’s goal of installing 500 million solar panels and 60,000 wind turbines within five years, in part by opening up federal lands for such developments, will also significantly expand the US market for renewables. And the plan to create a new Energy Department moonshot research program focused on climate, known as ARPA-C, could accelerate advances in green hydrogen, long-duration energy storage, and cleaner ways of producing steel, concrete, and chemicals, Kirsch says.

What has changed

But how different will things be this time around?

Varun Sivaram, a senior research scholar at Columbia University’s Center on Global Energy Policy and one of the authors of the MIT report, says there are several ways that investors can avoid the previous mistakes. They can invest at later stages, when the technological risk has been addressed; focus on digital and software opportunities that don’t require the buildout of massive factories or plants; adopt an investment model that doesn’t count on returns as rapidly; and look for technologies that slot into, rather than compete against, existing ways of manufacturing products.

All these things are happening to various degrees.

Bill Gates’s $1 billion Breakthrough Energy Ventures fund–which includes investments from two of the most prominent VCs of the last boom, John Doerr and Vinod Khosla–invests on 20-year cycles. Likewise, MIT’s “tough tech” incubator, The Engine, doesn’t count on earning its money back for 12 to 18 years.

The current investment cycle is also far more diversified.

While the first boom was primarily about cleaning up the power sector and early efforts to address transportation–and was particularly concentrated on thin-film solar, electric cars, and advanced biofuels–venture capital is now ranging more widely. VCs are funding protein-replacement companies like Beyond Meat and Impossible Foods; startups developing cleaner ways of producing cement and steel, like CarbonCure Technologies and Boston Metal; businesses working on carbon removal and recycling, like Climeworks and Opus 12; companies supporting the creation of carbon offsets and markets, like Pachama, Indigo Ag, and Nori; and those offering ways to reduce the wildfire risks associated with climate change, such as Zonehaven, Buzz Solutions, and Overstory.

New boom, new risks

Every investor interviewed for this piece stressed that the technologies have matured, the market is now ripe for these companies, and the hard-won lessons from the last bust have been internalized.

But each new boom invariably creates excessive hype around certain sectors and players, and ultimately reveals deeper market pitfalls than were obvious at the start.

Some risks are already clear. The fragile economy could still take a deeper dive or require a long time to really recover, potentially limiting the availability of capital for major investments and projects. In addition, powerful incumbent fossil-fuel players will continue to battle hard to retain their market dominance, and plenty of groups and politicians will keep up the fight against ambitious climate policies.

And it would take a lot of costly supporting infrastructure to make some of these bets really pay off, like pipelines to transport captured carbon dioxide or a modernized grid to accommodate rising shares of renewable power.

Sivaram says that certain markets might already be getting a little frothy, including those for electric vehicles. Some of the investments going into carbon-removal and carbon-market startups have also raised eyebrows among close observers.

The bigger risk, however, is still that promising technologies won’t get the early funding they need to develop into successful businesses, Sivaram adds.

With most VCs again avoiding long-term investments this time around, generous public funding will still be needed to ensure the breakthroughs that will drive costs down further and fill in some of the critical technological gaps in clean energy. Whether Biden can make enough federal money available to seed the marketplace with the next generation of startups could be one of the crucial factors determining how sustainable and long-lasting this boom will be.

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