Spending on climate tech has increased dramatically over the past five years, with more than a quarter of venture capital outlays going to the sector in 2022, according to PwC and Pitchbook. At this point, it has largely superseded spending on a closely related category: clean tech.
This shift toward mitigating climate change directly — as opposed to a broader aim of reducing general pollution as with clean tech — has dramatically enhanced industry’s ability to adopt sustainable net-zero and low-carbon technologies. This has led to a significant reduction in the greenhouse gases (GHGs) that cause climate change, as well as a much cleaner and healthier environment for the Earth’s 8 billion people.
It will be extremely difficult to replace fossil-based hydrocarbons with low-carbon energy and industrial technologies within the time frame needed to mitigate the worst potential impacts of climate change. A big part of the challenge is that energy and industrial technology shifts require much more capital, take far longer to develop, and do not yet have an established history of attractive investor returns traditionally produced by more proven areas, such as information technology and pharma biotech.
This limited history of attractive returns has shown some signs of improvement over the last few years. Climate tech exits reached at least $114 billion in 2021 — with 104 U.S. companies exiting, a 70 percent year-over-year increase. The advent of special purpose acquisition companies (SPACs), which have enabled climate tech companies to go public with much more capital than was previously available to the sector, has furthered the trend.
SPACs did unfortunately become part of an over-hyped cycle which resulted in multiple companies trading at unsustainable valuations and, ultimately, leading to significant losses. However, on the positive side, capital continues to flow in at all levels in support of climate tech companies.
For investors, the big question is: As capital flows into the sector, is it being deployed in the most effective way in order to sustainably lower harmful GHGs while also providing significant returns to investors? In other words: Is the investor community creating a framework for sustainable, attractive returns while supporting companies that will reach a scale capable of making a difference in the fight against climate change? Or is it producing a lumpy hype cycle that could culminate in poor results — much like Cleantech 1.0, but at a much bigger loss?
The answer is simply that we don't know yet. Further, we should be concerned about the risk of creating another bubble. Without strong discipline and thoughtful investment management, it could happen. If it does, capital markets and climate change mitigation will suffer.
How can climate tech investors avoid another bubble and ensure that climate tech becomes a sustainable asset class? Here are some recommendations.
Get the technical roadmap right. Can a given technology truly deliver on its claims? Naturally, there is risk in any new technology, but drilling down to really understand what is needed to reach scale takes significant time and effort. A talented entrepreneur knows how to lay out a detailed roadmap. Climate tech investors can be genuinely helpful to entrepreneurs while protecting their capital by asking the hard questions.
Talk to the experts. A thorough evaluation of what it will take to reach commercial scale is necessary to reduce mistakes. It’s important to engage veterans of the industry who understand how it works for in-depth discussion. This does not mean that you need to accept their views unconditionally. But it will help guide your thinking and inform any advice you might offer to the startup you are looking to invest in.
Build the right board and advisory board. Corporate governance must leverage expertise at multiple levels of technology development and commercial deployment in order to be effective. It is a common mistake to not have enough knowledgeable advisors actively involved in the critical decisions that support organizational growth and key capital expenditure decisions. Working through challenges in climate tech requires enough expertise around the table to ask those difficult questions that ensure you’re steering the ship as well as possible.
Keep an eye on the road ahead. Spend significant time thinking through how capital will be staged over the next couple of rounds. The last thing you need is for your portfolio company’s commercial-scale capital to be unavailable due to risk reduction targets that were not enough to qualify. This challenge is less likely than it was pre-2017 due to the availability of significant growth capital and the push for climate tech solutions among major industry players. However, reaching scale is always challenging and generally underestimated by most investors.
Develop multiple exit strategies. While its likelihood has significantly improved in recent years, exiting is still among the biggest challenges in climate tech because of the time it takes to bring technologies to market. Climate tech business growth is much slower than e-commerce and other faster-moving consumer investments. This is why different exit points — such as full or partial — need to be part of a strategy to reduce risk and provide optimal outcomes for a given investment.
Multiple challenges exist for climate tech investors in this ever-changing economic, political and social environment, but there are also extraordinary opportunities. With a thoughtful investment strategy, planning and discipline, those opportunities will likely last for decades given not just the magnitude of the climate crisis, but also the amount of capital needed to support and scale solutions. Additionally, many climate tech solutions have the potential to significantly improve human health and deliver products that are functionally better and more sustainable.
So what’s needed to tap this extraordinary convergence of planetary well-being and investment success? Get the technical road map right. Talk to the experts. Build the right board and advisory board. Keep an eye on the road ahead. And develop multiple exit strategies.
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William (Bill) Lese co-founded Braemar Energy Ventures in 2003 and leads the firm’s activities in the power, resources, and infra-tech segments. He currently serves on the boards of Carbonfree Chemicals, Voxel8, Fulham, Utility Associates, Lusbio, and Brightvolt, and is responsible for Braemar’s investments in General Fusion, Metalenz, and Renew Financial. With experience that spans technical, operating, strategy, and investment roles, he has been active in energy innovation for over 30 years. Bill serves on the Investment Advisory Board of the New York State Energy Research and Development Authority (NYSERDA), on the Steering Committee of the Northeast Clean Energy Council, as well as the advisory committees of the New York City Accelerator for a Clean and Renewable Economy (NYC ACRE), and Chain Reaction Innovations (CRI) of the Argonne National Laboratory.