When I wrote my predictions for the next decade at the start of this crazy year, my top prediction was that we might see an intersection between investors and entrepreneurs to tackle climate change, and specifically a transition to net zero.
Addressing climate change will require a concerted effort of World War II scale, but a genuinely global one. During 2019, I had dozens of conversations in boardrooms, with public market investors, entrepreneurs and venture capitalists which lasered in on the imperative to achieve net zero. So perhaps we have a chance to launch a modern-day Manhattan Project to tackle climate breakdown.
Since I penned those words, I saw there has been cracking activity in the sector. Including:
- Chamath Palihapitiya announcing the allocation of a “few billion” to solve the problem
- LowerCarbon Capital, Prime Impact & PaleBlueDot all launched
- Several corporates have also announced their corporate venture funds tackling decarbonisation. Many more made net zero commitments.
I got together with Celine Herweijer, who leads climate change work at the consultancy, PwC, to understand the emerging “climate tech” space. It was quite the project. The team looked at several thousand startups and investors, as well as investing activity since 2013.
I thought I would share some headlines, and encourage you to take a read.
The headlines are essentially these:
- We’re seeing an increasingly large number of founders start companies that tackle the “net zero” transition, in every one of the key sectors driving carbon emissions.
- There is am emerging ecosystem developing. The players look somewhat different from the software venture ecosystem. While some generalist VC firms, like Sequoia and USV, are moving to invest in the sector—and more will—there is also a big batch of existing specialist investors, like Congruent & DBL, to draw upon.
- Climate tech has many challenges. The technologies may be harder to develop or riskier than many internet plays. Getting early proofs of concept can be complex. Figuring out how to scale the business is harder than just dumping your App in the App store. All of these considerations will give rise to innovations in the ecosystem: new accelerators, new partnerships, new standard operating procedures and earlier corporate involvement.
- We’re very much at the foothills for this sector.
The big picture
Investment has grown at almost 5x the rate of the overall global venture capital market between 2013-2019, or 84% compounded annually.
In the seven-year period, mobility and transport have made up 63% of all funding. This is largely because of the drive towards electrification of cars and other modes of transport. The other sectors are rather earlier in their maturity curve and don’t weight as heavily.
Last year alone, climate tech investments made 6% of global VC activity in 2019. This is still small beer but is a ratio worth tracking.
More companies are being funded and deals are slowly getting bigger.
Despite the complexities of the technology, firms are able to, at least, raise Series A funding.
The full report (link at the bottom) goes into much more depth, and I recommend you read the qualitative analysis too. There is some important nuance there.
Will it make a difference?
One argument is that even if climate tech companies founded today scale quickly, they won’t get big enough, quickly to tackle the imminent threat of climate change. Instead, we need to rely on proven solutions and greater government action.
My take is that this understates the journey it will take to decarbonise our economies. The big news that more than 300 companies have now made net zero commitments and that even China has promised to be carbon neutral by 2060 creates a pressing multi-decadal pull for solutions for a decarbonised economy.
And this is where entrepreneurs commercialising technologies will play a critical role. The strength of startup ecosystems is that they are excellent at navigating the unknown and zeroing in on models that have traction. They help us also unearth the very best founders, the ones who have a massive outsize impact.
It will be one of the weapons we will use to tackle this beast.
Special thanks to the very large team that supported the analysis including Tarik, Ben, James, Jessica and Marisa. Yoram, Anti and Matteo at Dealroom did incredible work in supplying the underlying data.