The landscape has changed unrecognisably for climate relevant technologies since the high-water mark of COP26 back in Oct 2021. At that time, nations, states and large corporations were falling over themselves to commit to net zero emissions targets by 2025, and demand for the technologies that could deliver this goal were in high demand.
From an investment perspective, interest rates were still at record lows, resulting in VC funds being literally awash with dry powder and billions of dollars being funnelled into climate technologies based on the anticipated net zero future. This founder-friendly environment saw record levels of capital being raised by a wave of founders, many of whose products and services had barely reached prototype stage.
Fast forward 3 years and much has changed…
The flowing river of “easy money” from VC funds has dried up, with the sources of VC capital (pension funds, endowments and investment funds) realising that central bank interest rates can now deliver 4, 5 or 6% with little to no risk. Climate fund portfolios are awash with vanity project bankruptcies and badly burned investment committees have now raised the bar for new investment to pole vault altitudes.
Advisors are now redirecting pre-revenue founders back to friends and family, government grants and angel networks as raising early-stage institutional capital is now unbelievably difficult.
Politically, the US has replaced a pro-climate President with a “drill baby drill” one, who has appointed a former oil and gas drilling CEO to run the Dept of Energy. With rising geopolitical instability, the availability of low-cost reliable energy and the security of its supply has replaced the achieving Net Zero as the North Star of global energy policy.
Many of those COP26 nations and corporations have now walked back, watered down or pushed out their emissions targets in reaction to the shift in priorities of their voters, shareholders and customers.
So, where does this leave Climatetech?
One could be forgiven for thinking therefore that the show is over for climate technologies and investors appetite for them. However, the real picture is much less dramatic and much more nuanced than that.
The truth is that much of the record levels of capital sitting in Climatetech funds are already committed and fund managers are therefore obligated to invest those funds in this category over the next 10 years. The ‘what and how’ those investments are made, however, is more circumspect.
Previously it was enough for (clean) technology to simply perform the same function as the old (dirty) technology it was displacing, but with few – or better still, zero-carbon emissions. Now, however to be successful, new technologies need to perform the function both better AND be cleaner than the incumbent technologies they are displacing.
Take the example of Tesla cars. Their success is based on the fact that they not only emit no carbon emissions but also provide a superior driving experience with better performance. In contrast, the well meaning replacement of plastic drinking straws with paper was a disaster, with consumers roundly rejecting an inferior user experience despite the improved sustainability.
Climate/cleantech start-ups should not lose here. This shifting of success criteria, if managed correctly, could see an immense wave of industrial innovation investment initiated for climate solutions, delivering a suite of next generation technologies that are better than their carbon fuels predecessors, AND benefit the planet.
Capitalism is by its very nature Darwinian and so this shift to “cleaner AND better” technologies is just the latest step in an evolutionary journey that replaced horses with cars, Walkmans with streaming, helicopters with drones, incandescents with LED and so on. As always, the cream will rise to the top and capital will find its way to the technologies that best serve society as a whole, and include returns for investors.
Mark Hannigan is a Partner at Greenbackers Investment Capital and runs their Corporate Services practice from his base in Texas, USA
