A New Era for Cleantech Venture Capital

Today, there is much optimism among investors about the climate sector and its potential for both delivering financial returns and reducing the rate of climate change. This is reflected in the recordset for venture capital (VC) funding into the climate tech sector deployed to date in 2021 ($30B+). While the optimism feels familiar, it stands in stark contrast to ‘the cleantech bubble’ of a decade ago, in which VC clean investing peaked at $4B in 2011 before drying out. Benefitting from historical wisdom, this new wave of climate tech investing is expected to diverge from the ill-fated cleantech 1.0. in part, because startups are now focused on a broader range of industries, are leveraging megatrends of consumer preference, and are primarily founded on the principles of customer value creation over subsidy leverage.

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This era’s startups seek to decarbonize the farthest corners of the economy, including energy, transportation, food systems, built environments, and industrial processes. Both hardware and software are double-helixed in the solution suites, often enhanced by high leverage service offerings. This contrasts with the first wave of cleantech startups, which focused on new energy hardware; generally, technology that could not survive in an environment of falling natural gas prices, cheap Chinese solar panel exports, and the untimely credit crunch followed the financial crisis.

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Broad consumer demand for net-zero corporations and brands also creates a tailwind for the climate tech ecosystem. Millennials and their successors do not see climate change as a problem that could affect their grandchildren but rather a force today driving extreme weather, grid stability, and supply chain reliability – their current and future livelihoods. This shift has directly translated into increased government action and increased corporate commitments to sustainable business models, led undoubtedly in Europe but followed notably by a daily increasing number of leading US corporations. This shift, in turn, drives private investments to the entrepreneurs equipped to meet this demand, and the flywheel continues.

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Finally, we are at a critical juncture where this next wave of early companies is just starting to mature; risks and rewards are still high. This is the classical domain of successful venture capital. Decades ago, Geoffrey Moore authored the seminal strategy book "Crossing the Chasm"; he recently explained that the ClimateTech ecosystem is finally getting ready to traverse that chasm into a truly scaled commercial power.

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Venture capital has a particularly pivotal role to play when it comes to helping these climate tech companies cross that chasm. For the last couple of decades, venture capital-funded businesses have been the source of many of humanity's most disruptive innovations, from semiconducting to smartphones, from gene sequencing to vaccines. New emission-reducing (and sequestration) technologies combine emerging science with newly maturing approaches in machine learning, data science, and cloud computing. Venture capital is specifically poised to find and enable these startups, driving both carbon reduction and financial impact in a way that is not just correlated but also causal. This is the promise of this next exciting stage of venture investment in the burgeoning and critically important climate tech sector.