Climate crisis brings venture capital money back to clean tech

Investing

Venture capital money is flooding back into clean tech companies a decade after the “mini green bubble” saw private financing for the sector dry up. But John Thornhill argues that the climate tech 2.0 investment boom has better promise than version 1.0.

Between 2006 and 2011, VCs spent more than $25bn funding clean tech and lost more than half their money, according to research by MIT Energy Initiative.

The funding for clean energy companies all but dried up from VCs. That was until 2020. According to PitchBook data published this week, more than $40bn of VC money has poured into climate tech companies from January 2020 to August 2021, already exceeding the total for the previous two years by 37 per cent.

This has techFT# questioning whether we are heading for another “green bubble”.

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In 2006, the conditions appeared to be right for the growth of the clean tech sector. The price of fossil fuels was rising. Legislation was making its way through various parliaments around the world that bolstered the investment rationale for clean energy companies. That year, An Inconvenient Truth, Davis Guggenheim’s film about Al Gore’s campaign to educate the world about climate change, was released, charting a promising future for biofuels, electrification, and solar panels.

Silicon Valley piled money into clean energy start-ups with the belief that they could turn scientific breakthroughs into profitable enterprises — just as the chipmakers and biotech firms had done before.

But the global financial crisis brought an end to the clean tech boom. The global downturn in oil prices and the rise of the US fracking industry made it impossible for biofuel companies to compete. Meanwhile, Chinese solar companies started to flood the US with cheap solar panels, taking advantage of government subsidies and low silicon prices.

But the unhappy ending to the clean tech 1.0 saga was not these external factors, but rather, as John explains, because the companies were not ready for VC investment:

In his book Zero to One, Peter Thiel, the outspoken Silicon Valley investor, dissected the reasons for this crash, identifying several flaws in investors’ thinking. In summary, a successful climate tech company must offer a demonstrably superior solution to a specific problem and be capable of going global at the right time. “The world is not a laboratory: selling and delivering a product is at least as important as the product itself,” Thiel wrote.

Several important developments have occurred since the clean tech bust 10 years ago. Renewable energy such as wind and solar is, for the first time, starting to compete with fossil fuel counterparts on price without relying on government subsidies. Electric cars and mopeds populate the world’s busiest cities after advances in lithium-ion batteries made them an attractive alternative to those powered by petrol and diesel.

John writes:

Just as version 1.0 of most technologies can be a “little sloppy and ungrounded in economics”, so version 2.0 of climate tech is proving more realistic and resilient. “Technology is important but only if you understand how to bring it to market and make money to scale it,” says Katie Rae, chief executive of The Engine, a VC company backed by the Massachusetts Institute of Technology that has invested in several climate tech start-ups.

But crucially, Silicon Valley has changed its investment strategy. It is no longer opting for capital intensive renewable energy projects with high upfront costs. Instead, it is opting for smaller companies with niche products from new battery storage technologies to lab-grown meat, low-carbon concrete and sustainable aviation fuel,

That includes the US-Finnish start-up Carbo culture, which recently raised $6.2m in venture capital with the aim of removing 1bn tonnes of carbon dioxide from the atmosphere by 2030.

John again:

Carbo Culture’s pilot reactor, which turns biomass into biochar storing carbon in a stable form for a thousand years, has just begun operation in California and the company is planning to open its first commercial plant in Helsinki in 2024 selling renewable heat. Henrietta Moon, the co-founder of Carbo Culture, says it is difficult to build any company, let alone one focused on a new technology. “The best help we can get is from VCs,” she says. “I think there is a huge, huge opportunity for tackling climate change.”

Read John Thornhill’s opinion piece here and Henry Sanderson’s excellent Big Read here about the Clean Energy 2.0 investment boom.

The Internet of (Five) Things

1. Hedge funds win big on Trump
A group of 11 hedge funds including DE Shaw and Saba Capital earned millions of dollars in potential gains in a single day after a special purpose acquisition company that merged with Donald Trump’s new social media group rose as much as 421 per cent on Thursday. The former US President this week launched a social media outlet called Truth Social that aims to compete against the likes of Facebook and Twitter, creating a platform for his rightwing supporters ahead of a potential run for office in 2024.

2. Renault’s chip woes deepen
Renault has warned that it will produce almost 500,000 fewer vehicles this year because of the industry’s chip shortage. This is a significantly bigger dent in the group’s output than the 220,000 lost vehicles Renault predicted at the start of September. The gloomier forecast came as Renault reported a sharp decline in third-quarter sales. Revenues for the quarter were €9bn, or 13 per cent lower than the same period a year ago, far shy of the €11.3bn generated in the same quarter in 2019 before the pandemic struck.

3. Snap goes the stock price
Snap lost a quarter of its value in after-hours trade on Thursday as the social media group posted a bleak outlook for its fourth quarter, blaming Apple’s recent privacy changes. The Snapchat parent warned that revenues in the forthcoming quarter would be between $1.16bn and $1.2bn, well below the current consensus estimate of $1.4bn, according to S&P Capital IQ. Evan Spiegel, Snap chief executive, said that since Apple introduced a new privacy policy between April and June, it had become difficult for advertisers to understand campaign performance, dragging on revenues. The rules, which Spiegel said had “upended” the industry, require apps on Apple’s App Store to get explicit permission from users to track them for advertising purposes. Spiegel said “This has definitely been a frustrating setback for us,” he said. “But I think over the long term these privacy changes, and protecting privacy for users of iOS . . . is something that we fully support.”

4. Facebook struggles to appeal to younger users
Internal documents show that the number of US Facebook users under 30 is in decline and that Instagram, which has been phenomenally popular since being bought by Facebook in 2012 for $1bn, appears to be reaching the limits of its growth among younger users in key markets, raising serious questions about the company’s future. The company’s solutions to its growth challenges — encouraging users to open multiple accounts — is causing technical, reputational and legal headaches. In particular, Facebook seems to be struggling to accurately count how many real users its services have.

5. Supply-chain finance back in fashion
Mastercard has partnered with British financial technology company Demica to offer supply-chain finance to its business clients, showing the continued strength of demand for the lending product even after the collapse of Greensill Capital. Supply-chain finance is a process where financial institutions pay the bills a company owes to its suppliers, which accept less than the full amount in return for quicker payment. While it is an established financial product that large banks offer their corporate clients, the messy unravelling of supply-chain finance specialist Greensill Capital earlier this year has drawn attention to the ways in which it can be used to flatter and distort corporate balance sheets.

Tech tools

Sony’s A7 range has long been a popular choice for amateur photographers, offering high-quality image-making at a competitive price. This week, Sony released the ALPHA 7 IV hybrid camera, which has a series of new features and improvements from the ALPHA 7 III, notably the move from a 24MP sensor to a 33MP back-illuminated Exmoor R CMOS sensor. The ISO range for shooting stills remains the same as the previous model, running up to 204,800. But the new model offers previously unavailable 4K UHD video recording.

The ALPHA 7 IV is available for pre-order for £2,399.

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