What are the biggest investment challenges and opportunities for climatetech VCs?
I spoke to leading climatetech investors at Cambridge Cleantech’s Venture Day conference to find out.
Investment is flooding into the climatetech space like never before as the world catches on to the absolute urgency of the need to transform the way we live, play and work. There’s a colossal earnings opportunity, with the energy transition alone forecast to grow into a $120 trillion market opportunity by 2050.
But fast growth doesn’t come without its share of growing pains.
I spoke to leading climatetech investors at Cambridge Cleantech’s Venture Day conference in London to give you a glimpse into the challenges involved in getting investment into the right hands fast enough to turn the tide, and what the biggest investment opportunities are today.
In case you missed it…learn about one of the fastest growing cleantech companies in solar in my latest podcast episode:
Jim Totty, Managing Director at Viridus Capital
We invest in sustainability and impact themes, but particularly across energy, mobility, clean industry and food and agriculture.
Cleantech is a little bit different to some of the other sectors in life science; you’ve got just as much capital intensity but there isn’t a very well parameterised funding path where everyone knows who to ring and who to call to find funding and to then sell the business.
$10 million might be enough to get digital and software to market, or even less, but it doesn’t it doesn’t chew up capital in the same way. I think the biggest issue with cleantech is that it has the capital intensity of life science, but the novel business models of digital software, and that’s a bad combination. It makes it hard to fund.
We’ve seen if you look at the funding food chain, there’s a lot of money in VC. There’s a lot of money in bigger private equity buyout, and in bigger private infrastructure – but there’s a gap in between.
When you get to development and services, there’s the tech or the IP that you see in VC, but there isn’t the revenue and the profitability that you need to buyout infrastructure. So that’s the hardest part of the funding food chain to get capital and it’s probably the biggest issue we face – how to get businesses through that gap.”
I see opportunities in floating offshore wind. I love autonomous vehicles, I love chemical fuel replacements and foodtech. In fact, foodtech is the hottest area at the moment – it’s number one in my deal pipeline.
We need to feed 10 billion people by 2050 and we have a massive fertiliser issue. Land and water use is a huge issue so food and agtech is a really interesting one and certainly that’s one of the hottest and most most active sectors.
Susannah McClintock, Investment Director at Clean Growth Fund
We have to turn all of our assets into clean assets; the challenge is the scale of the problem. There are now a lot of opportunities in cleantech and I think the biggest challenge is picking things that can create the most change the fastest.
Both investing and clean technology have traditionally been the purview of the homogenous white male and we know that by 2050, 60% of the world’s income will be in female hands. Women will represent more than 50% of the consumer base. Perceived minorities of all types actually make up a bigger proportion of the planet and the investing majority. So, if we don’t wake up, we’re missing out on an opportunity.
We need a lot of energy storage, we know hydrogen is going to be important, we know carbon capture and particularly carbon use is going to be a big market.There are opportunities everywhere, but we have to make big bold steps forward.
One thing I think is a bit underrepresented is the shift in industrial processes – stuff that’s not necessarily seen always as cleantech because it’s not an out and out renewable player, but it’s shifting an existing very carbon intensive industry into something that has a significant carbon reduction. So industrial efficiency, I think is a big untouched area.
Vincent Ruinet, Investor at Future Positive Capital
We are a European venture capital fund and what we do is we support entrepreneurs in early-stage projects who are tackling global challenges with advanced technologies.
There are a number of challenges that need to be bridged; first, there has to be funding from different sources because often climatetech startups are capital intensive and you need a lot of funding before getting to high revenues.
Venture capital is just one part and you also need government support and grants to get projects into industrialisation and, of course, banks and project finance which can come through pretty soon if you are functioning properly. Then you need good regulation without that regulation being a constraint to some businesses, and we need talent, the right people and a new breed of entrepreneurs that have a global mindset.
There’s opportunity in carbon removal and I am also excited by companies that are taking a nature-based approach, so not reinventing something, but trying to see what nature can already do, because nature can do a lot of things.
There are so many challenges…the way we eat, the transportation sector, the way we power our homes; all those sectors are shifting and we’re facing global challenges with big opportunities, but we need to have a realistic view about what we’re investing in, so not only looking at the potential market value of the company, but the technology value and the human values they have as a brand. We see sustainability not just in terms of climate but also in terms of humanity, so we are invested in companies that are tackling some unaddressed communities.
Kevin Kistnassamy, Founding Partner at Blue Pelican Capital
There’s a lot of investment flowing into the space; there’s a lot of government money and venture capital money, there’s also a lot of infrastructure private equity money looking to switch products. I think the gap is really from $0.5 million to getting into like your early growth stage where the VC firms aren’t big enough to effectively do the ticket size necessary, and private equity funds aren’t necessarily willing to take the risk yet because there’s still a significant technological gap.
The European Union is very aware of this issue and is looking to establish a number of billion dollar venture capital firms that are able to do significantly larger tickets to be able to effectively support what we have to do in the European system.
But because this doesn’t exist yet, a lot of companies just want to do the technology and open station and then license their products for other people to build and this doesn’t work. It doesn’t work for VCs because the revenue model is weak. It doesn’t really work for the companies or for the industrials and the strategic buyers because there’s nothing to buy.
There’re a lot of opportunities here. There are some wins where you can make lots of money, I think food and ag is probably the easiest one, it’s fairly low capital intensity there are really innovative companies and it goes straight to the consumer market and so it’s a massive market. So I think that’s easy and it has an impact, but it’s really a small part of the overall problem.
The more difficult part is heavy industry, power and energy and heavy duty transportation, which represents together approximately 75% to 80% of emissions reduction. Within that space there are a couple of trending technologies like hydrogen where it’s easy to make money, but not necessarily easy to make it to make it quick enough.
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