The end of the beginning for "climate tech"
Part 1 of a 3-part series
“This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” - Winston Churchill, 1942
It’s been less than five years since the phrase “climate tech” first showed up on the scene, and the sector has already arrived at its first major inflection point.
Back in early 2020, when my former EIP colleague Kim Zou teamed up with Sophie Purdom to launch the newsletter “Climate Tech Venture Capital”, that was a pretty bold choice for a masthead, as practically nobody recognized the label as a meaningful, cohesive category (at least, nobody outside of a small bubble of hyper-specialized venture capitalists and some ARPA-e alumni).
“Climate Tech” has come a long way since then, evolving into a distinctive mashup of a movement and an industry. Those of us who work in the field have pretty much all dropped the clunkier phrase “Clean Tech 2.0”. Just recently, “Climate Tech” finally made the Wall Street Journal!
But I’m sorry to say, this was its inaugural WSJ headline:
The rise of climate tech was fueled by the same access to easy money as the rest of the tech sector, which boomed during a decade of so-called “zero interest rate policy”, or ZIRP. It’s impossible to overstate how much ZIRP was responsible for the attractiveness of big, risky bets during this period. Nearly everyone in tech benefited — from corporate giants, to your friendly neighborhood venture capitalists. ZIRP was the tide that buoyed all boats, and the end of ZIRP rocked them all.
This macroeconomic shock hit the broader venture capital market especially hard, because it exposed a deeper problem — actually, a kind of existential crisis. The problem, in the words of the economist Noah Smith, is that “the internet has mostly been built”:
“Basically, I think the end of the pandemic and the rise in interest rates were triggers for investors to wake up and realize something they should have realized a while back: the internet is a mature industry now.”
Tech spent the past twenty years building and then exploring the vast reaches of cloud & mobile computing, generating extraordinary returns in the process. But this expanse has now been fully mapped and populated with an endless array of software applications, from Bejeweled to MongoDB. Venture capital has scoured practically every nook & cranny of the digital world for opportunities to run a well established set of playbooks for building mobile and SaaS businesses.1 This includes plenty of niche applications in the sectors that are most relevant to climate tech, like energy. (I’ll return to this point later on.)
So, beginning around 2015, venture capitalists began casting about for the “Next Big Thing” which could approximate the kind of returns they realized while building the internet. Some notable VC firms (cough, Andreesen) threw their weight behind blockchain and crypto, which spun off into all kinds of silly directions. There was even an attempt to rebrand all this stuff as “web3” — no less than the third incarnation of the internet! — which ought to have a been a pretty clear sign of desperation. (Hint: when guys like these are getting in on the action, you know the scam has become too obvious.)
What a coincidence that the Next Big Thing in Tech, Generative AI, arrived just in time to rescue the industry…2
The end of ZIRP comes for climate tech
Unfortunately, climate tech has no obvious flotation device like GenAI, and the end of ZIRP has now fully caught up with funding in the sector. The raw numbers are rough.
Lots of seed-stage ideas are still being funded, but there is carnage in later rounds. This trend is very concerning, as the goal of Seed stage companies is to progress to later stages, and the amount of capital a company needs at each stage tends to increase by at least 3X.
At my firm, Energy Impact Partners, we’ve already felt the pain of this retreat from growth funding. We were an early investor in Moxion Power, a promising startup company building portable battery generators, which boasted one of the fastest revenue growth trajectories in the history of climate tech. Sadly, Moxion was recently forced to declare bankruptcy after failing to secure sufficient growth capital.
Jim Kapsis (of the mighty Ad Hoc group) and Michael Sachse recently posed the question: “Is winter coming for climate tech?” They laid out the problem in Latitude Media as follows:
“The last five years have been a remarkable time for climate focused companies.
They have seen an explosion in funds dedicated in whole or in part to climate investing. There are now over 160 funds with an exclusive or strong focus on climate tech startups, and another 80 funds actively seeking exposure to the climate space. This proliferation reflects the growing recognition that climate tech requires a focused investment thesis and expertise.
Counterintuitively, though, this capital expansion presents a problem: too many early-stage venture capital dollars are chasing too few quality companies. Even among the quality companies, few have drawn in growth capital and even fewer have achieved notable exits for shareholders.
The problem is not limited to climate tech — venture’s assets under management have gone from $300 billion in 2008 to $3.5 trillion in 2022 — but climate tech has greater risk than other sectors because of its spotty history of returning capital to investors. While traditional venture capital has a long history of winning investments to fall back on, climate tech doesn’t.”
Perhaps all of this is just an inevitable hangover following the financial bender that was ZIRP. Climate tech, having grown up almost entirely during this anomalous period in macroeconomic history, was particularly vulnerable.
But, I think there’s more to it. I sense a change in the air which feels bigger than the vicissitudes of the capital market. This feels like a real turning point: a new stage in the evolution of climate tech which is distinct from, but related to the identity crisis facing the rest of the tech industry.
Longtime doubters are whispering about “the beginning of the end”. But I truly believe that we’ve just reached the end of the beginning.
The end of the beginning means that the contours of the most interesting & attractive opportunities — for investors, for entrepreneurs, and for operators — have fundamentally changed. We all need to adjust our mindsets, accordingly.
How, specifically, our mindsets ought to adjust will be the topic of the next two posts in this series.
Please read along!
(Part 2)
(Part 3)
SaaS = Software as a Service.
Yes, this is sarcasm. I am a GenAI skeptic.
Looking forward to the next post :)
Thanks for this - awaiting the next two posts with baited breath!
Great insights overall.