Solyndra, the poster child of the first cleantech bubble, sought to revolutionize solar energy. … [+]
Image Source: Politico
There’s no question about it: climate technology is in again.
Over the past several quarters, entrepreneurial activity and investment interest in climate tech have skyrocketed. New funds devoted specifically to climate have launched at an astonishing rate in 2021: from blue-chip venture capital firms like Union Square Ventures, from large private equity players like TPG and General Atlantic, from a whole new breed of climate-specific VCs like Lowercarbon Capital. Scarcely a day goes by now without a climate tech startup announcing a major new funding round. A whopping $49 billion of venture capital funding will pour into climate tech in 2021.
BlackRock CEO Larry Fink aptly captured the current ebullience when he declared last week that “the next 1,000 unicorns” will be in climate tech.
Memories are short in the world of startups and venture capital. Amid the recent surge of enthusiasm for climate investing, an important part of this story is too often ignored or left out: this has happened before.
Between 2006 and 2011, the field of “cleantech” (as it was then called) underwent one of the worst boom-and-bust cycles in the history of technology investing. During these years, venture capitalists plowed over $25 billion into cleantech startups—and lost over half their money. More than 90% of the cleantech startups funded in this period did not even return the money invested in them.
The carnage scared an entire generation of investors away from the category.
As climate tech once again becomes a venture capital darling, we need to take a step back and ask a simple question: will this time be different?
The answer is yes—and it is important to understand why.
Macro Shifts
For starters, two big-picture trends have set the stage for climate tech startups to thrive commercially in a way that was not possible the last time around.
The first is the hard economic reality that renewables are now price-competitive with fossil fuels.
The graph below is worth a thousand words. In 2009, in the midst of the first cleantech boom, electricity from solar power was over four times more expensive than electricity from natural gas on a levelized basis. By 2019, driven by relentless scientific and engineering advances, both solar and wind energy had become cheaper than any fossil fuel source. And the relative cost of renewables is only going to continue to plummet in the years ahead.
The basic economics of renewable energy have transformed since the previous cleantech bubble.
Source: Lazard
In a market-based society, technologies gain widespread adoption only when it makes economic sense to use them. In the early 2000s, renewable energy technologies were simply not yet mature enough to be commercially viable. The cards were stacked against any entrepreneur seeking to build a renewable energy startup in this context. Government subsidies, though they were deployed widely, could only carry companies so far.
The world looks very different today. Renewable energy’s dramatic cost curve has set the stage for a worldwide transition to clean energy systems, which is already underway. A systemic transition of this magnitude will create wide-ranging market opportunities for an entire ecosystem of startups that enable, accelerate and capitalize on the emerging renewable energy economy.
The second fundamental shift is the simple fact that individuals, companies and governments take climate change a lot more seriously today than they did a decade ago.
In 2021, climate change is no longer a distant theoretical concern. It has become increasingly immediate and personal. From the constant wildfires in California to the historic heat wave in Europe this summer, climate change has begun to assert itself in people’s lives in unmistakable and painful ways. It has become real.
Corporations have (finally) begun to mobilize. Hundreds of the world’s largest companies—from Amazon to Procter & Gamble, from Visa to Ford—have publicly committed to bringing their net emissions to zero by a specified date and have begun to adapt their operations accordingly. BlackRock, the world’s largest asset manager, announced last year that it expects the companies in which it invests to develop detailed plans to reduce their carbon footprints. With nearly $10 trillion under management, BlackRock’s words motivate real action in corporate boardrooms.
Governments have also begun to devote serious resources to the fight against climate change. In the United States, President Biden’s signature legislation (currently winding its way through Congress) includes a proposed $555 billion budget for climate measures, which would be the largest such investment in history.
Meanwhile, political leaders from nearly every country in the world will gather in Glasgow this week for COP26 to hammer out strategies and commitments to slow climate change. In order for humanity to even come close to meeting the ambitious targets set out by the world’s governments in the 2015 Paris Agreement, economies around the world will have to be dramatically revamped.
The upshot of all this is that vast sums of money are now being channeled to fight climate change—sums that would have been inconceivable just a few years ago. Demand and budgets for technologies that reduce carbon footprints are set to surge. It is a good time to be a climate startup.
Software Is Eating The World
But there is another reason why today’s climate tech boom will play out more favorably than the previous cycle, one that is less widely discussed but is perhaps the most important part of the story (particularly for investors).
It is a direct consequence of the fact that—to use the cliché but profoundly true maxim that Marc Andreessen coined almost exactly one decade ago—software is eating the world.
The venture capital model works best for startups with a particular profile: massively scalable, capital efficient, rapid iteration cycles, low marginal costs, recurring revenues. At risk of stating the obvious, startups with these characteristics most often have software at their core. (They need not be software-only; some hardware element is often necessary to activate software’s potential.)
The first cleantech era was dominated by companies that simply did not fit this profile: solar panel startups, battery startups, biofuel startups, electric vehicle startups.
These companies had to build factories, develop large-scale manufacturing and production strategies, engage in years of basic science development, iterate through generations of hardware prototypes—often before they even knew whether they had a commercially viable product. They did not benefit from the basic dynamics and economics that software companies enjoy.
It is telling that the small handful of startups from the previous cleantech cycle that did survive and thrive were software-centric: Nest, Opower, even Tesla, which turned the car into a software product.
Solyndra, the much-maligned poster child of the first cleantech bubble, is an archetypal example of the era’s missteps.
Solyndra aspired to produce a revolutionary new type of solar panel, which would be cylindrically shaped rather than flat (hence the name) and comprised of novel materials.
In pursuit of this vision, the company raised over $1 billion from private investors and another $535 million from the U.S. government. It used this money to build two factories (the second cost $733 million) and at its peak employed well over 1,000 people.
After six years and massive capital expenditure, Solyndra concluded that it could not manufacture its solar modules at scale in a cost-competitive way, a situation that was further exacerbated by plummeting natural gas prices. The company shut down, wiping out the nearly two billion dollars invested in it (and permanently blemishing the Obama administration’s record). It remains a cautionary tale in the world of clean energy innovation to this day.
Solyndra and the many companies like it that got funded during the last cleantech cycle were too capital-intensive; their technology development timelines were too long and uncertain; and their unit economics were too shaky.
This time around, the climate tech landscape looks very different. Many of today’s most promising climate startups are software companies.
As software has permeated every corner of society and the economy over the past decade, the systems that impact climate change and the levers that will accelerate decarbonization are increasingly defined by software.
Opportunities therefore abound for startups to apply software—and most powerfully, machine learning—in the fight against climate change.
Let’s look at a couple examples.
Carbon Offsets
Carbon offsets have been an important, if controversial, part of the climate change discourse for decades. Yet to date they have failed to achieve real scale. Software and machine learning may transform global carbon offset markets into a major driver of decarbonization.
The idea behind carbon offsets is simple: one party pays for another party, anywhere in the world, to eliminate an agreed-upon quantity of greenhouse gases from the atmosphere through emissions reduction or capture. Common examples of offset projects include planting trees (which soak up carbon dioxide) and financing renewable energy infrastructure like wind turbines. Offsets are often used to “net out” an organization’s or individual’s existing carbon footprint.
By funneling resources to projects around the world that reduce carbon emissions, offsets can serve as an ingenious market mechanism to fund decarbonization.
But to date, we have failed to operationalize carbon offset markets at scale.
Verifying the legitimacy of carbon offset projects is manual, cumbersome and error-prone, with inaccurate accounting and fraud all too common. Because the buyer and the seller are typically on opposite sides of the world, transaction costs and coordination problems loom large.
How to confirm, for instance, that an additional tree in a distant forest has actually been planted that otherwise wouldn’t have been? Or that that tree will continue to grow and sequester carbon for years to come, rather than being cut down next year? More to the point, how to do so scalably and efficiently across the globe?
An exciting new wave of startups is applying software and AI to tackle these challenges. Their vision is to build digitized, automated, low-friction platforms to enable trustworthy carbon offsets to be bought and sold at scale.
Pachama and NCX (formerly known as SilviaTerra) are two promising software companies building AI-powered carbon offset marketplaces, with a focus on forestation. Both companies apply computer vision to aerial imagery and other sensor data to automatically estimate the carbon stored in forest trees and to continuously monitor the integrity of carbon offset projects on their platforms, without the need for extensive manual effort.
One area in which the two companies differ is their approach to the supply side of the marketplace. While Pachama selects a curated set of forestation projects from which users on its platform can buy offsets, NCX’s approach is more radically democratized: any individual landowner, no matter how small, can join the platform and sell carbon credits in exchange for a commitment to preserve trees.
Another software company to watch in this category is Patch, which raised a $5 million seed round from Andreessen Horowitz and a $20 million Series A round from Coatue in quick succession this year. Patch’s platform seeks to…