Tasks
- https://www.bvp.com/atlas/eight-lessons-from-the-first-climate-tech-boom-and-bust
- https://www.bcapgroup.com/from-clean-tech-1-0-to-climate-tech-2-0-a-new-era-of-investment-opportunities/
- Read David Rotman’s article on this topic
- Read Third Sphere playbook: Third Sphere Exits Playbook Working Doc
The highly-publicized CleanTech 1.0 boom and bust from 2006-2011: According to a well-known post-mortem study, of the $25 billion that VC investors poured into CleanTech 1.0 from 2006-2011, more than 50% was lost by 2015. (source)
Michael Kearney at The Engine focuses on the fact that the investment community has evolved and matured since Cleantech 1.0. He also points out regulatory and policy changes that could make it easier for energy deep tech to succeed.
DCVC’s thesis, outlined in their Deep Tech Opportunities report is that most deep tech isn’t a good fit for venture capital, but that there are pockets of opportunity where advances in computation, AI, ML, and so forth:
We back entrepreneurs who use emerging computational techniques to advance breakthroughs in science and technology, solving hard, real-world, trillion-dollar problems in industries that have resisted change. […] The secret, we believe, is to employ machine vision, robotics, simulation, large high-value datasets, and machine learning (along with other forms of AI) to attack old science and engineering problems from new angles. Only in the last decade has computing matured to the point that it can accelerate new ideas in physical and life sciences into broad commercial use. Today, it is speeding up the design-build-test-learn cycle and reducing resource requirements in every field from energy to materials science to drug development.
This means DCVC is not interested in certain areas such as Direct Air Capture:
“I’m not saying we won’t need it,” Rachel Slaybaugh says. “And I’m not saying there won’t eventually be good businesses here. I’m saying right now the markets are very nascent, and I don’t see how you can possibly make a venture return.”
They are similarly not bullish about investments in Clean hydrogen as a replacement for fossil fuels. They write:
Hydrogen lacks the energy density of petroleum-based fuels. It’s also energy-intensive to produce while being difficult and expensive to store and transport safely. We don’t think the compromises currently required are worthwhile.
Francis O’Sullivan et al. showed in 2016 that the Cleantech 1.0 wave resulted in dismal returns for VC investors. Basically, all categories of cleantech startups except software plays performed terribly. This includes hardware integration plays (like Better Place), which one might have expected would face less technology risk!
They argue that cleantech companies commercializing innovative science and engineering are especially unsuited to the traditional VC investment model for four reasons: (1) they take a long time to work, and they are illiquid during that time; (2) they are expensive to scale, typically requiring more capital than VCs are equipped to provide; (3) they operate in commodity markets with low margins; (4) potential acquirers are risk-averse, rarely willing to acquire, and have a low willingness to pay for risky acquisitions.
O’Sullivan’s conclusion isn’t that we should only create software startups. Software alone cannot accomplish the energy transition. Rather, he argues that the cleantech sector needs “a more diverse set of actors and innovation models.”
Leonardo Banchik at Global Founders Fund agrees that many of the systemic challenges of Cleantech 1.0 are real - i.e., it’s still hard to build a successful tough tech company with venture capital dollars. Leo attributes this primarily to: - The lack of funding for first of a kind (FOAK) plants - Lack of non-dilutive funding for scale-up means as a founder you will get totally diluted by the time your tough tech startup exits.
That being said, Leo feels that some things have changed since Cleantech 1.0: - Solar and wind (and to some extent batteries) have become much cheaper. This unlocks things that weren’t possible or economical 15 years ago. - The advent of more financial entities that specialize in late stage capital: Wollemi Capital, Halftone Ventures, Homecoming Capital, Keyframe Capital Partners, S2G Ventures. - New government programs like DoE LPO and DoE OTT.
According to Kavita Patel from MUUS Climate Partners, what has changed since Cleantech 1.0 is:
- The capital stack has matured.
- Debt is now available
- Policy incentives shift the economic balance, e.g. the IRA
Francis O’Sullivan has more thoughts about this:
- Founders should think carefully about how to raise the right amount of money and the structure of it, to minimize dilution and to avoid raising at unrealistic valuations.
- In particular, some startups have stacked up a lot of VC equity at high valuations. When the time comes from growth capital or an exit, there is a big discrepancy in valuation.
- One solution is to try to raise nondilutive capital (e.g. venture debt, lines of credit, government loans), strategic investments, etc
- Because you’ll need to raise billions eventually, and that won’t come from VCs. You’ll end up with a huge disconnect between the valuation from your VC rounds and your upcoming raises from non-VC
- When raising with VCs, look into phased raises (and evolving valuations per phase), with milestone-based payments and the option not to take the money if you don’t need it.
- More generally, founders should have a plan for their capitalization journey.
- Frank considers that the IRA doesn’t help all that much with avoiding the pitfalls of Cleantech 1.0, because many of the hurdles to new deep tech ventures come way earlier in the journey than when you’re ready to leverage the IRA.
- Why did integration plays fail in Cleantech 1.0? Mostly because the business challenges were at least as important as the technology challenges in Cleantech 1.0. Commodity pricing. Risk averse customers. A complicated value chain. And so on. It was hard for many of these integration plays to mesh with the business model of their customers and the existing industry they were plugging into.
- Keep in mind that most of these big industries buy from a single provider with a whole catalog of solutions. So even if you have a great (single) product, you’ll have trouble selling it unless you’re in somebody else’s catalog.
- Margins are low in the energy sector, so the system rarely invests (at scale) in problems that don’t already exist today. Frank is frustrated by the “impedance mismatch” between what startups & early-stage investors are talking about and what the energy system will actually pay for. Give me solutions to operator problems today!
- As an example of what does make sense, Frank shared the example of a portfolio companies that does biogas compression stations for heavy-duty trucks. This is an incremental solution but it advances near-term decarbonization today! And the opportunity is only slated to get bigger.
Some personal guidelines:
- You have to be quite confident that this can work
- You have to be passionate about the goal and the people you’re doing it with, so that even if it fails or takes a long time, it’s still a pleasure
- Leah Ellis reminded us that adventure = 1 part fear + 1 part excitement. Careers can be adventures, so set out outrageously exciting goals! 💪🏼
- The vision can and often should be relatively bold and more top-down.
Aaron Fyke from EnergyCache: if your clean tech company is only profitable at mass market scale and doesn’t have a way to make money with early adopters, you’re going to fail. source