Climate tech 2.0 must sell venture capital on its future
Like vanilla ice cream on a hot day, the Earthshot prize for environmental initiatives this week delivered a dollop of optimism for our warming planet. At a glittering ceremony in London, prize winners from around the world told feel-good stories of how they were restoring coral reefs in the Bahamas, cutting air pollution in India, generating clean energy in Thailand, reusing food waste in Italy and preserving forests in Costa Rica.
But the title of the awards, which echoes President John F Kennedy’s mission to shoot astronauts to the moon, is something of a misnomer. Although they serve as an inspiration to local communities everywhere, none of these initiatives is ever likely to make a big enough impact to repair the dent in our atmosphere. As the recent Intergovernmental Report on Climate Change made clear, only substantial, and urgent, cuts in greenhouse gas emissions and the removal of large quantities of carbon from the atmosphere can now make a difference. The real earthshots will be breakthrough technologies, such as fusion energy or mass carbon capture: these require billions of dollars of investment compared to the £1m prize awarded to each Earthshot winner.
The challenge is how to turn promising technological innovations into successful global solutions. Here, governments have an indispensable role to play in funding basic research, co-ordinating international action and shaping markets by adopting widespread carbon pricing, for example. But the encouraging news is that venture capital is also increasingly playing a part. 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.
“There is so much momentum at the moment. We love 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.
In her view, the climate emergency means we have to reconfigure almost all of our economic systems: from generating and transmitting energy, to transporting humans and goods, to growing, making and building things. This is where the traditional playbook of the VC industry can be used to make speculative investments in risky ventures and scale those technologies that work, Rae says. “Capitalism is part of the solution.”
However, many VC investors remain scarred by the clean tech bust at the beginning of this century when they put $50bn into green companies with dismal results. 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.
Today’s climate tech entrepreneurs have had to endure the residue of investor scepticism and build companies that offer a market solution now rather than anticipate the adoption of widescale carbon pricing, Rae says. 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,” she says.
Consider the case of Carbo Culture, a US-Finnish start-up, which recently raised $6.2m in venture capital with the aim of removing 1bn tonnes of carbon dioxide from the atmosphere by 2030. Its 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.”
The trend is encouraging but the timetable — much like that for eating a soothing ice cream on a scorchingly hot day — is short. As David Attenborough, one of the Earthshot prize council members, said, hope springs eternal but we do not have eternity. “We need to do this now.”
john.thornhill@ft.com