Jun 16, 2022

Is Climate-Tech at an Inflection Point? The State of the Industry in 2022

Bram Berkowitz

f you follow the news, you’ve likely heard about the serious threats climate change poses to the environment and society.

Not only has there been severe and rapidly changing weather, but experts are predicting that several cities could even be underwater by 2050.

And a whole sector of startups has put it on themselves to help solve this looming issue.

With startups constantly thinking about the future and being a huge force of change, this has sparked the development of a whole new startup subsector known as climate tech. 

Climate tech can be defined as startups that directly eliminate emissions, that help people acclimate to the effects of climate change, and increase our understanding of the environment.

But new startup sectors can be met with skepticism, a lack of investment, and a slew of challenges because they are often accompanied by new and unforeseen challenges.

And now, with climate change becoming one of the key challenges facing humanity, is climate tech finally at an inflection point?

If you ask the legendary venture capitalist Chris Sacca, who is well known for his investments in the likes of major tech giants Twitter and Uber, the answer to this question is a definitive yes.

“There has never been a better time to start a company focused on emissions reduction or actively removing carbon already in the atmosphere,” Sacca wrote in a blog post last August after his fund Lowercarbon Capital raised another $800 million. “The total addressable markets are literally the biggest in history and we have no doubt that multi trillion-dollar market caps are just up ahead.”

And Sacca looks to be right if you look at how funding for the subsector has begun to take off in recent years, according to a recent report on the future of climate tech from Silicon Valley Bank.

As you can see, U.S. VC investment in climate tech has followed general funding trends in recent years, with much more pouring into the sector in 2021 and at almost every funding round except the seed level. 

Additionally, VCs are raising much more funding in order to keep supporting the sector – VCs in 2021 closed more funds and raised more capital than ever before.

There are also some big names in the public markets like Tesla, which currently has a $662 billion market cap, and Rivia which have shown just how much potential there is for climate tech from an exit and profitability perspective.

It hasn’t always been like this, however, and it’s taken many years for climate tech to once again gain serious traction. 

In the early part of the 21st century, there was actually a lot of enthusiasm around climate tech and investors poured into the space. However, the cost of alternative energy technologies such as natural gas and solar power plummeted, which made it hard for startups in the space to grow and therefore hard for investors to achieve good returns. Unsurprisingly, this made it hard to attract funding to the space.

But there has been a real movement to increase awareness as a result of how dire the situation has become. This has really started to move the needle for shareholders and once the shareholders take notice, then the large corporations, which can really move the needle, start to follow.

In 2020, shareholders of the largest bank in the U.S., JPMorgan Chase, made waves when shareholders at the company’s annual meeting nearly passed a resolution that would have required the bank to be more transparent on its lending activities to the fossil fuel industry. As the largest global lender to the fossil fuel industry, this would have been a big deal.

While climate tech is progressing, there are still several challenges in attracting investment, according to a recent report from PWC on the sector.

A big one is risk aversion, particularly in the early-stage space, where we saw in the chart above that the amount of seed investment remained the same in 2020 and 2021. The report said that investors are still focused on climate tech in industries with “demonstrated success and a pipeline of late-stage funding.” 

Climate tech investment has been heavily weighted toward mobility and transport and food, agriculture, and land use, but much less so toward areas like Greenhouse gas capture removal and storage. This will be an issue for important areas of climate tech that don't have a track record. 

“Our analysis finds that there are still significant areas of untapped potential,” the PwC report stated. “Of the 15 technology areas analyzed, the top five that represent over 80% of future emissions reduction potential by 2050 received just 25% of recent climate tech investment between 2013 and H1 2021.”

Another problem the PwC report references is talent, which also happens to be an issue in most sectors these days. Specifically, the report talks about a lack of founders who really understand the most pressing climate challenges and how to solve them.

On the whole, though, climate tech is moving forward and looks to have lots of momentum. Between 2013 and 2021, there has been roughly $222 billion of investment into the space in 3,000 identified climate tech startups. Of every $1 of VC investment, roughly $0.14 goes to a climate tech startup. 

In his blog post, Sacca said that the good news is that many investors now understand what is happening with climate change and want to be part of the solution. But even better, at least according to the billionaire startup guru, are the investors that don’t care about saving the planet and are just interested in making money.

“Of course, that’s part of our underlying thesis: Massive change will happen because these types of investments will pay off for sheer business reasons alone. Thus, for everyone emotionally unburdened by the existential crisis facing all living things on the planet, welcome!” wrote Sacca.

It has become clear however that even in a world without targeted government stimulus, the green investing space is not going to disappear.

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