Jan 11, 2024
 in 
Trends

Venture Capital and Cleantech: Investing in a Sustainable Future

Author
Michael Sable
F

ew problems are as massive, pervasive and important as anthropomorphic (man-made) climate change. Over-reliance on fossil fuels with their deleterious impacts in terms of pollution, habitat destruction, and global warming has generated a need for innovative solutions. Industrialization has produced wealth but it has done so by endangering the health of the planet and the creatures that inhabit it.  

The survival of the human race is now literally at stake. Every year, we are faced with increasingly powerful hurricanes, intense droughts that produce food scarcity, the depletion of the polar ice caps, and unanticipated pandemics of novel diseases due to our abuse of the planet. 

These are the kinds of huge, existential problems that require entrepreneurial innovation and the active involvement of the venture capitalists that finance it. Broadly speaking, the solutions to these challenges are grouped under an all-encompassing category known as cleantech, which has been attracting larger and larger amounts of investment from the venture capital community. Investment in cleantech is one of the best ways of doing well financially while also doing well ethically. 

It is also an intellectually stimulating investment category because it is so interdisciplinary in that it integrates many different areas: finance, urban planning, software engineering, biotechnology, ESG, energy, etc. Cleantech is arguably the most important investment category in the venture capital arena.

What exactly is Cleantech?

There are many different definitions of cleantech. As defined herein, cleantech is synonymous with greentech and climatetech. It encompasses a wide variety of technologies including renewable energy (solar, wind, geothermal, biomass, nuclear); electric vehicles; bioremediation; recycling; electric vehicles; battery storage; water preservation; energy efficiency software; and even new materials. 

Cleantech is less about the technology used and more about the objective: to clean up the environment and facilitate sustainability by using any technology or process that does not harm the planetary ecosystem and the people that live within it. The impacts are immense as they can be felt through improvements in transportation, food quality, human health, air quality, and energy efficiency. Over the course of the industrial era, realizing success in these fundamental areas has proven to be exceedingly difficult, which is why cleantech is so challenging. 

Here are the myriad cleantech applications:

Energy & Energy Storage: Innovations that utilize, accelerate and enable the utilization of renewable energy resources in addition to energy production from alternative sources. It also comprises technologies that utilize waste streams to directly produce energy from landfills or waste. 

Circular Economy: This refers to an economic paradigm involving comprehensive reuse and regeneration of materials, products, and the waste they produce. Just as in nature, even that which decays can be used to add value by facilitating life.

Sustainable Water Management: Applications in this category center on improving water conservation, water resource availability and water pollution control. This has a tremendous impact on agriculture and human health given how polluted water is often a venue for the spread of disease. Food that can be produced with less water can facilitate greater food security and improve supply chains. 

Water is basic to our lives. As such this is an urban planning and public policy-centered aspect of cleantech involving political and technological dilemmas such as drinking water distribution, treatment, and usage. Examples include on-site water monitoring, cooling solutions, recycling of microbial water treatment, rainwater harvesting, and flood control. Waste centers on cradle-to-cradle approaches to reduction, recycling and reuse technologies in addition to original business models and approaches to materials utilization. Some examples include CHP (combined heat and power), waste cleanup and remediation and reprocessing technologies.

Sustainable Mobility: This has been a major focus of venture capitalists given the trillion-dollar market for mobility. The goal is to enhance mobility while decreasing the environmental consequence of fossil fuel powered cars, trucks and motorcycles. It also includes technologies such as fleet management software and hardware systems, logistics management, fuel cell vehicles, and biodiesel applications. Countries like China have made success in this market a national mission.

Chemicals and Advanced Materials: This is arguably the most difficult aspect of cleantech as it involves the ongoing revolution in physics, chemistry and nanotechnology. Increasingly, scientists are able to develop new materials that reduces the impact of hazardous substances. For example, materials and polymers that are resistant to heat like asbestos but without the cancer-causing impacts. Other examples include the manufacture of polymers from recycled pollutants and materials that can seamlessly integrate and communicate with the digital world.

Energy efficiency: Technologies that facilitate saving energy at home and in industrial processes, which reduces household and business costs while also decreasing greenhouse gas emissions. Examples include software such as enterprise energy management; artificial intelligence and big data applications such as energy analytics; and enhanced manufacturing techniques, industrial process improvements, waste heat recovery, and LED lighting. 

These are just a few of the major sectors in cleantech but new industries are being created as technologies evolve and cross-filtrate. We are at the beginning of a profound revolution because solutions to the environmental challenges of our era requires that scientists, entrepreneurs, and venture capitalists explore outside the constraints of their particular industrial sector.

The Cleantech VC Landscape

In recent years, venture capital investment in cleantech has exploded to $70 billion in 2022:

Over the last decade, the United States has experienced the greatest amount of cleantech venture capital investment followed by China and Europe. There is a higher degree of state investment in cleantech in China but the United States is increasingly catching up in that regard. The Chinese government targets industries that it regards as essential to the economic development and self-sufficiency of the nation for robust financial, technological and political support. However, recently, public policy in the US has begun to more actively support cleantech. For example, the Inflation Reduction Act of 2022 has set aside approximately $370 billion in funding for climate and clean energy projects including funds for EV and battery manufacturing.

Venture capital investment in cleantech reflects the size of the market. According to Statista, the global cleantech market is expected to reach $600 billion by 2030.

Between 2023 and 2027, the global cleantech industry is expected to realize CAGR of almost 6%, which is very appealing rate for such a huge market at a time when recession is on the horizon.

Over the last 5 years, there has been a significant shift in the share of cleantech investments.

Regional Share of Cleantech Venture & Growth Investments

The Asia Pacific with China in the lead has witnessed a 50% increase in investment while North America has experienced a decline of 33% of the overall share. Interestingly, not only is the Chinese market the largest single market for cleantech but the Chinese also dominate the cleantech supply chain in that they are key actors in terms of control over the rare earths and critical materials that are so essential to success in this industry. In particular, China is the third largest producer of lithium which is a critical material for the rechargeable batteries used in electric vehicles:

Batteries have been one of the primary drivers of the exponential increase in lithium production.

The global EV market which is expected to experience CAGR of almost 14% between 2023 and 2030 depends on lithium—at present—at demand for these vehicles is exploding in Asia:

China is a powerful stakeholder in the lithium-ion battery production industry. Not only is it the third largest producer but Chinese companies have acquired approximately $5.6 billion worth of lithium assets across Chile, Canada, and Australia over the last decade. In addition, China hosts 60% of the world’s lithium refining capacity for batteries. Rechargeable batteries accounted for 74% of lithium consumption as of 2021. Due to the importance of lithium as well as its relative scarcity, lithium prices have been rising dramatically. 

As of 2022, the average price of battery-grade lithium carbonate is estimated at $37,000 per metric ton which is a more than a 700 percent increase from the $5,180 price in 2010. This highlights a downside of cleantech in that it is not always benign. For example, aside from the rising cost of lithium, the lithium batteries used in electric vehicles are extremely sensitive to high temperatures. 

This is evident in numerous reports of electric vehicles spontaneously bursting into flames. A second risk is environmental. The mining of lithium presents significant environmental and health hazards to human and environmental life in the countries wherein that activity takes place. In particular, lithium extraction can pollute water supplies, cause respiratory problems, and destroy aquatic life. 

The same downside risks can be found with other renewable energies such as wind. Wind is intermittent in terms of energy availability and it can destroy the habits of birds and other wildlife. In addition, the manufacturing process utilized for solar panels is not environmentally benign as it can produce a great amount of greenhouse gases. These are realities that must be acknowledged and addressed for cleantech to be truly clean. While progress is being made, cleantech is not always clean.

Fortunately, there are a number of innovations on the horizon. China is also a market leader in at least one of these areas. Increasingly, sodium-ion (salt-powered) batteries have emerged as an alternative to lithium-ion batteries. A sodium-ion battery replaces lithium with sodium, a material that is 500 times more abundant than lithium and far cheaper. Other advantages include the fact that sodium-ion batteries are not as susceptible to catching fire and are less sensitive to changes in temperature than lithium-ion batteries; and sodium can be extracted and purified at much lower cost with much less environmental impact than lithium. 

A critical actor in the sodium-ion battery market that is rapidly scaling its ambitions is China’s CATL. CATL is the world’s largest battery manufacturer. In July 2021, it unveiled a sodium-ion battery that can charge to 80% in just 15 minutes at room temperature. 

Working with its partner BYD, CATL initiated mass production of sodium-ion packs in the second half of 2023 and installed them in the BYD Seagull and other Ocean series models. CATL’s sodium-ion battery will also be incorporated into the Chery iCar brand of new energy vehicles so the viability of sodium-ion batteries in electric cars will soon be tested. 

Another sign of the vitality of the Chinese market in this industry is that 3 Gorges Company in China and a consortium of other companies have opened the largest sodium-ion battery factory in the world which is based in Fuyang in central China. HiNa Battery Technology Co. Limited is another Chinese company that is active in the sodium-ion battery space. 

The startup company was just founded in 2017 by CEO Kun Tang and is headquartered in Zhongguancun, Liyang in the Science and Technology Industrial Park. Unlike CATL, which has a broad focus on the entire battery market, HiNa is explicitly focused on the development and production of next-generation sodium-ion batteries that are long-lasting, low cost and have high energy density. 

It is targeting the energy storage market and is one of the few companies in the world that already owns several core patents and technologies related to sodium-ion batteries including materials, components, manufacturing, and applications. The company also produces cathode and anode materials as well as electrolytes for sodium-ion batteries. This is a sign of how rapidly the cleantech market can change particularly in highly lucrative segments like sustainable mobility.

Current Trends in Cleantech

Within the well-established market verticals that have been defined above, there are a number of strategically important startups that provide insight into how the industry is evolving. One of the largest industries in the world is construction. This industry is notorious for the excessive amounts of harmful pollutants and waste that its materials and processes routinely release into the environment. 

However, cleantech is now making low-carbon construction possible. Low-carbon construction involves building processes that are less environmentally deleterious and sometimes completely in harmony with nature—i.e. exteriors comprised of materials that facilitate cooling so there is less need to generate energy. 

It is also increasingly possible to use sustainable building materials like hemp-based concrete and green insulation to replace the polluting materials that normally comprise these substances. Aside from construction but also encompassing food and clothing, there is a general trend afoot to replace fossil-based materials with sustainable or “green” alternatives. These sustainable materials are usually sourced from organic materials such as food and agricultural waste. Considering that one-third of food produced for human consumption—1.3 billion tons per year worth $1 trillion—is actually lost or wasted globally, the benefits of transforming a portion of that into productive use are immense.

There are startups working to capitalize on this opportunity. For example, Glavel has developed a process that makes it possible to produce gravel from recycled glass. This gravel—known as Foam Glass Gravel—is rot, water, and fire-resistant so it can be used in a wide variety of applications. Arbiom is a startup that is developing protein alternatives for animal feedstock. 

Unlike soy and whey protein which have high GHG emissions and resource utilization, Arbiom SylPro has the same nutritional value but is a yeast-based product that puts far less stress on the environment so it can be harnessed by livestock farmers in protein-deficient regions. This makes it a great tool to address food scarcity. 

Additionally, INOVUES has developed a smart window technology that makes it possible to convert absorbed light into electrical energy. As a result, it facilitates energy efficiency by making it possible to reduce energy consumption during peak energy demand periods. Finally, a radical example of the wave of new materials innovations impacting cleantech is Circular System. This startup produces natural fibers from agricultural waste. Its textile-grade fiber, Agraloop Biofibre, is produced from food and medicinal crops by a wet processing technique that converts cellulose fiber from leaves and stems into soft fiber stacks which are then spun into yarns. 

Again, the potential impact is immense due to the fact that 17 million tons of textile waste are deposited in US landfills annually, which can take over 200 years to decompose. These incremental revolutions in basic processes are indicative of how cleantech is having a profound impact on huge industries, which is a great part of the attraction to venture capitalists.

Some Notable Cleantech Investors

A number of venture capitalists have emerged as leading investors in the cleantech industry. Among them are:

  • Energy Impact Partners: Founded in 2015 and based in New York, EIP has invested $3 billion in cleantech. Its goal is to advance the economy towards a zero-carbon emissions state. It has invested in 100 companies at different stages including Arcadia, Scythe, Dragonfly Energy and Enchanted Rock.
  • Energize Ventures: Founded in 2016, and headquartered in Chicago, this early and growth stage venture capital fund has invested $480 million. Its Fund II closed in September 2021 and it seeks to invest in 15 or more digital-first cleantech startups that are seeking Series A, B or C rounds in energy and sustainability. 
  • SOSV: This global venture capital firm seeks to assist founders in the development of breakthrough technology in the human and planetary health arenas by transforming scientists into entrepreneurs. It supports them with seed and early-stage capital as well as training programs. Heretofore, it has provided over $200 million in funding including investments in Novoloop, Upside Foods, and Notco.
  • Khosla Ventures: Based in Silicon Valley and a very famous venture capital firm, it provides both early-stage and late-stage capital. It has been in existence since 2004 has made myriad investments in solar, biofuels, and battery storage including Mainspring, Impossible, and Terrapower.
  • Clean Energy Ventures: CEV is a Boston-based venture capital firm with a mission to support startups that can help it to realize its goal of reducing carbon emissions by 2.5 gigatons by 2050. It has a science-heavy team with physicists and engineers who conduct technology assessments to ensure the viability of the solutions proposed by the early-stage startups it is seeking to invest in. Amongst these startups are Sparkmeter and ClearFlame.

In addition to venture capitalists, there are also important accelerators and incubators active on the cleantech arena:

  • Urban Future Lab: Based in Downtown Brooklyn at the NYU Tandon School of Engineering, UFL is a nonprofit innovation hub for cleantech startups. It is home to ACRE, New York's longest-running cleantech incubator, and tech-focused accelerators such as the Carbon to Value Initiative, Offshorewind Innovation Hub, Innovate UK Global Incubator Programme, and Low-Carbon Hydrogen Accelerator. Participating companies receive business advisory services, marketing and design support, PR support, investor meeting preparation and introductions, access to mentors and channel partners, and office space.
  • Center for Evaluation of Clean Energy Technology: CECET is an Intertek company dedicated to the advancement of clean energy technology, launched in partnership with the New York State Energy Research and Development Authority (NYSERDA). CECET provides access to expert guidance, technical due diligence, and state-of-the-art laboratory testing facilities to speed up the commercialization of clean energy technology.
  • Los Angeles Cleantech Incubator: LACI is a nonprofit organization funded by the City of Los Angeles. In partnership with UCLA, USC, Caltech and Jet Propulsion Laboratory – LACI seeks to accelerate the commercialization of clean technologies by independent entrepreneurs. Aside from innovation and sustainability, LACI’s mission is to promote cleantech job growth in the region.
  • Telluride Venture Accelerator: TVA hosts an annual competition seeking applications from entrepreneurs seeking to accelerate their startup. From the candidates, TVA selects up to six companies to attend a five-month, immersive program in Telluride, Colorado. TVA invests $30,000 in return for a 5% stake. The entrepreneurs work together at a dedicated co-working space and attend regular workshops. They also benefit discounted products and services, ranging from web development and hosting to legal and accounting. 
  • Powerhouse Incubator: This is the world’s only incubator dedicated exclusively to intelligent energy technologies including solar, storage, demand response, and grid integration. Based in Oakland, Powerhouse co-working space and networking opportunities to meet some of best minds in the cleantech industry.
  • Prospect Silicon Valley: PSV is a nonprofit cleantech/urbantech innovation hub with the aim of solving the biggest challenges faced by cities. Prospect Silicon Valley targets solutions in mobility, transportation, energy and the built environment. Based in San Jose, where Prospect Silicon Valley operates a Technology Demonstration Center, Prospect Silicon Valley is facilitating collaboration amongst the public sector, startups and corporations to build new cleantech solutions for cities.

There are many other cleantech-focused incubators and accelerators across the country.

As new as cleantech is, it is also arguably the most rapidly evolving segment of the venture capital industry. This is because the problems are so immense and there are so many different sciences and knowledge-bases that can be brought to bear in solving them. Indeed, just as cleantech emerged as an alternative to fossil fuels, now that the deleterious aspects of some cleantech have been determined, innovations that can serve as alternatives to the first generation of cleantech are rapidly being deployed. 

These innovations are increasingly anchored in the new materials revolution and make use of the principles of the circular economy with industrial and agricultural waste being harnessed for commercial and  environmental benefit. These innovations will require continued investment from the venture capital community because the climate crisis is not going away anytime soon. According the International Renewable Energy Agency, global cleantech investment of at least $150 trillion is needed by 2050 to stay within the 1.5-degree temperature increase threshold recommended by the Intergovernmental Panel on Climate Change.

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