Billions are pouring into the business of decarbonisation

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August 16, 2021

“NERDS WILL invent the future,” declared Vinod Khosla in 2010. The venture capitalist was not talking about the sort of nerds responsible for e-commerce sites, marketplace apps or social-media platforms. Rather, his speech, delivered at the California Institute of Technology (Caltech), was intended to inspire brilliant engineers and scientists to pursue climate-related innovation. The “clean tech” investment bubble had recently popped, so it then seemed an unsexy career option. But if top talent took on the hard engineering challenges involved, he argued, early commercial successes and rising public awareness would produce a “Netscape-like” moment, referring to the web browser which ushered in the consumer internet in the mid-1990s. “Ten years from now,” he predicted, “the level of invention will explode.”

The billionaire investor, who has since backed Impossible Foods (which makes low-carbon alternative protein and is valued at $10bn) and QuantumScape (which develops advanced batteries and last year raised $680m via a special-purpose acquisition company, or SPAC), got the timing about right. The International Energy Agency, an intergovernmental forecaster, calculates that new patents related to core technologies like batteries, hydrogen, smart grids and carbon capture are far outpacing those in other technologies, including fossil fuels.

Money has followed the innovation. BloombergNEF, a research firm, reckons that last year investors poured more than $500bn into the “energy transition” (shorthand for decarbonising everything from energy and transport to industry and farming), twice as much as in 2010 (see chart 1). A slug of that has come in the form of risk-tolerant venture capital (VC) flooding into a range of fields (see chart 2). PwC, a consultancy, estimates that between 2013 and 2020 VC investments in climate tech grew at five times the rate of global startup funding overall. In 2021 these investments may near $60bn in America alone (see chart 3), up from $36bn last year. Can this boom avoid the fate of the previous one and give rise to a new blockbuster industry?

The short answer is: quite possibly. The modern climate-tech business looks fitter and more financially sustainable than a decade ago, when VC firms lost over half of the $25bn invested in clean-tech startups between 2006 and 2011. Abe Yokell of Congruent Ventures, an investment firm, recalls that in those dark years, “If you walked into a VC boardroom and said you are working on clean tech, the senior partners left the room.”

Now they are all ears, encouraged by success stories such as Beyond Meat, a rival to Impossible Foods that made its early backers a tidy sum when it went public in 2019 at a valuation of $1.5bn and is now worth nearly $8bn, and especially Tesla, the electric-car pioneer whose market capitalisation has ballooned from $1.7bn when it went public in 2010 to $718bn. The S&P Global Clean Tech Index has generated annualised total returns of more than 40% over the last three years, more than double those of the benchmark S&P 500 index of big American firms.

Climate tech now makes up about a tenth of new investments made by Sequoia Capital, a legendary Silicon Valley VC firm. This month Chris Sacca of Lowercase Capital, a high-flying internet investor known for early bets on Uber, Instagram and Twitter, said he would launch climate-tech VC funds worth $800m. Nancy Pfund of DBL Partners, another VC veteran, reports that whereas in 2004 she barely scraped together $75m for a clean-tech fund, her new climate-tech vehicle raised $600m—and was oversubscribed.

Just as significant, Mr Yokell’s listeners have grown more diverse. Besides traditional VCs they include governments, philanthropists, Wall Street and big business. And these newcomers are investing in new ways.

Stated intentions

Take states first. On August 12th America’s Department of Energy (DoE) announced a $1.5bn partnership with a division of Breakthrough Energy Ventures (BEV), a $2bn-plus blue-sky investment fund founded by Bill Gates and a handful of his billionaire chums, including Mr Khosla. It aims to accelerate development of novel technologies in sustainable aviation fuel, green hydrogen, direct air capture and long-term energy storage. This augments the $20bn-plus loan programme that the DoE has available to boost clean energy and transport. If President Joe Biden’s infrastructure and climate proposals win final congressional approval, more funding for deployment and scale-up of projects may be on the way.

European governments are splashing out, too. Earlier this year the European Commission, the EU’s executive arm, teamed up with BEV on a $1bn initiative aims to build large-scale demonstration projects for clean technologies. Britain recently unveiled plans to invest $235m into climate-related technologies. Climate is a sensitive issue in China. Nonetheless, says Peggy Liu of JUCCCE, a clean energy NGO, it is the world leader in climate tech. Much of its official spending on “smart” technologies for more efficient factories, better batteries and motors is green-tinted.

States are not the only converts to climate investing. Charities and family investment firms are channelling capital into early-stage firms and offering patient capital willing to stick with “tough tech” for longer than a typical VC. By one estimate, family offices of the super-rich account for roughly 10% of total climate-tech VC deals, up from perhaps 5% a decade ago.

Elemental Excelerator, a Hawaii-based outfit part-funded by the Emerson Collective, a philanthropically minded firm set up by Lorene Powell Jobs, the widow of Apple’s co-founder, Steve Jobs, looks to fund “first of a kind, transformational projects”. Elemental’s early-stage investments of $43m have garnered $3.8bn in follow-on funding, says Dawn Lippert, its CEO; 20 of its 117 portfolio firms have gone public or found private buyers. Ampaire, which develops hybrid-electric aircraft, was acquired in February for $100m. Stem, an energy-storage firm, went public via a $1.3bn SPAC deal in April.

Wall Street wants a look-in, too. Earlier this year JPMorgan Chase, America’s biggest bank, said it would commit $2.5trn to sustainable investing over ten years. Of that, $1trn, which includes the bank’s own capital as well as money it raises from bond issues and flotations, is targeted explicitly at clean technologies. “Five years ago, we didn’t have the capability to invest in such firms or their VC sponsors,” says Brian Lehman of JPMorgan. Now the bank has dedicated employees like Mr Lehman who focus solely climate and green issues. It is already making smallish loans to pre-revenue firms in the sector and will expand into bridge financing between VC funding rounds and project finance for capital-intensive initiatives like indoor farms and solar-power plants.

Recent weeks have also seen the emergence of a few huge private-equity (PE) funds with a similar remit. In April BlackRock, one of the world’s biggest asset managers, teamed up with Temasek, a Singaporean sovereign-wealth fund, to create a $1bn decarbonisation vehicle. And in July alone PE firms committed over $16bn to climate tech. TPG, a Texan PE titan, said it had raised $5.4bn for its Rise Climate fund. Canada’s Brookfield Asset Management announced its own $7.5bn climate-focused fund, led by Mark Carney, former governor of the Bank of England. General Atlantic, another American PE giant, plans to raise $4bn for BeyondNetZero (BNZ), a fund focused on climate that will be led by John Browne, a former boss of BP, a British oil supermajor.

The last group of newbie climate investors comprises big companies. Many corporate giants are going beyond hollow commitments of greenery and “net zero” carbon pledges by investing directly in climate tech. According to PitchBook, a data provider, between 2017 and 2020 such corporate venture investment surpassed $40bn in all (see chart 4).

It looks set to grow further. Microsoft, the software giant founded by Mr Gates which last year vowed to remove all of the greenhouse gases it has ever emitted—and more—by 2050, has set up a $1bn climate-tech fund. Its fellow Seattle tech titan, Amazon, has launched one worth $2bn, financed entirely from the company’s balance-sheet. As such, says Matt Peterson of Amazon, its investments need not meet any internal rates of return. “The focus is on decarbonisation, which is a strategic need for Amazon,” he explains. The fund will measure success by seeing how much its investments reduce the company’s carbon footprint. It has backed startups such as CarbonCure, a low-carbon cement company, Redwood Materials, a battery-recycling firm started by J.B. Straubel, formerly Tesla’s chief technology officer, and Zero Avia, a hydrogen fuel-cell aviation firm. Amazon has also given money to Elemental Excelerator.

Even oil-and-gas companies and power utilities are getting in on the action. Koch Industries, America’s biggest private firm and a fossil-fuel powerhouse reviled by environmentalists, is putting around $350m of what it calls “long-term, patient capital” into the energy transformation. Early investments include EVBox Group, which develops the charging infrastructure for electric cars, and Freyr, a Norwegian firm that wants to build car-battery giga-factories in the Arctic. On August 10th Reliance, an Indian power-to-phones conglomerate, co-led a $144m fundraising round for Ambri, an energy-storage startup founded by Donald Sadoway, a professor at the Massachusetts Institute of Technology with a few other clean-tech firms to his name. Reliance is in talks with Ambri (which also counts Mr Khosla among its backers) to build a big battery factory in India.

Path independence

Big businesses, startups and their VC backers have also learned from past mistakes and recent successes. Their approaches to climate investments have become more sophisticated as a result. One lesson is to go after a large industry that allows people to break the carbon habit without the need to sacrifice their lifestyles, says Ms Pfund of DBL Partners. Tesla, on whose board Ms Pfund sat when it was a private company, is the perfect example. Another is Apeel Sciences, which uses plant-based lipids to limit food waste, responsible for more greenhouse-gas emissions than notoriously carbon-intensive cement-making, by extending the shelf-life of produce. The firm, which DBL has backed, boasts a valuation of more than $1bn.

Another novelty is the arrival of late-stage capital. BNZ will back companies from $50m to $500m or more in revenues. Lord Browne insists that, thanks both to supportive policy and to growing public awareness of global warming, there is no longer a trade-off between tackling greenhouse gases and making a profit. On the contrary, he says, firms can both reduce emissions and earn bigger returns. He is on the lookout for companies that could become “the Amazon of electricity”. He has no doubts that “some are going to grow to that size”.

The rise of late-stage VC and participation of PE firms is a healthy development for the startup ecosystem, thinks Shaun Maguire of Sequoia. Many climate-tech firms require innovative debt financing, so PE “can be quite useful”, he says. They help solve the problem for the 95% of entrepreneurs who have historically failed to secure follow-on funding, agrees Laura-Marie Töpfer of Extantia, a Berlin-based climate-VC fund.

Plenty of late-stage and growth-capital may give earlier-stage VCs more confidence with startups working on hard tech. And the strong environmental, social and governance (ESG) commitments of PE funds will dramatically change founders’ incentives. To be an attractive investment, Ms Töpfer says, founders and their backers must now ensure that ESG “is baked into firms from day one”.

The final lesson is the importance of collaboration. Where in the past VC firms backed startups chasing similar approaches to making thin-film solar panels, new climate-tech investors are open to working together to spread risk and speed up development. Reliance would be a customer of the new giga-factory, not just its sponsor. Besides forking over $1bn to Rivian, which makes electric vehicles, Amazon has also ordered 100,000 vans to help the e-commerce giant decarbonise its delivery fleet. No VC has that sort of purchasing power.

Brookfield wants to use the low-carbon know-how from its many investments in big renewable-energy projects to help big companies meet ambitious decarbonisation targets. Connor Teskey of Brookfield says the sort of partner his firm has in mind is ArcelorMittal. In July the giant steelmaker unveiled a decarbonisation strategy to cut its global carbon emissions by 25% by 2030 at a cost of $10bn. “A tech VC fund with just $100m can’t do this,” says Mr Teskey. Large firms want “a partner who can write you a $1bn cheque”.

This new spirit of co-operation matters because, in the words of Carmichael Roberts of BEV, “in climate tech, everything is hard.” Everything, that is, except raising capital.

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Billions are pouring into the business of decarbonisation

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