Why investors are raising climate tech funds at a torrid paceJuly 20, 2021
Today, the investment landscape is powered by a vastly broader base of investors who are marshaling billions of dollars to tackle one overarching global threat: climate change.
"From seed- to growth-stage investors, we need a full ecosystem of climate tech funds," said Greg Smithies, a partner with Fifth Wall, a Los Angeles-based proptech-focused VC firm that is reportedly raising a $200 million climate-focused vehicle. "Ten years ago, a lot of this ecosystem sort of got gutted, and we need to rebuild it."
The new wave of climate-related dealmakers has been bolstered by a confluence of recent trends including a staggering rise in extreme weather disasters, an international push for net-zero emission targets and new tech breakthroughs that can potentially fight climate change.
Broadly, climate tech includes solutions aimed at decarbonizing the planet. Sprawled across sectors including transportation, real estate and agriculture, the industry encompasses startups focused on renewable power generation, electric vehicles, cellular agriculture and forestry management, among other areas.
So far in 2021, global investors have already closed as many climate-focused funds as were raised during the previous five years combined, according to PitchBook data. The flood of capital has led to a remarkable first half of the year for VC-backed climate tech companies, which have raised more than $14.2 billion worldwide—88% of the total for all of 2020. Smithies, who previously led sustainability investments for BMW i Ventures, joined Fifth Wall in December to co-lead the firm's climate practice. Fifth Wall has backed startups including energy management specialist Blueprint Power and Aurora Solar, which uses 3D modeling techniques to facilitate solar panel installation.
Smithies said an increase in tech innovations that will help lower costs has encouraged investment in startups that are working to reduce the carbon footprint of buildings. Buildings are among the largest sources of planet-warming emissions.
Demand for low- or zero-carbon real estate development has also been on the rise since regulators in the Biden administration have called for policies to slow down climate change.
Seventeen states along with the District of Columbia and Puerto Rico have adopted policies aiming to move to either all-renewable or zero-emission electricity supplies, according to the Clean Energy States Alliance.
Today's enthusiasm for climate tech represents a turnabout for an investment thesis that many considered a fringe strategy just a decade ago. Much of the skepticism among investors followed a series of failed VC investments in "cleantech 1.0" from the early 2000s, said Steph Speirs, co-founder and CEO of Solstice, a solar energy startup.
Speirs, who is currently seeking funding for her startup, said that she has seen more VCs interested in climate tech after the US presidential election last year.
New market dynamics are also a factor. In 1977, one solar energy watt cost around $81, according to Our World in Data. That price plunged to 38 cents by 2019.
"Even if you do not believe in climate change, you cannot cannot dispute the economic argument for deploying renewables," Speirs said.
Another sign of mainstream acceptance: More traditional venture firms, CVCs and private equity firms are creating funds that specialize in climate solutions.
Last week, growth-equity giant General Atlantic announced plans to raise a reported $4 billion for a growth equity fund focused on climate technologies. And TPG is said to be targeting $5 billion for its new Rise Climate Fund, focused on the climate and cleantech sectors.
Sam Hasty, an investor at Active Impact Investments, said that although fundraising for climate solutions has picked up, it remains to be seen whether GPs are disciplined and will be responsible for creating the impact that they say they're committed to. His Vancouver, Canada-based firm, which focuses on early-stage deals in the sector, closed a C$54 million climate tech fund in early July.
Many investors are wrestling with measuring the impact of their investments in a market that lacks a universally accepted accounting standard, Hasty said. For example, it is difficult to conduct an apples-to-apples comparison of emissions when the calculations depend on the details of a specific regional or municipal grid.
"The most difficult thing in venture capital in any kind of a hot market is separating the signal from the noise, right?" Smithies said. "Because there are hundreds of great ideas out there trying to save the planet and make money."
Featured image by Malte Mueller/Getty Images
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