VC has a pivotal role to play in the climate fight, but it can’t do everything
The TechCrunch Global Affairs Project examines the increasingly intertwined relationship between the tech sector and global politics.
The COP26 in Glasgow last week averted disaster but also made clear the private sector’s crucial role in tackling climate change. Besides a few notable political wins to address methane leaks and rekindle frayed cooperation between economies, it was new commitments from the private sector that perhaps hold the most promise.
Back in 2006, Al Gore’s film “An Inconvenient Truth” helped ignited $25 billion of venture investments in clean tech, mostly in the solar and ethanol sectors. Despite investors’ optimism, much of this capital burned out only a few years later, and as a result, many venture investors categorically avoided clean tech for the better part of a decade.
Thanks to our successes in the first clean tech wave, we are naturally optimistic about the role of VC in helping fund and scale game-changing clean tech solutions. Coming out of COP26 and as the world relies on the rapid adoption of clean tech to tackle climate change, it’s important that we understand VC’s further potential — but also its limitations.
At its best, the venture model enables young companies to take risks on early technology and pursue innovation in a way that large companies cannot. It might be counterintuitive, but venture-backed startups — beyond the magic created by their highly performing founders and organizations — also often outspend much larger and better-financed companies.
For a decade, Tesla, then an early-stage startup, easily outspent and outthought VW, Ford and the rest of the established car companies on engineering, designing and manufacturing electric vehicles (EVs). Similarly, startups Joby Aviation and Lilium are running circles around Boeing and Airbus on electric vertical takeoff (eVTOL) aircraft and QuantumScape is leading on next generation solid-state batteries.
Due to short-term horizons, CEOs at large companies focus on incremental growth, cost savings and other “market-driven” imperatives and cannot stomach the risks required to develop and commercialize disruptive innovation. Although history is filled with vivid lessons in disruption, big company CEOs still don’t lead. As a result, we continue to find areas where long time horizons, high risks and lack of leadership yield opportunities uniquely tailored to VC. A striking example is that 20 years after Tesla, there are still such opportunities in electrifying the transportation space. For instance, with the EV revolution now underway, the need to recycle EVs and their batteries is becoming critical to sustaining growth; the leadership position in this nascent endeavor to recycle batteries is once more occupied by a startup, Redwood Materials.
Venture investors can push forward climate-friendly disruption in many legacy industries. Take, for instance, the chemical and manufacturing sectors. The incumbent companies in these and other heavy industries are slow to act and culturally inept in reacting to disruption. VC money, on the other hand, is helping to develop technologies that will give them no choice but to adapt, such as sourcing hydrocarbons sustainably by using renewable energy to separate hydrogen from water and carbon from air and combining these elements into all the chemicals that we have until now made from coal, oil and gas. Young companies like Electric Hydrogen and Twelve are doing exactly that.
Venture is also well positioned to provide funding for experimental technologies, like fusion energy. Outside of government, there are essentially no incumbent companies in this area, and with no adjacent companies bold enough to seize the day, the field is reliant on startups. Several startups have this year attracted more than $500 million each of investment capital, including Helion Energy and Commonwealth Fusion Systems.
VC can’t solve everything
Despite my optimism about our ability to have an impact, we must remember that tech, let alone venture funding, is only one piece of the puzzle in addressing climate change. We must scale clean tech solutions unnaturally fast in order to combat the relentless march of climate change, and VC is not well structured as a sector to address some of those key challenges.
First, we need to see giant sums of capital, dwarfing anything in VC, flow to low-risk, already established solar, wind and storage technology, often in countries with weaker currencies and much higher financing costs than the nearly free money we can access in the United States. By our estimates, more than $30 trillion, and therefore more than 10% of all investable capital in the world, needs to be invested in the coming decade, at rates of return of no more than a few percent; otherwise, clean infrastructure will not proliferate fast enough to combat the relentless tide of climate change.
The good news is that giant sums of capital are currently languishing in bonds at rates of return below those in renewables. One of the challenges of this decade is to incentivize other sectors of the financial markets to reallocate some of that capital, especially in emerging markets where demand for power, transportation, materials and food is growing quickly. VC, with its demand for high returns and mismatched scale of capital, will have little bearing on this giant, but pivotal, infrastructure challenge and opportunity.
Many point to “impact investing” as a way around this problem. And it’s true: During our early years, we were often the only capital available to a new startup, and therefore we had the leverage to demand a high return. We could invest in high-impact initiatives without sacrificing our financial incentives.
But as we have been joined by many new funds in pursuing clean tech opportunities, the balance between impact and return has become harder to strike. We need to recognize the potential incongruence between high returns and high impact, and VCs today need to add singular value to justify a higher cost of capital and also remain disciplined amidst great enthusiasm in the sector. It’s very tempting to chase “hot” opportunities and shift focus to proliferating more mainstream technology. From my perspective, clean tech is still ripe for breakthrough technological innovation and the best and most impactful VCs will maintain a contrarian philosophy and focus on areas that are unpopular and unable to otherwise attract capital at an early stage.
Second, the importance of government intervention cannot be overlooked. The market is not pushing incumbents in the energy and other industrial spaces to transition away from dirty, fossil-based systems fast enough. Despite the promises of net-zero pledges and the growing accountability for results demanded by shareholders, government mandates likely remain necessary to speed up this process.
Finally, philanthropy has an important role to play. I am very proud that I helped launch the nonprofit MethaneSAT, an organization that will police methane leaks from oil and gas operations globally through satellite imaging. Though clearly impactful, the initiative’s role as an open and objective policy enforcement tool does not align properly with a for-profit endeavor. There are numerous other important nonprofit interventions to fund and pursue.
It has been a great privilege to have supported from an early stage some of the most iconic and important companies and technologies in clean tech. But enabling these technologies and the startups around them remains only one ingredient in our fight against climate change. We cannot let the excitement about new technology distract us from the monumental infrastructure tasks needed in the near future. A substantial portion of the world’s financial capital needs to turn its attention to this space, and other forms of capital — social, political, philanthropic — must also be deployed if we are to secure a more stable future for generations to come.