“I always worry something is going to happen and it will suck the wind out of the market,” said Craig Lawrence, who led energy and clean tech investing at Silicon Valley’s Accel Partners between 2008 and 2010.
Funding for clean tech projects is undergoing a massive boom. A record $501 billion was pumped into the energy transition in 2020, according to BloombergNEF. The WilderHill New Energy Global Innovation Index, which tracks shares in 125 global companies that aim to address climate change, hit an all-time high earlier this year.
But the failures of a decade ago still loom large. Before the Great Recession that followed the global financial crisis, Silicon Valley investors poured billions of dollars into sustainable energy startups they thought could become as big as Google. Then, as losses mounted, they fled — tainting the sector for years. By 2012, the value of venture capital deals in climate technology had slumped to a measly $1.1 billion.
But investing in young firms and complex new technologies always carries risks. The question is whether this time around, investors are prepared to stand by their climate convictions and stay the course, even if things get tough.
“I believe the fundamentals are there to build world-changing businesses,” Lawrence said. “That doesn’t mean all the companies funded right now are going to be that.”
From boom to bust
This isn’t the first time sustainable investments have attracted a tsunami of money from those aiming to do good while collecting monster returns. Between 2006 and 2011, venture capital firms anticipating major growth put over $25 billion into clean energy technology, according to a 2016 report published by the MIT Energy Initiative.
But it wasn’t long before they ran into problems. Venture capitalists that were used to securing returns after roughly five years had portfolios full of startups that were struggling to deliver, thanks in part to the realities of developing and scaling up complicated and fresh technology in an established energy market.
“There was a sort of hubris among venture capitalists in treating the energy industry like they treated the tech industry,” Lawrence said.
Ultimately, venture capitalists lost more than half of the money they invested during this period. Then, at a crucial moment for solving the climate crisis, funding dried up. The political controversy over Solyndra, the solar technology startup that went bankrupt after receiving roughly $500 million in US loan guarantees, didn’t help.
“When you hit these major bumps in the road, it gets scary,” said Carmichael Roberts, who serves on the investment committee at Breakthrough Energy Ventures. “And I think, we had a lot of folks come in and for their own sets of reasons, when it got really complicated, they left really quickly, instead of figuring out how to fix things.”
Clean tech 2.0
In recent years, though, fears have started to subside. Crucially, technological innovation and huge investment from China have pushed down the costs of renewable energy sources, which are increasingly competitive with traditional fossil fuels.
“This current surge is all about economics,” Lawrence said.
Investors are also taking a broader view of sustainability, looking not just at solar and wind projects but also food, agriculture and manufacturing processes.
Investors “caught up all in one go in 2020,” said Angus McCrone, chief editor at BloombergNEF. “That’s the explanation for the big burst of the enthusiasm we saw.”
The dynamics have lured back many venture capitalists, who pumped more than $11 billion into climate tech deals in 2020 compared to just $2.6 billion in 2015, according to PitchBook data.
“We’re out of time on climate, so we’re not patient,” Roberts said. “But we’re realistic.” Breakthrough Energy Ventures’ funds run for 20 years, instead of the 10 years typical in the venture capital industry.
Where the risk lies
PitchBook sees the climate tech market growing to more than $3.6 trillion in 2025. But that doesn’t mean all parts of the clean tech resurgence are safe from another pullback.
Among some investors, there are concerns that given past jitters, one scandal could spark withdrawals just as the sector starts to gain momentum. The magnitude of money now looking for a home is also feeding concerns that some will inevitably flow to unworthy companies.
“The amount of risk being put on the public market is higher than it should be, and I worry if some of those fail catastrophically, and retail investors get hurt, it will stain the whole category,” Lawrence said.
“It’s probably going to require government grants or some other kind of government assistance to enable projects to go ahead,” he said.
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