Climate change as funding opportunity
Besides being driven by returns to their investments, VCs in the climate tech space focus on different verticals and target different success metrics. World Fund for example has the climate performance potential (the potential to save on emissions per year) as KPI: if the technology doesn't save at least 100 Mt per year, they won't invest. Because of this high threshold, they focus on AgTech & Food and on Energy.
For MCJ Collective on the other hand, start-ups need to meet 1 of the 4 criteria: 1) pursue direct carbon removal, 2) pursue carbon or emissions mitigation, 3) climate adaptation and resiliency, and 4) enablement of tech, talent, and capital to go into climate. Voyager and Elemental Excelerator look for opportunities where decarbonization is central to the business model, not a value that is tapped upon later.
As with traditional tech investments, climate VCs also vary in how they manage their investments once a deal is closed. Some take a hands-off approach, while others are more interested in helping their portfolio companies actively. SOSV, for example, already considers whether they have enough expertise themselves to help the entrepreneur before funding their projects. Their commitment is not only about money, but also about the added value of the investor.
So which are the verticals or specific solutions VCs show interest in?
The carbon vertical has been the steepest climber of 2022 and continues to raise enthusiasm among investors. Last year's report of the Net-Zero Asset Owner Alliance tells us that besides constant decarbonization efforts, we should also remove 6 to 10 Gt of CO2 from the atmosphere per year by 2050 to keep global average warming to 1.5 °C.
VCs show a lot of interest in direct air capture, with the Swiss company Climeworks and its CHF 600m megadeal in 2022 as the best example. Both Europe and the US are competing to be the best environment to develop this technology. In addition to direct air capture, there are solutions such as soil carbon, afforestation, mineralization, ... The challenge for start-ups will not only lie in developing these techniques, but also in their scalability. Investors are therefore interested in creative ways to scale these nature-based carbon removal technologies.
Carbon accounting and supply chain traceability
The emissions of complex supply chains are hard to track for companies. To reduce their emissions in a targeted manner, they need to get a better quantified overview of these so-called scope 3 emissions. Innovation Endeavors expresses the need for more accurate accounting solutions for complex supply chains. There is also need for vertical-specific solutions, that are tailored for the specific industry and their typical issues. This niche focus would allow the accounting platforms to bring additional value as well.
Energy & electrification
The energy vertical has raised a lot of capital in the past years, but there are still many opportunities in the field. The current energy crisis in Europe has created extra momentum for the industry.
Replacing combustion engines remains a big area of interest for VCs. This can be done through alternative fuels, such as green hydrogen, or through the continuous development of electric vehicles and other means of transportation. Sarah Schlarsic from Voyager also mentions a big interest in more efficient industrial heating processes: the production of most of our materials involves large amounts of heat, which is produced with fossil fuels and goes lost for a large part.
Agrovoltaics is according to Sebastian Heitmann from Extantia Capital a trend with a lot of potential to build out. With strategically placed or with special transparent solar panels, land can be simultaneously used for both food production and power generation. The solar panels could also bring other benefits, such as maintaining a more stable temperature for the crops.
Another innovation worth mentioning is concentrated solar-thermal power (CSP), which uses mirrors to concentrate a large area of sunlight into a receiver. When this light is converted into heat, electricity is generated from the thermal energy. According to experts, the technique is currently not on investor or policy agendas, but it's a promising area.
There is not only potential in creating more renewable power, but also in recycling the materials. The costs of recovering raw materials from the old solar panels are currently higher than the raw materials itself. As a result, solar recycling is still an underdeveloped low-margin business. However, the first generation of wind and solar farms will in a few years reach the end of their lifetime. Together with an increasing demand for the raw materials (and its upcoming scarcity), the solar recycling industry will be worth $2.7 bn by 2030. Besides recycling, there will also be a higher demand for cleaning and maintenance to keep the existing ones running.
Battery recycling and efficient mining
Not only scientists look at sustainable mineral mining and lithium-ion batteries recycling, also Chris Sacca from LowerCarbon Capital and Sam Smith-Eppsteiner from Innovation Endeavors draw attention to the matter. Minerals are a finite resource, and these solutions will not only enable the transition to clean energy in a more sustainable way, it should also preserve the human rights in the mineral industry.
At the European Tech for Climate Action conference, Christian Joelck from 2150 explained that it's now crucial to invest in the "unsexy hardware solutions that actually reduce carbon emissions". He sees opportunities in concrete, cement, and steel. No wonder: if the cement industry were a country, it would be the 3rd largest emitter of greenhouse gasses in the world. Every year, ~25b tonnes of concrete are produced, causing 8% of global emissions. Carbon-low cement production processes or on the other hand storing captured carbon in cement are solutions investors are eagerly looking forward to.
Heating and cooling is another aspect of buildings that deserves more attention. Innovation Endeavors and Voyager both see a lot of benefits in the extensive deployment of home and building electrification (based on renewable energy), such as heat pumps, electrical hot water heaters, and induction stoves.
Climate adaptation and resiliency
Even if we are able to turn around our way of living and implement all necessary improvements, we will still experience the consequences of climate change. An important part of new technologies should be oriented towards coping with the already present effects, such as wildfire detection or flooding risk tools. Christian Joelck also expresses interest in a cooling solution for the heat we will inevitably experience in our homes and lives.
New climate insurance plans are a development Innovation Endeavors is curious about, because insurance plans will need to adapt to the changing world as well. Tools to enable better investment decisions for real estate, city planning, and infrastructure management are also welcome.
In all these verticals, there are opportunities waiting that urgently need to be taken. Have you seen a gap and do you have an idea to fill it? Go for it! If you don't have the software knowledge for it yet, you can reach out to us: at Noldev, we help climate entrepreneurs to build their software. We would love to hear your idea.