Apr 10, 2021 - Economy

Fighting climate change with venture capital is different this time

Illustration of the recycle symbol made out of dollar bills

Illustration: Sarah Grillo/Axios

Silicon Valley got a black eye a decade ago when its big venture capital foray into expensive and nascent cleantech didn’t pan out—but its recently renewed interest in a wider scope of technologies that can tackle the climate crisis could be different this time around.

Why it matters: Climate change is one of the most pressing challenges of our time, and the tech industry’s innovation could be a powerful tool to stem it.

Flashback: Several years after the Dotcom bust, a number of prominent venture capital firms like Kleiner Perkins, DFJ, and Khosla Ventures bet big on clean tech as the next big thing.

  • Venture capital jumped from about $300 million a year in cleantech investments between 1996 and 2005, to $1.7 billion in 2006, and peaked at $4.3 billion in 2011, according to the NVCA.
  • And while some investors did well and backed successful companies, the spectacular crumblings of companies like Solyndra and Fisker kept a lot of VCs and limited partners away for many years.

Fast forward: The climate crisis has sparked an interest from Silicon Valley and venture capitalists, with influential investors like startup accelerator Y Combinator, Union Square Ventures, and Sequoia Capital getting more serious about investing in potential solutions.

This time around, investors tell Axios that there are some fundamental differences:

  • Broader belief in climate change: The understanding that climate change will have profound consequences for the planet and the people on it is so much more widespread today. “It’s no longer something that will affect our great-grandchildren—it’s affecting us now,” DBL Partners managing partner Nancy Pfund tells Axios.
  • Stronger capital environment: “It’s no longer just a venture capital game,” says Spring Lane Capital co-founder Rob Day. “One reason the last wave of VC did not turn out really well is because at the end of the day, these are physical asset plays—even software plays are tied to physical assets.” Today, there's not only capital across all stages of VC, but also other types of investors to fund projects like factories.
  • Larger scope of investments: Beyond investing in the same areas like renewable energy and batteries, today’s climate tech VCs are looking at agriculture and other food production, eco-friendly transportation, and a wide variety of startups that can have an impact on society’s greenhouse gas emissions. “Nowadays, I’m equally—if not more—excited about our food bucket and that didn’t really exist before,” says Congruent Ventures managing partner Josh Posamentier.
  • Proven success: Companies like Tesla and OPower that came out of the last boom, along with newer successes have helped legitimize the sector and serve as a counterpoint to the skepticism that followed the cleantech bust.

Between the lines: Investors are hoping the industry will avoid one of the biggest mistakes of the last wave: plowing too much money into expensive factories and nascent unproven tech.

  • “The was too much capital for the state of the opportunities, technologies weren’t quite ready” says G2VP partner Brook Porter, who previously helped lead Kleiner Perkins’ (successful) green investing growth funds.
  • And advances in core technologies have not only brought down costs, but also made way for startups to innovate with new commercial applications or business models instead of building factories.

Yes, but: Like the rest of venture investing, there are still big risks—and unknowns.

  • For one, while there’s enthusiasm about carbon removal and offsets, some experts are still skeptical, citing the lack of a price on carbon and the need for higher quality offsets.
  • Other investors still worry that big headline-making failures or disappointing returns could once again put limited partners off. And this time, “it would take more than 10 years for them to come back,” warns Posamentier.

The bottom line: Investors are much more hopeful now that their dollars and the entrepreneurs they're giving them to will move the needle.

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