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BFD Expert Voices - Climate Deals

BFD Expert Voices

Data: Climate Tech VC; Chart: Axios Visuals

Climate tech startups and investors have to navigate a harsh reality: Funding for mature growth-stage companies has fallen off a cliff, writes Katie.

Why it matters: Thousands of startups have been founded over the past three years that could have a much harder time raising crucial funds to help them grow into commercial companies.

By the numbers: In the first half of 2023, overall funding of climate tech startups dropped by 40% to $13.1 billion compared to last year. And funding into growth companies was responsible for much of that, crashing by 64% compared to last year (see chart).

Threat level: While climate tech startups had previously been a bright spot in a tightening venture capital market, climate entrepreneurs are now starting to feel the constraints.

Tim Latimer, CEO of geothermal startup Fervo Energy, described it as: "Still tons of funding available for early stage, but growth stage has fallen rapidly. We’re funding more teams than ever but it’s becoming a bridge to nowhere."

What they're saying: Navigating this funding environment will require entrepreneurs to focus on getting their companies to commercial viability more quickly, with less runway, and with potentially more onerous terms through the fundraising process.

Sean O’Sullivan, founder of early-stage climate investors SOSV, told Bloomberg: "What it means for any good startup is that they’re going to be suffering more dilution over the next 18 months than they would in the booming economy."

Many startups, particularly capital-intensive ones, could struggle to make it through the "valley of death" between developing a good product and achieving commercial production or operation. "For companies, a one or two-year downturn could be the end of the day," said O'Sullivan.

A tight funding environment means investors will get much more selective in who they back, says Kunal Sethi, founder of Prithvi Ventures. Sethi tells Katie climate startups need to stand out for growth-stage funding by focusing on their concept (wow factor), competence and capital to achieve price parity.

Big picture: For some climate startups that are looking for growth funding, venture capital might not be the best place to look.

"Equity funding isn't always the only or best option," Sethi says. "Cost effective funding like project finance to fund the plant or manufacturing is equally important to scale and work towards unit economics."

The Department of Energy's Loan Programs Office, headed by entrepreneur Jigar Shah, offers climate companies low-cost loans for emerging, riskier technologies.

Fervo Energy's Latimer says, "If we actually want these technologies to get to market, we as a community have to do a much better job at growth stage and the bridge to bankability. That’s a different set of stakeholders and skills than early-stage."

What's next: Investors say there's enough "dry powder" (not yet deployed but allocated funds) available over the next two years to help some startups weather stormy waters.

But companies will have to operate in "leaner" times. Founder Collective partner David Frankel says, "[L]ean times create stronger startups. How? A lack of resources forces people to become resourceful or removes them from the market."

Harsh but true. Expect to see some shake out as climate companies face this harsh new reality.

1 big thing: Navigating the growth-stage skid

Private equity giant Carlyle has raised more than $591.4 million for its second renewables and sustainable energy fund, per an SEC filing.

Why it's the BFD: The raise has spurred Carlyle to set a $2 billion cap — nearly triple the fund's first renewables fund, Alan writes. 

Details: Carlyle began raising for its Renewable & Sustainable Energy Fund II in June 2022, per the firm's SEC filing. 

Fund II has made four investments, including $350 million in NYC-based solar developer Aspen Power Partners.

Zoom in: The fund expects to make 10 to 15 investments spanning $75 million to $250 million, per a Buyouts Insider report, citing a presentation last year to Boston Retirement System. 

It's planning control or significant minority stakes. Target sectors include solar, wind and battery storage, EV infrastructure, industrial decarbonization, and infrastructure service and equipment providers.

Flashback: Carlyle collected more than $700 million for its first renewables fund in 2021.

D.C.-based utility-scale developer Copia Power and Canadian developer Amp Solar were among the companies the fund invested in.

Context: The new Carlyle fund joins a growing list of multibillion-dollar renewables vehicles from private equity heavyweights. 

Blackstone, for example, is targeting $6 billion for its fourth energy transition fund.

Brookfield Asset Management is on track to raise more than $15 billion for its second global transition fund — effectively doubling the $15 billion it raised last year for its first such fund.

TPG, of course, raised $7.3 billion for its Rise Climate fund. 

And Apollo Global Management is set to launch an energy transition strategy this year. 

2. The BFD: Speaking of growth equity

Illustration of an upward trending arrow made of a lightning bolt.

Saul Griffith, the engineer and inventor behind Otherlab, has advice for climate tech investors: "Go bigger, and plan for longer."

"Invest in the inevitable. Software won't do shit to solve climate change. We need to do steel, cement, aluminum, massive amounts of electrification, agriculture, food," he tells Katie.

Why he matters: Griffith's San Francisco-based Otherlab has spun-off startups like Gradient, Sunfolding and Canvas. 

He's also an enthusiastic advocate for the electrify-everything movement (check out his book), and he co-founded electrification nonprofit Rewiring America, which recently welcomed Stacey Abrams as senior counsel.

Griffith's responses were edited for clarity and length.

What, in your view, was the big story in clean energy/climate tech this week?

I don't really read climate tech investing news because it feels like out-of-touch software bros pretending that they are saving the world. So the less obvious news story of the week for me was this one. ["The Energy Transition Will Be Volatile," from the Financial Times]

I think this article is important because (finally) the business media are understanding that the free market cannot move fast enough on this transition to keep our climate within reasonable bounds. This is why the [Inflation Reduction Act] and other policies like it taking shape around the world are so important, and will continue to shape climate tech investing.

We are about to have the five hottest years on human record. The climate news will only get darker, and things like the Canadian fires are bringing the reality of climate change, as opposed to the science, to everyone.

We are at the beginning of the emergency, not the end, so everyone needs to be thinking about the scalability of their solutions and whether their supply chain can ramp up.  I like this report from Rewiring America, "Pace of Progress," (obviously I have some bias) because it puts real targets of the scale and ambition required around the everyday things in our lives.

I still can't believe there isn't a giant conversation about refrigerants. We are going to need a lot of heat pumps, and they should be run on things with low global warming potential such as propane and supercritical carbon dioxide.

Building codes and other regulations are slowing down and preventing this critical transition. We live in a world regulated for fossil fuels, and our regulatory environment simply isn't up to the task on this transition.

One example is rooftop solar. America has a dysfunctional set of building codes and electricity network regulations that mean that rooftop solar in the U.S. is at least 3 times more expensive than it is in Australia. Fixing the regulatory environment needs to be on every climate tech investor and entrepreneur radar.

One tip for climate-tech investors or founders:

Try to find a way to build your company without venture. The venture timeline (7-10 year expectations on returns) is simply incompatible with hardware.

Also, plan for extreme global financial events. It's going to take 10 years at least to build your business. We've had two to three major financial meltdowns every decade for the last few decades (2000 crash, 2008, debt limit threats, inflation, etc...). These will likely kill most hardware start-ups if they happen to be raising at the wrong moment.

💼 First job: Working the pro-shop of a crappy little golf course when I was in high school. My first full-time job was in a steel mill making reinforcing steel bars. I love big industry as a result.

👑 Proudest investment: I really love what Channing Street Copper is doing.

🤦 Facepalm investment: I'm really good at doing things 10 years too early, like electric aircraft. My real facepalms are the things I was doing that I didn't continue to do that became really big later.

💡 In three-ish words, the change you would make to climate tech investing: Bigger, longer, with a side of regulatory reform.

3. Expert voices: "Invest in the inevitable"

Photo illustration of Otherlab's Saul Griffith next to the company's logo and various shapes

Photo illustration: Sarah Grillo/Axios. Photo: Clayton Boyd

🌞 Tesla’s New York boondoggle: Disgraced New York Gov. Andrew Cuomo spent $1 billion of the state’s money to convince Elon Musk to open a sprawling solar panel factory in Buffalo.

The plant was supposed to churn out enough solar-panel shingles to cover 1,000 roofs per week. Instead it’s averaging about 21 installations. WSJ has the details on Tesla’s sweetheart deal.

🤝 Transmission help: New York and New Jersey put aside their differences and joined six New England states in seeking federal help to upgrade regional transmission networks.

The states sent a letter to the Department of Energy asking it to fund a planning collaborative — and got a response from the agency last week that it’s interested in moving ahead. WBUR has the details.

📰 Jigar Shah's WSJ treatment: Some 150 companies are seeking $127.7 billion in loans from the DOE's Loan Programs Office, per a profile last week of its chief, Jigar Shah, in the WSJ.

“The loan program is part of the reason the Inflation Reduction Act’s tax credits and spending represent one of the largest outlays of taxpayer-financed industrial stimulus since the 1930s New Deal,” the publication writes.

4. Temperature check

Illustration of an ice cream cone with a melted puddle of ice cream that looks like the earth.

• Battery Smart, an India-based battery swapping network for electric two- and three-wheelers, raised $33m in what it’s calling a “pre-Series B” from existing investors Tiger Global and Blume Venture. Ecosystem Integrity Fund and British International Investment joined. https://axios.link/3JP3OAO

• Public Ventures, a Toronto-based firm that will invest in life science and cleantech startups that focus on underserved communities, is targeting $100m for its debut fund. https://axios.link/44e8NDw

• Hooked Foods, a Swedish vegan seafood startup, raised €644k in a crowdfunding campaign. https://axios.link/3PFFJAm

• Balcor Companies, a Houston-based firm, acquired a stake in Kaizen Clean Energy, a Houston-based hydrogen generator manufacturer. https://axios.link/3NKkdI7

• PVcase, a Lithuanian developer of solar-project-design software, acquired Anderson Optimization, a Boulder, Colo.-based solar siting software provider. https://axios.link/3rkZiDV

• First Solar, the Tempe, Ariz.-based manufacturer, closed a $1b five-year revolving credit and guarantee facility with JPMorgan Chase, Bank of America and others. https://axios.link/43nzaWs

• The U.S. Department of Energy issued $45m to 12 solar manufacturing projects, per PV Tech. https://axios.link/3rpqmBK

• Texas A&M University received ~$1m from the U.S. Department of Energy to evaluate the use of advanced nuclear fuel from Lightbridge in a NuScale SMR. https://axios.link/43f0s11

•  CATL, the Chinese battery manufacturer, said it’s achieved a breakthrough in charging lithium-ion batteries in extreme cold. https://axios.link/3refMh4

• Audi is planning to begin building EVs in Mexico, per Reuters, citing unnamed sources familiar with the plans. https://axios.link/3XCVZUI

• Enel, the Italian energy giant, laid off a chunk of its North American workforce, a spokesman confirmed to Axios.

• Tesla has started layoffs at its Shanghai battery factory, per Bloomberg. https://axios.link/3rcKGGt

• German investors are reportedly investigating former DWS CEO Asoka Woehrmann for alleged fraud related to greenwashing, per Reuters.

DWS, a Deutsche Bank subsidiary, was also under investigation by the SEC. https://axios.link/3PPfuYb

• Goldman Sachs projects that global EV sales will drive a 50% increase in copper demand by 2025. https://axios.link/3JOfCmT

• Re:meat, a Swedish cultivated meat startup, unveiled what it’s calling the world’s first cultivated Swedish meatballs. https://axios.link/3XIW88U

5. Hot deals

• Colin Bryant joined Coatue Management as a general partner and COO for private investments. He previously was with NEA. Coatue also hired Nicholas Mouradian (ex-Ares) as a partner focused on structured equity.

• Douglas Barnard was named EVP ahead of retiring next year from CF Industries, the Deerfield, Ill.-based nitrogen and hydrogen products manufacturer. Barnard was previously SVP and general counsel. https://axios.link/3JOUCfY

• John Mitchell joined Consolidated Asset Management Services, a Houston-based energy infrastructure services provider, as battery energy storage systems director. Mitchell was previously VP of sales and applications engineering at Indie Energy. https://axios.link/3NFIP4E

• Dana Gross joined the board of SolarEdge Technologies, the Milpitas, Calif.-based solar inverter manufacturer. Gross is head of strategic initiatives at Fiverr International. https://axios.link/3JP1w4G

6. It's personnel

July 5 — Finnish startup Steady Energy is developing a small nuclear reactor that it can pair with district heating systems for homes and industry, a novel concept that hasn't been commercialized before, Katie wrote.

Why it matters: District heating is an efficient and popular way to heat buildings and factories in Europe, but most systems rely on fossil fuels.

July 6 — Energy giant BP announced a $10 million investment in WasteFuel, a California startup that is raising a $45 million Series B to produce methanol for the shipping industry, Alan wrote.

Why it matters: As the industry shifts from heavily polluting fuel, shipping companies like Maersk are buying every drop of methanol they can find.

7. 🗞️ Catch up quick

🍻 It's Friday! Got here quick with the three-day week, so let's get right to it. 

🍞 Katie just made lots of cinnamon toast and it was delicious.

☕ The 2-year-old fully transitioned from sleep sack to blankets a couple months back. Last night, she decided she didn't want to pull up the blankets herself — but instead be re-blanketed by Terry or Alan each time she kicked them off. Coffee demand is high this morning.

Thank you to George Moriarty and Phoebe Neidl for today's edits.

And thank you for reading Climate Deals! Please share with your friends, family and electrification advocates.

July 07, 2023

1 big thing: Navigating the growth-stage skid