A “shakeout” is coming for the climate tech market

With its second fund, the firm Clean Energy Ventures has expanded its investment strategy in ways that reflect the evolution of climate tech financing in general. 

• The top line: Clean Energy Ventures announced today the close of its second flagship fund at $305 million, five years after closing its first fund in 2019. Daniel Goldman, the company's co-founder and managing partner, said venture capital for climate tech has seen a radical change in the interim, with an influx of new capital and players. But in the long-term, he added, the sector's current momentum is unlikely to be sustainable.
• The nuts and bolts: The venture capital firm received commitments from Carbon Equity, The Grantham Foundation for the Protection of the Environment, Builders Vision, and New Summit, among others. The fundraise came in at over $100 million above its original $200 million target.
• The current take: Goldman told Latitude Media that new strategic partners, like oil companies and utilities, are “leaning in,” which is likely to result in a mergers and acquisitions market in the coming years, and both create exits for the venture capital community and help bring new technologies to market. But “there have been over 1500 investments over the last couple of years in the sector,” he added. “The laws of venture capital say not all of them are going to be successful.”

While it still focuses primarily on pre-seed, seed, and Series A financing rounds, the firm has recently expanded to early-growth rounds as well, according to Goldman. 

“We're seeing much more of an end-to-end ecosystem, where companies can get financed all along the chain: from the high-risk early stage, to early stage venture —- which is where we mostly participate — to later-stage venture growth, infrastructure, debt, capital markets,” he said. “That's important for our ability to have an impact and scale technologies.”

Across the pond 

Meanwhile, as the European VC market matures, Clean Energy Ventures is expanding beyond North America. It has a new London office and aims to invest around 30% of its second fund in Europe and Israel. 

Last summer, the firm announced investments in both Israel-based green ammonia producer Nitrofix, and U.K.-based sustainable aviation fuel company OXCCU. Both investments were made alongside multiple co-investors, highlighting the role strategic partners have come to play in the market. 

“We want to crawl before we walk, walk before we run. We have a lot to learn about Europe,” Goldman said. “We think it's a very attractive market and we want to be able to invest in that marketplace, with co-investors. So we're not looking at opportunities where we would go in alone.” 

OXCCU’s $22.7 million Series A investment round, for instance, saw the participation of major strategic investors such as Aramco Ventures, Eni Next, and United Airlines Ventures Sustainable Flight FundSM.

“We have surrounded the company with organizations that can potentially help them build plants and be an off-taker of their fuel,” Goldman added.

Detecting promise, before the shakeout 

Within the nine focus subsectors for its funds — energy production, energy management, advanced materials, clean mobility, circular economy, carbon-to-value, storage, the water-energy nexus, and energy efficiency — Goldman says sustainable plastics, electrification of the steel industry, and the decarbonization of the cement sector are promising areas for future investments.

New solar technologies and nuclear, though, have been momentarily put aside, both because of time and capital constraints. 

“Over the last 20 years, there's been a lot of investment in new solar technology, but the landscape is riddled with challenges,” Goldman said. “As for nuclear, we have at times taken a look at fusion and fission, but we've concluded that while it's necessary, it's not something that fits with our typical fund life and capital intensity.”

In April 2021, Clean Energy Ventures announced a seed investment in Nth Cycle, a critical metals recycling technology maker that uses electricity and carbon filters to recover cobalt and other minerals from discarded batteries and other waste in North America and Europe. 

The investment, according to Goldman, is emblematic of the firm’s current strategy and approach. The company has several calling cards that appeal, Goldman said, including addressing supply chain problems, offering a non-Chinese supply of critical minerals, and creating economic activity in both North America and Europe. Clean Energy Ventures invested in a seed round, a Series A round, and a Series B for Nth Cycle. And it’s been involved in helping the company build out its management team and in raising capital to build its first project, which is being commissioned in Ohio.

The maturing and popularity of the climate tech industry is great news for the development of new technologies and the influx of new capital is very much needed, as “we’re under-spending to address climate change by multiple trillions of dollars,” according to Goldman. 

But he also offered a word of caution, warning that every blooming industry is bound to have to undergo a moment of readjustment.

“There will be some pain felt in this market, given the very substantial amount of investment of the past couple of years,” he said. “We’ll see some companies dying, or being combined, or have their intellectual property acquired. It’s a natural process an industry has to go through over time. I think we're going to be seeing a little bit of a shakeout in the market.”