Is winter coming for climate tech?

This is part one of a three-part series on the potential “winter” for the climate tech sector. Continue reading with part two and part three.

We’re worried about climate tech. 

We lived through cleantech 1.0 (b. 2007, d. 2011), and we see signs of similar mistakes unfolding this time around. And the problems are not restricted to a single group. Both founders and venture capitalists need to re-think their approach to the market.

On the one hand, founders need to deeply assess the business they’re building, and create a capital plan that fits their model — not every company is built to be a unicorn. On the other, VCs need to re-assess how they partner with startups, and consider paths that involve more ownership and increased operational expertise. For both sides, it’s time to focus on putting points on the board. 

We’re optimistic that it can be done, but we’re concerned that the most honest conversations are private, not public. But saying the quiet part out loud — about the nature of the climate tech boom and the risks that have resulted — is increasingly necessary.

The current climate tech boom

The last five years have been a remarkable time for climate focused companies.

They have seen an explosion in funds dedicated in whole or in part to climate investing. There are now over 160 funds with an exclusive or strong focus on climate tech startups, and another 80 funds actively seeking exposure to the climate space. This proliferation reflects the growing recognition that climate tech requires a focused investment thesis and expertise. 

Counterintuitively, though, this capital expansion presents a problem: too many early-stage venture capital dollars are chasing too few quality companies. Even among the quality companies, few have drawn in growth capital and even fewer have achieved notable exits for shareholders. 

The problem is not limited to climate tech — venture’s assets under management have gone from $300 billion in 2008 to $3.5 trillion in 2022 — but climate tech has greater risk than other sectors because of its spotty history of returning capital to investors. While traditional venture capital has a long history of winning investments to fall back on, climate tech doesn’t. 

Based on what we’re seeing in the market, we seem to be in the early stages of a climate tech liquidity crisis. Climate tech needs exits — companies going public and performing well, or else getting acquired at attractive prices — to keep investor dollars flowing into the space along with the entrepreneurial talent that will follow it. 

Still looking for winners

To the extent there have been climate tech exits, they have come via mergers with special purpose acquisition companies, or SPACs — a phenomenon that was the fleeting byproduct of ultra-low interest rates.

In general, very few SPACs have gone on to succeed in public markets, and climate tech companies fit this trend. Nearly all of these companies have lost 70% or more of their valuation since going public. Some, like Volta and Proterra, have either sold for pennies on the dollar or gone bankrupt. While some investors who timed the market right may have earned healthy returns, many were left holding the bag.

Perhaps no company exemplifies the hope and heartbreak of climate tech in public markets better than Rivian. After raising over $10 billion in venture capital from backers like Amazon and Ford, the electric vehicle company went public in November 2021. Rivian was valued at $86 billion initially — higher than traditional automakers like Ford and GM.

A problem quickly became clear, though: Rivian loses money on every car it makes, and not just a little bit of money. Rivian loses over $40,000 per truck. And those losses show up in the bottom line. Rivian’s path to profitability is, at best, uncertain. Analysts calculate that Rivian needed to increase production to over 200,000 units per year while simultaneously slashing costs per vehicle by around $30,000.

The company got much-needed cash with its $5 billion deal for a joint venture with Volkswagen, announced earlier this year, but making the company profitable is still far from easy.

So how did we get to this point? 

Why climate tech is different

Silicon Valley now has a strong bias for software.

The skills, business patterns, repeat revenues, and high margins set investor expectations. Software companies can achieve massive scale and profitability with relatively lean operations, as the marginal cost of producing an additional software product is essentially zero. 

This bias is reflected in company funding. Software dwarfs all other categories (many of which also include software) in terms of the sectors that VCs invest in.

Climate tech companies, though, are usually hardware companies.

Enormously profitable hardware companies are of course possible (see Apple and Nvidia), but there aren’t many. As a result, there are fewer founders familiar with the rhythms of hardware-focused companies and fewer VCs who can guide founders based on their past hardware successes.

Many climate tech companies face longer timelines and steeper cost curves in reaching commercial viability and scale than their software counterparts. They have to navigate complex supply chains and regulatory requirements, manufacturing partnerships, and distribution challenges. Many require risk averse buyers, like utilities, to purchase and deploy their products. 

None of this is impossible, but all of it requires new ways of thinking. 

Michael Sachse is a private investor, and previously was the CEO of Dandelion Energy, CMO of Opower, and was an entrepreneur in residence at New Enterprise Associates. Jim Kapsis is the founder and CEO of the Ad Hoc Group, and previously was the VP of market development at Opower, as well as an official in the U.S. Treasury Department. The opinions represented in this contributed article are solely those of the authors, and do not reflect the views of Latitude Media or any of its staff.

Editor's note: This story was updated on July 17 to make a correction in the "Still looking for winners" section. Rivian did not go public via a SPAC merger, but rather via IPO.