About a decade ago, the clean tech boom went bust. Industry darlings were dropping like flies. Solyndra, most famously, shut down after taking a $500 million loan from the U.S. government. Germany's Q-Cells went bankrupt, too, and was bought by South Korea’s Hanwha. A123 Systems, a battery maker, was snapped up on the cheap by Wanxiang, a Chinese auto parts company. That's just a partial list.
There are myriad reasons why so many companies went belly up. Some had the right tech at the wrong time. Many relied on venture capital, which typically seeks returns on a timeline that's unforgivingly brief for deep tech companies. Others were undercut by foreign competitors. Still others succumbed to general market forces that swept across the world during the Great Recession. Whatever the reason, the collapse spooked venture capitalists, who avoided the sector for years despite the potential for enormous long-term gains.
But in the last several years, venture capital has roared back, investing tens of billions of dollars in companies that hope to solve environmental problems. What changed? For one, the name: Clean tech is out. Climate tech is in.
Cynics might deride the change as marketing fluff designed to shed the sins of the past. They're not entirely wrong. After the last boom-bust cycle, the clean tech label was tarnished. Founders, for all their talk of failing fast and learning from failure, typically don't like to be connected with that kind of failure, even by semantic association.
Yet if you dig a little deeper, it's apparent that climate tech is more than just clean tech 2.0. It's both a natural progression and a bottom-up rethink of founding and investing in environmentally friendly startups. Climate tech is how founders and investors can collaborate to bring promising technologies and ideas to market in a way that will produce significant profits while also addressing climate change in a meaningful way.
For those who are deep into climate tech, that won't be a surprise. But with the recent downturn in the funding world, it's time to run down the similarities and differences to see whether they suggest this time will be any different.
A narrower focus
Probably the biggest difference today is climate tech's sharp focus on, well, the climate. Clean tech can be almost impossibly broad. While investors new to the space probably thought they had stumbled upon a tight niche waiting to be exploited, in reality, clean tech is dozens of niches that all share the same goals — to turn a profit and do something about environmental degradation — but go about achieving them in very different ways. During the last cycle, clean tech startups ran the gamut from solar power and biofuels to batteries, desalination and much more.
Using a similarly simplistic frame, you might say that venture capital writ large seeks to turn a profit, period. In reality, we know it's far more complex than that.
Clean tech's broadness, coupled with inexperienced investors' narrow view of the field, might have led some VCs to get a bit ahead of themselves. Because “preventing environmental degradation” is a hard thing to quantify, there wasn't much other than P&L to score them on. And for some challenges that clean tech sought to address, profits were never a realistic short-term outcome.
Climate tech, though, has an added metric that can apply to any startup in the vertical — carbon reduction.
That gives startups a clear goal while also affording them flexibility in how they achieve it. Today, we're seeing startups getting money for new battery technologies, just like before, but also a wide range of sectors that have a significant climate impact, including plant-based meat substitutes, carbon capture, cement, electric grid management and zero-emission aircraft. In other words, climate tech is almost as broad as clean tech, but it's easier to compare different companies based on their climate impacts than a more nebulous “green” goal.
Climate tech's focus on climate not only helps sharpen founders' focus, but it also gives them and investors a second metric against which they can measure success. In theory, more data should help investors weed out companies that are more fluff than substance. Because of that, maybe more climate tech startups will survive this downturn. I suspect we'll know more in the coming months.
The role of government has changed subtly this time around, too. The clean tech boom hinged on government intervention, though most of it was focused on grants and loan guarantees. Those exist today, but what's really boosting climate tech are policies and regulations.
Governments around the world have been proposing or implementing increasingly stringent regulations around carbon emissions. Fossil-fuel vehicles are facing phase-outs in 10 to 15 years in several markets, and many countries are trying to eliminate coal and natural gas from their electrical grids as quickly as possible. Taken together, those policy signals suggest that there's a good chance that markets for climate tech will exist in the near future, even if they don't today.
Climate tech firms also have the benefit of learning from the mistakes of the clean tech era, especially when it comes to which problems they tackle and how.
Take batteries, for example. In the clean tech era, battery companies were involved in nearly every aspect of making a cell, from making cathode and anode materials to pack engineering and manufacturing. Today, in the climate tech era, battery startups tend to work on one or two parts of the value chain. Most are concentrating on providing novel cathode and anode materials that can be dropped into existing production lines. That saves them from having to build billion-dollar factories from scratch, which sank a few startups last time around.
Some climate tech startups have taken a page from the SaaS boom. There's been a profusion of platforms this time around, from those that help companies track and reduce their carbon emissions to others that seek to optimize electrical grids to minimize pollution. Individually, they may not have as big of an impact on the climate as, say, a successful fusion startup. But their business models and timelines are more familiar to a wider range of VCs, and collectively, their potential to reduce carbon could be significant.
And for those whose business models don't resemble Silicon Valley's greatest hits — super-long-term bets like fusion power, for example — a new breed of venture capitalists have risen to meet the opportunity. Firms like Bill Gates' Breakthrough Energy Ventures and MIT's The Engine don't run decade-long funds. Breakthrough Energy Ventures, for example, runs on a 20-year timeline; The Engine has similar expectations about when it hopes to see profits. The bets they're placing are highly unlikely to pay off in five to 10 years but may still succeed given a little more time.
In that way, the approach these new firms are taking harkens back to what venture capitalists did decades ago, when they took fliers on promising companies like Genentech, which was founded to focus on recombinant DNA, a futuristic and truly innovative technology.
The current climate tech wave will probably have its share of failures, but thanks to better metrics, smarter approaches and savvier investors, there will just as likely be some very, very big winners.