For the last fifty years, venture capital has had a pivotal role in discovering, bringing to market, and scaling transformative technology innovations in all economic sectors, from healthcare to transportation. As modern societies battle some of their most wicked challenges to date and aspire to reach net zero by 2050, more than a third of emissions reduction is expected to depend on breakthrough tech innovations. Are VCs around the world seizing these opportunities and, if so, what lessons can be drawn from the investment strategies of sustainability VCs, and adapted by regional and local funds to increase the pool of money for the cleantech startup ecosystem?

Record-high levels of VC funding in cleantech

If the ongoing COP26 conference is highlighting one message, that is the need to share responsibility. We need advocacy, policy instruments, innovative business models, and  financial instruments and strategies aligned around the same goals. 

But this alignment hasn’t produced the expected impact and returns in the past. Instead, it fueled a cleantech bubble.

Closer to the turn of the century, VCs – especially in Silicon Valley – were already looking at cleantech as the next big thing. Between 2005 and 2006, VC investment in cleantech rose from a few hundreds of million of dollars to $1.75 billion and further tripled by 2008. 

Yet the timing was unfortunate. A mix of factors including the 2008 financial crisis, increased competition from China’s solar energy industry, and reductions in the price of natural gas left energy sectors largely dependent on fossil fuels – and the valuations of cleantech companies spiraling down. VCs lost more than half of the investment directed in cleantech innovations between 2006-2011. 

Now, VCs are once again in the game. Pledges to combat climate change from all sectors of society are more urgent than ever. This time, Europe is leading the way towards decarbonization of the energy sector and the economy at large, driven by the EU’s ambitious agenda. 

In the first three quarters of 2021 alone, sustainability VCs’ investment in climate tech amounted to a record annual level of ~$31 billion, 30% higher than in 2020, according to PitchBook. While investments span across multiple industries, the EV sector attracted half of the money in areas such as electric mobility, charging infrastructure, and battery technology. Finally, cleantech exits are also on a roll, doubling in number compared to last year, up to ~60 at the end of Q3.

Yet, it’s worth noting that overall global VC funding grew faster during this time  – it was already 50% higher at the end of Q3 than in 2020. And climate tech still makes up only 6% of VC money. VC funds, especially those with a regional or local focus, are prudent about long-term returns, high capital intensity, and other particular risks associated with cleantech investments.

Next, The Recursive looks into the strategies and outcomes of sustainability VCs that use investment tools to fuel tech as a force for good.

hen there are the protein replacement companies that we wrote about earlier. Impossible foods Beyond flesh Memphis Meats, Mosa Meat, Nuggs, Future Meat Technologies, and Shiok Meats (a seafood company) are developing methods for making meaty proteins that are less dependent on animal husbandry. Perfect Day and its competitors do the same for the dairy industry.

There is also a tremendous need for new sources of protein to feed the animals that people around the world still love to eat. That’s why there are companies like Ynsect, that provides insect proteins for industrial fish farms; or Grubly Farms, which provides feed to families who raise their own chickens.

For these opportunities, which raise hundreds of millions in funding, there are others that require the kind of high-margin software solutions that have yet to be developed. These are visual technologies for tracking, monitoring, and managing food production. Sensors to improve the warehouse and supply chain, software to manage production and track products and products from farm to table. Venture investors are also starting to invest in these companies.

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