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VC Firms Are Investing Heavily in Cleantech

Revenue & Finances

Isadora Teich wrote this article

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Startups that offer sustainable solutions have been attracting a lot of attention from venture capital firms this year, according to Climate Tech VC’s review of funding in the first half of 2021.

In different kinds of businesses, markets, and sectors, it is not uncommon to see trends shift over time.

Currently, we are seeing a lot of buzz and money in various green and cleantech areas. One of the buzziest kinds of companies in this arena is the electric vehicle company. If you want to learn more about the controversies and clever successes of EV companies like Tesla and Rivian, check out our blog post on the topic.

Knowing about industry trends is key. Let’s take a look at how VCs are pursuing cleantech, a brief history of this sector, what its future might look like.

The Last Decade of Cleantech in 60 Seconds

To keep it short and sweet, it is really interesting to see VCs suddenly pursuing cleantech so aggressively, when the last 15 years or so have been less than stellar.

Between 2006 and 2016, more than 150 cleantech startups began operating in Silicon Valley and none of them truly succeeded. According to Harvard Business School Alumni Art Vandilay:

“Unfortunately, the hype surrounding climate change and new regulations were not enough to counteract the inherent difficulties that made cleantech a bad sector for venture capital investments; cleantech investments required high upfront costs, developed hardware slowly, faced execution and manufacturing challenges, were exposed to highly volatile energy markets, and produced returns only after a long period of time.”

However, it is important to keep in mind that often certain things can be cyclical.

Also, technology has advanced greatly since 2006. We saw a cleantech boom from 2006-2016 and then a lull after where companies in this sector struggled to find investors due to the rocky decade before. However, money is flowing into cleantech once again.

VC Cleantech Investments So Far In 2021

So far, in the first two quarters of 2021, $16 billion in VC has gone into cleantech startups. This includes more than 250 deals in seven sectors. These sectors are:

-Carbon

-Climate

-Consumer

-Industrial

-Mobility

-Food and Water

-Energy

In the first half of the year, almost more money has gone toward cleantech than in the entirety of 2020. In 2018, less than $18 billion was invested in this sector for the entire year.

It is also interesting to note how investor interest has shifted.

Not only is more being invested, but it is going to different kinds of companies. A decade ago, almost all investor interest was in using solar and wind to produce electricity, biofuels for transportation, and efficiency-related software. Today, that has changed drastically.

Between 2Q 2020 and 2Q 2021, the most unique venture firm deals were made in the food and water sector, at 355 deals. That is almost a third of all deals made in this 12 month period. The next most popular sector for venture capital firms was mobility. Energy, the king of 10 years ago, is the 4th most popular.

Why Has This Change Occurred?

Firstly, it is important to remember that the only constant in the world of tech is change. In fact, clean wind, solar, and lithium-ion batteries losing the strong interest of VC may be a good sign.

After all, VC usually looks to burgeoning industries to invest in. As energy was a hot topic a decade ago, it makes sense that many of these companies which were young a decade ago have grown past the point where many VCs would invest.

Also, this change in trends is likely reflecting a better understanding of what actually causes the most emissions globally and what needs to be fixed.

The way we produce and transport food is incredibly carbon-generating and bad for the planet in a variety of other ways. In fact, food and water is the single largest category of emissions currently. This is a big part of why many people choose vegan diets. Produce has a smaller carbon footprint than many animal products, especially beef.

However, it will take far more than adjusting individual choices to impact climate change.

World governments, corporations, and industries will need to make wide systemic changes. A lot of positive work has already been done in the food agriculture industry. It is actually quite encouraging to see the market accurately assessing this problem and startups and VC working to address it.

Is Climate Tech Too Highly Valued Currently?

Some experts say so. Deal sizes have increased at almost every stage and growth equity rounds have tripled.

Meanwhile, early-stage investor Immad Akhund said that, amongst the latest batch of Y Combinator startups he had considered, climate tech startups have the biggest premiums and are the most difficult to get allocation in.

According to a longtime angel investor, Joanne Wilson, “valuations have become out of control.”

Of course, investors in early-stage companies are hoping that those companies grow massively and they get significant returns. However, due to the rocky past of cleantech, it is reasonable that some experts are wondering if these highly valued hot companies will actually deliver on their promises.

Final Thoughts

While it is impossible to say what will happen, these startups may have a better time this go around. The last time these startups became buzzy there was a lot of hype, but not enough follow-through.

As we have talked about before on the blog, hype does not always correlate with real-world success.

It is impossible to overstate how much things have changed since 2006. Today, innovative tech that may not have even been around five years ago, let alone more than a decade ago, is empowering clean startups to do everything from protecting the oceans to creating carbon-neutral diamonds.

Also, the existential and actual threat climate change poses to humanity is our greatest challenge.

There is possibly no greater need than for carbon-neutral technology to change the way our society operates.

We are under immense pressure and the work that these companies are doing could potentially save billions of lives. The stakes here are much higher and more complex than simply if these companies will make money and generate returns for investors.

While things may seem bleak, the fact that VC trends are reflecting what humanity truly needs is very encouraging. If you want to learn more about the exciting work that green startups are doing in different sectors, learn more here.

About ChopDawg.com: Since 2009, we have helped create 350+ next-generation apps for startups, Fortune 500s, growing businesses, and non-profits from around the globe. Think Partner, Not Agency.

 

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