I’ve been seeing a decent amount of buzz in the VC community on twitter about getting back into cleantech investing after a 5-10 year hiatus. I’m pretty excited about this. I was very young when the first "failed" wave happened, so I don’t have much perspective on learnings from that era.
But I do have some thoughts on how I think the next generation of climate startups will play out after 10 years of non-climate startup success. Call this an extension of my 30 predictions for 2030, as a lot of them were climate related.
- We need to start with an understanding that on an individual and aggregate level, human consumption of energy, food, resources, etc. will continue to grow, and there is no historical evidence that we can reduce our aggregate consumption of these items overall.
- Campaigns of reducing, reusing, and recycling are not long term solutions to the challenges we face.
- Rather than reducing, reusing, or recycling x, y, or z item, we should be replacing them. Plastic of anything should be replaced with some substitute that has a lower carbon footprint (LCF).
- We should also understand that preventing climate change will not be a primary factor in why we purchase anything, and we shouldn’t assume it will to the masses.
- We can see humans substituting these higher carbon footprint (HCF) resources with lower carbon footprint (LCF) alternatives, if they have some benefit in a (semi) free market on some dimension. (This is not particularly insightful, as it applies to any substitute product, independent of carbon footprint. But important to state outright. )
Challenges: There are a number of challenges that seem to be specific to cleantech startup ventures
- The technological success of frontier energy technology is very hard to predict. We’ve been investing in nuclear fusion for 50 years, and every decade we claim that this is the decade we’ll finally have it. (With that being said, I do think this is the decade.) Not being able to credibly assign probabilities of success, even in a portfolio approach, has the downstream effect of hampering venture investment in hard science ventures (with the notable exceptions of Lux Capital, and wealthy individuals like Gates, Bezos, Musk, etc.)
- Today the energy production and distribution industry is highly concentrated, centralized, and monopolistic — companies live and die by a handful of people at a handful of companies and gov agencies making yes or no decisions. Most cleantech startups are not D2C businesses (notable exception of Tesla/SolarCity). If the startup’s end customer is a utility, there only exist a handful of utility customers to sell to. It is tough to build a large business with only a handful of customers. It also takes decades to reach scale or critical mass. Again, this is too slow and TAM constrained for the traditional venture model to work.
- There aren’t too many examples of a “bottoms up” approach to building a cleantech business at scale. To reach a cost effective scale, Tesla had to build the world’s largest factory to just build batteries. On the other hand, selling energy storage in the form of a solar roof and battery panels is an amazingly effective bottoms up way of building a distributed energy grid.
Patterns: The companies that have broken out tend to have one or more of the following in common:
- They are selling a LCF product direct to consumer
- They are helping to decentralize the power grid
- They use early adopter’s higher willingness to pay for LCF products to subsidize building out scale to go mainstream
- Having a LCF a secondary benefit (to cost, aesthetic, performance etc.) as it reaches the mainstream
- There is a technology benefit to scale in the business. Also known as a network effect.
Types of climate startups that I think will be successful:
- D2C brands offering products that reduce individual carbon footprint
- Lab grown / plant grown meat or milk, oat milk (not almond milk), etc.
- Kitchen/household appliances that are 10x more energy efficient than current fixtures i.e. LED vs. conventional lightbulbs. The brands will sell them for free, and monetize a subscription model that resembles an energy savings contract
- Community solar and other D2C clean energy suppliers that have a cost advantage through their distribution - Arcadia | Join the renewable revolution
- Climate software - APIs that allow better data visibility into the massive data problem that is tracking greenhouse emissions. Software tends to be immune to these hard-tech scaling and 0 to 1 problems, so I’m confident we’ll see a lot of software only approaches to anything climate related.
I’m sure there are others, and I’d love to explore, if you have ideas or companies that are interesting, send them my way.