Conventional Venture Capital Fails in Early-Stage CleanTech. So, who is Investing Instead?
Too often venture capitalists portray themselves as a beacon of light, guiding society to a technological utopia (See meme to the left). Yet, for all the bells and whistles, there’s an undeniable chronic lack of successful venture investing in the early-stage cleantech. Using the “investors” mindset, this article aims to illustrate why conventional investors are scared away by cleantech, and who is taking the mantle instead.
Overall trends. Since 2008, cleantech VC funding contracted — hitting early-stage companies especially hard (MIT Energy Initiative). See Figure 1.
However, at the turn of 2019, we see an uptick in VC funding. Global tallies of VC and private equity investment into cleantech in that year range from $9.2 billion, according to Bloomberg New Energy Finance, to $16 billion, according to PwC. (The differences in these tallies are predicated on how one defines “cleantech”). Sound great? Well.. not really. Breaking down the numbers, we see most funding fails to be funneled into early-stage companies — still largely concentrated in later-stage funding.
Several red flags that make early-stage cleantech a difficult investment to chase after:
- Investors typically shy away from the long development times and capital-intensive nature of cleantech commercialization. Whilst a software product can be built and launched to market very quickly, the same cannot be said about cleantech. High R&D expenses, capital intensive warehouse/manufacturing cost, and unclear consumer acceptance, it’s very possible returns (if any) won’t be realized for 10–20+ years.
- Investors are deterred by exposure to unstable government regulations and an unfavorable track record. Policies, including the establishment of carbon credit markets, subsidies, and feed-in tariffs, have been riddled with inconsistencies — negatively impacting investor's confidence.
- Contributions to reduced environmental degradation do not translate into financial returns.
However, whilst these factors have pushed away conventional venture capital funds, we see an almost unanticipated rise of corporate venture firms investing in cleantech. Corporate VC firms are usually departments or entities of a larger company. CVC tends to invest beyond purely financial gain, often including an element of the strategic goal behind their investments. This can be insights into a new market or novel technologies that support complementary products.
Three Reasons why CleanTech investing appeals to Corporate Venture Firms (CVC):
- “Greening Opportunity”. Stakeholders are increasingly placing pressure on companies to act in an ecologically responsible way. Cleantech investments provide a vehicle for actualizing sustainability objectives. See. Amazon’s 2 Billion Climate Pledge Fund investment into Turntide Technologies, using its energy-efficient motors in some of the company’s warehouses.
- New technologies and Practices. Investing in a startup can provide the CVC’s with fresh insights into innovation. Startups are often developing a complementary product, which may increase the demand for the CVC’s own products
- Regulation. Whilst earlier mentioned this can be a dissuading factor, regulation can be a key motive behind corporate investors. Constantly tightening “green” policies force large companies to seek out innovations to ensure regulatory compliance. For example, Maersk, an international maritime company, has purposely funneled investments into new carbon tracking technologies.
Examples of CVC firms investing in cleantech.
- BP Ventures: $400 million into cleantech including Drover (carsharing), Freewire (electric vehicle charging), Fulcrum Bioenergy (creating biogas from household waste), Peloton (autonomous vehicles and truck platooning), and Victor (on-demand jets).
- Chevron Technology Ventures: Focused on water management, production enhancement, and emerging material including Acumentrics (solid oxide fuel cells), Ensyn (renewable liquid fuel), and Inventys (carbon capture).
- Constellation Technology Ventures: Mother company Exelon, its investments include ChargePoint (electric vehicle charging), Ouster (lidar detection systems), Powerhouse Dynamics (facility energy management), Sparkfund (an energy efficiency financing platform), Stem (behind-the-meter energy storage technology), and XLFleet (drive trains for fleet electrification).
- Enel Startup: Supported companies such as Archon (monitoring drones), Demand Energy (an energy storage company that Enel ended up buying outright last year), I-Em (maintenance and management for renewable energy plants), and Ultrasolar (which optimizes solar panel production).
- Engie New Ventures: Investment includes Advanced Microgrid, Airware (industrial drone applications), Gogoro (electric scooters and swappable batteries), Heliatek (organic solar film), and Homebiogas (residential biogas technology).
- Saudi Aramco Energy Ventures: Nexwafe (new materials for solar cell production), Oxymem (energy-neutral wastewater treatment), and Zouk (a European equity fund focused on cleantech startups that have backed firms such as solar company Off Grid Electric and British electric vehicle infrastructure company EO Charging).
- Total Energy Ventures: Investments include Solidia Technologies (which embeds carbon dioxide in concrete and construction materials), Sunfire (a German company working on fuels that turn renewable natural gases into electricity), and Xee (connected mobility).