She Says These Technologies Fight Our Existential Crisis and Breed Trillion-Dollar Opportunities
By: Keyi Wang
Tags: Startup, Climate Change, Technology, Venture Capital, Immigration

On Climate Tech and Investing

K: Climate tech is a broad concept. Can you help us unpack it?

H: The word “climate” encompasses two key objectives of this industry:

Mitigation: reducing greenhouse gas in the air to minimize climate impact, whether through emission control or carbon capture; Adaptation: reducing negative consequences of climate change already underway, such as weather hazards.

While 1. used to dominate public consciousness, 2. has also captured attention over recent years, as extreme climate events grow more frequent and severe. Facing threats like the Californian wild fires and Hurricane Sandy, we have to prepare and protect ourselves, especially our underprivileged communities, which are also the most vulnerable.

Photo by Marcus Kauffman on Unsplash

The word “tech” in “climate tech” represents a key piece of the solution, but it cannot exist alone. Innovations in business models, funding mechanisms, policies, and regulations are all crucial in catalyzing tech-centered initiatives to fight climate change.

K: Which parts of society are seeing the greatest transformation by climate tech?

H: While changes are ubiquitous, these five major areas are most impacted: electricity & power, transportation, buildings & construction, industrials & manufacturing, and agriculture & food supply chain.

K: Any major tech trends worth highlighting?

H: Rather than a few mega-themes, we are seeing numerous individual innovations that target specific problems facing different industries today. It goes to show how ubiquitous climate impact is, but fortunately so are solutions. Here are a few examples:

Methane capture and storage for coal mines : even after being retired and sealed, coal mines can continue releasing this powerful greenhouse gas for another century. [Keyi note: Methane has a global warming potential (GWP) 84 times that of CO2 for a 20-year horizon.] Technologies are evolving to more effectively capture such emissions and either utilize or safely store them away on a quasi-permanent basis. [Keyi note: for anyone wanting to geek out over this subject, this paper does a technical deep dive.]

: even after being retired and sealed, coal mines can continue releasing this powerful greenhouse gas for another century. [Keyi note: Methane has a global warming potential (GWP) 84 times that of CO2 for a 20-year horizon.] Technologies are evolving to more effectively capture such emissions and either utilize or safely store them away on a quasi-permanent basis. [Keyi note: for anyone wanting to geek out over this subject, this paper does a technical deep dive.] Advanced thermal insulation technology: cutting-edge material science is being deployed to provide effective thermal insulation, from the packaging for temperature-sensitive food and medical products to windows in energy-efficient buildings.

cutting-edge material science is being deployed to provide effective thermal insulation, from the packaging for temperature-sensitive food and medical products to windows in energy-efficient buildings. Garment manufacturing from sustainable materials: advanced engineering is replacing petrochemical-based fabric ingredients with unexpected natural alternatives, such as milk and mushrooms. This would help reduce the climate impact of what we wear.

Photo by Amanda Vick on Unsplash

K: Why did the industry’s last boom cycle in the late-2000’s, the “Clean Tech Wave 1.0”, go bust?

H: The way I see it, the №1 culprit was the mismatch between the software-oriented traditional VC model and hardware-focused climate tech startups, which were the majority at the time.

The quintessential software model centers around low upfront cost, rapid and numerous iterations, and fast scaling. It can go to market quickly with a minimum viable product (MVP) and release updates based on customer feedback in a matter of days.

Many climate tech startups, particularly hardware businesses, are just the opposite — they have very few shots (if not just one shot) at survival, and each attempt can cost tremendous capital and time. An MVP alone might take years, and if it flops, there might never be a second chance.

As a result, when VCs piled into the space in mid-2000s with their conventional “software” playbook, it didn’t work. The risk-return profile, investment horizon, and capital needs of most clean tech startups at the time called for a different type of capital, but VC was — for the most part — the only game in town.

[Keyi note: this podcast proposed another contributor to the bust — the “commodity” nature and low barrier to entry of major technologies pioneered by “Clean Tech 1.0” startups, such as solar and wind power generation. The fields were quickly swamped by competitors, including those benefiting from existing scale, manufacturing experience, supply chain advantages, and/or low-cost capital (another manifestation that VC wasn’t the optimal funding in such cases). The surge in supply set off ruthless price wars and drove most startups out of the market.]

K: What are you seeing with respect to the growing second wave for climate tech today? How is it different from the last one?

H: We’re seeing two major differences:

A greater share of software and business model innovations (which are more often VC-friendly than hard tech solutions), thanks to existing climate tech infrastructure.

We have a massive stock of climate tech hard assets today, such as solar panels, wind farms, and EVs, which did not exist in “Clean Tech Wave 1.0”. [Keyi note: the EV boom took place mostly after “Wave 1.0” and went well beyond the startup ecosystem with significant participation from incumbent carmakers.] On top of them, software and business model innovations can now flourish and help optimize the underlying hardware operations. For example:

Drones and computer vision technology are being deployed to quickly and cost-effectively assess building rooftops for solar panel suitability and detect installed panels that need maintenance [Keyi note: DroneDeploy is one of such providers];

Software can help commercial operators of EV fleets optimize fleet operations and charging schedules to achieve maximum productivity and minimum energy use.

Picture of rooftop solar panels taken from above; Photo by Hanson Lu on Unsplash

Make no mistake — innovations in “hard science” fields are crucial and still happening. But the landscape of climate tech has evolved to be more diverse, and VCs today are finding more investment opportunities that align with their business model.

2. Deeper involvement from a broader group of stakeholders.

While the first wave was largely fueled by investor enthusiasm and certain renewable energy policy incentives, we are now seeing governments, large corporates (even fossil fuel incumbents), and non-profit organizations play a much more active role. [Keyi note: a good example of the powerful role governments play is how China grew its EV industry from near non-existence to the world’s largest by sales and production over the last decade.]

There is growing consensus that climate change is an existential crisis for mankind and deserves a societal-wide response. These stakeholders provide complementary capital solutions: government grants and corporate investments are generally more patient and cost less than VC funding, which makes them crucial to those startups not fit for VCs as we discussed. In addition, these stakeholders provide critical ecosystem support, such as corporate partnerships and enabling policies.

K: In November 2019, Google announced an accelerator program for climate tech startups. In June 2020, Amazon launched a $2 billion climate pledge fund to invest in climate tech. Why are tech giants like them particularly active?

H: Apart from being good corporate citizens and contributing to a major cause most of their people care about, the tech leaders have multiple strategic rationales to double down:

Demonstrate leadership in new territories.

As major industries get reshuffled, they may discover new market opportunities to potentially lead in by acting early. For example, Shopify has launched a carbon offset platform, where its merchant partners can purchase credits (generated by third party carbon reduction projects) to offset the climate impact of their emission-heavy package shipping process.

Shopify offers the Offset plugin that allows its business customers to track and offset emissions from package shipping

2. Nurture key future customers.

For tech giants that sell advanced B2B computing tools (e.g. cloud and machine learning services), climate tech startups are much more likely to become customers than their often slow-to-move incumbent competitors. By partnering with these startups and helping them scale, these tech behemoths will be expanding their own future revenue pipelines.

3. Optimize energy usage.

The largest tech companies are also gigantic energy users. Many including Google, Amazon and Microsoft (who are already among the biggest corporate buyers of renewable energy worldwide) either claim to have achieved a “100% renewable” energy portfolio or net zero emission, or pledge behind such goals. As a result, they actively invest in and partner with climate tech startups that can help them manage carbon footprints and potentially save hundreds of millions in energy bills.

4. Commercialize in-house energy expertise.

The tech giants are accumulating significant proprietary knowledge in optimizing energy consumption, leveraging their own scale. Such knowledge could eventually be commercialized and marketed to third parties. In other words, a well-run cost item may set the stage for a future key revenue stream. [Keyi note: recall that AWS was born out of Amazon’s in-house initiative to optimize its own computing infrastructure utilization.]

K: Is climate tech a more localized or globally connected industry? Why?

H: The technology is definitely globally relevant. Just like search engine algorithms, once you figure out something that works well, you can apply it everywhere. That said, localization matters tremendously in applying the technology, given unique local laws and regulations, industry ecosystems and so on.

Overall, you see more global consolidation upstream vs. downstream in the industry value chain. A few upstream players may possess the best technology and demonstrate economies of scale in production. These leaders may have a global production footprint to gain easy access to source materials, customers, etc.

In addition, the founder universe of climate tech is more international and decentralized than that of software startups. First, you see a high percentage of immigrant founders among US climate tech startups, especially those built around technological breakthroughs spun out of universities and national labs. This naturally extends from the high percentage of international students and scholars in STEM fields of the US higher education and research system. Second, you also see founders in every corner of the world applying the latest climate technologies in their respective communities, relying on their localized knowledge of the regulatory and market environment.