Climate Change, Part I: Lessons Learned from Cleantech 1.0

In the midst of the global pandemic, the tech industry seems to have woken up to two facts:

  1. Climate change is real and happening all around us
  2. Technology has a place in doing something about it

VC funding going into climate change is swelling. We are hearing every week about new funds and approaches to deploying capital into the sector. 

This is exciting to see and we applaud these efforts. There is plenty of room in the space and, to be honest, we need all the help we can get. 

A Snapshot of Today’s Current Situation

It makes sense when you think about it. There is now widespread acknowledgment that climate change is a massive, global problem that brings with it significant economic repercussions and long-term geopolitical implications. 

Additionally, there is a lack of clear existing solutions to “fix it,” thus creating the opportunity for a technology-driven paradigm shift. 

So does all of this really come together to create a multi-trillion market opportunity primed for disruption?

Well, not so fast…

A Brief Look Into Cleantech & Its Demise

Hindsight is 20/20 and in the case of understanding where we’re headed with climate change and technology, checking the rearview mirror is essential. Let’s consider the first wave of cleantech investment:

First, it’s important to note that all venture capital dollars taken together and added up are a small fraction of global capital outlays—but arguably index quite high on “return on innovation” metrics.

A quarter of a century ago “cleantech” venture capital investments were a small piece of the venture capital pie. In 1995, these investments accounted for less than 1% of all US VC activity. The dot-com boom came and went. Not long after that, VCs started to take this newfangled climate change thing more seriously. Following Al Gore’s film, An Inconvenient Truth, there was a ramp-up of investment activity lasting from 2006 to 2011. 

For the cleantech sector, these were boom times. In 2008 roughly 30% of all  US venture dollars were going into cleantech. John Doerr gave a heartfelt TED talk. 

Then 2008 happened. It’s hard to ignore the effects that global financial crises had, but the US government under President Obama moved to counter these effects. Enter the Recovery Act (ARRA) in 2009 that provided quite a bit of government funding towards cleantech innovation from early-stage SBIR grants through the Loan Guarantee Program. 

ARRA also helped establish ARPA-E, which would continue to play a notable role in funding early innovation over the next decade. The net effect of all of this recovery act funding was to lay the groundwork for much of innovation that would be commercialized over the next ten years.

However, parts of ARRA were about to become a political minefield.  Solyndra, a maligned solar panel manufacturer, would have the ignominious front and center role. After receiving a DOE Loan Guarantee and a photo-op with President Obama, the company was involved in a scandal. They subsequently went bankrupt and became the subject of negative campaign ads from Mitt Romney’s presidential campaign, citing Solyndra’s ultimate demise as an example of wasteful government spending gone awry. What seems to conveniently have escaped the popular discourse was the fact the Loan Guarantee Program had a better track record than many privately backed lenders [1].

Regardless of your outlook on Solyndra, it marked a turning point. Over the next couple of years, cleantech funding declined to the point where “cleantech” became a dirty word for any startup trying to raise venture dollars. The field was barren and the landscape of capital providers in this sector was scarce, especially at the early stage, save for a few committed holdouts.  

Lessons Learned From “Cleantech 1.0”? 

Commodity Market Dynamics

Energy is a commodity and it’s bought, sold, and priced as such. 

In energy generation, particularly electricity, the means distribution is typically controlled by a small number of firms: the utilities. New technology businesses producing lower carbon energy were initially at an inherent disadvantage in competing with the fossil fuel status quo, which wielded a hundred-year economic advantage stemming from its existing scale, capacity build-out, and production efficiency.  

Many companies at the time aimed to compete with large well-established value chains, controlled by the utilities, as opposed to creating new marketplaces or platforms on which to build new businesses.  We did see the means of production, however, begin to shift from centralized to distributed, with solar PV taking center stage. In fact, we saw solar become the lowest cost form of electricity generation, which we’ll return to later. 

We continue to think that the electricity value chain will become further disaggregated and decentralized.

Technology, Market Understanding, and Scale

In a commodity market, you can’t just “disrupt a small portion of it.” Yes, addressing climate change is full of massive market opportunities—displacing just a small portion of any of them would make an enormous company—but successful companies have to scale up in the face of massive distribution networks, legacy systems, and deeply entrenched incumbents. 

Even with better technology, startups won’t succeed unless they are able to bring their technology into the market. Building a successful company requires a deep understanding of these markets and the scale of the industry. This is something that many underestimated as the sheer magnitude and scope of energy and cleantech sectors completely dwarfed many industries that early-stage capital was used to investing in.

Capital Crunch

There was a significant decrease in capital availability following the global financial crisis of 2008. Many venture-backed companies were not able to secure financing that would have been readily available just months before. As a result access to capital became incredibly scarce for anything perceived as having any risk: engineering challenges, scaling constraints, business model questions, or excessive capital requirements. 

The bottom line: it’s all about the cost of capital.  

Glut of Gas

On the domestic energy production side, we had the shale revolution. The U.S. went from being a net energy importer to an exporter. It’s hard to overstate the impact that this had on domestic energy production, policy, and geopolitics. 

Now, however, the tide has shifted. Solar PV is the lowest-cost source of electricity generation and solar plus storage is now cheaper to build and operate in many geographies compared to natural gas [2]. 

Ignore the VCs

Looking at VC financing trends doesn’t tell the whole story. Despite the fact that many venture funds lost their appetite for cleantech, there continued to be large amounts of capital flowing into the sector from other asset classes, and an incredible amount of innovation and deployment. We’ve seen dramatic reductions in the cost of many enabling technologies such as solar and batteries as a result. 

Cleantech 1.0 Saw Success…and We Will Too

Despite all of the above, there have been terrific success stories from the Cleantech 1.0 era.

A number of brilliant entrepreneurs were able to drive big outcomes in every sector. Tesla, Sunrun, Opower, Nest, Beyond Meat, and QuantumScape, and others have redefined “what is possible” over and over in the sectors they are operating in. And this is just the beginning…

Keep an eye out for part two of this series on climate change. We’ll talk about what’s changed and the areas in which climate tech today is strikingly different than cleantech was 10 years ago.

What did I miss? Let me know on Twitter at @alexluce_!

Credit Due: Portions of this piece are adapted from a presentation I gave for the Berkeley Energy and Resources Collaborative on The State of Cleantech VC in fall 2020.

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