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It takes a village to succeed in climate tech

Collaboration

Solving climate change depends, to some extent, on technological innovation.

The world’s leading climate authority, the Intergovernmental Panel on Climate Change (IPCC), published a landmark 2018 report highlighting the urgency of limiting warming to 1.5 degrees Celsius. The report outlines four potential pathways for reaching that goal. The pathways are vastly different, but one thing they have in common is a central role for new technologies, all of which fall under the growing category known as climate tech.

Relying on emissions-reducing technology isn’t the same as blind techno-optimism. New technology needs to complement existing solutions, deployed immediately. But the IPCC pathways make clear that the route to mitigation goes through innovation.

So, what does it take to turn a societal need into a functional reality? Scientific breakthroughs are only part of the challenge. After that, there’s a long road before solutions can be implemented at scale. They require funding through multiple stages of development, facing many financial and operational risks along the way.

There’s a parallel here with the response to COVID-19. Even if a working vaccine is developed, it must go through trials to determine efficacy and the logistical challenge of distribution to billions of people. But a key difference is that effective climate solutions are more varied than a single vaccine and usually more complex.

At a webinar last week hosted by Yale, Stanford and other groups, Jigar Shah, co-founder of clean energy financier Generate Capital, noted that climate technologies, unlike medical breakthroughs, must compete with systems already in place.  

"In the biotech industry, which I think folks herald as a well-functioning market, once companies reach a certain validation of their technology and approach, there's a payoff there," he said. "And in [climate tech], there really isn't one [in the same way], largely because there are a lot of incumbent technologies that provide electricity, energy, water, food, land and materials."

Valley of Death image

Source: Breakthrough Energy, as reprinted by CBEY

The period when a new technology is costly to develop but too early-stage to produce commercial revenue is often called the "Valley of Death" because even promising technologies often fail during this period. Success requires the collaboration of a wide set of partners and investors.

As an Environmental Innovation Fellow at Yale, I’ve helped compile insights for investors on overcoming the unique barriers faced by nascent climate technology. Fortunately, many investors are already tackling this challenge. 

The new wave of climate tech investors

In the early 2000s, there was a well-publicized boom then bust in clean energy investing. According to Nancy Pfund, founder and managing director of impact venture capital firm DBL Partners, much of this interest was from "tourists" looking for an alternative to the dot-com failures earlier in the decade. On a GreenBiz webcast last week, she observed that the current interest in climate tech is markedly different. "Today there’s such a high level of focus, commitment and knowledge on the part of both the entrepreneurs and investors," she said.

Pfund said the interest in climate tech is partially due to the compelling economics of renewable energy compared to alternatives. "There’s been a stunning cost reduction over the past decade," she said. "This brings in mainstream investors who are just making dollars and cents. They’re not even necessarily waving the climate banner. They want to rebalance their portfolio for the future."

During the same webcast, Andrew Beebe, managing director of Obvious Ventures, noted that an additional factor in the rise of climate tech has been the overwhelming public demand for climate action. "There’s been a societal shift as well," he said. "In entrepreneurs today and investors, I see an urgency like we’ve never seen before. People are not that interested in doing yet another social media company, unless it has a real impact."

In entrepreneurs today and investors, I see an urgency like we’ve never seen before.

It’s important to note here that climate tech takes many forms. There are software solutions that can help reduce emissions and that don’t face the Valley of Death I mentioned earlier. But some of the most critical solutions are physical technologies that require a lot of time and capital to succeed.

"You can't spell hardware without the word ‘hard,’ and everyone knows that," said Priscilla Tyler, senior associate at True Ventures, at the Yale-Stanford webinar. "Hardware is hard, which isn't to say it's impossible. And if anything, in my opinion, it begets more impact and more opportunity."

There are promising signals that climate tech is here to stay. Tyler is part of a group of venture capital investors called Series Green, which meets regularly to discuss climate tech opportunities. Additionally, multiple weekly newsletters share the latest deals in climate tech, and in a recent open letter, a long list of investors confirmed that, despite the COVID-19 economic downturn, they remain committed to climate solutions.

Going beyond traditional venture capital

A notable climate tech deal that happened last week was the $250 million investment in Apeel Sciences. The California-based company has developed an edible coating for fruits and vegetables that can help to preserve some of the 40 percent of food that normally gets thrown away. Investors in this round included Singapore’s sovereign wealth fund and celebrities such as Oprah Winfrey and Katy Perry.

A company such as Apeel doesn’t start out raising hundreds of millions of dollars from large institutional investors and celebrities. At the early stages, many new technologies depend on government grants and philanthropy. Apeel got started with a $100,000 grant from the Gates Foundation in 2012.

Apeel avocados

Apeel coats fruits and vegetables with an edible layer that can is designed to extend shelf life by two to three times.

Media Authorship
Apeel Sciences

Prime Coalition is an organization that helps foundations deploy philanthropic capital to climate solutions through flexible funding structures that allow for long periods of technology development and multi-faceted risk. It calls these funding sources "catalytic capital," because they can help unlock other forms of finance further down the line. 

In addition to helping others deploy catalytic capital, Prime also makes its own catalytic deals directly through an investment arm called Prime Impact Fund.

"We're looking to support companies that have specific things to be de-risked before they will be attractive to follow on funders, and then we can be the source of that de-risking capital," said Johanna Wolfson, principal at Prime Impact Fund, at last week’s Yale-Stanford webinar.

By collaborating with one another, investors such as Prime can help technologies move through the stages of innovation, until they’re ready for more traditional investment structures. Catalytic capital invested today could help create the next Apeel Sciences several years from now.

At each stage, investors serve not only as sources of money but also strategic partners for the startups themselves. This is particularly true for corporate investors, who may have substantial industry knowledge to share and more flexible expectations than traditional investors.

There’s a lot more sophistication on part of corporate investors now than there was 10 years ago.

"There’s a lot more sophistication on part of corporate investors now than there was 10 years ago," said Pfund. "Then, you saw the agenda of the corporation being pushed around the board table more than you do today, and that’s never a good idea."

If their interests are aligned, corporations and startups can create mutually beneficial relationships, where each offers the other something that it couldn’t have obtained on its own.

"These corporate investors see so many different technologies, and they believe their own products are better than the startup products, so how do you actually get their support?" said Andrew Chung, founder and managing partner of 1955 Capital, on last week’s GreenBiz webcast. "Well, you need to have a widget or product they haven’t seen before or can’t build themselves."

Non-financial support also can be catalytic

Investors such as DBL Partners often connect the startups in their portfolio to corporates and other partners. These connections can be hugely valuable for startups, especially in emerging industries where networks are largely informal.

While investors’ main role is to provide capital, they also provide many forms of non-financial support, which can be essential to advancing innovation. In addition to connections, they also can help startups to navigate dynamic policy environments at the state and federal level.

"Policy plays a pivotal role," said Pfund. "We don’t invest in policy, we invest in people, but we know that our companies are going to have to address the changing policy landscape."

We don’t invest in policy, we invest in people, but we know that our companies are going to have to address the changing policy landscape.

DBL Partners helps to shape the policy landscape by convening roundtable meetings, advocating for legislation and reaching out to regulators in order to help create a more favorable environment for innovation. This sort of engagement is relatively low-cost in the short term, but it can have massive benefits in the long term, especially as new technologies begin to scale up.

Shah pointed out that the challenges facing climate tech don’t end once solutions reach commercialization. Nascent technologies still need to be deployed at a large scale to have impact.

"A lot of us focus on going from zero to millions," he said, "but then, in fact, millions to billions is still nascent."

Reaching the necessary scale requires a careful alignment of technological development, market creation, political support and investment across a wide spectrum of capital.

"All of these things work together in tandem to really unlock nascent technologies," Shah said.

This story was updated June 4 to correct Apeel's funding information.

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