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We need more ‘patient’ capital behind early-stage climate tech

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Yuttano Contributor Studio

According to a recent PwC report, venture capital investment in clean technologies aimed at slowing the climate crisis increased from $418 million in 2013 to $16.3 billion in 2019, or a whopping 3,750 percent.

In addition, during the past year, more than 300 global companies — including Microsoft, Delta Air Lines and Amazon — have committed to achieving net-zero emissions before 2050, and many also have pledged to fund innovation.

Climate technologies have become better and more affordable. Renewable energy competes directly on cost with power from coal and natural gas plants, and the improving price and performance of batteries is making everything from electric vehicles to long-duration energy storage more attractive to customers.

All of this, along with U.S. states and other nations setting rigorous climate goals, is fueling significant demand for clean energy products and other climate-tech solutions that reduce greenhouse gas emissions.

As executive director of a nonprofit that funds and supports entrepreneurs developing new cleantech climate solutions, these are very promising trends — and ones that will be further fueled by a new U.S. president, who in his first few months already has taken many bold steps to confront the climate crisis head-on. Two of these steps include directing the launch of a Civilian Climate Corps aimed at creating new climate-related jobs and initiating the follow through on his campaign pledge to create ARPA-C, an initiative to foster game-changing technologies that will help the U.S. achieve a goal of net-zero, economy-wide emissions by 2050.

Without early-stage funding, only a small number of entrepreneurs are able to successfully move their innovations from the laboratory to the marketplace.

While this uptick in climate-tech VC investment and federal initiatives to shift to a clean economy are needed and encouraging, successfully solving the climate crisis isn’t guaranteed, and we can look back a decade for lessons.

What went wrong last time and how to avoid that this time

When the cleantech investment surge of 2006 went bust in 2011, there were many contributing factors, including the Great Recession, the Chinese government’s massive investment in solar manufacturing capacity and the gas fracking boom. But another problem lay in the fact that many early-stage cleantech startups received capital from venture capitalists who were new to investing in this type of company. They didn’t understand that many clean technologies take longer to develop, scale and deploy than software, a poor fit for the short three- to five-year timeframe for a return on their capital that they were used to seeing when investing in software companies.

Today, more market-rate venture capital is moving into the climate-tech solutions arena. But most of this financing is flowing to clean technologies that are fairly far along in the development cycle, where the risk to investors is much smaller.

The problem is that a very large funding gap still exists at the earliest stage — that point when entrepreneurs are starting to transition research discoveries into new startup companies, a time when VC investments aren’t yet an appropriate source of funding. Without early-stage funding, only a small number of entrepreneurs are able to successfully move their innovations from the laboratory to the marketplace and ultimately access the growing pool of venture capital that the PwC report highlights.

This is a societal problem because this early-stage funding gap causes many promising climate technologies to languish on the lab bench, never reaching their potential to help reverse the climate crisis and create new, green jobs. This is especially true for innovators without access to family wealth or connections to a handful of elite universities.

The power of patient, risk-tolerant capital

We will not be able to solve the climate crisis unless we have a full pipeline of new technologies in the very early stages of development that are supported by solid funding, including government research funding and impact-first investments that many are calling "catalytic capital." The deployment of catalytic capital is driven by the investor’s greater desire for impact than for financial returns, enabling more patient, risk-tolerant funding.

We will not be able to solve the climate crisis unless we have a full pipeline of new technologies in the very early stages of development that are supported by solid funding.

Among the earliest investors of this type of capital, VertueLab (the organization I lead) serves as an intermediary between the impact-first investors/philanthropists desiring that their financial resources help solve the climate crisis and startup companies developing promising technologies with the potential to make significant impacts on reducing greenhouse gas emissions.

A shift is happening

Since we started making these types of investments in 2014, we have seen others recognize that alternative models to traditional venture capital are needed to address the capital gaps that climate technologies experience.

Bill Gates’s $2 billion Breakthrough Energy Ventures fund invests on 20-year cycles, MIT’s "tough tech" incubator, The Engine, assumes it will not see a return for 12 to 18 years, and Prime Coalition began using philanthropic capital to invest in cleantech startups.

At VertueLab, our $5 million Climate Impact Fund leverages catalytic philanthropy to help fill the early-stage capital gap, investing in entrepreneurs developing innovative climate solutions. Our unique holistic approach combines this patient, risk-tolerant capital with expert business training, coaching and support in accessing federal grants. 

More private foundations and individuals (especially millennials) are recognizing the need to fill this capital gap and are using philanthropic giving and investing, often via donor-advised funds, to complement other funding to help deliver on the promise that new technologies can help solve the climate crisis. Bridging the gap with impact-first capital to help get startup companies ready for a massive wave of new climate-tech venture capital is key to bringing new climate solutions to scale.

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