The investor landscape in Silicon Valley is adapting to the increased demand for climate action. This week’s ‘Going Green’ article takes a closer look at the emerging green ecosystem, the role of Corporate Venture Capital, and highlights some of the relevant venture funds and their investment focus, which could be relevant for Danish start-ups.

Silicon Valley is almost synonymous with world-changing technologies and big tech companies with global impact on industries and societies. At the heart of Silicon Valley is the venture capital industry, which invests around 40 billion USD annually in innovative start-ups—70 times more than is invested in Denmark.

The venture capital model that is often associated with Silicon Valley rests on a large appetite for risk. Investments typically have a 10-year horizon, and VC firms are prepared to let a majority of their investments fail, banking on one to three out of ten investments being successful enough to cover the losses. Venture capitalists often bet large to support ‘hyper growth’ or ‘blitzscaling’ to create companies valued above 1 billion USD—the so-called ‘unicorns.’ The model has proven successful in software, internet and communication sectors, where scale can be achieved with less upfront capital investment.

So how is Silicon Valley relevant when it comes to addressing climate challenges? Silicon Valley has changed the way we consume, work and interact. Can its innovative capacity also be harnessed to transform our societies to a carbon-neutral future?

For perspective, this research shows that in 2013 the early-stage venture funding for climate tech companies was about $418 million. In 2019, total venture funding increased to $16.1 billion, a more than 3750 % increase. Source: PwC: The State of Climate Tech 2020. The next frontier for venturecapital

The Boom and Bust of Cleantech in Silicon Valley

The collapse of the cleantech sector in Silicon Valley some 10 years ago is key to understanding VC engagement with climate start-ups. In 2007, John Doerr from Kleiner Perkins, one of the most renowned VC firms in Silicon Valley, pronounced cleantech to be the business opportunity of the century, saying that “Going green is bigger than the internet.” From 2006 to 2011, VC firms invested more than 25 billion USD in cleantech start-ups. However, many of these investments failed. Nearly 150 renewable energy companies in Silicon Valley shut down, and VCs are estimated to have lost more than half of their money, causing what has been coined the ‘burst of the cleantech bubble.’ With their fingers burnt, many VCs lost interest in cleantech.

Observers have pointed out that traditional VC investments are not well-suited to cleantech. Cleantech start-ups often need longer time horizons to develop their solutions and significantly more capital to scale. They also operate in a market dominated by risk-averse legacy companies, on whom they often depend to bring their solutions to market. VCs in Silicon Valley also point to the fact that while investors have considerable expertise in growing software and biotech companies, cleantech requires a skill-set and technical know-how that was not widely available at the time.

A Second Green Wave – Enter Climate Tech?

But times are changing – again. The sense of urgency of the climate crisis has also been registered in Silicon Valley, where “climate tech” has entered the investment vocabulary. While ‘cleantech’ is still in use, the climate tech moniker covers technologies specifically aiming to reduce greenhouse gas emissions or addressing the impacts of global warming.

Nancy Pfund, founder of DBL Partners, when recently asked in a Greenbiz webinar of the differences between the first cleantech wave and now, pointed out that:

“Today, there is such a high level of focus, commitment and knowledge on the part of both the entrepreneurs, and the investors. The economics of clean technologies are extraordinarily compelling today. There has been a stunning cost reduction over the past decade, which brings in mainstream investors and asset owners, who are making dollar and cent decisions without wearing a climate banner. Also, the re-entrance of corporate investors is for real this time.”

Many of the larger VC’s are still choosing to focus on what they know best, digital technologies. However, there are signals pointing towards both well-established generalist venture capital firms and newer specialist funds zooming in on the business opportunities in climate change. Some of the large companies populating the Midas list of the world’s best venture capital investors have made statements in this regard:

• Sequoia Capital has recently called out for startups in the green space.
• Kleiner Perkins has spun out a separate Green Growth Fund, G2VP, focusing on companies using digital technologies to modernize traditional industries. They specifically focus on agriculture, energy, logistics, manufacturing and transportation sectors.
• Khosla Ventures has continued in the climate tech space, focusing on food, efficiency, power and energy storage. You can read more about Khosla Ventures here.

 

VC Funds Looking for Impact

Seeking to debunk the myth that there is a trade-off between impact and returns, there are venture capital funds like DBL Partners who are specializing in investments with big impact. They have been investing in clean technologies for decades with rates of return that outperform traditional investments. Others like Obvious Ventures and Congruent Ventures do not define themselves as impact investors, but invest in early-stage start-ups that will positively impact energy and resource consumption. You can read more about Obvious Ventures here.