How to finance a climate tech startup

Building a climate tech startup is as treacherous as traversing the Himalayas.
Building a climate tech startup is as treacherous as traversing the Himalayas.
Image: REUTERS/PHURBA TENJING SHERPA
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If entrepreneurs were mountaineers, starting a climate tech company would be like traversing the Himalayas. Beyond almost every peak lies another summit, and between them financial valleys of death. The environmental nonprofit Rocky Mountain Institute counts no less than four lethal gaps for aspiring climate startups, from leaving the lab to raising tens of millions of dollars before commercialization.

A successful traverse requires luck, technological prowess, and, of course, money. Lots of it. The companies that have pulled it off are rare and, like Tesla, often the exception that proves the rule. The issue of funding is particularly tricky.

“If you tell investors, I want to save the world but I have this technology risk, policy risk, and this market risk, the number of investors who say ‘I’ll invest in that’ is vanishingly small,” says Noah Deich, executive director of Carbon 180, a nonprofit pursuing carbon removal solutions.

But a few investors are finally raising their hand. As the number of climate tech startups grows, funders are willing to take risks that most avoided during the last clean tech boom from 2006 to 2011. Quartz worked with data from private equity research firm PitchBook to analyze the volume and category of investment in startups that promise to take a bite out of global emissions.

If you want to track investment in climate tech, any company that claims to reduce emissions or sequester greenhouse gases from the atmosphere conceivably qualifies. The accounting firm PWC estimates that this category, including everything from electric carmakers to energy efficiency firms, includes 1,200 companies and more than 2,500 active investors.

But a more precise measure of Silicon Valley’s enthusiasm may be the funding going to companies dedicated explicitly to addressing climate change, global warming, and greenhouse gas emissions. Since 2018, 86 of these global startups have received more than $900 million in investment, more than the prior 10 years combined. The biggest investments went to companies like nuclear startup Commonwealth Fusion Systems ($199 million over two years), and the lab-grown meat company Wild Type, which closed a $12.5 million deal in 2019.

While $1 billion may sound like a lot, it’s still a pittance in the scheme of things. US-based venture capitalists only invested about $217 million in 20 climate tech startups last year, 20% of the total global investment in the sector. Compare that to the billions of dollars flowing into smartphone apps and social media: Mobile startups have raked in more than $15 billion almost every year since 2014, and social media (which is far less capital intensive than hardware startups) peaked in 2011 at $4 billion, according to PitchBook.

That’s not to say things won’t change. Many are optimistic that Silicon Valley is on the verge of a huge boom to decarbonize the economy. Public markets and private equity will finance their growth if these startups get to a stage where more conservative investors are willing to take a swing.

A new landscape of funders wants their at-bat. And they’ve learned from the last bust, when researchers at MIT declared “the VC model is broken for clean tech” in a 2016 post-mortem.

“We’re not putting assets in the ground with venture dollars,” says Dawn Lippert, the CEO of the Elemental Excelerator, a nonprofit that provides up to $1 million in investment to a range of climate and justice-related startups. “You would never do that in any other industry and you would 100% never do that now.”

Instead, financing is more finely tailored to the need of slower growing, capital-intensive startups (although some climate tech fits in the software category as well). This new ecosystem spans every stage: accelerators, government grants, project financing, and perhaps most critically, financing far beyond Silicon Valley’s venture model.

Below is a summary of the financial stages, and funders, that are ushering startups from the lab to commercialization.

Industry giants and institutional investors are putting billions to work acquiring companies and financing research and development; consider Amazon’s $2 billion internal Climate Pledge Fund to reach net-zero carbon emissions by 2040. When it is time go public, there are now “SPACs,” essentially shell companies that can raise outside capital to acquire a private company in a reverse merger.  That’s flipped the traditional model of an IPO that is the culmination of a decade-long (or longer) journey for young companies seeking to join the major leagues.

So far in 2020, the financial instrument has raised more than $37 billion in the US, especially for electric mobility, batteries, and renewable energy, according to PitchBook. This has enabled some private climate tech companies to raise money for R&D and expansion without a traditional IPO.

“Arguably, there has never been a better time for makers of unprofitable and often unproven technologies to go public,” says PitchBook.