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STATE OF PLAY

Why investors are betting on Silicon Valley’s second climate boom

Tsjisse Talsma for Quartz
  • Michael J. Coren
By Michael J. Coren

Climate and emerging industries editor

Published Last updated

In a gritty corner of San Francisco, Peter Reinhardt is leading me past what looks like the site of an industrial accident. Propane tanks, steel airlocks, and heavy equipment lay scattered in partial disassembly.

Then there are the almond shells. Sixty-pound sacks lie on the ground next to towers of steel tubing, ready to be incinerated along with other crop waste hauled in from California’s central valley. The plants’ molecules will tear apart in a superheated atmosphere of carbon dioxide, producing a stream of hydrogen and other gases. That’s how Reinhardt’s startup Charm Industrial, crammed here between auto body shops and windowless metal-clad warehouses, hopes to power a zero-carbon future: by turning plants into a carbon-free replacement for fossil fuels.

Until a few months ago, Reinhardt, an MIT aerospace engineer who sold his data company Segment.io for about $3.2 billion in early October, remained skeptical this idea would work at all. He had spent Saturdays for nearly two years investigating different biochemical pathways and hitting dead ends until he found one that might turn a profit. Now he’s trying to prove it.

“There was no way to reduce the error bars without building something,” he told me as we walked across Charm’s site. If scaled up, his process could reduce emissions in two ways. First, it would synthesize a carbon-rich oil to be pumped deep underground, stashing carbon away from the atmosphere. As its technology improves, that oil could also be refined into hydrogen and used as fuel for industrial furnaces—and since it’s made from crop waste, Charm says the carbon emissions to the atmosphere would zero.

This isn’t theoretical: Two companies, Shopify and Stripe, have signed on as Charm’s first customers. Later this year, Reinhardt plans to pump its bio-oil into abandoned gas wells in Kansas to offset the companies’ emissions.

I’ve had a lot of venture capitalists by here. They’re super skittish. If I was a VC, I’d also be skittish.

Reinhardt, along with hundreds of other startup founders in Silicon Valley, are reorganizing their lives around the idea of “decarbonize everything.” A small but passionate group of founders and engineers are leaving companies like Tesla, or skipping the tech giants entirely, to take aim at what they call the biggest opportunity of a generation: climate tech.

It isn’t the first time. A decade ago, enthusiasm swelled for the renewable energy boom known as clean tech. That led to billions of dollars in losses as startups furiously spent venture capital with few solvent companies to show for it.

But climate funds are popping up once again. Billions of dollars are pouring back into the sector. Charm may be one of the big beneficiaries. It has raised $3.5 million in angel investment, according to private equity research firm PitchBook, and its global ambitions will demand hundreds of millions more.

Even as Silicon Valley stands on the brink of another potential boom, investors remain a bit nervous about the next big bust. “I’ve had a lot of venture capitalists by here,” Reinhardt said standing next to equipment still blackened from testing. “They’re super skittish. If I was a VC, I’d also be skittish.”

Climate bust 1.0 | This time is different? | Financing revolution | Culture shift | Is Silicon Valley the answer?

Climate bust 1.0

No moment captures the optimism of the last boom better than John Doerr’s TED talk in 2007. The partner at famed venture firm Kleiner Perkins walked on stage to recount a dinner conversation he had about global warming with his young daughter. “She turned to me and said, ‘Dad, your generation created this problem; you’d better fix it,’” he said, his eyes brimming with tears. “I’ve got to tell you, for me, everything changed that evening.”

Kleiner Perkins went on to become the standard bearer for the clean tech boom. The firm invested $630 million across dozens of companies, with half its partners targeting what Doerr predicted would be a $6 trillion business. “You remember that internet?” he asked the TED audience. “Green technologies—going green—is bigger than the internet. It could be the biggest economic opportunity of the 21st century.”

Doerr wasn’t the only one saying it. Billions of dollars from other investors followed, along with political support for climate change interventions. President Barack Obama’s arrival in the White House in 2009, and a Democratic congress, suggested a carbon price was on its way, a crucial step to reducing US emissions. Solar and renewable energy costs were falling fast. Soon, it was believed, desperate oil and gas companies would need to snap up startups promising carbon-free energy. Silicon Valley could get rich while changing the world.

Almost none of that came to pass. Of the more than 100 new energy startups launched between 2006 and 2011, backed by more than $25 billion in venture dollars, more than half failed. For those that succeeded, like the fuel-cell company Bloom Energy, it took more than 15 years to go public, and some still struggle to turn a consistent profit. Energy startups, it turns out, behaved nothing like their software counterparts, and technology investors proved unprepared for financing large infrastructure projects. Timelines were slow. Growth was expensive. The fossil fuel industry dug in its heels against the energy transition.

Politics and economics also conspired against the startups. The biggest climate bill in US history, the American Clean Energy and Security Act, narrowly passed the House of Representatives only to die in the Senate in 2009, burying any hopes for a national greenhouse gas cap-and-trade system along with it. China flooded the market with cheap solar panels, driving down America’s share of silicon-based solar module production from 40% in 1995 to just 4% a decade or so later.

Fracking landed the final blow. Thanks to a drilling technique known as hydraulic fracturing, natural gas production soared and prices fell from $13 per thousand cubic feet in 2008 to $4 a year later (and ultimately even lower) making wind and solar far less attractive by comparison.

It was a perfect storm. By 2011, “the clean tech sector was in shambles,” according to a post-mortem by the MIT Energy Initiative. VCs plowed $25 billion into the sector and saw more than half of it vanish. Of the clean tech companies funded after 2007, more than 90% failed to return even initial capital with the lowest share of startups to reach break even of any sector. Even when they did succeed, early returns didn’t compare to software startups. “High risk and low returns,” the MIT report concluded. The financial crater left behind sent investors fleeing for years to safer shores in social media and cloud services.

This time is different?

How times change. Climate tech, as it’s now called, is back. In 2019, nearly six cents of every venture dollar invested went into climate tech, according to PWC, a broad category that has grown to include everything from data center energy efficiency algorithms to electric airplanes. Last year, more than 500 climate tech companies collected $10 billion to $16 billion from investors, most of it in the US, China, and Europe.

What’s prompted this enthusiasm is the same thing that sparks every new Silicon Valley obsession: faith in a huge market. Doerr was likely right that decarbonizing the global economy will prove to be “the biggest economic opportunity of the 21st century.” He was just wrong about the timing.

In 2006, no countries and few companies were contemplating carbon neutral targets. Today, the situation is reversed: 20 countries have net-zero targets on the books (including recent announcements by the European Union, Japan, and China, the world’s largest greenhouse gas emitter), and over 120 more are working on them. Every major emitter, despite US recalcitrance, appears likely to adopt some form of carbon neutrality in the future, and proposals like the EU’s carbon border tax are poised to rewrite the rules of global trade.

Things are moving even faster in the corporate world. More than 300 major global companies committed to carbon neutrality by 2050, according to Science Based Targets, a nonprofit tracking corporate emission goals, and a quarter of Fortune 500 companies have set public climate goals, up four-fold from 2015. Customers and capital are at stake. Financial institutions have begun divesting from fossil fuels and pressuring companies to disclose their climate risks. Nearly 200 institutional investors managing $29 trillion in assets recently told (pdf) executives at the top US greenhouse gas emitters to disclose their plans to align their businesses with the Paris agreement’s goal of limiting average global warming to well below 2 degrees Celsius, according to the sustainability nonprofit Ceres.

That raises the question: What’s Silicon Valley’s role in this energy transition anyway? One clear answer is as a deep-pocketed customer willing to buy clean energy and climate innovations. Google announced on Sept. 14 that it would become the first major company to run its entire business on carbon-free energy around the clock by 2030. In June, Amazon launched a climate pledge vowing to go carbon neutral by 2040 (along with a $2 billion fund to help pay for it, on top of its founder’s $10 billion Bezos Earth Fund). Microsoft and Apple are both on board.

For some, like Jigar Shah, the founder of solar developer SunEdison and sustainable infrastructure financer Generate Capital, California’s technology scene can do the most good by funneling dollars into existing emissions-busting technologies, not inventing new ones. Beyond that, says Shah, “there’s actually very little that Silicon Valley can do to put climate change on a better trajectory.”

It’s true that US venture capital remains a tiny, tiny fraction of the financing pie: just 1.2% of the $1.4 trillion in total private equity deals in 2018 (and well under the 1% or so of companies financed each year). But a few still see venture capital, and scrappy founders, as key to getting to net-zero emissions.  Unlike most firms which are “born small, stay small, and innovate little,” argue researchers in a 2019 working paper by the Federal Reserve Bank of Atlanta, venture firms have an outsized impact. Annual economic growth in the US would be nearly one-third lower, 1.3% instead of 1.8%, without them, they find. Whether breakout successes like Tesla are outliers, or can be duplicated by new climate tech startups, remains to be seen.

Financing revolution

Three years ago, Shaun Abrahamson, co-founder of Urban Us, struggled to convince investors to join him backing companies to prepare cities for climate change. “When we started this, the first question we got was, ‘Is this real financial investing?’” he told me, laughing. “Every time I say it aloud, it sounds crazy. Because when you run the numbers—how big could these businesses be if they work—the numbers are never small.” He expects a number of the startups Urban Us has invested in, from home batteries to radiator retrofits, to turn into billion-dollar companies.

An entirely new set of financiers have arrived alongside Urban Us. They’re filling a crucial financing gap known as the “messy middle.” Google might have been founded in a garage. But hardware and energy startups need more capital and more time. Until recently, they’ve been largely homeless. During the last boom, hundreds of promising companies died stuck between promising prototypes and securing the capital needed to grow.

No early Silicon Valley investor would touch this climate innovation with a 10-foot pole.

Two new sets of investors have stepped into the void. First, angel investors, family offices, and philanthropic capital are backing the very earliest stages, often handing off promising technologies from university labs and government agencies such as the Department of Energy (DOE). One of those is Activate. Started in 2015 by Ilan Gur, a former program director at the DOE’s moonshot factory (the advanced energy division ARPA-E), it aims to usher technologies out of the lab and into the market. Most people will never lay eyes on them because they sit deep behind inside power plants or behind office buildings’ walls: highly insulative glass or machine learning algorithms to save energy. So far, Activate has graduated 55 companies from what Gur calls an applied R&D accelerator backed by the DOE, California Energy Commission, the US military, the Moore Foundation, and others.

“No early Silicon Valley investor would touch this climate innovation with a 10-foot pole,” says Gur. “Early-stage climate innovation is stuck needing really speculative money that’s not a fit for government but does not yet show returns.” But Activate, like similar nonprofit investors Elemental Excelerator and Prime Capital, can pick up where $80 billion in annual federal research funding leaves off. Philanthropy is set to supply a big portion of this patient, risk-tolerant capital. A poll by investment bank UBS found “sustainability” investments will compose a majority of the investments for 39% of family offices’ portfolios. Conventional VCs, such as Urban US, can then pick up the baton.

The next strategy is a hybrid of venture capital and project finance. Exemplified by Ultra and Generate Capital, two new investment firms, this approach should excel at putting steel in the ground. Rather than just invest in a company’s equity, these firms build, own, and operate the factory or facility, a sort of funding usually reserved for developing megaprojects such as toll roads, airports, and stadiums. If successful, they can replicate it over and over. That allows relatively small startups to finance tens or even hundreds of million of dollars in project development costs longer before conventional capital is ready to play ball.

For example, Ultra Capital specializes in “waste-to-value” projects. After financing a facility—a single-stream recycling plant or a sugar beet ethanol refinery, for example—it takes a cut of the operating profits. Companies that bring the technology and expertise are co-owners of the facility. Similarly, Generate Capital just provided $600 million to energy-efficiency company Alturus. While Generate gained a minority share in the company, more importantly, it plans to finance energy efficiency upgrades for Fortune 1000 companies that want to cut waste without paying upfront for all those HVAC, water treatment, and building automation systems themselves. It’s a small tweak to an old financing model with the potential to unlock billions, if not trillions of dollars waiting on the sidelines.

That opportunity is attracting a new sort of investor. And investors are noticing a new sort of founder as well.

Culture shift

“Entrepreneurs want to do something meaningful with their lives,” says Dawn Lippert, CEO of Elemental Excelerator, a nonprofit investing in commercializing climate-related startups. She has noticed that new startups now arrive with more than an engineer and some early R&D. They’re bringing years of expertise in marketing, partnerships, and scaling up huge companies. “What we’ve lacked in the climate tech space were people who are great company builders,” says Lippert. “That’s what feels exciting about Silicon Valley meets climate change. Silicon Valley knows how to scale ideas.”

Y Combinator, a top accelerator (Airbnb, Stripe, Instacart, and Dropbox rank among its alums), saw the same thing after announcing it was seeking startups to tackle carbon removal. You have these founders say, ‘I figured out that the only life mission I have is this,” says YC partner Gustaf Alströme. “There aren’t that many categories where we have founders saying things like this.”

I thought a ton of other smart people were working on this problem. But I came to realize that might not really be the case.

Ask founders why they’re starting a climate startup, and most will recall a moment when they couldn’t ignore it anymore. For Osi Van Dessel, a SpaceX engineer exploring an energy storage venture, it was the brutal 2017 wildfires, the most destructive fire season in California’s history (at the time), worse than the prior nine years combined. After researching the problem, he realized climate solutions weren’t getting the attention they deserved. “I started realizing this problem wasn’t going to solve itself,” he said. “I thought a ton of other smart people were working on this problem. But I came to realize that might not really be the case.”

Tim Latimer, founder of the geothermal company Fervo, was working as a petroleum engineer the same year for BHP in the West Texas oil patch. High underground temperatures were fouling fracking wells, and his job was to troubleshoot them. But Hurricane Harvey hit Houston that year, unleashing catastrophic flooding worsened by climate change. “I realized it wasn’t a tomorrow problem, it was a today problem,” he said. “The more I learned about climate change, the more I didn’t want my whole career to be about getting oil out of the ground.”

These founders are forming communities. And none have taken off like My Climate Journey, a podcast (and Slack community) started by Jason Jacobs in December 2018, after selling his fitness tracking startup. Jacobs had been casting about wondering what to do next, and wanted to answer his own questions about climate solutions. As he quizzed academics, government officials, and engineers on his podcast, My Climate Journey won an audience. Investors and entrepreneurs started asking for advice. Hundreds of them now swap ideas on Slack, and Jacobs’ angel fund is investing in more than a dozen climate startups a year.

Is Silicon Valley the answer?

All this mission-driven zeal contains echoes of Doerr’s TED talk more than a decade ago. Evangelical optimism around climate tech, despite the changed circumstances, could still spiral down into a clean tech 2.0, leaving behind shattered startups and reputations.

Even with lessons gleaned from the last boom and bust, some venture capitalists admit their financial model may not be what’s needed to meet the moment. Climate investor Tommy Leep recently pointed to a multi-billion dollar pledge by the founder of Social Capital to invest in climate tech as missing the point. “The most effective ‘investments’ for the planet probably won’t make it on [his] radar because they don’t earn the returns he seeks,” Leep wrote in a newsletter this July. “The Amazon is burning and Borneo rainforests are being decimated for palm oil. Conserving these crucial living ecosystems should be our top priority… I don’t think that the way we got here can get us out.”

It’s shocking how myopic Silicon Valley largely is. They largely think either it’s innovation or it’s money.

For people like Shah, whose Generate Capital is backing large infrastructure projects, venture investing and startups are a distraction. The true need is to scale up the cheap workable technologies in hand—from wind and solar to batteries and methane digesters—as fast as possible. “It’s shocking how myopic Silicon Valley largely is,” he said. “They largely think either it’s innovation or it’s money.”

The main barrier climate tech faces, he argues, is convincing conventional investors to open their wallets. The world needs to spend $3.5 trillion a year through 2050 to put the planet on a safe climate trajectory, according to the Intergovernmental Panel on Climate Change, and we’re spending about 20% of that figure. To make climate-related investments as attractive as any other asset class, something Shah began to do with solar panels after founding SunEdison in 2003, we need to prove out the business model. At Generate Capital, Shah has raised more than a billion dollars to make large investments in technology proven to lower emissions. “Everything else is noise,” says Shah.

But investors like Abrahamson of Urban Us haven’t written off Silicon Valley. He agrees the venture model isn’t always well suited for climate tech, but some (multi) billion-dollar success stories are out there: Tesla, Nest, Beyond Meat, Impossible Foods, Amply, Sunrun, and NextEra, among others.

He still sees plenty of white spaces on the decarbonization roadmap for climate entrepreneurs to solve as deadlines for net-zero emissions approach. There are no carbon-free alternatives for a Boeing 737, he notes (although Wright Electric is working on it).

What’s needed, says Abrahamson, is what Silicon Valley does well: experiment, and fast. “There are enough ‘Here Be Dragons’ on the map that you still want someone to explore,” he argues. “The best way to do that is to find someone who’s a little insane, give them money and encouragement, and wish them luck. We know that works.”