š A climate tech bubble in Europe?
š A climate tech bubble in Europe?
Little frothy planet
Hi everyone š
We. Are. Back! I thought I was going to take a month off the newsletter to come back with fresh ideas, but a month became three, and here we are. I missed you. I hope you missed me too.
Warm welcome to all new subscribers. Iām thrilled to have you here.
Letās resume were we left off. Today is the 28th edition of our Weekly journal, and weāll talk about Climate Tech and why concerns are rising over a potential bubble forming in Europe.
Letās dive in.
A little bit of history
Climate Tech has its own history with bubbles.
In the 2000s, concerns over rising energy prices tied with rising greenhouse gas emissions created a market opportunity for startups developing clean energy technologies (especially in the US). Clean technologies became appealing to Tech investors who poured billions to fund the development of entrepreneursā nascent ideas.
Never mind the fact that green technology had been struggling to achieve critical mass for decades. Venture capitalists expected to blow the doors off with their deep pockets and get sky-high returns.
In 2005, VC investment in clean tech measured in hundreds of millions of dollars in the US. Between 2006 and 2011, a whopping $25 billion of VC money was invested in Clean Tech companies worldwide. Venture capitalists who had been riding the Internet bubble (with mixed success) were drawn to clean tech by the same factors that had led them to the web ā the promise of new technologies disrupting a staid, old-fashioned industry.
āJust as the Internet transformed the media landscape and iTunes killed the record store, Silicon Valley electric car factories and solar companies were going to remake the energy sector. That was the theory, anywayā said Wired back in 2012.
Investors confidence was furthered by the US federal government directing roughly $44.5 billion into the sector between late 2009 and late 2011.
A virtuous circle formed with capital moving to clean energy and entrepreneurs moving to clean energy because there was capital.
That later was called the clean tech bubble. And Solyndra was the poster child of it.
Solyndra (former Gronet Technologies) was founded in California in 2005. The company was developing a unique solar panel design that was expected to tackle the soaring cost of polysilicon ā a crucial component of solar panels, by replacing it with CIGS. Between 2005 and 2009, Solyndra raised $1.2 billion including over $500 million from the Obama administration. Things were looking pretty good, and the company was closing in on a $6 billion IPOā¦. which failed. The company filed for bankrupcy 2 years later.
A confluence of factors made things go south for Solyndra and other clean tech companies, which led to the bubble bursting.
š A lack of specialist knowledge and impatience
First, Venture Capital investors started to find out that energy companies like Solyndra do not operate within the same timelines as regular Tech companies. They require investment in heavy industry that investors didnāt reckon for at the time. Generalist investors applied the same investment formula as they did with Internet companies and expected Clean Tech companies to generate the x10 returns within 3 to 5 years.
Which simply could not (and did not) happen.
š Macro-economic forces
Adding to the lack of specialist knowledge from investors were less foreseeable macro shifts such as:
The 2008 economic crisis drying up the market for investment at a time when clean tech companies required more funds to grow
Plunging fossil energy prices. Investment models where built on rising energy prices. They did not account for the 2008 crisis and the advent of new extraction techniques such as fracking which considerably drove the price of fossil energy down and reduced financial incentives for renewables
Chinaās manufacturing prowesses. China worked aggressively to develop its domestic solar production capacity which considerably reduced the attractiveness of Western renewables.
And the bubble burst. Of all VC investment verticals, clean tech had the lowest proportion of companies that broke even at the Series A stage at the time of the boom, according to the MIT. Ā Over 90% of clean tech companies that were funded after 2007 failed to return the investment. And investors were scared away from the sector for a decade.
A European Climate Tech bubble?
Since then, clean tech was replaced by Climate Tech which is much more than energy and efficiency only. It is about any sector which tackles the challenge of decarbonising the global economy. It includes:
"Low-to-negative carbon approaches to cut emissions across energy, built environment, mobility, heavy industry, and food and land use; plus cross-cutting areas, such as carbon capture and storage, or enabling better carbon management, such as through transparency and accounting", PWC says.
Since 2016, Climate Tech emerged as one of the trendiest vertical for investment in Europe. Facts from Dealroom:
Climate tech is the fastest growing vertical in Europe, with 10x growth since 2017. $11B were invested in Climate Tech in 2021 v. $1.1B in 2017
Climate Tech was the second larget vertical for investment during the period, behind Fintech.
In 2021, 13% of all European venture funding went to climate tech startups (v. 5.9% in 2018)
As of the end of 2021, the European climate tech ecosystem is estimated to be worth $104B, more than doubling in value since 2020.
Despite key evolutions, some of the same conditions that led to the clean tech bubble in the US are now present in the European climate tech market.
It is true that one of the downfalls of the clean tech boom was the influx of non-specialist tech investors into the vertical, with investment rationale that simply did not fit with clean tech companies.
Similar to what happened with clean tech, there is a massive influx of investors into climate tech, from new funds to generalists getting into the space:
European dedicated climate tech VC funds raised a record $2.6B in 2021, 2x more than 2020 according to Dealroom
Among European climate tech funds raised in 2021 are: Ligthrock ($900 million), 2150 ($297 million) or Blue Horizon ($201 million)ā¦
Lines are blurring between generalist VCs and climate specialists as agnostic venture funds invest into European climate tech startups (ex. Balderton capital investing in Infarm, VanMoof, Tibber or EQT ventures investing in Verkor, Einride, TreeCard etc.)
As shown with Solyndra, another factor that contributed to the clean tech bubble was the role of governments in pumping the system with public funding thus creating a general FOMO on the next disruptive market opportunity among private invstors.
There is today a high volume of public pronouncements about big climate change policy shifts (which goes with the urgency), and public funding flowing to the sector (ex. the EU announced investment of ā¬1.8 billion in clean tech projects last July).
The bubble risk
Given these two conditions, there is a risk of discrepancy between the venture capital model as applied by Generalist investors getting into Climate Tech and Climate Tech companies requirements. As seen with the clean tech bubble, investors canāt apply to Climate tech companies the same investment rationale they use for software and expect them to generate x10 returns with 3 to 5 years.
Thatās one risk for sure.
But the biggest risk with this massive influx of investors is likely to be the excessive hype around certain sectors and players, resulting in overfunding of sectors without immediate effect impact on Climate change.
Certain markets might already be getting a little frothy by the way.
A lot of money has been pumped into a small number of sectors focused on net zero (e.g., Electric Vehicles, carbon-removal and carbon-market), and some investments have certainly raised eyebrows among close observers of those spaces. In line with their usual VC strategies, Venture capitalists have been focused on these sectors because they are easier to scale. But these have lower impact on climate change today compared to adaptation measures looking to secure food and water supplies, Abrar Chaudhry says.
The biggest risk is that most promising technologies with an immediate impact on Climate Change wonāt get the early funding they need to develop into successful businesses.
How to avoid the bubble
[For funds]
Funds looking to invest in Climate Tech should adopt investment models that donāt count on returns as rapidly as they would expect with regular software/tech companies and measure technical risks. Alternatively, they should invest at later stages when technological risk has been addressed or focus on software opportunities that donāt require massive CAPEX yet donāt expect software to solve it all (because it wonāt).
[For LPs]
LPs should not hesitate to do their due dilligence and invest on Partners and fund managers with significant Climate Tech knowledge.
We absolutely need more capital going to solve the Climate crisis, but it needs to go to people who understand the space if we want allocation to be efficient and not create a bubble for anything climate related with little āimpactā.
[For governments]
With most VCs likely to avoid long-term investments and steer clearer from technical risks, public funding will be needed to fill in some of the critical gaps at early stages. Whether administrations can direct enough money to seed the next generation of startups (and do it efficiently) could be one of the crucial factors determining whether or not the bubble will burstā¦ again.
Hope you enjoyed this edition!
As always, feel free to like or comment. Iād love to get your view on this.
And if you are not a member of Upscalers yet, why not join us?
Iāll see you next week
Tim š