Climate tech and VC

Fireside Chat: Climate tech and venture capital

It’s been a long hot summer and while it’s been enjoyable to some degree, the effects of climate change have got us hot under the collar. 

There’s a lot of disagreement on what the right solution is and where our focus should lie. With so many seemingly amazing solutions out there, how do we get involved and what are the emerging technologies? 

We brought together experts in the field for a fireside chat with our Newton fellows. Here’s just a snippet of an animated and thought-provoking conversation.

What is climate tech?
David Contreras, Carbon Captor, moderated the chat for us and was joined by Susannah McClintock, Clean Growth Fund, Shruti Iyengar, Sustainable Ventures, and Matt Bray, Brayfoil Technologies. The mixture of founders and investors was fuel for the fire and the conversation kicked off with some dubiousness about the term climate tech.

“Climate tech is not a thing. Cleantech, climate tech, and sustainability are catch-alls for things that broadly have a positive environmental impact. When I started in the early 2000s, it was environmental or green, then we went to cleantech and carbon and that didn’t stick, and now we’re back with carbon with climate tech and net zero too. These are general descriptions that take carbon out of the atmosphere.” So, expect to agree to disagree on this one.

Appetite for climate tech

Despite the hangup on terminology, there is an appetite for climate tech. But, with the collapse of the market and evaluations coming down, has that greatly affected the climate tech sector?

Without a crystal ball, the investors feel it’s too early to tell. There’s been a decrease in willingness to deploy capital quickly as investors hold out to see how the next few months pan out. There’s expectation of a more definitive view when stats come out from Q3 – when the impact is expected to happen.

For one investor, they see this period as a correction. “We saw mass valuation inflation in the last two years from pre-seed to series A. In a way, correction is needed. Raising at that inflated valuation at seed stage may result in a down round at series A. There’s a balance between founders thinking that valuation inflation is a good thing and the company doing well, weighed up against what will be good for you in the long term.”

But the past two years have begun to open doors for some.

“We started five years ago with a base technology that came out of academia - there was little interest in our technology, particularly being based in the global south. In the past two years, the ecosystem has grown exponentially and several funds have launched in the clean tech space. It’s great for us to have that happen - for investors with a long-term cycle and not just looking at software solutions.”

Funding climate tech

So, how are all these factors affecting different stages of funding within venture capital (VC)? How are climate tech companies navigating all of this?

“We don’t have a crystal ball. Downward pressures are filtering through. We’ve seen some froth in valuations coming off. We know that later-stage funders are more exposed to the main market drop off and limited partners (LPs) will be affected as well. Those extreme valuation increases we saw in the last couple of years look more extreme at pre-seed and seed stages. There’s still plenty of money for B and C rounds to raise. The valuations may not have been as high as they had been, but there’s this hypothesis that climate tech is somewhat insulated and that there may be some outperformance vs others because there’s a lot of money around.”

“Compared to the financial crash of the previous decade, clean tech didn’t have much strength. When the big wave came over, that tech sank to the bottom of the sea, but now it is a more established concept and has so many tailwinds that it will likely hold up much better. It’s not that there won’t be a general downward trend, but it won’t be catastrophic.”

When questioned on angel investors and the role they play, the panel was in favour.

“We’ve seen growth in angels and investing groups in the climate tech space. They’re often people working in funds that realise they want to put their personal money into these businesses that the fund can’t or doesn’t have the mandate to.”

“Angels bring skills, connections, and passion and have those as a crossover from adjacent or historical sectors. I’ve met a lot of ex-oil and gas executives who have put personal wealth into renewables.” 

“We wouldn’t be anywhere without angels in our early days. It’s a double-edged sword in South Africa. Angels are very important because the VC ecosystem is very small, so the check sizes are very small. If your business is global facing then there’s some appetite there.”

Breaking into climate tech

With a realistic yet optimistic overview of climate tech, how do you break into this space? 

As with any venture specialism, passion is needed. “You’ve got to find what you’re most passionate about. Cover that path – not what everyone else thinks. People think there are cookie cutter pathways to get into venture capital and getting into the climate tech space.”

Get to know the funds that specialise in those areas and find someone there to talk to. 

“Be curious and pick a theme. Do a deep dive and write the thesis. Share your ideas with the world – show how you would be a good co-investor.”  

It sounds positive, but how does this space feel for a founder?

“Our journey has been an interesting one.” In South Africa there’s a lack of government incentives and mechanisms that drive climate tech forward as seen in the US, UK, and Europe.

“It took 2.5 years to raise our first $1mn cheque from grant funding in South Africa. For any startup to survive that long is really tough. It’s been a long road and with that funding we’ve found the product market fits and we got to pilot, but there were still challenges on the way. Receiving investment from international funds around the jurisdiction of the red flags of ‘can we invest here?’ and ‘should we invest here?’ is a problem. So, you have to think of creative ways to get around it. It’s really important to plug into global networks if you are based in a jurisdiction like this. The more support you can get from the broader community, the better.”

And as the sector has matured, it has opened up more funding opportunities. This is good news for founders but also allows investors to be more targeted.

In terms of what’s overhyped and underhyped, the investors feel hydrogen and carbon capture and storage (CCS) are both overhyped and underhyped. These solutions have potential but the investors aren’t sold on the long-term effects. There’s a need for transparency and hard evidence to prove that these solutions won’t end up producing more emissions or releasing them from the bottom of the sea 1,000 years from now. 

Speaking of the sea, one area was recognised as underhyped: the Blue economy. “It’s underinvested, yet the initiatives and intersection between the ocean and carbon sequestration are really exciting.”

Diversifying climate tech

As is the Newton mission, every part of the VC ecosystem plays a part in creating a positive impact and creating a more equitable space to work in. Our speakers had some thoughts on their own experiences as diverse investors and founders.

“It’s easy to be pessimistic but I choose to be partially optimistic. We’re in an extremely lucky age. We’re talking about the issues and people are doing things and allies are supporting us to do things in this space. I’m optimistic about that, but there is still a massive, gaping gap. There are initiatives like the Newton Venture Program and people and funds that focus on underrepresented founders and that’s a great start. There needs to be a big shift in terms of thought, awareness and education. People are upset about the Adam Neumann story – people are working really hard to raise less than $100mn with great track records and putting in a lot of effort. They’re keeping their track record spotless and making no mistakes, so the upset is understandable.”

“As an LGBTQ+ founder, it has been an interesting road. There are supportive organisations, such as StartOut, which is great. It’s worth looking into if you’re in one of those groups. South Africa is driven by certain demographics in certain places, but in Europe, it’s becoming more diverse. There’s an emphasis on getting those voices around the table. We’ve seen our investors and their teams have more diversity – especially at assessment stage, which is great and gives us confidence in that team.”

“One of the crucial keys to unlocking diversity is changing the lens through which we make selection. There are many initiatives within VC and we must all continue to support them and we must call it out. We have to speak our truth. It is changing but not quickly enough.”

Final thoughts 

“It’s hard to be a founder. As much as founders are competing for your money they’re doing some very hard work. Having respect for that within the process is important and founders will pick that up. It is a very long road – if I’d known how long in the beginning, it’s probably better that I didn’t know! Pick the hard road – you’ll learn a ton. Encourage anyone thinking of being a founder to go for it – you’ll learn things you didn’t expect to know and go in directions you didn’t expect to go, but it will be more interesting than not.”

I wish I’d known that I could just be myself. I’m a woman and person of colour, so there’s lots of nuances that I was unaware of and was unwilling to call it out. I reached a point where I thought if I don’t call it out, who will? That’s when things changed. I wish I could tell my younger self to be unapologetically you and own it.

“I would mandate diversity so that the investments we make and the companies that we support entirely match the blend of our global community.”

“Always ask yourself what the legacy is that you want to leave behind. If what you’re doing today isn’t contributing to that legacy, switch and do something else. You only have a short time and you don’t want to be doing things that you’re not proud of later.”

Has this conversation lit a fire in you? Take a look at our programs here to find out more about training and developing in VC.

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