Climate Tech Has Left the Startup ‘Valley of Death’
The other day I was a part of a large Zoom roundtable with academics and sustainability professionals discussing ways to make the best use of the pending stimulus and renewed interest among policymakers, consumers, companies and investors in technology that addresses the climate crisis.
An attendee who has been very successful and whose work I respect made a comment that took us down a familiar path, “before we think about making all of these investments we must recognize that the last time ‘cleantech’ was hot, 10 years ago, it was a total failure.”
The verdict of “failure” for this generation of investments, dubbed “Cleantech 1.0,” was delivered clearly and swiftly at the roundtable. This prevailing judgement was issued back in 2016 as well when the MIT Energy Initiative’s study, Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation, highlighted that investors “plowed $25B into the cleantech sector and lost over half of it.” The requiem was complete, it seemed. The conversation turned to “what went wrong?” and “how do we avoid making those mistakes again?”
As a cleantech investor since 2008, I am all too familiar with these comments and tropes of “failure.” Sitting at the virtual roundtable I knew that this analysis was wrong because it is no longer true.
I tried to think of the most succinct way to make this argument in a meeting with dozens of attendees and little airtime, and arrived at this: the $25 billion invested in Cleantech 1.0 went into companies that now have a combined market capitalization of more than $600B and employ more than 50,000 people.
Illustrative examples of success from the Cleantech 1.0 period of investment in 2006 to 2011 abound: electric vehicle manufacturer Tesla ($587B); microinverter company Enphase Energy ($20B); EV battery innovator QuantumScape ($11B); solar inverter and management company SolarEdge ($12.6B); residential solar behemoth Sunrun ($9B); sustainable meat company Beyond Meat ($9.4B). All of them continue to grow their market capitalization today.
The problem with the early analyses that declared definitive failure is that they called the game way too soon. In April 2011, these combined companies were worth $2B, which would have been a failure. In April 2016 when the definitive writings about the failure of the industry were published, they were worth a combined $36B.
Assuming that investors kept funding the winners, owned an average of 40% of these companies when they went public and held on, that 40% would now be worth nearly $240B. Bottom line? $25B invested in aggregate between 2006–2011 would be worth somewhere north of $200B today. That would not be considered a failure. Far from it. It would represent an outstanding return. Yes, the returns are concentrated in the success of Tesla and a handful of other companies, but that is the nature of the “power law” in venture capital. That is the nature of investing in technology in general (while everyone recognizes Google and Facebook, few remember Lycos and Friendster).
The concept of the “valley of death” is an important factor behind the Cleantech 1.0 reassessment that must be made. This is the period after a startup has raised its first capital, but before it has generated customer revenue. Software companies — which traditionally set the standard for success in venture capital investing — are often able to get through this period in a matter of months (some even accomplish this before raising any capital). Startups in climate tech generally have a longer “valley of death,” with the hope that once a company begins to generate revenue it will have even larger end markets and more loyal customers than traditional technology startups.
I first presented this concept as it pertained to cleantech as a guest lecturer at Stanford in 2011 — the idea that, if these startups persist long enough there will be an outsized prize on the other side of that valley. It looks like those who accepted the death of cleantech in the 2016 timeframe had forgotten or lost belief in this point, or didn’t look out far enough.
This is not to say that there aren’t lessons to be learned from companies that did fail during the first cleantech wave, and there were plenty. The “3 C’s” of customers, capital and competition were, as always, key factors. Those companies that failed underestimated how long it would take to win customers once their product was built, they thought cheap capital would always be available (the Great Recession happened instead), and they underestimated the force of competition from incumbents that they were seeking to disrupt. Winning companies have generally adapted their business models to face these realities over the last decade.
It’s also worth noting that during this cyclical period of venture capital, the deployment of renewable energy assets has been on a steady growth curve, with solar and wind up 42% and 15% annually in the United States over the last 10 years.
We are at the beginning of a series of consequential discussions in Zoom roundtables, board rooms, capitol buildings, universities and public forums to figure out the most effective ways to deploy capital for research, infrastructure and technology that reduces emissions. Recognizing that there were many challenges with venture capital investments made in sustainability ten years ago without diminishing their overall success, my hope is that we can reframe the discussion about cleantech investing from “why was it such an abysmal failure last time?” to “what took so long?” and “how do we identify the next blockbuster winners who will have an outsized impact?”
