Sustainable business ventures have sometimes struggled to attract the same levels of attention from investors as startups in more fashionable sectors. But there are signs that this trend is changing.
Despite representing 6% of the venture capital market, the amount invested in climate tech startups increased from $418m in 2013 to $16.3bn in 2019, according to a report from PwC. This growth in interest exceeds most other markets and, for comparison, was three times the rate of increase in investment in artificial intelligence over the same period.
And the amount of money flowing into climate tech startups has already topped $14bn in 2021 (as of 25 June), according to Pitchbook, which has tracked a similar rise in the amount of money flowing into climate tech ventures. This trend has convinced Brent Hoberman, co-founder of Lastminute.com and Made.com, and a serial investor, that now is the time to invest in climate tech solutions.
Climate tech startups are generally defined as any company that is innovating on existing products and services to make them more sustainable, whether that is through the reduction of energy use and waste, or use of natural resources. It can cover industries as diverse as fashion, food and transport.
“A lot of money is going to be made in solving the climate crisis and that’s why so much commercial venture capital money is going into this space,” he tells Raconteur. “Almost every venture capital fund is now putting climate tech high up on their priority list.”
Avoiding another cleantech bubble
The last time climate tech investment experienced rapid expansion, between 2006 and 2011, the bubble quickly burst. Venture capital funds poured $25bn of capital into climate-friendly ventures but the bet didn’t pay off and over half of their capital was lost, according to the MIT Energy Initiative. So what makes this time different?
Hoberman has invested in 12 climate tech startups through personal angel investments and the two VC companies - Founders Factory and Firstminute Capital - that he co-founded. He believes the increased awareness of the climate crisis, global events such as the upcoming COP26 meeting, more patient investors and government action means the same fate will not befall climate tech investors this time around.
“It’s a time of massive disruption in this space and disruption creates opportunities for entrepreneurs,” he says. “If I wanted to go back to being an entrepreneur, I’d look at the industries that are the most damaging to the environment and see how they could be fixed.”
For Hoberman and other tech optimists, investment in this space represents the best opportunity the world has for combating the worst effects of climate change. He says: “I don’t believe that forcing people into this massive behaviour change is going to be enough, there is a need for new scientific solutions.”
Hoberman points to the car industry as an example. “You can either go back to riding horses or keep improving battery technology and electrification upgrades to make the industry more sustainable.”
Firstminute Capital’s investment in New York-based lab-grown meat startup Fork & Goode is born of the same idea. “Personally, I don’t think people are going to stop eating meat until we make lab-grown meat or plant-based substitutes that are as good,” he adds.
Some climate scientists believe that an over-reliance on technology to rescue humanity from the climate crisis is detrimental because it will not be enough to meet climate target of keeping global temperature rises below 2 degrees. A 2020 report from academics from the universities of Cambridge, Oxford, Nottingham, Bath and Imperial College London claimed that we should plan to respond to climate change using today’s technologies, rather than wait for technological breakthroughs.
Hoberman believes that a balance can be reached by investing in long-term projects and companies such as Fork & Goode and eco-friendly fashion brand Pangaia, which encourage consumers to make more sustainable lifestyle choices.
He adds: “I’m not saying consumers shouldn’t make sacrifices, but if you think the answer is Extinction Rebellion stomping in the streets telling everyone to stop taking cars to work, you’re wrong. That’s just protest theatre, it’s not going to drive the change we need. If they used their energies to help find new breakthroughs, that would be better.”
The sectors benefiting from climate tech investment
Firstminute Capital and Founders Factory’s climate tech investments have so far been spread across multiple sectors, from the food industry to travel and fashion. Hoberman explains: “As an investment fund our first love is finding great passionate entrepreneurs solving big problems. If they’re doing that then we’re interested and you’ve got our attention.”
Certain sectors, such as the renewable energy sector and biodegradable plastics, remain riskier investments because of the higher amounts of initial capital required, according to Hoberman. However these types of projects do offer the potential for bigger rewards.
The influx of capital from a wide variety of sources is another cause for optimism. Hoberman, who is hosting a climate tech event as part of London Tech Week, says: “You’re getting support across the board from VCs, high-net-worth individuals and corporates, as well as policy makers – the whole economy is getting behind climate tech investing.”
With the Paris climate agreement targeting an annual collective spend of $100bn on climate change solutions, support from private finance will be important in supporting public funds in the transition to net-zero emissions.