The Current State of the Climate Tech Market
Intelis Capital founding partner Jonathan Crowder joined us on episode 188 of the Bigger Than Us podcast, offering his wealth of knowledge on the climate tech market. Here are the highlights.
These quotes have been lightly edited for brevity and readability.
Climate Tech In the Clean Energy Transition
(2:31) “In 2021…$920 billion was deployed into the energy transition in 2021 alone. Anytime you’re seeing numbers that are approaching a trillion dollars, it’s kind of staggering.
“To break that down a little bit, that’s $755 billion allocated to what, for the purposes of this conversation, we’ll call energy transition investment — which, by the way, that number has increased three and a half times since just 2013. And this bucket represents mostly deployments of technologies. So renewable energy, electrified transport, and the affiliated infrastructure, sustainable materials, energy storage, things of that nature — but typically excludes capital invested directly into companies.
“I think it’s really important to note that we’re now seeing global growth in the energy transition. 2021 represented new sector investment records in every region, including America, which grew 17%, year over year, to $114 billion.
“But for the purposes of our discussion — and certainly, it’s my lens on the world, it’s really about climate tech. So in 2021, $165 billion was allocated to climate tech investments.
“According to PwC, it’s roughly 14 cents of every venture dollar now. And that’s largely 82%, toward energy, which was $68 billion and transportation and mobility, which is $67 billion. These are, again, just staggering numbers over 200% year-over-year growth. And I think in the more general sense of this of the state of the market, it’s not just about the capital that has been allocated, it’s about the capital that will be allocated. And there have been a huge number of funds raised explicitly targeting impact or climate tech as part of their mandate. So there’s a significant amount of dry powder that’s still waiting to be allocated.
“In my opinion, it’s probably the most exciting time that I’ve seen so far to be focused on these sectors. But I also realized that the rapid growth here probably begs the question for some people about whether or not we’re in a climate tech bubble.”
Are We In a Climate Tech Bubble?
(5:51) “When I think about a bubble, or what a bubble is, I think there are really two important components.
“One of them is rapid escalation of market value, particularly the price of assets, then followed by rapid decrease in value.
“I kind of come back to…this turn of phrase that I’ve heard…what are the specific signals of a bubble in VC? And I love the way that storyteller extraordinaire, Chris Douvos, of Super LP fame, that he says it, which is, ‘VC works well when capital is expensive and time is cheap, and poorly when time is expensive and capital is cheap.’
“I think back on my conversations with other VCs over the last couple of years, and I think there’s a pretty clear trend. When I would catch up with firms that we regularly co-invest with, or stay in close contact with in 2019, valuation levels were not a frequent or important facet of those conversations. Occasionally, we would have some discussion about a particular company, but general valuation levels, particularly for firms that were focused on the earlier stages, were just not a regular conversation topic.
“Now in 2020, valuations were a major discussion point, maybe half the time. But by 2021, virtually every conversation I had with another VC in or around our target markets included at least some discussion about valuations. And nearly everyone with a Series A or later stage focus would share stories about losing investment opportunities by being outbid on valuation.
“And I will say, I think generally, sector-focused firms like [Intelis] that have a strong value proposition for entrepreneurs beyond just capital investment have probably been a little more insulated from that dynamic, but it’s still on [the minds of] most of the investors I know.
“Zooming out, where does that leave us? I think most reasonable people agree that we’re not at the end of this opportunity.
“Are we at the beginning of the end? I think probably not. If anything, I think we’re at the end of the beginning, maybe, and that many of the technologies that are being deployed into these sectors are well understood. They have superior unit economics or offer superior business models than their predecessors. And…they’re solving key challenges for the biggest incumbents in many of humanity’s most important industries.
“But if I want to think tactically, I think there’s a bull case and a bear case here. The bear case is that some climate tech companies are going to fail to deliver on customer and investor expectations. As a result, market valuations are outrageous, and they’ll come hurtling back down to earth, and that will damage the sector. And probably the other important systemic risk in the short to medium term is dislocations due to supply chain constraints and limited access to critical minerals. I think it probably goes without saying, there are a number of pure digital solutions in these sectors.
“Personally, I’m extremely optimistic about the opportunity for software to make a positive impact, but a lot of companies are either reliant on hardware or sell to customer segments that are and so there are risks on that side.
“The other side of the coin is the bull case. So, first and foremost, I think the most important thing to note here is that the growth hasn’t occurred proportionally across all stages. So from 2020 to 2021, the average climate tech deal size increased, quadrupled to $96 million. But the number of seed and Series A investments in those sectors has been essentially flat since 2018. So I think there’s clearly a significant amount of capital that recognizes the scale of these opportunities and is motivated to accelerate growth.
“But in my opinion, the early-stage market is still radically underserved. It’s one of the reasons we’re so focused on those stages at Intelis.
“And I guess maybe my second point on the bull case would be — and this is every bit as important — is that the opportunity, the customer opportunity is real and massive. You’re solving real corporate problems. These sectors are now backed by not just rising tides of consumer sentiment, although that’s certainly been a meaningful lever over the last couple of years, but by government policy, like the recent passing of the IIJA, and I think most importantly, from my perspective, they’re offering superior economics for their customers. It’s no longer a case of trading value for values. And, and I think that conventional wisdom is if you’re in the best companies, and the market opportunity is big enough, everything else works itself out.
“So when I try to think about how fast these industries are changing, how fast is the transition, I actually like to go back to the year, strangely enough, 1935. 1935 is the year that the Hoover Dam was dedicated by FDR. 10,000 people showed up to hear his speech about it. And it was an incredible achievement. It was one of the largest pieces of infrastructure ever developed, over 700 feet tall, one of the largest concrete structures in the world at that time.
“If we fast forward to 2021, when we deployed 290 gigawatts of new renewable energy generation capacity globally. That’s the equivalent of 150 Hoover Dams in a single year, which is staggering. And you zoom out even a little further and you think about numbers. For instance, there was a recent McKinsey report that suggested that in order to reach net-zero targets, by mid-century, we would need to allocate 276 trillion…dollars. Or another way to phrase it is the quarter quadrillion dollar problem. I’m not aware of many markets that have — maybe these days, there are a number of markets that are trillion-dollar markets. I don’t know how many markets there are where you speak in fractions of a quadrillion.
“Energy, obviously, is key to humans thriving globally. And we still see some important gaps. So I think in the short term, there will be some companies that failed to meet expectations, but on the whole, I’m incredibly bullish on the space.”
Hear more insights from Jonathan Crowder on episode 188 of the Bigger Than Us podcast.
About Jonathan Crowder
Jonathan Crowder is a founding partner of Intelis Capital and a member of its investment committee. Jonathan serves in all aspects of the firm’s operations, with a particular focus on developing investment theses, creation of internal processes and systems, sourcing potential investments, providing operational and strategic support to portfolio companies.
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