Thinking about Climate Tech Investing

One of the things most people like about Venture Capital is the outsized returns popularized in the media. What is less popular and not well understood are the risks. Risk is with us every day and in all situations. Risk is of course the flip side of the reward coin. Investing in early stage startups is all about risk assessment, risk mitigation and valuing potential upside, the reward. Recently a potential investor asked us about the policy risk around investing in climate related technologies and how that might change with different administrations.

Policy, legal and regulatory considerations are of course to be considered as part of a comprehensive risk assessment. Even though policies and regulations were not particularly favorable, the clean/climate tech sector grew dramatically under the previous administration. Both solar and wind energy grew exponentially. Solar grew both at the residential and utility scale. Living in Texas it was very common to see windmill blades on the back of large trucks on most road trips. Similarly, electric vehicles exploded in popularity and continue to gain market share. So the policy landscape may be a smaller risk for now.

Other than favorable policies, there are two key reasons that cleantech companies will continue to grow and thrive. The first, is that for a number of reasons consumer sentiment on climate change has crossed a tipping point. Extreme weather events have both increased in frequency and severity. News coverage of both the crisis created and potential solutions have also become more common and mainstream. The second, and potentially more critical one for investors, is that the economics for renewables has become better than fossil fuels, even without subsidies. As many studies have shown it is now more cost effective to build a renewable power plant than a new gas and coal plants. The price of solar panels has dropped far faster than predicted just 5-10 years ago. Innovation and ingenuity will continue to drive prices down and output up.

Of course, these companies face potential policy changes as well as normal business risks. Investing in startups is inherently risky. However, there is significantly more risk if we settle for the status quo.

Report on Two Climate Events

I had the privilege of attending two climate events last week. The first was an Author talk by Dr. Daniel Cohan. The book Confronting Climate Gridlock: How Diplomacy, Technology, and Policy Can Unlock a Clean Energy Future (Yale University Press, 2022), which was chosen by the Financial Times as one of best new books on climate and the environment. The second event, was a panel discussion on the Inflation Reduction Act (IRA). In particular the panel focused on how the IRA affects climate investors. The panel included three cleantech startup founders and two other cleantech investors.

Dr. Cohan’s book does a great job of bringing together a lot of the best scholarly thinking on the subject. It also lays out the case that not only do we need many solutions but we also need diplomacy, technology and policy to work together if it we are to meet our climate goals. The book also lays out various technologies into five pillars and describes the most likely effects of each of the pillars on contributing to reducing CO2 in the atmosphere. Highly useful if you are interested in the potential magnitude of a startup’s impact.

The IRA panel lasted an hour but could have easily gone much longer covering this massive bill. Startup CEO’s focused on the wide ranging benefits to their customers and consumers. From extending tax credits, creating new ones to creating almost $12B loan authority for the US governments Loan Program office. One of the highlights of the panel was the excitement around the new laws requirement for additional manufacturing of key technologies in the US. Investors pointed out that advances in clean energy technologies and the associated reduction in per kWh cost had already created momentum in the market. In there view, the IRA adds tremendous tailwinds. The panel discussion is archived at the Angel Capital Association website, it is only available to members.

The current economic, political and climate situations leave much desired, however there are reasons for optimism. Listening to these experts renewed our spirit and drive. We are excited to be a part of this community and work to make the world a little better every day. #impact investing #cleantech

Climate action enabled by the Inflation Reduction Act

When I was a sales person my managers used incentives to shape my priorities at work. As a sales leader incentives were an important tool to help my team and achieve the companies constantly evolving goals. That’s why I am very excited about the Inflation reduction act and the many incentives to help all of us combat climate change. In particular, I am excited about how the incentives and the added focus and attention will benefit climate tech companies. There are a lot of great articles and information in the details of the act, so I won’t add to the clutter, however I did find this useful –

Impact Investing and Inflation

I have been investing since the year 2000, when I purchased my first shares from my company’s Employee Stock Purchase Plan.  Not a great year to get started in terms of short-term appreciation in value, but it was a good time to start learning about investing. Really, any time is a good time to start learning about investing.  Since that first investment, I have seen my share of ups and downs, made some very good bets and some not so good ones.  And, I want to note that I’m  using the word “bet” intentionally.  Investing does involve a number of factors I cannot control or even influence.  However, unlike betting, you can beat the house over the long term.

I’ve been investing full time since 2016, and oftentimes I am asked for tips, advice, stocks to buy, etc.  Other times, I am asked my opinion on individual startups.  A couple of weeks ago, I was talking with a friend and he asked me where I see growth opportunities given current market conditions (inflation, stock market dipping, investment capital outflows slowing, etc.) The question made me pause and think for a minute.  When the answer came to me it was a bit surprising, a bit obvious and also reassuring.  First of all, like other investors I will tell you to look for companies that make something that is a must-have and not a nice-to-have.  Secondly, look for those that are cash efficient and either profitable or can/will be in short order.  Lastly, look for companies working in markets/problem areas that are large and growing.  For me, that means companies working in cleantech and healthtech.  While I think there are some great public market companies working in these areas, the real innovation, impact and financial returns will come from early-stage startups.

Texas, where I live, is experiencing one of the worst heat waves in history.  It has gotten so bad that a high of 100 degrees seems “cool” by comparison to days nearing highs of 110. You have no doubt heard of the heatwave punishing the UK and parts of Europe as well.  Unfortunately, these events seem to be getting worse, and more frequent, and this trend will likely continue in the coming years.  Climate change causes a myriad of problems from straining energy infrastructure, adding strains on fresh water supplies, worsening air quality, etc.  In turn those problems lead to poorer quality of life, health problems and even death from climate-related causes.  As with far too many maladies, poor and minority communities also bear the brunt of the worst impacts of climate change.  Like any complex problem, many factors got us to this point and it will take many solutions to mitigate (and hopefully reverse) our current course.

Luckily,  every day I see ingenious entrepreneurial-minded people taking on these problems with market-based business solutions.  The good news for investors is that the market for these solutions is large and hungry for new innovations.  While many of these problems will require groundbreaking technological breakthroughs, there are also plenty of opportunities for companies to optimize, or innovate on existing solutions to create massive benefits at scale, along with value for investors and society.  Whether it’s moving existing diesel engines to low carbon bio-fuels, helping solar companies find, educate and delight customers or improve access to healthcare in Spanish speaking Medicaid populations, there are many ways to make the world just a bit better, and these incremental changes add up to significant advances over time.

That is why at Semilla Climate Capital we believe in doing well and doing good.  We believe in the power of entrepreneurship to create companies, solutions, jobs, wealth, impact and a better tomorrow for all stakeholders.  We have seen that smart capital can help entrepreneurs optimize operations, attract talent and find customers.  While we face a number of serious, daunting problems, we should not accept dire consequences as a given.  Instead, we should work to make positive changes, even if small, and support those who are working every day to find meaningful solutions to large-scale problems.