Past, present and future of climate tech
Summary
- Clean Tech 1.0 Era (2006-2011):
- Fueled by rising environmental awareness, supportive policies, and significant VC backing, clean tech saw rapid growth.
- Faced significant hurdles such as market timing, cost challenges, VC expectations, policy gaps, and the 2008 financial crisis.
- Transition to Climate Tech:
- Paris Agreement of 2016 marked a turning point, aligning policies and corporate strategies toward net-zero goals.
- Four macro trends spurred the transition: economic viability of renewables, global policy alignment, venture capital strategy shifts, and broadened sector scope.
- The future of Climate Tech:
- Current market at $20 billion is projected to grow to $182 billion by 2033.
- Major focus areas include carbon management, industry decarbonization, sustainable agriculture, energy generation, and low-carbon mobility.
- Lessons from CleanTech 1.0 guide climate tech towards a more strategic and sustainable future, learning from past failures while adapting to current global demands.
Introduction
To achieve net zero targets by 2050 we will have to develop 35% new tecnologies which are not yet at commercial scale. Therefore, we need more entreprenuers who can take emerging climate technologies to commercial scale. But before building in climate tech space, it is important to understand how this space evolved.
The term "climate tech" might sound new, but the group of technologies it consists is not. A couple of decades ago, this sector was known as clean tech and was one of the most promising sector to emerge.
Then what happened to clean tech, how climate tech emerged? and where is the market headed?
Finding answers to above questions will give a broad sense of the overall climate tech market, the opportunities and the challenges - must for any entreprenuer who wants to build in the climate tech space.
The Past - Clean tech 1.0
The rise of the internet led to a new wave of companies—software companies—that revolutionised how we connect, communicate, learn, trade, receive care, and enjoy entertainment, reshaping our daily life globally. This era created trillion dollar internet companies creating immense value for the consumers, builders and investors.
A new class of investors - Venture capitalists (VCs) had a big contribution in creating such companies.
VCs backed bold ideas and entrepreneurs at a very early stage (even at idea stage) as they wanted disproportionate return by taking higher risks. They mainly bet on large markets & extraordinary people, this strategy gave them a large return on a portfolion level. This bet really payed off and companies like facebook, amazon, google, netflix are a result of this.
To make higher returns, they come in early into a new market. Therefore, VCs typically bet on markets that have immense potential to grow bigger in the coming time.
Similar to the software wave, a new wave was coming up during mid 2000s - 'Clean tech'. This wave was further pushed by 2 influential people: Al Gore and John Doerr.
An Inconvenient Truth," a documentary by Al Gore released in 2006, dramatically raised global awareness about climate change, showcasing the urgent environmental issues. Whereas, John Doerr, a partner at Kleiner Perkins, gave a TED talk in 2007 emphasising that:
Green technologies were set to surpass the internet in economic impact, and potentially the biggest economic opportunity of the 21st century.
The above narrative along with rising fossil fuel prices and supportive public policies enhanced the investment case for cleantech, together with the success VCs saw in the internet companies they thought that they can replicate the same thing in the clean tech industry.
So the famous Cleantech wave came between 2006 and 2011 where the clean tech emerged as a booming industry, driven by rising environmental awareness, supportive public policies and huge VC backing.
The total investment went upto $25 billion by 2008 and companies were largely built in the areas of solar, biofuels, batteries etc.
Unfortunately, similar to the fate of the dot-com bubble in late 90s the cleantech venture faced significant hurdles and the sector suffered a dramatic contraction in the following years and lost half of the investment, almost 90% companies failed to return their initial capital to investors. Almost all of the 150 renewable energy start-ups founded in Silicon Valley over the past decade had shut down or were on their last legs.
This was one of the largest bankruptcies in venture capital history. This serves as a cautionary tale: hardware, particularly in the climate tech space, presents distinct challenges that differ markedly from those of the software domain.
So what are the lessons learnt from Clean tech wave?
The rise and fall of clean tech teaches valuable lessons on market timing, investment trends, issues of premature scaling and dealing with complications of building hardtech companies. Analyzing these experiences is important for today's climate tech entrepreneurs aiming to navigate uncertain yet rewarding market of climate tech successfully.
This decline was largely due to several key factors:
1. Navigating Market Dynamics
Align innovation with market readiness and competitive pricing to avoid being undercut by cheaper alternatives.
A key downfall for many clean tech firms, such as Solyndra, was poor market timing. As these companies ramped up investments in advanced solar technologies, they were undercut by more cost-effective alternatives from China. The rapid escalation of Chinese production capabilities, coupled with their ability to significantly reduce costs, left firms like Solyndra, which had invested $845 million, unable to compete. This highlighted the critical need for aligning product innovation with market demands and competitive pricing.
2. The Price of Progress
In commodity markets, price is king. Clean tech must reach cost parity with conventional technologies without relying heavily on subsidies
In a commodity market for e.g. fuel or electricity, only thing that matters to consumers is cost. This was one of the most important lessons learnt for clean tech companies. Many clean tech solutions like wind, solar and biomass were not yet cost-effective or scalable enough to compete with fossil fuel technologies without substantial subsidies. For eg. due to fracking natural gas extraction from shale became easy and it became so cheap, that there was no longer a financial incentive to go with renewables, this was due to advancement in technology to extraction of natural gas from Shale.
3. Venture Capital Challenges
Climate tech ventures often have longer maturation periods; venture capital models need to adjust expectations and patience to accommodate these timelines.
Many companies relied too heavily on venture capital, which often demands quick returns that hard tech companies in pre-commercialisation phase cannot provide. For eg. VCs typically look for return in 3 to 5 year time period , where as in climate tech, the average time was 8.3 years (data from VC investment in climate tech between 1995-2007) and only 1.8% . achieved success in terms of IPO. VCs were not prepared for this and they were not patient enough to support the entrepreneurs through the journey.
4. Policy Frameworks and Support
Effective and comprehensive governmental policies are essential to sustain and scale clean tech innovations. Short-term incentives are insufficient without a robust, long-term strategy.
CleanTech 1.0 faced challenges due to early climate legislation that, despite being well-intentioned, was too narrow to adequately support the growing clean tech sector. The Energy Policy Act of 2005 and the American Recovery and Reinvestment Act of 2009 offered initial tax credits and funding, including $400 million to start ARPA-E for green tech incubation. However, these actions weren't part of a broader national strategy, limiting their impact on the energy sector. While ARPA-E did help some early-stage energy startups, the overall legislative framework wasn't strong enough to drive a major shift to clean technologies, leaving many initiatives lacking the policy support needed for market success.
5. Economic Recession: The 2008 Financial Crisis and Its Aftermath
Financial resilience is crucial for clean tech firms, as economic downturns can redirect investment away from high-risk sectors, stifling innovation and growth.
The 2008 global financial crisis significantly impacted capital flows, particularly affecting the clean tech sector. Financial institutions and investors shifted their focus toward safer, more liquid assets, severely reducing funding for higher-risk ventures. This realignment in investment priorities led to stalled projects and numerous failures among clean tech firms, critically impeding their development and scale-up during a pivotal growth phase.
The Transition from Clean tech to Climate tech
The original intent and vision behind clean technology was relavent, but it's execution had many challenges. The 2016 Paris agreement was a key landmark that brought global commitment to achieving net-zero emissions. This ultimately promoted a top-down approach that drove both national policies and corporate strategies towards sustainable practices.
Countries and Corporates both committed to achieve net zero emissions. For the first time a measurable targets to combat climate change were set and agreed at global levels. The race to achieve the net zero metric became the perfect breeding ground for new innovations and policy framework that gave rise to the current form of clean tech a.k.a climate tech.
The Paris Agreement catalyzed a global shift towards net-zero emissions, fostering a fertile environment for the evolution from clean tech to a broader, financially aligned climate tech sector.
So what are the major factors that has led to the attention towards climate tech sector? There are 4 macro trends that has led to this transition:
1. Economic Viability of Renewable Technologies
Renewable energy is now economically competitive, offering a sustainable alternative to fossil fuels and driving global market adoption."
The dramatic reduction in the costs of renewable sources like solar and wind energy is a game changer.
In 2009, solar power was over four times more expensive than natural gas; by 2019, advancements in technology made solar and wind cheaper than any fossil fuel source.
This cost competitiveness is pivotal as it enables renewables to compete without subsidies, ensuring broader adoption and integration into the global energy mix. Not only does this shift make economic sense, but it also sets the stage for a global transition to cleaner energy systems, creating extensive opportunities for an ecosystem of startups .
The graph below highlights the difference in price of various commodities between 2009 and 2019.
2. Global Policy Alignment and Net-Zero Emissions Targets
Global commitments to net-zero emissions are propelling investments and developments in climate tech, creating a robust demand for sustainable technologies."
A critical macro shift is the global commitment to net-zero emissions. Countries and corporations worldwide have set ambitious targets to achieve net-zero emissions, supported by actionable policies and investments.
For instance, major economies like Japan, the EU, and China aim to decarbonize by mid-century, and corporate giants such as Amazon, Apple, and Microsoft have announced comprehensive net-zero plans.
This global consensus is not just about setting goals; it involves significant financial commitments that strengthens the clean tech sector. President Biden’s proposal for a $555 billion budget for climate measures is an evidence of it.
3. Shift in Venture Capital Strategies
Venture capital has matured, emphasizing patient investment and strategic partnerships to nurture the development of climate tech, aligning financial strategies with the extended timelines of innovation."
Venture capitalists have evolved their approaches to accommodate the extended timelines inherent to climate tech ventures. They understand how FOAK (First of it's kind) technologies are commercialized and scaled up.
For example, initiatives like Breakthrough Energy Ventures , led by Bill Gates, adopt a long-term investment horizon, targeting 20-year cycles. This patient capital approach is crucial for the maturation of technologies that require longer developmental phases before achieving market readiness .
4. Broader Technological and Sectoral Scope
Climate tech now covers a vast range of applications, from carbon management to sustainable agriculture, diversifying potential investment opportunities and mitigating risks across different sectors."
The spectrum of modern climate tech has broadened significantly, integrating a diverse array of technologies such as carbon capture, advanced biofuels, Hydrogen, alternate food and precision agriculture. This has increased the overall marketsize of climate tech and gives opportunity to commercialize more technologies to achieve net-zero emissions.
The future of Climate tech
The climate tech market has become VCs interest area, they believe in it's potential but at the same time they are cautious on how to approach it.
The climate tech market is at 20 Billion USD currently and it is expected to grow at is projected to grow at around 25% and will reach a market size of 182 Billion by 2033.
The investment and deal count has been on a steady rise as well, except past 2 years when VC funding was down in all the other spaces.
As mentioned earlier, the race to net-zero has led to creation of new areas where decarbonisation is needed. This has led to specific categories where startups are coming up and VCs invest based on this categorisation. Though the categorisation varies, but I have included an indicative list below. This gives a sense on how the market is moving ahead.
Carbon tech: Carbon capture, utilization, and storage technologies—including point-source carbon capture, direct air capture, and biological carbon removal— plus carbon accounting software and carbon trading technologies.
Industry: Industrial decarbonization through alternatives to petrochemicals, low-carbon mining approaches, low-carbon metal production, and recycling technologies.
Built environment: Technologies that reduce carbon emissions from the built environment, either during construction or through improvements to the postconstruction energy efficiency of buildings.
Land use: Technologies to monitor and reduce emissions from nonindustrial or commercial land, including technologies that offer fertilizer alternatives, emissions leak detection, and monitoring of land use changes.
Intermittent renewable energy sources: Energy generation technologies reliant on solar and wind energy, including both hardware and analytics.
Dispatchable energy sources: Clean energy generation through geothermal, hydropower, and nuclear technologies.
Clean fuels: Generation of low-carbon fuels, including hydrogen, biofuels, and waste-to-energy/fuels and air-to-fuel approaches.
Grid infrastructure: Technologies to improve the efficiency, stability, and resilience of electrical power grids and better incorporate nontraditional energy sources.
Low-carbon mobility: Low-carbon air, land, and sea vehicles, largely involving battery or clean-fuel technologies.
Sustainable foods: A heavy focus on alternative sources of protein that result in lower levels of carbon dioxide emissions, plus more environmentally sustainable packaging materials.
Conclusion
In moving from clean tech to climate tech, the journey is similar to the dot-com era of the internet startups.
Just as internet founders and investors learned from the challenges of the dot-com bubble and went on to reshape the global economy, ClimateTech has taken lessons from CleanTech 1.0 to improve its approach to timing, cost efficiency, and investment strategies.
With worldwide commitments to net-zero emissions and better policy support, the climate tech sector is now ready for significant growth across energy, agriculture, transportation and industries.
Now the challenge lies in how to execute these technologies at a faster pace at scale that are commercially viable.