Catalyst - Can ‘deep tech’ solve climate? W. Ramez Naam
The first episode in this new podcast series gets off with a bang - my favourite topic of applying technology to address climate with one of my favourite thinkers in the space, Ramez Naam. Ramez has recently joined Prime Movers Lab as Chief Futurist, has been writing on and investing in cleantech for years and is the author of a number of sci-fi books (and, highest honour of all, was featured in the very first one of these Notes almost exactly a year ago). Key takeaway: The urgency to decarbonise is real, which totally changes the game for end-markets and, hence, financing options for deep tech companies.
According to MIT report, Clean Tech 1.0 between 2006-2011 ploughed $1.3billion into early stage deeptech companies, of which only $153mm had been returned to investors by 2016 when the paper was written. That set the common wisdom for many years around the opportunity for venture investment in climate / hard tech for a number of years. [This blog from a GV2P partner suggests that part of this pessimism was driven by impatience on timings and that returns in aggregate have turned out to be ok, although this is driven mostly by Tesla reflecting power-laws common in venture. This a bit simplistic, but it is certainly worth noting that the shape of the hard-tech hockey-stick is much better appreciated by investors now and there are increasingly sources of capital to fund it.]
There were some good exits from clean tech finance companies (e.g. SunRun, SolarCity), but there was a lot of money lost in hardtech like alternative solar technologies and biofuels. Drove a move to focus almost entirely on digital / software. [Ion Yadigaroglu of Capricorn suggests that lessons were overlearned from these sectors - biofuels was indeed a fundamentally bad venture bet because technology processes are pretty straightforward so is really infrastructure play, but thin-film solar bust was driven by subsidised mass-manufacture of silicon PV by China, which wasn’t easy to have anticipated.]
Common arguments against venture investing in deep tech:
Too capital intensive - yes, these companies can take a lot of capital to scale, but many software companies also burn through an unbelievable amount of capital (e.g. Uber), more than most climate tech companies ever will. Capital intensity not in itself an issue as long as the follow-on investors are there to deliver it. Hint: it is now, but wasn’t before.
Low-margin as commodity markets - need to be mindful of margin compression and competition, both of incumbent technology or product, but also to look for areas where there can be some level of differentiation besides on price [can see this in energy markets as example in terms of reliability / flexibility of generation, not all MWh made equal]. Starting to see some customers that are happy to pay a green premium to be market leaders [e.g. Maersk customers willing to take up capacity on low-carbon ships and the wider push on procurement from the First Movers Coalition]. The other thing to note is that the green premium paid on commodity prices actually has very low impact on the cost of the end product, which enables it to be used by premium products without hitting margins, e.g. cost of a high-end car using green steel or green cement in final building cost.
Timeframes too long - hardware does take longer than software to build (see above note from G2VP), but now the market recognises that and there are exit opportunities before full commercialisation. Easier now for companies to get firm orders early that helps bring forward the commercial validation, even if the technology and delivery will take early. Now have tools like software design and AI that can reduce the timelines for research and product development.
No exit opportunities - huge change in this just over the last 12-18 months, including SPACs. As well as public listing, there has been an increased pace of acquisition by incumbents like utility and oil and gas companies. Public markets massively rewarding clean energy companies because see them as growth markets [one might also say issue of too much cash chasing too few public market opportunities.]
Differences today vs cleantech 1.0:
Market size - $50bn on clean energy 10 years ago, $500bn today with continued strong growth
Talent pool - big pull of new human capital wanting to dedicate their professional lives to addressing climate (shout outs to Climate Draft and My Climate Journey)
Visible winners - first of all renewable energy, now EVs, proves possible that cost reductions can be achieved. Example of Tesla as example for both retail / institutional investors, but also venture. Tesla built a whole wave around EVs, both for other companies, but everyone contributing to the ecosystem.
Global consciousness - creating huge enthusiasm and urgency for creating change