What is Climate Tech?
Is Climate Tech the same as Clean Tech? Or Green Tech? “Neither of the two”.
This article was originally posted on Medium on February 8th 2021
In June 2020, we launched Pale Blue Dot; An early-stage venture capital fund that invests in Climate Tech startups in Europe and the US. At the time of fundraising, we saw a huge spike in interest in adding venture capital into the climate space.
The term “Climate Tech”, however, wasn’t still broadly used by investors or entrepreneurs. People would ask us if Climate Tech is the same as Clean Tech? Or Green Tech? “Neither of the two”, we would reply.
Fast forward a few months and Climate Tech has become one of the hottest investment trends. In September 2020, PwC published a report titled “The State of Climate Tech 2020.” According to the report investments in Climate Tech have grown more than 3750% since 2013. To put that in context this is around 3x the growth rate of investments in AI.
In this post, we want to help answer the question of what we, at Pale Blue Dot, consider as Climate Tech and what we invest in.
Climate Tech startups are highly scalable tech companies with a positive climate impact. Climate Tech is not a vertical, but an aperture that we use to look at companies across verticals. Companies with a positive climate impact can be found across all sectors.
We see Climate Tech startups in energy, food & agriculture, mobility, fashion, supply chain, and logistics, fintech, proptech, biotech, and so many other sectors.
In many ways, we are very close to a generalist VC fund, except that we have an additional requirement; that the startup does something positive for the climate.
To break it down further, we like to put the companies we look at into three categories; Companies that reduce carbon emissions, reverse the trajectory of climate change, or help us prepare for a new world.
Reduce, reverse, and Prepare for a new world
By reduce, we mean anything that is incrementally better than what we currently have. This could be, for example, minimizing various kinds of waste, moving towards green transport, energy efficiency software as well as adapting our diets to a more sustainable future. The business models of these companies aren’t necessarily directly tied to the climate crisis, but they save costs or cater to new behavior that we deem climate positive.
Reverse, requires more of a radical change and here we look at things that remove carbon from the atmosphere. This could be through for example carbon capture or through afforestation.
Prepare for a new world, is about understanding that climate change is already happening. We are already seeing the consequences and we need to adapt and try to mitigate the damaging effects we are seeing. This could mean technologies that help us deal with mass climate migration, natural weather disasters, as well as planning for the future of food and water security.
Overlap and differences with Clean & Green Tech
There is some overlap with Clean Tech and Green Tech, which are terms that are sometimes used interchangeably. Both of them are about reducing or optimizing the usage of natural resources and are generally solutions in regard to renewable energy, clean air, water monitoring, or recycling. These solutions, however, are often asset-heavy and capital intensive and can take longer to scale.
Most venture funds have a 10-year return horizon and many of the CleanTech solutions look to scale too slow and with too much capital to make it a good investment with the standard VC fund model.
The “new wave” of Climate Tech, means that venture funds, such as Pale Blue Dot, are looking to invest in startups that mainly use software and can quickly address a climate issue and scale to become a “billion-dollar company.”
That requires all of the normal things; great leadership, defensibility, market size to build a €100m revenue company with good margins within 10 years, but it also requires a positive climate impact.
This is not just about selecting a Sustainable Development Goal (SDG) to compare yourself to or about addressing your ESGs, it’s about asking whether the climate impact is fundamental to the business and whether it’s significant enough to make a positive impact on the world.
Companies where the climate part is fundamental means that the positive impact of the company is not a “tax,” “marketing,” or a “distraction,” but built into how they make money. We strongly believe that profit and impact go hand in hand.
New breed of founders
We are very impressed with the founders we meet in this space, and we have been thrilled to see that Climate Tech attracts not only great talent but new and diverse talent.
Venture and startups have undoubtedly been a force of innovation for the last 20 years, but until recently tech and the startup scene itself was only accessible to a segment of people solving some of their most immediate problems.
The market dynamics are changing and due to the severity and urgency of the climate issue, we are seeing a new era of entrepreneurs stepping into the space and pushing what is possible with technology.
Climate change is undoubtedly the biggest problem that we face as humanity and it is refreshing to see Climate Tech hosting entrepreneurs from so many different backgrounds having new insights and methods to battle our upcoming challenges.