Doing Better for Climate Change: Part II

‍[This is Part II in a series that explores the climate technology landscape from a VC perspective. See Part I here.]

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Key Considerations for Climate Tech Startups

Raising venture funding is hard. The challenge is further amplified during the current macroeconomic conditions as venture capitalists (VCs) have become more circumspect, often deploying capital with heightened prudence. On average, VCs see hundreds of companies each year and will likely only invest in less than 10 of them.

When assessing climate tech, there are a few "green flags" that investors like to see from startups. 

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Profit with Purpose

In climate tech, the startups that truly stand out are those that go beyond altruism-driven growth. They anchor their value in tangible economic or social returns. Ultimately, humanity isn’t going to give up meat, or stop travelling, purely for the sake of climate change. As BlackRock’s Larry Fink aptly puts it, “We focus on sustainability not because we're environmentalists, but because we are capitalists”. While good intentions can pique interest, it's the promise of tangible value that truly drives widespread adoption.

There's been a notable rise in what we term 'Recession Resilient' climate startups. Even in the face of economic challenges, these startups managed to raise an impressive $70 billion globally in the past year. These companies are addressing urgent global challenges with solutions that are not only environmentally sound but also economically astute. For example, the companies tackling soil carbon sequestration are not just combating climate change; they also improve soil health and crop yields, which directly benefits a farmer's earnings. This dual advantage makes them not only appealing but also resilient to economic downturns.

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Taking Advantage of Regulatory Tailwinds

Historically, startups viewed government bureaucracy as a roadblock. However, in the realm of climate tech, this perspective is shifting. As global awareness of the climate crisis intensifies, governments are becoming proactive, introducing policies and grants designed for sustainable innovations. Rather than merely reacting to these regulatory changes, startups are strategically placing bets on where these tailwinds are headed, seeing the evolving landscape as a golden opportunity to bolster their growth potential.

A significant challenge for climate tech remains its cost. Environmentally advanced solutions often carry a higher price tag than their carbon-intensive counterparts. Naturally, consumers hesitate to pay a premium solely for environmental advantages, which curtails the widespread adoption of these eco-friendly alternatives. Yet, measures like the European Union’s Carbon Border Adjustment Mechanism are beginning to level the competitive field, enhancing the appeal of green solutions. This not only provides a short-term uplift for climate tech startups but also grants them a window to optimize their long-term unit economics.

Moreover, while the majority (75%) of climate funding is anticipated to come from the private sector, government grants are bridging vital financial voids. These grants, offering non-dilutive funding, are a lifeline for capital-intensive startups, especially those navigating the funding chasm between their early and mature stages. For founders, this type of funding means retaining more equity and control over their ventures. Additionally, the presence of government grants can act as a confidence booster, often encouraging VCs to co-invest, seeing the government's backing as a validation of the startup's potential.

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Think about Adoption: 

When building in climate tech, understanding the market and its nuances is paramount. Startups in this sector often emerge from a deep passion for scientific advancements in addressing the challenge of climate change. However, it is important to not allow this to overshadow the fundamental business principle of customer acquisition. At the end of the day, regardless of how groundbreaking a product may be, its value diminishes if it remains unused.

This insight is especially crucial for climate tech ventures aiming to introduce alternatives to established infrastructure. For example, even with the most energy-efficient water boiler or air conditioner, even the most enthusiastic customer is unlikely to make the switch without compelling incentives, whether they be economic, regulatory, or otherwise.

Furthermore, startups should be attuned to their customers' financial preferences and payment cycles. This encompasses understanding replacement timelines, capital budgets, and financing requirements, and crafting payment options that resonate. Simplifying the purchase process is also about channelling the right sales avenues. In climate tech, this often translates to collaborating with intermediaries like consultants or installers. Recognising the pivotal role these partners play, startups might find it beneficial to onboard a partnership lead, ensuring these relationships are nurtured and optimised.

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The Opportunity in Climate Tech

Turning our attention to investors, it's imperative to spotlight the sectors that Aura Ventures is deeply excited about. Foremost among these, environmental intelligence shines at the crossroads of technology, regulation, and impact. Alongside it, property tech, green fintech, and agricultural tech emerge as sectors of growth.

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Environmental Intelligence — DEEP DIVE

Climate intelligence (CI) refers to the collection, analysis, and application of environmental data and insights to inform decision-making, policy formulation, and strategic planning in the context of climate change. It encompasses the use of advanced technologies, data analytics, and predictive modelling to understand current and future climate impacts, assess risks, and develop mitigation and adaptation strategies. This intelligence is crucial for businesses, governments, and organizations to navigate the challenges posed by global warming and to make informed choices that promote sustainability and resilience.

Historically, CI was a niche field, primarily focused on basic environmental data collection. However, with the advent of technology and the increasing urgency of climate change, it has evolved into a sophisticated discipline. The recent push by governments worldwide, including Brazil, Japan, Singapore, and the UK, for mandated climate disclosures has further spotlighted its significance.

This is a sector that Aura Ventures is particularly bullish on, driven by several converging factors:

Technological Advancements: The digital transformation, particularly in AI and analytics, has not only enabled the collection of vast amounts of data but has also refined its analysis, making environmental monitoring more precise and actionable.

Diversity in Use-Cases: Climate intelligence offers a diverse range of use cases, from enabling businesses to assess supply chain vulnerabilities due to extreme weather events, to empowering governments in formulating proactive policies based on predictive climate models. Additionally, it aids financial institutions in evaluating climate-related investment risks and supports agricultural sectors in optimising crop yields through data-driven insights on changing weather patterns.

Adoption of Clean Energy: Despite cost reductions in renewables like solar, challenges remain in their widespread adoption. Climate intelligence, combined with analytics, promises optimized energy system management, paving the way for a sustainable future.

Financial Implications: The increasing financial repercussions of extreme weather events, such as the US's losses of approximately $150 million in 2021, underscore the urgency for businesses to conduct comprehensive climate risk assessments.

Regulatory Shifts: As countries redefine their emissions targets and regulations, businesses are turning to digital solutions for climate risk evaluation, ensuring their investments are sustainable in both the short and long term.

Market Potential: The anticipated growth of the climate intelligence sector to a $4 billion industry by 2027 highlights its emerging importance and potential for investment.

Examples: ClimateAI, One Concern, Cervest, Descartes Underwriting. 

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Real Estate

The global real estate sector, the world's largest asset class, is at a pivotal crossroads. Astonishingly, it contributes to 37% of all greenhouse gas emissions, overshadowing industries like transportation and food production, yet receives significantly less venture funding in climate tech. However, the tide is turning, thrusting real estate into the climate action limelight. 

Regulatory shifts, such as Australia's Climate Change Bill 2022, which mandates a 43% emissions reduction by 2030 and net zero by 2050, are setting the tone. This mirrors global initiatives like New York's Climate Mobilization Act, pushing the real estate industry towards more sustainable practices and influencing property values.

In the investment arena, major capital allocators are weaving climate considerations into their strategies. Larry Fink, BlackRock's CEO, emphasised the role of climate change in reshaping finance. Similarly, the UN's Net-Zero Asset Owner’s Alliance has committed to making its $4 trillion assets carbon-neutral by 2050.

Furthermore, the demand dynamics are changing. A younger, environmentally-conscious workforce is driving the demand for low-carbon spaces. Tech giants like Microsoft and Google are setting ambitious carbon-neutral and carbon-negative goals, respectively. This shift underscores the urgent need for real estate owners to innovate and adapt.

With trillions in annual transactions, the real estate sector's vast market space presents a golden opportunity. As regulatory, investment and consumer trends converge, the industry stands on the brink of a transformative era. Pioneering entrepreneurs and investors who champion innovative, sustainable solutions are poised to reap significant rewards.

Problems & Ideas:

• Smart Buildings
• Property Lifecycle Management
• Water Conservation and Management
• Materials Supply Chain Analytics

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Green FinTech

Green fintech is swiftly emerging as a cornerstone of the traditionally favoured fintech sector. By integrating traditional finance, public finance, and technology, it's crafting specialised models tailored to the unique needs of "green" projects. With the global fintech market set to reach $750+ billion by 2025, the rise of green fintech is undeniable, fueled by growing climate concerns and a surging demand for sustainable financial solutions.

Financial institutions are pivotal in steering the transition to a low-carbon economy. Beyond their operational emissions, these institutions can significantly combat climate change by reshaping their portfolios to prioritise decarbonisation and investing in climate-friendly initiatives. Given that the world's top 60 banks channelled a staggering $4.6 trillion into fossil fuels from 2015 to 2021, the spotlight on the financial sector's environmental impact has intensified. This growing awareness is evident in the rapid expansion of the Net-Zero Banking Alliance (NZBA), which saw its membership surge from 43 to 122 banks. Consequently, technologies that assist these banks in monitoring and minimising their carbon footprint are becoming increasingly crucial.

On the consumer front, banking customers are showing a growing interest in eco-friendly financial services, prompting banks to adapt their offerings to include more sustainable options. Interestingly, while 65% of consumers express a desire to invest in purpose-driven products, only 26% follow through. This disparity between intention and action represents a gap in understanding from consumers to differentiate between the many green-financing product offerings that exist. This presents a disruptive opportunity for startups. By providing clear transparency roadmaps, they can bridge this gap and guide consumers towards more climate-conscious decisions.

For green fintech startups aiming for success, navigating the uncertain regulatory landscape, especially concerning reporting and tracking calculations, will be a primary challenge. Additionally, focusing on education and engagement might not yield as much traction as targeting business solutions, a crucial consideration for founders.

‍Problems & Ideas:

• Carbon Footprint Tracking and Offsetting
• Green Bonds and Sustainable Investments
• Decentralised Energy Financing
• Transparent Supply Chain Financing
• Emissions Trading

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Agriculture

Agriculture, the bedrock of human civilization, is undergoing a seismic transformation. Remarkably, this sector is responsible for nearly a quarter of global greenhouse gas emissions, surpassing even the industrial and transportation sectors. As the world grapples with the dual challenges of feeding a burgeoning population, expected to reach 9.7 billion by 2050, and mitigating climate change, climate AgTech emerges as a hotbed for innovation.

Regulatory frameworks worldwide are evolving, emphasising sustainable agricultural practices. For instance, the push towards net-zero emissions is necessitating innovations in crop production, livestock management, and food processing. This regulatory momentum is echoed in global movements like the New Green Revolution, which champions sustainable agricultural practices to ensure food security and environmental conservation.

From an investment lens, green AgTech presents a compelling opportunity. The industry stands at the precipice of a transformative shift, with nimble startups harnessing advanced technologies to tackle longstanding agricultural hurdles. The spectrum of innovation spans from precision farming—maximising resource efficiency—to biotechnologies fortifying crop resilience. As consumers increasingly gravitate towards sustainably sourced foods and with environmental factors costing the US agriculture sector a staggering $89 billion, the clarion call for innovative solutions has never been louder.

In this vast agricultural landscape, valued at over $5 trillion globally, AgTech startups hold the key to unlocking sustainable solutions. 

Problems & Ideas:

• Soil Health and Carbon Sequestration
• Sustainable Livestock Management
• Waste Reduction and Circular Economy
• Alternative Protein (shoutout Harvest B!)

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If you are a founder working on any of these issues, let’s chat!

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Special thanks to the industry experts who helped shape this work: Annelieke de Wit, PhD, Stanley Tanudjaja, Allen Fan, Visakhan Vythilingam, Alfred Lo.

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