When I started getting involved in clean tech 1.0 financing back in 2005, “climate change” was some future event.
Hurricane Katrina had just happened, and many experts viewed it primarily as a failure of the government to take care of its weakest citizens in the face of a natural disaster, not as climate change’s early shot. Al Gore’s movie, “An Inconvenient Truth,” had not come out yet. The scale of human-made CO2 and its impact on temperature were still somewhat debated. Most key scientists and investors understood, but the general population and politicians were ambivalent at best.
Fast forward to 2021: Climate change looks like a misnomer and we are in a true climate crisis. We see historic fires in Greece, Portugal and North America’s entire West Coast; epic floods in Germany; devastating tornadoes in historically temperate geographies such as the Czech Republic; record-breaking hurricanes in the Caribbean and Philippines; drought in Syria that ultimately led to civil war; destruction of the Great Barrier Reef. The list goes on. Nearly every region in the world has been heavily affected.
The climate crisis is real, happening now and really hurting us. So what do we do about it, and how do we allocate our money, time and brainpower to develop solutions? I believe it is a financial and a moral imperative to make climate technology, together with medicine, the main priority of humanity.
The financial imperative
If you don’t reduce carbon in your portfolio and in your business, you will become a dinosaur. Several stakeholders are coming together to create a financial groundswell.
Pensions and endowments are under increasing pressure to divest from fossil fuels. Shareholders are moving away from the likes of Royal Dutch Shell and Exxon, while more than 70 ESG/energy transition companies have gone public via SPACs and IPOs in the U.S. just in the past 18 months. Out of these companies, I would be willing to bet that 10 or more will be decacorns and two or three will be hectocorns.
For insurance companies, the natural hazard risk models have broken. FEMA maps are increasingly becoming obsolete; 100-year floods are happening every few years. Fire risk maps need to be completely redrawn. Having spent most of my adult life on the East and West coasts of the U.S., the damage is real. If buildings are on fire or underwater, they don’t have much value. We are discussing these issues with large insurers and the interest is unprecedented.
Governments are finally putting tough building codes in place. For example, 10% of buildings in London will not be up to code in early 2022. U.S. cities and states have been slower to adopt, but if you don’t think this is coming, look at other regulatory patterns where the EU led and the U.S. followed.
Meanwhile, as usual in recent history, technology has come to save the prior fumbles by governments and populations. Many promising technologies have matured and now have an easier path to entering the mainstream. The levelized cost of electricity from solar and onshore wind dropped 85% and 56%, respectively, between 2010 and 2020.
While technological progress has been on an encouraging trajectory in energy and in transportation thus far, we are nowhere near done, especially in real estate and critical infrastructure. Specifically, just deploying the existing technologies in the built environment/real estate will not be sufficient. Even if we ignore payback and return requirements, which are often too difficult to meet, we would take care of less than 50% of the carbon emissions in the built environment with existing technologies, according to a Fifth Wall analysis. Therefore, I believe the focus needs to be twofold:
- Scale up existing technologies so that payback declines from more than 10 years to two to five years. That’s where growth capital and eventually infrastructure investments come in.
- Invent and firm up new technologies. That’s where government, national labs, universities, angel investors and venture capital come in.
To tackle the crisis, capital must flood in and even more so than in the past few encouraging years, during which climate tech VC investment increased 40x between 2013 and 2019. We already have several multibillion-dollar tech and biotech venture and growth funds; now is time for several multibillion-dollar climate tech funds globally.
The moral imperative
If the financial impact is not convincing enough, I hope the appeal to human decency will be. I have heard so many times from some of the smartest investors in the world that this is not a good time to invest in climate — and, even more shockingly, that climate is not an “investable thesis.” It is too difficult, too large of a problem, too capital-intensive; we need to leave it to the government.
The short-termism and cynicism are infuriating. If we don’t invest in a major way now, when is the right time? When Northern California’s old forests have burned down? When North Carolina’s beautiful Outer Banks are shredded by hurricanes? When Amazon is worth $5 trillion, while its employees cannot find an insurable home on the West Coast? I would argue we have been focusing our precious resources on the wrong problems.
For the past 20 years, the brightest young people have focused their brains on how to trick people into double-clicking on an ad, getting eyeballs and likes. While certainly major advancements have been made in compute power and interconnectedness, I call the obsession with the social media world of Facebook and Twitter a colossal waste of brainpower given the challenges around health and climate.
The new generation of business leaders must be cut from a different cloth. I want the next Mark Zuckerberg to invent and scale a new battery. The next Jeff Bezos needs to look like Ryan Morris from Turntide Technologies, who is revolutionizing the electric motor industry. The next Jack Dorsey needs to create a new cement or other building material to create sustainable buildings. The next Steve Jobs needs to figure out how to consume, produce and transport water sustainably. Elon Musk might be controversial to some, but the truth is the world needs 10 more Elon Musks. Thus, my call to the next generation of entrepreneurs is to think about carbon, not clicks.
If we believe that the climate crisis is too complex and cannot be fixed fast enough, let’s look at biotech. In a time of crisis, humanity has proved its ability to act decisively. The amazing speed during the pandemic to develop and use vaccines, new monoclonal antibody treatments and ventilator technologies saved lives. Innovation from Moderna, Pfizer and BioNTech saved the world from the precipice of an even bigger tragedy — and this inspires new biotech entrepreneurs.
We need the same urgency applied to climate tech. Many accuse climate tech investors, including myself, and climate scientists as alarmists. I would argue we are not being alarmist enough. The crisis is already unfolding; our minds and bodies are just wired not to feel it too much. Humans have a hard time panicking about a long-lasting, gradually worsening misery. Humanity is the proverbial frog being boiled in the CO2-loaded oceans.
Not investing in climate tech is inexcusable
Over the past 15 or so years, I have been on both the losing and the winning side of this struggle. We have experienced epic investment failures in biofuels and solar. At the same time, we have enjoyed incredible improvements and wins in batteries, carbon nanotubes, graphene nanomaterials, agtech, solar and wind technology.
I am not naïve; I know how difficult it is to build climate tech businesses. I know it is a capital-intensive sector. I know it takes years to perfect these technologies with a significant component of hardware. I fully appreciate how difficult it is to work with utility and real estate relics and to get them to off-take novel technology when their whole model is built on minimizing capital expenditures and maintenance costs during both construction and operation.
I know we got the timing wrong so many times. The point is this: Because the problem is so large and so hard, we need the brightest scientists, entrepreneurs, lawyers and financiers on it. We do not have a choice. To me, it is not an option to tell my children I was on the wrong side of history: actively supporting the destruction of our planet. I sincerely believe building inefficient, carbon-churning buildings and driving gas-guzzling cars will be looked at in 30 years the same way we look at tobacco or asbestos today: inexcusable.
COVID-19 was the first global war of our generation. Climate is the next, much bigger, one and it will last for several generations. Young entrepreneurs, please, think more about carbon and less about clicks. We will support you.