Venture capital, as an asset class, is an industry of short-term wins. Most funds have a 10-year cycle: two years of initial investments; then two to three years of company building and follow-on investments; after that, five or six years of thumb-twiddling and waiting for the ship to come in, and maybe placing a last bet on the most promising companies in the fund portfolio.
This model forms part of a VC’s investment thesis; it also includes where the leads for potential investment come from (known as “sourcing”), along with the investment stage (pre-seed, seed, Series A, etc.), and any geographic or vertical or market limitations to the fund. The investment cycle has remained remarkably consistent over the history of venture capital: Wait 10 years, and the funds invested have (hopefully) multiplied.
The upshot of these investment cycles is that venture capital is best positioned to invest in the type of companies that are in a hot market, with predictably high user and revenue growth, and a somewhat obvious liquidity event outcome, whether through acquisition or IPO. All of this is why subscription-based companies — and in particular cloud-based subscription software companies — are so well suited to VC investment. B2B SaaS companies that know the market, know how to leverage data-driven growth and have a clear customer acquisition funnel are as close as it gets to a safe bet in venture.
Another “sure-fire bet” for venture capitalists is when the future can be predicted, even a little bit. Big shifts in legislation is one example: Build software that helps companies stay in compliance with certain laws likely to pass soon, and you know you have a guaranteed customer base. Another sure-fire bet with a guaranteed user base: Watching the population curve and realizing there are a lot of people about to retire and need support. None of this is new; VC firms have built specialized theses around these types of huge moves.
A recent McKinsey report suggests that “investments in climate technology are still increasing, defying the headwinds that affected most capital markets.”
Both VCs and founders alike love to talk about how they want to make the world a better place. That’s lovely and all, and it may even be true for some of them. But make no mistake: Venture capital is an asset class like any other, and general partners have a fiduciary responsibility to their limited partners. Everyone may agree that it’s lovely to make the world better, but unless the investors start to see a return on their investments, that firehose of investment very quickly gets reduced to a trickle.
If this sounds like the “green tech” investing revolution of a few years ago, you’re not wrong. But as TC+’s climate tech reporter Tim De Chant argued almost exactly a year ago, climate tech might not fall into the same traps. The green tech wave of the “Inconvenient Truth” era came to a spectacular and crashing halt. Between 2006 and 2011, VCs spent more than $25 billion funding clean tech and went on to lose more than half of their money, according to research by MIT Energy Initiative. The research concluded that venture capital is the wrong way to approach the climate change challenges, soberly noting that “more than 90 percent of cleantech companies funded after 2007 ultimately failed to return just the initial capital invested.”
For an asset class that lost $25 billion a decade ago, something significant has to change for venture capital to pour more than $40 billion into the same vertical again.
I suspect this isn’t a case of VC not learning its lesson: Investors didn’t get less sophisticated over the last decade. That’s true both for the GPs that run VC firms and for the LPs who invest in them.
Something else happened instead: The event horizon for when we can expect to end up in (literal) hot water when it comes to climate has come a lot closer. In a desperate attempt to keep this pale blue dot of ours habitable, the U.N. sustainability goals are set for 2050, with an intermediary cluster of milestones set for 2030.
2030 is just seven years away. For context, seven years ago, among the top-grossing movies were “Deadpool,” “The Girl on the Train” and “Doctor Strange.” The best-selling singles included “Hello” by Adele and “Cake by the Ocean” by DNCE. The point I’m making is that I remember those movies and songs well. In the scheme of things, 2016 doesn’t seem like that long ago.
Much more importantly, that 2030 deadline now falls within a 10-year fund cycle. That means that something predictable is about to happen: We are going to see enormous shifts in transportation, power generation, industry and manufacturing, the ways we live, and the ways we grow our food.
The fact that these shifts are all happening right now fills me with mixed emotions: On the one hand, it opens up a huge opportunity for startups wanting to do good and do well. That’s great for the startup ecosystem. Also great for the startup ecosystem: Funding is pouring into climate tech at unprecedented rates. That could mean that we see tons of improvement in the technologies and applications of those technologies in an effort to prevent the planet gently boiling off into space.
But on the other hand, I find it profoundly depressing that there was a 10-year lull in the development of climate tech startups because the first wave of green tech failed to deliver returns. It’s a reminder that we are in such a tight capitalist grip that even though it’s been abundantly clear for years that climate change is becoming more serious by the day, very few startups were able to grow and thrive in this space in order to try to build technologies. The thing to be scared of? When climate change falls within the fund cycle of venture capital, it means that the market agrees that we are truly, spectacularly close to a climate disaster.
Venture capital leaping back into the fold is a good thing — but it also serves as a reminder that, as an asset class, it is poorly positioned to help deal with problems that are less urgent than a couple of presidential terms. That also means that startups — which are often heavily reliant on funding from VC — are the wrong vehicle for long-term thinking.
Here’s to hoping that we’ll be able to put a serious dent in this climate crisis in the next seven years, and that a lot of startup founders (and the VCs who fund them, and the LPs who fund them) get filthy rich as a side effect of saving us. And it continues to be a crying shame that the motivation of giant bags of cash is the only way that things get done.