Conventional wisdom says cleantech 1.0 was a bust.
In a nutshell, cleantech 1.0: Beginning in 2006, venture capitalists poured more than $25 billion into clean energy technologies. Over the next five years they would go on to lose over half that, led by losses in biofuel and solar startups (remember Solyndra?).
That sounds like a bust. But closer examination reveals successes amid losses and lessons learned that will help ensure today’s far larger climate tech investments don’t face similar fates.
“Cleantech 1.0, properly done, wasn’t a bust,” said Vinod Khosla, founder of Khosla Ventures, in conversation with fellow prominent venture capitalist, John Doerr, chairman of Kleiner Perkins, at the Breakthrough Energy Summit in Seattle Tuesday.
“I looked at the returns. We turned $1 billion, through a lot of losses, into $3 billion of value. So, a surprising number there.”
– John Doerr, Chairman of Kleiner Perkins, on his firm’s cleantech 1.0 investments.
Successful investments of Kleiner Perkins during Cleantech 1.0 include smart thermostat firm Nest, which Google acquired in 2014, and Enphase, a solar energy company that went public in 2012, according to Doerr’s office.
$3 billion off $1 billion is considered a decent return for a fund writ large, but returns haven’t come as fast as they traditionally have for funds more focused on software companies.
Khosla mentioned several companies his firm invested in that remain operating today, including electric-vehicle battery maker QuantumScape and carbon recycling firm LanzaTech.
“They took a lot more patience and nurturing,” Khosla said.
Some technologies probably still need more time, judging by QuantumScape’s stock. It’s been on a gradual decline ever since a blockbuster opening day in 2020 (granted, the overall stock market has been dismal lately.)
Both Khosla and Doerr faced headline-grabbing losses in cleantech 1.0.
Khosla invested in KiOR, an advanced biofuels startup that went through high-profile bankruptcy in 2014.
As for Doerr, forget horses, he bet on the wrong car back in circa 2007. His firm invested in Fisker, a now little-known electric vehicle company, over Tesla.
“It’s a very painful mistake,” Doerr said.
His thinking was rooted in the fact Fisker was led by known automotive leaders, whereas Tesla wasn’t. That type of thinking may not hold for technologies that upend the status quo.
“I can’t think of one large example [of change] driven by somebody who knows the space super well,” Khosla said. “[I] much prefer people who think of first principles and hire the experience around them to surface the problems that might come up.”
At a macro level, investments in Cleantech 1.0 dried up because of two factors: the 2008 economic recession and the onset of the U.S. oil and natural gas boom, which dropped fossil fuel prices and made more expensive clean energy even less financially attractive.
Climate urgency kept growing, and in 2015, world leaders agreed to the Paris Climate Agreement, where virtually the entire world agreed to limit greenhouse gas emissions. So began another cleantech investment opportunity.
Fast forward to today. The cleantech 1.0 boom seems more like a whimper. Venture capitalists have invested more than $224 billion in climate tech between 2015 and Oct. 18 of this year.
Source:PitchBook• Data compiled upon request from Cipher. 2022 data complete through Oct. 18.
“I don’t think there is any dispute that the original cleantech 1.0 got us to where we are now,” said Molly Wood, a climate tech investor at the VC firm Launch.
Although comparing the two might seem unfair considering the mountains of money being invested today, the molehill of yesteryear offers lessons.
“Costs are king in climate,” Doerr said. “People will not pay a premium for an equivalent green product.”
Some of these lessons are being heeded.
Two VC firms launched after the Paris Climate Agreement, including Breakthrough Energy Ventures, whose board includes Khosla and Doerr, and The Engine built by MIT, are focused on technologies that will likely take longer to develop, so they’re intentionally allowing for more than the typical three to five years for returns.
“Climate tech as a sector is beginning to benefit from a more developed investment stack, akin to what software and biotech startups have had for decades,” said Katie Rae, CEO & managing partner of The Engine. “These are signs that point to venture scale returns and the possibility of very large companies.”
Awareness of climate change among the public, governments, corporations and investors is greater than it was during cleantech 1.0. Several factors are driving this, including the impacts of climate change being felt by more people and renewable energy costs are plummeting.
The enactment over the past year of major U.S. climate laws, led by the nearly $400 billion in government incentives in the Inflation Reduction Act, is also boosting climate tech companies.
“I don’t see us transitioning to the new clean energy economy without enabling action [from government],” said Doerr, referring to a comment U.S. Energy Secretary Jennifer Granholm said in earlier session at the same conference.
Blind spots may await, especially with a global economy facing an energy crisis, inflation and persistent supply chain shocks.
“I worry about it a lot,” Khosla said. He said he’s advising climate tech startups to prepare for lower evaluations. “That’s a risk you should manage very tightly.”
Editor’s note: Breakthrough Energy Ventures (BEV) is a venture capital fund within the Breakthrough Energy network, which also supports Cipher. BEV is also among QuantumScape’s investors.
Lunchtime Reads and Hot Takes
That Reusable Trader Joe’s Bag? It’s Rescuing an Indian Industry. — The New York Times
Amy’s take: Better headline: “Your reusable Trader Joe’s bag is rescuing an Indian industry.” I even shaved a few words. This is an uplifting story. I have owned that very bag for many years!
Sweden’s Incoming Cabinet Says New Reactors Will Be Built — Bloomberg (paywall)
Anca’s take: It’s a policy U-turn for the Scandinavian country, which had shut down half of its reactors in recent years. An increasingly electrified economy and the energy crisis are behind the move.
You Don’t Have to Be Vegan to Help Save the Planet — Bloomberg (paywall)
Amy’s take: I’m a proud flexitarian, eating plant-based meals much of the time. We should adopt that same language for our energy systems: Wind and solar most of the time, but we don’t need to be absolutist about it.
London’s Secret Fix for Air Pollution: Making Drivers Pay Up — Bloomberg (paywall)
Amy’s take: This is a helpful and specific example showing how electrifying cars can help clean up a city, with interesting comparisons to other cities.
Carbon Capture Projects Hit Record, But Would Mitigate Less Than 1% of Emissions — Bloomberg (paywall)
Anca’s take: A very sobering perspective about where we are at. Carbon capture and storage is, of course, only part of the solution. It will never be able to mitigate 100% of emissions but it will be important to know how big of a role it can play.
The new hurricane resiliency: being off the grid — Axios
Amy’s take: In this intentionally built community, all utilities are underground, and they never lost power, Internet, etc. during Hurricane Ian.
Norway is portrayed as both hero and villain in Europe’s energy crisis — The Washington Post (paywall)
Amy’s take: This story includes incredible quotes, both on and off the record, about the difficult dynamics here.
Putin’s war accelerates the EU’s fossil fuel detox — POLITICO
Anca’s take: Powerful start: “By launching a bloody invasion of Ukraine, Vladimir Putin has done more than almost any other single human being to speed up the end of the fossil fuel era.” Good overview of the various initiatives countries are taking to boost their energy independence.
More of what we’re reading:
Biden to lay out plan to complete emergency oil sales, support U.S. production — Reuters
Netherlands joins Spain and Poland in move to quit energy treaty — Financial Times (paywall)
EU proposes energy emergency measures but dodges gas price cap — POLITICO
Sasol, ArcelorMittal to jointly explore green hydrogen, carbon capture projects — Reuters
Greta Thunberg calls Germany using coal over nuclear a ‘bad idea’ — POLITICO
Germany pushes to extend lifespan of three nuclear plants – letter — Reuters
LATEST NEWS
Climate tech getting a boost but needs to reach all countries
Vijay Vaitheeswaran with The Economist moderates a panel with Jennifer Granholm, U.S. Energy Secretary, John Kerry, U.S. Special Presidential Envoy for Climate, Larry Fink CEO of BlackRock, and Christoph Schweizer, CEO of Boston Consulting Group at the Breakthrough Energy Summit.
Governments and the private sector in rich countries are stepping up investments in clean energy innovation, but more must be done to ensure both capital and cleantech reach the developing world.
That was one of the main takeaways in Seattle during the first day of the Breakthrough Energy Summit, where politicians, investors and inventors met to discuss the challenges of quickly reducing global greenhouse gas emissions.
“We have to pursue more potential solutions knowing that individually some of these pieces aren’t going to come together—it’s very tricky,” Bill Gates, the founder of Breakthrough Energy, said referring to the various technologies currently being tested to decarbonize various segments of the economy.
It’s also a matter of fairness, Gates wrote the same day on his personal blog.
“Europe and the United States, which have historically produced the vast majority of CO2 emissions, owe it to the world not only to eliminate our own emissions but to invest aggressively and get Green Premiums down,” he wrote. The green premium, which represents the difference in cost between a product that emits carbon and an alternative that doesn’t.
A reform of how multilateral development banks operate is also crucial to ensure more and climate-targeted money flows towards developing countries, John Kerry, the United States’ special presidential envoy for climate, said during the summit.
Kerry struck a cautious balance of optimism and pessimism, stressing the importance of having more countries commit to measurable decarbonization plans.
“I am convinced we will go to a low-carbon economy,” Kerry said. “What I’m not convinced of enough is that we will do it in time as scientists have told us we have to do it in order to avoid the worst consequences of this crisis.”
AND FINALLY...
Low-carbon cocktails
This is a cocktail made with milk from Neutral Foods, a carbon-neutral dairy seller getting money from several high-profile investors, including LeBron James, Mark Cuban and Breakthrough Energy Ventures (via CNBC). The “Carbon Neutral” cocktail was served at a Tuesday night party at the Summit.
Each week, we feature a photo that is somehow related to energy, the thing we all need but don’t notice until it’s expensive or gone. Email your ideas and photos to news@ciphernews.com.
Editor’s note: In addition to supporting Cipher, Breakthrough Energy also supports and partners with a range of entities working to tackle climate change, including nonprofits, corporations, startups and research firms. For more information on Cipher’s editorial policy, click here.
