Climate tech is one of the fastest growing sectors in entrepreneurship. Startups in this space have the potential to have a large societal impact and therefore attract people who are mission driven. But since climate tech is so broad and new, it can be difficult for new founders to navigate. The purpose of this mini guide is to provide insight on the current range of technologies within climate tech, and what kinds of funding to secure. For this mini guide, Amy Francetic, Managing General Partner at Buoyant Ventures, provided guidance on how to navigate this new and challenging space.
Why climate tech entrepreneurship
Founders who are just starting out and thinking about entering the climate tech space should reflect on why they want to be in this space specifically. One of the main differences between the climate tech space and other areas of entrepreneurships is how the company is clearly driven by its central mission. Many people who enter the climate tech space are driven by a strong motivation to help save the planet and society from environmental destruction caused by climate change. Dedication to this core value is widely shared by founders in the climate tech space and people who work in these companies. I personally work in the climate and sustainability space because it allows me to make a large impact on the issue that is most important to me – preventing climate change.
There are many other reasons why founders enter the climate tech space, including a fascination with new renewable energy technology, a motivation to help contribute to and create a more sustainable economy, or even to just be part of a space that is currently experiencing massive economic growth and exciting innovation. It doesn’t matter your reason for being in the climate tech space, as long as your reason is compelling enough for you to dedicate the necessary time and energy into building a start-up.
Areas for innovation
Climate tech is an incredibly broad industry. It attempts to solve all kinds of problems like measuring carbon emissions, storing renewable energy, and capturing carbon using all kinds of solutions, from software or materials science to green finance. This means that there is a place for everyone to contribute to the space.
Let’s dive into some key topic areas for climate tech companies.
Electric vehicles (EVs)
The transportation sector currently represents 27% of U.S. carbon emissions, more than any other sector. Therefore, EVs can play a crucial role in reducing carbon emissions and mitigating climate change. EV sales doubled from 2020 to 2021, representing 4.5% of total car sales in 2021. But EVs still need to overcome some key challenges that are ripe for aspiring founders before they can be widely used. The scaling of EVs will require widespread EV charging infrastructure, which will require both manufacturing and software development. Batteries for EVs also need to be improved to allow for larger vehicles like trucks to travel long distances.
Energy and batteries
There is a big push to reduce the electrical grid’s dependence on fossil fuels and replace it with renewable energy. However, this would require a large renewable energy storage capacity that the grid currently does not have. This is why battery technology is receiving lots of attention. Improvements in battery technology require research in materials science and engineering. Batteries that are capable of handling storage for large amounts of renewable energy are key to decarbonizing the electrical grid.
Carbon accounting software
There is a high demand for carbon accounting software because many companies are now under pressure to measure and reduce their carbon emissions. Carbon accounting software helps companies calculate and keep track of their carbon emissions. This then allows companies to write reports summarizing their carbon emissions and determine how to go about reducing them.
Carbon capture and storage
According to the IPCC, reaching net zero carbon emissions, specially in the industrial sector which makes up 24% of U.S. carbon emissions, will require carbon capture and storage. As mentioned above, there is also a large incentive for large companies to reduce their carbon emissions, and many companies are looking to carbon capture and storage as a way of achieving this. Current carbon capture methods are sufficient technologically but struggle to be implemented on a large scale. Areas for innovation include developing methods for transporting carbon that has been captured and systems to keep track of carbon that has been captured and traded. This requires both infrastructure and software solutions.
“We would hate to spend a lot of time coming up with an idea if the approach wasn’t really economically viable. Then it would just be an interesting science project.”—Amy Francetic
It can be difficult for founders to know what kinds of funding is the best fit for their startup. Let’s dive into the different kinds of funding available for climate tech.
The fundamental goal of venture capital firms is to invest in startups and technologies that will provide significant economic returns for the firm. For climate tech VC firms, your technology must help reduce carbon emissions, but the emphasis is still on the scalability and profitability of your product. For example, Buoyant Ventures looks for at least 5x returns on their investments. VC funding is most appropriate for technologies with a clear time horizon to become profitable.
Government funding is ideal for technology that is still in the research and development stage and is not yet ready for commercialization. Unlike VC funding, there is not an expectation of the technology being profitable or scalable;the expectation is to use the funding to conduct research and make improvements on your technology. After receiving the research grant, a potential end goal is selling the technology to a large company. ARPA-E is a common place for government funding in the climate tech space.
Why is this distinction important?
According to Francetic, a key mistake that many VCs and founders have made in the past, and continue to make today, is not understanding when VC funding is a good fit for a product and when it is not. Many technologies in the climate tech space are scientifically groundbreaking but not economically viable or scalable. For these technologies, research grants are more appropriate than VC funding.
“We would hate to spend a lot of time coming up with an idea if the approach wasn’t really economically viable. Then it would just be an interesting science project,” says Francetic.
On the flip side, many technologies are ready for commercialization and have the potential to be profitable. These technologies would significantly benefit from VC funding and mentorship.
In summary, it can be difficult to navigate entering the climate tech space. You first need to consider why you want to enter climate tech as opposed to other industries. There are also many different facets to climate tech and different areas for innovation. Knowing what your strengths and your skills are can help you identify which area of innovation to contribute to. Finally, understanding how funding works in climate tech is important so that you can attract the right funding for your startup.