Cleantech Venture Capital: A Growing Trend

The Rise of Cleantech Venture Capital Investment

This isn’t the first time energy ventures have appeared on the VC radar. Between 2006 and 2007, the industry grew by 60% with $75 billion venture capital invested worldwide — 2006 was defined by many as the year the world woke up to climate change (the same year Al Gore released his eye-opening climate documentary, An Inconvenient Truth).

Then the 2008 financial crisis struck. The industry faced a harsh winter for eight consecutive years as technology was still slow to grow and demonstrate real profits.

However, the 2015 COP21 spotlighted growing climate concerns after global temperatures kept ramping up. The prominent climate event brought about several public policies to increase environmental efforts, followed by organizations like the European Investment Bank, which aimed to invest €20 billion annually in the sector until 2020.

From that point on, cleantech grew slowly but surely, until the 2021 investment bubble, when funding reached $100 billion.

The Role of Governments and Other Institutions in Cleantech Success

Beyond technological advancements, it’s undeniable that cleantech has grown exponentially due to the looming threats posed by climate change, which are more tangible now than they were in 2006. As a result, global initiatives like the Paris Agreement have mobilized the public and private sectors to adopt more sustainable practices.

For instance, many governments have imposed regulations like the directive for industrial emissions (IED) in the EU, where certain industries are required to reduce their greenhouse gas emissions, decarbonize, and produce less waste or face penalties.

The US is also leading efforts with the Inflation Reduction Act, which offers incentives for people to save money on electricity bills and purchase electric vehicles.

The overwhelming flow of support for eco-innovations that mitigate climate change led technologies like semiconductors and carbon capture and storage to mature, making them viable options for commercialization. The former makes for exceptional energy transmission and storage, while the latter creates a direct impact on decarbonization efforts.

Key Trends In Cleantech Venture Capital

It’s true that cleantech venture capital investment in the past year hasn’t been as strong as in 2021 and 2022.

However, one subsector sustaining the industry is energy and power — fusion energy, renewable energy, batteries for energy storage, and alternative storage technologies — have held the fort.

In Q3 2023, investment in this subsector was $9.2 billion, almost matching the $9.7 billion raised in 2021. On the other hand, investment in the agriculture and food subsector declined the most, from $10.3 billion in 2021 to $3.7 billion as of Q3 2023.

While North America has reigned supreme as the region with the most venture capital funding historically, APAC underwent massive growth between 2022 and 2023, going from roughly 15% of global investments to over 27%. The region made a significant transition from primarily funding batteries and renewable energy to further exploring the materials and chemicals subsector for energy efficiency.

Additionally, early stage and seed venture capital investment has significantly grown in recent years as novel technologies are being developed to tackle the climate crisis, readying for the long haul with a strong financial foundation.

Challenges and Opportunities in Cleantech Venture Capital

From strict regulations to segmented markets and technological volatility, eco-innovations have to check several boxes before they can see the light of day — being shortlisted is already a major achievement.

To illustrate, 50% of the $25 billion in venture capital invested in cleantech between 2006 and 2011 was all lost by 2015.

To start, many US-based energy ventures have to comply with federal and state rules such as the Environmental Protection Agency (EPA) and Department of Energy (DOE) regulations, plus California’s zero-emissions mandates and New York’s Climate Leadership and Community Protection Act. And even more apply in Asia and Europe.

Additionally, unlike fintechs or SaaS, the cleantech market doesn’t have a specific hub where industry innovators, experts, and venture capital investors converge to collaborate and grow together — this makes scaling harder. This segmentation, in addition to a colossal fossil fuel industry still going strong, makes rivaling leaders and gaining market share difficult.

But it’s not all grim in the cleantech space. Entrepreneurs bet on this sector because of the future it promises, both financially and environmentally to solve climate change. While it’s capital-intensive and highly regulated, its solutions are becoming a necessity rather than a luxury.

Key Success Factors for Cleantech Startups

The rising need for cleantech solutions as a result of the climate crisis means the industry still has plenty of room to expand, bringing value from many fronts. This is key for a company’s success: developing a clear value proposition and a strong business model that venture capital investors can support.

If you’re storing energy in a novel and more efficient material, how will you charge users? Will you target utility companies or individual users? These kinds of questions are essential to crafting a sustainable business model.

Another important factor for this sector is leveraging the decades-long worth of research behind today’s tech, including the experts and pioneers still making waves today. An experienced leadership team that knows both about business and the technical aspects will get energy ventures closer to solidifying credibility and success.

And, as academia has it, collaboration is still a massive stepping stone for this emerging industry. Being able to partner with other private companies, public organizations, universities, and so on, will strengthen your R&D efforts and refine your product — something this new wave of cleantech companies can learn from past energy innovators.

These partnerships will also help you secure venture capital investor interest as a promising and committed company.

Lastly, no startup can succeed without planning for the ups and downs of the startup life. A robust risk management plan will ensure you can prevent hurdles and are prepared to take them on.

The Role of Insurance in Cleantech Venture Capital

A significant part of knowing how to mitigate risks is exploring the right insurance coverage for your startup’s needs. As such, emerging businesses can build a safety net and garner more venture capital support to realize climate crisis goals.

As cleantech encompasses a myriad of dynamics, from software to hardware and several different technologies at play, choosing the right package is crucial.

Top Insurance Picks for Cleantech Startups

For example, Pollution or Environmental insurance can support those in the materials and chemicals subsector. In the process of manufacturing or developing solutions, accidents like release of toxins (mold, chemicals, radiation, etc.) can happen — insurance mitigates the aftermath of such events. It can cover bodily injuries, property damage, and litigation costs.

Those with hardware-intensive operations in the renewable energy, EV, and energy storage spaces could also find Property insurance useful, as it covers their physical assets in case of natural disasters, burglary, or accidents like fires. These can damage equipment, facilities, products or inventory, in which case insurance kicks in to recover the losses.

Almost all cleantech solutions are connected to a digital infrastructure, be it for administrative or operational purposes. Some products, like EVs, are even hooked to cloud systems. This is why it’s never been more important for the industry to protect itself from cyberattacks — governments like the US are already planning on how to tackle these hurdles head-on.

Cyber Liability insurance can add an extra layer of protection for startups to fall back on in case of betterment opportunities post-incident, lawsuits stemming from data breaches or ransomware, and crisis management needs.

Lastly, as cleantech is all about innovating, it isn’t unusual to run into product defects and glitches that cause injury or financial loss. Product Liability insurance supports companies in case of litigation and product damages that can tarnish company growth and damage venture capital investor trust.

Choosing an insurance package that fits a startup’s unique demands enables business growth by demonstrating a commitment to safety, financial security, and a financial and operational cushion if incidents arise.

Undoubtedly, the cleantech sector is undergoing momentous changes that naturally occur when energy transitions come around. The opportunities are evident, yet it’s important to remember that risks can be just as present in such a high-stakes energy landscape.

By securing long-lasting partnerships, crafting a relevant value proposition, and setting a clear risk management plan, cleantech startups can begin to thrive in this booming and competitive industry.

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