Third – investors are looking to renewable tech now – startups are better at new tech to solve climate change but won’t receive investment absent strong signaling – the plan solves.

Call it cleantech 2.0. In recent years, there has been a huge increase in public and private spending, both in the US and elsewhere, on technologies and infrastructure to address climate change. A recent analysis estimates that total green investments reached $213 billion in the US during the 12 months beginning July 2022. Most of that spending is allocated to building sources of renewable energy, such as wind or solar, as well as to supporting battery and EV manufacturing and creating green hydrogen infrastructure. And the enormous amount of money is creating potential opportunities for the next generation of technologies to feed the expanding markets.

For startups like CubicPV, this means that after years of little market demand, the appetite for its products is suddenly almost insatiable. The company is designing a billion-dollar plant to make the silicon wafers needed to feed the rapid expansion in US solar production. What’s more, a bigger solar manufacturing base could eventually provide the startup with a lucrative future market for its next innovation: a new type of solar panel that is far more efficient at capturing sunlight than conventional silicon ones.

Silicon Valley and venture capitalists everywhere have fallen in love with the virtues and the promise of new catalysts and electrodes. Innovations in solar cells no longer seem like a lost cause. Startups are boasting radical new technologies for energy storage and carbon-free processes for making chemicals, steel, and cement. Investors are risking billions on scaling up nascent technologies such as geothermal power, fusion reactors, and ways to capture carbon dioxide directly from the air.

These innovations in what is being called “deep” or “hard” tech—products and processes based on science and engineering advances—could be critical in addressing climate change. While the past few years have seen remarkable progress in deploying relatively mature renewables such as solar and wind power, as well as strong growth in electric-vehicle sales, large gaps in the cleantech portfolio remain. In its most recent report this fall, the International Energy Agency estimates that around 35% of the emissions cuts needed to meet 2050 climate goals will have to come from technologies not yet available.

Key industrial sectors of the economy, in particular, have largely been untouched. Nearly a third of carbon emissions come from industrial processes used to make steel, cement, chemicals, and other commodities; concrete alone accounts for more than 7% of global emissions, while steel production is responsible for another 7% to 9%. Cleaning up these industries will take an almost unlimited supply of cheap, steady, and easily accessible carbon-free energy.

Progress will almost certainly require new science-based innovations. And that’s where venture-backed startups play an essential role. Over the last few decades, large industrial corporations in sectors such as energy, chemicals, and materials have all but abandoned research into new technologies. The days when industrial giants like DuPont created critical new technologies and spun them off into profitable operations are long gone. And while governments and universities fund research, venture-backed firms have emerged as an increasingly key outlet for transforming promising lab discoveries into sustainable businesses.

A slew of such startups are now rapidly moving toward commercialization, providing the first steps toward industrial decarbonization and adoption of radically new energy sources (see chart). But these startups still face some of the same issues that tripped up the cleantech revolution a decade ago

Transforming academic advances in physical sciences and engineering into commercial businesses is a project that’s fraught with dangers. It typically requires startups to build so-called demonstration plants at a relatively large scale to test whether their processes work beyond the lab and are efficient enough to compete with existing technologies. This is risky and expensive. Then, if it all works, startups commercializing, say, new energy sources or low-carbon processes to make concrete or steel face low-margin, well-established markets. They must often compete with mature processes that have been optimized over many decades.

These costly and time-consuming steps to commercialization, which a climate-tech startup must survive before it has any significant revenues, is often known as the “valley of death.” Few startups in cleantech 1.0 were able to navigate it.

The question now is: Can today’s ambitious startups successfully scale up their technologies and move across that valley this time around? These fledging venture-backed companies will first need to prove that their technologies work at a commercial scale. Then, if successful, they face the even harder challenge of making an impact on the huge energy and industrial markets, figuring out how to work with established companies to clean up these sectors. Can they survive?

Born again

The bad news is that the record for such venture-backed startups is dismal. From 2006 to around 2011, when much of the sector lay in ashes, venture capitalists spent about $25 billion on cleantech startups. The VCs lost more than half their money. It was particularly bad for those firms we would now call deep-tech startups; investments in stuff like new types of solar cells, advanced biofuels, and novel battery chemistries returned only about 16 cents on a dollar.

For much of the rest of the decade, investors hunkered down. As spending on cleantech dwindled to miserly levels, consumer-facing software-based businesses (think Airbnb and Uber) took off. The common wisdom was that advances based on science and engineering in cleantech were too expensive and risky to scale up. The proportion of venture capital going to cleantech dropped from more than 8% in 2008 to around 3% between 2016 and 2020.

Even before the 2022 IRA passed, however, venture investors had again begun eyeing the massive potential markets for climate tech, as governments around the world increased spending and more and more corporations set long-term emission-reduction goals. The markets are now real and growing, not speculative. While innovative battery startups a decade ago faced a tiny market for electric vehicles, today there is a huge demand for cheaper and more powerful batteries as sales of EVs take off. Likewise, demand for grid storage is growing as more renewable power is deployed and for cleaner industrial processes as companies pledge to reduce their carbon pollution.

Yet the trajectory of climate tech in recent years hasn’t been a straight line. Venture investments in cleantech startups, which amounted to just $2 billion in 2013, soared to nearly $30 billion in the US by 2021, according to the National Venture Capital Association. Then, just as things started to heat up, inflation and the resulting rise in interest rates began to make borrowing money expensive. The general venture capital market began to crash in 2022, and investments in climate tech soon followed. In the first half of 2023, investments in climate-tech startups were down 40% from the same period in 2022, reports Sightline Climate, a market intelligence firm.

But dig deeper into the numbers and a mixed picture emerges. For one thing, Sightline Climate says investments have begun creeping back up in the latest quarter this fall. And though funding overall became more difficult to secure in the first half of 2023, some companies—especially in markets favored by the IRA legislation, like green hydrogen, batteries, solar, and carbon capture from the air—are still raising large amounts of money. According to the latest data from the Engine, a “tough tech” venture group spun out of MIT, VC investments in startups working on industrial chemicals, materials, and carbon capture were actually up in the first half of 2023 from the same period in 2022—in fact, they were nearly at 2021 levels.

For some startups, however, readily available cash has dried up, providing a reality check on their sustainability. And the first few failures could raise the ghosts of cleantech 1.0. But for many others, the financial downturn is simply the most recent reminder that climate-tech investments aren’t exempt from swings in the health of the economy.

The same fundamental challenge that venture-backed startups faced in commercializing transformative technologies 15 years ago still exist. Novel, gee-whiz tech is not enough; a clear plan to target well-defined markets remains key to survival. “What is the path to market for these technologies?” asks David Popp, an economist at Syracuse University. He attributes the collapse of startups in cleantech 1.0 largely to the lack of demand for green products in highly competitive commodity markets. And that business puzzle, he says, remains: “I’m kind of curious to see, looking back five years from now, whether we’ll be looking at this like the first cleantech bubble.”