|
“It’s a raccoon’s worst nightmare” - Harry Tannenbaum, Mill.
Congrats to Harry, Matt, and the Mill team for their launch. We think they’ll transform organic waste as they did with Nest for HVAC. The Mill launch has been a master class for other climatetech founders.
Importantly, the team is taking advantage of hardware learning curves – a central part of climate tech. We talk about a recent related paper, the best reference we've seen, in this video.
Climate valuations “[Climate] has mostly been spared the carnage that hit the other parts of USV’s portfolio.”
What’s keeping climatetech valuations resilient? Multiple tailwinds are pushing climate startups along: customer sentiment; policies like the IRA, ACC II (Oregon’s ICE vehicle ban), CBAM or Local Law 97; climate risk repricing in markets like flood and fire insurance. But the biggest story is plain old tech disruption. Some good examples: In Q4, Hertz discovered that their EV fleet is much more profitable than their internal combustion fleet. People are starting to share their ridiculously high solar investment ROI. Climatetech looks just like plain old tech disruption, but with manufacturing learning curves and more complex capital structures.
But there are climatetech potholes, too.
An influx of new climate investors over the last 24 months bid up valuations and also led to more speculative investments in the name of impact. We remain skeptical of multiple themes, like voluntary carbon markets. We already see founders move to diversify revenues away from public purchase commitments made mostly at the top of the financial market in 2021. We’re also watching out for cleantech 1.0 pitfalls – long and expensive pathways to first revenues. For example, fusion energy breakthroughs, while exciting, are still at least a decade away from tech readiness, and from there need another 5-10 years of complex system upgrades to be commercially viable.
There’s also the increasing pushback on stating corporate climate goals. Organizations should get credit for their actions when they have a high probability of helping us get closer to our climate goals. But those taking shortcuts like cheap, junk offsets (and the folks selling these shortcuts) should be seen as much less desirable, even risky.
The consequences of opting to say nothing on climate will have another consequence - less access to talent. Many more of the most talented folks want to know that climate is a core part of how companies are building.
Finally, many consumers are still making big purchase decisions that lock in their emissions for another 15 to 30 years. Often the tradeoff is cost - finance, incentives, and cost curves still have a way to go. Sometimes, as we see with the induction stove vs gas stove debate, it’s outdated perception. These point to a need to do more to shift behavior on climatetech purchase decisions. What we’re discussing with founders Work across the capital stack. We received very positive feedback when we shared our Fundraising for Climate Startups. After 25 years of mostly software investing, working with physical assets is a new challenge for VCs and founders. A central part of the challenge is to understand what types of capital makes sense and whether these capital providers are aligned with VCs and other stakeholders. The inbound interest in our private credit platform jumped in 2022 and shows no signs of slowing.
Mind the FUD. The best sign that climate deployment is well underway? Incumbents sense they are losing ground and double down on Fear, Uncertainty and Doubt, often by deploying celebrities and even paying news sites. We see media coverage of micromobility risks, even as we set records for automotive fatalities. And then there are various sustainability techs smearing news stories, like those on renewables causing instability in power grids or concerns over lithium mining risks being worse for the environment versus fossil fuels. FUD is all about starving startups of growth by causing their partners and customers to pause or do nothing.
Geographies matter much more. IRA and much higher energy prices create new opportunities in markets like the US and EU. At the same time, more local differences – like Swiss water-quality standards or New York building emissions laws – will create unfair advantages for startups working in these regions. With less available capital, effective subsidies are more important than ever, and they vary greatly with geography. Geography also increasingly highlights customer appetite for climate tech in the face of shifting priorities, such as higher energy prices, or in the face of tailwinds, like resilience (Lebanon) and the need for clean industrialization (India).
Finally, expect 2023 to be unpredictable. So prepare for the best and the worst. And for your sake, take advantage of generative AI, even if just to draft or present ideas.
What we’re telling LPs For those who are in a climate-impacted industry, prepare and execute a plan to be aligned with climate goals or potentially be positioned on the wrong side of history (more backstory on EU’s push against carbon intensive imports here).
How to start a plan? Understand where one of the most transformative platform technologies is heading (no, we’re not talking about ChatGPT). As history has shown, such as with solar and battery cost curve predictions, never rely too heavily on predictions, but here’s a few dozen if you’re into that. Portfolio news Freewire announced their acquisition of Mobilyze. Climatebase was in Fortune discussing the migration of talent from Big Tech to climatetech. OneRoof was in TechCrunch celebrating the growth of their vertical community platform. Partsimony is offering a chance at a $250 Amazon gift card for their 1-minute survey on supply chain problems, with hopes to better serve the hardware community. UpShift recently celebrated crossing one million miles driven! That’s like over 40 trips around the planet while eliminating 774,221 lbs of CO2. More updates in WeFunder. Opportunities VC funding is much tougher than it was 12 months ago, but in climatetech, we’re seeing a growing universe of alt capital sources. California Energy Commision just approved $2.9 billion in new investments for Zero-Emission Transportation Infrastructure. USDOE is offering millions in prizes via the EAS-E Home Electrification Prize for home decarbonization ideas. NY State has launched a $30m pre-seed and seed matching fund. Norrsken Accelerator is hand-picking 20 of the world’s most promising early-stage impact teams and inviting them to an intense 8-week sprint at Norrsken House in Stockholm with $125k upfront investment.
Singularity Energy is looking for a US-based Backend Software Engineer to join the team. Bowery is looking for an associate plant breeder, a recruiting coordinator and many other roles. Cycle is looking for bike mechanics in multiple EU cities. Gradient is looking for help with supply chain, firmware and quality control.
And there are over 400 opportunities to join our portfolio companies. That friend who resolved to work on climate in 2023? Please forward this email to them.
Best, Third Sphere Team
You can find our previous updates here.
|