Cleantech Burned VCs Once. Here’s Why That Won’t Happen Again

By Dan Conner

BlackRock CEO Larry Fink, who oversees the largest asset manager in the world, might’ve succumbed to hyperbole when he recently declared that “the next 1,000 unicorns” would come from cleantech.

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Comments like that undoubtedly send shivers down the spines of seasoned venture capitalists who remember when similar predictions failed to live up to their supposed luster merely a decade ago.

In the mid-aughts, a cleantech VC investment craze attracted big bets from some of the industry’s largest names, who ultimately poured more than $25 billion into startups like Solyndra and Fisker. Unexpectedly, those companies ended up failing in spectacular fashion, as did many of their peers. In fact, more than 90 percent of these companies failed to break even after 2007—and most players exited the space to isolate and mitigate their mistakes.

In spite of this troubling history, the green investment ecosystem is swarming once again. As concerns about climate change among the general public continue to rise in fervor, so has VC interest in companies that could provide solutions therein. With 72 percent of people now concerned that climate change will cause them personal harm during their lifetimes, we seem to have reached an inflection point: Cleantech is a set of solutions that simply have to work because there aren’t any viable alternatives left.

An altruistic turning point

Regardless, there’s a bright side. For VCs, disruption breeds opportunity—and climate change will be one of the biggest disruptions in market forces we will experience. As these forces begin to sway, investors and business leaders look for upsides and back creative opportunities. What new businesses can be placed in the direct path of these market forces? Which existing markets unknowingly bask in ambient risk?

The Biden administration has designated climate change as one of its critical concerns—perhaps the top priority—so it’s likely that the sector will only continue to grow. The goal is a carbon-free electrical grid by 2035, on the way to net-zero emissions by 2050. Likewise, the president’s current infrastructure plan calls for the allocation of $73 billion toward overhauling the nation’s electrical grid along with heavy subsidies for a variety of clean infrastructure projects.

Contrastingly, a decade ago, companies that worked toward a greater good weren’t generally viewed as portfolio cornerstones. Soon, however, they might be the only companies left. According to the Global Sustainable Investment Alliance, roughly one-third of all managed assets worldwide take into consideration sustainability criteria during investment. As more investors evaluate investments based on environmental, social and governance factors, “doing good” is becoming a prerequisite for “doing well.”

Indeed, organizations across the private sector have begun shifting more resources toward meaningful environmental initiatives. For instance, U.S. automakers recently pledged to ensure that electric vehicles account for 40 percent to 50 percent of all new automobile sales by 2030. Although the nonbinding nature of the agreement and its seemingly absurd targets might have elicited eye rolls a decade ago, those targets are now in line with the goals major American automakers have already publicly announced.

In this changing landscape, diligence is key

At this point, the question for investors is whether to back companies focused on gainful change (prevention), disaster preparedness (anticipation), or catastrophe response (mitigation). Each of these categories comes with unique challenges and opportunities, and there are massive cleantech markets being minted along those lines at this very moment.

Moreover, there’s a strong case to be made for the emergence of new thematic funds focused solely on sustainability. Yet despite the heightened sense of urgency that’s catalyzing the 2021 cleantech boom, diligence will be critical. Green investments could again be lost to bad bets if we don’t take special care to evaluate opportunities using the right criteria.

If those investments do pay off, however, we all win.

Dan Conner is the general partner at Ascend Venture Capital, a micro-VC in St. Louis that provides financial and operational support to startup founders looking to scale. Conner specializes in data-centric technologies that enable the future states of industries. Before founding Ascend Venture Capital, Conner worked on the operations side of high-growth startups, leading teams to build scalable operational and financial infrastructure.

Illustration: Dom Guzman