The reports issued by the UN Intergovernmental Panel on Climate Change are often grim affairs. But even by that standard, last week seemed particularly bleak.
The result is that the world has already warmed 1,1 degrees Celsius and we are on track to reach 1,5 degrees Celsius, the "safe" limit set by the Paris Agreement, by the early 2030s. So, Unless we make drastic changes, the world will exceed the safe amount of warming, just 10 years from now.
There's a good chance that by the time people in their 30s and 40s reach retirement, the world is "automatically" shitting itself. Hurricanes, heat waves, polar vortices, fires, floods, droughts—all the things that make us stock our pantries, invest in backup power, and bolster our insurance policies—will fill us with nostalgia. Wasn't it nice how bad we thought things were back then?
Where is the panic?
No doubt many people are concerned. The problem is that most of them don't have (or can't raise) the kind of sums needed to fix the problem. Meanwhile, those who do largely miss out on one of the greatest crises, and one of the greatest opportunities, of their lives.
There are a handful of investors who "get it," but most don't. Instead of investing in fusion, batteries, carbon capture or network management tools, they seem happy to invest their money in ad optimization software, corporate expense cards, corporate SaaS platforms - CRM, marketing or payments, take your pick! ! – or anything to do with the metaverse, really. One after another after another. (Soon, AI chatbots will join the list because, come on, have you seen what happens after the last toy lands on "60 minutes”? It's like a bunch of high school students rushing to imitate the latest TikTok trend.)
And when they're not busy funding incrementalism, they're giving hundreds of millions of dollars to failed whiz kids or fanning the flames of runs on regional banks. Is that what you aspire to?
It would be less frustrating if venture capital wasn't tailor-made to address a problem like this. Considerable but manageable risks? Check. Needle movement technologies? Check. Huge advantages and the potential to reshape multi-billion dollar markets? Check and check.
Where is everybody?
Let's compare two very different markets to illustrate the problem. Here we have software as a service, which investors have lavished money and attention on because those companies produce recurring revenue, which is often more stable and predictable. In total, SaaS companies around the world raised $122.000 billion last year, according to PitchBook. In other words, to finance companies that rent software on a monthly basis instead of selling perpetual licenses, venture capitalists invested more money than the entire GDP of Slovakia.
On the other hand, we have clean energy, which includes everything from batteries to renewable fuels, electrification of buildings, solar power, wind power and more. Here, investors placed $40 billion in bets last year. In case you're bad at math, investments that remove carbon pollution from countless sectors of the economy were a third of those made just to sell software monthly.
Venture capitalists once backed companies that underwent big, consequential turnarounds. In 1946, VC pioneered American research and development. handed over to the founders from High Voltage Engineering a check for $200,000 to develop a fledgling technology known as X-rays to treat cancer. At $2.8 million in today's dollars, that may not sound like a lot of money. But remember, other than ARD, venture capital didn't exist back then.
Today, those big changes are just as modest. Probably too modest. Investors should collectively raise their ambitions, but the numbers don't reflect that. Let's look at two "big game changer" technologies: carbon capture and fusion power. Last year, global venture capital firms invested just $4250 billion in carbon capture and just $1100 billion in fusion power, according to PitchBook. Together, they represent a "get out of jail free" card, allowing humanity to produce enough energy to fuel the power-hungry process of reversing nearly 200 years of runaway carbon pollution.
Fusion represents perhaps the riskiest bet of all. Science has progressed rapidly in recent years, and many startups express increasing confidence in their timelines, but there are still plenty of risks involved. However, the technology has such tremendous potential, both for climate and profit, that investors should pour huge sums into the market.
In that way, the merger shows a way forward. Most merger companies will need a lot of money and most likely won't work. But those who do will generate significant profits. Today, the global energy market is worth $10 trillion. If a company could capture even a small part of that, it would be rewarded with an absolutely stratospheric valuation.
Given the risky but promising nature of a merger-heavy portfolio, let's assume for argument's sake that investors will need a 1000x return from a winner to write off the losses from their failed bets. If today's portfolios assume that winners must return 10 times, that means VC will need to take 100 times as many chances. So, companies must grow much more or there must be many more. The easiest solution, of course, would be for more companies to jump on the merger. But that would mean that many would also fail.
Fortunately, fusion is not the only climate technology that needs investment. The opportunities multiply day by day. Some are riskier than others, but all are bets on the future. And since all of our futures are tied to weather, if any of those bets pan out, the benefits will accrue not just to investors, but to everyone. In climate tech, venture capital has an opportunity to return to its roots: to invest not just for money, but to change the world.
