Venture capital is an industry of short-term wins. Most funds have a 10-year cycle: two years of initial investments; then two or three years of business creation and follow-up investments; after that, five or six years of crossing your fingers and waiting for successful execution, and perhaps making one last bet on the most promising companies in the fund's portfolio.
This model is part of a VC's investment thesis; It also includes where the potential investment leads are coming from (known as “sourcing”), along with the investment stage (pre-seed, seed, Series A, etc.) and any geographic, vertical or market limitations for the fund. The investment cycle has remained remarkably constant throughout the history of venture capital: wait 10 years and the funds invested have (hopefully) multiplied.
The result of these investment cycles is that the capital of risk is best positioned to invest in the type of companies found in a market dynamic, with predictably high revenue and user growth, and a somewhat obvious liquidity event outcome, whether through an acquisition or IPO. All of this is why subscription-based companies, and particularly cloud-based subscription software companies, are so well suited to investing in venture capital. B2B SaaS companies that know the market, know how to leverage data-driven growth, and have a clear customer acquisition funnel are as close to a sure bet in a business as you can get.
Another “safe bet” for venture capitalists is when the future can be predicted, even if only slightly. Big changes in legislation are an example: creating software that helps companies comply with certain laws soon to be approved, with that we already know that there is a guaranteed customer base. Another safe bet with a guaranteed user base: observations on the population curve and notice that there are many people about to retire and who need support. None of this is new; Venture capital firms have developed specialized theses around this type of large movements.
A recent McKinsey report suggests that “investments in climate technology continue to rise, defying the headwinds that affected most capital markets.”
Both to the venture capitalists as the founders love to talk about how they want to make the world a better place. That's lovely and may even be true for some of them. But make no mistake: venture capital is an asset class like any other, and general partners have a fiduciary responsibility to their limited partners. Everyone can agree that it's wonderful to improve the world, but unless investors start seeing a return on their investments, that source of investment quickly dwindles to a trickle.
If all this sounds like a revolution in investment in "green technology" for a few years, it is not wrong. But climate tech is likely to fall into the same traps as VC. The green technology wave of the “Inconvenient Truth” era came to a spectacular and crashing halt. Between 2006 and 2011, venture capitalists spent more than $25 billion funding cleantech and They lost more than half of their investment, according to research from the MIT Energy Initiative. The research concluded that venture capital is the wrong way to address the challenges of climate change, soberly noting that “more than 90 percent of cleantech companies funded after 2007 ultimately did not return even the initial capital invested.” .
For an asset class that lost $25 billion a decade ago, something significant has to change for venture capital to invest more than $40 billion in the same vertical again.
It may not be a case of VCs not having learned their lesson: investors have not become less sophisticated over the past decade. That's true for both the GPs who run venture capital firms and the LPs who invest in them.
But something else happened: The event horizon for when we can expect to end up in boiling water (literally) when it comes to climate has gotten much closer. In a desperate attempt to keep this pale blue dot of ours habitable, UN sustainability goals set for 2050, with a midpoint of milestones set for 2030.
2030 is only seven years away. For context, seven years ago, the top-grossing films included “Deadpool,” “The Girl on the Train” and “Doctor Strange.” Top-selling singles included Adele's "Hello" and DNCE's "Cake by the Ocean." What I want to say is that I remember those movies and songs well. In the scheme of things, 2016 doesn't seem like that long ago.
Much more importantly, that 2030 deadline is now within a 10-year funding cycle. That means something predictable is going to happen: Huge changes in transportation, energy generation, industry and manufacturing, the ways we live and the ways we grow our food.
The fact that all these changes are happening right now produces mixed emotions: on the one hand, it opens up a huge opportunity for startups that want to do good and do it well. That's great for the startup ecosystem. It's also great for the startup ecosystem: funding is pouring into climate tech at an unprecedented pace. That could mean we'll see huge improvements in technologies and applications in an effort to prevent the planet from slowly fading into space.
But on the other hand, the 10-year pause in the development of climate technology startups because the first wave of green technology failed to generate returns is very worrying. It's a reminder that we are in such tight capitalist control that even though it's been very clear for years that climate change is getting more serious every day, very few startups were able to grow and prosper in this space to try to build technologies. What to be scared of? When climate change falls into the venture capital funding cycle, it means the market agrees that we are spectacularly close to a climate disaster.
Venture capital returning to the fold is a good thing, but it also serves as a reminder that, as an asset class, it is poorly positioned to help deal with problems that are less pressing than a couple of presidential terms. That also means that startups, which often rely heavily on venture capital funding, are the wrong vehicle for long-term thinking.
Here's to hoping that we can make a dent in this climate crisis in the next seven years, and that many of the startup founders (and the VCs who fund them, and the LPs who fund them) become filthy rich as a side effect of saving us. And it's still a real shame that the motivation of giant bags of cash is the only way to get things done.
