Killing Me Softly with Data; Let’s Talk Software and Climate Tech

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“Climate tech” investing is currently a small but quickly expanding market. In order to transform the economy that humanity has built over the last 200 years into one that is decarbonized and sustainable, the world will need to spend a tremendous amount of capital. If we are to achieve this in the next 30 years an estimated $56tn will need to be spent by 2050, with an average annual expenditure of $1.9tn. Hope is on the horizon, as the climate venture segment grew 5x the overall growth rate of venture capital from 2013–2019, although it made up only 6% of the total in that last year. From the start of 2021 through the first half of 22, 78 new venture and growth equity funds, totaling $37bn have been announced, according to ClimateTech VC. Of these 78, 6 are growth equity.

While the climate tech market was already expanding due to the tailwinds of green energy and sustainable infrastructure revolution, multiple developments are accelerating its growth. Particularly, the Russian invasion of Ukraine and the consequent wide-sweeping energy insecurity in Europe, combined with global inflation and ongoing supply chain disruption, have driven the desire for national and regional energy independence and a deepening in the need for technologies promoting energy efficiency and access. These macro tailwinds all contribute to the shared interest in developing climate technologies quickly, whether the goal is decarbonization or purely energy security (where possible, from more sustainable sources).

Climate tech has leaned towards hardware in previous years, in part due to the need for the physical infrastructure for decarbonization. While this need is still pressing, there is a growing opportunity to invest in the software side. Innovations from the earlier years of the climate space — often dubbed “Cleantech 1.0” — have now reached a point where the engineering for the hardware has been achieved, but additional innovation is required to deploy them effectively at mass scale. As such, FWP sees software-focused strategies as the natural starting point in climate tech for experienced growth technology investors, with higher replicability and similarity to non-climate focused software investments (allowing new teams to jump into this sub-theme quickly) than would be found in hardware, which tends to be highly differentiated sector-by-sector (thus requiring specialists).

Take solar panels, for example. A figurehead of Cleantech 1.0, solar panels became quickly commoditized — much to the chagrin of early investors — which resulted in their hard costs decreasing over the last decade by 64%, 69%, and 82% for residential, commercial-rooftop, and utility-scale PV systems, respectively. However, soft costs remain a large and persistent portion of installation costs for both solar and storage systems, and especially for commercial and residential systems. Software is key for bringing down these costs to allow for greater adoption. In addition, a critical constraint for replacing a fossil-fuel based energy system with a renewables based on is current grid infrastructure. Renewables, due to their intermittency, require a decentralized, intelligent grid rather than the centralized, fragmented existing grid. Software again will be instrumental in this transformation. The bulk of climate tech investors FWP has identified have a focus on hardware (71%), while fewer explicitly have a software component (47%). Only 37% cover both. Most climate tech unicorns — some estimates at 80% — integrate both hardware and software, indicating a strong market appetite for these businesses. On behalf of our clients, FWP continues the search for the best opportunities within this growing space.

Madelyn O’Farrell, Investment Analyst

Devastating floods in Pakistan which have so far displaced 33 million people and killed 1,400+, alongside record droughts across the world, from Europe, the US, China, and more, are driving increased focus on climate solutions.

Another tailwind for climate and climate software specifically is the growing number of tech workers looking to pivot to the space. Networking and employment platforms such as Work on Climate, which helps traditional tech workers find new jobs in climate tech and build climate companies, and Climatebase, a climate tech job-discovery platform, are growing in popularity. The latter has seen over 600k users since inception. Yesterday, Climate Draft announced the next round of its “draft”, a process by which it connects top tech talent with fast-growing climate tech startups. The first draft, led last October, was an invite-only network of participants that spans approximately 140 companies, 30 venture capital firms and 200 senior leaders from companies like Google, Apple and Meta, as well as an over 1,000 person waitlist.

If you’re interested in learning more about the existing climate tech unicorns taking the lead in the market, check out this list.

This newsletter is intended solely for informational purposes, and should not be construed as investment/trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any reproduction or distribution of this document, in whole or in part, or the disclosure of its contents, without the prior written consent of Flat World Partners is prohibited

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This newsletter is intended solely for informational purposes, and should not be construed as investment/trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned. Any reproduction or distribution of this document, in whole or in part, or the disclosure of its contents, without the prior written consent of Flat World Partners is prohibited

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