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In 2011, Marc Andreessen wrote that “software is eating the world”, predicting that software companies would disrupt nearly every industry. His prescient projection has proven true over the past decade. Software has had a pervasive impact, ushering in dramatic efficiencies in business, transforming healthcare, and introducing countless conveniences into our daily lives.
However, while software has provided undeniable benefits, it is not a panacea for society’s greatest challenges, including the biggest of them all: the current climate crisis. Software alone will never solve the myriad of problems that contribute to the dire state of our planet. Hardware solutions and engineering-driven innovations in deep technology will enable some of the most important climate actions.
The most exciting aspect of today’s deep tech climate innovations is that they are no longer science fiction or research experiments. Many of the most game-changing climate solutions are close to commercialization. Here’s a look at how the deep tech ecosystem can seize the opportunity to solve our greatest collective challenge.
Switch to deep climate technology
It is not easy to overstate the critical importance of deep technology in accelerating solutions for global decarbonization and renewable energy. Much of the carbon capture and clean energy technologies coming to market are hardware products with deep technological innovations. We see companies developing new ways to extract lithium from brines to power electric vehicles, turn fast carbon into slow carbon with ocean buoys, and even inject captured CO2 into concrete for permanent storage.
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It’s perhaps unsurprising for a fund focusing on deep tech that one of our company’s first investments in the market was focused on hardware in the form of advanced lithium-ion batteries developed by Sun Mobility. . These swappable batteries enable “pay-as-you-go” EV power that could make e-vehicles financially viable for the first time in markets such as India.
In view of these technological advances, there is no doubt that to overcome the many challenges that threaten our planet, the public and private sectors must turn to climate solutions that include both atoms and parts. But the question remains, what precise role can the VC community play in seeding the climate change disruption of deep technologies?
Moving from a superficial state of mind to a deep state of mind
While Andreeson’s software prediction has played out in nearly every corner of the business world, software investments have far exceeded committed capital in Silicon Valley and beyond for the hardware innovations that initially gave the company its name. Mecca of technology.
Similarly, in climate tech, many of the early investments we’ve seen in this latest wave of climate innovation were focused on software or climate tech startup platforms providing services ranging from climate risks to carbon accounting. But if investors are serious about reducing emissions, they must also invest in some of the new technologies mentioned above. That’s not to say that measuring and analyzing climate risk using the latest software advancements isn’t essential for climate adaptation and resilience. But on the other hand, some software innovations, such as APIs that tout carbon offsetting of consumer products, won’t have a significant climate impact.
That’s why we need to focus on solving deep technology physics and chemistry problems that allow us to remove carbon from the atmosphere or reduce emissions. Otherwise, there is no hope of climate change mitigation. Beyond going deep, we also need to go deeper to solve broad and complex climate challenges.
For example, sectors like mobility and transportation attracted 46% of climate technology investment, but they only account for 16% of global emissions. In contrast, areas such as the built environment sector – which accounts for around 17% of global emissions – received only 5% of funding. These zones are ripe for deep technological disruption, and the venture capital community needs to broaden its view of investable climate zones.
Dispelling Deep Tech Myths
We also need to address some deep tech deep myths along the way. The first is that you can’t build big deep tech companies. Based on the past decade, many believe that unicorns and 10X releases can only be found in software. To help illustrate how simply wrong this is, the team at MFV Partners recently compiled a list deep tech companies that topped $1 billion in valuation and found about 120 recent deep tech unicorns with a combined value of $463 billion. That’s right, nearly half a trillion dollars worth of value has already been created in deep tech.
Another myth is that deep tech companies need a lot of capital and take forever to become big assets. To help bust this myth, our team analyzed recent deep tech unicorns to understand how much money it took them to get to unicorn valuation. The results reinforced what we knew from our experience: that the capital and time requirements of deep tech startups are comparable to those of other sectors. In fact, the middle deep tech unicorn took $115 million in capital and 5.2 years to get there.
The deep tech sector has seen impressive growth in recent years, with global investment in space quadrupling in recent years, from $15 billion in 2016 to $60 billion in 2020. But with the challenges large and complex today, there are likely to be many benefits ahead for deep technology to solve society’s most pressing problem, whether the economy is booming or slowing.
Prepare for slightly longer but more impactful takeoffs
Scaling any startup is a challenge. These challenges are accentuated in the climate technology sector, and particularly for those that focus on deep technology solutions. We saw this with Cleantech 1.0, where one of the biggest issues was that VCs couldn’t scale hard tech as quickly and cheaply as software.
Hardware solutions require significant investments in team building, manufacturing capabilities, inventory, and distribution. As a result, many deep climate technology companies require more capital investment up front and over a longer horizon than their software-based counterparts. And while investors need to think longer-term about leads, they don’t need a very long-term view about exits. Some of the most influential climate companies of our generation will see successful exits over the next five years.
This is an important point to make as we face the current market headwinds and fears of a possible recession. Investors are often quick to shy away from capital-intensive startups during downturns. It certainly happened when the first cleantech bubble burst and those who didn’t leave the space completely shifted their focus from things like solar to low-cap software startups in the sector. . It would be a troubling short-term view to take to address a climate crisis that requires immediate attention as our planet’s clock continues to tick.
Whether or not you agree with the modeling that suggests total climate catastrophe within the next 10 years, the fact is there’s no time to waste when it comes to deploying deep tech solutions. that have a real impact and can reverse or alleviate the problems threatening the world. climate. With that in mind, founders and investors should focus on solutions that can be brought to market in the short term and have a meaningful impact sooner rather than later.
Karthee Madasamy is Founder and Managing Partner at MFV Partners.
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