What does it take for a startup to have an impact on climate change?
According to the new report, the most promising candidates tend to be hardware startups that have spent years developing and proving their technology, and also have an advantage because they specialize in energy or raw materials.
The report, published by Congruent Ventures and Silicon Valley Bank, surveyed more than 50 experts from academia, finance and the private sector to compile a list of 50 North American companies across four categories: agriculture and food, energy, buildings and mobility, and manufacturing and materials.
Of the 50 finalists, the majority are manufacturing and materials startups (18), followed by energy startups (13). Agriculture and food were under-represented despite accounting for roughly a third of carbon emissions, suggesting there is still plenty of room for new founders and investors in this sector. Most of the startups are hardware-focused, bucking the trend of most generalist VCs to favor software.
It may not be so surprising that most of the promising climate tech startups are hardware companies. Climate change is a real-world problem. Software can only make so much difference to how people interact with the physical world. If the hardware is still dependent on fossil fuels, software will only just get by.
The average startup in the report is seven years old and has raised $374 million. The latter figure is skewed by some particularly well-funded startups, including Commonwealth Fusion Systems, Impossible Foods, Redwood Materials, Sila, and TerraPower, which have raised more than $1 billion each. The median company, however, is a bit different, having been founded six years ago and raising $114 million.
The split between the mean and median is reflected in the fact that the majority of companies on the list are on either side of the so-called commercialization valley of death. Early-stage climate tech startups may be successful in proving that their technology works, but once they embark on commercialization, the costs of a first facility are often far more than many investors can afford. The Congruent/SVB report found that 28% of companies have raised less than $50 million in funding, while the same percentage have raised more than $500 million. In other words, if a company manages to cross the valley, investors often reward them for it.
It's no wonder that the typical company on this list has been around for nearly a decade. Early-stage climate tech startups need to prove their foundational science, which is a lengthy process. After that, it can take years to build and refine the hardware. As a result, climate tech startups can take longer to mature than traditional software startups.
For investors who aren't specialized in climate issues, making long-term, expensive bets on risky hardware startups may be hard to stomach. But the potential payoffs are big: A McKinsey partner recently noted that the climate tech market is already $1 trillion and is expected to double every decade. As the threat of climate change looms, the companies most committed to reducing emissions could grab a sizable chunk of that market, and their investors stand to benefit.