Jim Adler, founder and general partner of Toyota Ventures, worries that advances in climate technology could fall into a “valley of death” if companies can't generate enough demand to survive.
No wonder he's worried.
Climate technology investment in the first half of 2024 declined for the second consecutive year in both total investment volume and deal volume, as investors shy away from funding capital-intensive, high-risk ventures with no clear path to market.
One way climate tech can secure demand is through forward contracts, where a customer commits to buy an agreed-upon amount of a product by a specified date at a specified price, Adler said at a Climate Week NYC event on Tuesday.
“I love that because it gives investors a drive to invest to meet that deadline,” Adler told TechCrunch. “We make early-stage investments that give us a peek into the future. Once we know there are customers, we and other investors will invest early because we know we're investing for something.”
Toyota Ventures founder Jim Adler speaks at a Climate Week event in New York. Image courtesy of Toyota Ventures
During a presentation to a crowd of about 75 people in Midtown Manhattan, Adler explained that historically, disruptive technologies – from railroads to oil pipelines to electricity – have only been able to scale once adoption rates hit a tipping point of 10% to 20%.
Even if there is enough supply and innovation in each sector, if that level isn't reached, “the dynamics of capitalism don't work,” Adler said.
“Without demand, the technology dies,” he continued. “Capitalism is the vehicle for scaling these technologies, but if the customers don't come, it's all for nothing. So how do we help the customers come?”
It's a particularly prescient question given that growth-stage deals in climate-related technologies fell 33% year-over-year in the first half of the year, according to a CTVC report, stifling growth for smaller companies that are proving their technology and need additional capital to scale.
Adler said growth-stage investors won't invest without clear demand signals from customers, such as futures contracts.
So how do startups get customers to enter into such agreements? One way is to push for government mandates.
Take Revel, a startup that started as an electric moped-sharing company and now aims to build EV charging infrastructure. While organic demand for Revel's charging service appears low right now (driven mostly by Revel's own small ride-hailing service), states like California and New York are mandating that all new car sales be electric by 2035, providing a much-needed demand signal for investors. Revel has raised about $270 million, according to PitchBook data, with big names like BlackRock leading the startup's funding.
Adler said he expects low-carbon fuels like hydrogen to hold their own in securing future demand: “If hydrogen sells for $2 a kilogram, adoption could accelerate sharply,” he said.
“Investors can invest knowing that there will eventually be some volume of customers,” Adler said. “That's a really big deal. I think we should all be a little concerned if this doesn't happen.”