A Crash Course in Climate Finance #1

Part 1: Venture Capital

The role that venture capital will play in developing early-stage clean energy technologies is likely to mirror its scale in developing AI, internet companies, and social media platforms. While many of the hallmarks of VC remain the same, including long-shot bets, radical new technologies, and high potential returns, many of the challenges are new. The range of possible investments under the cleantech umbrella, from green cement to long-duration energy storage to energy efficiency software, means venture firms often need an equally varied set of expertise.

Despite challenges, a Forbes report shows an 11% increase in investment in the energy transition in 2024, bringing the total to a record $2.1 trillion. Venture capital is already playing a crucial role in both funding and supporting companies across clean energy, electrification, and energy storage. Despite policy headwinds in recent years, the growth of cleantech companies suggests long-term venture capital investment will likely increase. While 2024 may have been a step in the wrong direction for climate funding, as venture capital investment in the industry fell by 16%, total investment still exceeded $600 billion.

The overall goal of virtually every VC firm involved in climate tech is two-fold: fostering the green transition and achieving traditional returns for the industry. This first point was emphasized during a conversation with Louis Schick, Director of Investments at Clean Energy Ventures. He explained how venture funds can maximize impact by investing in start-ups with incredibly ambitious impact goals. Clean Energy Ventures, which recently raised a fund, is seeking companies with the potential to deliver gigatons of emissions reductions. As he explained, this means passing on many viable and important clean energy innovations in pursuit of the technology with the highest potential capacity.

In virtually every discussion with both a founder who has raised capital through a venture fund and a partner or investor in one, one crucial lesson emerged. There needs to be a seemingly perfect fit between investor and start-up, and it is worth searching high and low to find it. This point was made most clearly during a conversation with Anna Sorokina, who has a rather unique perspective. Sorokina, who has been raising capital for her start-up, SolidSky, also worked at venture funds analyzing investment opportunities. From her work at a hard-tech start-up, she understood that partnering with a firm that understood its technology was critical. In order to reap the benefits of venture funds outside of just capital, such as technical and business advice, the fund partners need to be able to both understand and potentially improve their technology.

Along with capital, one of the benefits clean energy entrepreneurs seek in a VC match is access to diverse areas of expertise. Especially for deep-tech start-ups, the ability to discuss complex technologies is essential. As Matthew Cohen, a Principal at Clean Energy Ventures, explained, that is why it is beneficial to have a deep technical team. The goal of the firms is not simply a check, but insight and introductions. One reason venture capital firms include both past entrepreneurs and experts, as well as PhDs across various areas of engineering and software, is to enable the firm to work across a range of technologies and industries.

This ability of firms to support beyond traditional technical skills was mentioned during a call with Shomik Dutta, co-founder and managing partner of Overture Ventures. Dutta’s past experience offers a case study in VC's bringing their past skills to bear for portfolio companies. Outside of many venture firms, traditional staff, including PhDs and technical experts, Dutta’s years in the public sector offer political insight for companies within the Overture Portfolio. In the shifting political landscape of climate tech, early-stage companies can access policy insights without hiring outside consultants.

Louis Schick further expanded on this point, explaining that it was often the aspects of running a company that founders do not anticipate that can cause trouble down the line. He offered the example of HR: often, founders are so focused on finding product-market fit that they unintentionally violate labor laws or regulations. By providing HR advisors to early-stage companies, these issues can be avoided without pausing product development.

The interest in securing venture capital for many start-ups is evident, often as pressing as payroll. My personal interest was piqued by the motivators for the supply side: what causes someone to start a venture fund. Schaffer Ochstein, who has spent several years in the venture capital market and is now developing Terraforge Capital, explained his investment thesis for maximizing impact at an early-stage fund. This included finding founders who are “talent magnets”, attracting the best people. This, coupled with writing early-stage checks to maximize impact, is meant to attract the best founders in both the pre-seed and early-seed rounds.

To cap off a two-week dive into climate VC, a morning conversation with VoLo Earth Ventures Managing Partner Joseph Goodman and COO Elaine Hsieh offered a comprehensive conclusion to my research. This was due, in part, to the clarity with which Goodman explained their goals. As he put it, expectations have been placed on these funds to achieve certain rates of return to secure the capital needed to drive greater inflows into clean energy projects. 

This is the golden rule if the green transition ever hopes to see the amount of private capital it will require to reach climate targets. As Goodman explained, “the venture capital industry still needs to prove its efficacy, its ability to make top returns…we need that larger pool of capital.” Goodman argues that demonstrating venture firms' ability to deliver high returns will translate into the higher investment required to develop and grow the industry.

There is no magic funnel that sorts start-ups into pools for where to look for capital, but if there were, I have gathered a solid idea on what the VC funnel would sort. For starters: moonshots. The biggest bets are both in the realm of possible returns and possible impact. Secondly, talented and a little bit crazy, founders. Almost every VC I spoke with emphasized that founders should hold off on taking funding until necessary, and that for many, debt financing or grants may be better. But for companies looking to move the needle toward a green economy, VCs may be your path. It is a pretty unique industry when financiers tell journalists that potential partners shouldn’t be afraid to look elsewhere, but I suppose that is because these VCs are looking for something rare. For our sake, I sure hope they find them.