Climate Science and Policy

As per the Intergovernmental Panel on Climate Change’s (IPCC) Sixth Assessment Report, in order to achieve our net-zero ambitions, we require a step change in technology innovation(1). While we have made notable progress in developing climate technologies to mitigate a substantial portion of our emissions, a recent International Energy Agency (IEA) analysis assessed the market readiness of 400 different technologies that will be needed to reach net-zero emissions by 2050 and found that only about half of the technologies are available in the market today(2). According to PricewaterhouseCoopers (PwC), climate technology or ‘Climate Tech’ is defined as technologies that are explicitly focused on reducing greenhouse gas emissions, or addressing the impacts of global warming(3). Climate Tech solutions include software not only hardware, as well as business model innovation and industrial processes which can be different from or overlap with both hardware and software. This is the broad definition that will be used throughout this guidebook.

Both governments and the private sector have critical roles to play in ensuring investment in clean and sustainable energy innovation to scale up these promising solutions. Scaling climate technologies will require funding sources that encourage innovation, large outcomes, risk-taking, rapid iteration, and market disruption. In the early stages, startups and venture capital (VC) investment will be fundamental to finding and growing companies best placed to commercialize breakthrough solutions to the climate crisis’ most challenging problems. Over the past 50 years, VC- funded businesses have been a vital source of transformative inventions, from the smartphone to gene sequencing and vaccines. However, while the investments and timelines for the drug development cycle are also risky and lengthy like many climate innovations, the difference is that at least the process for drug discovery has various value-accretive steps that are clear and standardized. On the other hand, funding remains one of the major barriers to replicating this cycle of innovation in the climate technology space.

While founders in other sectors have often cited some of their foremost challenges as the strength of their business model, finding a real problem, or recruiting, although Climate Tech entrepreneurs do also face these challenges, it appears that securing funding is the largest obstacle. In fact, in a recent report by Endeavor Insight titled “Scaling Climate Tech: A Global Study of Entrepreneurs and Networks” interviewed founders cited access to capital as the greatest challenge hindering their progress(4). Furthermore, climate solutions often require long-term, high-risk capital in both very large and very small investment sizes, sometimes making them unsuited to traditional venture capital. This funding gap is also particularly perceptible at the scaleup or growth stage of a company’s development where a startup has matured into an established entity seeking to foster widespread adoption of its products or services.

This body of work is primarily intended for graduate and postdoctoral students, focused on climate solutions, who may be considering commercializing their research but are not sure how to go about it. The guidebook aims to help the reader prepare a financial strategy to shift across the Climate Tech Valleys of Death. According to the Clean Energy Finance Forum, VCs sometimes refer to the “Valleys of Death” for startups, meaning the periods during which companies burn through funding (or have insufficient capital pre-commercialization) as they begin operations but have yet to turn a profit and where risk, challenges, and capital needs shift(5). This concept is particularly descriptive for Climate Tech because of the large amounts of capital that certain decarbonization technologies require. Despite this intended focus on academic founders, more seasoned entrepreneurs can also derive value from this guidebook as they contemplate sources of funding beyond VC and how some of their peers have navigated the financing of growth in the latter Valleys of Death.

This guidebook sets forward to achieve this aim by demystifying the funding options available to Climate Tech entrepreneurs (formally known as the Climate Tech capital stack). A capital stack is the structure of all capital that is invested into a company. At a high level, this includes cash awards (such as grants and stipends), equity (selling a portion of the company’s ownership), debt (borrowing), and milestone-based payments. The guidebook will address: i) what type of capital Climate Tech businesses can raise (and how to tap each source of capital), ii) at what stage in their business evolution (or Valley of Death) should they access each type of funding (distinguishing between hard tech and software), and iii) who to raise the funding from (and why venture capital is not for everyone).