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In 2011, Marc Andreessen famously wrote that “software is eating the world,” predicting that software companies would disrupt nearly every industry. His prescient projection has held true over the past decade. Software has had a widespread 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’s not a panacea for society’s biggest challenges, including the largest of all: The current climate crisis. Software alone will never solve the myriad of issues contributing to the dire state of our planet. Hardware solutions and engineering-led innovations in the deep tech space will enable some of the most significant climate action.
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 earth-changing climate solutions are close to commercialization. Here’s a look at how the deep tech ecosystem can rise to the occasion to solve our greatest collective challenge.
Going deep-tech on climate
It isn’t easy to overstate the crucial importance of deep tech in accelerating solutions for global decarbonization and renewable energy. Much of the carbon-capture and clean energy tech coming to market now is hardware products with deep tech innovations. We’re seeing companies develop new ways to extract lithium from brines to power EVs, turning fast carbon to slow carbon with ocean buoys, and even injecting captured CO2 into concrete to permanently store it there.
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Perhaps not surprisingly for a fund concentrating on deep tech, one of our firm’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 powering that could make electronic vehicles financially viable for the first time in markets such as India.
As you look at these technological advances, there is little doubt that to overcome the numerous challenges threatening our planet, both the public and private sectors need to look towards climate solutions that include both atoms and bits. But the question remains, what role precisely can the VC community play in seeding deep-tech climate change disruption?
Shifting from a shallow mindset to a deep one
As Andreeson’s software prediction has played out in nearly every corner of the business world, software investments have well outpaced capital committed within Silicon Valley and beyond to hardware innovations that initially gave the mecca of technology its name.
Similarly, in climate tech, many of the first investments we saw in this latest wave of climate innovation were focused on software or platform-based climate tech startups providing services ranging from climate risk ratings to carbon accounting. But if investors are serious about cutting emissions, they must also be investing in some of the novel technologies mentioned above. That’s not to say that measuring and analyzing climate risks using the latest software advances isn’t essential for climate adaptation and resilience. But on the other hand, there are some software innovations, such as APIs that tout the carbon offset of consumer products, that aren’t going to have a meaningful climate impact.
That’s why we need a dedicated focus on solving deep tech-related physics and chemistry problems that allow us to remove carbon from the atmosphere or lower emissions. If not, there is no hope for climate change mitigation. Beyond going deep, we must also go broad to solve the large and complex climate challenges.
For example, sectors like mobility and transport have attracted 46% of climate tech investment, but they only account for 16% of global emissions. In contrast, areas like the built environment sector — which accounts for an estimated 17% of global emissions — have received only 5% of funding. These areas are ripe for deep tech disruption, and the VC community must broaden its view of investable climate areas.
Dispelling deep tech myths
We must also address some deep-lying deep tech myths along the way. The first is that you can’t build large companies in deep tech. Based on the last decade, many believe that unicorns and 10X exits can only be found in software. To help illustrate how this is simply false, the team at MFV Partners recently compiled a list of deep tech companies that have passed $1 billion in valuation and found about 120 recent unicorns in deep tech with a combined value of $463 billion. That’s right, nearly half a trillion dollars of value has already been created in deep tech.
Another myth is that deep tech companies require loads of capital and take forever to become large assets. To help bust this myth, our team analyzed the recent deep tech unicorns to understand how much money they took to get to unicorn valuation. The results reinforced what we knew from our experience: that deep tech startups’ capital and time requirements are on par with those of other sectors. In fact, the median deep tech unicorn took $115 million of capital and 5.2 years to get there.
The deep tech sector has seen impressive growth over the last few years, with global investment in the space quadrupling in recent years, rising from $15 billion in 2016 to $60 billion in 2020. But with today’s large and complex challenges, there will likely be plenty of upsides ahead for deep tech in addressing society’s most pressing issue — regardless of whether the economy is booming or slowing.
Preparing for slightly longer but more impactful takeoffs
Scaling any startup is a challenge. These challenges are heightened in the climate tech sector, and specifically for those focused on deep tech solutions. We saw this with Cleantech 1.0, where one of the most significant issues was that VCs could not scale hard tech as cheaply and quickly as they could software.
Hardware solutions require significant investments in building a team, manufacturing capabilities, inventory and distribution. As a result, many deep tech climate companies require more capital investment upfront and over a longer horizon than their software-based counterparts. And while investors must have longer-term thinking regarding runways, they don’t need a super long-term view on exits. Some of the most impactful climate companies of our generation will have successful exits within the next five years.
This is an important point to make as we deal with the current market headwinds and trepidation about a possible recession. Investors are often quick to move away from capital-intensive startups during downturns. That certainly happened when the first cleantech bubble burst and those that didn’t exit the space completely shifted their focus from things such as solar to capital-light software startups in the sector. This would be a troubling short-term view to adopt when tackling a climate crisis that needs immediate attention as our planet’s clock continues to tick.
Whether or not you agree with modeling that suggests full-on climate catastrophe in the next 10 years, the fact is there is no time to waste when it comes to deploying deep tech solutions that have real impact and can reverse or mitigate issues threatening the global climate. With that in mind, founders and investors must focus on solutions that can be commercialized in the near term and make a significant impact sooner rather than later.
Karthee Madasamy is founder and Managing Partner at MFV Partners.
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