#1 - Why Cleantech 1.0 Died

And why Climate Tech is different and may be here to stay

Introduction

I’m Leonardo - but everyone calls me Leo - and this is Next Ascent, a solution-oriented newsletter about climate change and the technologies to help tackle it. Not a mountain climbing reference, Next Ascent is a hat tip to one of my favorite TV series called the The Ascent of Man by mathematician and science historian Jacob Bronowski.

The Ascent of Man got me into science at an early age and tracks the development of technology from neanderthal times to the modern era. This blog is named the Next Ascent because it refers to the next journey we must take as a species to transition to modern, sustainable systems away from the fossil-fuel based path which brought us here.

As a Partner at an early-stage venture capital fund, Global Founders Capital, I spearhead our investments in climate tech globally. I’ve had the privilege and adventure of working in climate since 2006 and because I’ve got an unusual background for someone in VC – having a technical engineering background and business experience from consulting – I hope we can spend time here together exploring topics that are not yet covered widely and digging into why these ideas matter.

Today’s climate tech wave offers the opportunity to do well while doing good. There is a massive, multi-trillion-dollar commercial potential to transform every global industrial vertical green (I’ll cover the opportunity set in my next post). Talent is flocking to this space like never before, and my aim is for this blog to provide a useful 101 and sometimes 201/301 to people looking to leap in and make a difference. If I can inspire even a few more folks to apply their talents to the climate fight, this blog will have been worth it.

How I got to green investing

Below I share a bit about who I am, but you can skip this section if you want to get to the content.

I developed a passion for sustainable tech over 15 years ago growing up in an unsustainable city – Las Vegas, Nevada – the city of sin & and mainly coal and natural gas electricity generation since the early 2000s (Exhibit 1). Back then I wondered why we weren’t using more solar energy when our days were filled with such strong sun.

To learn more and dig into the problem, I started my climate journey as a mechanical engineering undergrad in 2006 doing on-campus solar research on concentrated photovoltaics (anyone remember Amonix?). Since then, I spent time at the Department of Energy’s Office of Energy Efficiency and Renewable Energy (EERE), did research at two US National Labs on cleantech commercialization, earned an MS & PhD in Mechanical Engineering with a focus on Thermofluids, spent a few months as a product manager at an early-stage desalination startup, and lastly spent nearly 5 years in the sustainability practice of a global consultancy.

Exhibit 1 – Growing up in a coal and natural gas-powered state while surrounded by some of the world’s best solar resources compelled me into a climate career. With respect to my home-state of NV: How in the world are we still over 50% natural gas powered in 2022? Perhaps a topic for a future post. (Source NYT and EIA)

During my journey, I saw cleantech 1.0 rise and fall, and many times was tempted to go into general tech thinking the world would never care about the exciting green technologies that have the power to decarbonize our planet. Luckily, a new climate wave started a few years ago and nearly every morning I’m grateful and flat out chuffed to apply my learnings to support early-stage climate tech ventures succeed.

So why did the first movement die and what is driving today’s wave? While much has been written on this topic, I wanted to start this blog with my own perspectives.

R.I.P. Cleantech 1.0

Close your eyes and let your mind harken back to a time when large sums of capital flowed into solar manufacturing startups like Solyndra, compressed air energy storage ventures like Lightsail, concentrated solar power outfits like Brightsource, and battery swapping networks like Better Place. Sure, cleantech 1.0 had some winners such as Tesla, Sunrun, and Enphase, but not far behind the winners are a graveyard of failed battery chemistry, solar energy, hydrogen, algae biofuel, and transportation electrification startups. So what killed the movement?

Cleantech 1.0 lasted from 2006-11 and lost nearly $25B of mostly venture capital for a few reasons:

⚙️Unproven tech – Solar and batteries were too early and too expensive. Solar PV (photovoltaics) dominated and dropped costs by 80% in the period that followed, which wiped out value in other technologies like thin-film, concentrated PV, and concentrated solar power (e.g., Solyndra, Amonix, Brightsource).

🛑 Lack of exits – Approaching 2011, several O&G majors paused renewable investments, utilities were risk-averse to work with new tech, and private capital was nervous and constrained following the 2008 crash.

📉 Financial Crisis – The global financial crisis of 2008 partially drove cleantech 1.0 busts by shining light on pre-2009 bubble-like valuations.

🛢️Fracking – The combination of horizontal drilling and hydraulic fracturing was a tech unlock that materially reduced the cost of methane-based gas and power, increasing competition against renewables by becoming a cheaper source of energy.

Birth of Climate Tech

Starting around 2018, both structural and catalytic factors began pushing the climate wave to take off. Presumably to both create distance from cleantech 1.0 and to acknowledge that this moment addresses a larger set of tech solutions, this wave is called climate tech and not cleantech 2.0 (I was corrected two years ago and haven’t looked back since!).

Here is why this time is different - and why this wave will (hopefully) last.

Structural factors

🔋Proven tech – Risky bets still exist for some tech, but solar, wind, storage, and electric vehicles have been proven and are scaling due to unprecedented cost reductions. In particular solar experienced dramatic, underestimated cost-downs (Exhibit 2) and is now the cheapest form of power humans have ever created at ~2-5 cents/kWh for intermittent solar PV compared to ~4-7 cents/kWh for baseload gas combined cycle power.

Cheap renewables have enabled utility-scale clean power and they’re also key to unlocking previously too-expensive approaches which rely on green electricity such as e-fuels and e-chemicals like sustainable aviation fuel and green ammonia, green hydrogen, long duration heat energy storage, and some green industrial commodities such as steel.

Digital technologies such as AI/ML and internet of things (IoT) have also improved to allow for greater execution/efficiency gains.

🌏 Demand for solutions – Increasing pressure from regulators, consumers, and investors are helping create a market for decarbonization products.

🚀 Better exits – Corporates are hungry for green solutions given external pressures and there is a material and growing amount of capital ear-marked for ESG and climate purposes.

⛽ Gas prices – Gas prices are rising, boosting growth for increasingly cheap renewables and alternative fuels.

Exhibit 2 – The cost of solar PV experienced dramatic cost downs of 99% over the past four decades. Furthermore, the cost trajectories were consistently underestimated by forecasting organizations such as the International Energy Agency (IEA) as shown above

Catalytic factors

With structural factors in place, a few catalysts helped add green fuel to the fire:

🎤 Greta – Strong hat tip to Greta Thunberg, the courageous young Swedish student who spoke truth to slow-moving, double-speaking power. "‘Net-zero by 2050, blah blah blah.’ This is all we hear from our so-called leaders – words."

🦠 COVID – The pandemic caused many of us to look inwards at our relationship with nature and provided a rare opportunity for a sustainable reboot as many economies were shut down. In my consulting days, we advised several regional leaders in the US and EU on “green restart” programs and policies.

✒️ Gates and Fink – Bill Gates’ writings on climate tech and investing through Gates Ventures and early Breakthrough Energy Ventures bets helped spur excitement in the space. While not the first to discuss stakeholder capitalism, Larry Fink’s shareholder letters helped reignite the conversation on how businesses can create returns for stakeholders - not just shareholders - and make a difference for the climate. Let’s temporarily leave aside the work which Blackrock and other asset managers have ahead for their organizations.

🪖 Ukraine war – The climate tech wave was well on its way by the time Russia invaded Ukraine, but the threat to and eventual loss of cheap Russian methane pushed the EU to consider accelerating renewables and fission (and unfortunately coal and natural gas as well).

📃 Inflation Reduction Act (IRA) – With generous tax credits for a host of technologies and green commodities from green hydrogen and sustainable aviation fuel to carbon removal and the extension of the solar investment tax credit (ITC), the IRA added nitrous oxide to the climate tech wave in the US. This is attracting even more capital — and generating more excitement — into the space than ever before and has the potential to make the US a world leader in climate tech commercialization.

What’s next for this blog

Next up, we’ll explore some of the investment areas which I find most exciting in climate tech and the role for venture capital vs. private equity / infrastructure funding in these areas. The next few blogs will also cover:

• a high-level 101 on climate math

• my guideposts on best technical pathways for making or separating things

• concepts such as economies of scale vs. number

• why I think water is a challenging space for venture capital

• my thoughts on nuclear fusion

Lastly, I’ll also continue using emojis because they comfortingly remind me of the icon gallery from my consulting days 👔

Thanks for reading and feel free to reach out to to me on LinkedIn with questions/comments (linkedin.com/in/leobanchik).

Also feel free to let me know - what else should we be talking about?