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Climate Finance

Will there be 1000 climate tech unicorns globally in the near future?

When Larry Fink, the CEO of BlackRock, the world’s largest asset management firm with over $10 trillion under management, said (check out his talk between 3:28:25 and  3:28:50) that the next 1000 unicorns would be from climate tech, the world was stunned.

Was even one of the world’s smartest guys finally falling for hyperbole?

How the numbers currently stack up

As of mid 2022, globally there are about 50 unicorns that can be said to be pureplay climate tech. I could not find any official numbers on this, but this well compiled list from Climate Tech VC helped me arrive at the estimate.

This is against the total of about 1100 unicorns worldwide, across all sectors..

Climate tech unicorns thus constitute about 5% of the total number of unicorns.

On funding & valuation, climate tech unicorns have raised in all about $50 billion, and are together valued at about $130 billion.

The above are healthy numbers, but nothing spectacular when one considers that the total worth of the global unicorn ecosystem is about $3.85 trillion.

The total climate tech unicorn valuation is thus about 3.5% of that of the total unicorn ecosystem.

Currently, the most valuable climate tech unicorn, the Swedish battery startup Northvolt, is valued at about $12 billion.

The world’s most valuable startup (Bytedance, TikTok's parent) is alone valued at about $300 billion - more than twice the valuation of all climate tech unicorns! SpaceX (space exploration), Shein (fast fashion) & Stripe (online payment solutions) are each valued at around $100 billion. (How I wish I could include Tesla with a mouth-watering marketcap of $725 billion in the climate unicorn list, to beat these fellows black & blue!).

Some math & history

What the numbers above make clear is that climate tech is no longer the poor cousin in the startup world

But there is really little in them to indicate that it is likely to become its blue eyed boy.

So, to claim that that there could be as many climate tech unicorns as all the unicorns put together might sound super optimistic, even if we consider this to happen over a decade.

But I would request you to look at the chart in the Climate Tech VC post once again. The progress in the number of unicorn startups from 2015 and 2022 is instructive - it is multiplying by a factor of two every two years. From 1 in 2015, there are almost 10 new climate tech unicorns in 2021.

That exponential rate in itself shows that perhaps - just perhaps - the climate tech segment is reaching the tipping point and is poised for very high or even exponential growth. Exponentials can have a hard time keeping up once they reach a certain point, or they could grow even more, well, exponentially. It is a bit unclear which of the two paths the climate tech unicorn exponential belongs to, but for now at least the growth path of climate tech unicorns is quite furious.

While the math might seem encouraging, what makes investors become circumspect while evaluating the prospects of climate tech startups is their history, which has been rather patchy. 

Climate tech (called cleantech in its earlier avatar) had shown promise earlier too - about a decade ago - only to have its believers and investors completely let down. Many investors lost hundreds of millions of dollars as their bets on many hard engineering startup plays simply led to harder plays, and then died. Famed investors like Vinod Khosla had to bite the dust. Even the most powerful government (US) wasn't spared the whip.

The key reasons for their failure included the small sizes of the end use markets, unexpected challenges with many hard engineering/deep tech solutions, poor awareness on the part of investors, and a lack of pressure on the investing community to sustain investments into effective solutions.

When things started falling apart, the venture capital community simply erased cleantech from their screens - and they had so many alternative markets to go after!

If you had mentioned cleantech at the gates of a venture capital firm around this time, it is quite possible you would have been simply denied entry, leave alone allowed to meet someone.

Why climate tech 2.0 will not be 1.0

Will cleantech - climate tech, whatever - once again flatter to deceive?

I strongly believe it will not, and here are my reasons why 2022 will not be 2012 for climate tech startups.

Renewable energy has surely taken off

The world currently has almost 1.5 TW of solar and wind power capacity. That's pretty large folks - the global fossil fuel power generation capacity (coal + natural gas) is only about double that. This large base of renewables imply that climate tech startups catering to these sectors have markets at least an order of magnitude larger than what they were ten years ago.

Energy storage costs have fallen dramatically

The torch bearer for battery tech, Li-ion, has seen its costs fall from over $1000/kWh in 2010 to about $150/kWh by 2022 - that's an over 80% drop, real steep I'd say. Falling costs, resulting in enhanced scalability of batteries could take care of the real Achilles Heel of solar and wind power - their intermittence - and further accelerate their already furious growth.

Governments and industries have gotten far more serious about decarbonization

Many of the earlier versions of COP (the annual global stakeholder gathering for climate change action) used to be derided as a gathering for the world's leaders to have a bit of fun. This has changed recently, with the recent conventions trying to get more serious on the promises and deliverables by the key emitting countries. It is difficult to put a number on something like "getting seious" but if I'm asked to, I can perceive a 10X increase in seriousness amongst key stakeholders since 2010. Have politicians, bureaucrats and CEOs become 10X more saintly than what they were 10 years back? Nopes, pigs still can't fly, but these key stakeholders are finding it dramatically more difficult to ignore CO2 emissions or do greenwashing. In other words, decarbonized business and industrial operations are becoming the new normal.

Everything around us could be low carbon

This is something most people - even those who are part of the climate tech sector - do not realize. If the world has to move to Net Zero in the next few decades, most everything around us will need to be decarbonized. While this is obvious for stuff like electricity (solar, wind), heating (bio-energy..) and transport (elecric vehicles), here are some of the less obvious examples of decarbonized "products":

  • Your clothes could be made from low carbon fibers such as hemp instead of cotton
  • Almost every electrical appliance you use (AC, refrigerator, washing machine...) will be far more energy efficient that it is today
  • The doors and furnitures in your home and office could be from low-carbon, sustainably sourced wood, or recycled from older wooden products
  • A significant portion of the agriculture value chain would have turned low carbon - through solutions such as precision farming and practices such as regenerative agriculture etc.
  • Buildings worldwide are getting dramatic low carbon make-overs - through energy efficient solutions, low carbon building materials and use of distributed renewable energy such as rooftop solar

In other words, climate tech has begun to penetrate practically every part of our business and life. That's a big statement, really.

Software has started eating the world of climate tech as well, and that's a good thing

My team recently did an analysis of the 500 climate tech startups we have shortisted (under 50 decarbonization avenues) at our climate intellignce portal Clixoo and found that almost a third of them (160) had a significant digital or software component. Our analyses opened our eyes to an amazing and diverse set of value adds digital is performing in almost every decarbonization avenue. IEA estimates that digital has the potential to cut CO2 emissions by 17% by 2030 - and this is something both startups and venture capitalists are gonna love.

Close climate wakeup calls for financial capitals

If all the above won't stir the investor community to put money on hundreds of innovative climate tech startups, perhaps some close calls they had, could. In 2021, London & New York, interestingly the two key financial capitals of the world, were both hit with unprecedented flooding. What more forceful message can you think of for those who hold the global purse strings? Should such events repeat, and in many other cities and affecting powerful stakeholder ecosystems, expect all types of financial institutions to suddenly make climate tech as the highest priority sector. (Many finance sector stakeholders from banks to pension funds to large asset management firms, including Larry Fink's BlackRock, are already putting emissions reduction at top of their evaluation criteria)

Such desperation, further accentuated by clarion calls by watchdogs such as IPCC, is resulting in massive financial flows into climate action. Overall annual Investments (all types) in climate tech are in trillions of dollars every year. Estimates from firms such as McKinsey and others suggest that total climate tech investments could even inch close to $10 trillion a year for the next 30 years - that would be about 10% of global GDP.

So what is my opinion about the statement from Larry Fink?

I can go on and on - and sometimes I really do on topics such as these - but I feel enough said this time round.

Coming back to Larry Fink, it's just about possible that he was a tad tipsy when he made the 1000 climate tech unicorns comment or, much more likely, he really knew what he was talking about.

What is my opinion?

Having observed this sector for over ten years, and having seen its progression from close quarters in the last five, if you gave me only one choice for the question: "Will, or will not, there be 1000 climate tech unicorns by 2030?", I’d choose the former.

All questions at ASK Narsi