Climatetech’s second wind
Xhulio Ismalaj discovers why the future for the subsector is hopeful
Batteries and microgrids. Hydrogen and biofuels. Point-of-source carbon capture and low-carbon fertilisers. This is just a taste of climatetech’s investable universe.
Some of these technologies featured in the ‘Cleantech 1.0’ boom, which started in the late 2000s. That wave, however, fell off by the early 2010s, due in part to the technological maturity of these businesses. Many renewable energies and electric vehicles were simply not at the stage economically where they could be competitively produced with what was on offer at the time.
Perhaps the main reason was that the policy environment to provide support for these businesses was not in place. The nature of many climate technologies is such that they need incentives or a compliance-based system to encourage people to use them, otherwise they are just an additional burden on top of existing conventional processes.
The most recent surge of interest in the broader climatetech space took off in late 2020, when there was an explosion in the number of climate pledges at a country, state and city level, as well as at a company level, thereby providing a market for many climate technologies.
“Five years back, impact investing was in one bucket with philanthropy. So, you do something and probably never see the money again, or maybe see it with close to zero interest rate,” says Dörte Hirschberg, general partner at Climentum Capital, a VC firm backing early-stage, hardtech companies addressing CO2 emissions.
“That has changed. Now, especially in climatetech, professional investors see that the mega trend is so strong, and so much is needed, that you can actually make money with it,” she adds.
Climentum is a case in point: it aims to achieve healthy financial returns while making a positive impact on climate. The VC’s terms are akin to a non-climate fund, maintaining, for example, carry and an 8% hurdle rate.
In climatetech, professional investors see that the mega trend is so strong, and so much is needed, that you can actually make money with it
Climatetech growth equity firm Blume Equity is similarly targeting market-rate returns with an eye on impact. “Our LPs recognise macro tailwinds are supporting the climate space and want exposure to that, because not only is it a good thing to do, but they recognise the financial market opportunity as well,” says Clare Murray, the firm’s co-founding partner.
To achieve those returns while helping the planet lower emissions through a scalable technological solution, Climentum has backed Continuum Composites Recycling, a company recycling end-of-life wind turbine blades, while Blume has invested in Dutch business Sensorfact, which develops products to allow manufacturers to monitor energy consumption.
But where else do opportunities lie? EV services continue to be popular as pressures on EV charging and grid infrastructures mount, while batteries-related opportunities have received high interest too.
With a plethora of European regulations coming in, particularly related to Scope 3 emissions, carbon accounting businesses are set to remain desirable, while the EU’s Corporate Sustainability Due Diligence Directive has seen Blume look into supply chain decarbonisation. The firm is also doing a deep dive into biodiversity as a climate risk mitigant.
Climate technologies need early funding when they still have risks. That happens at the VC level, where firms can source businesses from angel investors or government grant programmes.
With the number of ‘climatetech’ businesses around, many of which are hyped up depending on the month in the year, which do you pursue?
Justifying Climentum’s focus on more industrial businesses, Hirschberg says: “First of all, we look at the problem: we need to stop climate change. This is an atoms space. This is physics, chemistry, engineering. So, ultimately, you will need a lot of hardware. This was always our starting point: what has the biggest direct impact?”
The VC firm makes initial investments of €1-5m at the Seed+ and Series A stages, avoiding pure software businesses. “Whenever there is a good software solution in climatetech, many VCs would love to do that deal, because it’s their home turf. Generalists also always start with software. So, these rounds are crowded, valuations can be high and it can be relatively hard to differentiate as a young, new investor,” she says.
“That is very different the moment you have a more technical, hardware component that requires you to go into the chemistry or physics of whatever it is. Then, there are way fewer players. So, what we found as a new fund that wants to tackle this problem, is that it’s a way more attractive field to engage in.”
At this stage, investors look to bring their portfolio companies past their last technical risks, providing them with an appropriate manufacturing approach, their first real customers and revenues.
Holding its investments from as low as five years and up to eight, a firm like Climentum is open to multiple exit pathways, including IPO – an easier feat to achieve in Scandinavia – as well as trade sales to strategics.
A third option is selling to PE, which Hirschberg believes can work better for businesses in certain industries, such as recycling. “What you do is very replicable. If you have one recycling plant, you can build the next. There, it can also make sense to have a buy-and-build strategy and build a recycling consortium that doesn’t only recycle wind turbine blades, but also other items.”
Weighing in on one of the VC firm’s investments in green packaging, she added: “A lot will happen in this area, moving away from plastic to alternatives. And there are currently many small companies trying different things, so I'm relatively certain at some point there will be a consolidation of these businesses, and this could be run by a private equity player.”
Blume sits at the post-venture, growth equity stage, investing at a point when companies are revenue-generating, either at profitability or on a pathway to profitability, have proven product market fit and are looking to scale, usually across other European markets. The firm invests anywhere from €5-50m per business, also considering climatetech companies that have a hardware component.
“There has been a growing recognition that SaaS business models are not going to solve the climate crisis alone, so you need to be comfortable investing into hardware and product-led businesses,” says Blume’s Murray.
With more quantitative information available, a PE player operating at this level is better able to understand a company’s size, customer interest, cohorts, churn, market opportunity, cross-selling abilities and that pipeline for growth.
Like most PE firms here, value creation includes support with finance, strategy, talent and professionalisation. More common in the climatetech subsector, however, is the need to develop a robust sustainability strategy, which can comprise climate action plans and ESG reporting, as well as how to better communicate the brand’s narrative to customers, shareholders and regulators.
In the carbon accounting space, there's going to be significant consolidation in the coming years
Regarding exits, pan-European and global PE firms typically begin to show interest as climatetech companies reach profitability, especially if there is a buy-and-build play.
In carbon accounting, for instance, or in the broader ESG tools and services space, we have already seen the buy-and-build playbook occur from Carlyle with Anthesis and Ares with SLR Consulting – both of which have made a number of acquisitions and continue to build their product offering.
“In the carbon accounting space, there's going to be significant consolidation in the coming years,” says Murray. “There have been a lot of players who have popped up and, unfortunately, not many of them have been able to reach scale. A number of them are going to get acquired, potentially from traditional consulting firms who are looking to bring on the capability to assess emissions as well.”
At a level above is Nordic Capital, a buyout firm that has invested in climatetech with ticket sizes ranging between €50m and €400m.
“We avoid crazes and hype,” says Elin Ljung, managing director and head of communications and sustainability at the firm. “Our investments are based on a fundamental increase in underlying customer demand, for example, driven by a push to decarbonisation. The businesses at the ticket sizes we invest in are very stable. We wouldn't go into high-risk investments.”
In greentech, we are seeing more and more strategic buyers and impact funds that want to scale, and fund the scalability, of this type of business model
Many of the firm’s climatetech investments, too, combine both hardware and software. One of its portfolio companies, Foxway, supports clients to recycle and refurbish IT hardware, while also offering them a decarbonisation tool to track and monitor their decreasing climate emissions.
Here, value creation involves addressing customer demand, scaling up offerings, driving top sales and cost efficiency across operations, as well as introducing other productivity measures.
On exit routes, Ljung says: “Looking at Nordic Capital’s history, we have always seen a lot of strategic buyers for our assets. And in greentech, we are seeing more and more strategic buyers and impact funds that want to scale, and fund the scalability, of this type of business model.”
The managing director notes that impact funds in particular are an “interesting” exit route for the firm: “We haven't looked at these much before, but over the last three years there has been considerable expansion in this area. They are still quite new but, by definition, they look purely for investments that have products and solutions that can enable the green transition or meet some of the climate challenges. They're accelerating heavily across the world.”
In addition, there is a growing number of infrastructure funds investing in, say, solar panel installations or other types of fundamental societal infrastructure. That is an exit option too.
Overall, the macro trend in climatetech is likely to stay strong as the climate change problem will not disappear in the next few years. “Fundamentally, the younger generation, the future founders, they care about the climate and they will continue to think more about these problems than about the next pizza delivery app or so on,” says Hirschberg.
With a growing number of firms that believe that they can do both profit and purpose, more and more money has flowed into climatetech in the past couple of years, and that trend is expected to continue.
