Software will not solve the climate crisis: in-depth technical investments are needed

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In 2011, Marc Andreessen famously wrote that “software eats the worldpredicting that software companies would disrupt nearly every industry. His prescient projection has come true over the past decade. Software has had a widespread impact, driving dramatic efficiencies in business, transforming healthcare and introducing countless conveniences into our daily lives.

While software has delivered undeniable benefits, it is not a panacea for society’s greatest challenges, including the biggest: the current climate crisis. Software alone will never solve the myriad of problems that contribute to the deplorable condition of our planet. Hardware solutions and engineering-led innovations in the deep tech space will enable some of the most important 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 climate-changing climate solutions are about to be commercialized. Here’s a look at how the deep tech ecosystem may have the opportunity to solve our greatest collective challenge.

Deep tech in the field of climate

It is not easy to overestimate the critical importance of deep tech in accelerating solutions for global decarbonization and renewable energy. Much of the carbon capture and clean energy technologies now entering the market are hardware products with profound technological innovations. We see companies developing new ways to extract lithium from brine to power EVs, turn fast carbon to slow down carbon with ocean buoys, and even injecting captured CO2 go inside specific to store it there permanently.

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Perhaps unsurprisingly for a fund focused on deep technology, one of our company’s first investments in the market was focused on hardware in the form of advanced lithium ion batteries developed by Sun Mobility. These interchangeable batteries enable “pay-as-you-go” EV power that could make electronic vehicles financially viable for the first time in markets such as India.

When you look at these technological advances, there is little doubt that in order to meet the numerous challenges that threaten our planet, both the public and private sectors must look to climate solutions that are both atoms and bits. But the question remains, exactly what role can the VC community play in seeding profound climate change disruption?

Shifting from a superficial mindset to a deep one

As Andreeson’s software prediction has played out in nearly every corner of the business world, software investments have far surpassed the capital invested in Silicon Valley and beyond for the hardware innovations that initially gave the technology mecca its name.

Similarly, in climate technology, many of the first investments we saw in this latest wave of climate innovation have been towards software or platform-based climate technology startups that provide services ranging from climate risk assessments to carbon accounting. But if investors want to take emissions seriously, they should also invest in some of the new technologies mentioned above. That is not to say that measuring and analyzing climate risks using the latest software developments is not essential for climate adaptation and resilience. But on the other hand, there are some software innovations, such as APIs touting the carbon offsetting of consumer products, that will not have a meaningful climate impact.

That’s why we need a dedicated focus on solving deep engineering problems in physics and chemistry that allow us to remove carbon from the atmosphere or reduce emissions. If not, there is no hope of mitigating climate change. In addition to going deep, we also need to go wide to solve the large and complex climate challenges.

For example, sectors such as mobility and transport account for 46% of the climate technical investment, but they are only responsible for 16% of global emissions. By contrast, areas such as the built environment – ​​which accounts for an estimated 17% of global emissions – have received only 5% of the funding. These areas are ripe for deep technology disruption and the VC community needs to broaden its view of investable climate areas.

Dispel deep technical myths

We also need to tackle some deep-seated, deep-down technical myths along the way. The first is that you can’t build big companies in deep tech. Based on the last decade, many believe that unicorns and 10X outputs can only be found in software. To help illustrate how this is simply incorrect, the team at MFV Partners recently compiled a list of deep tech companies that have surpassed $1 billion and found about 120 recent deep tech unicorns 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 a lot of capital and take forever to become big assets. To help break this myth, our team analyzed recent deep tech unicorns to understand how much money they cost to get to the unicorn rating. The Results reinforces what we knew from our experience: that the capital and time requirements of deep tech startups are comparable to those of other industries. In fact, the median deep tech unicorn took $115 million in capital and 5.2 years to get there.

The deep tech sector has experienced impressive growth in recent years, with global investment space has quadrupled in recent years, from $15 billion in 2016 to $60 billion in 2020. But with today’s vast and complex challenges, there are likely to be many benefits for deep tech in addressing the most pressing problem of society – regardless of whether the economy is booming or slowing down.

Preparing for slightly longer but more impactful starts

Scaling a startup is a challenge. These challenges are exacerbated in the climate technology sector, and specifically for those focusing on deep tech solutions. We saw this with Cleantech 1.0, where one of the main issues was that VCs couldn’t scale hard technology as cheaply and quickly as software.

Hardware solutions require significant investment in team building, manufacturing capabilities, inventory and distribution. As a result, many deep-tech climate companies require more upfront capital investment and over a longer horizon than their software-based counterparts. And while investors need to think about runways in the longer term, they don’t need a super-long-term view of exits. Some of the most influential climate companies of our generation will successfully exit within the next five years.

This is an important point to make as we are dealing with the current headwinds in the market and fears of a potential recession. Investors are often quick to move away from capital-intensive startups during recessions. That certainly happened when the first cleantech bubble burst and those who didn’t leave the space completely shifted their focus from things like solar to wealthy software startups in the industry. This would be a disturbing short-term view to adopt in 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 a full-blown climate catastrophe in the next 10 years, the fact is that there is no time to lose when it comes to deploying deep engineering solutions that have real impact and solve problems that global climate. With that in mind, founders and investors should focus on solutions that can be commercialized in the short term and have a significant impact sooner or later.

Karthee Madasamy is founder and Managing Partner at MFV partners.

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