The Breeze - Issue #20

Scalable climate tech, Climate Returns: Episode 1, financial climate risks and incentives

The Breeze is a free weekly email about climate tech investing.


One of the common climate narratives is that we need to try every possible solution to reduce greenhouse gas emissions. The thinking is that by trying everything, the solutions will add up to a long tail of reduced emissions. Since we can’t predict what’s going to be successful, we should experiment widely. For example, the popular Drawdown guide proposes 100 GHG-reducing solutions we could try.

Traditional tech investors focus on solutions that can scale. When considering an early-stage investment, they imagine how big a startup can become and work through what would have to go right to achieve massive scale. If a startup can get to scale, it radically transforms its industry. Think of Netflix, once a DVD-by-mail company (remember?) that has since transformed our living rooms with streaming.

It makes sense to apply the scalability lens to climate tech. Many technologies can scale relatively inexpensively, especially when software and low-cost sensors or robots are involved. When market forces get behind the tech, it can take off in a powerful way. Tesla is rightly heralded for creating the EV industry. As their EV sales grew, battery and manufacturing costs declined, and buying an EV became more accessible for consumers. Now dozens of EV models from all major auto manufacturers will hit the road in the next few years as EVs replace combustion engine vehicles.

Natural solutions don’t scale in the same way. Even if natural processes are promising for sequestering CO2, they don’t have a path to get market forces behind them to scale up. For these reasons I’m skeptical of ideas like Project Vesta, which uses olivine from volcanic rock to sequester carbon on beaches. They’ll be able to experiment with a handful of beaches (which would be valuable for scientific learning), but they won’t scale up massively enough to make a significant impact. The process doesn’t get cheaper over time. The olivine turns beaches green, which is not something people want. Modifying natural habitats for the purpose of accelerating sequestration is rife with unintended consequences, in addition to being ineffective.

Some climate tech VC firms take scalability a step further and make investment decisions based on the emissions-reduction target that they want their companies to achieve at scale. For example, Breakthrough Energy Ventures requires that its investments will reduce GHG by 1/2 gigaton per year. Others aren’t as prescriptive in their emissions criteria, but they pay attention to the major emissions drivers in each industry and invest accordingly. These investments might be sprinkled across dozens of areas or focused on a few key areas to decarbonize.

As new VCs move into climate tech, it’s important for them to gain an understanding of which areas will effectively reduce CO2 at scale. Climate tech investors who actually want to make a GHG-reducing impact should prioritize moving capital into these areas now because it takes time for them to scale up.

Vinod Khosla, founder of Khosla Ventures, makes a compelling case for areas to focus on. He recently proposed that the biggest climate impact will come from transforming a handful of remaining industries. In A Few Critical Climate Technology Breakthroughs, he says, “A dozen or so key technologies/entrepreneurs will make a substantial difference, far more than the next hundred efforts.” If we can scale up solutions in these areas, market forces will take over to expand their impact, which will eclipse other less-scalable solutions.

In other words, we shouldn’t try everything. We should focus resources on a few areas that need the most decarbonization and invest specifically in technologies that accelerate their transformation:

There are many other very good business efforts on environmental technologies… They make business sense and environmental sense but won’t make a big enough dent in global emissions in the next twenty-five years, at least at a few % or more of global emissions level. The book Drawdown covers many of the most important areas to affect climate risk but only a few can make a big enough (in my view) difference and change our societal trajectory.

His thesis is that “instigators”, or entrepreneurs with big visions, create companies that completely shift how existing industries operate. Once those shifts are underway, the incumbent players respond in order to compete in the new paradigm, which further propels the shift. The instigators end up transforming their industries. For climate tech-themed startups, this results in massive decarbonization relatively quickly, like our Tesla example above.

Another example is Pat Brown, a doctor and scientist, who realized in 2009 that using animals for food was a huge environmental problem. He set out to recreate the taste of animal meat with plants. Vinod says, “Many laughed at the idea that a plant protein, even with a roughly 90% lower GHG and water footprint, could be as tasty to non-vegetarians as beef.”

A decade later the plant-based meat transformation is underway. Pat Brown’s Impossible Foods and its competitor Beyond Meat are expanding rapidly. New entrants like Meati, Memphis Meats, and Rebellyous Foods are starting to take off, and incumbents like Cargill and Tyson are scrambling to stay relevant. The entire meat industry will undergo a complete upheaval in the next few years (followed by decarbonization) thanks to Pat’s work on creating a meat-tasting product without using CO2-hungry animal husbandry.

In his piece, Vinod specifies 12 high-impact areas that we should focus on to scale up:

  1. EVs & automotive batteries

  2. Food & agriculture, especially meat

  3. Low carbon transportation: air (jet fuel) and shipping (electrofuels, biofuels)

  4. Cement or substitute construction material

  5. Low carbon dispatchable electricity generation (fusion, geothermal, nuclear)

  6. Public transit

  7. Grid storage (long duration battery storage)

  8. HVAC

  9. Industrial processes (hydrogen)

  10. Fertilizer (hydrogen)

  11. Water

  12. Steel

He argues that revolutions in the first 4 are underway with EVs like Tesla, alternative meats, Lithium-ion batteries and new jet fuels. Numbers 5-8 have plausible solutions on the horizon, and the remaining 9-12 aren’t as clear to him. His wish list for technological progress includes hydrogen for industrial processes, fertilizer and dairy alternatives in agriculture, HVAC, water desalination, using less steel (or making it stronger), direct air capture, and other materials like plastic, fibers and recycling. Many of these need a lot more funding to achieve tech breakthroughs that can scale.

Furthermore, the trends that are growing, like shipping and A/C, should be prioritized. “Global shipping is currently 2–3% global emissions, but projections have it getting to 10–17% by 2050. Air conditioning is 10% global electricity use but is projected to triple by 2050…” Matt Eggers points out that aviation’s emissions as a portion of all GHG are on the rise from 2.5% today to 10%+ by 2050. These growing segments deserve more attention now as their emissions impact will become even more significant later.

There are 3 implications for new climate tech VCs. First, nearly all of these areas are “deep tech”. We won’t get to massive GHG reduction simply by adding a software layer to solutions. Software can make markets more efficient and nudge consumer behavior, but the areas that need the most decarbonization require building deep tech and moving capital. Understanding and investing in these deep tech themes will require a bench of technical and scientific acumen on the investment team.

Second, progress for these startups will be measured differently than SaaS metrics and other purely digital solutions. The projects will have discreet stages from physical prototype to real-world scale, or small batch to production ready, and they’ll use different distribution channels than what internet investors are used to. Facebook’s original “move fast and break things” mantra does not serve here. Testing and iterating will be more deliberate.

Third, these solutions will require a variety of different funding types including government grants, venture capital, debt and project financing. Firms that can provide some of these options would simplify fundraising for their startups and potentially earn higher returns on their winners by being involved in a variety of financing structures.

Using the scalability lens to examine the specific areas that we need to invest in is helpful for climate tech founders and investors who are seeking to make the biggest climate impact with their capital and resources. Though we continue to see billion dollar climate tech funding pledges from corporations like Amazon and firms like Social Capital, climate tech is still a fringe investment theme. We should focus our limited resources on those technologies that can transform industries and thus massively reduce GHG emissions at scale. Drawdown would be more effective for investors as a shorter book.


One of the projects that I’ve been working on with Congruent Ventures is a new series called Climate Returns. Our goal is to raise awareness of climate tech and sustainability among founders and investors through conversations with VCs at mainstream firms. The first 3 episodes include investors from NEA, Benchmark and Union Square Ventures.

Episode 1 on August 4th will feature Abe Yokell of Congruent speaking with Aaron Jacobson of NEA. Aaron originally joined NEA in 2011 to partly focus on energy, but he shifted to enterprise software as cleantech lost steam. It will be interesting to hear his thoughts on the energy transition now, nearly a decade later.

The format is a livestream video interview with audience Q&A. Join us on Tuesday!

Register for Climate Returns: Episode 1


Trade Winds

More than three dozen pension plans, fund managers and financial institutions who represent over $1T in assets urged the Fed, the SEC, and other agencies to “explicitly integrate climate change across your mandates.” They asked regulators to adopt 51 recommendations made to 8 federal agencies, with a focus on recognizing climate change as a systemic risk and requiring companies to disclosure financial risks due to climate threats. They point to the Bank of England and the European Central Bank as already integrating climate risk into their mandates in a structured way.

This is the biggest effort I’ve seen from asset holders in recognizing climate risk and asking for change in regulation. Fear of losing money can be a big motivator, and they’re rightly scared. Unchecked, climate risks could ripple through the economy. Asset owners and ultimately taxpayers would end up holding the bag.

ADL Ventures analyzed 107 episodes of the MCJ podcast to understand what guests wished for most to solve the climate crisis. They found 5 leading insights, which they investigate in detail in the piece:

  1. “A price on carbon, however unlikely, would efficiently reduce emissions and accelerate the development and deployment of innovative climate solutions.

  2. Catalytic public sector funding is needed to commercialize hard tech climate solutions.

  3. Divestment signals climate-friendly sentiment; ESG investing creates tangible benefits.

  4. Collaborating with hydrocarbon companies may be more productive than punishing them.

  5. An all-of-the-above strategy is needed to tackle this multifaceted problem.”

The top 4 insights are essentially financial solutions. The message is loud and clear that we need more funds, aligned incentives, and proper guardrails to design our way out of the climate crisis.

HBR writes that impact investing, which classically foregoes profits for impact, is necessary to push forward solutions that have positive planet externalities. However most of the decarbonizing solutions sit above a “zero-cost line”, meaning they aren’t profitable without government subsidies or policy change such as a carbon tax. For example, carbon capture and storage is unprofitable until there is a price on carbon.

Impact capital won’t flow into these solutions fast enough to fund the decarbonization projects we need to.

Here’s an example of the impactful projects below the zero-cost line and currently unprofitable projects above the line in the Netherlands:

The piece proposes that we should “lift the line with carbon pricing, subsidies or regulations, so that more actions fall below it and attract investment… In other words, once externalities have been internalized, then all investing becomes impact investing.” (h/t Brett Gentry)

This is in line with the ADL Ventures analysis in the previous article above. Incentives and guardrails would unlock profit-seeking capital to flow into impact solutions. A price on carbon would raise the line, making investments with positive climate externalities not only impactful but also profitable.

The Sierra Club acknowledged that its early leaders and members included white supremacists who systemically excluded Black people, Indigenous peoples and other people of color from their membership and work. They committed to making diverse leaders the majority of the top-level team and funding $5M to invest in staff of color and environmental and racial justice work. (h/t Jess Eastling)

The Sierra Club might be the most recognized environmental organization in the U.S. I’m encouraged to see that they recognize their past and have internalized the importance and intersections of diversity in leadership, racial equity and climate justice. I expect them to be a strong voice in the climate justice conversation going forward.


Invest with Jetstream

I’d like to invite you to join me in investing in climate tech startups through my Jetstream Syndicate. It’s a group of over 250 angel investors who are supporting early-stage climate tech founders. I share startups that I believe are great investment opportunities, and you decide if you’re like to invest or not. It’s free to join, and you can invest with $1,000 or $100,000. We’ve invested in startups like SINAI Technologies, Pachama, and Windborne Systems. 💸

Learn more about Jetstream


Thanks for reading! Special thanks to Parker and Becky for reading drafts. Photo credit worldofsf.

Stay breezy,

Tommy