The Breeze - Issue #7
Uncertainty and acceptance, surviving the freeze, funding news, Earth Day
|Apr 17|| 2|
The Breeze is a free weekly email about climate tech investing.
💌 If someone forwarded this to you, sign up!
🐦 Follow me on Twitter for climate, tech and investing.
🗣 Feedback or news tips? Email me at firstname.lastname@example.org.
💸 Accredited investors may apply to join my Jetstream Syndicate.
I’m just now starting to internalize what the impact of coronavirus will be on climate tech funding and adoption. I expect this year to pose major setbacks. I will always be a climate tech cheerleader, but the reports from the field are giving me a reality check.
We are expecting to return to normal in 12-18 months when we have a vaccine. But apparently we have never approved a vaccine for any coronavirus. LA Mayor Eric Garcetti says large gatherings might not resume until 2021. Zuck forecasts June 2021.
The challenges ahead for climate tech startups started to get clear for me the past couple weeks as the economy has started to tank. Unemployment claims have soared to 22M, wiping employment growth since the financial crisis. Manufacturing and home-building have plunged to levels of 36 years ago. Not to mention dining and travel.
This is bad because corporations that set science-based targets are now reevaluating their priorities. These are the corporations that we would expect to be the first in line to buy climate solutions. For example, in October 2019, British Airways owner IAG became the first major airline group to commit to carbon neutrality by buying offsets and investing in sustainable aviation fuel. They are now operating at 10% flight capacity and cut 30,000 staff. With their focus now on survival, their climate priorities will slide.
The travel industry is an extreme example, yet most industries will be affected. There are certainly silver linings, such as less pollution from flying and driving. But broadly if the climate tech buyers don’t show up, the climate startups won’t get off the ground.
In conversations with climate tech investors, this has raised existential questions for startups:
With unemployment claims reaching 22M, will consumers buy voluntary offsets? Or would this be an inconceivable “self-tax”? How about for corporations or small businesses considering purchasing offsets?
Will Amazon’s order of 100,000 EVs inspire other companies to take the same action, or is fleet electrification on hold? Amazon has tons of cash and thinks long-term; others might not be so bold. Uber Eats surpassed Uber Rides for the first time, and Lyft launched grocery delivery. Will they pause EV pilots? Will consumers delay buying EVs since gas is cheap?
We just don’t know. The big freeze puts a lot of plans in question.
Climate entrepreneurs have been here before. Climate people who have been at this for years are used to climate getting pushed out of the spotlight. I think back to this tweet from Apoorv of Weave Grid that I referenced in Issue #4:
So what are climate tech startups doing? I want to share some of my thinking from conversations I’ve had with startups and savvy investors the last couple weeks.
I focus on 2 groups: pre-seed startups that are often pre-revenue and/or pre-launch, and seed startups that are in market with product and often sales.
For pre-seed startups, my main question is, why are you building this or launching this now? Is there a market today that will buy or use what you’re making? If there is no clear buyer or user today, ie the company is building for a time in the future when they believe customers will show up, I would seriously check all of those assumptions.
It’s hard enough as a startup to go into a market during a downturn; going into one with a climate-focused product that is likely to fall from a buyer’s priorities is especially risky. If you don’t have buyers knocking on the door, you’re going to have a hard time fundraising over the next months. Trying to fundraise off a stellar team, deep experience or a prototype without clear access to customers will be a slog.
For seed startups who have raised funds and have initial users or buyers, it’s survival time. Drop your burn rate thoughtfully, raise more if possible and hunker down. For fundraising, showing customer and revenue growth is key but not necessarily sufficient. I’m seeing startups that have name-brand firms involved in previous rounds having some success raising more at their previous round’s valuation or at slight markups. Lean on previous investors to extend your runway (go for 2-3 years if possible).
Startups coming out of accelerators or funded by a group of angels (without name-brand VCs involved) are having a harder time fundraising for additional runway. I’ve seen some start looking for strategic partners (ie large customers as investors, other big players in the space, or government funding) because first meetings with institutional investors aren’t going anywhere.
With institutional VCs it can be a Catch-22: having some tailwinds from how society is adjusting to the pandemic is table stakes, but you also have to prove that your company will thrive once the pandemic has passed.
From my recent talks with VCs, this is a fragile time for most climate tech startups. Though we know the climate crisis isn’t taking a break, the economic conditions for getting customers and funding have moved out of our favor.
How are climate entrepreneurs going to deal with this crisis? That will be the most revealing factor. It’s a great time to be a climate tech founder if you’re one of the few who has access to customer and investor pools of capital. If not, it might be worth taking a deep look at the changes outside of one’s control and prepare for alternate paths to stay in the climate fight.
How Climate Tech Startups Can Survive the Economic Freeze
Here are my highlights, paraphrased or quoted:
SK: [During shelter-at-home] the challenge is that it’s hard for startups to plan for how long they won’t be able to do in-person work, or to set up the top of the sales pipeline because they do that at conferences. There are medium-term questions of when can I do all of that again, but at that point we’re in a recession.
SK: Where you are in the fundraising cycle is one of the most important indicators of how well you’ll do. [Funding] hasn’t dropped to zero, but it’s certainly a lot more difficult. Every company that can is trying to push out fundraising by extending their runway.
ER: Government-funded startups are in a good place; the government is getting money out the door.
SK: What we’ve seen before in recession environments is that the things that save money do better. Yet even those things tend to suffer because there’s more friction to try anything new.
EK: "CB Insights projects that seed funding will drop by 22% this quarter. No doubt that it will be harder for people to raise and to get customers even if the product makes complete sense.”
SK: There’s going to be a series of massive policy responses, like PPP. It could usher in a new era for sectors we’re interested in, like accelerating EV charging. We just don’t know at this point.
ER: I don’t see larger companies moving away from their commitments to sustainability. Ibedrola is doubling down on renewables. Corporate leadership is a good sign.
EK: "No matter what crisis we’re facing, whether it’s the coronavirus or climate crisis, people matter. What you choose to do with your life makes a big difference. The world needs people like you working on the most important issues of our time. Like the coronavirus, the climate crisis isn’t a distant threat. It is at our doorstep affecting billions of lives right now.”
I’m trying something new here by adding funding news. If this is valuable or you have suggestions for sources, please lmk!
Amperon, makers of predictive software for grid operators and energy retailers, raised $2M seed from Blackhorn Ventures, Powerhouse Ventures, Intelis Capital, Garuda Ventures, SK Ventures and V1 VC. More at TechCrunch and in Emily Kirsch’s post.
The Climate Service, providers of climate risk audits for corporations, raised $3.8M from Persei Venture, Synovia Capital, and the Association of International Certified Professional Accountants. More at TechCrunch.
Now that we all understand exponential curves from coronavirus, we can easily apply the insight to the climate crisis, right? Wharton’s Howard Kunreuther discusses what COVID-19 teaches us about flattening the climate curve. h/t Nicole Systrom. 📕
Happy 50th Anniversary of Earth Day on Wednesday, April 22! Register for Earth Day Live for online events starting Wednesday through Friday. 🌎