Defining ClimateTech investing
ClimateTech investments have been on the rise for the last half-decade, with over $60B invested into over 1200+ startups between 2013–2019. Valuations are exaggerated, deals are closing in a matter of days, and many startups are founded every day.
Over the last year, I have connected with over 250 investors in the space. Connecting with these investors has been very interesting, to say the least.
There are a few bins that I classify investors as:
- Early-stage vs growth stage
- Software vs hardware
- Impact returns vs financial returns
Regardless of the classification of each investor, I thought it would be useful to define what early-stage investing in ClimateTech looks like.
Pre-seed rounds are typically the earliest investment into a startup prior to the company having developed a minimum viable product. These rounds are smaller than traditional seed rounds at lower valuations and are often used to help a company achieve certain intermediate milestones prior to strong product-market fit and customer traction.
Investors writing checks into pre-seed startups are typically angel investors, friends/family, and accelerators. Angel investors can consist of high-net-worth individuals, former founders, and current/former executives that typically align themselves within a niche or a mission. Angel investors can really be an asset to startups, operationally or strategically.
At this stage, investors are typically investing in the team, rather than the product itself. When evaluating the team, investors look at the founder-market fit, as well as the product-market fit.
Seed rounds are used to build an initial product and prove the business model. During this stage, it is common for a startup to demonstrate the technology and business via a pilot.
In addition to angel investors, institutional VCs and corporate VCs also make investments in the seed round. Traditional institutional VCs invest for financial returns and have the know-how to build strong teams for financial success. Meanwhile, Corporate VCs tend to have strategic objectives, which means that startups can leverage the corporate’s resources.
At this stage, investors are investing in the team, the product, and the market opportunity. Assessing technology and business model risk is part of the picture.
Investments in climate look relatively similar to traditional investing, except for the fact that many of these startups that will truly make a climate impact are science/engineering heavy (hardware/process innovation). This means that investors financing climate needs to be riskier than traditional software/tech investing.
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