How a Shift in Perspective is Driving Increased Climate Tech Investment
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To discuss the rapid growth and potential impact of AI-driven climate technology, Anik Bose, General Partner of BGV, spoke with Barak Ben-Avinoam, CEO of NetZero Technology Ventures, and Eshel Lipman, Co-Founder of Ignite the Spark. The pair discussed their organizations’ role in creating opportunities and disseminating key messages for the energy innovation sector, how climate technology has grown over the last two decades, and what comes next.
The Promise of Innovative New Technologies
To open the discussion, Bose asked Ben-Avinoam and Lipman about the state of the AI climate tech space today and what promising technologies are having the biggest impact. Ben-Avinoam highlighted the three Ds of energy: decarbonization, digital transformation, and decentralization, and the vast opportunities represented by each of these elements. The need for clean fuels and fuel replacements like hydrogen is also an important element of the clean technology drive across many industries. AI plays a major role in identifying areas for improvement, supporting the implementation of corrective and preventive measures, and making economically sound decisions based on that data.
Lipman notes that “when we build an energy technology company, the challenges faced are huge; to have the biggest impact, technology needs to be robust, which means long development cycles and long sales cycles.” This means there’s a need for best practices in established fields of electrochemistry, electronics, and mechanical engineering. Because of this, there is a substantial opportunity for AI to make an impact. For example, independent power producers and developers can better evaluate what kind of energy mix they can provide to customers at a given moment, addressing congestion and transmission challenges dynamically. Lipman highlights another example with the development of smart meter technology that can analyze the aggregated stream on all currents going into a house. Learning the pattern of every appliance allows individual users and providers alike to see power consumption patterns in real-time. The impact of these technologies is huge, but there are challenges due to the scope of that impact.
The Growth of Climate Tech Globally
There has been a notable uptick in VC investments in Silicon Valley in recent years. Some of this is being driven by real-world conditions: the massive wildfires in California dating back to 2018 are a prime example. Bose asked the panelists about this uptick in investment and what lessons have been learned over the last 15-20 years.
Ben-Avinoam emphasized that there have been substantial changes in technology and how investors and governments approach it. The next generation of VCs is specializing, assigning particular partners with domain expertise, or raising focused, purpose-built funds for climate technologies. Governments in Israel and the EU are allocating large amounts of money to entice new investors and innovation in climate technology. These changes are shifting the perspective on what a startup in climate tech looks like. Where cleantech 1.0 startups often felt like impact investments, modern climate tech companies are bonafide profit opportunities, just with longer sales cycles and a longer time to exit.
Lipman expands on this, noting that the atmosphere driving the market has transformed dramatically from where it was fifteen years ago. Then, the main focus of many companies was on creating things like biofuels made from crops. Many of these failed for various reasons, and the public focus has shifted. Today, with the impact of soaring energy prices, the visual impact of global warming, and the focus of individual countries on net-zero targets, there’s an increased interest in a broader range of climate technologies. And VCs with an ability to think beyond the typical fund lifecycle are suddenly able to provide capital and help those unique companies grow. The pool for investment is growing, with traditional oil and gas companies looking for their next big thing as the age of fossil fuels sunsets, governments establishing innovation authorities, and more traditional investment channels looking for new ESG opportunities.
The Role of the Israel Innovation Authority
At the core of climate tech’s advancement is a shift in perspective. The focus on the timeframe to exit and the increased role of government are important factors in supporting the development of new technologies. Bose asked the panel about the role of the Israel Innovation Authority, in particular, and what the public-private partnership model looks like in action.
“The Israel Innovation Authority understands the market failure of traditional VC investment cycles lasting up to seven years, with many of the large exits in energy taking seven to ten years, possibly longer,” says Ben-Avinoam. The government’s gap funding allows companies to get off the ground so that when VC funding comes in, the venture is already 2-4 years underway, shortening the time to exit and allowing more traditional funding to get involved. The grants, offering $2 million or more to these startups, attract leading scientists, entrepreneurs, and developers to engage with these major issues and launch new technologies to address them.
The chances of obtaining additional dilutive funding and private capital for these startups increase significantly because of this model, which in tough-to-evaluate businesses is crucial. NetZero partners with the Israeli government to facilitate this funding model, effectively allowing entrepreneurs to focus on only running their businesses and not on raising more money as they get started.
How Regulations Will Shape VC Investment in Climate Tech
Climate technology is a global issue, which means many governments are getting involved with funding and developing new regulations. Bose asked the panelists which regulations have the biggest impact on shaping VC investment.
Both Ben-Avinoam and Lipman identified several areas in which political considerations and new regulations impact the industry. The war in Ukraine, for example, is pushing many companies and governments to consider alternatives to fossil fuels that are currently sourced from Russia. The long-term impact of the situation remains to be seen, but it’s opening a broad dialogue around that reliance.
More broadly speaking, existing regulations have traditionally made it difficult to introduce anything new. Many of the innovation authorities in these countries are working to establish sandboxes and methods through which innovators can build and test new ideas, and government investment is helping to relieve the pressure for short exit times. “When you build an energy venture, it’s not a simple staff-based company that delivers credentials to a client and bills them monthly. You need to know your supply chain, the technology, your market, and the regulations guiding the market,” said Lipman. “With so many different regulations, you need a complete understanding of everything from safety requirements of batteries to the network, the grid rules imposed, and the environmental impacts.”
Regulations will continue to impact climate technology investments – both existing regulations and new ones designed to address this growing space. Government partnerships, investment support, and a greater understanding of the landscape in which technologies are being developed will help companies obtain the funding they need to innovate and address the biggest climate challenges of our time.
