How to Invest in Climate Tech
HERmesa friends….it’s been a minute!
But, we are now back with a great newsletter (if we do say so ourselves) about investing in Climate Tech.
Many thanks to Puja Balachander from Carbon 13 and Julie Blane of the Sustainable Women’s Network for sharing their expertise on Impact and Climate Tech Investing. This newsletter is a summary of a recent HERmesa “Breakfast & Learn” event that Puja and Julie led for our investors .
Setting your intentions: Investing for Impact
Every angel investment is a ‘financial vote’ for the future that you want to see. Through this lens, investing in the climate is a rational response to the climate emergency. But what does this mean in practice?
Julie Blane opened with the insightful comment that Climate Tech is not a narrow, finite category; rather it crosses every industry, geography and investment stage. The investor needs to decide on their climate tech thesis: Are you investing to reduce carbon emissions? To improve the sustainability of the food/agricultural system? To improve water quality?
Once you decide on your thesis, you must review the deal opportunity for its ability to produce the desired outcomes, in addition to your ‘regular’ diligence.
How do we measure the outcomes of this investment? This is not as easy to answer as it sounds! There are a huge range of frameworks - a veritable alphabet soup - of criteria that are still emerging & are not always transparent nor in alignment:
eg: Bcorp, CDP, ESG, GIIN, Iris+, IMP, UNPRI, SASB, SDG, “Theory of Change”…
Identifying stakeholders is an important part of any impact investment and Climate Tech as well
Which communities will be impacted by this business and who will gain from it?
Beyond the intended outcomes, and mapping stakeholders who benefit, the impact investor must also ensure that they understand the risks of unintended outcomes
how will stakeholders be impacted if the new technology doesn't work as planned or takes much longer to implement?
Finally, consider the “Double Materiality” of Climate Risk in your investment:
How is climate affecting my investment?
How does my investment affect the climate?
These are hard questions! The only way the climate tech investor is going to be able to answer them is by asking her own hard questions of the founders and interrogating the business opportunity for both profit and purpose.
Is this Climate Tech Opportunity Tech & Commercially ready?
Climate Tech investing is an implicit buy-in of the idea that technology will, indeed, save us. But the only way it is going to save us, is if the tech works and if people adopt it at scale!
How does the early stage investor evaluate these risks in a deal?
Technical Readiness
Let’s start with understanding the stage of the technology that the startup is building:
“Valid on Paper” - startups are usually raising funds to test their ideas in the lab.
Do they have access to lab facilities (bonus points if it is deeply discounted space)?
Do the founding teams and their advisors have unique, specialised knowledge to build the first iteration?
“Validated in the Lab” - Hooray! The science / tech is working. It’s time to test in the real world. At this point, the team is raising to support pilot testing.
Are there signed Letters of Intent in place?
Are the terms of the test clear (e.g. what will make the ‘pilot’ move to ‘contract’ stage)?
“Starting to Scale” - The first one or two pilots were a success! At this point, the fundraise is all about building out the technical and commercial teams to support wider adoption.
Do the product and commercial roadmaps align?
Are there sufficient input & production facilities to produce the product? (e.g. where are you producing the solar panels at scale? do you have access to thousands of litres of fermentation capacity?)
Commercial Readiness
Many, but by no means all, early stage climate tech companies are led by technical founders. They are obsessed with a problem and by building a fantastic solution. But sometimes living in this world 24/7 means that they have less of an understanding of how the product will be sold.
Below, we’ve listed - ok, stole! - a few of the great questions that Puja asks when evaluating early stage climate tech startups as head of Venture Launchpad at Carbon13:
Do the Founders Know the Problem that they are solving for the Paying Customer?
Is there a path to being cost competitive with the status quo? In other words, will the product succeed without customers paying a ‘Green Premium’?
What are the Switching Costs for the Customer? And does the product need to be certified before customers can switch?
The closer the solution is to urgent, cost competitive and ‘drop in’ for the customer, the better for the commercial model
Climate Tech Investing
As noted at the beginning of this newsletter, “Investing in Climate Tech” crosses all types of investments, sectors and stages.
At HERmesa, our investors are already active climate investors, putting money into startups that are:
Eliminating micro plastics and harmful chemicals in cosmetics (HIGHR)
Reducing Travel Emissions (Byway)
Creating bio-polymers for fully compostable packaging (Shellworks)
Discovering and creating bio-stimulants and bio-pesticides to improve soil health (FA Bio)
Helping vineyards cope with the impact of climate change (DeepPlanet)
Ensuring supply chains are sustainable (Compare Ethics)
…and we are just getting started.
If you are a female founder of a startup addressing the climate crisis, apply to pitch at our upcoming Climate Tech Pitch Event in June
If you are an investor keen to learn more and invest alongside climate tech experts, we’d love to hear from you: hello@hermesa.co.uk