VC and incremental impact in Climate Tech
Why Venture is a necessary tool in our battle against climate change and how incrementality of CO2 abatement matters.
Much has been written on the needed capital stack in our battle against climate change (USV, CTVC) but less on why Venture should be a part of the stack. At its core Venture Capital accepts technology and execution risks that other asset classes do not.
At its core, Venture is also a portfolio approach governed by a power law where a small number of bets will deliver the outsized financial return. In Climate Tech specifically, however, there is another important dynamic and that is the incrementality of the impact solutions and technologies can have.
Let me explan that further: Let’s assume there is a technology that can mitigate one tonne of CO2 equivalent per year per unit deployed (by the way that would be a VERY impactful technology, for context the average US vehicle emits 4.6 tonnes per year).
In year 1 it is deployed 10,000 times. For simplicity lets assume they all got deployed on Jan 1, so the CO2 impact in year 1 would be 10,000 tonnes of CO2.
In year 2, however, these same 10,000 initial units continue to have the same 1 tonne/unit impact and therefore reduce emissions a further 10,000 tonnes (20k tonnes thus far).
Lets assume a healthy, VC-style growth in the first few years of 200% growth YoY. That would mean that in year 2 a further 20,000 units are deployed mitigating 20,000 tonnes of CO2 plus the 10,000 tonnes from the Year 1 units and 10,000 from those units in Year 2, or 40,000 total.
For modelling purposes lets assume growth starts to slow down in later years to 175%, 150% and 120%. Unit deployment reaches almost 400,000 units by 2030 (conveniently the year by when we need to cut our 50+ Gigatonnes of emissions by half!) and these units mitigate 396,000 tonnes in that year.
The impact, however, is not only from 2030, but rather from the cumulative mitigation since the first year of almost 1.5 million tonnes of CO2 (or 1.5 Megatonnes).
The impact of this single technology given it’s speed of deployment and its impact stacks up over time.
Now multiply this impact potential across a VC portfolio of concurrent technologies, or across hundreds of Climate Tech solutions now being funded and scaled.
For example, in 2021, just 8 early stage portfolio companies invested into by 2150 already reduced or mitigated 277,000 tonnes of CO2. But those companies all continued to grow in 2022 and those 277,000 tonnes were once again mitigated in 2022 plus the impact of new deployments.
This is why we need to ensure impactful technologies are deployed at speed and scale. Every tonne reduced matters. We need to pull massive multiple levers concurrently and there is no single solution that can allow us to achieve the levels necessary to reach the Paris Agreement targets.
