…Well, are we? A 2020 report from PriceWaterhouseCoopers, cited by MIT Technology Review, found that from 2013-2019, early-stage venture capital funding in green energy technologies rose from $418 million to $16.1 billion – an increase of more than 3,750% during the period, or 3 times the growth rate of VC investment into artificial intelligence, which has also been identified as a critical emerging industry.
While the climate change imperative is a very real thing, and it’s hard to argue with companies putting market principles to work for positive global change, have company valuations risen too far, too fast? And what do these swelling valuations mean for energy and investment alike? The latest edition of the Investable Universe podcast features Bennett Cohen, partner at San Francisco venture capital firm Piva Capital–the energy, mobility and industrial fund backed by Malaysian state-owned oil company Petronas–on the investment outlook for renewable energy technologies.
Prior to joining Piva, Cohen established the venture capital arm of Royal Dutch Shell in San Francisco, where he led investments focused on the future of energy. Before that, he helped to develop the strategy underpinning Shell’s New Energy division, which develops business globally in renewable power and storage, smart grids, electric mobility and energy access.
Why it’s different this time
Cohen told the podcast that while many market participants have been around long enough to remember (and heed the lessons of) venture capital’s “first” clean-tech bubble of the mid-aughts, today’s frothy investment climate in renewable energy technologies has other drivers.
Chief among these are the aggressive net zero emission targets made by major economies across Europe and Asia, along with climate pledges by major companies and asset holders. There’s also the relatively recent rise of VC mega-funds–like Japan’s SoftBank Vision Fund–that have flooded startups with billions of dollars, bringing with them (as critics might caution), growth at any cost, but who also have longer-term (15-20 year) time horizons in the venture asset class and can dabble in the longer commercialization timelines associated with science-related startups. There are corporate venture capital arms exploring new business models, and family offices with an explicit mandate to invest in climate change mitigation strategies. And there are new investment vehicles, like special purpose acquisition companies (SPACs) that have incentivized new startups to access public markets much sooner than previously.
“I think what we’ve experienced in the past few years is…ESG or responsible investing become the norm,” Cohen told the podcast. “I think large, institutional asset holders feel that if you’re not assessing environmental, social and governance risks in your companies, you are effectively…not being a responsible investor, leaving risks unaddressed and compromising value, whether it’s in the medium or long term. One principle that I find really helpful to understand is the ‘universal owner[ship] principle,’ which [means]… if you really are holding tens of billions, even trillions of dollars under management, you effectively own a slice of the global economy. You own the whole economic picture.
“Carbon emission would be the perfect example of [something that] a universal owner would really have a hard time with. Because if one company in your portfolio is emitting greenhouse gases–which is a big externality and is impacting other companies [and] sectors in your portfolio–that’s a sub-optimal outcome at the portfolio level. So that’s why you’re seeing asset holders really put pressure on their larger holdings to really improve on all these metrics. So I think we hit a tipping point in the last couple of years, where that is now a mainstream perspective in the institutional capital community.”
Cohen’s own fund, Piva Capital, is a relative newcomer to the VC landscape, having just launched in 2019 and still investing out of its inaugural $250 million fund focused on the future of industry and energy. The fund typically invests $5-10 million at a time, in the Late Series A, Series B, and occasionally Series C rounds. The fund seeks to avoid science and technical risk, while investing in companies already generating yearly revenue in the single-digit millions: those who are seeking “that next tranche of capital” to accelerate growth.
But above all–and perhaps this is key to avoiding “green bubble 2.0”–Cohen notes that his fund looks for sustainable companies whose solutions don’t depend on what he calls a “green premium,” meaning they’re not expecting customers to pay more for the solution simply because it’s a zero-carbon alternative.
Companies ticking all those boxes and are currently part of Piva Capital’s portfolio include Boston Metal, which has patented a new method of making steel from iron ore based on molten oxide electrolysis, a new production method in which electricity is the only input. Cohen notes that steel currently accounts for eight percent of global CO2 emissions and is under tremendous pressure to decarbonize, with few existing technology solutions for meeting the imperative.
Crude barometer
As to whether continued weakness in the price-per-barrel of crude oil will impact demand for sustainable technologies, Cohen suggests that it’s a “both/and” question. Oil prices are always an important index number in the green tech space: when oil prices are low, energy prices tend to be low, in general. Although they don’t always compete directly, solar and wind electricity are, he says, “less-energized” in lower-oil-price environments. Not surprisingly, biofuels and electric vehicles have a harder time competing economically with internal combustion engine (ICE) vehicles when gas is cheap.
On the other hand, when oil prices are low, green tech companies are often emboldened, Cohen notes, because the oil majors (the market incumbents) wield less market strength.
“It’s a number [the price-per-barrel of crude oil] that doesn’t always have a straightforward impact on all the different facets of the market, but it is a very important barometer to keep an eye on,” Cohen explains. “One of my old bosses used to say, ‘Don’t make investments that hinge on the price of oil, because then you’re just a commodity speculator.’ I always remember that piece of advice.”
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