Most VCs LOVE software and HATE hardware.
The low costs and near infinite scalability of software make SaaS the “perfect” investment - easy to measure, easy to scale, easy to exit
Now contrast that with often expensive, slow and maintenance-needed hardware solutions like carbon capture/direct air capture (DAC), renewables infrastructure or industrial recycling and it’s no wonder why most VCs prefer software.
Because the incentives and structure of venture are all wrong for solving climate change
First of all, there’s the traditional 10+2 fund life cycle (more info here). Think about it - we literally need to reinvent, rethink and rebuild the entire economy and infrastructure of our world…
And Rome wasn’t built/rebuilt in a day.
So, why does it make sense to think in such short time horizons? If our climate tech investments need “exits” or liquidity in 12 years or less, where do things like fusion, carbon capture, de/reforestation, decarbonizing infrastructure or better mobility and electrification come into play?
Because replacing/retrofitting buildings or building gigatons of carbon capture capacity aren’t a five year project. We NEED the ability to think and plan for the longer terms (see this post here on why Evergreen funds are ideal/the future of climate tech)
Secondly, there’s dilution - namely, the amount of capital a startup needs to scale and reach its true impact potential. For a company like Facebook, Slack or Airbnb, it’s a function of engineers and IT folks spinning up additional servers, updating/checking the code and keeping systems running - ie. The costs don’t scale linearly and there is MASSIVE operating leverage.
So, as an early stage accelerator that invests $100k for 5%, as companies grow and scale, the more cash-efficient they are, the greater the ownership stake we have if/when they exit.
Contrast that with a company building massive green hydrogen processing centers around the US or a Gigafactory for EV batteries… Those require serious cash.
Which risks diluting early investors to almost nothing (NOTE: In these scenarios, we often recommend startups pursue venture debt or non-dilutive funding after their early venture rounds - see this guide here)
And last but CERTAINLY not least, there’s the hardware/knowledge risk of the business. Building something in the real world is ALWAYS more complex and expensive than you think,
You don’t invent a new battery chemistry (like EExion), create a better hydrogen propulsion system or engineer mushrooms to eat trash and turn it into new raw material (like Mycocycle) without serious talent, incredible innovation and major pitfalls/struggles along the way. There are SO MANY things that could go wrong:
The math doesn’t pan out
The manufacturer messes up or bails
The production gets delayed
The parts or machinery get damaged
The interest rate on your loans balloon
It goes on and on.
But there is one INCREDIBLY important thing to remember as a climate investor.
Software is eating the world, but software alone can’t tackle climate change
Just like designing a diet or workout plan is a great first step, but then you need to actually execute - you need to take action.
Like reducing building energy usage via AI
Like decreasing food waste with better planning and management
Like accelerating renewables adoption with optimized solar site selection (like REplace Energy)
All of these move the needle on climate change… but alone, they’re not enough. We NEED the massive infrastructure investments, we NEED to decarbonize the real world and heavy industry, we NEED to change the way we live.
Because software at the end of the day is just lines of code - bites and bits.
And we live in the real world. And that’s made of atoms and sh*t.
So no matter how awesome your AI-for-everything is, it still isn’t capturing carbon or cleaning our oceans or planting more sustainable crops.
That’s why in 4WARD.VC's Partner in Clime Accelerator, we shoot for a 50/50 split of hardware and software solutions.
Because while the best things in life are free, getting down and dirty and doing the hard work ist the ONLY way we’ll save our planet and our future.
Not only that - it’s also the BIGGEST opportunity of ALL TIME.
We need to rethink and rebuild the ENTIRE infrastructure and economy of the the world. And the largest industries out there, they’re also the biggest emitters and ones most ripe for disruption (more on our investment thesis here).
Construction & Real Estate: 38% of global emissions
Food & Agriculture: 25-30%
Manufacturing & Materials: 20%
Transportation & Mobility: 14-23%
ENERGY: 73% (obviously there are overlaps in these sectors…)
Together they make up 44-68% of the world’s economy and nearly ALL of global emissions.
What’s the best way to build a unicorn climate company?
Solve a MASSIVE problem.
Like how to make the $3.7T of global real estate be net zero.
Or the $8.9T of food and agriculture.
Or the $928B of energy generation and storage
If those don’t sound like BIG problems worth solving… I don’t know what does.
It’s time to do the hard(ware) work and be massively rewarded. Because it’s ripe for the taking and there are BILLIONS in governmental grants & tax credits available and TRILLIONS of investment dollars entering the cleantech and climate space in the coming years.
The hard thing about hard things is overcoming short-term incentives.
And that’s where hardware as a service often comes in for incredible hardware + software solutions to not only make REAL impact on the REAL world, but also create opportunities for recurring revenue or leasing/debt options to help the companies more efficiently scale and change the world, like with:
Fractalytic - a hardware AI monitoring & optimization system to cut natural gas usage 10-30%
Aqualitas - smart water sensors to boost fish farm yields and increase energy efficiency
And there are MILLIONS of smart hardware solutions out there - we just have to go find them and create the business models of tomorrow.
Because not every company can raise $500M in debt & government grants to build the next fusion reactor.
That’s where we at 4WARD.VC are here to help. Through our Partner in Clime Accelerator, our Climate Techies Slack and Whatsapp communities and our massive outreach efforts to Corporates & Governments and Universities & Higher Ed, we’re creating the ultimate climate tech platform.
We connect the dots to accelerate the transition to a sustainable future because it’s a HARD problem, but if we can bring the right folks to the table and leverage our world class network as well as align the incentives… well, our motto is
Everyone wins when everyone’s winning.
Now, who is with me?
Who is ready to build our climate-friendly future?
PS. Have you joined our Climate Tech Startup Crew Slack and Whatsapp? If not, it's a great place to network and collaborate with 1.3k+ other climate techies focused on solving major real world problems.
Thanks for reading Clean & Green: Climate Tech & Sustainable VC by 4WARD.VC! Subscribe for free to receive new posts and support my work.
Have you checked out 4WARD.VC's "Partner in Cime" Climate Accelerator program and Climate Investor Syndicate?
4WARD.VC’s “Partner in Clime” Climate Accelerator is disrupting the outdated venture industry with the world’s most hands-on, sales & traction-focused accelerator for elite early stage climate companies led by CRAZY ASS, world class #climate founders tackling MASSIVE problems in areas including Food & Agriculture, Construction & Manufacturing, Commerce & Circularity, Recycling & Waste Reduction, #Energy & Renewables, Transportation & Mobility
For more info and to apply, please visit: http://4ward.vc/accelerator
Thank you Matt, a blog full of knowledge and recommendations for a hardware company like ours, on our way to financing.