Catalyst with Shayle Kann - Can 'deeptech' venture capital solve climate change?

Episode Date: November 11, 2021

Can investors win by betting on early-stage innovations in hard-to-decarbonize sectors such as energy, transportation, agriculture and heavy industry?  The answer doesn’t matter only to venture capitalists. If you believe that we need fundamental science and engineering innovation to climb our way out of the climate crisis, it's an important question. Plenty of reasonable observers say the answer is no. Case in point: The 2016 MIT report Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation by Ben Gaddy and Varun Sivaram. But things have changed since “Cleantech 1.0,” the first wave of investment in the sector that resulted in a lot of bankruptcies -- but also some big hits like Tesla, Sunrun, and Nest. Capital is flowing back into the sector at stunning rates, as venture investors all turn their attention to climatetech. So do the arguments against deeptech climate venture capital hold up today? To explore this question, Shayle turns to Ramez Naam, another veteran of Cleantech 1.0. Ramez and Shayle go point by point, covering questions such as: Does climatetech take too much capital to scale? Is the time to commercialization too long? Is the exit landscape still relatively unattractive? Will this new climatetech boom lead to another bust? Catalyst is a co-production of Post Script Media and Canary Media. Catalyst is supported by Atmos Financial. Atmos offers FDIC-insured checking and savings accounts that only invest in climate-positive assets like renewables, green construction, and regenerative agriculture. Modern banking for climate-conscious people. Get an account in minutes at joinatmos.com.

From the studios of PostScript Media and Canary Media. I'm Shail Khan, and this is Catalyst. Sometimes in talks, I say we're in the middle of a, or at the early stages, honestly, of a $100 trillion clean energy revolution. That sounds like it's just a made-up number. When you actually look at the infrastructure turnover we need to address climate change, it is that big. Do I expect clean tech investment to bust again?

I actually do at some point, but I think it to rise from that. trough as well. So I wanted to kick this show off by tackling head-on, perhaps the most important question guiding my professional life, which is, can deep tech climate venture capital work? In other words, will all these investors who are betting on early stage hard tech innovations in heavy emitting sectors like energy, transportation, agriculture, and industry win? I sure hope so. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage

3.4 gigawatts of flexibility, built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform. when it counts. Learn more at energy hub.com. I'm Shail Khan. I'm a partner at the venture capital firm, energy impact partners. Welcome to Catalyst. And the answer to this question around deep tech plus climate does not just matter to us venture capitalists ourselves. It dictates the availability of

capital for this kind of innovation, which then influences the volume of startup activity, the success of those startups, the talent pool that's chasing the space, and the ecosystem that builds around it. If you believe that we need fundamental science and engineering innovation to climb our way out of the climate crisis, this is an important question. It's also a funny question to be asking right now because there are a couple of ways to look at it. On one hand, during much of the last decade, there was pretty broad consensus in the world of VC investors is that the answer, with some exceptions, cough, cough, Tesla, was no, you can't really make money in aggregate betting on deep tech in climate and energy.

If you want to understand why, that was the conventional wisdom, here's a stat from a 2016 MIT report authored by a couple friends of mine, Ben Gaddy and Verun Sivaram, that was called Venture Capital and Clean Tech the wrong model for clean energy innovation. So here's the stat. In that first wave of clean tech venture capital investment a decade ago, early stage, Series A investors plowed ultimately around $1.4 billion into startups that were in the categories of material or chemical or process innovation and hardware integration, the so-called deep tech categories.

How much of that $1.4 billion had those companies returned to investors by 2016 when the report was written, a grand total of $153 million. Meanwhile, the 157 million that during that same period went into software deals in clean tech had already returned more than 3x. The numbers would be a little bit different today thanks to companies that were actually built in that first wave and have seen big exits since, like QuantumScape, which is a good example. But nonetheless, that was the data that VCs were staring at for a long time. So the lesson was clear. On the other hand, it doesn't take a long scan of the news right now to see that, despite that historical data, capital is flowing into the deep tech climate sector as if the Huber

dam had just burst. And there's plenty of talk around the quote-unquote lessons learned from the infamous clean tech 1.0 boom and bust a decade ago. But I at least haven't seen anyone tackle this question directly, particularly with regard to the hard tech stuff. So let's do it. My partner for this conversation is my friend and fellow traveler Ramez Nam. Mez and I have both been around what is now called the climate tech space since the first wave.

But nowadays, we're both immersed in and investing in deep tech within climate. I help lead the deep decarbonization investing efforts at energy impact partners. And Mez is a partner in the chief futurist at another deep tech investor, Prime Movers Lab. So we both carry much of the same baggage, but we also have both come out the other side, feeling at least some measure of optimism around this question. So with no further ado, my conversation with Mez. Mez, welcome. Shale, it's so good to be here.

It is great to have you. I'm excited to have you on the new pod and also excited to have this conversation with you in particular, which I think you and I have had snippets of off mic historically and have never fully gotten down to it. it's overdue and it's one of the most important questions in climate and clean tech out there. It is. And one that is quite important to both your and my career at the moment. So let's frame the question and sort of how we got there to start. And then we'll dig into it.

So I think our point here is to try to dissect this quote unquote lesson that lots of folks, I would venture to say most folks in the sort of tech and venture capital community writ large. learned in the wake of the Clean Tech 1.0 boom and bust a decade ago, which was some version of hard tech or deep tech does not work for venture capital in climate, or sometimes it's stated as in energy. Do you think that's an accurate depiction of the lesson to start? I think a lot of people believe that, and I think we did have very hard times 12, 15 years ago, but I do think we're in a different era now where it's still tough, but I think there's a lot more reason to be optimistic about venture in deep climate tech today. Right. And we'll get into all those reasons why times might be different or maybe the lesson wasn't right in the first place. But I do think we should spend a minute talking about how that lesson was learned in the first place because it was pretty pervasive for a very long time. And it was taken, at least in the circles that I ran in as sort of like common wisdom in a lot of places.

It is indeed viewed as gospel. Yeah, exactly. So let's like talk through how we got here. Well, we had this big wave between the boundaries are fuzzy, but let's say 2006 to 2011, 2012, of a big rush of venture capital going into what we call Clean Tech 1.0. And then a collapse that started maybe around 2010 in the midst of that. And poor outcomes. A lot of money went into very hardware-focused, R&D-focused. Clean Tech Ventures, and as those failed to pan out, we saw this retrenchment of venture capital.

Maybe it peaked around 2008, something like that, and by 2015, the dollars flowing per year had dropped by a factor of four or five, and especially for the earliest stage deals. One of my first systematic exposures to that was MIT published a report that looked at Series A investments from 2006, 2011, in Clean Tech. And the title of it was, uh, venture capital, the wrong model for clean energy or something along those lines. And it scarred me, I will say, even though I don't agree with that point. Right. Yeah, that was the, that's the perfect, um, emblem of the lesson that was learned. But, you know, I do think that there was a, there was a category of people who sort of looked at what happened in that bust in the 2010 to 2013.

bloodbath that was those many of those companies, though not all of them from that first wave and said, well, clean tech writ large is a bad sector. But then there were others who segmented it out a little bit more and said, no, the mistake here was investing in the hard tech stuff, which you pointed out. A lot of the dollars in that first wave went to the hard tech stuff. I think that's great to point out that it wasn't that segmented in some people's minds and in others it was, and we did have good exits. We saw good exits eventually in the finance side of things and companies like Solar City and Sun Run. We saw exits more on the software side. But the deep hardware, particularly in alternatives to silicon, in solar, in biofuels, battery swappings,

are all things that you've brought up. We saw really a bloodbath there. And that, I think, two things, happened. One, in the minds of those who did not segment out different types of clean tech, that was an indictment of clean tech overall for venture. And two, even among those who did separate it out, they saw hard tech, clean tech, physical hardware advances as still a bad sector and said, oh, we'll just go invest in digital. Yeah, exactly. And so, and then, you know, interestingly, as the, as clean tech has reemerged as climate tech today, there is still, a class of investors who are going headlong into climate tech world, but are saying I'll only do it in a software, digital context, because I still believe it to be the case that hardware is a not-investable sector within this market.

And I think that comes partially from people's background in venture in overall tech. And in consumer tech or B2B tech, you still see a lot of the dollars come from network effects that come from software-rich and data-rich. and network effect, virtuous cycle sort of companies that are hard to replicate even in consumer tech. I do want to point out that they're, interestingly, I think the story even from CleanTech 1.0 is a little bit more nuanced than people give it credit for. I mean, you alluded to, right, so the big categories of where the money pits in CleanTech 1.O were thin film solar, like you said, alternatives to silicon for PV biofuels. and then one big money pit, which you said battery swapping, it was better place.

One company, yeah, single large money pit. And, you know, if you add those three up, those were sectoral bets, or at least two of the three were sectoral bets that just did not pan out. Then film, apart from first solar basically,

didn't win. Biofuels did not scale. From a venture perspective, though there's a pretty big market for biofuels today, and Better Place didn't work out. If you subtract those three things out, it's a very different picture.

And, you know, you weigh those then against the relatively small and number, but ultimately fairly large exits from that period, Tesla being obviously the poster child, but like Quantum Escape now got out, right? And QuantumScape was a Clean Tech 1.0 company founded in 2010 or maybe even earlier. And now, you know, whatever it is today, a $9 million company or something like that. And you're right. And a lot of these conclusions were drawn in 2015. They weren't drawn in 2018, 19, or 2020, or let alone today when Tesla's hit a trillion dollars in valuation or you have these large expenses of companies like QuantumScape. Right. All right. Well, so regardless of whether it was right or not, the sort of lesson was learned, and it is pervasive enough today that

I think it's worth addressing head on. Can you scale a business, a venture scale business, doing something hard tech or doing something deep tech in this new climate tech domain. And so in thinking about how to dissect that question, I think there's sort of four components to the argument against hard tech in climate. So I want to run through these individually, but I'll just name them all to start. The first argument is that it's too capital intensive. Just takes too much money to get to scale. So by the time you do it, the exits don't look that attractive or maybe you'll never get

there because it's going to take too much capital. That's argument one. Argument two is that mostly in the world of climate tech or energy tech, you're competing in commodity markets. And so at the end of the day, you know, there's no opportunity for outsized margin or value creation for a startup. Argument three is that it takes too long. This has been a common trope as well.

It's just too time intensive to build out these new technologies in these, you know, large incumbent historically slow-moving sectors. And so from a venture timescale perspective, you can't get a commercialization or an exit in time. And then finally, there's just no attractive exit landscape. You know, even if you can get all these other things done, there aren't strategic acquirers who will pay a premium. The public markets aren't interested in it. And so there's just no outcome for investors. So those are our four arguments.

And I think we should talk through each of them individually. So starting with the first one, too much capital to scale. What is your perspective on that in today's? Well, I think it is a lot of capital required to scale physical hardware technologies. There's R&D capital up front, but then just because things go through learning rates where getting to scale is part of how they achieve innovations in the manufacturing process and so on that drive down costs. That looks awfully expensive. But I think that's in a bit of a vacuum. If you look at, you know, some real darlings of the tech VC world, companies like Uber or Lyft or Wework,

you see companies that have burned through an enormous amount of capital far more than most clean tech companies ever have or ever will. So I'm not sure that on its own, the too much capital scale argument really holds that much water. And the flip side of that is, you hate to say this as a VC to some extent, but it does matter how much additional capital is out there to help companies get to scale. You don't want to invest in something, no matter. how brilliant it is at a seed or Series A if there are just no follow-on investors. And the landscape of venture and how much money is available in funds to invest in these companies at both early stage and growth stage has changed radically just in the last 12, 18 months. We've seen billions,

you know, at least 5 billion in new funds for early to growth stage come in the last just 12 months. And that makes the risk proposition look a little bit better. And we can talk about why that new capital is flowing in, because I think it's for legit reasons. Yeah, I think that's exactly right. I mean, you know, it's worth remembering that sort of this world in which the capital intensity was a big, considered to be a big problem, maybe a death knell for a lot of these companies, that was a world pre-soft bank vision fund, let alone pre-today's environment with all the crossover hedge funds throwing tons of money into the sector with all these new

big growth stage funds. I was looking back at Pitchbook. Pitchbook counted 597 what they called mega rounds, individual rounds over $100 million in the first three quarters of 2021, not in climate tech just across the board. But, you know, we're in a funding environment where like the scale of capital available to companies that have big promise, big markets and so on. is unprecedented. And so to the extent that that doesn't disappear,

and I'm interested in your take on this, I think it's only going to grow in climate tech for at least a few years, given the interest from LPs and commitments into these new funds, I think you've de-risked the part of the question that is, is there follow-on capital if this works out? The answer to that is yes.

More than at any time in the past ever, there is follow-on capital. I do think we'll see that oscillate. I do think we'll see waves that come and go, just depending on the macro environment, what happens with the stock market and the global economy, and so on. But you're right. LPs have more interest than ever, and the policy environment and the competitive environment of how well clean tech stacks up to dirty tech have just changed the equation. So the long ground, I think we'll see more and more of this capital. Yeah, as I was thinking about this question,

doesn't take too much capital to scale for companies in this space, especially for manufacturing, it strikes me that it's only really a problem for two reasons. The first is if the capital isn't available, which I think we basically just pointed out it is for the moment. And then the second is it does basically put you at a higher bar for an exit, because if you are going to raise a lot of capital before you have an exit, then that exit needs to be commensurately larger because you're going to have a much longer capital stack at that point. And so it's inherently related to the fourth point we will talk about, which is what does the exit landscape look like?

But it does, I think, mean that for these companies, you know, you can't build a really expensive manufacturing hardware climate tech company that's going to take $400 million to reach manufacturing scale that then doesn't have a huge opportunity on the other side. I think that's absolutely right. Virtual power plants are becoming a reliable way for utilities to manage capacity, but enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched, and being able to prove it, from the control room to the living room. Energy Hub's platform handles the full picture, from near real-time forecasting, locational dispatch,

and the kind of rigorous verification that holds up when regulators, grid operators, or leadership, ask, did it deliver? Easy enrollment creates momentum, proven performance builds trust. That's why more than 170 utilities rely on Energy Hub to manage over 2.5 million devices delivering 3.4 gigawatts of flexible capacity. See what that looks like at Energyhub.com. All right. So first point down, too much capital to scale. I mean, I think the short answer here is like, yes, it takes a lot of capital to scale. No, it doesn't necessarily take way more capital to scale than some of the other businesses that are getting built, and the capital is available.

All right. Let's move on to number two. Competing in commodity markets, so there's no opportunity for margins. What's your take here? Well, I think I would actually break this up into two separate questions. There's the extent to which Clean Tech has and does compete against non-clean tech commodities, and then there's the extent to which different types of Clean Tech or different companies in Clean Tech compete.

compete against each other, and that's the sector. And I think when you look at biofuels in particular, we had this phenomenon where 2007, 2008, we had oil prices sky high. And so there's a lot of optimism around biofuels because the bar you had to hit as far as your cost per gallon or whatever metric you had for a cost didn't look so infeasible. And when the oil price collapsed post the 2008 financial crisis, you had the overall landscape of what you needed to compete against for fuel going into a tank change radically. And so I think that competition against commodity markets is real. I do think it's very different now with policy that is really driving scale of clean solutions. And at this point, the obviousness that we're going to have policy ratcheting up and up and up over the long run.

that was, I think, a little bit less clear 12, 13 years ago. Now, there is this other phenomenon, and I think here you see it in thin film PV, that in addition to the sort of the competition against, let's say, coal or gas in that case, and gas prices coming down didn't really help the solar market either. You still have this phenomenon of every solar hardware company, every solar hardware company is in some sense competing against every other solar hardware company. And they're all riding these learning curves of the cost coming down. So I'm not going to say that's not a problem, but I do think there are smart ways to be an investor in that. One is to not underestimate the pace of reduction of either fossil fuels in cost or of competing clean tech, especially the dominant

clean tech. But the other is to look for either initial niches. where a new company can get a foothold, where the dominant technology doesn't win automatically, or parameters other than just straight up unit cost where you can compete and differentiate. And I think that was a little bit lost in the first clean tech hardware investment cycle, but now I see investors being a little bit more savvy and nuanced about that. You hit on a couple things I want to follow up on there that have been on my mind. one is you mentioned the sort of increasing obviousness of policy coming. You know, a sort of sub lesson that I think was often learned in that first cycle was you can't bet on policy, right? Or you

should not invest off the basis that policy will be coming. There's interesting trends in the market right now, like take carbon removal as an example, direct air capture, something like that. Like, that is inherently a bet on policy, right? It's hard to imagine that market really scales in the absence of substantial policy. So is it just now that it is more certain that there is enough policy coming and so it's okay to make that bet? Or are we just deluding ourselves?

Well, I'd say, look, within clean tech and deep tech, there's some sectors I'm more confident than others. And there's somewhere the policy momentum, the policy train that's coming is really, really obvious. I'd say, for instance, storage, energy storage for electricity, it is completely obvious that renewable penetration is going up and up and up, and that focusing on decarbonization of grids is the first thing that policymakers around the world are doing, whether it's Europe as a whole or the UK, now it's up from the EU,

or 30 U.S. states, or maybe the U.S. federal government. And so there it's just dead obvious that there's a huge market for storage, or mobility storage, you know, the storage market for EVs, is much, much bigger than it is for a stationary storage. And there again, just that the momentum on EV growth driven both by policy and cost of clients is just enormous. Other areas are perhaps a little bit more speculative. But you do see with the EU's fit for 55, 55% carbon reductions from 1990 by 2030, with the EU negotiating a 2050 complete net zero, with a handful of U.S. states having effectively net zero loss in the books for 2045 or 2050, you do see something

coming that's going to require innovations outsiders to electricity and transport. And so I'm not sure that carbon removal is the place where I have the greatest confidence, particularly CDR or DAC, but I do see that we're going to have over the 20-year time frame, A 30-year time frame, very clear push in some parts of the world for going well beyond electricity and transport and decarbonization. The other dynamic at play here that my views have, I'd say, changed on somewhat over time, and particularly in the past year or two, is the concept of the green premium in a commodity market. So, again, the sort of historical lesson is, there is no such thing as a green premium in a commodity market. It's a commodity market. And so either you're pricing at parity or better or you're not selling into the market.

And, you know, we've started to see some cases in high volume commodity markets where at least at some meaningful scale, there are customers who will pay a premium for a zero carbon product because they will reap the benefits from having done so downstream. They will reap the benefits with their customers, with their employees. they're reap the benefits with their shareholders and activists who are leaning on them. And there feels to me to be enough of that momentum that I'm willing to say, at least in some of these sectors, that it's actually okay to assume a green premium while you are initially scaling. In the long term, you need to be cost competitive. There's no question.

But can you come to market not being the cheapest source of X on day one? I think in some markets, the answer to that is yes. has to do with sort of the degree to which there is consumer visibility into the use of X and then how much that pressures the customers? I think that's totally fair. And I think you see it, when you look at electricity, this goes beyond electricity, you look at the RE100, these companies that have committed to all of their electricity coming green sources.

What you see there is it's tech companies, which there's a certain psychology of that, that they're founder-led or one generation from founders. The founders have certain attitudes. there's a fierce competition for talent, and you see that employees in tech really want their employers to go green. But the next segment in the RE100 are primarily consumer brands, B2C brands. And when you look at them, those are B2C brands that already sell their products at a premium, that already have higher margins than the sort of lower brand value competitors they have,

and they know that Clean is a brand halo. So they're all looking for how do they position their goods as clean. So even if the clean technology you're selling is really B2B or selling into corporates, they want to inherit the brand halo from that so they can keep positioning the products they sell to consumers as a higher price, more premium product. The other point that Rebecca Dell from Climate Works Foundation is made to me repeatedly, which I think is really salient, is that from the consumer brand, perspective, oftentimes if you pay a premium for the most carbon-intensive parts of the thing

that you are making, you can pay a fairly hefty premium for those things, but the cost of the end product isn't affected nearly as much because the cost of those things aren't that big a share of the end product. So examples would be like, you know, we see this in cement and steel, right, where there's buyers consortia that are starting to form now saying, I'm a big buyer of steel and I promise to source green steel with some volume. by some certain year. And, you know, my expectation is they recognize that probably in the early years of doing that, they're going to pay a premium for that green steel. But is it going to significantly drive up, if I'm BMW, is it going to significantly drive up the cost of a car

to an end consumer if you pay a little bit more for steel in some of those vehicles? I don't think so. Same thing with cement and buildings, right? So there's a way to sort of hide that extra cost if you're getting enough value out of the B2C side at the end of the day. Yeah, you tweeted something about this just a few days ago, actually. And I think steel is one of my favorites, because, you know, as a crude approximation, about half of steel goes into buildings and half goes into cars. And you see automakers, who all, except Toyota, have decided that the future is electric and that, you know, they are moving in that direction in part because consumers want vehicles like that.

You see automakers starting to signal demand for green steel, as you were saying. And some analysis that I've seen is that that might, while it increases the cost of steel, certainly now, it might increase the cost of an auto by small, single digit percent overall. And so there's a chance that for some of these automakers, they might start that green steel utilization in their highest end products, use that as a way to get a brand halo. They might increase their margins. We don't really know at this point. But it doesn't have to be a gigantic hit to the overall product cost, as you were saying.

I think one of the biggest drivers, biggest unheralded drivers of the climate tech revolution, of the success of these companies in the long term, is going to be the fact that there is perceived to be, and I think increasingly proven to be a brand halo associated with zero carbon, low carbon, clean products. It turns out, you know, if customers really care about that, it will drive all sorts of activity upstream. I think you're right. And this is steel, by the way, is a sector a couple years ago I wrote a piece for tech crunch on how to decarbonize the U.S. in the world. And I said, look, I'm more freaked out about industrial emissions and electricity. Because we should move fast in electricity, but industrial emissions and agriculture are the

places we've made the least progress on. Steel is like 8% of global carbon emissions. It's three times aviation. Consumers don't really pay that much attention to it. Policymakers haven't either. But honestly, what we've seen in steel makers like SSAB and in Sweden and in automakers expressing demand is a lot more progress in the last 24, 36 months in that sector than I expected at all. Well, this is my other thesis of part of what's happening in climate tech world and where to find opportunities from an investment perspective or technology perspective, which is that I think a lot of smart people have started to just look sector by sector at the biggest culprits

and lay a lot of pressure on those sectors. Steel is at the top of the list for the reason you described, right? It's 8% of global greenhouse gas emissions alone in a single sector, single largest source of industrial emissions in the world. Cement is second to steel, also getting a ton of attention. You know, petrochemicals and chemicals are one beneath that. Like, we're just going to go down the list, right? And everything that's on that list in the top, I don't know, 20 or 30 is going to get a lot of pressure over the next five to 10 years. And that means there's going to be opportunity for zero carbon alternatives. That's right. And I think it's in part because we've made progress on electricity and transport. I'm honestly,

deployment, we have a lot more to go. But now the writings on the wall, that clean electricity and electric vehicles are just going to win on cost. So now you are lifting their aspirations. Policymakers are, corporates, our investors are, of what's next? What do I have to do to go beyond that? All right. So back to our list, this second argument that, you know, you kind of can't compete in commodity markets. I think my takeaway from this is basically, it is actually really hard to compete in commodity markets. And you've got to be realistic about that. Like, it's tough to build a business that does that successfully with some novel technology, particularly in these sectors where, like, we've been making Portland cement the same way for quite a long time. So you've got a

high bar if you want to try to compete with the traditional process or the traditional type of cement. With that said, there is enough buyer pressure that if you've got a viable solution and a clear path to scale, then there's a pathway for you where I wouldn't have said there was five, 10 years ago. Yep. Okay. On to number three, timeline. Time to commercialization is too long.

It takes too long to build these things. This is actually probably the one that I heard, I would say, the most in the wake of Clean Tech 1.0 is people just saying, like, this stuff takes too long. So it's not a venture capitalable sector. What's your take on timing? Well, the timeline is longer for anything hardware-related than it is for pure software. You can start a B-to-C software company or a B-DB SaaS company and be selling products a year, two years down the road. Clean tech or anything really deep hardware related is

not going to be that fast. That said, now we start to see exits happening before commercialization has been achieved. You brought up QuantumScape earlier. That's a great example. Or ESS, you know, my portfolio just went public two weeks ago now when we're recording this. And they've got a commercial product, but they haven't certainly hit commercial scale at this point. And I think that speaks to retail investors also being very excited about this sector, seeing the huge opportunities, seeing, I think, in a large sense what happened with Tesla and wanting to find the next company in that sector. So I'm not going to say this is not a problem.

This really is a challenge, but it's no longer the case that we have to wait all the way until we have a product commercially on sale or at scale for this to produce an exit. Yeah, I would add three things, I think, on the timeline. question. The first one is that, as we just alluded to, there's a lot more urgency from buyers of these future products than there was historically. And so it's, I think, easier for credible solutions to get firm orders. I mean, LOIs certainly, but increasingly firm orders as well earlier in their life cycle. So like, we have orders for electric planes from, you know, electric aviation companies that are going to come to market in 2026 at the earliest, but they have orders

from big airlines today. That kind of thing is relatively new. And though it doesn't bring you to the market earlier, it certainly makes it easier for you to get from here to there because it's going to make it easier for you to raise capital and bring on more partners and so on. So first, I think there's sort of more urgency from buyers that draws forward commercialization for companies, even if the technology timeline still takes longer. The second thing is that I think there are some of these sectors in which you can iterate faster today than you could 10 years ago. We now have the applications of machine learning and AI to R&D in ways that we never did before. We have new tools like synthetic biology that are being applied.

All these things mean that there is sort of an opportunity for faster technology iteration that can bring things to market faster purely from a technology perspective, setting aside the other reasons it takes a long time, which is regulatory and incumbency. And then the third is that obviously, you know, the hand in hand with it taking a long time to do things is that it's tough to do those things. And so when you succeed to the victor go the spoils, you should have a pretty clear moat. Whereas as you said, you can build an enterprise software company pretty fast. It doesn't inherently mean there can't be another competitor that builds the same thing even faster. I think that's totally right. And we used to believe that these companies,

the software side, had much bigger moats than they do. We used to believe that or companies like, again, I'll say Uber or Wii work, we thought, oh, they have natural network effects. They're going to have a gigantic moat. But it turns out switching costs for consumers are actually pretty low and maybe lower in some of those purely software or primarily software app-based businesses than they are in really hard technology. All right. So take away on this one on the timeline. It does take a longer time, typically. I think we've both. We've both said that. But despite that, it seems less to me that it is sort of a death knell for an early stage startup than it was. One, because maybe you can move faster.

Two, because you have more commercialization opportunities in the meantime. Three, because you may have an exit before you reach commercialization or full-scale commercialization. All these things just make it such that, you know, taking longer is not the end of the world. There's also other sectors for what it's worth. Like pharma is a big sector with long timelines, generally speaking, you know, heavy regulatory environment where there's been proven success for decades from a venture capital perspective. It's just whether the sort of, whether the prize was worth the risk, which it clearly

was in pharma and maybe wasn't clearly for a while in climate. That's right. And that prize is looking better and better and better in climate now. Right. And so that gets to the last point. Unattractive exit landscape, which I think was true before. There were not buyers who would pay big premiums for zero carbon alternatives to things or zero carbon businesses, you know, the public markets were not super friendly to these companies. And so it wasn't clear if you were successful what it was even going to look like for you. This is maybe the one that most obviously has changed. I think this is the one that's had the hugest change just the last 12, 18, 24 months. And some of it is the public markets, certainly with SPACs, it's just been a huge enthusiasm

around deep tech. And I think it's a fair case we made that SPACs have generated more upside for deep tech in climate tech and in other sectors than they have for any other type of investment. As public investors really understand retail investors kind of can get their heads around what happens in a deep tech company, I think, or what the product is like, or what the impact that it has. But I think the other is the big, gigantic, multi-billion dollar exits get most of the attention. But acquisitions have also been.

been over not just the last 12 months, but the last, you know, three, four, five years have been very substantial for earlier size exits. And you see that, I think, especially coming out of Europe, you see European utilities, companies like the NLs and Ibradorolas of the world. You see even the European oil and gas companies, like them or hate them, what you see is they all understand that there's a clock ticking on their current Canada. cows, and they're all trying to get a piece of the new pie in clean tech. And that's provided some of the best exits for companies like EV charging companies. I think you'll see that in sectors like hydrogen as well.

So it's a more robust exit landscape in both the public markets and in acquisitions. That's right. And I think the other point that's worth making is that it's not just the SPAC thing. I mean, two other things have been going on in the public market context. One is that the sort of IPO market, traditional IPO market, has started to open up to some of this stuff as well. So it's not just SPACs. You know, we see companies in hard tech pre-revenue world, even outside of clean tech, right?

So take like too simple, which is an autonomous trucking company that went public traditional way, despite being pre-revenue and being deep tech and having all the same risks everybody else has and has whatever it is, an $8 billion market cap or something like that today. And there's a bunch of other examples like that as well. let's see what Rivian does, you know, when it goes out with $80 billion market cap or whatever it's aiming for. That's not a SPAC. It's just an IPO. So there's, you know, the sort of SPAC thing is maybe bleeding into the public markets in other mechanisms to get into the public markets. And the other thing is that the stuff that is deemed climate tech, at least as I've defined it,

is performing well in the public markets as well. So we, a while ago, ADIIP, just for our own purposes, created this index, called the EIP climate tech index, and it just tracks a basket of public companies, some of which were D-SPACs, some of which were just, you know, larger public climate companies take companies like First Solar, and Vestis and Tesla and all these. Tracks them all as a basket. So as of now, since the beginning of 2020, NASDAQ is up 62% as of this recording, and our climate tech index is up 97%. So it's performing roughly 50% better the NASDAQ over that period, which is to say not only are the markets open, but they seem to really attach a premium. That's phenomenal. And we've seen that in other areas as well, just looking at

in energy companies. If you plot energy companies on one scale by what percent of their revenue comes from clean energy, and on the other scale by what's their multiple of earnings that they get or multiple revenue that they get in the public markets, it is off the charts. So you compare and Orsted, for instance, to any oil company, and you just see this incredibly higher multiple because people see the market that Orsted is an offshore wind, one of the leaders there, as a huge growth market and them is having a real competitive advantage. I do want to acknowledge the one thing I don't think we have seen yet in the context of climate tech, which is like mega acquisitions, which we do see in software world.

So, you know, the sort of like Salesforce buying Slack for $28 billion and that, you know, there's tons of many multi-billion dollar acquisitions in software world. I can't think of too many of those yet in climate tech. Now, it may just be a little early, right? Because a lot of these companies newly have very rich currency that they didn't have before. So it may be coming. But that's the one thing that I think we still need to see to really feel like this kind of like exit landscape question has been settled.

I think it's a fair point. And I think it remains to be seen what will happen when we see big shifts in the commodity energy markets. What happens if, as we hope, oil demand peaks this decade? It is just a rule of them that capital chases growth. So what's going to happen to these integrated international oil companies? What are they going to be, are they just going to be winding things down, just returning money to their shareholders or are they going to be trying more and more desperately to pivot? And the same with the same with utilities. All right. So we've tackled our four arguments for why hard tech and deep tech is a bad fit for venture capital in climate. But we haven't covered all the things that might be different now from the first cycle. There's a long list, and I don't think we need to spend a ton of time on them, but maybe we go back and forth and just name things that are also different today from CleanTech 1.0. Number one for me is just pure market size. If you go back, 2004, the world was spending maybe $50 billion on clean tech very broadly defined. Now we're spending well north of $500 billion. And that just means to the victors, to the companies that win in this area, the spoils are

larger based on current spend, and we have this long track record of growth. And people expect, you know, by 2030 we're spending a trillion dollars a year in clean tech. All right. So bigger market. I'll add the talent is a whole different caliber. I mean, there is, the talent that is flowing into the climate tech world right now is unbelievable, incredibly strong, driven by urgency. I think there's a generational thing that's a part of it. You know, there's sort of a whole generation of people who are coming of age right now that feel differently about climate change, feel a different sense of urgency than the same age people did 10 years ago or 12 years ago. And they have incredibly strong pedigrees. They're tackling

really big problems. So I think that the talent pool is just a whole other caliber. I completely agree that. We've seen that a bunch of things like the climate draft, things with what we've seen happening with my climate journey, pulling more people in and just a fierce hunger there. As a riff off that, I'd say the venture talent, we've had more and more people come from traditional venture backgrounds and say, this is what I'm doing, or even come from energy venture backgrounds that used to invest in fossil fuels and saying, this is what I'm doing. And that, in terms of bringing in new capital and bringing in mentorship, strategic advice, and so on, I think is not to be underestimated. All right. I have a couple more things that are different. One is that

we've proven a winner in the form of cheap renewables. Now, it wasn't necessarily, you know, an overall sectoral winner from a venture capital perspective, but, you know, one thing that is true now, and you alluded to it before is just solar and wind got really, really cheap. And lithium ion batteries are getting really, really cheap. And everybody now appreciates that. And it's sort of widely recognized and they happen to be zero carbon. And, you know, we've proven that it's possible. I think EVs are the next one, right? Like, we're sort of proving that it's possible to do it. We didn't really have those proof points before. And so I think those, all those things having happened or being in the process of happening and being sort of inevitable, make it easier to

imagine the next thing succeeding. I think that's massive. I would add to that, a proof point for investors in the form of Tesla. And I don't think that one company can be ignored. When you have a trillion-dollar company that's really a clean tech company, it completely changes the mind of retail investors about what's possible, both as competitors or things and that etc. are just things that rhyme or component suppliers like QuantumScape that could change the game in that area. And it changes to some extent the viewpoints of venture investors as well. Yeah, there's one thing I like to say to companies that we're talking to, which is if you're going to try to do something big, you're either, you're either going to be riding a wave or you're

building a wave. And, you know, Tesla built a wave. And that's the hardest thing to do. They like, you know, absent Tesla, maybe we would have eventually electrified passenger vehicles, but certainly wouldn't happen as fast. You know, that if you're, if you're trying to build a wave, the bar is set extremely high for you to do so, but, but it is, you know, the biggest opportunity on the planet. You could still build really huge, successful enterprises riding that wave. So if the wave is vehicle electrification, now you need better batteries. So you're quantum scape. You need better lithium mining. So you're one of the direct lithium extraction technologies. You're building better anode material. So you're sealing anotech. Like there are going to be many, many billion

companies built off of the back of vehicle electrification. So you either can build the wave or you can ride the wave. And if you correctly identify the wave that is being built and time it correctly, then, you know, the opportunity for you is still really large. Yeah, I think it's a great way to put All right. The other thing that I would say is different is my final one is that I think there's particularly for deep tech in climate, there's a much richer ecosystem to help bring you along, especially in the early days than there was before. So the sort of maturity of places like ARPA-E much, much stronger than it was. It existed in the first cycle, sort of midway through the first cycle, but it was really just getting up and running. Now it's a really big

burgeoning organization with like a lot of heft behind it. private sector organizations like Activate and all these other ones that can help bring scientists from sort of like the lab into pilot maybe or somewhere in that early stage. There's a rich capital ecosystem at that stage too. So this kind of like warm bath that you can be put into as a early stage deep tech entrepreneur focused on climate, I think is a real game changer ultimately. That's a fantastic one. My last one is just the global activation of passion around this.

Everything from activists marching in the streets to the school strike for climate to the effect that has had on policy. And I know I've mentioned this before, but it is now just crystal clear whether you're in Brussels or in New York or California or in Beijing, that the world is going to do more and more on this sector. people are experiencing extreme weather and have the perception that climate is here and now, whereas even five years ago they thought it was something to do with in the future. And I think that has just crystallized thoughts and minds on this and will continue to drive

more and more enthusiasm in the sector. All right. So what's your verdict? Can Deep Tech venture capital work in climate? Shail, I'd say right now Deep Tech venture is working in climate. If we look at the exits just over the last 24 months and the ones that look like that'll happen in the next 12 months, it's, there's future is always uncertain.

But right now at this moment, it is working. All right. Well, I'm right there with you. It is what I spend my time on. So obviously, I think it's going to work. But, but no, I do think, I think it, you know, it's interesting as I've thought through this over the past few years. I think it's a combination of times have changed and we learn the wrong lessons.

last time. I think both of those things are true. Like there are things that are different, but also I think we tacked too far in a particular direction. We collectively tacked too far in a particular direction after CleanTech 1.0. And so it's nice to see the pendulum swinging back in the other direction. And the pendulum might swing back again, but it will swing forward again as well. We are just, you know, sometimes in talks, I'd say we're in the middle of a, or at the early stages, honestly, of a hundred trillion dollar clean energy revolution, essentially. We're going to turn over. That sounds like it's just a made-up number.

When you actually look at the infrastructure turnover we need to address climate change, it is that big. And I have confidence that humans, when backed into a corner, will just start acting more and more aggressively in this sector. So do I expect clean tech investment to bust again? I actually do at some point, but I think it to rise from that trough as well. Mez, thank you so much for doing this. Exactly the conversation I wanted to have.

Always a pleasure, man. Rames Nam is a partner and the chief futurist at Prime Movers Lab. Okay, so this is a very real thing. My wife is currently pregnant with our first child. She's also an only child, and she's currently sitting right here next to me, as you could hear. And she has agreed that if we hit 100,000 downloads of this podcast in its first month of existence, then our child's middle name will be net zero, or possibly NZ, something similar.

But. But if we don't hit 100,000 downloads within the first month, then she gets full carte blanche to give it whatever middle name she wants. I'm smiling because it's going to be good. So do with that what you will, audience. Catalyst is hosted by me, Shail Khan. This show is a co-production of PostScript Media and Canary Media. you can find me, Canary, and PostScript on Twitter.

Tag us if you want to provide feedback on the episode or if you want to suggest future topics. You can find background links on topics and guests from this episode in the show notes or you can go to canarymedia.com. Our producers are Daniel Waldorf and Stephen Lacey. Sean Marquand composed our theme song. I'm Shail Khan and this is Catalyst.