VCs love data. They use it to decide who to invest in, which companies to pass on and which markets to focus on. Their vocabulary is made up of the KPIs they appreciate most, from EBIT and CAC, to LTV and TAM (that’s earnings before interest and tax, customer acquisition cost, lifetime value and total addressable market, to everyone else).
This nerdy obsession with numbers has even led some VCs to crunch data on behalf of governments. Just look at Kleiner Perkins' Ryan Panchadsaram, who is heading up a Covid-19 tech response team for the US Government, or UK VC Kate Bingham, who last year bagged a vaccine procurement role.
But despite this passion for data, there's one set of numbers that nearly all early-stage investors are ignoring: climate performance metrics — specifically, a startup’s potential to reduce the world’s greenhouse gas emissions. This is a huge mistake.
Why? Because in 2021, economic data alone cannot reveal the full potential of any given investment.
The climate tech opportunity
Today, corporates are pledging billions of euros to achieve net-zero, governments are putting ambitious climate policies in place and an ever-growing number of consumers are putting eco concerns first. Put simply, climate performance will become a core value creator of our economy — and there is already evidence for this.
Climate tech presents one of the biggest investment opportunities in history — the BCG Henderson Institute estimates cumulative global investments towards reaching net-zero by 2050 will reach $75tn.
Europe in particular will become a Disneyland for early-stage VCs investing in climate tech.
Europe in particular will become a Disneyland for early-stage VCs investing in climate tech: besides policies to more than halve emissions by 2030 and to hand out R&D grants totalling almost a trillion euros in the coming years, it also accounts for 45% of all patent applications worldwide thanks to the number of world-leading institutions based here. Yet, only 6% of VC dollars go to climate tech globally.
Why don’t VCs care?
So why don’t VCs pay attention to climate performance metrics? There are three highly interdependent reasons:
1. VCs don't invest in what hasn't been proven
VCs are known for herding, which is why they are often later to critical trends than they would like to admit.
As Peter Thiel states in the Founders Fund manifesto: "We wanted flying cars; instead, we got 140 characters." The reason for that is data: you can only extrapolate what already exists. Since climate performance is not being consistently measured, we’re stuck in a closed loop.
2. Existing climate performance tools aren’t made for VCs
There are no mature startup- or VC-first tools on the market that can forecast climate performance.
The carbon and ESG accounting tools that exist, such as the Greenhouse Gas Protocol, are not useful for VCs or asset-light startups, because they are designed for corporate operations that have a lot of supply chain data and are often under regulatory pressure.
3. For VCs that do care about climate, it’s complicated
Estimating tech’s climate return potential is a highly complex problem. Not only does it require digging into climate science, but also economic and policy forecasts.
From my conversations with scientists and VCs, there are two sides that need to be bridged: scientists are anxious that tools that would be somewhat useful for VCs today are overly simplistic, disregarding important assumptions and uncertainties.
Most LPs, on the other hand, aren’t keen to fully understand what climate return is or how to estimate it to the highest level of accuracy. Many do not put pressure on the VC funds they invest in because they believe that a direct focus on profits is sufficient. Hence, VCs don’t want to build a rigorous competence in climate assessments.
More tools, more collaboration
For the minority of impact VCs that are trying to measure climate performance, sparse third-party reports are the only resources that are available, and these tend to be too high-level to base investment decisions on. These include papers by Project Drawdown, the IPCC, UNFCCC, or Right. Based on science.
Therefore, to get more investors switched on to the potential of tomorrow’s climate unicorns, more tools need to become available, and it will take a collaborative effort to build them. There are some tools that look at the potential on a technology level, such as CRANE; or a startup level, such as Climate-KIC’s LCA-based tool, but these cover only a fraction of the data scenarios an investor would need to estimate emissions reduction potential, let alone other metrics.
For the good of our economy, our society and our planet, we will need to find a way to connect science and the climate tech ecosystem. Coinvestors need to find a common language to discuss climate potential with each other, with startups and with their LPs.
When this happens, investment decisions will no longer need to be based solely on traction, team and market potential. Once investors can truly tap into the climate performance potential of their investments, the transformation our economy needs will pick up pace.
