Climate Change Issue

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Climate Change Issue FALL 2020 The founders, investors, corporations, and policies helping solve CLIWe climate change. MATE can CHAN fix GEit. 06 A home for Tough Tech founders. The Engine, built by MIT, is a venture frm that invests in early-stage companies solving the world’s biggest problems through the convergence of breakthrough science, engineering, and leadership. Our mission is to accelerate the path to market for Tough Tech companies by providing access to a unique combination of investment, infrastructure, and a vibrant ecosystem. Tough Tech Publication 06 October,2020 The Engine, Built by MIT Edited & Produced by: Nathaniel Brewster Design: www.draft.cl Print by: Puritan Capital, NH & MA CONTENTS 04 Introduction 06 Cleantech’s Comeback 12 Thoughts on a Changing Climate 28 A Survey of Companies and Technologies 56 The Engine Portfolio Companies 76 The Engine Network 77 Tough Tech’s New Home INTRODUCTION A Climate of Hope In an era of great uncertainty, I remain optimistic. For every group of founders in which we invest, dozens of others are also pursuing solutions to challenges like climate change. | TOUGH TECH 06 4 Last month, as multiple hurricanes those at the forefront of the cleantech existential imperative of deploying barreled toward the Gulf Coast and revolution, recording their perspectives capital in cleantech startups as well wildfre spread unchecked through on the present and future of sustain- as the necessity of an infrastructure the West, the threat of climate change able technologies, climate policy, and to support technology and business became tangible for many Americans. investment. I suspect you will fnd their development as effciently as possible. perspectives encouraging regarding While the problem seems ever more the technology at our disposal and, In an era of great uncertainty, I complex, we have understood for simultaneously, demanding of addition- remain optimistic. For every group of many years what the solution set al innovative breakthroughs to move us founders in which we invest, dozens of should include: policy that enables the toward decarbonization. others are also pursuing solutions to deployment of clean technology and challenges like climate change. These catalyzes further innovation in critical Of course, innovation will play a founders are made of incredible stuff felds. Such policy is a patchwork of critical role in our response to climate — intelligent, focused, and dedicated technology, investment, and regulation change. While electric power systems to building a sustainable future.+ that depends on a diverse and moti- possess the technologies to drive de- vated group of researchers, innovators, carbonization within the next decade, entrepreneurs, policy makers, and a number of carbon-intensive indus- business leaders across the world that tries require scientifc and engineering have dedicated their lives to fghting breakthroughs to move us toward deep climate change. As we embark on a decarbonization of the entire economy. critical decade, this group and its bold Katie Rae actions give me hope. As investors, we see great opportu- CEO & Managing Partner nity in supporting those innovative The Engine This publication acknowledges the breakthroughs, but we recognize that scale of its subject matter and strives systemic change is necessary for these to provide readers with an impactful technologies to reach commercial summary of the technology and invest- impact. Beyond strenuous technical ment landscape for the current gener- journeys, climate solutions often ation of cleantech — while refecting have common challenges. How do on the developments that made the you deploy meaningful frst-of-a-kind | TOUGH TECH 06 technologies of today possible. projects at scale, while competing against economically stable incum- Community is at the core of The bents? How do you establish fnanc- Engine — the open exchange of ideas ing pathways to avoid “valleys of that drive us all forward. In that spirit, death” during early-stage growth? we’ve spoken to a broad group of Investors of all types understand the 5 | TOUGH TECH 06 6 Cleantech’s Comeback. What we learned from the collapse of investment in Cleantech 1.0 and how we can ensure the success of Cleantech 2.0. By Michael Kearney, Senior Associate, The Engine Cleantech 1.0, investors piled $25 seem large, the paths to market are billion into cleantech startups from arduous, and value capture in those 2006-2011, funds that resulted in markets is challenging. For Cleantech little return on capital.1 2.0 to be a resounding success for The subsequent fight of capital venture investors, a series of structur- from cleantech increased commercial- al reforms and government interven- ization challenges for the struggling tions are necessary. sector. In the latter part of the 2010s, The climate challenges facing the however, the tide turned once again planet are numerous — emissions are for cleantech startups. With $4 billion tightly tied to global economic growth invested in the space since 2017, and, despite progress in reducing investors clearly have renewed interest emissions in the electricity sector in supporting cleantech companies. through deployment of carbon-free So, what have we learned from electricity and effciency gains in end Cleantech 1.0? What are investment usage, achieving the Paris Climate Ac- frms doing differently to account cord goals of limiting global tempera- for this newfound knowledge? What ture increase to 2°C will require both | CLEANTECHS´S COMEBACK problems may still exist, and what can an extraordinary build-out of existing be done to solve them? In short, the renewable resources and rapid inven- investment community has moved to tion and diffusion of new technologies. account for the deep technical risk, umerous accounts have documented long development timelines, and capi- the collapse of venture investment in tal intensity associated with cleantech the clean-technology sector during investing. However, while energy /1/ https://energy.mit.edu/ the frst ffteen years of the 21st markets, including electricity, fuels, wp-content/uploads/2016/07/MITEI- century. Retrospectively known as and transportation infrastructure, WP-2016-06.pdf 7 There is an emerging body of Society must approach the existential evidence that in the energy sector, challenges of climate change from /2/ Nanda R, Younge K, Fleming startups are more likely to fund high- every angle — every tenth of a degree L. 2015. Innovation and entrepre- risk, high-impact technical projects2 increase in global temperature that neurship in renewable energy. In compared to large incumbents with we are able to mitigate has meaning- The Changing Frontier: Rethinking incentives to show growth on a quar- ful implications for the future of our Science and Innovation Policy, ed. terly-returns basis that is not aligned planet. That the investment commu- A Jaffe, B Jones, pp. 199–232. Chi- with the longer timelines associated nity is stepping up to this challenge cago, IL: Univ. Chic. Press with innovative projects. As a re- is a resoundingly positive step in the sult, these startup projects are vital. right direction. Lessons from Cleantech 1.0 n a thoughtful review of fnancial ence as cleantech companies in the ical advance at the root of a cleantech returns during Cleantech 1.0, sample were more likely to fail. innovation requires accessing the Gaddy, Sivaram, and O’Sullivan As we refect on the Cleantech 1.0 frontier of a specifc scientifc feld. (2016) evaluate the returns to period, it is important to refect on Rarely do investment teams retain cleantech venture capital invest- areas where the investment commu- in-house talent able to adequately ments relative to those in other nity has evolved in response to the evaluate these types of technologies. sectors. Of the $25 billion that in- challenges that hindered returns. During the Cleantech 1.0 period, the vestors placed in cleantech frms Today’s investor community has in - venture capital industry self-assem- from 2006-2011, they lost more ternalized these lessons, shifted focus, bled around software-driven business than $12.5 billion (over 50%). and launched a variety of experiments innovations, with VC funds recruiting Moreover, whereas successful that offer hope that the returns for primarily from MBA programs rather Icleantech investments returned 8.6 Cleantech 2.0 will be different. than PhD programs. times the initial investment to VC In response to this challenge, two frms, similarly successful investments Technical Risk: Investors did not divergent pathways have emerged. On in software companies returned 11.6 fully appreciate the technology risks the one hand, many frms have es- times the initial investment, and this inherent in clean technologies. Com- chewed technology risk altogether and likely understates the overall differ- plete understanding of the technolog- found ways to use parallel innovations BOOM AND BUST IN CLEANTECH VENTURE CAPITAL $6 billion 150 companies Total Financing 5 125 4 100 3 75 | TOUGH TECH 06 2 50 A-round deals 1 25 A-round Financing 0 0 2004 2009 2014 Chart from: Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation, An MIT Energy Initiative Working Paper: July 2016 8 in software, connectivity, and analytics horizons for technology development, costly. This is key to the lower returns to build large, impactful businesses in scale up, and manufacturing. thresholds described above. Condi- the energy sector. These investors look New funds and fnancially engi- tional on a comparable
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