Recent investments in climate tech have been astronomical. According to a PWC The State of Climate Tech report 2021, there’s been a 210% increase in venture investments year over year between 2020 and 2021.
Although onlookers might be quick to assume that climate tech is a relatively new “trend” or an emerging asset class, historically speaking, “climate-conscious technologies have been around for decades”, states Jonathan Azoff, a managing partner of SNØCAP, a climate tech venture fund.
Like any segment in the market, innovation goes through its ebb and its flows. What makes climate tech especially intriguing at this time, is that for the first time in history, the margins of multiple technologies have matured to a point where prices have the potential to be competitive with the conventional alternatives.
We sat down with Jonathan to get an investor’s perspective on what it’s like operating a fund that’s exclusively focused on platforms across climate tech, the mechanics behind founding teams, and the processes leading up to a closed venture deal.
Interviewer: Can you tell us a little bit about the process of pulling together an investor team? I imagine it’s quite different than hiring employees for a company.
Jonathan: I think at the surface it might seem different, but founding teams are all about filling your skill gaps. The difference is when an investor is evaluating a founding team for a company and operating business, the expectation is that the founders can support the various operating roles of that business. If it’s an innovative business, you want to make sure that there’s someone who’s been involved in that innovation previously, such that you know they can bring that expertise. With funds, it’s slightly different. You want a mix of unexpected talent and expected talent. What I mean to say is for a lot of high net-worth individuals or family offices, they’re looking for basically an edge, something different. Generally speaking, coming to them with a product that they haven’t seen before, like a financial product, which is effectively what a VC fund is, gets them excited.
Both I and my partner being engineers stands out. That means we have a particular view on the market that someone maybe more agnostic wouldn’t. However, if I start to talk to an institutional partner, they’re going to want to see more of a financial background. They’re going to want to see a previous track record of fund management. We, as fund managers and founders have to think about those dynamics and make sure once again, to account for those gaps. I think it’s very similar in practice to how you would grow out your founding team. It’s just these things you’re optimizing for, are based more on the people who will give you money as opposed to the operating of your new and innovative business.
Interviewer: There hasn’t been a great degree of interest in climate tech until recent years. What do you think is the main reason for the increased interest in the VC space?
Jonathan: The first thing is that climate tech in its current machination, is what is interesting to people. It doesn’t mean that ecologically conscious innovation has not been popular or at least has not ebbed and flowed over time.
The interest in climate-conscious technologies has come and gone. I don’t think that innovation, as it pertains to climate consciousness is new per se. It just so happens that some of the technologies we have today are particularly interesting because, for the first time, they have the potential to be cost-competitive. The ability to deploy technologies that can both be economically and environmentally superior to the conventional alternatives is exciting.
When you look at technologies like cellular agriculture, for instance, there are a few underlying processes that have been solidified and the costs have come down to the point where now you can start a lab-grown crustation business, a lab-grown fish business, lab-grown meat business…etc. It’s all the same process, except with different cell lines and scaffolds. I think that what is unique about this go around, is that we’re seeing a lot of these businesses provide a confluence between economic and environmental benefits.
Interviewer: Having worked on a broad spectrum of ventures, what led you to decide to fully go in on climate tech investing, instead other types?
Jonathan: Probably the simplest answer is I love people. I think the best way to show that you care about people is to support them, meet them where they are, and help them move forward in life. Innovation is in my opinion, the major lever that we have to pull as a society to move us forward to getting people to change their habits.
Getting people to change their dietary habits and travel habits is a lot harder than simply giving them a better alternative. From my perspective, it is the kind and optimal thing to do.
Throughout my career, I never felt the level of potential impact that I feel in investing in climate. I am helping de-risk an entire suite of verticals, that have the potential to change how we live our lives. We call it climate tech now, but I think if we’re successful, it’s just tech later, just like how smartphones aren’t called smartphones anymore. I think for me, it was a no-brainer, especially now that I am a parent of two young kids. I do want to show that I care and I want to do it through my work.
Interviewer: When you’re vetting companies in this space, what are some of the defining features you look for?
Jonathan: First of all, climate tech’s a very broad set of verticals. Then within those verticals, they are multiple sectors. In the space itself, no one person could be an expert in all the sectors and all the verticals. The way we bring some sanity to our thesis is we focus very high up on the supply chain, on the molecules, tools, and processes that we know well and understand. Then we work with founders as technologists ourselves, bringing a diverse set of skills that to the table. We effectively look at the technology first and understand its viability. Then we assess the market. Then we look at the founding team and assess whether or not they could meet the market with their sets of skills.
It’s a multi-stage sort of process and it starts with a few conversations and moves very quickly to diligence if we see the right signals. From there we have an investment committee, and we make decisions as a committee based on how much, and if we will invest, and then it moves to a deal and we hope they take our deal. Not all VCs win deals that they put down capital for, but I think with the way the market’s moving, we’re excited. We think we’ll be able to get involved in a lot more deals.
Interviewer: Do you think a founder’s geographical location has an influence on what types of startups they create? Ie. Do you think it’s more common for someone to start a climate tech company in Silicon Valley or a country in Africa?
Jonathan: Totally. If you’re in Kenya, the primary mode of heating your home previously was coal; now there are businesses that are changing that to use natural gas.
Innovation around natural gas is a very viable pathway for climate tech businesses, which may not seem very appealing to someone living in North America or in Europe, especially when you’re thinking about things like direct air capture and mobility.
These are basic problems that we’ve already solved, like infrastructure, and are still being solved there. I think, depending on your geography, you’re going to have different solutions, but I think it’s important to think about solutions as part of a system and each system interacts with and impacts the other systems.
Interviewer: What are some of the greatest challenges you face as an investment firm that specializes only in climate tech?
Jonathan: It’s funny you say niche because we’ve had to prune our thesis down to make ourselves more specific, just so we could focus on a smaller subsection. There is a deluge of businesses out there in climate tech, that fit within the verticals I described earlier; it’s about recreating our supply chains and our products.
There is no shortage of companies that are thinking about what we use and the modalities we transact in the world with. Also, no shortage of opportunities in the environmental sector; from agriculture to food, waste, energy, and infrastructure. Climate tech may seem like a sector, but I would urge anyone who thinks of it that way, to understand that there are many verticals and many sectors within those verticals.
Interviewer: What personally motivates you and how do you define success?
Jonathan: This is where I benefit from the some amount of the privilege I’ve had from working in tech, that is I’m pretty insensitive to failure. Generally speaking, I tend to only do things that make me feel inadequate, for example, transitioning my career from software to financial services. It’s not an easy endeavor, because managing money is a different field; it’s a field that people go to school to study and perfect. I’m taking a big leap for myself to go and do this, but it brings me a tremendous amount of satisfaction to know that I can overcome the challenges in learning and that I can isolate opportunities as a result that otherwise would be missed. I can also support founders through my values, whether those are values of representation or values of impact. At the same time, I have a strong degree of conviction that I can do it profitably.
Those motivators, I think are what get me excited. I will say though if I had to simplify the answer to one single thing, it is meeting people who are excited to innovate in the field of climate consciousness. Specifically, it’s exciting because the more you learn and educate yourself about climate, the more depressing it can become. When you meet people who are excited about the path forward, you get to enjoy and live in that excitement for a small amount of time. To me it’s addicting and it’s really what gets me out of bed every day.
Conclusion
VC investing often develops the uninviting persona of men in suits and stuffy concrete buildings. In all his years of starting and investing in companies, Jonathan has found an alternative, fulfilling way to manage money, in a manner that benefits the human race, as well as doesn’t compromise profitability.
Although climate change is an urgent topic of concern in modern media and politics, there are springs of hope and innovation all around the world—especially where it is really needed. If these springs are watered by the right sources, they may just have the potential to turn into a reservoir for scalable clean technology, bringing us into an era where ‘green’ is a given.