JPMorgan Banker Warns of Silicon Valley Trap for Clean Tech

Yahoo

2 days ago

(Bloomberg) -- The venture capital model honed and perfected in Silicon Valley is proving a bad fit for the clean tech industry, and investors should instead accept that they'll need to commit much bigger sums of money for longer periods of time.
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'In traditional VC, the model is to make 100 bets, 90 of which will completely fail, and of the 10 remaining maybe a couple will have real exponential growth,' JPMorgan Chase & Co.'s Rama Variankaval said in an interview. However, 'the amount of capital you'd need to replicate that in climate is enormous, so you might need to accept a revised model where you are picking fewer, more concentrated bets.'
The warning from Variankaval, whose role as global head of corporate advisory includes running JPMorgan's Center for Carbon Transition, has serious implications for the trajectory of climate change. More than $200 trillion needs to be invested in the transition to net zero over the next three decades to avoid catastrophic temperature rises, BloombergNEF estimates. Spending last year, meanwhile, was just over $2 trillion.
Most of the money — both public and private — flowing into the low-carbon transition is going toward electrified transport, renewable energy and power grids, BNEF's analysis shows.
Those are capital-intensive sectors that require committed capital. That's in contrast to the 'asset-light businesses' to which venture capital is best suited, Variankaval said.
'If you are investing in a software business and you put in $10 million, the need for additional capital from this company might not be high,' Variankaval said. 'But $10 million in a climate tech company doesn't get you a whole lot of runway.'
Of the $270 billion of energy transition-focused private capital raised between 2017 and 2022, venture capital accounted for $120 billion, or 43%, while private equity and infrastructure-focused funds raised $100 billion, or 37%, according to a September 2023 report by S2G, a firm that focuses on venture and growth-stage businesses.
Fresh examples include climate tech investment firm Energize Capital, which just raised $430 million for a new fund targeting early-stage startups working on projects like new batteries and software for the electric grid.
Clean tech was particularly vulnerable to the rapid surge in interest rates that started in early 2022, with much of the capital-intensive green sector brought to its knees in the period that followed. Over the past three years, the S&P Global Clean Energy Transition Index has lost almost 40% of its value, compared with a gain of more than 40% in the S&P 500 Index.
'The problem is investors are very segmented,' Variankaval said. 'Different investor groups have different risk-reward preferences, and for the most part a lot of the transition theme falls in the gap between various pockets of capital,' in what's known as 'the missing middle.'
Other banks have offered similar warnings. Barclays Plc, which has called on the UK government to address the funding challenge facing companies in low-carbon industries, said in a recent report that climate tech companies face 'a longer and riskier path to profitability' because they tend to be 'capital expenditure-intensive, with high upfront investments required in plant and equipment.'
It's clear 'what success looks like,' Variankaval said. 'It's project finance, it's infrastructure. That's where we need to get to, because that's the right cost of capital for a lot of these projects and companies.'
Meanwhile, the Trump administration has made a point of withdrawing support from clean energy and instead doubling down on fossil fuels. Though the approach has angered many climate investors, Variankaval suggests it has also helped clarify which technologies have the most potential.
The sense now is that 'winners and losers have been more directly identified,' he said. 'It seems like nuclear and geothermal might be more in the winner camp and things like hydrogen might not be. In a way, that helps investors to say, 'Okay I feel like I can have a bit more focus and I know policy support will continue for these couple technologies'.'
Demand for nuclear energy was underscored on Tuesday, with an announcement that Meta Platforms Inc. has entered a deal to buy power from Constellation Energy Corp. The agreement marks the latest example of Big Tech tapping an energy form that's available around the clock and that doesn't release greenhouse-gas emissions.
There are also some green technologies 'that we can see will continue to have quite solid policy support, maybe even increased support,' Variankaval said. 'In some ways, that's helpful because you're focusing now on maybe two or three things.'
The bottom line, though, is that 'climate risk is real,' Variankaval said. 'You're living with the consequences every day, and it's a problem that has negative consequences if left unaddressed. That story does not change in my mind because of either economic cycles or political cycles.'
(Adds references to Meta purchase of power from Constellation, and Energize VC fund.)
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