One of the things most people like about Venture Capital is the outsized returns popularized in the media. What is less popular and not well understood are the risks. Risk is with us every day and in all situations. Risk is of course the flip side of the reward coin. Investing in early stage startups is all about risk assessment, risk mitigation and valuing potential upside, the reward. Recently a potential investor asked us about the policy risk around investing in climate related technologies and how that might change with different administrations.
Policy, legal and regulatory considerations are of course to be considered as part of a comprehensive risk assessment. Even though policies and regulations were not particularly favorable, the clean/climate tech sector grew dramatically under the previous administration. Both solar and wind energy grew exponentially. Solar grew both at the residential and utility scale. Living in Texas it was very common to see windmill blades on the back of large trucks on most road trips. Similarly, electric vehicles exploded in popularity and continue to gain market share. So the policy landscape may be a smaller risk for now.
Other than favorable policies, there are two key reasons that cleantech companies will continue to grow and thrive. The first, is that for a number of reasons consumer sentiment on climate change has crossed a tipping point. Extreme weather events have both increased in frequency and severity. News coverage of both the crisis created and potential solutions have also become more common and mainstream. The second, and potentially more critical one for investors, is that the economics for renewables has become better than fossil fuels, even without subsidies. As many studies have shown it is now more cost effective to build a renewable power plant than a new gas and coal plants. The price of solar panels has dropped far faster than predicted just 5-10 years ago. Innovation and ingenuity will continue to drive prices down and output up.
Of course, these companies face potential policy changes as well as normal business risks. Investing in startups is inherently risky. However, there is significantly more risk if we settle for the status quo. While we duly weigh the risks of every potential investment, we continue to be optimistic of their potential for significant impact and financial returns. While we can’t predict the future, we feel bullish about this market segment.