Some VC investments are head-scratchers, right? I thought so too. So, I took a deep dive into the world of climate VC investing to understand their decision-making process. And guess what? It’s wildly different from the PE and infrastructure world I know. Here’s what I learned:
1️⃣ 𝗧𝗵𝗲 𝗣𝗼𝘄𝗲𝗿 𝗟𝗮𝘄 𝗥𝘂𝗹𝗲𝘀: VCs know that less than 5% of their investments will bring in most of their returns. And they’re talking outsized returns—10x as mediocre, 100x as the holy grail. They’re fine with most bets flopping because the whole game is about one or two big wins. In this world, they spread bets equally across many startups. Startups can fail for any number of reasons, so they cast a wide net.
2️⃣ 𝗜𝘁’𝘀 𝗔𝗯𝗼𝘂𝘁 𝗢𝘂𝘁𝗹𝗶𝗲𝗿𝘀: If the tech is already in the headlines, then VCs have probably moved on. They’re hunting for the not-yet-obvious, those niche technologies that have potential but are still under the radar with low valuations. They want to get in early, before everyone else even notices.
3️⃣ 𝗧𝗲𝗮𝗺 𝗚𝗲𝘁𝘀 𝗧𝗵𝗲 𝗠𝗼𝗻𝗲𝘆: For Angels, the team accounts for 80% of their decision, and even VCs weigh it heavily at around 40-50%. In the early days, there’s not much data to go on, so they lean on the team’s track record and drive. Tech DD plays second fiddle here because it’s still too early to know if the tech can scale.
4️⃣ 𝗖𝗹𝗶𝗺𝗮𝘁𝗲-𝗦𝗽𝗲𝗰𝗶𝗳𝗶𝗰 𝗖𝗵𝗲𝗰𝗸𝘀: True climate investors have some extra criteria. They’re looking for tech with huge CO2 mitigation potential—think the Bill Gates rule of at least 1% emissions reduction, or one billion tons of CO2. Plus, they want startups with a Tech Readiness Level (TRL) between 5 and 7. If your TRL is lower, it’s angel territory; higher, and it’s for the strategics and infrastructure funds.
When I ran my own heat pump startup through this lens, I found we only matched 2 out of the 4 criteria. Residential heat pumps aren’t exactly new, and they won’t deliver 100x returns. Plus, with a TRL of 9, we’re outside the VC’s preferred range.
𝗦𝗼, 𝗶𝗳 𝘆𝗼𝘂’𝗿𝗲 𝗮 𝗰𝗹𝗶𝗺𝗮𝘁𝗲 𝗼𝗿 𝗰𝗹𝗲𝗮𝗻𝘁𝗲𝗰𝗵 𝘀𝘁𝗮𝗿𝘁𝘂𝗽 𝗶𝗻 𝘁𝗵𝗲 𝗲𝗮𝗿𝗹𝘆 𝘀𝘁𝗮𝗴𝗲𝘀, 𝗰𝗵𝗲𝗰𝗸 𝘁𝗵𝗲𝘀𝗲 𝗰𝗿𝗶𝘁𝗲𝗿𝗶𝗮 𝗯𝗲𝗳𝗼𝗿𝗲 𝘆𝗼𝘂 𝘀𝘁𝗮𝗿𝘁 𝗿𝗮𝗶𝘀𝗶𝗻𝗴 𝗳𝘂𝗻𝗱𝘀. If you’re already past it, drop me a note, and we’ll find a way to get you into the big leagues. Follow me for more cleantech insights, and let’s navigate this landscape together! 💼🌍
Big thanks to Yoann Berno for clearing my head about Angel/VC investing in his super-intensive and fun course on Climate Tech investments!