When Initialized began methodically investing in climate as a category a few years ago, we were riding an exuberant wave with Congress’ negotiating what eventually became the landmark climate-focused $370 billion Inflation Reduction Act. 

While we aren’t sure how supportive the next government will be in fighting climate change, the problem remains one of the most resilient investing categories in venture capital outside of artificial intelligence. Deal value hit a record $16.5B last year, up more than threefold from 2020.

We wanted to share some thoughts on what we’ve learned so far investing:

Climate adaptation remains a completely underrated category

While an earlier wave of climate companies succeeded by rigorously focusing on building products that were better, cheaper or faster regardless of climate change, we’re seeing a new category of customers that have urgent, catastrophic needs with disasters arising more frequently. When Initialized originally invested in Pano in early 2022, it wasn’t clear how quickly megafires would become a huge issue outside of the West Coast. Since then, drier, hotter weather has tipped the balance of other forest ecosystems in Hawaii and Canada into becoming more vulnerable to large fires. It’s become a far more global problem, impacting air quality on the East Coast.

We’re similarly seeing entrepreneurs raise funding for solving flood protection, drought, air quality and insurance issues as communities vulnerable to climate change need solutions now. Historically, adaptation has only received 7.5 percent of climate venture dollars but we expect that share to increase.

We love software entrepreneurs facilitating the energy transition: 

With renewable pricing at levels so competitive that it’s cheaper to build new solar and wind farms than it is to continue operating existing coal and gas power plants, we love to see teams building software supporting expansion of renewables. One team we’ve recently invested in is Coperniq, which is creating modern software for solar installers to have a clearer, top down-picture of where all their projects are gated so they can complete installations on time.

CEO Abdullah Al-Zandani grew up relying on the power of renewables in war-torn Yemen, where the energy grid was not always reliable. He had to set up his own solar system for his family to get power, even accidentally electrocuting himself once or twice during the process. Later on, when he became a student at UC Berkeley learning energy engineering, he met software engineer Max Kazakov. They built rich workflow and project management tools for solar installation companies to manage communication between the central office and workers in the field.

With significant labor shortages, both broadly across the US economy and more specifically in the trades, small-to-medium businesses need to use the resources they have more efficiently. On top of that, these types of businesses are favored in the current more conservative fundraising environment.

Construction tech and proptech are also an underrated entry point:

There isn’t a clean binary between hard-to-abate sectors and everything else – it’s a spectrum. Building decarbonization has elements that sit at part of the cheaper end and other areas that sit at the more expensive to abate side. CEO Lee Hoffman at portfolio company Runwise has noted that it can be much harder to go electric in commercial buildings compared to cars, simply because buildings need to last for a hundred years or more versus 10 to 15 years for a vehicle. His company has built a sensor and software system that helps more than 6,000 buildings optimize their energy usage. They are the product of choice for landlords and property managers on the Eastern seaboard to manage energy usage. Another that I’ve spent close to a decade thinking about is permitting. Almost a decade ago, I wrote a long piece that started a reform movement for how we think about restrictive zoning in American cities. Similar pressures apply to how small, interested groups of people will obstruct wind installations or other infrastructure we need to build to get to net zero. As a result, permitting reform is a concept that has generated quite a bit of support across the political spectrum.

We’re investors in Permitflow, which is building a software platform that will transform the pre-construction process. Initially, they’re working with more predictable projects like solar installations and single-family home construction. The more data, permits, and projects the company ingests, the more it will be able to predict, pre-populate and estimate permitting timelines and risks going forward for future customers.

We’re particularly excited about the prospect of LLMs making it easier to process and apply for any kind of government process, whether that’s permitting, funding or some other type of RFP.

We’ll continue to occasionally fund moonshot companies aimed at hard-to-abate sectors:

While our firms’ DNA and history is more rooted in software, we have funded moonshot-style companies in the past like autonomous vehicles and we’ll continue to make some selective investments here. Recently, we funded Beyond Aero, which just successfully flew a prototype for a hydrogen-powered short-range business jet. 

For these kinds of companies, we’ll look for founders that can recruit and manage complex technical teams, can demonstrate that they can aggressively sell a product that still may have significant R&D risk to committed customers and tap non-dilutive sources of funding to support a potentially longer and more capital intensive R&D trajectory.

Carbon Dioxide Removal is past the initial hype period and it’s now about delivering: 

Buyer consortiums like Frontier, which was started by Stripe, helped blow open the entrepreneurial and venture fundraising market for carbon removal with its $1 billion pledge to buy tonnage. However, these volumes may be one or two orders of magnitude short of the $20 billion in carbon removal commitments that need to happen annually, assuming the cost per ton is $200, by 2030. Corporate sustainability budgets have also felt downward pressure with the end of ZIRP as companies have cut more discretionary programs, which means the buyer pool may be growing more slowly than would’ve been anticipated two years ago. Longer term, however, the need for carbon removal is enormous and the federal government’s move last fall to pilot directly paying for carbon removal is a promising sign. Initialized recently funded Clairity from former SpaceX engineer Glen Meyerowitz to test dilute CO2 removal, which may open the door to lower energy costs per ton.

We’ll continue to look at startups solving MRV or measurability, reporting & verification: 

You can’t reduce what you can’t see. MRV continues to be a place we look across our climate tech investments. We’ve made a number of investments that will help reduce greenhouse gas emissions through agricultural efficiency, wildfire prevention, and understanding urban heat islands, in addition to monitoring emissions with greater scrutiny. This was precisely the thinking that led us to Albedo, which is building very low Earth orbit satellites and which, in late 2021, obtained the first commercial NOAA license to sell 10-cm satellite imagery—much higher-res than the 30-cm imagery that was allowed previously. We’ve also made other investments that use the latest breakthroughs in computer vision to help identify other kinds of emissions that contribute to global warming.

In terms of early-stage companies – in addition to having visionary founders that want to win – we’re looking for:

  1. Companies with pre-existing sales pull: 

Our portfolio founder Lee Hoffman of Runwise said it best, “The only things that end up having a real impact on climate change are the ones that people would have adopted regardless of the climate change impact.” The product needs to be better, faster or cheaper, or it needs to solve an existential problem for the customer. It’s hard to fund climate “nice-to-haves,” and thankfully, so many technologies are increasingly competitive or better versus their non-sustainable counterparts. 

  1. Ability to attract non-dilutive funding and other forms of capital: 

Some of the moonshot-style investments will need to attract a mix of capital from venture to government grants to project-based financing to achieve scale. We’ll look for founders that have a demonstrated record of securing other forms of financing. 

  1. Companies that are politically resilient regardless of who is in federal control: 

While the Inflation Reduction Act was a monumental achievement with north of $370 billion in incentives for the energy transition, we expect that under different federal leadership some parts of it may be rolled back. Certain areas like wildfire will have political support across the spectrum and so we’re looking for concepts and products that aren’t vulnerable to having their tax credits or funding support pulled under a different administration. Founders may need to be savvy about constructing their businesses in a geographically diverse way that makes them easier for any political faction to support. That could mean avoiding state-by-state regulation that penalizes decarbonization (like California’s new net metering regime cratering solar installations) or by having a vision to produce a large-scale number of jobs in districts that need the economic development (not unlike how the IRA itself was designed to be durable in conservative states).

Climate impacts will keep producing unexpected growth markets

We expect the funding market to get choppier for companies getting closer to the election, but that doesn’t change the reality that climate change is upending insurance markets, disaster prone communities and even less serious societal norms around summer travel today. Other regions and major emitters are setting new standards around climate tech for carbon removal and as impacts become more pronounced over the next decade, we expect it to become unavoidable by both the private sector and federal government.