Today is That Rainy Day
At the end of June, ReGen Ventures held its second annual investor day in Byron Bay to share updates, insights, and analysis with the people who gave our firm life. Below is a revised excerpt shared with our Limited Partners to address why there has never been a better time to work in the climate space than today.
Today is that rainy day
Climate change is the defining issue of the 21st century. The concentration of CO2 in our atmosphere has increased by 50 percent since pre-industrial levels as earth’s biodiversity declines faster than at any time in history.
Only a few weeks ago, on June 7th, 2023, coinciding with Clean Air Day in Canada, forest fires in Quebec marked one of the top three worst wildfire pollution events in US history.
Meeting net-zero targets will require refactoring our entire economy to the tune of $9.2 trillion in annual capital investment in physical assets alone. Avoiding the worst effects of climate change by 2050 will require removing billions of tons of CO2 from the air every year. And restoring w\hat we have left on this planet will require regenerative solutions wherever possible.
Then vs now
Unlike the first “CleanTech” bubble, which took place between 2006 to 2011 and generated lackluster returns due to concentrated investment in a narrow subset of R&D-heavy, capital-intensive energy technologies with challenging unit economics, lengthy development timelines, and limited market pull, the market and technology conditions have aligned to propel a more diverse set of “ClimateTech” companies.
In the past year, amid inflation hikes, elevated interest rates, ongoing supply chain constraints, geopolitical tension, and venture retrenchment, the economics and market demand for climate technologies have created a broad and enduring shift.
This resilience is due to the fact that ClimateTech is not a distinct vertical, but rather a horizontal trend underpinning sectors including industrials, energy, fashion, food, agriculture, transportation, the built environment, and more that will persist over the coming decades due to a confluence of tailwinds.
Policy support & regulatory
Government actions in the form of mandates, subsidies, and market design have been and will continue to catalyze the development and adoption of climate technologies. As two salient examples in just the past twelve months:
The US Inflation Reduction Act (IRA) was passed, allocating more than $370 billion toward mitigating climate change across renewables, agriculture, transportation, manufacturing, and more. There is now an additional $19.5 billion in Federal funding for climate-smart agriculture that likely require Aigen's robots, $2 billion for wildfire management projects that need BurnBot's systems, and up to a $2,000 tax credit for new heat pump purchases that can be designed and installed with Arch's software.
The leaders behind the EU Green Deal revealed their plan to dedicate more than €1 trillion in funds to transform the EU into the first climate-neutral continent by 2050 while providing future generations with healthy soil and biodiversity, fresh air, clean water, and nutritious food. As a result, Arkeon Bio, Seqana, and Hide Biotech are well-positioned to tap into non-dilutive funding in the coming years.
While we do not rely on policy in our investment decisions, the magnitude of these investments has accelerated technology trends and shifted capital market behaviors.
Cost curves
As customer adoption and demand increase while the marginal cost of production decreases, the “green premiums” that once held back widespread adoption of nascent climate technologies will hit zero, ultimately inverting into “green discounts,” whereby the right thing to do will become the cheaper thing to do.
Renewable power is now the cheapest energy in history. By 2025, the International Energy Agency predicts 90 percent of the growth in global electricity demand will be covered by low-emission sources of energy.
The total cost of ownership (TCO) for many battery electric vehicles will be lower than the TCO for their internal-combustion-engine counterparts by 2025. With nearly every major car manufacturer now committed to producing zero-emissions vehicles, an explosion of EV adoption is on the horizon.
The cost of synthetic biology tools is declining exponentially. Between 2001 to 2022, DNA sequencing technology, the tools that allows scientists to read and manipulate genetic code, fell by ~1,000,000x, outpacing Moore’s Law by a factor of 1,000x.
Looking ahead, solutions in earlier stages of development and deployment, including grid-scale storage, green hydrogen, bio-manufacturing, and sustainable materials, which carry premiums today, will soon come down the cost curve with the help of early adopters and government incentives that will pave the way for scale economies and mass-market success.
Consumer awareness
As first and second-order effects of climate change become more salient, consumers, especially millennials and Gen Z, and corporations, are increasingly making climate one of their top priorities. Between 2016 to 2020, the popularity of global internet searches for sustainable goods increased by 71 percent. During a similar period, products with sustainability-related claims grew ~2x faster than their conventional counterparts.
Even though they comprised less than one-fifth of the market for consumer packaged goods, sustainably marketed products accounted for one-third of the overall market growth since 2013. And in fashion, one of the heaviest-polluting industries, apparel resale is expected to grow over ten times faster than conventional retail in the next few years, while global brands increase commitments to adopt recycled, renewable, and regenerative-organic materials in the short term and hit net zero by 2050.
Talent migration
The final trend ReGen continues to observe is the migration of people away from other industries and toward ClimateTech. Not only do people want to buy from companies grounded in purpose, but they also want to build them. You do not have to look beyond our portfolio to see founders leaving jobs in enterprise SaaS, apparel, and academia to work on ideas that can restore the health of people and the planet.
We expect this mass talent transfer to increase and accelerate as the number of climate-focused communities, fellowships, incubators, and venture studios crop up across the globe to shepherd ambitious people to take their first step toward climate action.
During the Los Angeles Tech Week in June, our friends at Climate Draft and Lowercarbon Capital hosted a packed event highlighting how aerospace talent is pivoting away from space and towards founding ClimateTech companies. For many, the simple realization that the worst place on Earth is better than the best place on Mars was enough to change course.
Where to from here
Climate is one of the greatest existential challenges of our lifetime. There are enormous long term tailwinds and pools of capital pursuing solutions. It is a market defining trend. But climate concern alone is not the sole enabler. At ReGen we are going beyond climate. We see the confluence of climate, environmental regeneration, and human well-being as the defining driver of the next decade and beyond.
Our job is to identify and augment the founders in the top left quadrant of the diagram above who believe in a better future while acknowledging that a better future won’t happen on its own.