TL;DR The next wave of climateTech investment will be in Climate Adaptation Tech. Billions in public capital are being redirected to climate adaptation. Private markets, including VC, are starting to follow. We consider ways to distinguish CAT startups, and I introduce my work-in-progress overview of the market.
Climate Adaptation is about our ability to cope with the trends or disruptions caused by climate change. CAT is the tech powering that ability. Examples of CAT: wildfire prediction and response, improving crop resilience, water conservation technologies. Examples of not CAT: electric vehicles, renewable energy
This writing argues that the next wave of climateTech investments will be in climate adaptation, and that there is a growing opportunity for VCs to ride that wave.
The first question for CAT is, why now?
Why now?
Nations are not on track to hit their climate targets, and even if ambitious targets were met, the effects of climate change can no longer be eliminated. From heightened risk of major floods and wildfires, to infrastructure and agriculture straining under new temperatures. Developed and developing economies will be equally hit, with some projections seeing cities like London and Melbourne facing more climate hazards than Karachi and Addis Ababa1. The next wave of climate investments will be in climate adaptation.
The public sector is recognising this. UN Secretary General António Guterres said in 2021 that half of all climate finance should be directed to climate adaptation2. The EU has committed to spending 578 billion EUR, 30% of its 2021-2027 budget, on climate action - with climate adaptation being a central part of that3. Bank of America analysts predict the climate adaptation market will double to $2 trillion a year within five years4.
We are starting to see increased venture investments in climate adaptation, although it is still early days. Of the 180+ VC firms exclusively investing in climateTech or allocating a large proportion of their portfolio to climateTech, only 5% explicitly mention climate adaptation in their thesis5. Chris Sacca’s Lowercarbon Capital, has doubled its climate adaptation investment YTD compared to previous years.
These two trends - increasing global demand for climate adaptation tech and lagging venture investment - present an opportunity for investors with a minor or undifferentiated presence in climateTech to capitalise on the coming wave of climate adaptation startups. VCs should invest in early players now, establishing themselves in the space in preparation for future deals, and getting allocation in what could be underpriced companies.
Onto the second question for CAT, now what?
Now what?
CAT is a large and diverse space comprising a range of solutions from insurance to seawalls(Kind Designs), agricultural tech(AgroScout) to alternative water sources(Source). Navigating this space and finding venture backable opportunities requires structure. We can delineate along three dimensions; theme, persistence, and order.
Theme is about the problem being solved. A non-exhaustive list includes fires, floods, heatwaves, storms, as well as invasive species, threats to industrial and agricultural productivity, climate related disease, climate caused migration, sea-level rise and drought. Themes can be divided into sub-themes. For example, Convective Capital frames the fireTech space into three sub-themes; fuel management - managing forests to optimise wildfires, community resilience - securing housing and infrastructure, and suppression - detecting and responding to wildfire threats.
Persistence is about how long a particular problem lasts. It is binary; acute or chronic. Acute problems cause short lived stress such as fires, heatwaves, or floods. Startups addressing acute problems builds solutions to predict(Earthblox), detect(Dryad Networks), and respond(Rain) to such stresses. Chronic problems are long-term changes in weather patterns caused by climate change that create lasting stress - for example permanently increased temperatures that disrupt crop yields and strain infrastructure. Startups addressing chronic problems look to either increase resilience to these changing weather patterns(Tropic), or provide solutions for relocating people and resources.
Finally order, which is also binary: first-order or knock-on. This covers where in the chain of climate change effects a startup provides value. An example is a chronic stress such as increased temperatures. The first-order effect of this stress is heat-related disease, reduced economic output due to fewer outdoor working hours, etc. The knock-on effects could be mass migrations to less temperature-stressed regions, or completely overhauling the economic idiosyncrasies of that region to make it better suited for the new climate. CAT startups addressing first-order effects are trying to minimise the immediate effect of a given climate phenomenon. For example, startups specialising in climate-caused disease or innovative AC units. CAT startups addressing knock-on effects are trying to dampen the systemic effects such phenomenon cause. For example, migration support startups(FastVisa) that make it easier for people to relocate, or agriculture or insurance startups that make it easier for locals to recuperate their losses.
These three dimensions - theme, persistence, and order - help segment the problem space. In the solution space, we can apply the usual startup delineators: solution and distribution. What kind of solution does the startup use? Software, hardware, novel science, etc? What kind of distribution does the startup use? B2C, B2B, etc?
Using these dimensions I am overviewing the CAT space, developing an intuition for it, and identifying pockets of venture worthy opportunities. You can find my overview here. The aim is to have a comprehensive list of startups in the CAT space, categorised by the above dimensions. While building this list I came across Arshad Chowdhury’s similar database. It’s awesome to see others with inroads into the space, and I will harmonise our two database once mine is more fleshed out.
Wrapping up, we have our thesis, mental model, and next steps. Expect my next post to be a deep dive into the CAT space.
What I’m reading this week
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https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/sustainable-investing/climate-adaptation.pdf
https://unfccc.int/news/antonio-guterres-50-of-all-climate-finance-needed-for-adaptation
https://commission.europa.eu/strategy-and-policy/eu-budget/performance-and-reporting/horizontal-priorities/green-budgeting/climate-mainstreaming_en
https://www.bloomberg.com/news/articles/2021-11-17/why-investing-in-climate-adaptation-will-soon-be-very-profitable-green-insight
https://www.ctvc.co/climate-tech-vc/