The Energy Transition Will Create 1,000 Unicorns

Back in 2013, when venture investor Aileen Lee, founder of Cowboy Ventures, coined the term “unicorn” to describe VC-funded companies valued at $1 billion or more, just 14 still-private companies less than a decade old qualified for the title. Crunchbase now counts 952 globally, with just over 300 in the United States alone, with the U.S. cohort valued at nearly a trillion dollars.

As you might suspect, the software, cloud, and media space is well represented, with recent entrants Airbnb Inc. (NASDAQ:ABNB), Snowflake Inc. (NYSE:SNOW), DoorDash Inc. (NYSE:DASH), Zoom Inc. (NASDAQ:ZM), CrowdStrike Inc. (NASDAQ: CRWD) and Moderna Inc. (NASDAQ:MRNA) debuting to massive valuations

But that is about to change.

Larry Fink, the CEO and Chairman of giant money manager Blackrock Inc. (NYSE:BLK), sees addressing climate change as presenting a massive potential for new businesses.

“It is my belief that the next 1,000 unicorns–companies that have a market valuation over a billion dollars–won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement,” Fink said on Monday at the Middle East Green Initiative Summit in Riyadh, Saudi Arabia.

Fink has been publicly advocating the importance of considering sustainability when making finance decisions in his highly anticipated annual letters to CEOs.

Fink said Monday he sees demand from investors to put their money in climate technology.

“As an asset manager at the nexus between owners of capital and companies and assets we invest in on behalf of them, we see this playing out every day. Asset owners are looking for investment opportunities that will come from this historic transition to net zero.”

Venture Capital is Shifting to Energy Tech

Fink’s sentiments appear to be supported by current trends in the venture capital markets.

After a brief hiatus driven by fears of a “Great Unwinding,” venture capital is back with a bang, characterized by huge deals, little diligence, and hyper-fast follow-on rounds. According to the latest PitchBook-NVCA Venture Monitor, in the first nine months of this year, VCs in the United States netted a record-setting haul of $96 billion across 526 funds, topping the $85.8 billion raised for 665 funds in all of 2020. The past year has witnessed dozens of startups, including a growing number of unicorns, list on public stock markets with the market capitalization of American VC-backed firms that are going public in 2021 poised to reach an unprecedented $500bn in the current year from $200bn last year.

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The VC boom has been even more spectacular in Europe, with startups in the continent hauling a record $121 billion in funding in 2021, or roughly three times the $41 billion of capital raised in 2020, according to a report by VC firm Atomico.

Despite venture investors pouring money into startups at a record clip, they aren’t exactly spreading that cash around evenly. Indeed, Pitchbook has revealed that investors have been concentrating their capital into fewer industries over the past 15 years.

The software sector has increasingly been gobbling up the lion’s share of VC funds, with software startups accounting for 33.8% of all venture dollars this year compared to 22.5% 15 years ago. Meanwhile, tech hardware, health care devices and supplies, energy, and pharmaceuticals and biotechnology have seen funding decline by 9.5%, 6.1%, 5.5%, and 1.3%, respectively.

But a cross-section of experts is now saying the VC landscape is about to change dramatically over the coming years.

In an article titled The End of Venture Capital as We Know It by Sam Lessin published on The Information, the author argues that a monumental shift in startup investing with the future of venture capital being breakthrough science that will transform billions of lives in sectors like energy, transportation, infrastructure, agriculture, manufacturing, and human augmentation.

Breakthrough Science

One of the new age sectors that has been seeing renewed interest is renewable energy and technologies that address climate change.

Lessin notes that in the past, investors have felt jaded by overhyped clean energy solutions, which fell short of expectations mainly because they failed to be cost-competitive with fossil fuels and other conventional energy sources. However, this is no longer the case thanks to breakthroughs in fields such as solar energy and battery storage that have dramatically lowered costs. Back in June, a report by the International Renewable Energy Agency (IRENA) revealed that the share of renewable energy that achieved lower costs than the most competitive fossil fuel option doubled in 2020, with concentrating solar power (CSP) falling by 16%; onshore wind fell 13%, offshore wind by 9% and solar PV by 7%.

Battery storage and recycling

According to a February report by global communications, research, and consulting firm focusing on cleantech Mercom Capital Group, corporate funding and M&A for the battery storage, smart grid, and energy efficiency sectors more than doubled in 2020 to $8.1 billion compared to $3.8 billion in the previous year.

VC [venture capital] activity was markedly lower, though, with global funding for battery storage, smart grid, and efficiency companies coming in 12% higher with $2.6 billion compared to 2019 levels.

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Battery storage gobbled up the lion’s share of investments, with corporate funding into the sector climbing 136% to $6.6 billion with 54 deals consummated. As expected, lithium-ion batteries continued to attract the most dollars, with a $600 million equity raise by Swedish lithium-ion battery maker Northvolt being the key highlight. However, the report also noted that other storage technologies, including solid-state batteries, energy storage systems, energy storage downstream, and flow batteries have been recording strong interest, too.

Encouragingly, investor interest in the space has clearly been on the rise, with 105 VC investors participating in battery storage deals last year compared to 78 deals in 2019. Breakthrough Energy Ventures was the top investor in 2020 while utilities, oil, and gas companies were involved in four battery storage deals.

Interestingly, large battery companies such as Northvolt are now turning their attention to an often-neglected space: Battery recycling.

A recent IHS Markit Report has noted that a large number of EV batteries are approaching their end-of-life stage, thus presenting a huge opportunity for recycling. IHS has projected that over 500,000 tons (57 GWh) of batteries reached their end-of-life point in 2020 with 1.2 million tons (121 GWh) and 3.5 million tons (350 GWh) expected to do so in 2025 and 2030, respectively, thus creating a sizeable repository of recyclable material.

Falling battery costs

As we have pointed above, these growing investments in battery storage are likely to accelerate the pace of innovation and lead to further decreases in battery costs.

Last December, Bloomberg NEF, a clean energy research that has been, among other things, tracking battery costs, announced that battery costs had dipped below the $100 per kWh threshold for the first time ever.

The crucial milestone was achieved for battery packs designed for electric buses in China.

In the EV industry, the $100 per kWh battery cost price point is generally regarded as being critical for the wider adoption of electric vehicles by making them cost-competitive at the sticker price, which remains an important psychological barrier for many buyers.

Whereas that historic feat wasn’t for passenger electric cars, the segment is not too far behind.

BNEF estimates that the average battery cost in 2020 clocked in at $137/kWh and will drop to $100/kWh by 2023.

That’s a phenomenal decline considering that lithium-ion battery pack prices were above $1,100 per kilowatt-hour in 2010, meaning they will have dropped more than 90% by 2023.

Another notable trend: Many electric buses in China use cobalt-free lithium iron phosphate (LFP) battery chemistries, which boast lower costs and higher range.

Last year, Tesla Inc. (NASDAQ:TSLA) introduced LFP batteries in its standard range Model 3s in China and dropped the starting price from 309,900 yuan ($48,080) to 249,900 yuan ($38,773).

CEO Elon Musk has revealed that the improving energy density of LFP batteries now makes it possible to use the cheaper, cobalt-free batteries in its lower-end vehicles so as to free up more battery supply of lithium-ion chemistry cells for Tesla’s other models.

Indeed, the entire EV industry is now looking to ditch cobalt for cobalt-free batteries.

Flying Cars

Meanwhile, Lessin says a transportation revolution is underway–with supersonic commercial aircraft, electric aviation, self-driving cars, and space.

Flying cars, also known as electric air taxis, have been around us for a long time thanks to sci-fi staples such as “Back to the Future” and “The Jetsons.” But with major brands like Boeing (NYSE:BA), Airbus (OTCPK:EADSF), Hyundai and Toyota (NYSE:TM) now promising to whisk riders through the skies in flying taxis and receiving a heady dose of Wall Street endorsement, the dream is increasingly getting closer to reality.

Indeed, many experts are now upbeat that air mobility over short distances is closer to becoming reality than ever before in history, thanks mainly to massive advancements in battery technologies and autonomous flight. And make no mistake about it: Flying taxis have real potential to completely restructure public and private transportation, decongest our roads, and lower greenhouse gas emissions.

In fact, a Morgan Stanley Research study says the autonomous urban aircraft market will continue to mature during the current decade and then boom globally to reach $1.5 trillion by 2040.

Sure, flying taxis have no shortage of critics and detractors, including Elon Musk, who has dismissed these futuristic flying devices as being little more than giant drones that are 1,000 times bigger and noisier and will “blow away anything that isn’t nailed down when they land.”

But even Musk himself has admitted to giving serious thought to flying cars after being sold on a futuristic, all-electric, 5-seater jet made by German company Lilium.

The leaders here are Joby Aviation Inc. (NYSE:JOBY) and Archer Aviation Inc. (NYSE:ACHR) which went public this year.

Joby Aviation is a California-based startup founded in 2009 and backed by major investors, including Toyota and Intel (NASDAQ:INTL), is regarded as one of the leading companies in the flying taxi space. Joby caught the attention of many investors after it bought Uber Technologies’ (NYSE:UBER) flying taxi division Elevate in December. The company’s flying taxi, the Joby S4, has the following specs:

• Vehicle type: Vectored thrust with six tilting propellers

• Capacity: Pilot + four passengers

• Range: 150 miles (240km)

• Speed: 200mph (322km/h)

• Projected Launch Date: 2023

Meanwhile, Archer Aviation is an urban air mobility startup. Earlier in the year, Archer agreed to go public via a SPAC (special purpose acquisition company) deal with Atlas Crest Investment Corp. (NYSE:ACIC) in a deal that valued Archer at $3.8B.

The transaction included United Airlines (NASDAQ:UAL), Chrysler/Peugeot parent Stellantis (NYSE:STLA), as well as mega-investors Ken Moelis and Marc Lore.

Archer is developing electric vertical takeoff and landing aircraft, or “eVTOL,” helicopter-like aircraft that can take off and land without runways. United Airlines has announced plans to buy $1B of Archer’s eVTOLs, with an option to purchase another $500M later on in a bid to promote “decarbonization” in its operations. 

By Alex Kimani for Oilprice.com

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