Bay Area outdraws world for climate change VC capital

While world leaders converged on Glasgow, Scotland, last week for the annual UN Climate Change Conference, the real drivers of clean, climate change-fighting tech were right here in the Bay Area — and in abundance.

Bay Area climate tech is attracting more venture capital investment than in any other tech hub in the world, according to a new report from London & Partners and Dealroom.co. In fact, Bay Area startups are leading by a massive margin: from 2016 to 2021 the Bay Area attracted $19 billion in climate tech investment, followed by Shanghai at $7.8 billion, and the greater Los Angeles area at $6.8 billion. The Bay Area also leads in the number of rounds raised by climate tech startups, demonstrating active early-stage interest, with 69 rounds raised in 2021. This was followed by London at 40 rounds, and Berlin at 24 rounds.

Data from a British firm shows that the San Francisco Bay Area attracts more VC investment in clean tech than any other tech hub in the world. (Courtesy London & Partners and Dealroom.co)

David Callaway, who founded the market-centric environmental newsletter Callaway Climate Insights last year, says Bay Area tech companies are attracting so much capital now due to a distinct shift in how firms view environmental, social and governance investments, or ESG.

“For so long, climate change was portrayed as something that we need to sacrifice for,” he said. “When you start to position fighting climate change as an opportunity for investment, where you can help the world and make money, it becomes much, much sexier.”

Part of the reason the Bay Area leads in climate tech investment is because much of the innovation that has made ESG “sexier” has also happened here. One obvious example is Tesla, a company that was headquartered in Palo Alto, until last month, and deserves much of the credit for changing the perception of electric cars from heavy, impractical machines to sleek, luxury commodities.

Carbon storage companies based in the Bay Area are also drawing a lot of venture capital. Blue Planet, for example, a company that converts carbon dioxide gas into synthetic limestone for gravel and concrete, has secured over $9.3 million from Chevron and San Francisco firm For Good Ventures. This tech is appealing in that it can help actively reverse carbon dioxide emissions from other industries — for example, refining crude oil.

Most of American venture capital is concentrated in the Bay Area to begin with, and the United States as a whole is investing more in ESG than other competing countries. Between 2016 and 2021, the United States invested $48 billion in ESG, followed by China at $18.6 billion and Sweden at $5.8 billion.

Global climate tech investments have skyrocketed in the past five years. (Courtesy London & Partners and Dealroom.co)

For major Bay Area firms like Andreeseen Horowitz, which invests in a wide range of technological innovation, Callaway says ESG is still a “niche.” These firms are moving incrementally toward more investment in climate tech, as the tech itself proves to have a more promising return on investment.

However, several firms in the Bay Area are accelerating the trend with big investments in ESG. San Francisco Prelude Ventures is a leading fund in the ESG arena, for example, while firms like Sequoia Capital and Google Ventures have shown considerable interest in ESG in recent years. Simultaneously, notable social interest funds like Breakthrough Energy Ventures — Bill Gates’ famed sustainability fund, technically based in Washington — invests heavily in Bay Area climate tech companies like Lilac Solutions and Pachama.

Callaway says this is as much a long recovery for venture capital as it is a new trend. American venture capitalists were burned in the so-called ‘Great Recession’ of 2008, after doubling their investment in cleantech between 2005 and 2007. Even after the economy began to rebound, investment in clean tech continued to lag. Cambridge Associates estimates the sector fell to $10.9 billion in investment between 2010 and 2013, after a high of $19 billion between 2005 and 2009. The CIO of CalPERS, which manages pensions and health benefits for California’s public employees, notably called Cleantech “a noble way to lose money” in 2013.

Trendy tech, like the Tesla car, helped turn the tide. Government regulation — especially that which includes funding for electric vehicles and charging infrastructure, like Biden’s proposed infrastructure plan — helped, too. But the biggest acceleration came in 2020, largely because of COVID-19. Just as decreased traffic helped many people tune-in to the sound of songbirds, so did a nature-created virus remind investors the importance of making peace with the planet. According to the London & Partners report, investment increased from $8.4 billion to $17 billion between 2019 and 2021.

It’s all these factors, combined, that are nudging venture capital to invest more in climate tech. Investing “has gone beyond solar and wind, which really are more manufacturing-based companies, to ‘what’s the next big tech solution,” says Callaway. “The Bay Area was naturally geared to take the lead.”

virwin@sfexaminer.com