Five Years of Cleantech Investing, and What I Hope the Next Five Will Look Like

Susan Rohac, Managing Partner, Climate Tech Fund at BDC Capital, discusses the challenges and successes in the past five years of cleantech investing, including BDC’s Cleantech Practice and Climate Tech Fund, and highlights anticipated changes that may change how cleantech investing is approached.

A New Team and Fund

It’s hard to believe that it has already been five years since BDC launched its Cleantech Practice. And what a whirlwind it has been. After the mandate was announced, some people expressed doubt, told us that cleantech investing is hard and thought that we were doomed for failure. Nothing makes someone work harder to succeed than to prove a doubter wrong. We set out with drive and determination to do just that.

We had a lot to learn but we quickly built a pan-Canadian team, small but mighty. Individually, we likely would have failed but our combined education, backgrounds, skill sets and our conviction that this sector needs to succeed drove us forward every day – not even a pandemic could slow us down.

A Wild Ride

Cleantech investing has always been a wild ride, and the past five years have been no different. When we launched our first fund in 2018, cleantech was still a bad word in investor circles but shortly after our fund’s launch sentiments began to change. Public awareness of the climate emergency increased, governments and large companies made more and stronger net-zero commitments. The rapidly declining costs of solar, wind, battery and other climate technologies fueled hope for success.

By 2021, over 200 new VC, Corporate VC, Infrastructure and Private Equity Funds targeting cleantech were announced representing over $100B of new private capital. And if that wasn’t enough, dozens of cleantech firms went public via SPACs (Special Purpose Acquisition Companies) raising tens of billions of dollars. But as the saying goes, what goes up must come down. And the first to fall were SPACs. While this triggered a sharp pull back in private VC markets, we continue to see cleantech firms with the right fundamentals get funded, albeit at much more tempered valuations. Some governments and corporations have pulled back from their commitments, and we witnessed the Silicon Valley Bank’s collapse, but the tides are turning again. The introduction of the Inflation Reduction Act in late 2022 helped send a powerful signal that cleantech is at the core of US industrial policy and will be the foundation of a new industrial revolution. Canada’s investment tax credits for clean-energy projects and the creation of the Canada Growth Fund will see shovels in the ground for Canadian projects as well.

“By 2021, over 200 new VC, Corporate VC, Infrastructure and Private Equity Funds targeting cleantech were announced representing over $100B of new private capital”

Susan Rohac

Despite the ups and downs of cleantech, I think that by any metric the fund has been successful. The Cleantech Practice has supported 50 Canadian cleantech companies, and many of them have been identified on the Cleantech Forum’s Global 100 list over the years. Many are scaling, exporting, and becoming global champions in their respective sectors. We have had some great exits, and yes, some disappointments, but overall, the fund has been profitable and returning capital well above our most optimistic assumptions. I think the key to our success was collaboration: we invested time in understanding the ecosystem and creating formal and informal partnerships with public and private sector investors, accelerators, and like-minded associations. We have seen the need in many cases of the full spectrum of financing instruments, from grants, equity, and debt to project financing – a blended approach to accelerate the path from research to full-scale commercialization plants. Together, we built on the common interest of enabling and supporting the next generation of Canadian cleantech companies who could help the world address the climate crisis. This collaboration was to the direct benefit of our portfolio companies: for every $1 committed by our fund, our portfolio companies raised an additional $7.3 from the private sector – that is over $3.5B flowing into these 50 companies!

Some Key Takeaways From Five Years of Cleantech Investing

The first takeaway is that cleantech, or climate tech, as an asset class is much too broad and diverse to lump together. The uniqueness of the technologies, their markets and pain points make it impossible for one investor to have deep domain expertise in all that is cleantech. There is no end to the amount of knowledge required. One deal you are learning about low-carbon nutritional building blocks in alternative proteins, the next literal building blocks in the cement industry. You need to quickly figure out what dynamics are important while leaning on outside experts and partners to put together information needed to make tough decisions.

The second key takeaway is that back-to-basic investing principals hold true – cleantech is no different. Is there a compelling and differentiated value proposition, a solid team, a large market opportunity, a defendable technology, strong partners, and validated market traction? While no guarantee of success, these six ingredients are ultimately what investors are assessing. This holds true for any type of tech company – from asset-light software plays to the lumpiest hard-tech companies. Note to entrepreneurs: how well can you articulate these six factors?

Finally, learning to say “no” is a big part of a venture capitalist’s role and hearing “no” is a big part of a tech company’s journey. Honestly, it’s tough – no one likes to say “no” when capital is so critical to success, but the reality is there are many more companies looking for capital than is available. Most investors, including us, have a defined investment thesis which describes the aspects we are targeting, including: the stage of company, size of investment, thematic area, potential climate impact, etc. Even companies who match our thesis may still receive a “no” when assessing overall portfolio construction and diversification. Regardless of the reasons, offering a fast “no” with a clear and honest explanation is the best path forward. Entrepreneurs, I encourage you to press for honest feedback and not to take it personally. Make the investors that you meet allies, ask them how you can improve on your pitching or if they could recommend other investors to reach out to − a game changer in many cases.

“Make the investors that you meet allies, ask them how you can improve on your pitching or if they could recommend other investors to reach out to”

Susan Rohac

Looking Forward

With our Climate Tech Fund launched in November 2022, we want to help preserve and extend Canada’s hard-won reputation as a leader in the cleantech/climate tech sector. Our team focuses on technologies that can materially mitigate GHG emissions. As one of the largest, most active investors of its kind in Canada, we play a key role and aim to make the right long-term investments to support Canada’s climate targets while building globally competitive firms.

We are encouraged with a few changes we are seeing in the sector. Firstly, the quality and experience of entrepreneurs joining climate technology companies have changed dramatically. We are seeing successful serial entrepreneurs and C-Suite talent from adjacent industries coming into climate tech opportunities across the country. This cross-over of talent will help propel and accelerate climate tech companies’ success and ultimately make them more investable.

The clock is ticking for many countries and large corporations to hit their net zero targets. These commitments will create a swell of demand for climate tech solutions adoption – the flood gates should open! That’s why we feel it’s important for small cleantech companies to put in place, sooner rather than later, big company policies, procedures, financial reporting, and governance. Adding these internal capacities once at full scale is hard, growing into them from an early stage makes it more manageable. For example, formalizing the Board of Directors with balanced governance structures, responsibilities, committees and voting thresholds early in the life of your company will pay tenfold. The Canadian Venture Capital Association (CVCA) templates are a great place to start.

It’s hard to predict what the next five years will look like. Who could have predicted some of the up and downs of the last five years? I do know there will be ups and down and we still have lots to learn, but we are ready. And we are not alone. There is an ever-growing stakeholder base with a high level of commitment, cooperation, and determination to succeed. I am convinced that the diverse and impressive number of Canadian climate technology companies can form the backbone of Canada’s economy for decades to come.