Four Tips For Climate Tech Entrepreneurs To Succeed In A Tough Market

Four Tips For Climate Tech Entrepreneurs To Succeed In A Tough Market

The stage appears to be set for climate tech entrepreneurs to succeed. The venture capital industry has mostly recovered from its uneconomic investments in 2020 and 2021, climate policies are generally moving in the right direction and global warming disasters are constantly in the headlines. But there are still challenges for new climate ventures.

To start with, the small budgets and scant human resources of chief sustainability officers are being sucked into spending on climate disclosure compliance. That leaves minimal scope for new projects, such as improving climate risk assessments. Energy transition affordability has become the dominant narrative in the market – voters can’t be expected to pay $60,000 for an EV. This has damped down more ambitious net zero strategies. Witness BP, Shell and Total Energies rowing back on their portfolio diversification plans and governments failing to keep to their net zero pledges. The voluntary carbon market continues to be a graveyard for the careers of ethically driven entrepreneurs as they fail to slay the many-headed hydra of constantly evolving market rules. Throw in critical policy reversals, such as the exclusion of Scope 3 emissions from the SEC’s climate rule, and it is clear that succeeding with a climate tech venture is far from assured.

The Verdantix research team has seen all of this before. We first benchmarked carbon management software in 2009 and climate change consulting services in 2008. Here are our tips on how to succeed in the current context:

#1 Do not – under any circumstances – use climate, carbon or green in your brand name
You are competing in a very crowded market. There are already 1,000 tech vendors with climate, carbon or green in their brand name. You will never be able to differentiate your brand. You can not build a defensive moat with an undifferentiated name. In addition, this locks your brand perception into a product category. New ventures like Sweep and Watershed have dodged this bullet; they have the flexibility to expand their value proposition into CSRD compliance or supply chain sustainability.

#2 Stop talking about the medium-term or long-term – economic buyers don’t care
Much of the dialogue in the sustainability echo chamber is anchored by policy goals, such as limiting global warming to no more than 1.5°C by 2100, or by corporate net zero targets that are typically set to 2050. The average age of a Fortune 500 CEO is 58 years old. The majority will still be alive in 2050, but very few will still be in role. The same argument will hold for the next five years. Climate tech value propositions need to focus on improving financial performance this year. Using climate analytics to show that a travel business such as TUI lost €120 million in 2023 due to wildfires and floods has vastly more impact than providing a net zero forecast to 2050.

#3 Target the business case, not ethical case
Less than 5% of executives running firms with more than $250 million in revenue – the target market for climate tech – will make investment decisions due to their ethical leanings. While it’s great to win marquee sustainability brands such as Microsoft, Patagonia and Unilever as customers, the reality is that this is a tiny cohort. Your value proposition needs to resonate with hard-nosed bean counters to achieve repeatability in sales and scale the business. This means that entrepreneurs need to talk the language of CSOs – skewed towards ethical goals – but also provide compelling financial analysis for other stakeholders. Corporate PPAs are a great example: CSOs want to buy renewable power to reduce Scope 2 emissions and procurement leaders want to lock in lower prices for electricity supply.

#4 Anticipate very high levels of competition and major price pressure
For entrepreneurs, raising a seed round or Series A round can feel like winning the lottery. Indeed, during the last couple of years, the probability of raising money from VCs nursing losses from badly priced deals in 2021 may not have been that different from a lottery win. But a lot of business plans fall apart when the average contract value (ACV) in the total addressable market model turns out to be 3x more than the going rate in the market. The problem? Too many climate tech ventures chasing the same market opportunities. To counteract this, entrepreneurs need to spend much more time assessing segment-level pain points. What do banks in Europe need in terms of climate analytics? Do fund managers in Canada need to model portfolio emissions? Generic value propositions such as multi-industry carbon accounting will not survive confrontation with the competition.