Last week’s announcement of a $75 million round of venture capital for Svante was just the latest in a recent upswing in venture investments for carbon capture technologies. Venture investments into these technologies was up 4x in 2020 (40 deals) from the 10 deals just back in 2017.
It’s a really encouraging trend for a technology that has been described as “absolutely essential” for meeting climate change mitigation targets. Especially as major investors are jumping in. The Svante round was led by Singapore’s Temasek, for instance, and other investors include oil company capital, government capital, BDC Capital, and others.
But I couldn’t help but see this and the other recent deals in the carbon capture sector, and think it felt pretty familiar. It has a lot of the same features as the biofuels venture frenzy from over a decade ago. And that ended poorly for many investors. Are we seeing the same hype and investment bust cycle again, but this time in carbon capture?
Some of the features of this wave of carbon capture investments definitely resemble those of the biofuels wave.
First, it’s an industry highly dependent upon government support to become established. Then, it was ethanol and biodiesel mandates. Now, it’s the 45Q tax incentive program, as well as a host of official and unofficial carbon pricing schemes already present in the market. In this case, I believe many of these investors and entrepreneurs are gambling not only that this support will continue, but that it will continue to ratchet up over time in some form.
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Second, much of the effort is dominated by necessarily capital-intensive commercialization efforts. Initial commercial-scale biofuels production plants typically cost hundreds of millions of dollars and a significant amount of time to develop and construct. The lack of available project capital for such first-of-a-kind efforts meant that much of the funding was raised through big venture capital rounds. While many carbon capture projects are a bit smaller and can be modular, this capital intensity and long development cycle is also a factor for them, whether for point-source capture or ambient air capture. That probably helps explain why so many of the recently-announced carbon capture venture rounds have been fairly large.
Of course, the way venture capital math works, the bigger the round the bigger the resultant valuation. And to generate good returns off of a high valuation venture investment, you need an even bigger “exit”. This sets up the unicorn-or-bust dynamic that drove so many biofuels startups to become busts.
Third, major energy companies are central to a lot of the efforts here, as investors and as project partners. As these energy giants look to the future amidst threats to their core fossil fuel businesses, they’re eager to get exposure to carbon capture both as a market opportunity and possibly as a way to prolong the existing business. That was somewhat the same dynamic in biofuels. It does mean, however, that these crucial investors and commercial partners may not always regard the success of these startups as their top priority internally.
Fourth, major competing efforts are underway that could potentially put price pressure on the innovation and commercialization efforts. In the case of biofuels, gasoline price drops and then the rapid falling price of electrification in transportation made it hard for many biofuels efforts to compete. In the case of carbon, there are many other efforts underway to reduce atmospheric carbon emissions. We need all of them ultimately! But in the near term soil carbon sequestration, afforestation, and other less tech-centric approaches could also help supply the markets for carbon credits and reduction mandates, much more cheaply than carbon capture and storage innovations.
And fifth, significant price declines are necessary for the new solutions to be effective. Some of these should be achievable with the progression from pilot scale to commercial scale. But some is going to require further successful but as yet undiscovered innovation.
With these similarities, you can see how this wave of carbon capture investing might trigger an experienced investor’s pattern recognition. Together, the could portend a similar story arc of a lot of early enthusiasm, major capital bets and high valuations before a single dollar of revenue, uncooperative markets, shifting policies, and as a result: A lot of bad and highly visible outcomes for investors.
Reasons outcomes may be different for carbon capture startups
Despite those worrying similarities, there are some important differences as well.
To begin with, a more robust capital ecosystem may now be in place to supplement the venture capital to make more capital available in different forms and when it’s actually needed. In other words, the necessary “steel in the ground” might be funded by other ways than through the startup corporate equity stack. The modular nature of many of these carbon capture solutions helps — even at my firm, Spring Lane Capital, which focuses on small-scale project capital, we are seeing interesting opportunities that could fit our mandate. If early project capital of various forms is more available, that could help early commercialization efforts. And certainly carbon capture startups are seeing a lot of available philanthropic capital, “strategic” capital and non-dilutive funding that could be more patient and help see them through the inevitable rough patches.
Furthermore, market pricing may indeed be friendlier than it was for early advanced biofuels efforts. Some early corporate adopters of carbon capture are publicly willing to pay premium prices for some types of carbon credits, with an explicit goal of helping get the market for those solutions moving forward. Willing corporate customers might also be willing to provide long-term offtake contracts for these early carbon capture projects, providing more revenue certainty than the mostly merchant revenue streams that advanced biofuels are subject to. More certain revenue means happier early project investors.
And the magnitude of the overall tailwinds for carbon capture technologies is big. At least for now. We are already seeing signs of some environmentalist pushback on certain applications of carbon capture and storage, and many climate advocates have a sense of ambivalence around carbon credit markets in general. So this current momentum and consensus might yet dissipate. But for now, everyone from climate scientists to oil companies to U.S. federal legislators can all agree that they want to see carbon capture technologies continue to develop.
Does it even matter if these early investments fail?
While that wave of advanced biofuels venture bets is now fairly infamous, it’s not like biofuels have been a completely failed effort overall. The markets for ethanol and biodiesel / bioheating oil have continued to grow. Companies like Gevo GEVO that have begun to focus on the aviation fuels market have been favored by investors recently. If there’s one thing we learned from the aftermath of the last cleantech venture bubble, it’s that bad venture bets don’t mean bad market outcomes. Since we do need the successful commercialization of carbon capture and storage tech, from a societal perspective it’s just good to see these innovation efforts be well capitalized, regardless of how those particular investments turn out.
But if you want to see people do a lot more of something, show them how they can make money doing it. It would be great to see these investments ultimately do well, as that would prompt more and faster follow on capital.
So I hope these entrepreneurs and investors learn one of the key lessons from the biofuel wave, which is that over-reliance upon venture capital for project capital needs is often self-defeating. There’s a more robust capital ecosystem now. These efforts should seek to take advantage of that.