To successfully navigate the ‘Valley of Death,’ it is crucial to comprehend its intricacies and understand why this journey is an unavoidable part of the growth trajectory for most climate tech startups.
Hardware: The heart of climate solutions
It is unsurprising that the most promising climate tech startups are concentrated on hardware. Climate change is a tangible, real-world challenge that necessitates physical solutions. While software can facilitate optimisation in human interaction with the physical environment, it cannot fundamentally address issues if the underlying hardware infrastructure remains dependent on fossil fuels.
As a prominent climate-focused investor notes, “Climate cannot be solved with SaaS alone.” Startups focused on hardware require substantial resources and extensive timeframes, rendering them high-risk ventures for investors.
A report by Congruent Ventures and Silicon Valley Bank surveyed over 50 experts to identify key players in North American climate tech. Nearly all startups focused on hardware, defying the typical VC preference for software. Most of the top 50 companies were in manufacturing, materials, and energy, with agriculture and food underrepresented despite their significant carbon footprint.
According to TechCrunch, early-stage climate tech startups often succeed in proving their technology at a small scale but face substantial obstacles in commercialisation, primarily due to the prohibitive costs of constructing a first-of-its-kind facility. In the Congruent/SVB report, 28 per cent of companies raised less than US$50 million, while an equivalent percentage secured over US$500 million—indicating that successfully crossing the Valley of Death can yield significant rewards.
Nonetheless, the commercialisation journey is prolonged; climate tech startups often require a decade or more to mature, especially when hardware development and refinement are involved.
Hardware is hard: Why the fallen… fell?
The commercial Valley of Death has claimed numerous climate tech startups, with Running Tide, Arrival, and Ambri being among the recent casualties.
Running Tide, an ocean carbon removal company, faced a dramatic decline in the demand for carbon credits. Despite partnerships with major corporations such as Microsoft and Shopify, and the successful removal of 25,000 tons of CO₂, the declining voluntary carbon market undermined the company’s capacity to sustain its operations.
Electric vehicle manufacturer Arrival encountered challenges of its own. Burdened by development delays, macroeconomic pressures, and unsuccessful financing attempts, the company grappled with overwhelming liquidity issues. Despite aggressive cost reductions and workforce layoffs, Arrival was ultimately unable to secure sufficient capital to surmount these obstacles.
Battery innovator Ambri, known for its liquid-metal battery technology, also succumbed to the Valley of Death. Ambri’s attempt to raise US$300 million for manufacturing faltered after losing its lead investor, and a last-resort US$50 million bridge loan failed to materialise. Though this particular case has made a comeback after filing for Chapter 11 bankruptcy, successfully reviving its operations in August.
Also Read: Funding the green transition: Southeast Asia’s climate tech leaders of 2024
Each of these cases illustrates the difficulties inherent in scaling hardware-centric operations without stable financial backing. High costs, fluctuating demand, and missed funding opportunities were significant contributors to their respective failures.
Why must the valley be bridged?
European venture capital firms Speedinvest, Planet A, and Norrsken VC have created the Climate Hardware Playbook—a guide to address common issues in fundraising, management, and product development for climate hardware startups. The playbook is based on interviews, surveys with 118 investors and 142 founder participants, covering 3600 climate hardware funding announcements in Europe between 2015 and 2023. It presents three main arguments for why bridging the Valley is critical.
First, inaction would subject the future generations to a more challenging existence. Second, there has never been a more opportune time to bridge the gap. We are at an inflection point where tighter regulation, declining cost curves, and corporate climate targets are creating a level playing field for climate hardware. With half of global GDP and a quarter of carbon emissions under net zero targets, companies—particularly those in hard-to-abate sectors—are under immense pressure to innovate and reduce emissions.
Third, despite limited data, current trends suggest promising returns for climate hardware solutions, as evidenced by recent exits of hardware-focused climate tech companies. Tesla’s growth, from a 2010 IPO valuation of US$1.7 billion to a major market player, and Ginkgo Bioworks’ US$1.1 billion acquisition by Occidental in 2023, are notable examples.
Additionally, Energy Impact Partners’ Climate Index, which tracks both software and hardware companies focused on sustainability, has outperformed the NASDAQ by approximately 2.8 times, underscoring the potential of investments in this sector.
From a portfolio perspective, incorporating hardware investments can mitigate risks inherent in a software-centric approach and balance investment timelines. Groundbreaking hardware innovations, often protected by patents, provide stability that retains value during market fluctuations—particularly attractive in today’s volatile economic climate.
Moreover, hardware may present unique entry points compared to more saturated software markets. Fewer venture capital funds invest in hardware, leading to less competition for deals. While SaaS valuations soared over the past five years, increasing 6.5 times from 2015 to 2021, hardware investments have remained underexplored, presenting a more favourable risk-return profile.
Consequently, the funding ecosystem is evolving, with new stakeholders addressing gaps in the climate tech funding stack. This includes infrastructure and growth-stage climate funds like General Atlantic’s Beyond Net Zero, KKR’s Global Climate Fund, and specialised real asset funds such as Generation’s Just Climate.
Climate tech venture capital firm Earth Venture Capital is also doubling down on climate tech, raising its second fund just two years after debuting Fund I. Defying expectations, Earth Venture’s first fund is among the rare 10% of VC funds launched in 2022 to generate positive returns, according to data from Carta.
Also Read: How to navigate the investment opportunity in climate tech sector
“Earth VC is building bridges across the abyss—connecting outlier deep-tech startups with the untapped potential of Emerging Asia, a region projected to contribute over 50 per cent of global growth by 2030. By targeting the dual frontiers of deep-tech and climate innovation, we are addressing a US$3.5 trillion market opportunity in sustainable technologies. In this race against time, our role extends beyond funding; we actively guide startups through the Valley of Death, bridging financial and market gaps to accelerate adoption,” stated Tien Nguyen, Founding Partner at Earth VC.
Atoms or bits: The future lays in equilibrium
Have we been overly focused on the digital realm at the expense of tangible innovations? Peter Thiel, one of the founders of PayPal, certainly believes so. He recalls that, in the 1960s, technology encompassed advancements across multiple domains—computers, rockets, supersonic planes, and the Green Revolution, among others. Today, “technology” is often synonymous with information technology, resulting in a narrow focus on software while neglecting the physical innovations that create substantive real-world impact.
Thiel emphasises the stagnation observed in many physical domains—from outdated subway systems to slower modes of transportation—and believes we need to reignite our ambition for progress in the material world. Genuine technological advancement necessitates more than writing code; it requires breakthroughs in energy, biotechnology, and manufacturing to address pressing real-world challenges.
The future of climate tech hinges on striking a balance between “atoms” and “bits”—leveraging the potential of digital tools alongside the tangible progress achievable only through physical technologies. For climate tech to cross the Valley of Death and lead us toward a sustainable and prosperous future, it will take visionary investors, determined founders, and a renewed focus on building the hardware our world so urgently requires.
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