What Is the Effective Way to Assess Climate Tech Venture Capital Investments? Most Common FAQs Answered

ClimateAngels | Sep 14, 2023

Deep in the heart of the global economic and business environment transformative landscape lies the Climate Tech Venture Capital framework. A framework carefully crafted just like a treasure map, guiding investors toward opportunities that promise not only financial returns but also a greener, more sustainable future. This blueprint encompasses vital factors: technology scalability, market demand, competitive dynamics, and the leadership prowess of the companies in question. Explore this comprehensive article that sheds light on the Climate Tech Venture Capital Investment assessment framework, Climate Tech Venture Capitalists (VCs), and answers to the most common climate tech FAQs and more.

When assessing climate tech venture capital investments, a well-structured framework becomes an invaluable tool for gauging the potential impact and return on investment (ROI).

This framework should encompass critical factors like technology scalability, market demand, competitive dynamics, and the competence of the company’s management team.

Moreover, it’s essential to align your investment strategy with your own objectives and risk tolerance. In this context, several globally recognized frameworks hold sway in the industry, including the United Nations Sustainable Development Goals (SDGs), the Paris Agreement, and the Environmental Protection Agency’s (EPA) Greenhouse Gas (GHG) Protocol.

These established frameworks offer invaluable guidelines for harmonizing investments with global climate and sustainability objectives. By subjecting investments to these widely accepted benchmarks, you not only ensure social and environmental responsibility but also pave the way for long-term financial success.

Integrating these frameworks into your assessment process enables you to contribute to a more sustainable, and greener future while making well-informed decisions that not only enhance your investment portfolio but also benefit the planet Earth.

Now that we’ve outlined the significance of such a framework, let’s delve into the world of Climate Tech VC and address the questions that pique your curiosity.

So, what is a Climate Tech VC?

You mean, who are climate tech VCs or venture capitalists? 🤔

👉 A Climate Tech VC is a venture capital firm that invests in companies that are working to mitigate climate change and its adverse effects. These VC firms are focused on funding startups that are developing innovative technologies and solutions to address the challenges posed by climate change.

Here’s Bloomberg TV’s small News Talk to Make You Understand about Climate Tech VC:

Note: Climate Tech VCs are playing an increasingly important role in the fight against climate change by providing the necessary capital to help these startups grow and scale their operations.

What is a Venture Capital Investment or VC Funds?

Venture capital funds or VC Funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises (SMEs) with strong growth potential.

These investments are generally characterized as very high-risk/high-return opportunities.

How do climate investment funds work?

The Climate Investment Funds (CIF) is a multilateral fund that accelerates climate action in 70+ developing countries. CIF deploys highly concessional finance to empower transformations in clean energy, resilience, nature-based solutions, and other areas.

Curious to know in depth about the working of VC funds? Here: Venture Capital: What Is VC and How Does It Work?

How do you Evaluate a VC Investment and its performance?

There are different return metrics that a VC can incorporate while evaluating the performance of a VC Investment, such as internal rate of return (IRR), multiple of invested capital (MOIC), cash-on-cash return (CCR), and net present value (NPV).

If you dig deep, you’ll find that evaluating the performance of a venture capital (VC) fund is crucial for investors to determine the success of their investments.

The metrics used to evaluate VC fund performance, include:

– Multiple on Invested Capital (MOIC): This metric measures the amount gained on investments and is considered the most common fund metric. Anything above a 1.0x is considered profitable.

– Gross Total Value to Paid-In Capital (TVPI): This metric demonstrates the overall performance of the fund relative to the total amount of capital paid into the fund to date. A TVPI of 1.5x means for every $1 an LP invested, they’re projected to get $1.5 in value back as a return.

– Net Total Value to Paid-In Capital (TVPI): This metric is similar to Gross TVPI, but it takes into account management fees and other expenses.

– Residual Value per Paid-In-Capital (RVPI): This metric is the ratio of the current value of all remaining investments within a fund compared to the total contributions of LPs to date.

– Distributions per Paid-In-Capital (DPI): This metric measures how much money has been returned to investors relative to the amount they have invested.

– Internal Rate of Return (IRR): This metric calculates the rate at which the fund’s invested capital grows over time and is expressed as a percentage. These metrics are used by investors to compare the performance of different VC funds and determine which funds are generating the highest returns.

Remember: It’s important to note that these metrics are not perfect and should be used in conjunction with other factors when evaluating VC fund performance.

What are the Evaluation Criteria employed by VCs in general?

There are several frameworks that investors can use to assess climate tech venture capital investments.

Some popular frameworks include the Task Force on Climate-related Financial Disclosures (TCFD) framework, the Sustainable Development Goals (SDGs) framework, and the Environmental, Social, and Governance (ESG) framework.

After analyzing these frameworks, four general evaluation criteria used by venture capitalists are reached:

1. Technology

2. Attractiveness of the market

3. Customer adoption

4. Product or service

Remember: Technology and market attractiveness often determine the potential of a product.

What is an ideal Framework to Assess Climate Tech Venture Capital Investments?

The ideal framework to assess climate tech venture capital investments involves a multi-dimensional approach.

You can start by categorizing opportunities into one of four cohorts based on scalability, defensibility, and asset intensity.

Next, evaluate the readiness of each sector using the ‘Readiness 3’ factors: technology readiness, market readiness, and regulatory environment.

For example: ClimateXcapital’s framework to classify Climate-Tech:

ClimateXcapital-framework to classify Climate-Tech

Source: ClimateXcapital

By combining these assessments, investors can identify promising climate tech ventures, anticipate potential risks, and make informed investment decisions.

Comprehensive frameworks like this provides a structured and insightful way to navigate the diverse and evolving landscape of climate tech investments.

What is the most common Climate Tech Valuation Technique used by VC firms?

The Venture Capital Method

Instead, the most common VC Valuation approach is called the Venture Capital Method, developed in 1987 by Bill Sahlman.

The Venture Capital Method is a method to estimate the value of a pre-revenue company.

This method is based on two key assumptions:

– The VC method assumes that investors will want to get a return on their investment (ROI) measured by the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA).

– The VC method also assumes that the company will have an exit event in the future, such as an initial public offering (IPO) or a merger and acquisition (M&A), where the investors can sell their shares and realize their ROI.

The VC method works by estimating the exit value of the company based on its projected EBITDA and a valuation multiple derived from comparable companies. Then, the exit value is discounted back to the present value using the investors’ required rate of return.

The present value is the post-money valuation of the company, which is the value of the company after receiving the investment. The pre-money valuation of the company, which is the value of the company before receiving the investment, can be calculated by subtracting the investment amount from the post-money valuation.

Note: The investors’ ownership stake can be calculated by dividing the investment amount by the post-money valuation.

For instance, suppose a VC firm wants to invest $10 million in a start-up company that is expected to generate $50 million in EBITDA in five years. The VC firm requires a 40% rate of return and expects to exit at a 15x EBITDA multiple.

The exit value of the company can be estimated as $50 million x 15 = $750 million. The post-money valuation of the company can be calculated as $750 million / (1 + 0.4)^5 = $136.8 million.

[The above formulae is nothing complex but 8th grade quant – simple interests and compound interests. Or you can use this VC fund calculator by Angellist]

The pre-money valuation of the company can be calculated as $136.8 million – $10 million = $126.8 million. The VC firm’s ownership stake can be calculated as $10 million / $136.8 million = 7.3%.

Now that you know how to spin your head around the Climate Tech Venture Capital Investments, Climate Tech VCs, VC funds, and how they work, let’s answer frequently asked questions (FAQs) about climate change, climate tech, ESG, and more.

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Q-1. Who is the leading climate tech VC?

Leading the charge in Europe’s climate-focused venture capital landscape is the World Fund. Established with a lofty mission of steering the global economy towards decarbonization, World Fund is dedicated to empowering visionary entrepreneurs who are actively crafting climate tech solutions geared towards creating a regenerative world.

Q-2. Is climate tech a good investment?

The realm of climate tech investments has witnessed substantial growth over the years. While this transformation has been gradual, the emergence of a modern, sustainable, and net-zero economy has now solidified its position as one of the most significant business prospects of our generation.

Q-3. Who is investing in climate tech?

In the landscape of climate tech funding for the year 2023, the United States continues to lead the pack, closely followed by China, the United Kingdom, and Germany.

Remarkably, the United States has poured an impressive $120 billion into Climate Tech startups since 2018, dwarfing China’s investments threefold. The United Kingdom, Sweden, Germany, and France also play substantial roles, collectively contributing between $9 billion and $13 billion. 👇

Top countries for climate tech investment in 2023

Q-4. Who is the largest funder of climate investment?

The Green Climate Fund (GCF), a pivotal element of the historic Paris Agreement, holds the distinction of being the world’s largest climate fund.

Tasked with the critical mandate of supporting developing countries in their efforts to raise and realize their Nationally Determined Contributions (NDCs), the GCF paves the way for low-emission, climate-resilient pathways.

Q-5. How big is the global Climate Tech VC fund?

In a remarkable feat, Climate Tech VC funding for 2022 reached an astonishing $70.1 billion, marking an 89% surge compared to 2021. This surge was driven by over 3,300 global venture funding rounds, effectively doubling the previous year’s record total.

Q-6. What are the biggest exits of climate tech?

The domains of transport and energy currently lead the charge in climate tech exits. Notably, 64% of these exits, orchestrated by 186 companies, originate from these two sectors. These successful exits underscore the maturation of the market and bolstered investor confidence.

Q-7. Who is the CEO of the climate investment funds?

At the helm of the Climate Investment Funds (CIF) stands Mafalda Duarte, serving as CEO. This multilateral fund, with an impressive size of $8.5 billion, has been a stalwart supporter of climate action across 72 developing countries for well over a decade.

Q-8. Is Tesla a climate tech company?

Without a shadow of a doubt, Tesla claims the coveted title of the largest climate tech company. Its pioneering efforts and substantial impact in the realms of electric vehicles and renewable energy solutions firmly establish its leadership.

Q-9. How much climate tech funding in India?

In a bid to propel climate tech advancements, an Indian fund is setting ambitious goals with a target corpus ranging from $100 million to $125 million. Insights from market research firm Tracxn reveal that climate tech startups collectively amassed an impressive $2.7 billion in funding during 2022, a significant increase compared to the $855 million they secured from investors the preceding year.

Q-10. Will 2023 be the defining year for India’s climate tech startups?

Anticipation runs high as 2023 promises to usher in a transformative phase for India’s climate tech startups. Forecasts indicate the widespread integration of climate tech across diverse verticals and sectors. Moreover, niche models within the sector are anticipated to gain initial traction.

Q-11. Is climate tech part of ESG?

ESG (Environmental, Social, and Governance) investing holds a pivotal role in addressing climate change and curbing global warming. ESG funds prioritize climate-related financial disclosures, aligning with the fiduciary duty of investment management teams to identify sustainable investments.

Q-12. Is ESG the same as climate change?

ESG factors encompass a broad spectrum of considerations within ESG investing and reporting. While climate change is certainly one of these factors, ESG goes beyond climate-related concerns to encompass issues such as human rights and executive compensation, making it a comprehensive approach to sustainability and responsible governance.

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