Bridging the divide: Venture capital investments and climate tech

Tom Heintzman: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Tom Heintzman. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

David Janashvili:  I do think that with this uncertainty and with the heightened rate of failure for even some of the largest companies, you have more and more scrutiny applied to investments. We see investment committees take longer, be a lot more discerning, and do a lot more due diligence.

Tom Heintzman: On this show, we’ve covered a wide range of issues where startups, early stage companies are working on the range of issues needed to address climate change. From improvements in renewable energy generation and storage, to smart grids, to prop tech, which refers to technologies to decarbonize buildings, to critical minerals and carbon removal. These startups all require capital, which generally comes in the form of VC funding, venture capital funding. Yet VC investments in the US climate tech companies have faced many challenges this year, in particular over investor uncertainty regarding the US election and now implication of Trump’s second term in office. On today’s episode, we’ll discuss some of those potential implications, how climate tech companies are adapting to access capital and what our clients need to know as they engage in this space. Joining me to provide further insights is David Janashvili, Managing Director in the Energy, Infrastructure and Transition Team in New York City at CIBC Capital Markets. Listeners may remember DJ as a previous guest on the show for an episode we aired in September 2023 on our takeaways from New York City Climate Week. DJ, it’s great to have you back in the show.

David Janashvili: Thank you, Tom. Glad to be here.

Tom Heintzman: DJ, your work focuses on venture capital and climate tech. I’d like to start by addressing the elephant in the room with regards to the potential implications of Trump’s second term for this space. In the lead up to the US election, many climate tech investors are cautious about deploying capital and adopted a wait and see mode. Now that Trump has won, how might this new administration impact market sentiment in 2025?

David Janashvili: The uncertainty of it all isn’t going away anytime soon. And in the absence of facts, we are relying largely on feelings. There’s been a lot of promises made to all sorts of constituents and it’s not clear how all of them can be made true. Personally, I don’t believe that concepts like IRA and other legislative support for climate will be chopped away entirely. We’re talking about much more of a surgical approach. There’s some risks that folks expect to EV and EV charging infrastructure support, some of the battery storage related technologies and projects, given that there will be more focus on fossil fuels and what’s expected to be lower costs of gas and lower costs of gas fire generation. So uncertainty means continued scrutiny applied to investments, especially ones that carry more risk like in the climate sector. However, I would note that that scrutiny is welcome by the highest quality players. We do see deals getting done, larger finances getting announced that we’ll talk about momentarily. But we also see big failures like Northvolt filing and many others that continue to muddy the water. To make the investment decisions quite difficult.

Tom Heintzman: DJ, VC investments have been declining for climate tech companies this year, and you just mentioned Northvolt, which obviously was a pretty spectacular failure, unfortunately. What’s been the implication of both declining funding and what do you think the implication will be of the Northvolt news? And then conversely, what types of companies have been successful at raising capital? Who’s providing the capital? And what momentum do you see in the space?

David Janashvili: That’s a huge question, Tom. I think worth dissecting the data a little bit. If you look at the numbers and volumes in terms of dollars of VC funding into climate, you see the seed stage and series A stage deals are still there. Companies are able to raise capital to demonstrate their technology, to develop their technology. Unfortunately, it seems that the traditional VC funding model isn’t well suited towards climate where you have technologies and companies that require a lot more capital over multiple stages to not just demonstrate that the technology works and there’s potential for its adoption, but also to demonstrate ability to scale that technology up. That’s where we’ve had bigger and growing gaps. Timing between Series A, Series B and Series C fundings have been longer. Series B and Series C fundings have been smaller. We continue to hear large investors prioritizing support for their existing portfolio companies rather than seeking to invest in other series B, series C type transactions. And that is certainly problematic. I think on the negative side, certainly a number of folks like Northvolt that have failed with Northvolt’s filing for bankruptcy, a combination of now a year long process of decline, Northvolt of course, a global champion as it relates to these independent companies, battery gigafactory companies, on the manufacture of lithium ion battery cells, pursuing three large projects in Sweden, Canada, and Poland, raised in excess of $15 billion, including from some of the highest quality investors like the Canadian pension funds, Goldman Sachs, etc. Has failed to set up manufacturing, has failed to get to production. And that’s been an execution challenge a lot more than a technology challenge. It’s a similar story around the folks like RNX Energy and potentially Core power that is pursuing a gigafactory in Arizona here in the US on the back of a conditional loan guarantee from the DOE, TBD where that goes of course, given the current climate. Having said that, there have been successes. We have seen a number of aspirational type fundings, certainly in the nuclear sector. We have a growing electric load. Virtually everywhere you see, both in North America and beyond, and virtually every state, every county. And that’s buoyed by both electrification, but also new uses of energy. We’re likely going to have significantly less restrictions on things like crypto mining. Certainly data centers as a whole are continuing to drive a load growth forward. So the value of electrons, no matter when they’re generated, which was not always the case, is going to continue to increase. So energy and energy supply will have to be a real all of the above type approach. We will have to have an all of the above approach in that sense. And then in addition to everything that’s linked to power production, many of these companies, whether it’s on the production side, transmission, distribution, storage and services have been buoyed in terms of their values in private markets. We also have continued resurgence in all things fuels. And clean fuels. You’ve seen the likes of TWELVE and Infinium raise or announce very large funding rounds from very high quality investors, TPG Rise and Brookfield respectively. In that case, those folks showcase their successes during the New York climate week and continue to do well. And we see a number of others in that e-fuel space coming up down the pike and driving a lot of success.

Tom Heintzman: In our episode last year, you discussed how there was a need to bridge the divide between VC funding, which typically goes to companies, and climate tech projects, which may require more of a project financing approach. And also the price tag on these projects tends to be a lot larger while you might be raising 10, 20, $30 million for a venture capital company, you’re probably raising, or you may be raising 100 or 200 million for the project. Another way of saying the same thing is that VC capital is very expensive and using it to fund large capital projects can be very dilutive. What progress have you seen on funding the projects and how are companies resolving this tension between the large amount of capex required and the traditional VC model?

David Janashvili: I think that’s absolutely the question. About a year ago when everyone was talking about first of a kind type projects, the so-called FOAKs, we perceived and decided as an industry that there is an asset class, like first of a kind project. And as a result, massive funding up there. I personally don’t believe there is such an asset class. What we’re seeing is execution is coming into focus both on technology. Scale up, but also very importantly, from a business model perspective, the discipline that’s required to stand up a strong business that will deliver lasting results is now something that investors seek. And that’s not something that FOAKs were focusing on initially. What I’m trying to say is that FOAK is not really an asset class in its own. And just like in whether it’s in an industry like cement or things that are more complex, like AI, you have to have teams that have done it before, have implemented large and complex projects, not just raised capital and spent it, that have actually dealt with manufacturing delays, supply chain delays, issues around utilities and energy supply, and then ultimately issues around ultimate offtake and feedstock as well. Today, we have an emerging group of companies, and I already mentioned TWELVE and Infinium, but I will certainly lump in some of the FOAKs that presented our climate tech event around materials technologies this year like nCycle and Cyclic Materials and many others that are truly taking the core the technological team that put these ideas together and augmenting that with high quality execution capabilities. Terra CO2 is another one, Carbon Upcycling is another, where we have these teams that are well balanced and well set up to take these technologies and bring them to a larger scale. And that’s what gives most investors comfort that their money will not be lost.

Tom Heintzman: DJ, you’ve been active in discussions and collaboration with ARPA-E, the United States Department of Energy Venture Fund, which incidentally now also has a growth equity program as well. For instance, I’ve had the pleasure of attending a few of the workshops you’ve hosted to introduce ARPA-E to startups. Can you tell our listeners more about the dialogue you’re having with ARPA-E and how they’re helping to shape the environment for startups in North America and why initiatives like this matter?

David Janashvili: We are incredibly fortunate that we get to work with Director Wang’s team. Very importantly, my personal and many of our team members’ relationship with ARPA-E spans multiple different types of administrations. I worked with the previous administrations or the team under the previous administration under the Trump 1.0 administration. ARPA-E has been a huge driver of innovation. They have been the largest and one of the most successful venture funds globally with a vast number of success stories. I’ll let them speak on their own about how good they’ve been and they are continuing to support key companies through the Scale-up projects, which is up to $20 million in growth equity to demonstrate that scale projects. What’s interesting is that ARPA-E is now getting into a physical project implementation. They’re working with corporate VCs and large industrials and energy players to help companies not just with capital, but also with know-how, with lab facilities, and also importantly with projects. A great example of that is the airport in San Antonio that is being redone and it’s being a number of ARPA-E funded technologies, whether it’s on sodium ion storage or electric vehicle charging. High voltage electric vehicle charging, others that they’re bringing to the fore, allowing all these early stage companies a almost risk free way of demonstrating their projects at scale. We believe ARPA-E is going to continue to be very, very relevant at the core of energy related innovation. And importantly, they slot really well within the overall network of the different funding pockets within the Department of Energy and elsewhere in the government. I should note that in the coming year, I believe it’s in April, that ARPA-E is going to have their next annual summit this time in Washington, D.C., a bit easier to attend than Dallas. And we at CIBC are looking forward to hosting an event and helping support many of ARPA-E’s alumni companies at that event and beyond.

Tom Heintzman: DJ, one last question. There’s a lot of change going on in the space, both technologically, but also rules and regulations, capital. When it comes to execution and future proofing investments in the climate tech space, what insights would be valuable to pass on to our clients? And also as our clients engage in this space, how can institutions like CIBC be of assistance in that transition?

David Janashvili: I love that question because it helps us talk more about how important bankers are Tom, I do think that with this uncertainty and with the heightened rate of failure for even some of the largest companies, you have more and more scrutiny applied to investments. We see investment committees take longer, be a lot more discerning, and do a lot more due diligence, including third-party due diligence. We as bankers fit into that very well. More and more climate and impact investors are looking to standardize their processes as far as evaluating companies. They’re looking for advice from folks like us who get a chance to see a multitude of different technologies, projects and business models. So I am very optimistic about the future role of banks, not as just as Project and corporate capital providers, but real strategic advisors to both management teams and honestly also to venture late stage venture and growth equity players that support all these companies and management teams. We think, I think, and the team here thinks that the next two or three years will continue to be difficult, but there will be increased flexibility when it comes to avenues of funding. The IPO markets are rumored to be coming back and we hope that there will be higher receptivity towards public listings for many of the later stage and more successful climate tech companies. We think the emergence of private credit as a more flexible and maybe it’s in some cases, certainly in the upside cases, company friendly source of capital is another where we as bankers can continue to add value and help design bespoke financing structures, whether it’s in convertible debt and all sorts of flavors of preferred equity, etc. In terms of future proofing, I want to come back to the original point that I was trying to make around execution coming at a premium. In the end, investors are trusting their funds and their investors’ funds, their LP funds, to management teams, not just to some theoretical and hypothetical technology. We’re talking about management teams that have to be very sober about their prospects and really try and zoom in on what investors would look at as far as downside cases. And that’s another place where we as bankers can really help, not just model things out, but also though our own experiences and through our connectivity with the various investors. The fact that we oftentimes go through investor committee processes with investors, be able to advise the companies on ways to not just put together their marketing materials, but also put together the business models, figure out what matters and what doesn’t, seek what kind of candidates to seek, whether it’s CEOs, CFOs and chief revenue officers, etc. Again, I think climate tech, even though many of the companies and technologies are not mature, as an asset class, as an industry is becoming more mature, meaning there’s a lot more discipline that is required to do this. My favorite example is some of the biggest failures come from a billionaire meeting a PhD at a cocktail party. And we see that now. Investors are looking for discipline and for well-structured put together teams and business models and that’s what we bankers can help advise on as well as capital structure, financing, M&A, etc.

Tom Heintzman: So in other words, our investors should invite you to the next cocktail party. Is that what I’m hearing?

David Janashvili: Or come to mine! 

Tom Heintzman: Okay, thanks DJ for taking the time to join the show today, I enjoy our annual catch up and the ability to check in on the status of climate tech. And thanks to the listeners for tuning in. Please join us next time as we tackle some of sustainability’s biggest questions, providing you different perspectives to help you move forward. I’m your host, Tom Heintzman, and this is The Sustainability Agenda.

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