As President Biden and his team prepare for the COP26 UN Climate Conference next week, they should highlight to the world how America is providing leadership in climate-focused venture capital (VC) investment. VC investment is the central factor accelerating the pace of innovation across a range of leading technologies, including biotechnology, medical devices, computer software and hardware, and climate and sustainability.
Simply put, innovation must drive down the cost and improve the reliability of climate technologies enough to make the global energy transition economically viable in developed and developing countries. Most importantly, this must happen before the most consequential impacts of climate change become unavoidable. Fortunately, American startups are leading the world in climate and sustainability technology investment, raising record amounts of capital to a develop broad range of climate and sustainability technologies, a promising trend that we must build off in order to be successful.
Data collected by Pitchbook shows that America is the undisputed leader in both the number of companies and amount of capital invested in climate technology startups within its borders.
Over the past five years (2016-2020), 44.5 percent of global climate technology VC investment went to U.S.-based startups. 1,917 early and growth stage companies raised $41.8 billion to develop solutions to the climate crisis, including new energy sources; energy storage; food and agriculture; clean transportation and infrastructure; and carbon capture and utilization technologies. China has attracted the second most VC investment for climate technologies, totaling $32.8 billion invested into 363 companies. Total VC investment in European Union countries is a distant third.
Climate and Sustainability Venture Capital Investment by Country 2016-2020
Top Ten Countries Attracting Climate and Sustainability Venture Capital Investment 2016-2020
Source: PitchBook Data, Inc.
Innovation has driven down the cost of clean energy to a price competitive level with fossil fuels in many markets, which creates a distinct opportunity to finally address this crisis. There are a number of promising programs in the Build Back Better Act (Democrats’ budget reconciliation package) currently being negotiated, as well as the bipartisan infrastructure framework, and the U.S. Innovation and Competition Act, that can harness momentum in the startup ecosystem and build on this unique American strength to develop the technologies necessary to make the global energy transition economically viable.
One key proposal from House Ways & Means Committee Chairman Richard Neal (D-MA) in the Build Back Better Act would provide startups with clean energy and storage tax credits. This proposal has the potential to be one of the highest impact policy actions by accelerating the deployment of climate solutions and thus allowing innovation to descend the learning curve and take further costs out of the equation. Such incubating policies can induce exponential impacts many times larger than the cost of the policy. While certainly not the most expensive climate provisions under consideration, these could ultimately be several of the most critical provisions because they leverage the strengths of the most dynamic and innovative companies in the world. It should have been no surprise for instance that the two most effective COVID-19 vaccines were developed by entrepreneurs in young companies backed by venture capital. In fact, VC-backed startups have been critical to driving the pace of innovation in most frontier technology areas in the modern economy. The pace of climate technology innovation is no different.
There are dozens of other programs with tens of billions of dollars in funding in the legislative packages that can accelerate climate-related innovation. These include funding for climate technology research and commercialization efforts; programs to encourage integration of climate technologies into infrastructure networks and power grids; and funding to accelerate the scale-up of promising climate technologies.
In addition to global leadership, winning the race to become the global leader in climate technology will also put America in the enviable position of leading what may become the world’s biggest industry. If successful, the country will see millions of new jobs, more domestic manufacturing, and economic growth.
The advantage to the American strategy is that innovation often drives down the cost and thus expands access to the benefits of technology. A corollary to consider is how the Moore’s law pace of innovation in semiconductors has expanded access to previously unfathomable amounts of computing power across the world. The question is no longer if, but when, these technologies can affordably produce reliable clean energy at scale to allow developing countries to fully transition their economies, and who leads the new energy economy.
As American startups continue to lead the world in the climate innovation race, their successes not only accelerate the energy transition domestically, but also lower the barriers to the energy transition for all nations. If the packages under consideration ultimately pass and are effectively implemented, America has a distinct opportunity to leverage our greatest strengths to lead the world through this crisis.
Justin serves as SVP of Government Affairs at NVCA. Justin joined NVCA in September 2014 and focuses on tax policy, capital formation, regulatory and energy issues. Justin is a member of the NVCA Tax Policy Council and acts as liaison to the Capital Markets Working Group, NVCA Growth Equity Group, Blockchain Technology Working Group and the Emerging Ecosystems Task Force.