Hardware companies dominate a list of promising climate tech startups

What will it take for a startup to make a dent in climate change?

The most promising candidates tend to be hardware startups that have spent years developing and proving their technologies, according to a new report. Oh, and it helps to specialize in energy or raw materials.

The report, published by Congruent Ventures and Silicon Valley Bank, surveyed over 50 experts in academia, finance and private sector businesses to assemble a list that was then whittled down to 50 North American companies in four categories: agriculture and food, energy, buildings and mobility, and manufacturing and materials. 

The majority of the final 50 were manufacturing and materials startups (18), with energy startups not far behind (13). Agriculture and food were not well represented, despite the sector being responsible for about a third of carbon emissions, suggesting that the space still has plenty of room for new founders and investors. Nearly all of the startups focus on hardware, cutting against most generalist VC’s preference for software.

That promising climate tech startups are mostly hardware companies may not come as much of a surprise. Climate change is a real world problem. Software can only change so much about the way people interact with their physical world; if the hardware still relies on fossil fuels, then software can only nibble at the margins.

The average startup in the report is 7 years old and has raised $374 million. The latter figure is skewed by some particularly well-funded startups like Commonwealth Fusion Systems, Impossible Foods, Redwood Materials, Sila and TerraPower, which have each raised north of $1 billion. The median company is a bit different, though, having been founded six years ago and having raised $114 million.

The split between the mean and median is reflected in the fact that the majority of companies on the list sit on either side of the so-called commercialization valley of death. Early stage climate tech startups might be successful in proving their technology works, but when they move to commercialize it, the cost of a first-of-a-kind facility is often far greater than many investors are willing to stomach. In the Congruent/SVB report, 28% of companies have raised less than $50 million while the same proportion have raised over $500 million. In other words, if companies are successful in crossing the valley, investors often reward them for it.

It’s also unsurprising that the typical company on this list has been around for the better part of a decade. Early stage climate tech startups frequently have to prove the science that underpins them, a process that takes a while. After that, hardware can take years to build and refine. The end result is that climate tech startups can take longer to mature than classic software startups.

For investors who don’t specialize in climate, placing long, expensive bets on risky hardware startups can be a tough pill to swallow. But the potential upside is significant: A McKinsey partner recently noted that the market for climate tech is already $1 trillion and is expected to double every decade. As the specter of climate change looms, companies that have the best shot at reducing emissions could snag a significant portion of that market, and their investors stand to benefit.