Software has had a lot of attention from climate VCs in recent months, from carbon credit monitoring systems to carbon accounting platforms. But, if investors are serious about cutting emissions, they need to invest in hardware solutions, says Tove Larsson, General Partner at Norrsken.
How much investor appetite is there for climate hardware at the moment?
Investors’ interest in climate tech has increased immensely across the last few years. There are several reasons for this; I think in general, the sense of urgency to address climate change has increased as it is nowadays more apparent, through wildfires, water shortage, glaciers melting etc. But also, investors have realised the potential in this space. Increasingly more major corporations and small businesses alike are making net zero pledges. However there is a huge gap to be filled to meet these goals, which means that the demand and willingness to pay for climate solutions that help us get to net zero is at an all time high.
As a result, more and more investors recognise that climate tech solutions are future-proof investments with advantages in terms of being able to attract talent, customers and nowadays also capital.
Why should people back hardware?
When looking at climate tech, hardware presents some of the most interesting investment opportunities. First of all, from an impact perspective, it is very clear that software alone will never solve the climate crisis — hardware solutions are key to enable some of the biggest transitions needed. Also, hardware solutions typically come with lower demand risk — if you get the tech right and are able to bring the solution to the market, buyers will pull it out of your hands, you don't have to take a “go to market-risk”.
A great example is Northvolt, where the battery demand from planned EV production in Europe is >5x the volume of confirmed projects in Europe 2040. Also, hardware solutions typically come with higher defensibility/barriers to entry.
What are the difficulties and drawbacks for VCs wanting to invest in climate hardware?
Hardware investments typically are quite capital intensive and can take slightly longer to realise full potential, but we see that the market is evolving in that regard with more exit opportunities for VC investors along the way, like secondaries or SPACs.
What's next for the industry in terms of this dynamic?
We really believe that some of our next unicorns will be climate tech companies and more specifically those focused on? hardware solutions. Areas we are particularly excited about are the energy space — renewables, energy storage, fusion and next generation nuclear solutions — and sustainable transportation, where we are proud backers of Einride, Heart Aerospace and Northvolt and carbon removal solutions such as Direct Air Capture. Given the enormous potential in this space, we think that investors shying away from hardware climate tech will miss out on making a huge difference in terms of generating impact and amazing financial returns.
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