Hardware companies dominate list of promising climate tech startups

What needs to happen for a startup to impact 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 specializing in energy or raw materials helps.

The report, published by Congruent Ventures and Silicon Valley Bank, surveyed more than 50 experts from academia, finance and the private sector to create the list, which was then narrowed down to 50 North American companies divided into four categories: agriculture and food; energy, buildings and mobility; manufacturing; and materials.

The majority of the final 50 are in manufacturing and materials (18), with energy startups not far behind (13). Agriculture and food were underrepresented, despite the fact that the sector accounts for about a third of carbon emissions, suggesting there’s still plenty of room in this space for new founders and investors. Almost all of the startups are focused on hardware, which contradicts the preference of most generalist VCs 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 how people interact with the physical world; if hardware continues to rely on fossil fuels, software can only chip away at margins.

The average startup in the report is seven years old and has raised $374 million. That last number is skewed by some particularly well-funded startups, such as Commonwealth Fusion Systems, Impossible Foods, Redwood Materials, Sila, and TerraPower, which have raised more than $1 billion. The median company, however, is a bit different, having been founded six years ago and raised $114 million.

The split between the mean and median reflects the fact that most companies on the list fall on either side of the so-called Valley of Death of commercialization. Early-stage climate tech startups can succeed in proving that their technology works, but when they move on to commercialization, the cost of a first-of-a-kind facility is often much higher than many investors are willing to bear. In the Congruent/SVB report, 28% of companies raised less than $50 million, while the same share raised more than $500 million. In other words, when companies make it across the valley, investors often reward them for it.

It’s also not surprising that the typical company on this list has been around for nearly a decade. Early-stage climate tech startups often have to prove the science that supports them, a process that takes a while. Then, hardware can take years to build and refine. The net result is that climate tech startups can take longer to mature than traditional software startups.

For investors who don’t specialize in climate, making long, expensive bets on risky hardware startups can be a tough pill to swallow. But the potential growth is significant: A McKinsey partner recently noted that the climate tech market is already worth $1 trillion and is expected to double every decade. With climate change looming, companies with the best chance of reducing emissions could capture a significant share of that market, and their investors could benefit.