The IRA: A Win, Win for Innovators & Investors
If you’re like me, your email and Twitter feeds have been pulsing with excitement for weeks around the surprise passing of the Inflation Reduction Act. Finally, some good news!
At the risk of being redundant: TVC is excited too. I won’t attempt to dig through the 730 page bill and map out its many implications (P.S. if you’re looking for that, the experts at Climate Tech VC did an incredible job with their line-by-line tracker here). That said, we can’t pass up the opportunity to comment upon the symbolic and tangible importance of this unprecedented commitment to decarbonization, as well as share some reactions from experts in our community.
TVC invests in companies that apply transformative technologies and science to purpose-driven solutions. Nowhere do we see this play out more fruitfully than in our World Preservation vertical, in which the pain point requires us to completely reimagine how we live in order to solve the most complex existential problem facing mankind. Solutions built around decarbonization and a cleaner future are by their very nature must-haves, are ballasted by secular tailwinds that persist despite down markets, and are increasingly intersectional. You will see a wide breadth of areas explored in our portfolio — spanning consumer-oriented products to deep tech solutions — with the common thread that all of these phenomenal founders are building scalable solutions rooted in a more sustainable future.
If anything, the IRA bill reinforces the attractiveness of investing in ClimateTech solutions, and particularly those that are focused on deployment and commercialization as opposed to long R&D pipelines. While consumer pressure for companies to be more sustainable is well researched, the regulatory tailwind to do so has been shaky up to this point, with government quarrels over what climate-focused incentives mean for workers and the economy impeding any significant process. The IRA changes all that, as it specifically dedicates billions to the below themes that address climate change in a meaningful way:
- Lower energy consumption and accurate consumption measurement
- Cleaner energy and technology production
- Decarbonizing core sectors of the economy
- Investing in climate resilience and environmental justice
A core component of TVC’s competitive advantage is our community, given the collective nature of how we source companies and add value to our portfolio partners. Across our founders, Venture Partners, and LP/Co-Investor network, the enthusiasm for this global leadership and the ballast it provides to climate-focused innovation is echoed throughout. As our portfolio company Epoch Biodesign Co-Founder Jacob Nathan shares, “I have grown up with the same level of urgency around climate as my parents would have experienced around the Russian missile crisis. To see a core piece of legislation become reality, followed quickly by California banning the sale of non EV vehicles by 2035, reminds me of the Hemingway quote ‘gradually, and then suddenly’. California itself is the fifth largest economy in the world, and in the meantime we’re seeing sales of electric vehicles in China triple in the last three years as a percentage of new vehicles sold. There’s a feeling that this is finally happening, and it’s because of new technologies but also how those new technologies make government policy cheaper, and ultimately that’s spurred by government policy making those technologies cheaper in the first place. That virtuous cycle is really beginning to take shape, and it’s a win for everyone. To be clear, there’s much work ahead but these are important foundations to build from”.
Epoch Bio sits at the intersection of biology and climate, using their proprietary protein discovery and design platform to engineer enzymes that transform plastic waste into everyday chemicals (read more about their incredible approach here). As Jacob thinks about opportunities for his U.K.-based company globally, on a high-level, the legislation reinforces geopolitical leadership on the issue and strengthens the U.S. as a place to do climate business. “There is now a massive subsidy to develop in the US around breakthrough technologies, which are key to supply chains, resource security, and national security. What it will lead to is greater acceptance among buyers in the American economy around more sustainable green tech, opening up a world of opportunity in the eyes of the buyer. It is certainly a momentum change to be capitalized on.”
From an investor point of view, the IRA helps investors reconcile the desire to invest in hyper-growth, scalable technologies with the need for capital intensive, machinery-driven investment that decarbonization often requires. TVC LP and Day One Ventures investor Sanjiv Sanghavi summarizes it nicely, stating, “If you think about how the IRA is structured and what its benefits are, the overarching theme is that it takes the concept of ClimateTech being an expensive investment and obliterates that thought. Things that have previously been bottlenecks or obstacles — such as the expense of building a U.S. manufacturing plan or starting a carbon sequestration project — are now solved for. Everything about investing in ClimateTech has now been made cheaper due to tax credits and incentives.” Lowering these critical development costs opens up the universe of companies that fit the criteria for venture investing, helping more companies get from initial installment of infrastructure towards actual adoption — which is where more generalist VCs are likely to invest.
In addition to more infrastructure-focused innovation, we expect a surge in software solutions that benefit from low-cost computing power that didn’t exist in CleanTech 1.0. We love this report by BCG which summarizes the massive impact that AI can have across areas like climate mitigation, resilience, and adaptation, and a similar article by Weiwei Pan in Fortune highlights some amazing examples of how data scientists are contributing to the efforts. “Climate is a unique sector in that if you nestle in between the stages of infrastructure installation, adoption, and ultimate deployment, there are millions of software opportunities, data platforms, and marketplaces to be built”, says Sanjiv. Adds Jacob, “What we didn’t have even 10 years ago is the level of compute power available at the low cost that we have today, combined with all of the advances in new AI architectures and deep learning systems, how we can create machine intelligence, and how we can utilize that to design complexity. When we think about CleanTech 1.0 vs. now, what is totally different is the sheer power of computing and what that’s enabling startups to build with a lower development cost and lower CAPEX requirement. That is a trend that’s only accelerating massively”.
Ani Widham, a TVC co-investor and Regulatory Senior Product Manager at Clarity.AI who previously worked on initiatives like the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, expresses similar enthusiasm around the opportunity for startups to make an impact. “The US has talked for decades about achieving energy freedom — the IRA furthers that goal and evolves it to include technology freedom. I joined a startup based on the belief that the technology needed to combat this crisis doesn’t exist yet, or at least isn’t being implemented enough by existing companies. These new technologies need capital to be developed and deployed, which is where venture can help”.
All in all, the timing is right for a massive boom in climate innovation, and we can’t wait to see what’s next. Below are areas in which TVC has a particular interest and the types of questions we ask ourselves. You will notice they are intentionally vague, as we are open to hearing a wide range of approaches from the best minds working in this space.
- Is biology the ultimate answer for scalable climate remediation? Companies funded: Epoch Biodesign, Helixnano, Concert Bio
- Will the carbon offset market as we know it exist in 20 years, and what could take its place? Are carbon insets the answer?
- How do tools built around decentralization and user ownership align with a move towards decarbonization, and what areas in particular benefit from an approach rooted in Web3?
- How do we redefine materials from a first-principles perspective to make them both environmentally scalable and producible at mass volume? Companies funded: VitroLabs
- Who will ultimately solve the complexity of capturing Scope 3 emissions, and what other innovations does that data unlock?
- How does access to space impact the future of earth? Companies funded: Axiom Space, Yuri, Radian Aerospace, Gravitics
- How do we reduce food waste, and redefine the foods we love to serve a growing global population? Companies funded: Orbem, bettaf!sh, Phil’s Finest
- What will our relationship with the workplace look like, both in terms of physical spaces and in the way we reach them? Companies funded: Infogrid
- If clean energy is limitless (through nuclear fusion or other methods), are there any limits to what humans can achieve?
- How do we bridge the gap between consumers who say they care about sustainability and those who take action (big or small)? What does the “sustainability conscious consumer” really look like, what brands does she/he support? Companies funded: Altru (P.S. More insights on this area from TVC Consumer lead, Steph Sarelakos, here.)
- How do we protect those most vulnerable to the human impacts of climate change, and what data sets need to be built to mitigate these impacts?
Want to talk more? Please reach me at [email protected]. Can’t wait to hear from you!