The VC Slowdown Must Not Hit Climate Tech

Technology companies laid off over twenty-two thousand workers in the first ten days of November. The pandemic era of cheap money and long leashes for startups appears to have ended, and belts have begun to tighten. As the federal reserve continues to wrangle inflation through precedent-busting rates increases, venture capital firms and the startups they fund have had to re-evaluate their paths to success. Look no further than Party Round, a fundraising startup, which rebranded itself Capital after it became clear that its boisterous name no longer reflected the state of the economy. Notably, investment in green tech has yet to slow significantly, a trend that must continue if we wish to slow the planet’s warming. 

Vinod Khosla, a prominent venture capitalist, urgently reminds us that we do not have the necessary technology to decarbonize the economy, and developing that technology will require funding. Solar and wind remain necessary supplements to the power grid, but are insufficient unless paired with other sources of power that do not fluctuate as wildly. Startups focused on the holy grail of clean energy, nuclear fusion, have not moved beyond development stages. And top nuclear fusion startups do not anticipate delivering a viable product before the 2030’s. Even that deadline will require Venture capital firms to pour billions into these companies on top of the billions they have already contributed.

The sustained rates of investment in green tech, relative to other sectors, may be due in part to the Inflation Reduction Act (IRA) passed earlier this year, which devoted over $370 billion to fighting climate change. This included funding for various high-risk green tech solutions including carbon capture, superhot rock energy, and decarbonized concrete. While necessary, the provisions in this bill are all carrot and no stick. Activists hoped that the IRA would contain a market-based solution such as a carbon price. A market-based solution both rewards innovation and makes pollution more expensive by instituting a fixed price on every pound of carbon emitted, imposed through tax liability. Financial regulators have long advocated for this system because of the leveling effect it would have on the market. Not only would clean energy companies receive a subsidy, but high emitters would appear less attractive because their bottom lines would reflect their impact on warming. The IRA’s absence of such a system may prove fatal for green tech. 

Environmental ambitions have been put on the backseat in the face of harsh economic realities. For example, President Biden ran on the promise of phasing out new oil and gas drilling, but dramatically increased drilling on public lands when the war in Ukraine cratered supply. Moreover, the Federal Reserve does not appear to have any intention of slowing their rate hikes. This continued austerity may become severe enough to break through the IRA’s buffer. Unless investing in green tech continues to be attractive for VC firms, the outlook for our climate will become even bleaker.