She Says These Technologies Fight Our Existential Crisis and Breed Trillion-Dollar Opportunities
Q&A with Hara Wang, Climate Tech Investor and Co-Founder of Next-Gen Climate Accelerator Third Derivative
This story is part of the Entrepreneurship of Life series, a collection of interviews with immigrant startup founders, venture capitalists, and tech business leaders.
We hear about climate change all the time, but what is climate tech? Why do some tech observers predict that the first trillionaire might be a climate tech entrepreneur?
From 2006 to 2011, VC firms pumped over $25 billion into clean energy start-ups and lost over half their money. A number of high-flying “unicorns” went bust. The setback was followed by years of funding drought for climate tech as investors licked their wounds. What went wrong?
As the industry gradually regained its feet, between 2013 and 2019, global annual investments in climate tech increased almost 40-fold from $418 million to over $16 billion, 5 times the overall growth in venture funding. What propelled the comeback? Is this time different?
Despite the second boom, climate tech startups still face an exceedingly tough survival game. What are their unique challenges and how do we address them?
Hara Wang, climate tech investor and co-founder of Third Derivative (D3), a next-generation climate tech accelerator, weighs in on the above questions. She also demystifies her job, shares her take on navigating the workspace as a minority, and more.
Recently selected for Forbe’s 2021 30 under 30 — Energy List, Hara is a globally-minded climate tech innovator who has advanced climate solutions across maturity stages, verticals, and four continents. Before co-founding D3, she was a venture investor working alongside entrepreneurs to build and scale next-generation energy, mobility, and manufacturing solutions. Prior to that, she was a McKinsey consultant helping the world’s largest institutional investors and corporations navigate the energy transition. Hara grew up in Shanghai and currently resides in New York.
H: Hara (Guest)
K: Keyi (Interviewer)
On Climate Tech and Investing
K: Climate tech is a broad concept. Can you help us unpack it?
H: The word “climate” encompasses two key objectives of this industry:
- Mitigation: reducing greenhouse gas in the air to minimize climate impact, whether through emission control or carbon capture;
- Adaptation: reducing negative consequences of climate change already underway, such as weather hazards.
While 1. used to dominate public consciousness, 2. has also captured attention over recent years, as extreme climate events grow more frequent and severe. Facing threats like the Californian wild fires and Hurricane Sandy, we have to prepare and protect ourselves, especially our underprivileged communities, which are also the most vulnerable.
The word “tech” in “climate tech” represents a key piece of the solution, but it cannot exist alone. Innovations in business models, funding mechanisms, policies, and regulations are all crucial in catalyzing tech-centered initiatives to fight climate change.
K: Which parts of society are seeing the greatest transformation by climate tech?
H: While changes are ubiquitous, these five major areas are most impacted: electricity & power, transportation, buildings & construction, industrials & manufacturing, and agriculture & food supply chain.
K: Any major tech trends worth highlighting?
H: Rather than a few mega-themes, we are seeing numerous individual innovations that target specific problems facing different industries today. It goes to show how ubiquitous climate impact is, but fortunately so are solutions. Here are a few examples:
- Methane capture and storage for coal mines: even after being retired and sealed, coal mines can continue releasing this powerful greenhouse gas for another century. [Keyi note: Methane has a global warming potential (GWP) 84 times that of CO2 for a 20-year horizon.] Technologies are evolving to more effectively capture such emissions and either utilize or safely store them away on a quasi-permanent basis. [Keyi note: for anyone wanting to geek out over this subject, this paper does a technical deep dive.]
- Advanced thermal insulation technology: cutting-edge material science is being deployed to provide effective thermal insulation, from the packaging for temperature-sensitive food and medical products to windows in energy-efficient buildings.
- Garment manufacturing from sustainable materials: advanced engineering is replacing petrochemical-based fabric ingredients with unexpected natural alternatives, such as milk and mushrooms. This would help reduce the climate impact of what we wear.
K: Why did the industry’s last boom cycle in the late-2000’s, the “Clean Tech Wave 1.0”, go bust?
H: The way I see it, the №1 culprit was the mismatch between the software-oriented traditional VC model and hardware-focused climate tech startups, which were the majority at the time.
The quintessential software model centers around low upfront cost, rapid and numerous iterations, and fast scaling. It can go to market quickly with a minimum viable product (MVP) and release updates based on customer feedback in a matter of days.
Many climate tech startups, particularly hardware businesses, are just the opposite — they have very few shots (if not just one shot) at survival, and each attempt can cost tremendous capital and time. An MVP alone might take years, and if it flops, there might never be a second chance.
As a result, when VCs piled into the space in mid-2000s with their conventional “software” playbook, it didn’t work. The risk-return profile, investment horizon, and capital needs of most clean tech startups at the time called for a different type of capital, but VC was — for the most part — the only game in town.
[Keyi note: this podcast proposed another contributor to the bust — the “commodity” nature and low barrier to entry of major technologies pioneered by “Clean Tech 1.0” startups, such as solar and wind power generation. The fields were quickly swamped by competitors, including those benefiting from existing scale, manufacturing experience, supply chain advantages, and/or low-cost capital (another manifestation that VC wasn’t the optimal funding in such cases). The surge in supply set off ruthless price wars and drove most startups out of the market.]
K: What are you seeing with respect to the growing second wave for climate tech today? How is it different from the last one?
H: We’re seeing two major differences:
- A greater share of software and business model innovations (which are more often VC-friendly than hard tech solutions), thanks to existing climate tech infrastructure.
We have a massive stock of climate tech hard assets today, such as solar panels, wind farms, and EVs, which did not exist in “Clean Tech Wave 1.0”. [Keyi note: the EV boom took place mostly after “Wave 1.0” and went well beyond the startup ecosystem with significant participation from incumbent carmakers.] On top of them, software and business model innovations can now flourish and help optimize the underlying hardware operations. For example:
- Drones and computer vision technology are being deployed to quickly and cost-effectively assess building rooftops for solar panel suitability and detect installed panels that need maintenance [Keyi note: DroneDeploy is one of such providers];
- Software can help commercial operators of EV fleets optimize fleet operations and charging schedules to achieve maximum productivity and minimum energy use.
Make no mistake — innovations in “hard science” fields are crucial and still happening. But the landscape of climate tech has evolved to be more diverse, and VCs today are finding more investment opportunities that align with their business model.
2. Deeper involvement from a broader group of stakeholders.
While the first wave was largely fueled by investor enthusiasm and certain renewable energy policy incentives, we are now seeing governments, large corporates (even fossil fuel incumbents), and non-profit organizations play a much more active role. [Keyi note: a good example of the powerful role governments play is how China grew its EV industry from near non-existence to the world’s largest by sales and production over the last decade.]
There is growing consensus that climate change is an existential crisis for mankind and deserves a societal-wide response. These stakeholders provide complementary capital solutions: government grants and corporate investments are generally more patient and cost less than VC funding, which makes them crucial to those startups not fit for VCs as we discussed. In addition, these stakeholders provide critical ecosystem support, such as corporate partnerships and enabling policies.
K: In November 2019, Google announced an accelerator program for climate tech startups. In June 2020, Amazon launched a $2 billion climate pledge fund to invest in climate tech. Why are tech giants like them particularly active?
H: Apart from being good corporate citizens and contributing to a major cause most of their people care about, the tech leaders have multiple strategic rationales to double down:
- Demonstrate leadership in new territories.
As major industries get reshuffled, they may discover new market opportunities to potentially lead in by acting early. For example, Shopify has launched a carbon offset platform, where its merchant partners can purchase credits (generated by third party carbon reduction projects) to offset the climate impact of their emission-heavy package shipping process.
2. Nurture key future customers.
For tech giants that sell advanced B2B computing tools (e.g. cloud and machine learning services), climate tech startups are much more likely to become customers than their often slow-to-move incumbent competitors. By partnering with these startups and helping them scale, these tech behemoths will be expanding their own future revenue pipelines.
3. Optimize energy usage.
The largest tech companies are also gigantic energy users. Many including Google, Amazon and Microsoft (who are already among the biggest corporate buyers of renewable energy worldwide) either claim to have achieved a “100% renewable” energy portfolio or net zero emission, or pledge behind such goals. As a result, they actively invest in and partner with climate tech startups that can help them manage carbon footprints and potentially save hundreds of millions in energy bills.
4. Commercialize in-house energy expertise.
The tech giants are accumulating significant proprietary knowledge in optimizing energy consumption, leveraging their own scale. Such knowledge could eventually be commercialized and marketed to third parties. In other words, a well-run cost item may set the stage for a future key revenue stream. [Keyi note: recall that AWS was born out of Amazon’s in-house initiative to optimize its own computing infrastructure utilization.]
K: Is climate tech a more localized or globally connected industry? Why?
H: The technology is definitely globally relevant. Just like search engine algorithms, once you figure out something that works well, you can apply it everywhere. That said, localization matters tremendously in applying the technology, given unique local laws and regulations, industry ecosystems and so on.
Overall, you see more global consolidation upstream vs. downstream in the industry value chain. A few upstream players may possess the best technology and demonstrate economies of scale in production. These leaders may have a global production footprint to gain easy access to source materials, customers, etc.
In addition, the founder universe of climate tech is more international and decentralized than that of software startups. First, you see a high percentage of immigrant founders among US climate tech startups, especially those built around technological breakthroughs spun out of universities and national labs. This naturally extends from the high percentage of international students and scholars in STEM fields of the US higher education and research system. Second, you also see founders in every corner of the world applying the latest climate technologies in their respective communities, relying on their localized knowledge of the regulatory and market environment.
Third Derivative (D3) Explained
[Keyi Note: a few weeks after I sat down with Hara and before this interview was published, D3 launched its inaugural cohort of 47 climate tech startups, handpicked from over 600 applications across 61 countries and 6 continents. These startups represent a diverse portfolio of hardware, software, business model, financial innovations, and other solutions in 7 major industries. They will commence an 18-month program working with D3, its 9 VC partners collectively managing $2 billion of funds, and 9 corporate partners with $3 trillion in aggregate market capitalization, including FedEx, Microsoft, and Wells Fargo.]
K: Can you tell us more about D3, what it aims to accomplish, and how it differs from traditional climate tech accelerators?
H: D3 is a joint venture of Rocky Mountain Institute (RMI), one of the world’s leading clean energy think-and-do tanks, and New Energy Nexus, a globally respected clean energy entrepreneur support organization.
More than a typical accelerator, we see ourselves as a vertically integrated climate tech innovation engine. We combine a next-generation accelerator, committed venture capital, a curated ecosystem of global corporations, and unparalleled market, regulatory, and policy insights. Our goal is to find, fund, hone, and scale the most-promising technologies to achieve larger, faster reductions in global carbon emissions.
K: What makes it apparently more difficult for startups and venture investments to succeed in climate tech versus most other verticals? How does D3 attempt to overcome this?
H: Climate tech startups and VCs face a number of special challenges that do not necessarily apply to other sectors. I’ll highlight two below.
First, the technological knowledge barrier to climate tech investing is high.
It takes collective expertise across a variety of STEM fields for a climate tech VC to understand and make smart decisions about their investments and prospects.
At D3, we turn this knowledge barrier into our advantage. We carefully build our team emphasizing diverse technical backgrounds. In addition, we can leverage RMI’s multi-decade experience across climate tech markets, policy, and regulations, as well as its wide expert network across academia and the industry.
Second, to succeed, climate tech startups often must integrate into a complicated existing value chain, which can be challenging.
Established players in the system often hesitate towards becoming vendors, partners, or customers to startups with unproven technologies. They might look for venture backing as a form of reassurance, while VCs in turn prefer to see corporate partners commit before they invest — a classic chicken-and-egg problem.
To break the logjam, our team works hard to bring capital providers and corporate partners together onto the same platform, where they collaborate closely with us and one another from the beginning to support our startups, rather than wait on one another to take the first plunge.
K: How have your role and responsibilities shifted from your last venture job to D3?
H: My job at D3 is as much about creating as it is about investing. Here we’re designing and standing up a new platform to catalyze climate innovation and help more climate tech startups succeed. Engaging with our corporate and investor partners is another key piece of my work — their active participation is crucial to the thriving of our ecosystem.
Personal Path and Reflections
K: How did you find your passion in climate tech investing?
H: Like many other climate practitioners of my generation, Al Gore’s documentary about climate change, “An Inconvenient Truth”, struck a chord in me. I remember watching the documentary as a teenager in Shanghai, during one of my high school classes, and feeling the urgency of the need to fight against climate change.
In 2012, during an internship in Shanghai, I covered manufacturing and supply chain trends for the solar photovoltaic industry, which was much smaller at the time than it is today but rapidly growing. When digging into industry history, I realized what tremendous efforts from scientists, engineers, business developers and investors went into scaling this industry, and what a global undertaking it was. I was fascinated and decided I want to support the next generation of trillion-dollar climate technologies that the world needs and will build together.
To me, fighting climate change is a profound and transgenerational cause where you can potentially leave a legacy beyond your lifespan. I find myself simultaneously drawn to three angles about climate change — technological solutions, business models, and social impact. I find climate tech investing right at their intersection, exactly where I’d like to be.
K: As someone who grew up in Asia, did you experience language or cultural barriers at any point in your career here?
H: I fundamentally believe that having a different native language and cultural background is a career asset that allows me to bring something unique to the table. As someone who is Chinese, I’m able to generate proprietary leads, make crucial connections, and provide unique cultural perspectives, especially in situations involving Chinese startups, investors, or partners. I make sure to articulate my unique value-add to my team, and they recognize and appreciate it.
I also think that across many industries in the US, we are seeing growing awareness that people’s insights and contributions to the team have little to do with how well they speak the “language” — whether literally or metaphorically — as long as they can make themselves clearly understood.
For us international professionals, seeing our minority cultural identity as a career barrier rather than differentiator can end up being self-fulfilling. It is natural to feel the pressure to alter ourselves in order to “fit in”. But I think it is often more important to speak up when we notice people around us act in a way that is not inclusive. If we don’t, others might never become aware of the issue, and the status quo wouldn’t change itself.
K: Do you carry with you any cultural heritage that makes you proud — an object, tradition, idea, etc.?
H: One cultural gift from my hometown, Shanghai, is the pride I take in my hometown’s history, culture and how its people have fought hard to elevate the city to the position it has on the global stage today. Growing up in this amazing city gave me the cultural confidence to stay myself wherever I go.