(Bloomberg) —
Sean O’Sullivan has had a front-row seat to watch the climate tech industry rise, die and rise again.
The man who likely helped coin the term “cloud computing” has quietly been one of the leading investors in the technology that could redefine what we eat, what we wear, how we get around and — most importantly — how we meaningfully reduce greenhouse gas emissions.
O’Sullivan founded venture capital firm SOSV in 1995, and he has shown a somewhat uncanny instinct for the next big tech opportunity. An undergraduate student at the Rensselaer Polytechnic Institute, he co-founded MapInfo in 1985, a digital mapping startup that later went public. And in 1996, he and a small group of technology enthusiasts at Compaq for the first time brought up the term “cloud computing,” a then-obscure concept that forms the backbone of popular internet services today from Spotify to Netflix.
For the last 17 years, the entrepreneur-turned-venture-capitalist has devoted much of his time to a sector that he believes the survival of future mankind will rely on: Startups that can slow down or even reverse the course of climate change.
To that end, SOSV — with over $1.5 billion assets under management and specializing in early-stage investment — has bankrolled more than 250 climate-tech startups around the world since 2007. That list includes some that have grown into major players in their respective industries, including milk-free dairy maker Perfect Day and cultivated meat producer Upside Foods, as well as a wave of companies with radical new ideas, such as shrimp-waste-based textile manufacturer TômTex and Renewell Energy, a startup that wants to turn inactive oil wells into gravity energy storage solutions.
O’Sullivan views backing climate tech companies as more than good for the planet. It’s also good for investors. In fact, climate tech has become SOSV’s best line of investment, he said, adding that “it is very, very, very attractive.” (There are some signs VC funding for climate tech may be softening a bit, though.)
Bloomberg Green spoke with O’Sullivan about his years-long journey as a climate-tech investor, what he has learned from previous failures, as well as a looming threat facing climate-tech startups today. The conversation has been edited and condensed for clarity.
How did you get into climate tech investment?
It was around 2007 when we were looking initially at the high cost of oil in society. Back then, I lived in Los Angeles which was overwhelmed by congestion and the crazy over-construction of highways to create more congestion. It just seemed suicidally stupid for humanity to continue along that path.
I grew up very poor. My family had nine brothers and sisters including myself, and a single mom, who was raising us. It just got ingrained in me very early that there can’t be waste. So I was looking to improve efficiency in transportation systems, and that was the first investment that we made in climate tech.
As a longtime investor, you witnessed the initial climate tech boom following the 2009 Copenhagen United Nations climate summit, and you also witnessed many high-profile failures afterward. What lesson do you think investors can learn from the first wave of climate tech investment?
The first wave of climate tech was really geared towards the energy side of climate tech, and that’s a very hard area. There are lots of things that can be done at the end of the energy side. But those big chemistry processes and big infrastructure are areas that venture capital generally doesn’t do well. You’re not going to generate VC stock returns when it’s a project finance model. That was a mistake that was made the first time around.
But it wasn’t really climate tech in the first place, it was just energy tech. Looking now, climate tech is very much broader. It’s covering the reinvention of all of these different means of production. It’s a much broader range of industries, including all the decarbonization technologies.
Will that diversity give climate tech investors a higher chance to succeed this time?
I think there is no way that is not happening. We are reinventing how we produce all means of materials. We’re talking about probably $50 trillion worth of new industries that need to be created. There are going to be hundreds of hundreds of major companies that are coming out of this.
We think in the next 20 years, there will be at least 500 unicorns [startups with a valuation of more than $1 billion] in this space. Major industries will be reinvented. This is going to be a great opportunity for investing for the next 30 years.
For the short term though, we haven’t seen many climate tech startups hitting the $1 billion valuation mark or going public. Does climate tech investment really make money?
It is still early days in climate tech. It generally takes companies seven or 10 years to get $50 million or $100 million in revenue. Until you get to that level of revenue, you’re not going to be valued at billions of dollars.
Up until now, our gross internal rate of return at SOSV for climate tech companies has outperformed our non climate tech companies, and it is in the range of around 50% over the course of eight years from 2015 to 2022. It’s in the top decile of venture capital returns.
The macroeconomics are particularly challenging this year. How are climate tech startups holding up?
Climate tech companies are doing pretty well because there’s just so much of an influx of capital into climate tech right now. But we worry about the future.
The pace of investing this year is slower than it was last year. So that’s a worry: Are people going to continue to favor climate tech the way that they have in the last year where climate tech got off scot-free during the overall tech downturn? We haven’t been affected by the downturn since the end of 2021, but how long can that continue? We don’t know.
And we know that larger rounds have really dried up across every aspect of venture capital. Mega fundraising rounds — raising $50 million or $100 million and plus — have stopped. That has dwindled to maybe 10% or 15% of what it was. The economy is actually not that bad, it’s the financing environment that’s really been hit very hard. What in particular has got slammed is financing for later-stage startups.
Given the macro pressure, have customers also scaled back their transition to lower-carbon products or services?
So far, we haven’t seen a slowdown by corporate customers. I would say it’s more that consumers may be pulling back. For companies, a one or two-year downturn could be the end of the day. What it means for any good startup is that they’re going to be suffering more dilution over the next 18 months than they would in the booming economy.
To contact the author of this story:
Coco Liu in New York at yliu1640@bloomberg.net
© 2023 Bloomberg L.P.
