Jim Adler, founder and general partner at Toyota Ventures, is concerned that climate technology gains could fall into the “valley of death” if companies fail to drum up enough demand to survive.
And he’s not wrong to be worried.
Climate tech investments in the first half of 2024 dipped for the second consecutive year, both in terms of overall funds invested and deal count as investors shy away from funding what can be capital-intensive, high-risk businesses without a clear path to market.
Speaking at a Climate Week NYC event Tuesday, Adler said one way for climate tech to secure that demand is through forward offtake agreements. This is when a customer promises to buy an agreed-upon amount of a product at a specified price by a specified date.
“I like that a lot because that encourages investors to invest to hit that date,” Adler told TechCrunch. “We do early stage investment, which is a telescope into the future … If we know there’s a customer then we and other investors will invest at the early stage because we know we’re investing for something.”
During a presentation to a room of about 75 people in midtown Manhattan, Adler laid out how historically, disruptive technologies — from railways to oil pipelines to electric power — have only been able to scale once they hit the tipping point of 10% to 20% adoption rates.
Even if sectors have enough supply and innovation, if they don’t hit those rates, “the dynamics of capitalism don’t kick in,” Adler said.
“If the demand doesn’t show up, the tech dies,” he continued. “Capitalism is a way to scale these technologies, but not if the customers don’t show up. So how do we help customers show up?”
This is an especially prescient question when we consider that growth-stage deals in climate tech declined 33% in the first half of the year compared to the same period last year, per a CTVC report. That hinders the growth of companies that have proven their tech on a smaller scale and need additional funds to expand.
Adler says growth stage investors won’t invest without clear demand signals from customers, like forward offtake agreements.
So how do startups get customers to make such agreements? Pushing the levers of government mandates is one way.
Take Revel, for example, the startup that started as an e-moped sharing company and now is pursuing EV charging infrastructure. While organic demand for Revel’s charging services today is likely low — it’s mainly buffeted by Revel’s own small ride-hail service — mandates from states like California and New York that require all new car sales to be electric by 2035 provide investors with a much-needed demand signal. Revel has raised around $270 million, per PitchBook data, with heavy hitters like BlackRock leading the startup’s rounds.
Adler said he’s hoping low carbon fuels, like hydrogen, will have their own moment in securing future demand. “If hydrogen shows up at $2 per kilogram in bulk, that could really push adoption to the right and up the curve,” he said.
“Investors can then invest knowing that there’s a customer at the end of this in some volume,” Adler said. “It’s super important. If this doesn’t happen, I think we all need to be a little worried.”