Climate start-up funding no longer dominated by venture capital companies

    13 Dec 2022

    This past fall, one of the busiest investors in climate technology wasn’t a blue-chip venture capital firm or a specialist decarbonisation fund. It was a Swiss conglomerate that makes circuit breakers, light switches and electric car chargers.

    ABB Technology Ventures, the investment arm of ABB, was among the most active financiers that collectively put $10.7 billion into climate tech businesses in the third quarter, according to clean energy research group BloombergNEF. It’s an unusual name to top this list — and its executives say the heavy spending will continue.

    Investing in the sector is “certainly becoming more and more of a focus,” said Andreas Wenzel, ABB’s head of corporate strategy and mergers and acquisitions. “I would expect it continues.”

    ABB has cut 10 cheques to start-ups totalling $100 million in 2022, a record sum for the industrial giant that only invested $250 million over the prior 11 years. Earlier investments were mostly in robotics or industrial automation.

    More recently, ABB has looked for start-ups to supplement its business making electric vehicle charging equipment. And it’s branched into software — last month, ABB backed Tallarna, a British data analytics firm that helps companies manage energy projects.

    European industrial companies like ABB are racing to curb their greenhouse gas emissions and deal with the continent’s energy crisis.

    Early in the pandemic, industrials saw a surge in demand as factories, power plants and other customers, short on labour, sought to automate more of their operations. But inflation and a slowing economy has dampened that growth, and fed an urgency to find new markets, said Omid Vaziri, an analyst with Bloomberg Intelligence.

    There are few more promising markets now than electric vehicles and renewables. ABB is still a minor player next to big funds and the oil and gas industry. Still, the Swiss company is getting involved in larger deals. In July, ABB was part of a massive $1.1 billion financing round into Swedish battery maker Northvolt.

    More later stage deals like this will come, Mr Wenzel said. He described the investment strategy as producing “VC-like returns”. Yet, unlike venture capitalists, ABB’s primary interest is in scouting companies that it can partner with or eventually buy.

    “We are never investing purely with a financial mindset,” Mr Wenzel said.

    One of ABB’s recent investments was in Hydrogen Optimized, a unit of the Canadian energy company Key DH Technologies, and an existing business partner. Hydrogen Optimized makes electrolysers, a key component for green hydrogen production. ABB makes rectifiers, electrical devices that allow hydrogen power to work.

    Andrew Stuart, chief executive of Hydrogen Optimized, described the deal more as a corporate marriage than a financial investment.

    “In our case, it’s one plus one equals 800,” he said. “It’s just phenomenal.”

    Mr Stuart said ABB has a minority interest in his firm and a board seat, but he declined to share the investment details.

    In 2020, ABB replaced its chief executive and has since been on a restructuring tear, shedding fledging divisions and moving deeper into the mobility sector. It’s soon set to spin out electric vehicle charging units worth $2.6 billion.

    “Clean tech investment is absolutely the place to be,” said Mr Vaziri, the analyst. “The danger is that ABB could fall behind peers in capturing this opportunity.”

    ABB isn’t the only industrial conglomerate trying to become a clean-tech heavyweight. In November, SE Ventures, the investing arm of Schneider Electric, announced its second €500 million ($527 million) fund for start-ups in industrial automation and climate tech.

    Like ABB, it’s already backed companies in electrification, hydrogen and energy management software. It has a “good, solid pipeline” of new companies for its second fund, which starts next month, said Amit Chaturvedy, managing partner for SE Ventures.

    Most investors welcome this insurgence from the stodgy corporates.

    “It’s great that we’re seeing it in climate,” said Sarah Hinkfuss, a partner with Bain Capital Ventures. “It’s increasing the size of the tent.”

    But there’s a concern that big companies might lock start-ups into exclusive agreements when they invest. Sometimes simply taking money from a corporation can cause start-ups to lose out on partnering or selling to competitors of their investors, said Ms Hinkfuss.

    “This can jeopardise their positioning as Switzerland,” she said.

    Both ABB and SE Ventures said they don’t hamstring companies this way when they invest.

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