ADL Insights: Climate Tech Venture Fundamentals in a Post-SVB World
“The Deposit Insurance National Bank of Santa Clara” sounds like a made-up business name from an SNL skit or perhaps a cheeky Sunday Night Football intro (like THE Ohio State University), but for much of the weekend this very real and unexpected FDIC receivership entity for the bank formerly known as SVB held the fates and near-term liquidity of over half of America’s start-ups in its hands.
Though the overall impact on the start-up and VC world is likely just beginning to unfold (full disclosure: neither ADL nor any of its clients or holdings have SVB accounts), the federal government’s swift decision to guarantee deposits while leaving creditors and shareholders behind speaks clearly to the importance of entrepreneurship in the US economy. SVB’s uninsured deposit base of >$150 billion was greater than the GDP of 16 US states, so a protracted resolution that caused large-scale furloughs and layoffs would have decimated the climate tech sector and many other important and innovative industries. Much like the high-tech and life sciences sectors, the story of our sector’s growth in the last 15-20 years can’t be told without some of the major capital and institutional commitments SVB made to our sector.
Nonetheless, even with a short-term federal backstop, many of the core market dynamics which led to this crisis remain in place, and may even worsen because of the headline shock caused by this event and other current or pending bank failures. As illustrated in the countless conversations between start-ups and government officials which fed into the final policy outcome, the tricky interface between established corporates, government agencies and start-ups, will be of utmost importance in a softening fundraising environment. ADL Ventures is well-prepared to help your organization navigate the post-SVB world through our venture consulting and venture creation engagements, so don’t hesitate to contact us.
Here also are some critical observations, sharpened by many years of both successes and failures in the clean energy world, on the near-term impacts for climate tech firms:
1) A drastically tightened venture capital environment
No longer can your EV-related start-up negotiate a valuation simply by citing Tesla as a comp, and no longer can any company with the words “decarbonization software” in its business plan raise a round with a few slides worth of mock-ups. Real metrics matter even more now as an already softening VC environment just lost a 40-year bedrock of liquidity and outstanding service (ironically SVB has time and time again provided various forms of emergency funding which prevented start-ups from meeting the same fate it did on Friday). Even the most climate-positive technologies need customer and marketplace validation or else more cash runway simply delays an inevitable demise. On the other side of the table, incumbents need to discover promising technologies more efficiently and quickly as ADL has done for leading corporates such as PG&E and Sto, or else institutional investment may not take those start-ups across an increasingly perilous valley of death.
2) A shift away from being fully or predominantly reliant on VC funding, given the changes above
ADL’s team members have worked productively with some of the largest and most respected VC and PE investors globally; however, not all strong businesses have the exit timing or growth profile suited for that type of investment. Start-up cash burn (not necessarily climate tech related) was one of the core symptoms cited in the reduction of SVB’s deposit base which originally triggered the unsuccessful financing transactions that preceded its collapse. In a post-COVID environment super-charged by SPACs and other large funding rounds, there may have been a tendency to shift toward growth at all costs in some circles, without an eye toward step-by-step execution. SVB itself is a constant reminder to companies big and small to manage cash prudently no matter how large and liquid your funding source is (in their case robust public markets dried up within days), and realize that every good business cannot be over-concentrated in any specific funding source. Furthermore, capital intensive legacy sectors in climate tech require deployment and product-scale-up support which institutional investors are not chartered to provide, which leads us to point #3 below.
3) The increased importance of established corporate and government partners
Perhaps it’s the ultimate irony that FDIC and future SVB asset buyers are helping save the start-up ecosystem, as many founders (again not necessarily climate-related) are dismissive or skeptical of incumbents and regulators. In reality, corporate and government support for the right start-up technologies stay in place even when investor momentum fades, if and when both sides have a tightly defined strategic fit and value proposition such as in the case studies above. ADL is honored to help federal and state governments provide unique support to start-ups, and to help major buildings, energy and transportation corporations find their next breakthrough product through both external and internal sources. Just like a successful orchestra or sports team, the best companies in our capital and time intensive sector utilize complementary partners to provide a diverse array of capabilities and skills. It’s telling that just a day after SVB, the focus of the mobility panel at SXSW was on corporate / start-up partnerships, an area where ADL has been a pioneer in climate tech helping build new businesses with large-scale players in the advanced construction, electric / gas utility, and EV sectors. ADL has proven frameworks in place to solve the most pressing business problems in those sectors through both internal innovation and recruitment on a programmatic and recurring basis.
So as the near-term dust settles from an unprecedented weekend of financial turbulence, let us remember that no entrepreneur can achieve success alone without the right corporate and government partners. Never has this been more true in our sector than today, where the IRA provided such large-scale and wholesale support for climate innovation that even Europe is looking to catch up to the US after 30+ years of energy efficiency and renewables policy leadership. We look forward to working with many of you to build the next set of businesses that make SVB just a blip on the radar screen in the story of the historic clean energy transition we are undergoing.