SDGx have worked with the UN Association of Australia (UNAA), to produce a report highlighting the vital role that ‘deep-tech’ will play in finding large-scale technological solutions to the climate crisis.
SDGx, a venture capital (VC) firm, is preparing its first fund aiming to reach $100 million, with founding partners including Jeremy Liddle and Zarmeen Pavri.
The report argues that the advances coming from deep-tech are the only way we’re going to truly decarbonise our economy because we need a revolutionary technology shift, rather than relying on incremental changes, which will be too slow.
It’s estimated that by 2050 there may be $8 trillion in annual climate-related damages along with 200 million people displaced. And stresses that even with 197 countries signing up to the Paris Agreement, there is still a 97 per cent probability of the world exceeding a 2°C temperature increase.
“To achieve net-zero emissions we believe it is essential to invest in and build a portfolio of technology companies that have the potential to reduce GHG emissions by 0.5 gigatons per year within 10 years.” Jeremy Liddle says.
There are many different ways to approach this, but it’s through supporting, and nurturing, deep tech that the high-impact innovations can be given space to grow. But what is ‘deep-tech’?
According to Liddle there’s five key factors that need to exist for a technology to be viewed as deep-tech. With three out of five being required for the firm to invest:
- It’s revolutionary, not evolutionary innovation.
- There’s heavy R&D investment that’s gone into the products, including trials, which then means that there’s high barriers to entry
- Needs to have been tested in pilot environments; in a lab or or commercial pilot.
- Must be transformational; profoundly changing or creating new industries, markets and improving lives.
- Needs to be protected intellectual property, with patents offering a long and sustainable competitive advantage, which also creates a higher enterprise value for the companies.
Access to capital is a challenge, and it’s access to long-term, patient capital that fledgling technology enterprises need the most. This is the driving force behind the SDGx investment fund.
They’re still at the early stages, but at the core of the approach is to offer patient capital, that recognises the challenges of building truly transformational technology.
“We target projects that are at a minimum technology readiness level, around four, which means that it’s being tested in the lab, and it’s out of research phase. Although, with these deep tech companies, they tend to have multiple pieces of technology in the pipeline. So there tends to be a constant R&D cycle.
It happens in two stages; we do a smaller investment, of around $US50k to $US100K in the earliest stage companies, and that’s really buying a seat at the table, to get to know the founders, and to look at the technology closer for 6 to 18 months. We would then follow on with a bigger investment. Here we’d want the technology readiness level to be six or seven class, which means it’s actually been proven in a commercial environment and by a customer, whether paying or not, who has taken the technology and proven it out. And at that stage these companies become very valuable very quickly, and become pretty attractive acquisition targets.” Liddle explains.
Targeting Big Industries for Big Impact
SDGx is focussing on large, established industries, as this is where the firm sees the greatest potential for impact, as the outcomes are so far reaching. This size also gives the companies huge scope for scale, and that’s good for returns.
“Our focus is on industries within production, manufacturing and mobility. These are the sectors that currently have the highest emissions, and if we’re going to reach that 0.5gt reduction in ten years, we need to find startups targeting those areas. It’s things like EV’s, and green infrastructure upgrades. There’s a lot of opportunity.” Zarmeen Pavri explains. “There’s no sacrifice on returns, it’s a VC asset class at the end of the day.”
Impact is central to the firm’s ambitions and it’s fortunate to have found that many of the startups they’re focussed on are already well-progressed in measuring their impact.
“For these types of firms impact comes naturally, impact measurement doesn’t seem to be a challenge. Reducing emissions and taking climate action is central to their business model, so they’re well prepared to then measure that impact for investors like us.” Pavri says.
There’s never been a greater need for the development of revolutionary technology to decarbonise our economies, and while impact investors have been pioneers in funding growth in the space, it’s not been fast enough nor at sufficient scale.
Investing in deep-tech goes further. It has its sights set firmly on the long-term, with capital that is not only patient, but also offered with subject matter expertise and managerial advice. And in Australia, there’s currently few options available.
“I think it’s fair to say that there’s no other pure play climate technology VC fund in this part of the world right now.” Liddle says.
SDGx aims to fill that gap, and through a blended-finance model, deploy capital to startups that have big ideas.