Global Arbitrage: Why Green Investing Needs An Ecosystem Approach
Nicole LeBlanc is a partner at Toyota’s growth fund, Woven Capital, focusing on mobility, sustainability and smart city investments.
When it comes to the climate tech investment landscape, we’re no longer in the era of point solutions; we’re in the ecosystem era. Across the globe, companies have deployed isolated technologies, such as EV charging stations, but the reality is that these end-point solutions often fall short because they lack coherent integration.
So, what we’re seeing now is the emergence of software companies, like WeaveGrid (one of our portfolio companies) and Monta, that are trying to smooth over these transitions and integrate disparate technologies. We’re at an inflection point in clean energy, with multiple standards and technologies competing for dominance. I believe the most successful climate tech investors will be those who understand the unique contributions of different regions to the global ecosystem and how true success depends on geographic diversification.
In short: There’s an investment arbitrage opportunity in looking across markets and understanding which are artificially accelerating adoption through regulation, which are driven by economics and where gaps in funding create undervalued assets. In this arbitrage game, corporate venture capital (CVC) players may hold an advantage over traditional venture capital (VC) investors.
The U.S. Market: Policy Uncertainty And Capital Reallocation
In the United States, the climate tech investment landscape has been profoundly shaped by policy shifts. The Inflation Reduction Act created a surge of early-stage investment in sustainability-focused startups. New entrants, particularly circularity and recycling startups, used this capital influx to validate technologies through proof of concepts with various partners, while covering expenditures that traditional VC-backed startups couldn’t. However, many now face a critical gap as U.S. policies shift while startups attempt to transition to the execution phase.
This gap has widened as venture capital has dramatically shifted toward AI, leaving many promising climate tech companies struggling to secure growth-stage funding. Despite this reallocation of capital, though, certain climate tech segments remain fundamentally relevant regardless of policy changes. As one clean energy startup founder explained to me, the utilities sector continues to invest in innovative solutions because they face ongoing operational challenges that require technology solutions, regardless of whether government incentives are available. For these utilities, climate tech isn’t about subsidies but solving real business problems.
One of the most promising opportunities in the U.S. market lies in engaging traditional energy players, like oil and gas companies, in the clean energy transition. They have the capital, scale and infrastructure to make meaningful investments, particularly in technologies like blue hydrogen, which is derived from fossil fuels, allowing them to participate in the transition while leveraging their existing capabilities.
While purists might prefer an immediate jump to green hydrogen, the reality is that transitional technologies may be necessary for the next five to 10 years to build the ecosystem for full decarbonization.
The European Market: Regulation-Driven Innovation
Europe presents a dramatically different investment landscape, driven primarily by stringent regulations that create real costs for noncompliance. Companies operating in Europe face substantial fines—potentially $100 million or more annually for some companies that can’t meet emissions standards. These regulations effectively create an artificial market for clean energy. Many corporations will pay premiums for clean solutions because the alternative is expensive regulatory penalties.
For CVCs, the European market offers a unique value proposition traditional VC’s can’t capitalize on: Investments in sustainability startups can directly help parent companies reduce regulatory fines and compliance costs. This isn’t just about generating returns; it’s about mitigating real business risks. Corporate investors can be kingmakers by not only providing capital but also connecting startups with business units that need their solutions to avoid costly penalties.
Last year, approximately 50% of all funding for physical climate tech solutions came in the form of debt financing. I see VC becoming more concentrated in larger mega-rounds at the growth stage, with many boom or bust outcomes. In Europe, numerous Series A companies that raised funding in the last 12 months are now facing a softening VC landscape. Our analysis identified many companies like this in that region. With valuations remarkably low, this can allow CVCs to step in with favorable terms.
The Japanese Market: Limited Early-Stage Ecosystem
Japan presents yet another distinct market in the clean tech investment landscape. The country has relatively few early-stage investors focused on sustainability and clean energy, resulting in a limited pipeline of growth-stage companies. However, again, I think this scarcity creates an opportunity for corporate leadership in spaces where traditional VCs aren’t active.
Japanese corporations tend to take a longer-term view of sustainability initiatives, in my experience. Some timelines extend decades into the future, which requires laying groundwork far in advance, given the three- to four-year product design cycles in industries like automotive. This long-term orientation enables Japanese corporate investors to make patient capital investments that may not align with the typical five- to seven-year return horizons of traditional venture capitalists. As a prime example, within the automotive industry, development cycles can take years—by design rather than inefficiency—and as a result extending the time required to integrate into the system and become part of the production process.
The challenge in Japan is not necessarily a lack of technology innovation, but what I see as insufficient support for startups to scale these innovations globally, which also creates an uphill battle for talent acquisition. CVC can play a crucial role in bridging this gap by providing funding as well as access to global markets and manufacturing expertise.
A Global Investment Strategy
The most successful investors in climate tech recognize that different regions complement each other in the ecosystem. Europe’s regulatory environment creates demand for solutions that can then be refined and scaled in markets like the U.S., while Japanese manufacturing expertise can help reduce costs once technologies are proven.
The traditional venture capital model is being tested by climate tech investments, which often require patient capital. This, as well as the current volatility in markets and technology preferences, makes flexibility crucial. This should extend to investment strategies as well. Geographic diversification can help create resilience in an uncertain technology landscape and provide multiple paths to exits and returns.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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