How to invest $1 billion in the energy transition

The Facts

One of climate tech’s biggest investors is speeding up his funding efforts — and he isn’t worried that a second Donald Trump presidency could derail the energy transition.

Tom Steyer — a San Francisco billionaire who made his fortune running a hedge fund before becoming a major Democratic fundraiser and a climate-focused 2020 presidential candidate — thinks it’s easier to identify good deals now that climate tech startups valuations have moderated after the ill-fated SPAC craze of 2021. His investment firm, Galvanize Climate Solutions, invests in traditional equities of established companies looking to decarbonize, as well as in startups, and keeps engineering and entrepreneurial experts on staff to spot promising technologies and bring them to commercial scale. Much of what the $1 billion startup division has invested in the last two years was rolled out in just the last two months, he told Semafor, with no plans to slow down.

Tim’s view

Steyer is most bullish on a sector that suffered a beating this week: Corporate carbon accounting. When the U.S. Securities and Exchange Commission on Wednesday adopted significantly watered-down carbon emission disclosure requirements for large companies, it effectively kneecapped a lucrative business opportunity for companies selling emissions-tracking software. But Steyer remains convinced this data is going to come out sooner or later. When it does, he thinks it will put enormous pressure on companies to decarbonize, and that the software companies handling it therefore have an opportunity to contribute to massive emissions reductions — and make a handsome return for their investors.

Of the 12 companies in the Galvanize startup portfolio, five have built some form of sustainability data-tracking software. Software startups avoid some of the cost and regulatory pitfalls that plague many of the climate tech companies that want to mass-produce a physical product. Steyer acknowledges that the energy transition will require things — EVs, grid infrastructure, wind farms — to be built. The challenge, he said, is doing so at a cost low enough to drive mass adoption. The most “disruptive” tech he’s seen recently is a new hybrid sedan from Chinese automaker BYD that sells for just $11,000. “That’s not a nice-to-have, that’s a have-to-have,” he said. The challenge for Galvanize is to find its own “have-to-have” technologies. That’s the only way, Steyer said, to finally beat out fossil fuels.

The View From Tom Steyer

Tim McDonnell: What sets Galvanize apart from other climate tech investors?

Tom Steyer: We’re trying to build a climate-only investment business, at a pivotal time in the execution of the transition. Every single investment, we look at from a returns standpoint financially, [asking] does it have real positive climate impact? If it doesn’t, we don’t do it. But returns and impact go together. We reject completely this whole idea of a green premium, that you’re going to try and change the world with an NGO. That is not the structure that enables you to really scale in the way that we all know we need to scale.

We want to build real, defensible domain expertise so that over time, we just have the strongest mousetrap. We have technologists, policy experts, experts in communications, hiring, go-to-market. If you don’t have the best people in the world, you’re not going to lead, you’re not going to be the best partner [for startups], you’re not going to get the best returns, you’re not going to have the most impact. People at Galvanize have long experience in climate investing. Our goal is to be the best partner for entrepreneurs, and we bring so much more to the table that people go like, ‘We’ll take them at a 10% discount.’ That’s honestly happening.

Tim: What are you most interested in investing in at the moment?

Tom Steyer: We’re super focused on measurement and information, and data transparency, because we believe we need that so companies and CEOs can make good decisions. The energy transition is a big physical problem — transportation, electricity, manufacturing, the built environment. But really, we’re going to solve this with a lot of information technology. Where are we emitting? What are the things we can do to change that profile? That’s the part of the business we think is the most interesting. For example, we’re invested in a business that uses real-time information to reduce cement emissions. So it’s like, this is a company with a huge physical element to it, but where really the information is going to be the driver.

This push for companies to disclose their emissions reminds me of the old Warren Buffett saying: ‘You don’t know who’s swimming without trunks until the tide goes out.’ That’s why we think transparency and information systems are incredibly important. How are we going to have a carbon market if we can’t measure carbon sequestration? If we’re gonna get to net zero, that means probably sequestering 10 gigatons of CO2 a year, at $100 a ton. That’s a trillion dollars a year. So you want to be the one to build the system that can support a trillion-dollar market.

Tim: Building infrastructure is also just really challenging.

Tom Steyer: That’s what people always worry about. Look at how hard it is to get a permit in California. Are we really going to build hundreds of thousands of acres of solar arrays in the desert? We have a seven year window [to get on track for net zero], and getting a permit takes about seven years. But if we can stay within the existing footprint, we can get an awful lot done. Some things will have to be built, but how long that will take is indeterminate, and you have to be building a business that absolutely makes sense from an investment standpoint right now.

That was another reason we didn’t make a lot of investments from [the Innovation & Expansion Fund] in the first two years. When capital-intensive businesses raise capital, they by definition dilute [their investors], and you don’t know if the price is worth it because [by the time they reach commercial scale] the market is going to be different. It could be ebullient, it could be despondent, it may not exist. So if you get into a capital-intensive business you have to be aware of the mitigating factors to actually getting through [the valley of death].

Whereas information businesses, you have infinite replicability, low cap-ex. There are lots of problems with those businesses, too. But if you’re an investor you have to ask yourself how you’re going to make it to the finish line. To finish first, you must first finish. And if you have infinite profitability, that means you can really impact things. You can get to a global scale really fast, if you have the best product.

Tim: Are you worried at all about whether a second Trump presidency could throw a wrench in the momentum behind climate tech?

Tom Steyer: The tide is coming in for renewable power and there’s not much that can stop it. You don’t like renewables? That’s fine, but if dirty energy costs 5 cents and clean energy costs 1 cent consumers will choose the cheaper option every time. It’s just business, plain and simple. Do I think we can go back to the 1950s and have Esso stations charging 33 cents a gallon? No. More importantly, why would we want to? There are two very different views at work in the world, but between the industrial logic and competitive dynamics, it’s like, ‘sorry, the tide has come in. we’re here — the energy transition is underway’.”

Obviously having good policy is important. But at some point, technology wins, and finance wins. There are a bunch of people who are arguing for old technologies that are much more expensive and don’t pay for their costs. I liken this to newspapers. In the 90s, with the internet, people in the newspaper business said ‘It’s going to ruin our growth prospects.’ It didn’t ruin their growth prospects, it destroyed the industry. When new disruptive technologies come in, it’s an S curve, and we need these S curves. If the cheapest and the best technology is clean, people are gonna go for it.

Capitalism is gonna save us. We’re in this race, really, between the deterioration of the natural world and the creativity and innovation of the business world. We built Galvanize to be part of the army pushing our locomotive as fast as possible to get ahead of that other locomotive, and we’re looking for disruptive change.