Climatetech startups are the primary actors in our collective ability to innovate solutions to mitigate climate disaster. Funding them, however, remains a unique challenge. Though the need for climate investments is even greater than in years past—a recent International Energy Agency report states that we’ll need to triple our current clean energy spend in the next six years to achieve net-zero emissions by 2050—many climatetech startup founders still face near-insurmountable obstacles when it comes to getting sufficient capital to hyperscale. At Greentown Labs, we’ve seen this play out time and time again, especially with moonshot technologies.

In many ways, the funding dilemma that climatetech startups face reflects an outmoded, broken venture model. 

For VCs still beholden to traditional venture criteria, climatetech startups aren’t always appetizing on paper. Unlike less asset-heavy tech software (e.g., SaaS), climatetech has a longer and more arduous path from idea to commercialization to deployment. While the success of SaaS is imagined to lie somewhere on the other side of the valley of death (that canonical “J-curve” rite of passage), climatetech startups experience a more complex and volatile life-cycle with up to four valleys of death, each as formidable as the others. In fact, it’s often the third valley of death—once a nascent company has hit a Technology Readiness Level (TRL) between 5-7 and is transitioning out of the pilot stage to demonstrate full-scale deployability—where climatetech startups tend to need orders of magnitude more funding than they have previously.

That said, it’s not just the intensive upfront capital needs that make VCs balk. There’s also a greater risk of failure to reckon with—the technology is often first-of-its-kind (FOAK) and not yet proven, and it’s not always clear what the business model will be. Plus, these startups tend to have outsized, ever-growing capital needs, with the ticket size for climatetech startups being five-to-six times higher than fintech, quantum computing, and other tech sectors. And then, on top of all that, there are the protracted timeframes for ROI. A McKinsey analysis found that while digital marketplaces need an average of three years to get to market, climate technologies need at least seven years—more than double the time frame.

With all this put together, it’s clear that venture capital alone is unlikely to fund these critical climate technologies.

If the venture model is insufficient, where are climatetech startups supposed to get the funding they need?

On a high level, we need an integrated ecosystem of support to close the gap between innovation and market. This includes risk-tolerant VCs that understand the nature of the climate space, interventions from “catalytic” government (subsidies, policies, incentives), coalition-building with incumbents, and incubators that are poised to identify promising startups and help them scale.

But another critical and rapidly-evolving part of this ecosystem—and climate resilience as a whole—is the insurance industry.

Insurance (including brokers, underwriters, and reinsurers) is the intermediary that has the potential to de-risk the financial chain for investors, enhancing startups’ bankability and easing their transition to commercialization. Already, the cascading effects of climate change have impacted insurers, making risk more difficult to measure and driving premiums for climate resilience and natural-catastrophe protection to unprecedented highs (a projected 50 percent increase by 2030 to $200-250 billion per annum). 

Insurance companies must get on board with climate technologies and engage with startups as early as possible (i.e., during the risk management planning phase) to provide an insurance policy to debt providers, thereby unlocking the capital needed to help these emerging companies get to market faster. We don’t have much time: a report by Howden (a global insurance broker) and Boston Consulting Group found that at least $10T of insurance coverage is needed to cover the $19T that has been pledged to finance the climate transition over the next six years.

So what does this mean? As the Howden report states, “Insurance and insurability have become clear and present strategic priorities. Astute companies, creditors, and investors are elevating insurance to boardroom discussions as the foundation of the capital stack and source of medium- to long-term financial security.”

In other words, to ensure that startups can get the coverage they need at speed and scale, we need businesses and insurance companies to forge long-term partnerships and adopt a radically new kind of collaboration—one that marries startups’ firsthand climate knowledge with the risk-management tools and infrastructure that insurance companies already have. We need insurance to step out of the shadows as a behind-the-scenes economic engine, rise to the occasion, and adapt to the accelerating pressures that the market is imposing on climate technologies. Our decarbonization efforts and net-zero goals depend on it.