Cynthia Phitoussi
As the urgency to combat climate change escalates, companies have been increasingly turning to technological innovation to reach sustainability goals and pave the way for a more sustainable future. Over the last couple of years, Israel emerged as a hub fostering disruptive solutions in the climate tech sector. More and more, we, as early-stage investors, have met with companies leveraging breakthrough technologies to support decarbonization, climate adaptation, environmental protection, and more. As we started investing through our second fund, SeedIL Ventures 2, we have focused more firmly on the sector and are now able to share some reflections and learnings as Israeli investors interested in sustainability.
Israel has long been valued for its dynamic innovation ecosystem and top-notch entrepreneurial capabilities. Its combination of government support, a thriving entrepreneurial culture, and a rich talent pool turned it into a powerhouse for disrupting technologies and, more recently, for climatetech innovation. According to a Startup Nation Central report, the Israeli Climate Tech sector currently comprises over 800 high-tech companies and 60 VCs funds dedicated to support and fund these companies. In 2022, Israeli climate tech companies raised close to $2Bi in VC investments and $481M in Q1 2023 alone. More and more, we see the emergence of events, research, conferences, acceleration programs, and startups dedicated to climate tech challenges happening in the Israeli tech scene.
That said, Israel has not developed its capabilities to combat Climate Tech overnight. Israel's geographical attributes and resource scarcity have propelled innovation, placing the country as a reference in many climate tech subsectors. It is the first to reverse desertification and excel in water management and precision agriculture, with companies like Netafim deploying its drip irrigation systems worldwide. It leads in food tech and alternative proteins with Future Meat, Remilk, and Aleph Farms and in mobility innovation with Autofleet, Via, and Optibus. However, Israeli VC funds traditionally avoided climate tech - previously known as clean tech - due to long sales cycles and the long path toward monetization and ROI. VC funds usually seek shorter-term returns and hesitate to invest significantly in this sector. Companies tackling energy, decarbonization, or water utilization are hardware reliant and inherently capital-intensive, with complex CAPEX structures that can hamper their scalability.
With changes in government policies, regulations, and incentives, there is a sharp increase in appetite for investment in climate tech innovation from pressured enterprises with climate commitments. But how to align climate tech investment with VC's ROI rationale? We believe Israel has a definitive edge to be a global player in all the data challenges of climate tech. From crop intelligence to carbon removal, climate data intelligence will be at the core of many unicorns' births. These solutions rely on software-powered remote sensing, computer vision, IoT technology, and others, all of which Israel has historically built strong technical capabilities for (mainly due to their application and development at the Israel Defense Forces). To achieve emission reduction goals, transparent and auditable emission measurement solutions will be crucial, particularly in the construction industry. Additionally, as consumer sustainability awareness grows, a new generation of talented individuals is gravitating toward this sector.
"Israel's geographical attributes and resource scarcity have propelled innovation, placing the country as a reference in many climate tech subsectors"
This is where, we believe, lies genuine opportunities for software-focused investors such as SeedIL, and this momentum resonates well with our strategy. We invest in early-stage B2B software, companies with scaling and disruptive potential, with amazing teams that completed initial market validation and a first MVP. We believed in the power of software for sustainable, positive change for many years. It started with our investment in Breezometer in 2014, at a time when climate tech was not a buzzword, and there was no definition for the sector. Acquired by Google in September 2022, Breezometer combines data sources to provide its customers with extremely precise information on air pollution and environmental recommendations. We also invested in BlueCircle, which creates a digital twin of wine producers' supply chains to optimize its management and minimize waste. Another portfolio company of SeedIL Ventures is ReturnGO, which develops a solution that allows e-commerce websites to optimize their supply chain and reduce waste by efficiently managing return and exchange products.
So, what should be considered when evaluating investment opportunities in the sector? Our climate tech expert and advisor, Gerard Kuperfarb, explains:
"Climate technologies are a relatively complex ecosystem that requires the ability to orchestrate multiple skills, such as a detailed understanding of end-users (agriculture, construction, etc.), expertise in different fields (chemistry, artificial intelligence, ....), early investment, financing investments in the transition of some existing facilities, building infrastructure, etc."
When evaluating opportunities, we look at three main criteria. The first is, and always will be the team. Climate tech teams require skilled founders with a complementarity of technical and business acumen and deep expertise in the field they are acting in. Second, understanding the startup's roadmap to monetization considering that climate tech startups rely on longer R&D cycles than other sectors. Third, go-to-market strategy and view on their buyer, champion, and users. Climate tech is a new sector with newly established players and, consequently, customers. Climatech companies often face long sales cycles but high product stickiness. Revenue growth curves are dramatically different than for regular SaaS products that we, VCs, are more traditionally used to.
To conclude, we quote our advisor, Mr. Kuperfarb:
"The climate tech space is full of opportunities. All the criteria for an upcoming disruption are met: changes in regulations and the willingness of many users to favor sustainable solutions and pay a premium price. I believe that the proven ability of Israeli entrepreneurs to scale up their businesses to serve global markets, cooperate with strategic partners around the world, its recognized academic excellence, unrivaled entrepreneurship, as well as early government support all contribute to the growth of climate technologies in the country while providing solutions to the international objectives of decarbonization and sustainable development." Surely, this year has solidified the case for VCs in climate tech and erased all doubts about a trend that is here to stay.
