In the climate tech world, there’s a widespread understanding that hardware plays a crucial role in reducing carbon pollution. However, this mindset overlooks the significance of software and digital solutions. According to Vaughn Blake, partner at Blue Bear Capital, "hardware is just part of the equation." The focus on hardware-centric approaches has led to an underinvestment in software-based climate tech, which is where Blue Bear Capital is looking to make a difference.
The Rise of Software-Centric Climate Tech
Blue Bear Capital is a venture capital firm that’s taking a software-centric approach to investing in climate tech. This approach is a departure from the traditional hardware-focused strategy employed by many other investors in the sector. Ernst Sack, partner at Blue Bear Capital, emphasizes the impact potential of digital solutions and applied AI: "The applicability of AI is so universal."
Sack points out that software-based solutions can be applied to various industries beyond traditional climate-friendly technologies like solar power. He cites examples such as wind energy, water treatment, refrigeration, steel production, cement manufacturing, chemicals production, marine logistics, and aviation logistics.
Unlocking the Potential of Software in Climate Tech
One of the key benefits of software-based solutions is their universal applicability. Sack explains that "so many parts of the world economy have an energy intensity where, if we were to build a physical, hard asset or a hardware company, it can almost always only serve one narrow vertical." In contrast, software can be applied across multiple industries and sectors.
To capitalize on this opportunity, Blue Bear Capital has recently raised a $160 million third fund. The fund includes limited partners such as the McKnight Foundation, Rockefeller Brothers Fund, UBS, WovenEarth Ventures, Zoma Capital, and executives from private equity and infrastructure funds.
A New Approach to Investing in Climate Tech
Blue Bear Capital’s investment approach is designed to help more companies achieve successful exits. By keeping the portfolio small, they aim to provide more focused support to their investee companies, which should enable them to reach an exit more effectively.
Blake highlights that "the model through which we invest understands and presupposes that IPOs are going to be less likely in the markets in which we invest." As a result, each successful exit might be smaller than the usual outsize numbers targeted by many venture funds. However, he emphasizes that they hope to deliver similar returns for their limited partners.
The Importance of AI and Software in Climate Tech
Sack’s emphasis on the universal applicability of AI is crucial in understanding the potential impact of software-based solutions in climate tech. He notes that "a company like Raptor Maps is deployed across over 100 gigawatts of solar generation capacity, and a 10% performance improvement is 10 gigawatts."
To illustrate this point further, Sack highlights that "that’s roughly equivalent to 10 billion of cap-ex and something like three to five coal-fired power plants or nuclear plants." This example demonstrates the significant impact that software-based solutions can have on reducing carbon pollution.
Investing in a Later-Stage Strategy
Blue Bear Capital is adopting a later-stage strategy, which allows them to invest more money in follow-on rounds. By doing so, they’re providing more substantial support to their investee companies, enabling them to scale and achieve their goals.
This approach also enables Blue Bear Capital to take a more active role in shaping the growth strategies of their investee companies. Sack emphasizes that "we’re not just writing checks; we’re actively working with our portfolio companies to help them grow."
Conclusion
The importance of software-based solutions in climate tech cannot be overstated. By adopting a software-centric approach, Blue Bear Capital is poised to make a significant impact on the sector. Their focus on AI and digital solutions has the potential to unlock new opportunities for reducing carbon pollution.
As the world continues to grapple with the challenges of climate change, it’s essential that investors like Blue Bear Capital are willing to take risks and invest in innovative software-based solutions. By doing so, they’re helping to create a more sustainable future for generations to come.
