The Billion Dollar Venture Opportunity in Climate Tech for The Built World

[This is Part II in a series that explores how the climate crisis will impact the built world technology industry. See Part I here.]

At Fifth Wall, we’ve been spending a lot of time in 2020 focused on climate tech for the Built World. We believe that the collision of the climate crisis and the global real estate business will be one of the most disruptive events in the real estate sector in our lifetime, and so by extension, the economy as a whole (real estate represents about 10–25% of GDP (per HSBC) and is the largest asset class by far). The macro forces behind this imminent collision are simple: real estate is directly culpable in the climate crisis. Taken as a whole the industry is responsible for 30–40% of all greenhouse gas emissions (GHGs), more than any other sector of the economy, and powerful stakeholders are increasingly holding real estate companies accountable to this fact. (See Part I in this series for a background on these numbers and summary of how regulators, capital markets, and customers are holding real estate accountable for its climate footprint)

Given Fifth Wall’s perspective as the largest venture capital investor focused on technologies for the global real estate industry and our network of more than 60 of the world’s most significant real estate owners and operators from 14 countries, we have proprietary insight into how the global push towards decarbonization across the economy will affect the real estate industry. In particular, we believe this focus on decarbonization is creating a huge demand for climate tech, in which the global real estate industry will be forced to invest trillions over the next decade.

In short, we believe that climate tech for the Built World is our next big venture opportunity.

We thought it would be helpful for our partners and the larger real estate community to understand our thinking, so I’m sharing an outline of our climate tech thesis below.

Fifth Wall’s Climate Tech Thesis

Summary

1. The real estate business is being forced by a “perfect storm” of secular tailwinds (regulation, capital markets demand, tenant demand) to invest significantly in climate tech. It’s not altruism, nor is it voluntary. And it’s not a 10 years-from-now forecast; it’s this quarter and growing.
2. Unlike the cleantech boom and bust of the early 2000’s, climate tech companies in 2020 are being built on a stack of modern technologies that are venture investable.
3. This is a large addressable market — perhaps even historically large.
4. Fifth Wall’s model and platform gives us a difficult-to-replicate competitive advantage when it comes to investing in climate tech for the real estate industry.

1) The Real Estate Industry is Being Forced to Spend Money on Climate Tech — Today

• Real estate — buildings — are the most significant source of GHGs in the global economy, representing 30–40% of all GHG emissions. See Part I for a background on these numbers.
• As political, cultural, financial, and economic institutions continue to implement ever stricter actions to limit GHGs, real estate is a huge and obvious target.
• As a result, we expect a series of secular forces specific to real estate to compel the industry to spend significantly on climate tech in the short term (0–5 years).
• Specifically, decarbonization requirements coming from a) regulators; b) capital markets; and c) customers, have together created a “perfect storm” that is forcing real estate owners/operators to develop and implement aggressive decarbonization strategies. See Part I for more detail.
• Stated differently, compared to any other time in history or any other industry today, we believe there is a significant and growing economic incentive in real estate to decarbonize, which has resulted in an increased, short-term demand for climate tech. This demand does not rely on altruism, fashionable marketing strategies, or other fundamentally voluntary drivers.

2) Climate Tech Companies in 2020 are Being Built on Venture-Investable Technologies

Software is eating the (built) world, and real estate’s decarbonization challenge is on the menu

• Compared to the first cleantech venture boom and bust of 10–15 years ago, modern climate tech is built on a different stack of technologies.
• Back in 2000–2010, cleantech investing tended to focus on fundamental R&D, deep-tech, heavy infrastructure, and manufacturing. Companies pursuing such technologies generally require too much time and capital to make sense for a venture capital strategy.
• Fast forward to today, in contrast, we believe the core technology underlying much of modern climate tech is venture investable.
• Many of the innovations that Silicon Valley has leveraged to transform just about every sector of the economy over the past couple decades are now being brought to bear on the climate problem in real estate.
• Today’s climate tech entrepreneurs and engineers harness big data, machine learning, IoT, SaaS, the Cloud, biotech, global manufacturing and supply chains, among other technologies. In an upcoming Part IV, I’ll outline and explore this investable universe in detail.
• A defining characteristic of this modern group of technologies is that when leveraged by great teams, we believe small amounts of capital can build very valuable businesses that scale quickly. That is to say, they can generate suitable venture capital investments.

3) Climate Tech for Real Estate is a Very Large Addressable Market

Real Estate makes every other business look small

• Real estate is the world’s largest asset class, one of the world’s largest operating businesses, and as stated previously, the world’s largest emitter of GHGs. The dollars moving around here on an annual basis are measured in trillions.
• Decarbonizing our homes, offices, communities, and cities promises to be one of the greatest challenges faced by our civilization over the next decade.
• As with many such grand challenges humanity has faced and solved in our past, our most potent tools promise to be innovation, science, technology, and entrepreneurship.
• So at the core, decarbonizing the Built World is an engineering and technology problem, as well as a technology investing opportunity. The interim approaches of “turning down the thermostat” and buying offsets as sustainability strategies are not long-term solutions for decarbonizing our real estate assets. Instead we must innovate and invent better ways of providing the real estate products and services we need while polluting less, and eventually, not at all. We believe that the entrepreneurs and investors who deliver these climate innovations and technology solutions to the real estate business will be able to capture a tremendous amount of value.

4) Fifth Wall’s Competitive Advantage

Some of Fifth Wall’s 60+ Corporate LPs

• Fifth Wall is different from a generalist venture capital firm. We are focused on building a platform that allows us to be the best investor possible in the companies and technologies disrupting the Built World. We’ve designed every aspect of our platform around delivering superior, durable returns in this niche.
• We’ve built a trusted global network of more than 60 of the most significant real estate owners and operators in the world. As LPs, these corporate investors are aligned with our goal to invest in and deploy the best-in-class technology startups across all aspects of their businesses, be it proptech, retail tech, climate tech, and beyond.
• For entrepreneurs selling tech products or services into the real estate business anywhere in the world, Fifth Wall’s distribution platform offers global sales access. Having now facilitated over 125 partnerships between our portfolio companies and our LPs, an investment from Fifth Wall can provide real estate business development opportunities across our platform.
• Combined, we think this platform provides a competitive advantage to consistently deliver alpha across all segments of technology and real estate, climate tech being just one of these segments. From proptech, retail tech, to climate tech, it is the same “playbook”: better information, better insight, better deal flow, better access, better distribution, better terms, and ultimately we hope…better returns.

An Emerging Coalition to Confront the Climate Crisis

We look forward to working with our investors, the broader real estate industry, and the passionate entrepreneurs who’ve chosen to tackle these incredibly important problems.

As investors we are inspired by the opportunity at hand and by the leverage our platform provides for investing in climate tech.

As citizens, parents, and members of the global community, we are encouraged by this convergence of purpose and profit. Given real estate’s dubious distinction as the economy’s largest emitter of GHGs, we think climate tech for the Built World is one of the highest leverage pathways available to decarbonizing our entire economy. We are proud and excited to play a part in opening up this front in the fight for our future.

If you are a like-minded stakeholder and share our vision for creating, investing in, and deploying the science, technology, engineering, and innovation needed to decarbonize the most polluting sector of our economy, then please get in touch (feel free to DM me on Twitter). We believe this will be one of the grand challenges our civilization will face over the next several decades and we believe we can best address these issues collectively.

Follow ups

A question I’ve received in response to this post is “what about net-zero? What about offsets, etc.?”. Of course at present many companies, institutions, and even governments are pursuing this approach, framed as a “better-than-nothing” strategy to buy time to transition to a true low-carbon infrastructure. This approach makes intuitive sense: reduce emissions aggressively and balance out the remaining CO2 with removals.

But of course there is a catch. True zero requires nascent technologies that are not yet available at commercial scale. But this can only happen if we make the necessary commitment and investments — starting today. Doing so requires attention and capital, both of which are in danger of being diverted by offsetting.

In Part I of this series, I talk about real estate’s role in the climate crisis and Why Decarbonization is Not Optional for Real Estate Leaders.

In Part III of this series, I’ll talk about the dangerous distraction of offsets and why real estate owners and their sustainability teams should not be complacent.

This post is presented for informational purposes only, is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Fifth Wall Ventures Management, LLC or its affiliates (collectively, “Fifth Wall”; any such investment vehicle, a “Fund”). Any such solicitation of an offer to purchase an interest will be made by a definitive private placement memorandum or other offering document.

Forward-looking statements and opinions as to carbon reduction initiatives and real estate markets or any other matters, as expressed in this presentation, are those of the individual presenters, but are not necessarily the views of Fifth Wall as a firm, and cannot constitute a guarantee of future success or profitable results. As a result, investors should not rely on such forward-looking statements and/or opinions, or on anything else contained in this post, in making their investment decisions. Moreover, certain information contained herein may have been obtained from published and non-published sources prepared by other parties and may not have been updated through the date hereof. While such information is believed to be reliable for the purposes for which it is used herein, Fifth Wall does not assume any responsibility for the accuracy or completeness of such information, and such information has not been independently verified by Fifth Wall. This presentation speaks as of its publication date, and Fifth Wall undertakes no obligation to update any of the information herein.

In addition, in considering any prior performance information contained in this post, prospective investors should bear in mind that past results are not necessarily indicative of future results, and there can be no assurance that any Fund will achieve results comparable to those of any prior or existing Fund or portfolio investment of Fifth Wall.

None of the information contained herein has been filed with the United States Securities and Exchange Commission, any securities administrator under any state securities laws or any other domestic or foreign governmental or self-regulatory authority. No such governmental or self-regulatory authority has passed or will pass on the merits of the offering of interests in any Fund or the adequacy of the information contained herein. Any representation to the contrary is unlawful.

This communication is intended only for persons resident in jurisdictions where the distribution or availability of this communication would not be contrary to applicable laws or regulations. Any products mentioned in this post may not be eligible for sale in some states or countries. Prospective investors should inform themselves as to the legal requirements and tax consequences of an investment in a Fund within the countries of their citizenship, residence, domicile and place of business.

No assurances can be given that any of the carbon reduction initiatives or other initiatives described in this presentation will be implemented or, if implemented, will be successful in effecting carbon reductions or any other initiatives. Further, no assurances can be given that any Fifth Wall fund or investment vehicle will ultimately be established to invest in these technologies or that such fund or investment vehicle, if established, will successfully identify and execute on investments that meet its stated objectives. Investments targeting carbon emission reductions involve substantial risks and may not ultimately meet Fifth Wall’s stated investment objectives. Investors should consult their own financial, tax, legal and other advisors in connection with any proposed investment and should carefully review all disclosures and descriptions of risk factors that are contained in relevant offering materials.