Startup trends: what’s happening in sustaintech?
The pace of innovation in the sustaintech space continues to accelerate as a dire need to reverse climate change escalates. We spoke to Sting sustaintech coaches Karin Ruiz and Magnus Rehn to discuss what’s happening in this crucial part of the startup ecosystem.
With the EU aiming to reach climate neutrality by 2050 and public pressure reaching unprecedented levels, it’s no surprise that startups in sustaintech/climatetech/greentech – or whatever you prefer to call it – are thriving.
As the industry grows, the capital flows
Today, sustainable business is the only way forward. Companies that do not take active steps to help the world reach net zero will simply become redundant. Venture capital firms are increasingly impact-driven, and it’s not just for the good of humankind. It’s now widely accepted that sustainability and profitability go hand in hand. In Q2 2021, investment in European sustaintech reached an all-time high of EUR 5.4 billion.
“If you look at the amount of capital invested and the number of startups and scale-ups cropping up, the sustaintech space is growing exponentially,” says Magnus.
“People are becoming more and more aware of the importance of sustaintech, and the positive correlation between sustainability and profitability. Investors know that in this space they can get a higher return on investment and future proof them, while doing good at the same time,” he explains.
Karin echoes this: “There are more and more voices arguing that if you have a measurable positive impact and put sustainability at the core of your business, it’s a clear indicator of future profitability. If impact is a top priority the financial return will follow.”
It’s a matter of survival
In the past, sustainability has been a nice-to-have, but today it’s a matter of survival for businesses, as well as our planet.
“Today, there’s no other way forward. Policy and legislation play a part to some extent, but what we’re really talking about is survival. For example, if you want to raise a fund, more and more LPs will demand that you have a solid ESG strategy and are directly contributing to the Sustainable Development Goals. They need to be able to prove that the capital they invest is used in a wise way, not only from a return on investment perspective. It should also have a purpose,” explains Karin.
Magnus also makes another crucial point: “If you want to attract the best talent, you need to be doing something positive. People want to join purpose-driven companies and to be proud of their work (or their investments). At least, I wouldn’t want to sit here and say ‘I’m personally invested in this company that makes plastic bottles and landmines.’”
But the sustaintech space is far from saturated
Both Karin and Magnus believe there will be greater and greater demand for sustaintech solutions that tackle the climate crisis – and the research backs this up. The International Energy Agency estimates that almost 50% of the technologies we need to get to net zero by 2050 have not reached the market yet. Deploying mature technologies like solar and wind is crucial, but will not be enough.
“We’re only scratching the surface of the sustaintech market. If we look at the amount of capital invested into this industry over the last five years it has doubled every year. Is it a bubble? No, it’s not a bubble because the problem will not be solved – and the technologies are crucial. Of course, there will be companies and projects in this space that don’t make it, but as an industry it will only grow. And we’re not just talking over the next 10 years, we’re talking 50 or more,” explains Karin.
Risk mitigation is naturally occuring
When you invest, you inherently take on a certain amount of risk because you can’t predict the future. But in the sustaintech space, this risk seems to be lower.
“The risk is always there, but because there’s room for so many startups and solutions in this space, the risk is naturally less that a company or project won’t make it,” says Magnus. “More and more soft money is also being channeled to the sustaintech space as a result of new policies such as the European Green Deal. These deals often require co-financing, so for example, the grant would provide financing of around 50% and the rest has to come from other sources in a hybrid agreement between public and private money. This basically means that as a private investor, you’re reducing the risk by half, and investors get more bang for their bucks, so to speak,” he adds.
Food, fashion and circular solutions are in the spotlight
A high number of agritech, foodtech and circular economy startups especially are cropping up.
“We just reviewed the list of candidates for Swedish Sustaintech Venture Day, and what’s sticking out is electrification of course because that’s our theme, but also agritech,” says Magnus.
At Sting, we’re also seeing an increasing number of highly promising startups join our programs too, for example, Flox, Ignitia, Karma and Klimato – who recently put climate labels on all of the food at COP26.
“Over the last few years it’s been fun to follow these types of projects but now they’re getting serious and the agritech sector is growing quickly, especially in southern Europe,” he adds.
“There’s also crossover between bioeconomy and the fashion industry, where there’s a particularly high demand for innovative new solutions and circular business models. So many fantastic startups are cropping up in the space. For example, Sting company Reselo, which has developed a fully sustainable bio-rubber that can be used in shoes, and others like Sellpy, It’s Re:leased and Hack Your Closet are really trailblazing in the re-use space,” says Karin.
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Electrification is creating a demand for smarter energy storage
Where the use of fossil fuels is declining, electrification is rising. As a result, Magnus and Karin say we need more innovations in the energy storage space.
“Today, we must be able to transport energy from one point to the next safely and efficiently and store intermittent sources of energy (like solar and wind) so we can rely on these power sources at a later date. To do this, we need innovative, effective ways to store and distribute energy. One way to manage this, for example, if we’re talking about battery-powered vehicles, is to use them as a crowdsourced storage solution when they’re plugged in. But you also need to have a smart grid to enable this,” explains Magnus.
With the rise in electrification, it’s no surprise that startups in the battery technology development space are also getting a lot of attention at the moment, such as Enerpoly, who’ve developed rechargeable zinc-ion batteries, and Cling Systems, who are creating a circular economy for lithium-ion batteries.
“Finding alternative battery solutions that do not use rare metals that are very hard and dangerous to mine should also be top of the agenda, as well as recycling of these materials. Although electrification can be a good thing, we must limit the amount of natural resources we need to produce these batteries and increase their longevity or this will not be a sustainable long-term option,” says Karin.
Credibility is key (especially for early-stage startups)
It’s hard to talk about startups without talking about teams, and sustaintech startups in particular need to make sure they have the right people on the bus.
“When building a startup in this space so much of it is about who you have on the team, because the credibility aspect is so important. If you’re just a couple of enthusiastic students who want to change the world (which I’ve met a lot of), that really is great as you need drive and energy. However, you also need sustainability experts and industry on your team who bolster your credibility and really know their stuff when it comes to impact. If you can bring them into your core team, establish a group of advisors. If you have credible people involved in your business it’ll provide a crucial quality stamp that’s much more critical than in other sectors,” explains Karin.
Impact entrepreneurs must prioritize scalability
Impact and scaling goes hand in hand – and early-stage startups need to think big. As awareness of climate change rises, people also increasingly want to see facts and figures that back up your level of impact.
“From the get-go, sustaintech startups should be asking themselves: how do we scale? How can we make a bigger impact? I always encourage our startups to really think big, as they often limit themselves at the beginning” says Karin.
“Sustaintech entrepreneurs also need to work out if what they’re doing will really have a big impact in the first place – or is it just incremental? This is why it’s important to closely measure impact with accurate assessment tools and KPIs. It’s also super important to choose the right business model, meaning the one that allows you to make the biggest impact possible and be truly scalable. Investors will also look closely at scalability and potential negative implications of your solution, so startups need to get this right,” Karin adds.
Even if in the early stages it’s a bit of a guessing game, Karin stresses that showing you’ve thought it through from early on and having impact assessment as part of your business model from the very beginning is key to success. Internationalization should also be considered early on.
“A lot of these markets are truly international, for example, when it comes to energy, you can’t limit yourself to the Swedish market. A lot of the big B2B customers are international companies. It’s also worth remembering that while the same problem might be everywhere, the solution might be different for different geographies,” says Karin.
“The fact you can demonstrate you’re able to understand frameworks, see the value in measuring impact shows, and looking beyond your immediate market shows you’ve done your homework and you’re serious. If you don’t build this into your plan, you’ll be taken by surprise,” Karin adds.