SoCal Cleantech Still Buzzing Despite Gloomy VC Environment

It’s been just over a month since the Silicon Valley Bank collapse rocked the tech landscape, but even before the bank’s failure, the economic outlook for startups across the nation had been remarkably grim. A combination of interest rate hikes from the Fed, record-setting inflation, and the lingering effects of COVID have made venture capital money hard to come by and kept the IPO window firmly closed for essentially all of 2022.

In the stingy environment, founders have shifted priorities away from growth-at-all-costs and focused instead on building sustainable businesses that generate revenue. Layoffs have impacted virtually every tech company under the sun from Salesforce to Nefflix to Meta, and many analysts anticipate the dour climate to continue well into 2023, if not longer. “Anticipate that for the next six months things are going to be kind of status quo,” says Harpreet Walia, partner Michelman & Robinson and the firm’s Emerging Companies & Venture Capital Chair. “You're not going to have any movement, so you need to at least get through that period of time.”

There have, however, been several bright spots in the tech landscape. Most notably artificial intelligence is having a real moment thanks to the incredible success of OpenAI and their ChatGPT service, which is quickly becoming the hub in the middle of a full ecosystem of shockingly powerful new tools.

But flying a bit below the radar perhaps, cleantech is also looking relatively healthy compared to the sector at large. Matt Petersen, the President and CEO of the Los Angeles Cleantech Incubator (LACI). “We have many of our startups with active rounds right now that seem to be going quite well,” says Petersen. “Some of our founders recently closed oversubscribed rounds and added additional capital in the round. I still think there's a strong demand now. You've seen a little bit of slowdown, but it's still pretty robust.”

Part of the reason, Petersen thinks, that cleantech hasn’t been hit as hard as other areas is due to the influx of state and federal funding aimed at decarbonizing the economy. The Inflation Reduction Act and the Bipartisan Infrastructure Law have earmarked hundreds of billions of dollars for businesses focused on electrifying the economy and transitioning the country away from fossil fuels. Petersen says LACI is seeing robust activity for startups focused on electric vehicle charging, clean energy, building decarbonisation, micro grids, and even circular economy projects. “There’s an enormous amount of capital looking still to go into these companies, given the federal incentives,” he says.

Harpreet says that the current leaner times may also create companies that are ultimately more resilient and smarter. When the purse strings do start to loosen, he thinks there may be some excellent deals to be had, but he expects venture money to start flowing into earlier stage companies first. “I think you are definitely going to see [VCs] going back to what they do best and trying to focus on early stage and growth companies where they can be more effective,” he says. There are opportunities to be had, both for founders and investors, but the road to success may be a bit slower and the valuations may be a bit more realistic than the giddy highs we saw in 2020 and 2021.