Climate Adaptation Tech- What is VC backable

So before heading off to The Drop to talk venture opportunities within Climate Adaptation Tech (CAT), I wanted to pen a few thoughts down, pose a few questions and peruse through a plethora of venture backable opportunities, in what is a criminally underserved but increasingly popular and supposedly lucrative section of climate technology. At least if the multiple 100 page reports and LinkedIn posts are anything to go by. Yet, there appears to be a dichotomy between adaptation being an obvious play on the surface and the number of climate VCs actually investing in deals that we would class at CAT.

My approach is to see adaptation as the process which industry and society undergo in order to better deal with and "adapt" to the effects of climate induced change already locked into the environment, think extreme weather events, floods, droughts, etc. The outcome of this process is an entity that is more resilient to climate effects - be that a large corporation, a particular linear asset or society as a whole. Traditional examples that are often pointed out are things like heat-resistant infrastructure in cities at risk and sea walls to protect coastal settlements. The technological innovations that inform you, faster, more efficiently and at less of a cost than consultants, which assets in your supply chain are most at risk from heat stresses and floods- those are examples of CAT (defined later).

Mitigation, the traditional realm of climate investment, is focused on limiting the effects of man made emissions, mainly decarbonisation- less reactionary, preventative and easier to measure than adaptation, by quantifying the reduction or removal of greenhouse gases from a specific activity or project. Mitigation is still the primary investment opportunity of a lot of climate tech VCs- 90% of climate tech funding goes to mitigation, while adaptation receives less than 10%, and “pure play” adaptation startups receive just 3% of total climate tech funding despite being 12% of companies.

Why aren't more funds looking at adaptation?

On the surface there certainly seems a huge opportunity to. The chasm between the supply of capital into adaptation solutions and demand for it is huge, with the commonly cited figure for the global climate adaptation finance gap sitting at a shortfall of around $250 billion to $300 billion. 

The claims of a market worth $2T by 2030 and the much lauded figure that each $1 invested in adaptation and resilience generates more than $10( more in some studies) in benefits over ten years, seem attractive.

Not to mention that it's a pretty safe bet based on where humanity seems to be heading.

We've blasted past the 1.5 °C set under the Paris Agreement and look poised to go even further with the current geopolitical climate (no pun intended). Catalysed by vast energy consumption and consequent emissions of the AI race and the fact that humanity tends be quite terrible at having empathy with situations that don't directly affect them (most of the current climate issues and struggles are in emerging markets that lack investment and infrastructure to properly deal with these threats )- the situation is going to have to get a lot worse before the laymen and women of the world start caring.

The reality is somewhat different, pure play climate adaptation funds in the space number fewer than 10, with maybe double that in generalist funds dipping their toes in, but out of hundreds, if not thousands of climate tech VCs! (I'm also not counting the funds that have opted to change from a "climate" to "resilience" fund, but who are still investing in mitigation solutions or who have switched to defence tech)

How do investors view CAT ?

It's not a straightforward question. The funds that do exist within the space have differing takes on what constitutes "CAT" and "venture backable". For more impact-oriented VCs, in the pursuit of financial returns and measurable positive social or environmental impact, they may accept slightly lower financial returns, or longer time horizons, in exchange for impactful outcomes. Their playbook might constitute the funding of resilient infrastructure upgrades in emerging markets, early warning systems, water and sanitation infrastructure, irrigation and wastewater reuse technologies and solutions that might not have an immediate path to venture like returns. Critically for them though, they demonstrate how climate adaptation tech investing can integrate into  social, environmental and economic goals to create resilient and inclusive growth pathways beyond basic resource provision. Funds like the new joint foundation venture, The Adaptation and Resilience Fund (A&R Fund) embody this patient capital approach and represent a substantial philanthropic commitment to scaling solutions that build resilience and catalyse systems-level change where it is needed most.

Crucially, note the distinct difference in funding versus investment here. Funding is the realm of philanthropies and not for profits that aren't tied down to creating returns for LPs within a set time frame whereas VC investors are investing in solutions in the hope they grow and deliver exponential returns on their initial investment. The types of CAT investment that each group pursues will be completely different as they are prioritising different outcomes, one mainly impactful, the other financial while still working on an impactful space and under SDG 13.

There are a number of different factors in play, to start with I don't think CAT deal flow is that well defined or easy to identify, it's still an emerging sector and few companies, if any, are calling themselves 'CAT deals'.

So what exactly is CAT?

Climate Adaptation Technologies are innovations that help industry and society prepare for, respond to and ultimately build resilience to specific climate risks, the five risks I find the easiest to group being:

Extreme Temperatures (Heat+Cold) Extreme Wind/ Storms (Cyclones, Hurricanes, Tornados, etc.) Wildfires Water Risk (Floods, Droughts, Impaired Water) Biological Risks (Pests, Invasive Species, Biological Risk- my chosen focus)

These, of course, overlap with each other.

Each of these risks threaten various different sectors including Agribusiness, Transportation & Logistics, Linear Assets, Urban Environments, Utilities, Public Health or National Security.

Convective Capital, Mazarine Climate & UpRoot Capital identify an existential risk they want to address then extrapolate down to the sectors facing those risks. Then finding THE founders going above and beyond to service their customers in those fields who need better, faster and cheaper ways to deal with these risks.

Mazarine Climate's inaugural investment into TDRi is a perfect example of this, an innovation in road integrity management designed to deal with the "too much water problem" faced by owners and operators of road assets.

It's not what first comes to mind when thinking of water risk deals: desalination, smart water analytics and management or wastewater pollutant filtration.

If we're to believe the prevailing narrative, the logical play in the water risk space should be backing solutions that will help industry and society manage perceived water shortages that will come with a changing climate and as is often bandied about that “water is the new oil” and will become a commodity that's coveted, traded and much sought after compared to the present.

This may very well be the case in the future, but it's not the only type of water risk investment one can make, and maybe doesn't deliver returns in the timeframe needed for a VC exit the opportunity, presuming you start investing today. Right now, the "too much water" risk looks like the more prevalent climate induced threat.

All of that to say, while you do need to think outside the box to find interesting CAT deals, starting with solutions that know their customers' needs comprehensively seems a logical first step- whether that's proverbial rabbits or a whale (lots of smaller customers vs one enterprise level customer).

Other approaches focus on the sectors first, those most in need of adaptation in an evolving climate and where demand will fall hardest in a 2.0 °C or even 3.0 °C warming world. Supply Chains, Insurance, Healthcare, Finance & FIRE (Finance, Insurance and Real Estate) are the most visceral.

A caveat to covering all risks across various sectors is that you could miss out on some deals coming across the desks of risk-specific VCs. Indeed, with most of the funds in the space focused on angel, pre-seed, and seed level, moving with conviction early and with speed is the name of the game.

This rings all the more true if we’re to believe pre-seed holds the last vestiges of genuine venture capital because access is harder and signals are clearer- giving investors who back founders before the crowd a competitive edge.  

The contrasting view would be that there are relatively few CAT deals out there, and if you're a fund with significant resources or hyper-efficient deal sourcing techniques then you'll catch them. CAT is such a small field at the moment that all the current players collaborate, syndicating and sharing deal flow to leverage their various expertise and networks in any given field.

Venture-Backable vs Not (Within Adaptation):

There is clearly a distinction that needs to be made between specific venture backable opportunities in adaptation vs those that aren’t. When sketching this out, a quick framework could look something like this:

VC Backable Adaptation:

• Scalable business models: Can sell to many customers globally

• Defensible IP: Patents, data moats, proprietary tech

• Recurring revenue potential: Software subscriptions, seed licensing, ongoing services

• Examples: Gene-edited drought crops, precision ag sensors, climate risk analytics

Not VC Backable Adaptation:

• Location-specific: Custom engineering for each site

• One-time infrastructure: Sea walls, levees, harbour or modifications

• Government/public goods: Policy frameworks, behaviour change campaigns

• No defensible moat: Commodity construction, pure services

With Test Questions woven in:

1. "Can this solution be deployed in 10+ different markets without rebuilding?"

2. "Is there defensible IP or data advantages?"

3. "Can revenue scale faster than costs?"
   

This is just a quick example and I’m sure with more rigorous thinking one could come up with a comprehensive VC backable vs not VC backable framework!

Are there any quantifiable metrics with CAT?

Some funds find climate adaptation technology a trickier investment prospect than mitigation as there are no clear metrics on how efficiently innovations are adapting their customers to risk- there is no one real way to measure all different types of adaptation (in the same way that you can track emissions reduced from mitigation).

Avoided losses or damages has been floated around as a metric, but given CAT's immediacy and need, does the most effective metric become: how many of those affected by, or trying to prevent being affected by, climate risk are paying to have it addressed in a more efficient way than current solutions can offer? (and how much would they pay?). Of course, this is just for VC-like returns. For maximum impact your measurement criteria would be different.

Finding CAT deals

Finding CAT deals isn't easy. There are very few founders, if any, that are calling themselves 'CAT' companies or even adaptation and resilience companies. It's therefore up to the investor to go into the weeds and dig around for companies helping a particular customer deal with, and adapt to, a particular risk that is being made worse, and will continue to get worse, by our changing climate.

This leads to a huge plethora of potential deals from early stage companies, ranging from solutions enhancing agricultural resilience in the face of mounting climate pressures (CRISPR gene editing, new biocontrols, even CEA) to your climate risk analytics companies like Climate X and Mitiga, which have been the traditional CAT darlings. Even worst-case scenario bets like Geoengineering (using aerosols to reflect sunlight amongst other ideas) for if we're really up shit creek without a paddle.

Taking UpRoot Capital's thesis as an example - backing exceptional early stage companies that help their customers deal with pest, invasive species and biological (PIB) risks that are getting worse in a changing climate. The choice to focus specifically on PIB risks isn't arbitrary - this threat category has experienced a staggering 702% cost increase over the past 20 years, faster growth than any natural hazard, making it now the second most costly environmental threat globally. Yet despite this escalation, there's a massive market inefficiency in that only 3% of spending goes to prevention versus reaction. Perhaps most concerning is the concept of "invasion debt" - climate change is creating conditions where the worst PIB impacts are still coming, as invasive species introduced today may not show their full damage for decades.

The portfolio companies aim to serve sectors from Agribusiness, Transportation & Logistics, Hospitality & Tourism, Public Health, National Security, Industry & Infrastructure and Conservation & Biodiversity.

The toolbox of solutions founders leverage to help their customers is diverse and roughly falls under two categories. Those that help predict and detect these PIB threats and then solutions that help to remediate them more effectively than current methods - whether through lower cost, reduced environmental impact, improved targeting, or faster deployment. The wheelhouse includes eDNA and RNA sensing, advanced analytics, IoT sensors, lab on a chip diagnostic services, biopesticides, mechanical and robotic solutions that automate processes like SIT and many many more. This focused thesis actually opens up a plethora of deal flow, potential acquisitions and lots of customers under an overarching thesis to help tie it all together, spanning well beyond agtech into multiple sectors.

What are the exit opportunities?

So we've covered that a strong thesis helps find CAT deals and what those CAT deals are, the question then remains: what are the exits?

Are people buying this tech and is there appetite from PE and Corporates — the short answer, yes?

The acquisition conveyor belt, from VC-seeded investments to PE buyouts for platform plays and comprehensive climate adaptation solutions, runs smoothly, with historical precedents proving demand. In the water risk sector alone Fort Point Capital acquired Jones Lake Management in 2022 as part of a platform focused on freshwater ecosystem management, bolting on Savin Lake Services (brought dredging capabilities and expanded operations into Michigan) this year and Ponds Beautiful (enhanced reach and service depth in Northern Ohio) in 2024 to enhance solutions coverage. Similarly, Stanley Capital Partners acquired SePRO in 2024, a U.S.-based leader in aquatic ecosystem management, to build a platform around freshwater resilience. SePRO provides herbicides, biological control agents, and monitoring tools to address invasive species, water quality degradation, and climate-induced eutrophication.

Meanwhile, in the PIB space, Bayer's AgraQuest acquisition in 2012 and a recent flurry of activity around ecologically friendly pest control consolidation (Gridiron/Greenix, Citation/Aptive) show precedent, appetite and demand for solutions to help address a growing risk posed to industry and society. The VC opportunities in climate adaptation tech then reveal themselves to be seeding and cultivating a crop of CAT innovation solutions- ready-made acquisitions for Private Equity platform plays.

I don't have all the answers, and the potential opportunities in CAT are so vast that there are better placed people out there to talk through the exit strategies of wildfire CAT solutions, which seem heavily tied to the tricky B2G route and likewise with innovations helping their customers with heat risk.

I suppose public sector and health plays seem the obvious place to start. This isn't to say there aren't exit strategies, I'm just not as familiar with the space- one for discussion at The Drop next week!

I would love to hear from any investors within CAT with portfolio companies in these fields about how they see the exit opportunities lining up.

Final thoughts

That's a lot covered in what was supposed to be a brief primer, but hopefully I've managed to demonstrate that there are venture backable opportunities within the CAT space, even exits. They will not be so easy to find as their brothers and sisters in the mitigation realm though — the space is just more nascent, less well defined and most of the current literature focuses solely on the need for "resilience", the "gap" and general well-to-do notions that we "need to do something" about this current crisis but without offering a real "how" we get there.

I would argue that CAT is how we get there, or at least one way. In all the various guises these technological innovations take shape they offer one of the largest opportunities of VC investment within our lifetime. Climate adaptation is currently populated by reports, consultants and think tanks and is crying out for innovation that knocks a couple of zeros off how much financing an adaptation project costs. We're going to need these solutions, probably sooner than a lot of us think and right now might be the best time to start investing in some….

Climate Adaptation Tech- What is VC backable? (Drop Ripple, 2:45pm)

Link to Luma: https://luma.com/073c0ddg