CTC #62 - An inside look at Canadian climate investment

Hey there,

Welcome to another issue of Climate Tech Canada! We’ve got a great guest post this week from Florent Schmahl, Chief of Staff at vertical farming startup Growcer. Florent caught up with founders and investors across the ecosystem at MaRS’ climate conference to dive into the state of climate investment in Canada.

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This week in climate tech:

• An inside look at Canada’s climate investment ecosystem

• Friendlier raises $5M to scale reverse-logistics

• Canada proposes a cap on oil & gas emissions

Let’s get into it!

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Frontline insights: Climate investment in Canada

Guest post from Florent Schmahl, Chief of Staff @ Growcer

A few weeks ago I had the opportunity to attend the MaRS Climate Impact conference in Toronto. Apart from representing Growcer, I was on a mission to uncover how Canada's climate investment space is shaping up, to discover what’s hitting home with founders, and pinpoint where Canada can really grab some opportunities in this climate transition journey.

💸 Investor perspectives

There are about 15 to 20 active venture investors in the Canadian climate scene right now according to Graeme Millen, former Managing Director at SVB, roughly 10% of what’s found in the US. Each fund has its unique investing strategy, but there are some common threads: 

Impact vs returns: Impact is a priority for most funds, but commercial returns help attract capital to maximize impact. Kristian Knibutat from The Atmospheric Fund looks for commercial rates of return “because we want to attract more capital. We realize that we're not large enough to solve the entire problem on our own. It’s important to demonstrate to the market that investors can invest and receive a commercial return." Other investors, like Renewal Funds, also look to exceed market level returns, but think about portfolio construction differently, aiming for a more consistent set of successes as opposed to swinging for the fences on every bet.

Commitment to climate: The integrity of a company's commitment to climate change is critical for climate-focused investors. Tom Boddez from Active Impact Investments: "There are those motivated to run a profitable business … but they may add a climate impact angle to their pitch without really understanding how to measure it. If tomorrow they found a more lucrative, non-climate-related opportunity, they might pivot. That's a significant risk.”

Measure what matters: Investors are responsible to their LPs and need to track and report on both performance and climate metrics. Shirley Speakman from Cycle Capital said that, “one of the things that entrepreneurs are going to need to get accustomed to is [data collection and reporting]... My LPs are requiring me to report on certain factors which means that I'm going to require the entrepreneurs to report on certain factors.”

👩🏻‍🔬 Founders’ view

Several Canadian climate tech startups, including Oneka Technology, Friendlier, Whiteboard Foods, Bug Mars, and Lite-1, shared their funding journey from the early stage to commercialization and what they wished the investment side knew about their experience:

Seed stage gap: Many founders emphasized how hard it is to secure funding at the seed stage, with some VCs expecting unrealistic milestones at an early stage. Roya Aghighi from Lite-1 said there needs to be “a shift in the mindset of investors in the Canadian landscape … For any earlier stage startups to get to the level of their requirements, there is a gap … how would a startup get there without support and without funding?”

Climate expertise: Specialized knowledge from investors is an important factor due to the complexity of climate issues and specific sectors. Aghighi, who is developing sustainable dyes from microbes at Lite-1, said “There's not enough of an understanding of your industry … the lack of understanding and the lack of support is sort of forcing all of us out right now.” Mary Dimou from Nadarra Ventures pointed out the gap in hard tech, where “there's not a ton of technical specialists in funds here that are able to actually evaluate these technologies at that early stage.”

Risk-aversion: Founders need greater risk appetite from investors and corporate customers to help get early stage ventures off the ground. Canadian investors have a tendency to favour later-stage, less risky companies or more traditional software that they’re familiar with.

Prashant Jairaj from Whiteboard Foods summed up the situation: “Different industries and categories have different runways for progress … but that doesn't mean one category is better than the other. It's just the horizon that a venture fund or general investor looks at would just need to change depending on the category. If your foundational thesis is to address the climate crisis across a variety of industries, then you need to be okay with various different runways to get to that point and not solely focus on the industry that gets you to your financial objectives in the shortest time frame possible."

Government springboard: Many founders pointed to government support as a critical tool in the climate tech ecosystem, particularly plugging the early stage gap and de-risking for private investment. Natalie Duncan from Bug Mars put it succinctly: "Non-dilutive funding was a game-changer for us, providing over $500,000 in grants that fueled our early growth without diluting equity." Jane Kearns from Evok Innovations added that "without SDTC, there would be no Cleantech in Canada today”. 

➡️ Room to grow

One of the biggest opportunities I took away from my conversations at MaRS was the need for more financing options to get things rolling. Canada's doing a great job at the starting line, providing grants and seed funding, but gaps start to show when companies shift towards commercialization. 

Getting more creative with financing, like funding hard assets or strategic capital from corporate VCs, can help our climate tech industry break out of “pilot purgatory” and make the leap to commercialization.

Compare this to the broad spectrum of tools available in the US, where companies can tap into a mix of debt, equity, and everything in between. Graeme Miller hit the nail on the head when he said, "It’s an overly simplistic approach if in Canada there's debt and there's equity. In the US there's a hundred different types of financial vehicles between the two." This variety is key because it lines up better with the risks and rewards inherent to climate-centric business models which are often capital intensive. 

I’d love to see Canada adopt this blend of diverse financing solutions. Imagine LPs adjusting their return expectations or looking at performance over longer periods, like more than 10 years. Combine that with more capital options and bolder adoption by corporate buyers and we would have all the right tools to nurture a robust, long-term climate tech ecosystem.

-Florent

💰 Funding

♻️ Friendlier (Guelph, ON) raised $5M in seed extension funding for its reusable packaging solution led by Relay Ventures and Garage Capital. The company closed a $2.3M seed round back in May of this year. Friendlier offers a platform for reusable plastic containers that can be returned for a deposit. The funding will be used to expand the sales function to meet growing demand and scale their reverse supply chain for reusable packaging. For more, check out our interview with co-founder Kayli Dale.

⚛️ General Fusion (Richmond, BC) received $5M from the Strategic Innovation Fund to advance their fusion energy technology. The funding will be used for R&D efforts in pursuit of zero-carbon fusion power by the mid 2030s.

🏅 Milestones & growth

🧱 CarbonCure expanded into Africa, supplying their low-carbon concrete technology to ARISE Integrated Industrial Platforms in Benin and Gabon. ARISE expects to deploy at more of their sites across the continent.

🔋 Cyclic Materials opened a 8K tonne / year pilot plant to test their proprietary Mag-Xtract metals recycling technology. Cyclic has also developed a proprietary liquid-based separation technology to recycle magnet feedstock, and plans to open a commercial demonstration plant in 2024.

🧪 Lite-1 took home $200K in prize money at the Spring Impact Investor Challenge, winning the TELUS Pollinator Women Led Impact Investor Challenge for their sustainable dyes solution. Lite-1 is using microorganisms to produce sustainable dyes, replacing traditional non-renewable resources and toxic ingredients.

🔋 Moment Energy and BluWave-ai are partnering with Hydro Ottawa to help manage increased load from EV charging and buildings at mobility research centre Area X.O. The project combines Moment’s battery storage with BluWave’s intelligent demand response systems, and will eventually be deployed throughout the city.

🗞️ In the news

🏭 A different cap: The federal government announced a cap-and-trade system for oil & gas sector emissions, aiming for ~35% reduction from 2019 levels by 2030. Under the system, companies will have emissions allowances that decrease over time. Firms will need to reduce emissions, buy allowances from other companies, or pay into a decarbonization fund to meet the cap.

What about the production cap? The feds went a different direction after getting burned by recent court decisions where federal rules were too broad or encroached on provincial jurisdiction. Production could increase 12% under the system, which the feds highlighted to show that it’s definitely not a production cap.

How does this net out? Another system adds complexity (i.e. on top of Alberta’s TIER system, methane targets, etc), but cap-and-trade has upsides. It targets emissions specifically (albeit not from the eventual combustion of fossil fuels, just production) and lets market forces find the most effective paths. The cap also ensures oil & gas are doing their fair share: other industries are decarbonizing, but Canada is losing ground because of oil & gas which produces 28% of Canada’s emissions.

🔥 Adapting, slowly. Canada’s adaptation efforts aren’t keeping up according to a new Synthesis Report from Natural Resources Canada. Canada’s economy is highly sensitive to climate change, and annual costs could be in the $30–62 billion / year range without new adaptation efforts.

This is worth noting when folks say Canada will benefit from climate change because of more resources in a warming North. Climate change is way more dynamic than this simple narrative and will likely offset any gains. Cities are particularly vulnerable as they’re set to bear the brunt of costs but are already struggling with a lack of funding and high borrowing rates.

The report highlighted infrastructure, health, natural resources and ecosystems as being disproportionately affected. Adaptation is under-leveraged and under-invested in - expect this to change with more extreme weather and pressure from stressed insurance providers.

In other news 

• Canada is on track to hit our 2026 emissions targets, assuming all the policies in the emissions reduction plan are rolled out. Finally, some good news!

• The feds announced plans to target enteric methane from cattle (i.e. cow burps) with a new credit system that would incentivize farmers to reduce emissions, e.g. through diet changes. The move could help farmers be competitive, as dairy giants recently announced plans to disclose methane in their supply chains.

• Canada helped launch the Cement & Concrete Breakthrough initiative at COP28 to expand the use of low-carbon cement worldwide.

• Ontario plans to add more wind and solar power to the grid after the Ford government cancelled renewable energy contracts five years ago. The province is adding 2,000 MW with regular additions of 5,000 MW over 4-6 years.

• Bruce Power announced the first ever carbon offset protocol for nuclear generation, opening up a new funding avenue for nuclear projects.

📌 Jobs

Featured postings from some of Canada’s most innovative companies. Check out roles in marketing, energy markets, customer onboarding, data science and more!

➡️ Hiring? List your posting here.

That’s all for this week - thanks for reading! If you’re enjoying the newsletter, share it with a friend!

Justin