Why VCs Are Investing in Climate Tech Beyond Carbon Capture

Lucas: So there's this narrative that climate tech venture capital is all about carbon capture - suck CO2 out of the sky, sell credits, save the planet. And that's real, but it's not where the bulk of the money is going in 2026. Luna: Where is it going, then? Because whenever I scroll through climate headlines, it's always direct air capture this, DAC that.

Lucas: Right, the flashy stuff. But the actual venture dollars - especially from the smartest climate funds like Breakthrough Energy Ventures and Lowercarbon Capital - are flowing into what I'd call 'boring physics problems.' Industrial heat, green steel, long-duration storage. Things that don't sound sexy but move gigatons.

Luna: Give me a concrete example. What's a startup in that space that's actually getting funded today? Lucas: Rondo Energy. They make what's essentially a giant brick battery that stores heat at over 1,500 degrees Celsius.

You charge it with renewable electricity when it's cheap, then release that heat for industrial processes - cement, chemicals, food processing. They raised a $60 million Series B in late 2025 led by Breakthrough Energy Ventures and Microsoft's climate fund. And they're not alone. Luna: So it's about decarbonizing the stuff that can't just plug into a battery - the actual thermal energy that industry needs.

That's a huge market. Lucas: Exactly. Roughly 25% of global energy use is industrial heat. Electrifying that with renewable power and storage is a trillion-dollar opportunity.

And VCs are waking up to it because the policy tailwind is finally real - the Inflation Reduction Act's 45Q and 45V tax credits changed the unit economics for these projects. Luna: What about steel? That's another hard to abate sector. Is there venture activity there?

Lucas: Big time. Electra - a startup out of MIT - is using low-temperature electrolysis to make iron from low-grade ores, which cuts emissions by something like 90% compared to traditional blast furnaces. They raised an $85 million Series A in early 2026. Lowercarbon Capital led it.

And you look at the investor syndicate - it's all climate specialists, not generalist VCs. Luna: Why aren't generalist VCs piling in? The numbers sound compelling. Lucas: Two reasons.

First, the capital intensity is higher than SaaS - you need tens of millions before you even have a prototype. That scares firms used to writing $2 million cheques for software. Second, the timelines are longer. A steel plant takes five to seven years to commercialize.

Most VC fund lives are ten years. So unless you have dedicated climate funds with longer duration, it doesn't pencil. Luna: And that's where the specialist funds have an edge - they structure their funds to match the asset timeline. Lucas: Exactly.

Breakthrough Energy Ventures launched with a 20-year fund life. Lowercarbon has a similar philosophy. That lets them invest in Rondo or Electra without sweating the exit in year seven. Luna: Speaking of exit timelines, look at the public markets.

ARKK, the innovation ETF, is up nearly 5% in the last five days. ARKG, the genomics one, up 9%. That suggests some appetite for long-duration science bets is returning - even if it's not climate specifically. Lucas: That's a great point.

The sentiment spillover matters. When ARKK's up, LPs feel better about allocating to venture. And when LPs feel better, funds raise faster. We're seeing that in climate tech - Q1 2026 was the biggest quarter for climate venture since 2021.

Luna: This kind of deep dive is exactly why I love doing this show - you get real, specific, actionable frameworks. If today was actually useful to you, the way these stay ad-free is listener support - buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that keeps us independent. And honestly, we get to dig into the stuff that matters without chasing clicks.

So if you're getting value, that's the best way to keep it going. Luna: All right - so back to the steel story. Electra's process uses renewable electricity to refine iron ore at 60 degrees Celsius, not 1,600. That's a fundamentally different chemistry.

Lucas: Right. And the ore they use is low-grade - what the industry calls 'waste'. So they're turning a liability into a feedstock. The unit economics get interesting because the input cost is near zero.

That's why VCs are excited - it's not just green, it's cheaper on a per-ton basis once you scale. Luna: Cheaper green steel - that's the holy grail. What about long-duration storage? Because lithium-ion is great for four hours, but not for 24 or 100.

Lucas: You've got a bunch of approaches. Form Energy is doing iron-air batteries - cheap, abundant materials, 100-hour discharge. They raised a $450 million Series E. There's also companies like Malta, which uses molten salt and antifreeze.

And startups like Hydrostor, which pumps compressed air into caverns. All of them are getting serious venture dollars now because the grid needs 10 to 100 hour storage to handle renewable intermittency. Luna: And the policy piece - the IRA's 45Q and 45V - how does that actually change the deal math? Lucas: So 45Q gives a tax credit per ton of CO2 captured - up to $180 per ton for direct air capture, less for industrial capture.

That turns a negative-cost project into a positive one. For storage, 45V offers a credit per kilowatt-hour discharged, up to $50 per megawatt-hour for new standalone storage. That's huge for long-duration projects where the upfront capital is steep but the operating cost is low. Luna: So if you're a founder in this space, you're basically building a project finance model with a tax equity layer.

That's a very different skill set from SaaS. Lucas: Completely. And that's why a lot of generalist VCs are sitting it out - they don't have the internal expertise to underwrite a 45Q stack. The climate specialists who came from energy or project finance have a massive edge.

Luna: Are there any sectors within climate tech that you think are being overlooked? Something that doesn't have a Lowercarbon or Breakthrough Energy writing cheques yet? Lucas: I'd say geothermal - but not the traditional kind. There's a new wave of startups using fracking techniques from oil and gas to create artificial geothermal reservoirs.

Companies like Fervo Energy and Eavor are drilling horizontal wells and circulating fluid to extract heat. Fervo raised $244 million in 2025. But the category is still tiny relative to its potential. The Earth's core is a 24/7 baseload energy source - no intermittency, no batteries needed.

Luna: And the technology is borrowed from an industry that has a lot of experienced engineers who might be looking for a transition. Lucas: Exactly. That talent pool is a hidden asset. A lot of former oil and gas engineers are now working at Fervo or Eavor.

They bring decades of drilling expertise. That's something software-first VCs might miss. Luna: So if I'm an LP looking at climate venture, what should I be tracking beyond the usual suspects? Lucas: Watch the deployment pace of the 2022 vintage funds.

They raised a ton of capital - Lowercarbon's $800 million fund, Breakthrough Energy's second fund at over $1 billion. If they're putting money to work quickly into industrial heat, green steel, and storage, that's a signal. Also watch the follow-on rounds - if a startup like Rondo gets a Series C from a crossover investor like TPG or GIC, that validates the thesis. Luna: And the public market data - ARKK and ARKG up this week - that's a sentiment indicator.

If innovation stocks keep rallying, it'll be easier for climate tech companies to eventually go public or get acquired at good multiples. Lucas: Right. And that's the eventual exit path. We're not seeing many climate tech IPOs yet - the companies are still too early.

But the M&A is starting. Shell just acquired a stake in a thermal storage startup. That's a sign that the incumbents are paying attention. Luna: So the headline is: follow the boring physics, not the flashy capture.

Lucas: That's the takeaway. The venture dollars that will actually move the needle on climate are going into heat, steel, storage, and geothermal. The carbon capture story is real, but it's a smaller piece of the pie than the marketing suggests.