Implications of $1.8T in Energy Transition Investment, $20M Award to ION, Industry Woman of the Year, and More

Happy summer VoLo Earth community!

In recent years, Satya Nadella, the visionary CEO of Microsoft, has championed the idea that "every company is a software company." This concept has become a universal truth, reflecting the profound integration of digital technologies into the core operations of businesses across all sectors.

We see a similar transformation with the Energy Transition. Just as digital technologies and software evolved from niche applications to become fundamental pillars of businesses, the Energy Transition is set to permeate every industry.

The Energy Transition represents some of the largest total addressable markets (TAMs) in the global economy and encompasses the fastest-growing sectors at scale. Investment in the Energy Transition surged to nearly $1.8 trillion in 2023, marking an astonishing 90% increase since 2020, the year VoLo Earth was founded. This is on track to hit $2T this year. Forecasts suggest this investment could soar to between $5 trillion and $7 trillion by 2030. This explosive growth is projected to generate a market capitalization of $50 trillion to $100 trillion by 2040, capturing a substantial share of the global market cap.

Why Now?

The question of "Why now?" is a great place to start, and the answer is quite straightforward: energy consumers are always on the lookout for the best technology that offers the best service at the lowest cost. Traditionally, commodities have held this position. However, in recent years, manufactured technologies have emerged as the most cost-effective and highest quality options. This shift comes after decades of support, and subsidies, that have driven down costs and gradually built the necessary infrastructure. As highlighted in a recent report by the Rocky Mountain Institute, manufactured technologies often outperform commodities in terms of cost and speed, and that new solar and wind output will exceed electricity demand growth this year.

But for renewable energy to truly surpass commodities in terms of cost and feasibility on a large scale, the surrounding infrastructure needs to expand. This expansion is creating new multi-billion-dollar markets, including those for connectivity solutions, financial services, software ecosystems, and supply chain technologies.

And, it goes without saying, demand for Energy simply… can never go away.

The Investment Story

Investments in energy transition companies are where this story begins. These companies' projects generate revenue across the value chain and drive market cap expansion across sectors. (And just a friendly reminder: while this all sounds incredibly promising, please don’t base any actual investment decisions solely on this summary. Always do your own research and consult with a financial advisor.)

Capital Flows:

• Infrastructure Capital: In 2023, $1.8 trillion was invested in energy infrastructure, including solar, wind, electric vehicles, and heat pumps. This represented a 17% increase from the previous year, and a 24% CAGR from 2020.

• Revenue Generation: For every dollar invested in energy transition infrastructure, additional money (somewhere to the tune of $3-$5 per VoLo Earth sub-sector deep dives and operating experience) circulates up and down the value chain to produce, deliver, and operate that infrastructure. For example, installing a new solar farm pays solar panel producers, logistic companies, local contractors and support/maintenance, and utilities may upgrade power grids - further reverberating the former.

• Profit Margins (EBITDA): As investment dollars move through the supply chain, companies capture profit. On average, as companies reach full scale, $0.30-$0.70 is captured as profit, with the rest covering costs like labor, rent, and utilities. This is based on VoLo Earth market analysis of mature and early stage companies within 17 submarkets of the energy transition across 13 value chain stages, and of course, still has room to vary.

• Market Cap Creation: Applying EV/EBITDA multiples from comparable public markets, this $0.30-$0.70 in EBITDA translates to $10-$20 of market cap for every dollar invested.

Market Cap Implications

If $1 invested leads to $10-$20 in market cap, then for each $1 trillion of investment, we can expect $10-$20 trillion in market cap. If Energy Transition investments continue to grow at the current ~20% annual rate from $1.8 trillion, we will reach $5-$7 trillion by 2030, potentially creating $50-$100+ trillion in market cap by 2040.

The decoupling of emissions and economic growth is proving clear as the inverse becomes evident. Cleantech is already becoming an increasingly significant contributor to GDP growth globally - as the Energy Transition diffuses throughout all industries, this will become more true.

The VC Opportunity

For early-stage companies, this presents a substantial opportunity. For the sake of continuing the logic, let's say $10 trillion of the forecasted $50-$100 trillion is captured by all early-stage companies which emerge and mature over the next decade. The generally accepted rule of thumb in the Venture Capital industry is a targeted 3X return on average, which means for a $3 trillion return, the industry as a whole would need to invest about $1 trillion over a decade. This translates to an annual investment capacity of $100 billion, compared to the current $50 billion average annual deployment. Even if the ratio of value creation from new entrants to incumbents shifts, the order of magnitude and direction presents a compelling argument for the gap in annual VC deployment into the Energy Transition.

Addressing Biases and Opportunities

Many investors view the energy transition through one of two lenses: either as politically motivated and misaligned with their return goals, or as primarily an impact investment where returns are secondary to impact. However, the capital stack for the energy transition is maturing. In 2023, a record $57 billion in new capital was dedicated to climate infrastructure across the private equity industry. Yet, there's still a perception lag, with the energy transition often relegated to ESG budgets.

As the perception shifts and recognition of the energy transition's mainstream economic impact grows, those investing now are positioned to realize substantial returns. For venture capital, this landscape offers unparalleled opportunities to drive and benefit from this global transformation.  Billion-dollar growth stage development strategies are already emerging in Europe, the Middle East, Southeast Asia, and the US, targeting this value chain segment. With close alignment of verticals, we can look to SwissRe’s value chain map as a high level framing of the core growth vectors within Buildings, Transport, and Industry:

Conclusion

The energy transition is more than just a trend; it's a profound opportunity that mirrors the digital revolution, poised to reshape every sector of the economy. The significant investments and market cap growth projections underscore the vast potential and critical need for continued capital inflows. For venture capital, this landscape offers unparalleled opportunities to drive and benefit from this global transformation. Those who understand the energy transition's transformative power and invest now are poised to reap substantial rewards, fostering a greener, more sustainable future.