Steve Smith is the President of National Grid Partners and Group Head of Strategy, Innovation and Market Analytics at National Grid.
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Cleantech is having its moment, with investments reaching new heights in recent years.
Even as the broader tech industry finds itself in a reset, a trifecta of tailwinds are making 2023 an ideal environment for cleantech startups. Much has been made of the maturing EV and solar industries, but I believe hydrogen, in particular, is poised to break out and reshape global energy markets.
Done right, hydrogen generates electricity with zero carbon emissions, creating only water vapor. It sounds downright magical (though it’s really only chemistry). This golden goal has captivated entrepreneurs for decades, but we haven’t yet seen innovation at scale. Here’s what’s different this time around:
1. Corporations are now the biggest buyers of clean energy as they seek to reduce emissions. A full 63% of the Fortune 500 (paywall) have already committed to emissions reductions, and we’re seeing more momentum every week.
2. The London School of Economics reports more than 5,000 national climate laws have been passed worldwide over the past dozen years. Leading the way: The U.S. Inflation Reduction Act, which directs nearly $400 billion to energy innovation.
3. Investors are expected to underwrite roughly $40 trillion over the next three decades to move away from fossil fuels. Forty trillion. That’s a mind-bending number.
What Hydrogen Entrepreneurs Need To Succeed
Alas, launching a new clean fuel like hydrogen isn’t as simple as getting some coders together and cashing out to Big Tech a few years later. To succeed, hydrogen entrepreneurs must avoid the mistakes of their clean-energy predecessors—the investors, founders and operators in the early 2000s who underestimated the resources and government support required to scale and compete with fossil-fuel alternatives that have more than a century’s head start.
To avoid those pitfalls, hydrogen entrepreneurs—and their employees and investors—must embrace crucial realities. My colleagues and I have had countless conversations with stakeholders in the space. Based on these conversations, our group has curated the best insights into a playbook for entrepreneurs tackling the massive hydrogen energy market opportunity. (Consider that Bloomberg anticipates one hydrogen generation technology alone, electrolyzers, will rack up $130 billion in sales by the end of this decade.)
For starters, it takes far more capital to scale a hydrogen-focused startup—roughly five to 10 times more than a typical Silicon Valley software venture—because hardware infrastructure simply costs more. The time frame for returns is longer too; entrepreneurs should expect a decade or more before an exit due to the time required to demonstrate progress as the market matures.
It’s also crucial to develop hydrogen innovation that fits into existing industrial processes. No matter how we create energy—even with zero emissions—people are still conditioned to expect energy delivered and priced as a commodity. Moreover, operators mindful of end-user costs and other bottom-line numbers usually resist disruption to operations for new hardware ramp-up. Overcoming that long-held inertia is almost always complicated and requires winning over myriad stakeholders. It can be pull-your-hair-out frustrating at times.
The upside for hydrogen entrepreneurs is massive, but it’s a complex market with many applications. Those considering building a company can quickly be overwhelmed when considering where to start.
Getting Started With A Hydrogen Startup
Here I revert to classic advice: Follow the money. In 2022, VC and PE firms invested nearly $3.7 billion in hydrogen, according to CB Insights data—a greater spend than any prior year in the hydrogen market and almost double the 2021 figure.
Within hydrogen applications, consider focusing on the two biggest markets: Hydrogen production and end-use cases like vehicle fueling infrastructure and fuel cells.
Both applications require reliability, price competitiveness and integration with existing systems—not easy technologies to deploy and scale. But entrepreneurs will be aided by those tailwinds outlined above, which amount to a growing appetite for innovation in traditionally risk-averse industries thanks to corporate decarbonization mandates and public demand. I believe those markets could quickly multiply in size as more players in the space gain momentum.
Investors will be a critical partner on any hydrogen entrepreneur’s journey, which can be far longer than those in other industries. While money of course is usually good, in the hydrogen market, the much-ballyhooed investor “value-add” is essential to get right.
Seek out hydrogen-specific market expertise, partnership networks and technical acumen—investors steeped in conventional SaaS software won’t be much help securing permits for a deployment in Texas. Ask potential investors hydrogen-centric questions, and talk with other clean-energy entrepreneurs they’ve invested in. Entrepreneurs deserve investors who are committed to their business; understand industry lingo, dynamics and timeframes; and are in it for the long term.
Conclusion
Today’s market tailwinds are poised to take hydrogen-powered clean energy from a nascent idea to a true force in the battle against climate change. Entrepreneurs who understand the lessons of Cleantech 1.0 and internalize the requirements of today’s hydrogen markets have a unique opportunity to build enduring companies—ones that can fundamentally reshape how major industries consume energy.
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