Venture capitalists (VCs) are increasingly focusing on startups to tackle the climate crisis. Despite the challenges in 2023, the commitment to climate solutions remains robust. According to PitchBook, overall investment in climate tech fell 14.5% to $41.1 billion in 2023, down from a peak of $51.0 billion in 2021. Here are the key trends and insights shaping the evolving landscape of climate tech investment.
Key Trends in Climate Tech Investment
- Decline in Early-Stage Investments: From 2022 to 2023, early-stage and venture-growth deals fell by 24.8% and 34.5% year-over-year, respectively. In contrast, pre-seed/seed deal value increased by 16.2%, highlighting a focus on nurturing nascent innovations.
- Stable Late-Stage Investments: Late-stage deal value remained relatively stable, with only a 0.6% year-over-year decline.
- Muted Exit Activity: Exit activity dropped 50.5% from $18.7 billion in 2022 to $9.3 billion in 2023, a stark decline from the $106.4 billion record high in 2021.
Key Insights from Industry Leaders
Long-Term Commitment
Hannah Sieber, Co-Founder & CEO of Artyc, emphasizes the long-term nature of climate tech investments, stating, “Exits can often take 10+ years, so founders should be prepared to build their solution for the long haul.”
Challenges in Disruptive Industries
Arun Gupta, Founder & CEO of Skyven Technologies, notes the difficulties in breaking into slow-moving, risk-averse industries. Despite these hurdles, there is a growing interest in thoughtful and savvy use of capital in climate tech.
Top Climate Tech Segments in 2023
- Low-Carbon Mobility
- Industry
- Grid Infrastructure
- Intermittent Renewable Energy Sources (Solar and Wind)
Significant Deals
In 2023, 50 VC deals for climate tech companies exceeded $150 million, and nine of these exceeded $500 million, demonstrating that companies with big visions can attract substantial investment.
Climate Tech Drivers
Macroeconomic Conditions
Climate tech is influenced by broader economic trends, including high interest rates and lower fundraising activity. However, the need for climate adoption due to warming temperatures, ecosystem degradation, and pollution remains strong.
Regulatory Support
The Inflation Reduction Act (IRA) in the United States is a key enabler of climate tech deployment. Arun Gupta notes, “IRA funds are now being disbursed, having a disruptive impact on the climate tech space.”
Consumer Awareness
High energy costs over the past two years have accelerated the adoption of home energy technologies. Consumers are increasingly motivated by both economic and environmental factors to invest in energy generation, storage, and efficiency solutions.
Seeking Funding
Strategic Approach
For early-stage climate tech companies, a strategic approach to funding is crucial. Non-dilutive funding sources like SBIR grants, crowdfunding, or bootstrapping can build discipline around hypothesis testing and metric-focused growth.
Hannah Sieber advises, “Grants are powerful for accelerating a product roadmap but should align with the company’s vision.”
Venture Capital Timing
Arun Gupta recommends starting with programs like the NSF SBIR and support from friends and family, before turning to venture capital later in the company’s development.
Final Thoughts
The long-term outlook for climate tech remains positive. As Arun Gupta states, “Climate Tech has some of the best long-term outlooks because it aims to combat the exponentially increasing effects (and financial costs!) of climate change.” VCs are increasingly adapting their expectations to accommodate the longer timelines required for hardware and infrastructure projects.
In conclusion, while the climate tech sector faces significant challenges, it also offers immense opportunities. The combination of strong regulatory support, growing consumer awareness, and innovative funding strategies is driving a new wave of climate tech startups poised to make a substantial impact. As VCs continue to invest in these startups, they are not only aiming for financial returns but also investing in the future of our planet.
