VC funding for climatetech startups has significantly decreased in the first half of the year. But as investors favour smaller deals, more entrepreneurs are raising money this year than last.
Canary Media’s chart of the week translates crucial data about the clean energy transition into a visual format.
Despite the fact that funding for climatetech firms is off to its worst start since 2020, the situation is more complicated — and possibly less dire — than that number might indicate.
According to recent data from Climate Tech VC, which tracks investment in climatetech, just over $13 billion was invested in climatetech startups globally in the first half of 2023. This is a considerable decrease from the nearly $22 billion startups raised in the first half of 2022.
By investing riskier, early-stage concepts that might find it difficult to obtain finance from a bank or other more traditional sources of capital, venture investment helps possible climate solutions get off the ground. Startups are currently employing venture capital to try to tackle unresolved problems such as decarbonizing systems for creating cement, growing meat in bioreactors, drawing CO2 out of thin air, and making home electrification easier.
Kim Zou, co-founder and CEO of CTVC, says that despite the persistent slowness in this crucial area of climate finance, there is no need for fear.
Instead, she claimed that it shows a change in investors’ priorities for climatetech. Venture capital firms are now directing funds towards smaller investments in early-stage climatetech companies and away from so-called “megadeals” that pour enormous sums of money into more established, capital-intensive enterprises working on things like EVs.
The data accurately depicts this narrative: Although VCs are funding fewer startups in the climatetech sector overall, they are funding more businesses. The number of climatetech businesses that raised money increased from 586 in the first half of last year to 633 in the first six months of this year. For the earliest-stage firms, the increase is even more striking: 34% more seed-stage businesses got investment in the first half of 2023 than in the same period in 2022.
Mature climatetech businesses, meanwhile, have faced difficult funding conditions and increased need to show investors that they are profitable and have exit options, such as going public or finding a suitable corporate buyer. In recent years, EV and energy businesses received a large portion of this later-stage funding; but, due to the shift away from more established firms, each of these sectors had a 50% decrease in funding in the first half of this year compared to last. The markets for those products are currently “relatively saturated,” according to Zou, who also noted that “we’re seeing an uptick in early-stage activity concentrated in unlocking decarbonization, so things up and down the value chain — critical minerals, mining, EV charging, and deployment of heat pumps.”
The funding slowdown this year is a continuation of a continuous decline from the golden days of late 2021, when venture capital investment peaked historically, both for firms in the climatetech sector and generally. However, in Zou’s opinion, this pattern can be entirely normal.
“2021 and the beginning of 2022 was really the market peak,” she added. “There were crazy deals, crazy valuations getting done, that were not sustainable. Some investors would say that was almost too much of a peak.” “So one could also read this as, rather than being in a free-fall market decline, we’re coming back to pre-peak — a more sustainable investment ecosystem, where deals that should be done are getting done, at a reasonable valuation.”
She said that in due time, we’ll be able to determine whether or not that perspective is accurate. “The asterisk to that is that Q3 and Q4 are typically where we see the most activity,” she said. “So really that’s where the question lies.”
