Where are climate tech investors focusing their funds?

TL;DR

• While VC funding going into climate tech has declined for a second year in a row amidst tough market conditions, the share of global VC funding being allocated to climate tech companies has more than tripled within the last decade. 

• In terms of the actual figures, BloombergNEF reports that climate-tech companies raised as much as $51 billion in VC and private equity funding across more than a thousand deals in 2023. 

• Today, there are 80+ climate tech unicorns collectively valued at more than $180 billion, with several companies such as Watershed, Ørsted and Climeworks leading the charge in championing a net zero future. 

• Promisingly, VC funds are increasingly being allocated to those climate tech startups with the greatest emissions reduction potential. This includes CCUS – the only category to have seen an absolute increase in investment over the past two years. 

• The current challenging market can provide opportunities for investors that exercise good judgement and discipline. 

• However, progress in other key areas is required beyond capital to ensure net zero becomes a reality. Here, Estonia stands as a shining example, with three times the number of climate tech startups per capita than the US. 

The detail

Climate tech companies are critical in furthering the net zero agenda. 

With the International Energy Agency reporting that global energy-related CO2 emissions grew by 1.1% in 2023 to reach a new high of over 37.4 billion tonnes, the development and deployment of those technologies specifically intended to accelerate decarbonisation has never been more imperative in reversing the effects of climate change. 

According to McKinsey, annual clean hydrogen production needs to increase more than sevenfold for the world to reach its net zero target by 2050. Further, the global capacity of long-duration energy storage must increase by a factor of 400 come 2040 if the power sector is to achieve net zero by that year. 

Whatever the targets, climate tech companies have a key role to play in helping humanity bridge these enormous gaps. It is, therefore, encouraging to see that the proportion of total venture capital (VC) investment going into climate tech startups is on the up. 

Critically, this data shows that the share of global VC funding being allocated to climate tech companies has more than tripled within the last decade.  

Of course, we cannot ignore the fact that the actual value of VC funding going into climate tech has declined for a second year in a row, with geopolitical issues, inflation and rising interest rates having all set private markets back. However, while the market crunch has hit climate tech startups, the fact that they continue to secure a great piece of the overall VC pie is promising.  

In terms of the actual figures, BloombergNEF reports that climate-tech companies raised as much as $51 billion in VC and private equity funding across more than a thousand deals in 2023. But where exactly have these funds gone? Where are climate tech investors directing their investments? 

Let’s explore. 

Understanding major climate tech investor strategies 

Climate 50, an annually published list of the top 50 most recognised climate investors, is a highly insightful resource providing insight into notable firms and their strategies.  

As part of this list, five awards are also allocated across different categories.  

Named the top early-stage VC in the latest edition of Climate 50, Plug & Play Ventures operates as the world’s largest early-stage investor, investing in more than 250 companies across 50 accelerator programs every year. This includes actively engaging in the climate tech space, with the firm having hosted its own climate tech innovation showcase last year, shining a spotlight on startups across the value chain including Tsubame BHB, H Cycle and Eavor.   

Energy Impact Partners also featured in the Climate 50 Awards as the top growth VC. Having been founded in 2015, the New York based investment platform has already amassed $2.9 billion assets under management with funds backed by Microsoft. Critically, EIP specifically focuses on those software and hardware companies working to decarbonise the global economy. Examples include US unicorn Arcadia that connects businesses to clean energy suppliers, and Enchanted Rock – another US firm that runs a platform aimed at decarbonising the grid. 

Top Corporate VC went to Berlin-based Future Energy Ventures – an investor founded in 2016 that is backed by both E.ON and the European Investment Fund. Most recently, it has earmarked €110 million for investment in climate tech startups, primarily focusing on those entities that develop and implement digital solutions to drive the energy transition.  

The winners of the final two categories – Top Emerging VC and the Public’s Favourite VC – went to Elemental Excelerator and New Climate Ventures respectively.  

The former is focused on combining innovative technologies with community impact, working to both solve climate change while bringing benefit to those frontline areas that are most vulnerable to adverse impacts of climate change. To date, Elemental Excelerator has invested in more than 150 companies pioneering solutions that offer direct benefits community residents. 

New Climate Ventures, meanwhile, is an early-stage venture capital firm that, like others on the list, invests in innovative carbon reduction and avoidance technology companies.  

In considering the strategic focus areas of these firms, it’s interesting to see that both hardware and software providers are on the radars of leading climate tech investors – a balance that can also be seen when looking at some of the world’s leading climate tech companies.  

Climate tech firms in the spotlight 

Some of you will have seen my deep dive into Watershed in last week’s newsletter – a climate tech company helping its customers to measure, report and reduce their greenhouse gas emissions. 

It’s a startup that I continue to follow closely. The fact that they have set themselves a target of helping to reduce or remove 1% of total global emissions by 2030, all on their own, is truly incredible. Indeed, it’s little wonder that the firm continues to attract significant attention in the VC landscape. 

In February, Watershed completed a $100 million Series C funding round that valued the business at $1.8 billion – remarkable for a company which is barely five years old. While several household names participated in the round, one that stuck out to me was Kleiner Perkins, the chairman of which is none other than John Doerr. 

Doerr has a habit of identifying promising companies in their early stages. He is perhaps best known for being an early backer of Google and Amazon, famously purchasing a 12% stake in Google for $12 million in 1999. Today, he also stands as a leading climate tech advocate, having recently donated $1 billion to fund climate research at Stanford University.  

The fact that Doerr has backed Watershed and now serves on the company’s board is testament to the company’s potential. If you haven’t already, I’d urge you to read last week’s newsletter to see why it is a shining example of a climate tech startup that can make a massive difference.  

Of course, Watershed is just one example of a multi-billion-dollar climate tech company among many. Just last year, it was confirmed that there are 83 climate tech unicorns that are collectively valued at more than $180 billion.  

From smart farming to electric vehicle companies, there are a variety of different companies covering different climate subsectors that make this list. Among these, it’s good to see that some of the most populated categories include battery energy storage and solar energy – segments that both I and Gamcap are looking to actively support. 

As well as providing this list, HolonIQ publishes the annual Global Climate Tech 1000, identifying those top climate tech startups from around the world. It’s a resource that I recommend digging into at length, but a more accessible and digestible place to start is the 15 climate tech companies to watch according to the Massachusetts Institute of Technology (MIT), a list I broadly agree with.  

Ørsted is one of those organisations. A company that has built more offshore wind farms than any other company in the world, it is showing the path that other traditional energy companies should be looking to take in the energy transition. In 2008, fossil-fuel plants accounted for 85% of Ørsted’s heat and power generation – now, renewables make up 91% of its energy portfolio. 

Alongside Ørsted, MIT has also highlighted Climeworks for its efforts in the field of direct air capture, or DAC. As its name suggests, this is an amazing technology that is capable of extracting CO2 directly from the atmosphere. And while it remains in its infancy, Climeworks is leading the charge with DAC’s commercialisation, working to build modular and scalable DAC plants that are powered by renewable energy. 

Current trends and what needs to change 

I personally find a lot of value in analysing the ambitions, goals, stories and impacts of specific investors and companies that are leading in the field of climate tech. However, it’s just as important to consider the bigger picture regarding VC investment in climate tech companies.   

This report from PwC makes for a great read. Based on the analysis of 32,000-plus deals involving more than 8,000 climate startups and the direct consulting of investors, it outlines several key VC trends in our industry.  

Interestingly, PwC highlights that there has been increasing alignment between those startups looking to tackle the greatest emissions sources and funding. Indeed, it appears there has been a direct effort from investors to allocate more capital to those startups working on higher emissions reduction potential technologies. It’s great to see that carbon capture, utilisation and storage (CCUS) investments were particularly strong here, this being the only climate tech category to see an absolute increase in investment over the past two years. 

Additionally, the PwC report also reveals that climate tech funding is typically moving away from early-stage to mid-stage deals. Indeed, the former represented less than half of all deals for the first time in 2023, while mid-stage deals accounted for more than 45% – up from around a quarter just four years ago. In the eyes of investors, this shift has emerged both because of their own concerns around the scalability of technologies, as well as startups’ reluctance to raise funds at lower valuations.  

For those looking for a summary, the conclusion is particularly interesting. Yes, climate tech investing has dropped amidst tough market conditions – however, this challenging market can provide opportunities for investors that exercise good judgement and discipline. 

Learning lessons from Estonia 🇪🇪

Without question, the world needs those very same savvy investors to step forward and work hand in hand with startups containing the potential to reduce worldwide emissions now more than ever before.  

However, we must recognise that capital can only do so much, and not be blind to the importance of progress on other fronts such as policy.  

Estonia is a country that the entire world can learn from. Having implemented several critical policy changes such as easing the burden of regulation for new firms, inviting overseas talent with a dedicated startup visa, and prioritising infrastructure developments to help key technologies scale, the country has created an incredible enabling environment for climate tech companies to thrive. 

Economist Impact outlines the results of these initiatives clearly. By 2022, the country had approximately 165 climate tech firms per million people – more than double that of the UK, and well over three times more than the US and Germany.  

At a time where net zero goals appear to be slipping away in many parts of the world, with deadlines looming ever closer and forecasts becoming increasingly gloomy, it is vital that climate tech firms are provided with fertile grounds to thrive. 

Climate tech investors themselves will play a vital role in that. However, stakeholders across the ecosystem need to work to eliminate barriers and whip up tailwinds in order for climate techs to reach their potential, scale and deliver maximum impact as quickly as possible.  

— Lew 👋

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