The Grim Outlook For Climate Tech

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At a time when next-generation technologies need to be developed to decarbonize the global economy, private investors are still holding back. The final quarter of 2023 was the worst since 2020 for global climate technology fundraising.

Climate tech companies will raise $32 billion in funding in 2023, down 31% from the previous year, according to data released today by analytics firm Sightline Climate. Overall, there were also fewer deals, marking the first annual decline since 2020. Deal sizes and total amounts were reduced or blocked across the board, consistent with a reduction in initial fundraising across all stages of the fundraising cycle, from seed to growth. Investors face the possibility of rising interest rates and a recession. It looks like something similar could happen in 2024.

Group approach

Sightline data shows that climate technology is now in second place and investors are in a holding pattern, waiting for overall economic conditions to improve and their hopes in recent years to come to fruition. Considering how much they suffered from the failure of green technologies in the 2010s, it is not surprising that they are trying to tread carefully. The decline in startup deals is also a sign that fewer entrepreneurs are willing to take risks in new ventures. But time is running out to bend the global emissions curve; Disruption will require more investors willing to take first-mover risks, and more mature companies will have to prove they are worth taking those risks.

The rate of companies “moving” from one level of fundraising to another has continued to decline since the start of 2022, as companies remain resilient rather than trying to grow too quickly and getting stuck in product and market space. This means less capital is available for startups, which explains why seed and Series A funding fell in 2023 for the first time since 2020. lower profits.

“People are having a huge discussion about what the launch of these climate technologies will look like, but it's still so early stage for the team that it's hard to say,” Sophie Purdom, Managing Partner at venture capital firm Planetia Capital, told me.

Climate tech companies are reluctant to go public; Many have experienced fires in recent years, such as electric bus maker Proterra. Regardless, the most promising path forward may be to acquire large industrial or energy companies, including large oil and gas companies that are facing enormous decarbonization pressures and are urgently looking for tailored solutions. Acquisitions could increase this year, especially for startups looking to leave the venture path and enter the market on the cheap.

But not all companies will reach the exit door. Air conditioning technology will likely see a healthy decline, Purdom said: “A lot of businesses will close this year, but that's normal. It would be a very bad situation if there was a big explosion instead of letting the air out of the tire slowly.” "

Until winners from the current generation of startups are identified, the flow of venture capital funding will likely decrease. But 2024 may provide some answers, and it will be the year that some of the more mature companies get the chance to prove their strength by signing or awarding their first major customer contracts or setting up unique factories.

“Rubber will start to meet demand in 2024,” said Clay Dumas, founding partner of Lower Carbon Capital. “Some early winners will be identified, which will lead to increased investment and the creation of new companies.”

Area of ​​dispute

There have been several large deals taking place this year, particularly in the electric vehicle battery sector, thanks in large part to the massive influx of public funding achieved in previous years. And with some major federal funding announced in 2023 (such as the US Department of Energy's $1.2 billion commitment for an air capture plant), there's reason to expect more private funding next year.

Another important question is whether interest rates are stable. If it does, “I think the contraction will reverse,” said Scott Jacobs, chief executive of infrastructure investment firm Generate Capital. Jacobs told me he's interested in new technologies like carbon capture and hydrogen, especially the boring but growing solar energy.

Wall Street View

Climate technology funding focuses almost exclusively on emissions reduction initiatives; Climate adaptation technology has not been taken into account. That could change this year, says Christian Hernandez, a partner at VC 2150, which is primarily interested in large financial institutions, which have the most to lose if their owners or the assets they insure are damaged by flood or fire: a lot. There is talk of adjustments and banks and insurance companies will push for them because they have large risk pools. "

The IPCC report says we face a climate-changed future. This means higher energy prices.