A new era of scaling for climate funds

With $23bn raised by new climate funds so far in 2023, the largest increase in the number of funds has been in smaller vehicles under $50m.

Chalk it up to beginners’ luck, but some of the most impressive fundraises this year in climate tech have been by debut funds. In February, Galvanize Climate Solutions held a first close on $894 million for its Innovation & Expansion Fund, which began fundraising in early 2022. The fund, which has since held a final close on more than $1 billion, will invest in early- to growth-stage climate companies focused on timely decarbonization, providing both capital as well as interdisciplinary resources to help accelerate the path to commercial scale.

Capital constraints have made it harder for emerging managers in generalist funds to get funding this year, but those raising early-stage climate funds have received a lot of capital, Raj Atluru, managing partner at Activate Capital Partners, told Venture Capital Journal. “There’s been a whole remake of early-stage venture in climate. There was a whole bunch in cleantech 1.0, but a whole new set of firms have really garnered a lot of traction.”

Among those are Lowercarbon Capital, in Jackson, Wyoming and Congruent Ventures in New York. Lowercarbon, founded in 2018, raised $1.2 billion over two funds in 2021 and 2022 and is now fundraising for its Q 1 Parallel Fund for an undisclosed amount. It has led or participated in six deals in the past two months, including Breathe Batteries’ $10 million Series A round last week.

Climate tech funds raised $23 billion in the first eight months of 2023, according to a CTVC report published in early September. The fund count dropped 20 percent to 62 from 78 new funds raised in the same period in 2022, but is on track to tie the number of funds raised in 2021 by year-end, CTVC said.

The smallest funds, those below $50 million, represent the largest increase in the fund count this year, while the biggest number of funds raised was in the range of $126 million to $500 million, which accounted for one-third of new funds. Mega-funds, as one would expect, including the final close on NGP’s $700 million energy transition fund and Just Climate’s final close on its $1.5 billion fund focused on asset-heavy companies in the growth stage, comprised the majority of this year’s new asset value.

Other climate funds have been founded by veterans of anchor platforms such as BlackRock. Last year, BlackRock and Temasek Holdings launched Decarbonization Partners, which is investing in late-stage VC and early-stage growth equity companies, with a focus on technologies across clean energy, electrification, green materials and a circular, digital economy.

In September, out of its first fund, which has raised $1 billion to date, Decarbonization Partners co-led the $460 million Series D round of Ascend Elements, which manufactures sustainable, engineered battery materials for electric vehicles. The funding will be used to construct a lithium-ion battery precursor facility in Kentucky, the first sustainable cathode precursor and cathode active material manufacturing plant in North America. The firm is projecting a final close on Fund I in the fourth quarter of this year.

When allocating to the bigger funds, LPs are looking for much more experience, said Atluru. “For funds like us, raising $500 million, it helps to have a track record of being in this space for a while,” he noted. Activate Capital, founded in 2017, completed fundraising for its $500 million Fund II late last year and is already seeing interest from LPs for a third fund, which it won’t start raising until next year.

Most of the early-stage funds are also being led by experienced investors, who have worked at various other platforms over long periods of time. “They’ve joined with other folks that want to found a fund dedicated in this space,” Atluru said. “They may have been at a big platform like a generalist fund that maybe stopped doing climate and they wanted to continue. Or an older fund that’s no longer here, but maybe you had a partner who went off to start a new fund.”

One of the attractions to climate funds for LPs is that the sector and many individual companies within it are scaling, reaching a new level of maturity after prior waves of clean technology investments in the mid-1990s and mid-2000s.

“They’re now laying the groundwork for who are the platforms and funds that are going to be important investors in this next wave, which we think will be a permanent wave,” said Atluru. “And I think LPs are seeing that.”

The seventh paragraph has been revised to reflect the correct amount in Fund I, as well as the expected timeframe for a final close.