Early-stage deals buck downturn in climate tech investment

Sharp declines in funding for transportation, energy and food and land use sectors drove overall weakness in later-stage funding for climate tech in the first six months of 2023.

An influx of fresh entrepreneurs to early-stage climate tech may explain why seed-stage funding for climate tech was able to increase 23 percent year-on-year in the first six months of 2023, bucking the sharp decline seen in later funding rounds.

The good news about early-stage deals was a bright spot in an otherwise downbeat report about climate tech funding for the first half of this year. Funding across all stages totaled $13.1 billion in H1, down 40 percent from the same period last year, according to a new report by Climate Tech VC, a New York-based market intelligence platform. Series C and growth-stage deals were hit particularly hard, with funding plummeting 72 percent and 64 percent, respectively, CTVC reported.

Unlike the overall dollar amount, the total number of climate tech deals rose 8 percent to 633 in H1, indicating a significantly smaller average size of climate tech deals.

“Earlier stage companies are newer and many of them are going after emerging niches within climate, so they’re not just younger versions of energy generation or mobility and transport electrified companies,” said Sophie Purdom, co-founder of CTVC and managing partner of climate-focused venture firm Planeteer Capital.

“They’re often building in these enabling spaces, where especially in a market downturn, any business model that’s driving revenue, whether through cost savings or efficiency, there’s more consumer pull for those types of products than maybe some other ones that are more capital intensive or nice-to-have. For good or for bad, lots of the Series B and C stage companies at this point are [like that],” Purdom told Venture Capital Journal.

Purdom added that “a significant amount of dry powder that’s already been committed and sometimes called to early-stage climate tech-specific venture funds, so there’s just more willingness to deploy at those stages.”

A lot of generalist investors have told CTVC recently that they have seen more resilience in climate tech sectors than in other venture-backed innovation sectors, said Kim Zou, chief executive and co-founder of CTVC. “They’ve seen valuations remain relatively high and resilient in climate tech relative to other technology areas.”

Still, investments at certain stages, such as growth, have been hard hit. Growth deals accounted for just 21 percent of total climate tech funding in H1 2023, compared with a roughly 50 percent share in prior years. In contrast, seed funding for climate tech increased 23 percent in the first half of the year from 2022, even as overall angel/seed venture funding dropped by more than 50 percent during the first quarter of 2023, the report showed.

All eyes on Q3

However discouraging the data is for the first half of 2023, CTVC expects the third quarter to reveal more about the health of climate tech funding. “If you look at the past three years since the climate tech boom started, Q3 has always been the highest quarterly amount of funding over the year,” Zou said.

The reasons for that include a lag in announcing venture deals, typically three to six months after a deal has actually closed, she explained. In addition, the third and fourth quarters are usually when funding peaks, as people try to close a round or complete a deal by year-end.

A further decline in funding next quarter could indicate a true climate slowdown, suggesting that investors are reassessing their strategies and moderating their pace as they await returns and results from their existing investments before committing to new ones, the CTVC report noted.

The overall plunge in climate tech funding was mostly driven by reduced investment in transportation, energy and food/land use sectors, which fell by 45 percent, 47 percent and 49 percent, respectively. Those sectors “have historically made up the lion’s share of blockbuster rounds,” with Northvolt’s $2.7 billion private placement deal, Rivian’s $2.5 billion round and Commonwealth Fusion Systems’ $1.8 billion round, all in 2021, as prime examples.

“Now in transportation we’re seeing opportunity less in the EV/auto direct play and more in enabling those types of companies, so EV charging, EV fleet management,” Zou noted. “Even going up the value chain to critical minerals and mining, especially with [US Department of Energy] focusing on that domestic content side of the tax credit enabling these value chains to proliferate and to have EVs deployed at scale. That’s where we’re seeing a  lot of innovation interest and investor interest.”