To most, emissions of hundreds of millions of tons of CO2 per year would constitute a problem – but in climate tech, it’s an opportunity for VCs investors. The concept is simple; as governments and companies face pressure to limit their emissions, technological advancements have brought down the cost of environmentally friendly methods, and are beginning to make them a viable alternative to traditional polluting processes.
But while climate tech seems like a slam dunk for investors – its potential has been compared to that of high tech – the sector comes with a few significant challenges, and investing in it isn’t everyone’s cup of tea. Still, that hasn’t stopped a sizeable army of Venture Capital (VC) firms, some of them even focusing completely on climate tech. Can they brave the storm and help turn carbon into cash?
Read also: 10 Climate Tech Venture Capital Firms You Should Know
Brief Overview of the Climate Tech
Falling under the umbrella of Greentech – a broad term that describes any environmentally beneficial technology – climate tech zeroes in on reducing greenhouse gas emissions (primarily carbon dioxide, which makes up the majority of emissions and is the primary culprit of climate change). To compare: Greentech involves countless technologies like recycling and wastewater management, while climate tech focuses on emissions by, for example, reducing agriculture’s carbon footprint or developing carbon capture methods.
Though exact classifications vary, the sector is generally divided into six subsectors (as classified by Nasdaq): energy, transportation, industrials (manufacturing and resource handling or sourcing, like mining), buildings, agriculture (food and land use), and carbon tech (decarbonization and carbon accounting). Some of the subsectors are already pretty established; climate tech in energy, for example, has led to renewable energy as an alternative to fossil fuels, while its presence in transportation resulted in electric vehicles and even aircraft.
Read also: Top 5 Green Tech Startups in 2024
Climate Tech Venture Capital Investment Trends
Generally, climate tech is on the rise; as detailed by Climate Tech VC, the sector had about 2,600 companies rake in over $142 billion in investments since the start of 2020, reaching a CAGR of 32% by the end of 2022. Over the last decade, the sector’s share of venture capital and private investment rose from just under 2% to around 10%. Still, growth has been slowing recently. Investments took a hit in 2023 with a funding decrease of 30% and CAGR of 23%, according to Climate Tech VC; a report by the professional service company PWC even puts the loss at 40.5%. This, according to PWC, was due to ‘geopolitical turmoil, sinking valuations, inflation and rising interest rates’. Plus, mature technologies like solar and wind farms, their capability and markets having outgrown the startup stage, no longer receive as much funding.
Climate tech is a tricky field for investors & VCs. Many might still be spooked by cleantech’s financial bust in and around 2010; a handful of factors, including a recession, cheap natural gas, and nonexistent demand for its products, created a perfect storm and caused the sector to collapse in on itself (as reported by Techcrunch). Though it’s now back with a vengeance, the incident highlights some harsh truths for climate tech. The field is rooted in innovative yet risky tech – risky in the sense that much of it is untested and might take a while to make an impact, if at all (as described by McKinsey). That leaves its immediate commercial viability uncertain. The long incubation times are also an issue since climate VCs often favor shorter timelines that are incompatible with such complex tech.
These problems are made hairier by the difficulties faced by new tech trying to break into an established industry with legacy infrastructure, habits, and connections. This rings especially true for industry and agriculture: the biggest emitters of them all (contributing 34% and 22%, respectively, to all emissions). But according to the PWC report, industries with a high emissions reduction potential (ERP) have seen less VC investment than others (though this is beginning to shift). The report argues that since many mature technologies already exist, these now seek heavy investments from governments and banks rather than VCs. Still, while McKinsey predicts that 90% of baseline manmade emissions could be reduced with existing climate tech, a report by the Economist estimates that early-stage funding is still not enough to reach net-zero by 2050.
5 Leading Climate Tech VCs & Investors
1. Breakthrough Energy Ventures
There are countless climate tech VCs, but this list will focus on some of the firms that are entirely focused on the sector. One of them is Breakthrough Energy Ventures, a VC operating under the Bill Gates-founded project Breakthrough Energy, whose concept revolves around achieving net-zero greenhouse gases by 2050. The fund heaves with money; when it was founded in 2016, its directors were collectively worth $170 billion (as reported by Quartz), and has since invested $3.5 billion into over 110 companies from young to more mature. Notable investments include CarbonCure, a 2021 X Prize winner that developed a method of storing CO2 in concrete, and fusion power company Commonwealth Fusion Systems.
2. Pale Blue Dot
Across the Atlantic lies Pale Blue Dot, a VC based in Sweden that specializes in investing in American and European pre-seed and seed climate tech startups – that’s finance speak for companies at the infant stage. As such, its fund and ticket sizes aren’t as big as you’d expect from a firm dealing with more mature companies; Pale Blue Dot has two funds, sized €87 million and €93 million respectively, and its ticket sizes range from €500,000 to €1.5 million. It has over 20 diverse companies in its portfolio; examples include BettaF!sh, who aim to create a seaweed-based tuna alternative, and Cosmic Aerospace, a company focused on electric aircraft.
3. Energy Impact Partners
US-headquartered Energy Impact Partners focuses on – you guessed it – the energy sub sector of climate tech. It invests in pre-seed to late stage companies, and advertises a strategy of bringing together newcomers and veterans to scale things up, thereby addressing some of the issues of investing in climate tech. It now has $4 billion in assets under management across the world and has invested in over 110 companies, through which it claims to have saved over 11.3 million megatons of CO2. Energy Impact Partners’ many investments include steel decarbonization company Boston Metal and AtmosZero, who design industrial electric boilers.
4. Climate Capital
Climate Capital, an early-stage climate tech VC headquartered in the US, takes a different approach. Rather than honing in on one subsection of climate tech, its founder Sundeep Ahuja believes that since climate affects so many industries, it’s better to stand back and pick out the most promising companies from across a range of sectors (as reported by Invested in Climate). Its check sizes range from $25,000 to $50,000, though it also provides an opportunity for its syndicates – specialist investors – to invest another $50,000 to $200,000. The firm now supports over 350 projects; it’s invested in companies involved in energy, carbon management and monitoring, weather and disaster monitoring, transportation, agriculture, meat alternatives, and biotechnology.
5. World Fund
With a goal of decarbonizing the economy, German climate tech VC World Fund focuses on early to growth stage companies; the latter are young companies that, having established their potential, now need to raise more money, hire more staff, and evolve their business model into a sustainable one. World Fund has invested in 16 climate tech companies, including several focused on the buildings subsector. Recently, it raised €300 million in its first fund – setting a European record for climate VCs – and plans to use it to help European climate tech companies that, according to managing partner Danijel Višević, have a history of being killed off once they got past the infant stage (as reported by EU Startups).
Why Should VCs Continue to Invest in Climate Tech?
Despite the issues plaguing climate tech, the above VCs investors – and more – are set on tackling them head-on. They have good reason to; the market, already worth $20.34 billion, is still growing. Though investing in cleantech hasn’t always been smooth sailing, mature climate tech products are hitting their stride; electric vehicles, for example, are revolutionizing the auto industry, and their impact is now seeping into other areas of transportation such as aviation. Solar power has also become a staple in many parts of the world. Now, as investors are increasingly eyeing high-ERP technologies (as highlighted by the PWC report), newer innovations such as carbon capture, green hydrogen, and alternative foods could see this growth too. Of course, the cleantech bust of the previous decade might cause investors to think twice. But there are signs suggesting that climate tech is different; as opposed to cleantech, it has a focused and measurable goal, its costs and efficiency are now competitive with traditional methods, and there are widespread political efforts and clear-cut frameworks for emission reduction and clean energy (as reported by TechCrunch and Fortune).
Read also: Top 6 Clean Tech Companies & Startups in 2024
Bottom Line
Climate tech, for all its promise, is not without its issues; for some investors, these might be enough for them to put their money elsewhere. Still, it has one obvious factor on its side: the climate itself. As heatwaves sweep the planet and sea levels rise, climate change is becoming harder to ignore – for people as well as companies and governments, many of which now have the target of reaching net-zero greenhouse gases by 2050 and need ways to meet it. This has created the ultimate market niche for climate tech, and in some sectors, it’s already raking in cash. But there’s still a long way to go; another PWC report finds that the world must ramp its decarbonization rate up by a factor of seven if it is to meet its 2050 target. Save for a nuclear holocaust, the only way to achieve this is climate tech – and climate tech needs investors. Will they come through?
