While climate initiatives take high priority in policy initiatives, climate tech investments are being carefully evaluated before action is taken. Investors remain cautious of how the future will affect present investments, and despite large-scale climate unicorns like Cruise and Goodleap, each with valuations over $10 billion, investors are slow to provide capital for climate tech.
In early July, Sightline Climate’s data-driven platform and newsletter, CTVC, released its report for 1H 2024, providing a comprehensive snapshot into the current state of climate tech investing. The platform tracks investment trends, deal activity, and the performance of climate tech companies, offering detailed reports and analysis to help investors, startups, and other stakeholders understand the landscape of climate technology financing.
Overall, CTVC found that climate tech venture and growth investment, totaling $11.3 billion, was down 20% compared to 1H 2023. Although investment was down from the year prior, 1H 2024 added an 8% increase in funding overall, bringing the total investment to $156 billion despite recent slowdowns..
In the first half of 2024, climate tech attempted to make a return from a challenging 2023. Investors continued their wait-and-see strategy, holding out for more certainty before funding. This caused many investment areas to decline, but it may not be entirely indicative of the future forecast of climate tech.
Early Stage Investment Declines
The wait-and-see trend continued through 1H 24, reaching early-stage ventures. Seed and Series A activity declined, along with the already-declining later-stage activity. Climate tech venture and growth investment came to $11.3 billion in 1H 24, down 20% from 1H 2023. However, there’s been an overall decline in VC action in 1H, so the trend may not be exclusive to climate tech. Some causes of the slowdown include: sticky inflation, high interest rates, and geopolitical disorder.
Although investment activity declined, investors seem to be taking action carefully, rather than fully pausing it, signifying more cautious and secure investments. At earlier stages (Seed, Series A, and Series B), round sizes were larger than in 2022 and 2023, when the market was finding its footing after the 2021-2022 climate tech mania. But due diligence may not be the only factor contributing to the slowdown—founders are also moving from equity to project finance and debt to fund their work.
Sophie Purdom, co-founder of CTVC, says this shift isn’t entirely unexpected.
“If we’re being honest, we’ve all already felt this coming — but now the data is definitive. The H1’2024 climate tech funding market has fallen back to 2020 levels. Nothing’s particularly new, though. Since the peak of Q3’21 madness, the climate tech market has been consistently constricting,” Purdom said.
Seed and Series A investment was down 11% on average, and deal activity dropped 30% for Seed and 23% for Series A. Although the total deal count declined, deal size went up. Seed and Series A both saw increases of 21% and 16%, respectively.
Purdom emphasized that the broader venture market has seen similar trends, noting, “What’s actually novel is that the downtick in funding & deals has finally reached the early stages, and that former darling companies have officially shuttered. We’re seeing a reversion to healthy levels of venture and growth funding with fewer, larger rounds of financing from equity investors. At the end of the day investing in climate tech should and must be driven by financial returns, not ethics.”
Series B presents a “Valley of Death”
Series B investments saw changes in timing and scale backs. While it’s already challenging to raise a Series B, climate tech companies now take longer to reach the milestone. Compared to 2021, it took about double the amount of time to raise Series B funding in 1H. CTVC reports that many companies are getting stuck at this funding stage. In light of this obstacle, bridge rounds are common—with the new investor expectations, companies are looking to gain time to prove themselves for the next series of funding.
Purdom noted that the 2021-2022 market mania was influenced by a zero interest rate phenomenon (ZIRP) belief. “[The belief is] many of these climate challenges need to be solved, so therefore these spaces should be big markets and the technologies could be billion dollar businesses,” Purdom said.
Purdom emphasized that this belief is different from the reality of bottoms up pricing and market sizing. Along with a quiet IPO landscape, exits have also become slower and fewer, slowing growth funding. Over time, this shifts to affect earlier and earlier stages.
Renewed Focus on Energy and Transportation
Each climate tech vertical defined by CTVC (transportation, energy, food & land use, industry, climate management, built environment, and carbon) was down in 1H 24, with an average drop of 24% across all verticals.
Vertical priorities also shifted during the first half of 2024, with energy investments overtaking transportation for the top spot. More specifically, those investments were focused on hydrogen, energy storage, EV charging, and alternative proteins. Overall, both energy and transportation remain major investment areas, with eight out of 10 1H deals coming from the two dominant verticals.
First of Their Kind Deals Excel
Overall, deal activity decreased, with 26% fewer deals compared to the peak of 1H 23. However, when deals were signed, they were significantly larger than last year’s, averaging 21% bigger.
First of their kind (or FOAK) deals made significant strides in the first half of the year. These deals notably support the first commercial-scale projects of their kind, utilizing new processes or technologies to do so. Some of the companies that raised capital include: H2 Green Steel (a green steelmaking company), Fervo (a heat harnessing energy company), and Ascend Elements (a battery recycling company).
Swedish startup H2 Green Steel reached $5.2 billion in growth funding from investors like the European Union, Microsoft, and Siemens. They intend to continue construction on the world’s first commercial-scale green street project in Sweden, with debt, equity funding, and grant support from the EU Innovation Fund.
Geothermal company Fervo reached $244 million in corporate strategic funding, led by Devon Energy, a shale oil and gas company. They intend to build a commercial project pipeline to support their first commercial-scale project in southwestern Utah.
Battery recycling company Ascend Elements reached $162m in their Series D funding, with notable investors including IRONGREY and Just Climate. They intend to construct a commercial-scale sustainable cathode precursor (pCAM) manufacturing facility, which will be the first of its kind in North America, allowing for domestic lithium battery recycling.
According to Purdom, the popularity of FOAK is due in part to the need to bridge the Valley of Death from innovation to deployment. Additional factors include customer demand and willingness to pay for the output and signing agreements with fixed prices and volumes ahead of time, which puts investors at ease.”
Late-Stage Funding Comes from Varying Sources
When it comes to late-stage funding and growth investment, deals have declined 21% from 1H 23, but companies aren’t relying on venture funding. They’re varying their capital raises to explore equity, debt, and loan. For example, 2H Green Steel paired a $372 million equity raise with a $4.5 billion debt raise.
In this stage, investors are looking for security, such as concrete proof of commercialization and ARR goals. Growth investment fell 33% and Series C remained stagnant, with deal counts down for both—on average, declining 11% from 2023.
Purdom said, “I’ll be the first to say that the strongest climate tech companies leverage the full climate capital stack—beyond just venture capital. Many of the most notable deals from the last six months came from companies graduating from equity to project finance and debt in the race to deploy, deploy, deploy.”
Challenges Cause Business Closures
Rising challenges caused some prolific companies to file for bankruptcy in 1H 2024. Lack of demand presented obstacles for new tech, such as the hydrogen-fueled regional plane engineered by Universal Hydrogen. Despite the successful launch of their plane, the company had to shutter doors after failing to drive customers. Instead, the aviation industry has shown interest in sustainable aviation fuels (SAFs), such as those produced by World Energy and Neste.
Looking Forward to 2H
Purdom noted that in the months to come, we’re likely to see the decline of tourist investors, as well as a slowing of deployment urgency by climate specialist funds. As companies founded during the climate tech renaissance of 2018-2019 approach the Series B Valley of Death, they’ll be waiting on investors to complete lengthy due diligence processes.
Purdom commented, “Growth investment and deals have also dropped precipitously. Late-stage funds are holding on to record levels of dry powder, while holding out for more concrete proof of commercialization and ARR goals.”
Although 1H has revealed a decline in investments, it’s typical for 1H to be quieter than 2H. In 2H, it’s possible we’ll see a renewed focus on climate investments. Some determining factors at play include the upcoming U.S. presidential election, the tough current macroeconomic fundraising environment, and potential AI advancements.
