The rise of climate tech startups and the role of VC

With growing awareness of climate change and a need for urgent action for its mitigation, climate tech has become an attractive industry for most investors. According to some sources, over the last decade, the combined enterprise value of global climate tech startups increased 56 times and is likely to continue to grow. A huge surge in investments in companies of such nature has completely reshaped the landscape of venture capital, making it vital to understand the underlying concepts of the high-growth industry that is climate tech. But what are climate tech startups exactly? And who are the key players in their growth?

Climate tech startups explained

As the name clearly suggests, climate tech can be defined as technology solutions that are explicitly focused on reducing greenhouse gas emissions and addressing environmental concerns of climate change. From directly influencing levels of pollution to simply educating the general public about global warming, startups in this industry cover a rather wide array of sectors and are worthwhile taking a look at. It is also important to point out the difference between clean tech and climate tech. The latter includes any innovative business model of increased productivity and efficiency with little to no impact on the environment, while the former directly deals with GHG emissions and addresses the problem of climate change.

Evidently, all climate tech players have mitigation of climate change at the core of their operations, despite there being many different types of such companies. According to the Stanford Social Innovation Review, the climate tech industry can be split into five main categories, which include transportation, renewable energy sources, agriculture, buildings and infrastructure, and industrial processes.

Moving towards zero-emissions means of transport is likely one of the first things that come to mind when discussing climate change and climate tech. Electric mobility since 2019 has had the highest share in the global investment of all climate tech sectors. This perfectly depicts the fact that transitioning to net zero directly involves solving the issue of emissions caused by transportation via the implementation of biofuels, electric vehicles, advanced combustion engines, and many more.

Transitioning the energy supply to renewable sources is another important and widely known part of climate tech, being the second top-funded segment of the field over several years. Startups, focusing on this part of the market, usually work with alternative energy sources including but not limited to wind, solar, fusion, and biomass energy. Recently, a surge in nuclear energy investments has also been seen.

Food systems are responsible for 20.1% of global greenhouse gas emissions, thus cultivation of sustainable agriculture and responsible land use is vital. Due to high media coverage and increasing demand, investments in plant-based products and dairy alternatives have been on the rise, but this part of the industry is also relatively broad. Startups place emphasis not only on alternative food and proteins but also on practices like efficient land management, agricultural biotech, and vertical farming techniques just to mention a few.

Buildings, construction, and industrial manufacturing together account for over 50% of global emissions, making it another highly important factor in fighting climate change. Startups operating in these segments usually partake in increasing the efficiency of processes in terms of heating, lighting, and production of resources. In fact, efficient manufacturing has been one of the most invested in categories in the past years.

Even though there are many types of climate tech startups, they all have the same underlying idea of mitigating climate change in one way or the other. The increased worldwide interest in this topic due to several factors has only attracted more investments and entrepreneurs in the industry and made climate tech startups a very promising and fast-growing field.

Why now?

The world is currently experiencing an unprecedented rise in climate tech startups, and this phenomenon can be attributed to several factors. One of the primary drivers of this trend is the growing awareness of the devastating consequences of climate change. As the effects of global warming become increasingly severe, more people are looking for ways to address this issue, and entrepreneurs are seizing this opportunity to create innovative solutions. The constant work of activists and scientists from different fields helped this process of general awareness of this problem. 

As a consequence, another factor driving the rise of climate tech startups is the increasing availability of funding. Investors are becoming more interested in supporting environmentally-friendly businesses, and there are now more opportunities for startups to secure capital than ever before. This is in part due to the increasing popularity of socially responsible investing, which has led to a surge in demand for sustainable investment options. It is worth mentioning the huge boom in ESG funds that we saw in 2021. A record $649 billion was poured into ESG-focused funds worldwide that year, accounting for 10% of worldwide fund assets. That year The MSCI World ESG Leaders' index had risen 22%, compared with the MSCI World Index's gain of 15%, effectively outperforming the market. Although 2022 and 2023 have not shown such outstanding performances, this important empirical data debunks all those investors that see this type of investments as a burden and not as a way of making profits.

Moreover, the declining cost of renewable energy technologies has also played a critical role in the growth of climate tech startups. Solar panels, wind turbines, and other renewable energy solutions have become increasingly affordable over the past few years, making them more accessible to entrepreneurs and consumers alike. This has led to a surge in demand for renewable energy solutions and created new opportunities for startups to enter the market. In fact a new IRENA report shows almost two-thirds of renewable power added in 2021 had lower costs than the cheapest coal-fired options in G20 countries, which is remarkably significant news.

In addition to the economic benefits of sustainability, there are also a number of regulatory drivers that are pushing companies to adopt more environmentally-friendly practices. Governments around the world are introducing new regulations aimed at reducing greenhouse gas emissions and promoting sustainability. This has created a need for companies to find new ways to comply with these regulations, and startups are stepping up to offer innovative solutions to help them do so. We have seen some very interesting legislation in the last year, like the Inflation reduction act in the US and the Repower EU regulation. Focusing on the latter, it’s probably the most important policy in at least a decade. There are more than 360 billion dollars poured over the next 10 years addressed for the energy sector in various ways, like EV incentives, project investments, and benefits for households that improve their energy efficiency. It takes on average 7-10 years for a start-up to scale, and the average lifetime of a venture capital fund is 10 years. This means the timeline of the Inflation Reduction Act fits the start-up ecosystem in the climate space. Although it does not directly address the start-up ecosystem, it offers a general entrepreneurial stability as a solid foundation. 

The Role of VC in Climate Tech Startups

Given this recent boom in “cleantech” startups, we ask ourselves who the key players are, how the approach of venture capital backers is different to other types of startup, how their way of thinking has changed over time, and whether the current method is as successful as it could be. In simple terms, venture capital is a form of equity financing where capital is invested in exchange for equity, typically a minority stake, in a company that looks poised for significant growth. The venture capitalists can also provide other forms of backing through technological expertise or managerial experience, as these firms are usually at an early stage of maturity, but the ways in which the VC and the firm cooperate and the end result vary greatly. So where do climate startups fit into the equation?

According to Climate Tech VC (CTVC), which offers market insights into VC climate technology, over 4,000 investors took part in at least one climate deal in the United States last year, with 14 percent taking part in five or more, leading the race by quite a margin when compared to the rest of the world. Notable recent deals include included Northvolt's $1.1B growth round, TeraWatt’s $1.0B Series A, TerraPowers $750M+ growth round, RT Advanced Materials $740M, Voyah's $700M Series A, Climework's $650M growth round and EnergyX's $450m growth round joining 160+ other companies that closed a $100M+ Mega Round in Climate Tech through 2023. This evident rapid growth of cleantech funding has led to the founding of VCs exclusively aimed at this growing industry, with some of the big names including Speedinvest, Bpifrance and Pale Blue Dot, already deploying billions of dollars in an attempt to find innovative solutions for a more ecological future.

In a VC’s search for potential investments, their criteria when deciding whether to invest in climate tech deviates from being largely profit driven to considering emissions reduction potential as a key metric. This reflects a desire to avoid ‘greenwashing’, that is unsubstantiated self-presentation of carbon-efficient credentials, which many firms use today in an attempt to seem more eco-friendly without much to show for it. There are select industries gaining more traction from VCs, among which are food and agriculture, transport and manufacturing comparison to other startup sectors, and their potential to greatly reduce emissions therefore play a large role. Once a deal negotiated, the struggle between impact and returns continues. Cleantech firms tend to be highly capital intensive and slow to scale, resulting in unattractively long payback periods. Products from these firms also run the risk of being hard to differentiate from those produced by non-renewable firms, so may not attract as many customers as expected. The very competitive nature of the market is another challenge to overcome, as thinner margins don’t lend themselves well to the high returns VCs are aiming for.  

With these new obstacles to face and an ever changing economic landscape, VCs have had to alter their approach over time. Funding has seen an upwards trend, so more money is available to invest and at earlier seed stages, a good sign for startups in general but especially the capital-intensive climate tech industry. However, the fact that this funding is spread over fewer successful deals and recent fear of recession makes us question if this will lead to more successful ventures. In addition, the availability of new sources of funding through angel investors, syndicate deals or crowdfunding platforms may limit the impact VC will have as more firms turn to these alternatives as opposed to risking the full commitment of VC funding. In summation, the cleantech market is on the rise and venture capitalists are investing more than ever before, but the years to come will determine if they will continue to go hand in hand or if ecological innovators look to others to fund their endeavours.

Two deep dives

Within the vast, highly-competitive and varied world of climate tech start-ups, two in particular are worthy of further analysis.

Sylvera is a climate tech start-up, founded in 2020, that uses AI and satellite imagery to measure carbon emissions and help companies achieve their carbon reduction goals. Their platform provides accurate, real-time data on carbon emissions and enables businesses to identify and track emissions from their supply chains. Sylvera is one of the most reliable companies on the market, which brings to two main outputs.                               

First of all, several world-leading companies trust Sylvera’s data analysis and carbon-emission ratings enlarging the company’s status and network. Among these, are companies such as Bain & Company, BCG, Shell and Equinor. Due in part to this rapidly growing recognition, Sylvera has also just closed their latest funding round (type A) in 2022, raising in May 5.8 million, and is now valued at 39.5 million dollars. The role played by VC and Private Equity firms, such as Insight Partners and Index Ventures, was determinant in the success of the seed round. The latter also co-led the round. “Trust is absolutely essential to reach the scale required to address the climate emergency” said Carlos Gonzales-Cadenas, one of Sylvera’s board members, identifying once again reliability as one of the core values for the company and its employees.

The other tech startup worthy of being mentioned is Space Forge. Founded in 2018, Space Forge has been able to close Europe’s largest seed round (for an aerospace manufacturing company), securing a funding that was approximately four times their initial target. They closed the initial round with 7.6 million dollars with the Bristol Private Equity Club increasing the group stake with almost 500.000 pounds. Space Forge is now valued at 10.2 million dollars. Besides this, the company can mention various well-known governmental partners such as the UK Space Agency and the European Union. The start-up’s goal is to build fully returnable satellites that can manufacture super materials in space. The core idea demonstrates an exceptional vision which potentially will be decisive in determining the future of our planet. Indeed, the next industrial and market revolutions are likely to be in space, rather than on Earth. That’s why Space Forge is pursuing the goal to use microgravity in the production of semiconductors. In simple terms the company aims for each satellite to be able to return from space, enable its refurbishment, and then for it to be returned to service on-orbit. Nowadays we have learned not to take anything for granted but Space Forge, and similar realities, could really give a global and clear push for a sustainable and productive use of space, as a concrete alternative to our planet.

Conclusion

With the technology sector in continuous expansion and the fight against climate change becoming more urgent as years go by, investments in climate tech startups are projected to rise in the coming years. More and more entrepreneurs will dive into this sector both seeking profit and positive contribution to society. Given the boost of big tech firms on R&D in AI and Machine Learning, it is reasonable to expect more and more applications in this industry. The future is bright for climate tech startups and climate tech investors hoping that this ecosystem will contribute to the vital fight against climate change.

By: Amos Appendino, Balthazar Munro, Ferdinando Coda Danunziante, Enrico Dametto, Paulius Steponkus

Sources:

• Greenbiz

• PWC

• Dealroom

• Reuters

• Forbes

• McKinsey

• Time

• CEPR