All over New York City, climate tech startups are pitching solutions and fund managers are courting LPs. But for all the excitement around Climate Week NYC, investors are getting impatient about the still-anemic environment for climate tech exits.
While the market for initial public offerings has opened slightly and potential acquirers may be tempted to bargain hunt, a lack of returned capital to plow back into new opportunities threatens to slow progress in mitigating and adapting to climate change.
“For sustained progress, you need capital to keep going towards servicing more solutions, reinforcing the things that are working,” said Stonly Baptiste Blue of climate tech venture firm Third Sphere. “The next wave of capital will likely come from the returns of this first wave.”
Third Sphere rented out the Anjelika theater in Soho for some straight talk about climate tech exits and the circular capital economy. The New York-based firm drew from third party data as well as its own experience investing 100 investments over ten years, with 10 exits.
Fresh in the minds of climate investors and entrepreneurs is the failure of climate tech 1.0 in the 2010s to sustain itself, a bursting of enthusiasm and startup valuations that led to a nearly decade-long funding drought.
This time is different
The latest climate tech cycle is different in many ways. It is broader than just renewable energy, driven by technology solutions that touch nearly every part of the economy. Solar power, EVs and batteries have gained significant traction and passed critical tipping points.
And extreme weather caused by global warming is becoming impossible to ignore as it slams crop yields, raises prices and renders entire regions uninsurable.
But a looming cash crunch faces many startups. One sign: a spike in “undisclosed” rounds (as ImpactAlpha’s deallow desk has noted!). “That means that people are just doing more bridges or down rounds. It’s not the kind of stuff that people want to put in press releases,” said Third Sphere’s Shaun Abrahamson. “There are a lot of startups that have struggled to do anything more than get a little bit more money from insiders.”
Many of the exits that have taken place were either by oil and gas companies or via special acquisition vehicles, or SPACs, that have since imploded.
One especially tricky stage: growth companies looking to build their first-of-a-kind, or even second- or third-of-a-kind, commercial plants. Such project finance is fraught with risk, and has spawned a cottage industry of impact investors and architects who are creating blended financing models to get growth companies through that “valley of death.”
A Climate Week pitch event this evening organized by Trellis Climate, the Schmidt Family Foundation and other investors will focus on such first-of-a-kind, or FOAK pitches.
It’s not just climate. The broader venture capital and private equity markets are trying to regain their footing.
Falling rates, offtakes and tax credits
The outlook may be brightening. Fund managers continue to raise billions for climate funds, and many startups are successfully raising seed and follow-on rounds. Interest rate cuts are boosting confidence and making it easier to finance projects.
Third Sphere points to additional sources of funding available to climate tech startups these days, including grants, debt and tax credits from the Inflation Reduction Act. Secondary markets are providing liquidity and returning capital while the market for IPOs and acquisitions resets.
“Offtake agreements and tax strategies have emerged as levers for helping attract more capital into climate tech because they represent additional exit pathways,” said Blue.
As examples, he flags to a recent blended finance raise by sustainable aviation fuel maker Twelve’s enabled by an offtake agreement, and a recent $7 million grant from Washington State to Third Sphere portfolio company Photon Marine that helped accelerate the close of its venture fundraise.
Falling interest rates are also helping drive profits and potential climate tech exits. “A number of our portfolio companies are posting their best customer growth quarters yet and as a result getting more inbound M&A and corporate partnership interest,” said Blue.
