ImpactAlpha, July 19 – U.S. climate policy is in disarray. Venture capital investments are plummeting. The IPO window is shut. And crypto is in a deep freeze.
For climate tech investors, it’s business as usual, at least for now.
Climate tech startups raised nearly $19 billion in the first half of 2022, on pace to nearly match last year’s record $40 billion in investments. The volume of deals was up 76%, to 477 transactions, compared to the year-earlier period and even 36% higher than the second half of 2021.
The torrid dealmaking was driven by early-stage climate tech investments.
“Market slowdown, market shmo-down for early-stage deal activity!” exclaimed Climate Tech VC in its first-half market tally. Seed and Series A deal count more than doubled compared to the first half of 2021.
The resilience of early-stage climate investment is something of an impact investing triumph in itself. It was just such support for nascent innovations that was seen as a yawning capital gap a few years ago.
Funding for early-stage climate startups was deemed highly risky and capital-intensive, with long lead times and uncertain payoffs. Now, a flowering of technological innovation and a wave of talent piling into climate solutions is creating fertile ground for such investments. Many funds are hiring climate scientists to help them sort through complex tech.
“In a decade+ of investing in seed startups, we’ve never seen talent migration like this,” tweeted Craig Shapiro of the Collaborative Fund, which has debuted two new climate-focused early-stage funds in recent weeks.
Climate tech, you might say, is the new tech.
This week, Systemiq Capital, led by Paul Polman, Jeremy Oppenheim and Irena Spazzapan, announced a €70 million first close of its second early-stage climate tech fund.
ClimateTech VC has tallied more than 78 new climate tech funds of all stages over the past 18 months, and some $20 billion in dry powder that should further buffer climate tech startups from potential market drafts.
Gap no more
The Prime Coalition was created in 2014 to help bridge the early-stage climate financing gap. With seed funding from Prime, Clean Crop Technologies, which reduces post-harvest losses with a chemical-free treatment, went from drawing board to prototype in 10 months. It raised a $6 million Series A in March. Prime-backed startup Lilac Solutions, a lithium mining technology company, raised a $20 million Series A round in 2020 led by Breakthrough Energy Ventures.
But few commercial investors were willing to take a risk on high-impact, high-risk climate startups. Prime Coalition raised its $52 million Prime Impact Fund in 2020 from investors such as the Sierra Club, Packard and MacArthur foundations.
Last year, Prime Coalition spun out Azolla Ventures, a venture capital fund that invests in early-stage startups with the potential for gigaton-scale climate impact. The funding gap, it now says, has shifted downstream to financing first-of-a-kind demonstration plants and guaranteeing customers for critical technology that has not yet been commercialized.
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“We haven’t seen significant effects,” said Kareem Dabbagh of early-stage climate VC VoLo Earth Ventures of the broader downturn. Valuations are being more closely scrutinized, he said. “That’s probably good for everybody and hasn’t affected the strong early-stage growth and quality talent that we’ve seen flowing into this space. Many investors would probably agree that climate tech remains very bullish and very exciting.”
Colorado-based VoLo Earth last week led a $3.3 million seed round in VECKTA, an online energy marketplace that connects commercial energy users with capital, services, and equipment suppliers.
“Year of the carbon vertical”
While mature sectors like transportation and clean energy dominate later-stage funding, emerging climate tech markets such as carbon, climate management and the built environment make up a growing bulk of seed and Series A deals, according to Climate Tech VC.
Indeed, the VC-run newsletter dubs 2022 the “Year Of The Carbon Vertical,” as investments in carbon capture, removal, utilization, measurement and markets have surged. As Chris Sacca noted in launching his carbon removal fund in April, innovation in the space is “bonkers.”
Deal volume across the carbon sector nearly doubled from the first half of 2021. The eight-fold spike in financing was driven by Swiss direct air capture company Climeworks, which raised a combined $650 million in funding from Partners Group, GIC, venture investor John Doerr and other investors.
“I don’t see a slowdown,” Doerr told a climate tech conference in May. “I think valuations will be more responsible.”