02 July 2023 |

Down bad?


On Friday, CTVC published a report on climate tech funding through the first half of the year. The numbers aren’t pretty: Climate tech venture funding is down 40% year-over-year, which isn’t much better than the rest of the market (which is down ~53% overall year-over-year). 

That’s too bad. A persistent late 2022 and early 2023 narrative surrounding climate tech was that it was somewhat insulated from the rest of the market. Good reminder that many of the narratives we cycle through aren’t always true. More often, they reflect what we want to be true. 

Here’s some nuance, though. Early-stage climate tech venture funding is actually up. Which tracks with my experience of putting these Sunday newsletters together: A lot of deals are still getting done.

The challenge is in the later stage of climate tech funding. 

For one, the second climate tech boom we’re currently in isn’t that old. It will take more time for the early-stage companies that have raised recently to get to later stages and even ask for more capital.

Then the question becomes whether there will be anyone to fund them. Growth-stage funding for climate tech has fallen off a cliff, especially post-Series B:

Searching for exits

What’s the challenge here? 

  • Is too little capital available post-Series-A? 
  • Is the capital that could jump in at the growth stage too reticent to fund companies right now?
  • Are there not enough qualified growth-stage candidates, i.e., climate tech businesses with real revenue that have taken significant steps towards commercialization to get funded?  

All of the above are contributing factors. Only a handful of companies that raised early-stage funding in 2017 and 2018 have since scaled revenue significantly, expanded their footprint, and positioned themselves as prime later-stage funding targets on the path to IPOs.

A while back, I chatted with Tyler Lancaster of Energize Ventures about this exact dynamic. Given he’s an investor in companies like Arcadia that buck the trend and count as some of brightest spots in later-stage climate tech fundraising and company performance, he was optimistic about there being more success stories in the IPO and exit column for climate tech soon:

If you look at exits from the past five or six years in climate generally, they’re, well, mediocre…but we’re optimistic there will be a run of really excellent exits soon that will help attract more limited partner capital into the space and answer a lot of the questions that some folks still have around, you know, is this just the same as Cleantech 2.0?

The returns in the sector might not match the hype and expectations that folks have. So it’s really important for us to answer some of those questions as an ecosystem over the next few years, and I think entrepreneurs and will.

I hope Tyler’s right and some of his firm’s portfolio companies (like Arcadia) will surely do well. But, especially given I have no horses in the race that I have a financially vested interest in, I’m not quite as bullish on the whole.

The net-net

The second climate tech boom, which we’re currently in, needs to deliver exists and significant liquidity for the investors that have taken risks on thousands of companies over the past 3-5 years.

Yes, tangible climate impact is most important. But returns on investments for investors are a close second. If this climate tech boom ends up mirroring the pitfalls of the last climate tech boom in the early aughts, then the climate tech venture ecosystem won’t get a third chance for a while. 

Early-stage funding rounds are cool. But absent IPOs, nothing is proven, and funding for other stages of climate tech venture funding could fall off the cliff too. 

And to get more companies to the point where they can exit and deliver returns, growth stage capital is critical. Otherwise, early-stage funding is a bridge to nowhere. Hopefully, big exits for companies like Arcadia in the coming years do pave the path for more capital at later stages. However, we will also need new funds to step up in this arena. Any takers?