Equity investment in startups has significantly declined in 2023, despite growing demand, momentum and urgency for climate tech-driven solutions.
Venture and private equity investment was down 50.2% year-on-year to reach US $638 billion in 2023, while private market equity and grant funding in climate tech startups fell by 40.5%. Geopolitical turmoil, inflation and rising interest rates have set climate tech investment back to the level of five years ago, according to PwC’s fourth annual state of Climate Tech report.
Sinking investment in startups overall has made the investment landscape significantly more difficult for climate tech startups to navigate, but the demand for climate investment has never been higher.
Despite the gloomy figures, climate tech is demonstrating resilience in that the climate tech share, relative to the overall startup market, has increased.
Climate tech’s share of private market equity and grant investment continues to outpace other investment sectors, growing at an annual rate of 10% in a continuation of a decade-long upward trajectory, says PwC.
Commenting on the climate tech investment trends and investor approaches to the market, Karolina Lewandowska, Co-founder at Starbeam Capital, says combatting climate change requires a “comprehensive approach that combines energy and climate solutions with rapid innovation. While software solutions are crucial, it is important to recognize that many climate-related advancements also rely on hardware components. These hardware innovations have a tangible impact on reducing greenhouse gas emissions and mitigating the effects of climate change.
“Currently, there is a disproportionate investment in software, leaving early-stage hardware companies at a disadvantage. Investors often lack the necessary knowledge in hard science and engineering, making it difficult for these startups to secure the funding they need. To drive future breakthroughs, we require patient capital from venture capitalist investors. As well as long-term strategic plans and targeted policies, such as carbon pricing, from the governments.”
Lewandowska adds that climate tech and hardware-based startups face funding gaps at later stages of funding, hindering their ability to scale. Access to growth-stage capital remains a significant barrier for climate tech companies in the UK.
Robert Hokin, Managing Partner, Greenbackers Investment Capital, commented that after seeing 27 climate tech pitches delivered in one day, “of those 27 companies as investable as they think they are, quite a number of them are not going to make it.
“Why do I think they are not going to make it? Because funds are taking too long to make up their minds about whether to invest, or they’re not investing at all because these companies aren’t meeting certain preconditions as far as revenue, market traction, and as far as team and technology development stage goes. It’s a shame because we need these technologies, we need these teams in the market faster.”
He urged climate investors to rethink their risk tolerance to help the best climate startups succeed: “We all want to decarbonize the planet. We all want to ensure the survival of our species. Just switch on the weather report these days, you can see what’s happening around us and we all are pulling from the same rope.
“We need this to work, we want this to work. So I would say to the funds, ‘think again. Adjust your tolerance for risk, help these companies and help your bottom line.’”
Despite the growing challenges facing climate startups in an increasingly volatile world, there are noteworthy positive trends in climate tech investment: although typically little investment has gone into the sectors that generate the biggest shares of emissions, PwC notes that this has begun to shift over the last 12 months.
The most significant climate investment sector driving this trend is the decarbonisation of heavy and light industry, one of the biggest contributors to CO2 emissions. As innovation emerges that enables the decarbonisation of typically tough to abate sectors, investment in industrials has surged in 2023. And investment in renewables and clean technologies has seen its 7th consecutive year of record-setting growth, with renewables led by solar and EV investment.
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