ArcTern Ventures has secured $335 million for its latest fund, the climate-focused venture capital firm announced today. This third funding round is nearly twice the size of the firm’s second.
- The top line: Investment in climate technologies experienced a downturn in 2023, but with the close of the first major climate tech VC fund of 2024, ArcTern is betting this year will see money start to move again.
- The nuts and bolts: Toronto-based ArcTern Ventures backs early growth-stage companies, and its third fund secured significant institutional investment, including from TD Bank Group and Credit Suisse. The firm invests in both software and hardware startups targeting sectors that emit 200 megatons or more of annual emissions, and selects portfolio companies based on a data-driven assessment of a technology’s potential for emissions abatement.
- The current take: “In our opinion, people are feeling much more positive, capital is going to start moving, and once it starts to move, it’s going to happen very fast, and we’re going to see a big bounce back in valuations,” said ArcTern Ventures managing partner Murray McCaig. “But I do think it’ll be a ‘flight to quality’: so companies that are demonstrating some market traction, versus big dreamy bets that are going to take a little longer to come to market.”
Climate tech investing is reaching a “tipping point” as large institutions start to put capital into funds like ArcTern’s, McCaig told Latitude Media.
“When we did our very first fund it was mostly backed by angel investors and family offices, our own capital,” McCaig said. As the fund and the market have matured, though, it has become easier to attract institutional dollars.
To date ArcTern has made eight investments out of its latest fund, and McCaig said he’s primarily interested in innovations in mobility and home electrification. He pointed to electric vehicle battery analytics company Recurrent, home solar installer Palmetto, and smart electrical panel maker Span as particularly promising.
The fact that many climate tech companies are building new infrastructure or designing new manufacturing processes represents a challenge for investors like McCaig, because they require a lot of upfront capital before they generate their first dollar or revenue. “That creates risk without necessarily the corresponding reward,” he said.
ArcTern’s approach to infrastructure-based investments — like in compressed air storage company Hydrostor — is to look for “systemic innovation” where all of the components has already been individually proven, and are just being combined in a unique way that helps them “get to bankability faster,” McCaig said.
They also look for innovations that are modular, he added, meaning based on infrastructure that can be built in stages that each cost under $10 million.
Despite a challenging 2023 for the sector, McCaig said ArcTern is still all-in on solar, and is playing a long game: “We see nothing but upside for solar,” he said. “We’ve been around for a long time so we’ve seen a lot of market ups and downs, and we’re used to that.”
Net Metering 3.0 — the California rule which reduces exports of residential solar — was a “bump in the road,” he added. “But if you’re smart, now’s the time to be investing.”
Today, the average cost per ton of emissions avoided by companies in ArcTern’s portfolio is just over $100, McCaig told Latitude Media. That’s based on the firm’s greenhouse gas impact model, which it uses to calculate how much carbon dioxide is abated through an individual investment.
“One thing we always say is that if you’re not making money, you’re not having an impact,” McCaig said.“That’s kind of a core to our investment thesis, because we need companies that can deliver impact today, not decades down the road.”
