2023 climate tech venture investment trends

Despite a drop in total investment dollars, there are signs that climate tech investors are maturing

January 11, 2024
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Catalyst podcast
Catalyst podcast

Venture and early-stage investment in climate tech in 2023 was down 30% from 2022, according to market intelligence firm Sightline Climate. But is that a bad thing?

In this episode, Shayle unpacks the findings of Sightline’s 2023 Climate Tech Investment Trends report with Kim Zou, co-founder and CEO of the firm, which also produces the popular CTVC newsletter. (Shayle is an adviser to Sightline, and Kim was also previously a partner at Energy Impact Partners where Shayle works.) Kim argues that smaller deal sizes suggest that the climate tech space is actually maturing.

The data focus on venture and early-stage capital, rather than non-equity financing, which actually expanded in 2023, another sign that climate tech finance is becoming more sophisticated.

Shayle and Kim also cover topics like:

  • Why food and land use fell out of the top three verticals (and why heavy industry took its place).
  • Major funding rounds, acquisitions, and bankruptcies in 2023.
  • The role of generalist investors moving into climate tech.
  • Zou’s predictions for investment trends in 2024.

Recommended Resources

  • Latitude: Exclusive: Non-equity funding for climate tech is taking off
  • Latitude: Clean energy capital is getting pricier
  • Catalyst: Financing first-of-a-kind climate assets
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Shayle Kann: I'm Shayle Kann, and this is Catalyst.

Kim Zou: I think we all kind of recognize that climate tech investment hit its peak in '21 and '22, but I'm still pretty positive on '24. I think '23 was a year where investors and founders alike played wait and see.

Shayle Kann: It definitely was not the best of times, but honestly it wasn't the worst of times either. It just was 2023, a year in climate tech investing.

I'm Shayle Kann. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. So 2023 was kind of a weird year in the climate tech, venture capital, and private market investing world. There were these two deeply opposing forces kind of fighting each other all year. On one hand, there were real meaningful reasons for momentum and optimism in the market. Most notably, in addition to the overall trend of climate change, there was a lot of policy tailwind that showed up, both in the US and in Europe. There's a flood of new capital that had arrived over the previous three or four years to do well while doing good, and things were looking up. On the other hand, or maybe we call this one the other fist, there was the macro environment with inflation and economic malaise and interest rates, et cetera, and obviously the effects that all had on the broader tech investing in VC world.

So all year, investors and entrepreneurs took on the time honored tradition of talking about the vibes in the market, trying to clarify what exactly was happening. Well, the year passed. And so now we actually know. Thanks in part to my friend Kim Zou and her company Sightline Climate, which just put out the first comprehensive review of climate tech investment trends in 2023. Disclosure here. Kim used to work on my team at EIP, and I'm an advisor to her company. But anyway, I brought Kim on to get a bit more into the details on what actually happened in this market last year and what we might expect it to mean moving forward. Here's Kim.

Kim, nice to see you.

Kim Zou: Nice to see you again. Thanks for having me.

Shayle Kann: Of course. Excited to talk about the year that was in climate tech investment in 2023, and mostly to talk about a bunch of cuts of the data that you guys collected and get a little bit into the weeds on it. But before we do, let's cover the highlights to start. So characterize the overall year in climate tech investing in 2023, and maybe contrast that with previous years. I know you've been collecting the data for a few years.

Kim Zou: Yeah. So I think to take a step back, just to caveat what we mean when we talk about climate tech investment, in our investment trends report we recently published, we're specifically focusing on venture capital and growth. So it doesn't include project finance or debt. Really looking at early stage capital financing climate tech. This year, 2023, we saw a wait and see approach to climate tech. So there was 32 billion in venture growth funding globally in climate tech, which was a 30% decline from the prior year. And I think that number isn't a surprise to most investors and founders that are operating in this space, both because of the macro downturn that we've seen impact all of venture, so it's not specific to climate tech. But also, I think we all realized '21 and '22 was really the peak of the market for climate tech and venture as a whole. So the highlight, the key number is a 30% decline, but I think it's relatively in line with overall venture as well.

Shayle Kann: Yeah, we should mention that briefly. I know it's too early to actually have final year date. You guys are ahead of those who are trying to track the overall venture market, but what do we know about how that 30% decline in climate tech venture compares to the trend in overall venture?

Kim Zou: Yeah. We're tracking this data in real time, so we were quick on our feet to publish it right when the year came out, but PitchBook released their Q3 report and as of their Q3, and overall venture tech as a whole was down 39%. So we'll see what their final number ends up, but climate tech was marginally insulated, maybe relative to overall tech.

Shayle Kann: Yeah, which is kind of interesting. I think you would've expected... Those of us in the market recognize that there were a few sectors in 2023 that were relatively shining stars. Overall tech was way down, and then if people talked about what's bucking the trend. It was obviously AI, but behind ai, people talked about climate a lot. So what you would've expected was a more muted impact on climate tech than on overall tech. And that seems true from the data that we've got so far, but maybe not as dramatic a difference as you might've expected, obviously pending that Q4 data.

Kim Zou: Yeah. I think across the board, what really drives these large absolute numbers is large growth rounds and mega rounds. And I think relative to earlier years where we saw a lot of those mega rounds, we didn't see as many this year. And so deal activity was only down 3%. So you could call that even a tapering relative to 2022 rather than a significant decline. So deals are still getting done. Early stage seed series A, still getting done, but that absolute dollar amount, that declined was really driven by these larger growth deals that dissipated.

Shayle Kann: Yeah, that's a really good point. So when you say deal activity, you mean deal count, just the number of investments that were made, and down 3%. So let's just call that flat. That is a market difference, right? So same number of overall investments made, 30% less in dollar terms implies, as you said, either smaller overall or certainly fewer of those big mega rounds. And I do think that's one of the things that's always made climate tech a little bit misleading when you just look at the high level dollar numbers because it is a sector, and we'll probably talk more about this later, that lends itself to big mega rounds because it leans hardware, it leans manufacturing, and that stuff is capital intensive. And so you get these billion dollar plus rounds periodically that really skew the numbers. So maybe it is true that actually, overall the market wasn't really down 30%, it's just almost nobody, we'll talk about who the exceptions to that were, but almost nobody raised the big mega mega round.

Kim Zou: Yeah. Yeah. And I think in a lot of ways we've defined success in venture as that absolute dollar amount, but I think specific to climate tech, it might not make sense to define success as an absolute dollar in venture investment, because at the end of the day, when we think about all this hardware and hard tech that needs to develop into projects, you want these companies to graduate out of having to raise 100, $500 million growth rounds and being able to raise first of a kind project finance or debt to build these larger projects. So in a way, success could be seen as being able to graduate out of venture and move on versus larger and larger growth rounds that are really expensive and diluted for founders.

Shayle Kann: Yeah. Success really is exits, which we'll talk about a bit later, but same story, right? The world in general had tended toward these really big private rounds, both in climate tech and more generally rather than companies going public, even during the zero interest rate policy world. But clearly, that has dried up substantially. So that's clear overall. That also relates to the sort of question of is it universal across stage? A lot of the conversations that folks were having over the course of 2023, and you could see this playing out in lots of markets where the public markets and the broader macro economic environment starts to deteriorate, that has an initial effect on the stuff that's closest to the public markets, which is later stage, and then takes time to sort of bleed back through the value chain to eventually have an impact that like seed and series A. How did that look in the data in 2023? Was there a significant bifurcation between early stage and later stage?

Kim Zou: Yeah. So we put this report out in H1, and the headline there was that late stage venture and growth plummeted 30%. That also holds true at the end of the year, so investment at the later stage drop 30%. The big change in this end of year report was that we saw, for the first time, an impact in the early stage as well. So count was still the same, if not relatively marginally higher, but series A investment was down 41% compared to 2022. That's the first time we've seen series A investment drop since we started tracking the space four years ago. And I think what that means, and maybe this is a symptom of larger venture, not just specific to climate tech, that's the first time this macro downturn is starting to impact the early stage market. We're starting to see early stage investors also pulling back rather than just later stage deals and growth rounds getting smaller.

Shayle Kann: But it's a similar story where deal count was flat-ish in early stages and dollar activity was way down, because one thing anecdotally that I saw a lot over the course of 2023 and expect that I will see more of now is the company going out to raise a series A, let's say, and they set out to raise 30, $50 million, which in 2021 was totally possible for not every company, but lots of good looking companies in climate tech. And that round became very, very difficult to raise, and it took six months plus for them to learn that reorient go back out to market with a $15 million raise, and then eventually get that done. And so I saw a lot of like, these rounds were completed, but they were completed as a smaller number than certainly that same company would've seen two years earlier.

Kim Zou: Totally. And I think there's two follow up points to that. The first one is if we're talking about what does success look like, I don't necessarily think a calling back of round sizes is a bad thing. I think it's more realistic, more tied to milestones that these companies are trying to achieve. Raising two to three X over the amount you need and at the valuation you want so that you're only diluting yourself 20 or 25%, that puts you in a place where you're trying to achieve a valuation that you might not be ready to. So I think mathematically, this could be a more realistic sort of fundraising environment for both the founders longterm, as well as investors to be excited about these deals.

And I think on the second point, the reason these deals are getting done but they're smaller is also because many of these deals were less so what we call graduating rounds where these companies raised at the next later phase, but rather extensions or bridge rounds where maybe they were extending their runway by a couple million so that they wouldn't have to go back to market and face a valuation downtick, but rather trying to extend their runway and going out to existing investors. So a lot of those smaller rounds too, we noticed there was a pretty significant drop off in companies that were able to graduate to the next phase, to the next stage. And so I think a symptom of that too is that deal sizes dropped off, and therefore investment declined.

Shayle Kann: Yeah, I think to the extent that the dataset that you've got, which is basically as comprehensive as it could possibly be, to the extent that it's not totally comprehensive, my guess is what's missing is even more of those bridge rounds and extensions.

Kim Zou: Oh yeah.

Shayle Kann: Because those don't often get announced, but they have become the norm, certainly were the norm in 2023. So there's probably even more of that, and the trend that you're describing is even more pronounced, I think, than the data would suggest. Let's talk about verticals. I've always said climate tech isn't really a sector. We've sort of decided to call it a sector. It's actually just a common theme across many different sectors. And so I oftentimes think it's more interesting to talk about the individual sectors than it is to talk about climate tech as a whole, albeit there is a lot of capital and interest in climate tech generally. Let's talk about sectors. What do you think of as a sector that sort of relatively speaking... Dollars were down across the board, but relatively speaking, what sectors saw more investment and what sectors saw less?

Kim Zou: Yeah. And so just for those Catalyst listeners that don't know our methodology, we think about climate tech across seven broad verticals that really encompass the way we eat, the way we move, et cetera, et cetera. So that's food and land use, transportation, energy industry, climate management, which is what we call things like climate risk, emissions and sustainability reporting, and built environment and carbon. So those are kind of the seven verticals, categories we think of when we talk about climate tech. The biggest surprise in terms of verticals this year was really the decline in food and land use. Transportation, energy, and food and land use have historically always been the big three. We've even called them the big three in all of our reports just so far, in a way, the largest sectors, the most mature. This time around in 2023, appetite for food and land use evaporated. There is a distaste for food and land use, in other words. And we saw that that sector was down 55% in investment to 3 billion this year.

And I think for those who have been tracking the space in the public markets, the performance of Beyond Meat and some of these other alternative protein, as well as a pretty significant trail of bankruptcies in indoor and vertical farming have led to there being a pretty significant drop off in food and land use.

Shayle Kann: Yeah, those seem like the two big categories that have been hit. Food and land use, it's a broad sector, but really, where a lot of the dollars went and now a lot of the dollars evaporated is exactly what you just said. It's alternative proteins where... There were just a ton of companies. So I think there is also a particular need to separate the weed from the chaff, and I guess that's also a food reference now that I think about it, but there's a culling of the herd. I guess additional agriculture related reference.

Kim Zou: We can keep them coming.

Shayle Kann: I know. There. And then an indoor ag, as you said, that's been a category that's just received a lot of money, not as many companies, but a lot of money in that money has dried up pretty quickly, as if it were a drought. Sorry, I had to add one more.

Kim Zou: Oh, there we go. There we go. I think a big theme throughout this report too is that we started seeing almost replacements on the leaderboard, if that makes sense. So before this year industry actually grew a significant amount, that one has always been underfunded relative to the level of emissions coming from that sector, and it replaced food and land use in that third vertical spot. And I think overall, we're starting to see what used to be the largest, most mature verticals and sectors take alternative protein, take emissions and sustainability reporting, ones that were pretty saturated when it came to the count of companies now starting to, for better or worse, have the air let out of the balloon a little bit, or people losing their taste a little bit for those sectors.

Shayle Kann: I guess on industry, because you mentioned it, that seemed like it was the biggest relative winner, at least from the overall dollar data, it seems like some of that is skewed by... We talked about the big mega rounds. There was really one mega mega round in 2023. There had been more in previous years, like Commonwealth Fusion raised 1.8 billion a couple of years ago and stuff. But in 2023, there was one mega round that seems to have contributed a lot to that industry vertical, right?

Kim Zou: Yeah. The one that everyone's been talking about, it seems like, in these later stage growth circles in climate tech is H2 Green Steel. And I think if you look at... We tracked the top 10 largest deals in climate tech this year. If we zoom in on industry, steel in particular had a pretty breakthrough year. So there was H2 Green Steel, which raised a billion to fund a Green Steel plant in Sweden. And then Boston Metal was not insignificant as well. They raised $200 million also to build green steel, but more from a [inaudible 00:17:17] standpoint. And I think what's notable about these large mega deals that happened in 2023, there's probably two things, in my opinion, that enabled these companies to raise such significant rounds. The first one is most of these companies already had projects in motion, right? So H2 Green Steel, they're building a massive steel plant in Sweden and Europe where there's a lot of policy tailwinds, think CBAM, that's enabling that project to kind of develop. And that's what that $1 billion round was really financing.

The second major thing we're noticing across these mega deals is if you look at the funding they've raised in the last two years, I think six out of 10 had raised significant hundreds of millions of dollars of public financing or government funded rounds, whether that's from the loan programs office in the US, or from the European investment bank in Europe. They've all been able to... There've been case studies and public finance catalyzing these larger private funding rounds.

Shayle Kann: Yeah, that's interesting. You mentioned another one of the relative losers, I don't want to say loser, but markets that's been down year over year, which is a smaller total amount because it was never quite as big in the first place, but is notable, which is emissions and sustainability reporting, right? This was a category that... I think there are real macro tailwinds for this category, but it also suffered from the lots of traditional tech investors getting interested in climate, looking for things that they recognize, finding B2B SaaS in the form of enterprise carbon accounting or whatever, and then maybe overfunding that sector. Is that the sense that you've picked up as well?

Kim Zou: Yeah, I think it's similar to the case of alternative protein where there's a lot of market oversaturation of a category that people felt like they knew really well, whether it came to consumer tastes like alternative protein or enterprise software. And at the end of the day, I don't think the numbers or the milestones necessarily match to a lot of the valuation expectations or the funding rounds. And so in that sector in particular, it feels like a bit of a wait and see. It's not necessarily a market that needs... Carbon accounting isn't necessarily a market that needs 200 or 300 players. And also, I think a lot of them end up being a bit more consulting and advisory based than traditional enterprise SaaS, like generalist investors understood.

So in many ways that sector feels like it's been playing wait and see to figure out whether or not there's actually an opportunity there. However, we are noticing a lot of those companies either moving or starting to invest in Europe because of regulations like SFDR that are driving more compliance requirements for that type of reporting, whereas in the US, we're still kind of waiting to hear back on the SEC climate risk disclosure.

Shayle Kann: So obviously the actual... Ultimately, the thing that matters in venture capital world is outcomes. And those outcomes can be positive, those outcomes can be negative, and the sort of reemergence of climate tech is long enough in the tooth that we should start to be able to measure those outcomes. So let's talk about both sides of that, starting with exit activity, what have we seen? 2023 was a weird year there. There had been lots of exit activity, and then 2023 is where it sort of turned overall. The IPO markets basically shut down. And so did we see significant exit activity in 2023? And what did it look like, if so?

Kim Zou: Yeah. Exits did fall off a little bit in 2023. It's not a little bit, actually. It cut in half. So we tracked 50% less exits in 2023, and this was really driven by SPACs finally fizzling out. I think we started to see that happen towards the beginning of 2022, but the count of SPACs were climate tech SPACs were down 80% compared to the prior year. However, what's notable, there's still acquisitions happening in this space, although as you probably know, acquisitions aren't always a sign of healthy success in the exits market. And 80% of those acquisitions were undisclosed, which if you have a successful massive acquisition, you probably want to shout it from the rooftop. So we can assume a lot of those might've been smaller tech and acquisitions that might not be something to be as proud of. However, there were a few notable IPOs to kind of kick off this year, including Nextracker, which I'd say is more from the kind of clean tech 1.0 error, but still a sign of climate tech hardware being able to successfully IPO.

There's also light renewables development or renewables developer that IPO'ed as well, and a few successful SPACs like LanzaTech that's been a climate tech darling for some time and was able to successfully SPAC. On the acquisition side, I think the one that climate tech investors and founders couldn't stop talking about this year was Oxy's acquisition of carbon engineering at a billion dollars. So the first unicorn we've ever seen in DAC and probably carbon removal. That one's interesting. I think a lot of people have some hypotheses on how that acquisition happened and what was the strategic relevance for Oxy acquiring carbon engineering. So I'd say there was some signs of green shoots in this space, but overall, the kind of exit count was down 50% compared to the prior year.

Shayle Kann: And then of course, we should look at the other side of the coin, which is bankruptcies and companies that went out of business. I think as the market started to turn, the expectation, of course, was that you would see a higher proportion of that. Overall, how much have we already seen in terms of companies shutting down or effectively shutting down?

Kim Zou: Yeah. This is also one of those things where there's probably a lot more companies that went bankrupted or went out of business, but it didn't necessarily make the headlines. I think some of the more notable ones, the first one was Proterra, that was one where it's been... Proterra has been around for a while. It's been a climate tech darling. They've raised from some of the largest climate tech investors like G2 Venture Partners. And at the end of the day, inflationary pressures, higher interest rates, supply chain disruptions, despite making it to all the way to going public... They SPAC'ed, I think in 2022. Despite making it all that way, they still couldn't quite get over those hurdles. And I think at the end of the day, that's a symptom of these business models which are reliant on long supply chains, which are reliant on hardware and a lot of various factors outside of their control going their way. So they filed for bankruptcy, and then their battery business actually ended up getting acquired by Volvo.

So that was another thing we saw this year too, where there were some acquisitions, but some of them were more so acquisitions, scooping up companies that were struggling at lower valuations.

Shayle Kann: Yeah, Proterra is a particularly tough one because in the SPAC craze of 2021 and beginning of 2022, I tracked at some point, I don't remember exactly what the number was, but close to 40 companies that I would call climate tech companies that successfully merged with SPACs and de-SPAC'ed, became public companies. Most of them were pre-revenue and had never actually produced anything commercially yet. Proterra was not one of those, right? They did SPAC, or they did de-SPAC rather, but they’re a real business selling real electric buses with real meaningful revenue. And so for them to be one of the earlier failures was, I think, a surprise to a lot of people because there are many other companies that are actually sitting there as public companies today. And some of them may become sort of zombie companies because they can't really raise capital and they're trading extremely low, but they've hung on longer than Proterra did. So I think Proterra being one of the early climate tech SPAC bankruptcies was surprising to many people

Kim Zou: 100%. And I think overall... Obviously, we are seeing a decline right now, but overall, I think it is a market where it's survival of the fittest. And Proterra was one that was a bit of a surprise because they had revenue and they had hit a lot of their milestones. But I do think some of these bankruptcies or out of businesses that are happening is a way to kind of put the market in a much more realistic position where hopefully ideally, it is survival of the fittest, its companies that are able to build projects, its companies that are able to deliver on time or deliver on time over a number of years. And I do think next year, because hopefully inflation and interest rates are coming down, those shorter term hurdles that have disrupted a lot of these businesses that might still be in the clear, those types of hurdles can allow these companies to breathe a bit more.

Shayle Kann: All right, let's talk about... I think one thing that you guys have done with the data that you've got that I think is particularly interesting is compared the volume of investment in dollars of any given sector within climate tech to the amount of emissions that that sector represents to basically try to come at one weight of saying what's underfunded and what's overfunded, just not necessarily relative to the economic or financial opportunity, which is obviously what the investors are really thinking about, but just from a societal perspective, where are the dollars going and is that where the emissions are coming from. So in that light? What sector do you think of as being overfunded, and what sector do you think of as being underfunded?

Kim Zou: Yeah. One of the analysis we like to do is understand the correlation between climate tech investment and emissions percentage. So the vertical that has historically been the most overfunded is, surprise surprise, transportation. And I think when you look at climate tech, a lot of what drove this second or third wave of climate tech investment was Tesla being the star of the show and driving a lot of interest in this electrification of transportation EVs. So we've tracked transportation accounting for 15% of total emissions as per the IPCC 2019 report, but receiving 30% of venture and growth investment since 2020. Whereas on the other hand, energy investment made up 22% of overall funding, but 34% of emissions and heavy industry made up 10% of investment, but 24% of emissions. However, I think with transportation being the largest historically funded vertical, that trend has actually started to shift a little bit more.

So we're starting to see more climate tech funds and investors tailor made for industrial decarbonization. As noted before, this has been the first time we've seen industry take the place of food and land use. I think the overall climate tech ecosystem and investors are starting to wake up to the opportunity in industrial decarbonization. There's a lot of excitement for solutions like industrial heat pumps in those areas. Obviously, we talked about there's a lot of excitement for Green Steel and cement. There's also a lot of policy tailwinds geared towards decarbonizing industry as well that's, I think, pushing more investor interests into those sectors. And I think the other thing that had been holding energy back, which is surprising, right? You would think climate tech is mostly energy innovation, energy financing, but I think one thing that's perhaps held that sector back is this investor sentiment that in many ways, the energy emissions challenge is solved because of the relative maturity of renewables.

And we're talking about venture here, so I think the idea is there more venture specific innovation, venture scalable innovation for energy was maybe a question, but I think that's also starting to shift a bit more as well with more funding and hydrogen and energy storage driven by the inflation reduction act.

Shayle Kann: 100% agree with you that a lot of investors, new investors to the space come into it with the belief that energy is solved, relatively speaking, or particularly that electricity is solved, relatively speaking. It takes them a while to realize that most energy is not electricity, that electricity is like 20% of final energy consumption in the US. 80% is not electricity anyway, but they start out with the perspective of, well, wind and solar are cheap and we've got lithium ion batteries. And a lot of them come in saying, "Well, okay, nuclear could solve the rest of it, and so probably we should be looking at a bunch of other stuff." And eventually they learn more and more and realize that, one, it's not that simple. It's not solved. Energy is huge. There's a million venture grade– This is my opinion, obviously. I'm editorializing, but I feel strongly that there's an enormous amount of what will be successful venture businesses to be built in energy, but that does take a lot of newcomers to climate tech a while to grok, I think.

Kim Zou: One thing that was interesting that was underlying a lot of this data is it seems like investors in climate tech, we've been tracking this space for the last three to four years, and the climate tech market itself seems to have matured in its understanding of climate tech. More and more investors are what we call repeat investors. Those are doing more than four deals a year, so five plus deals a year. And so I think the overall sector is starting to understand which verticals have that emissions intensity, but also understand what areas of innovation across climate tech, whether it's energy storage or industrial decarbonization are meaningful areas to put their dollars to work.

Shayle Kann: That's actually another question I wanted to ask you, which is there's been lots of talk about... As climate tech was gaining steam and momentum and becoming more prominent, there was lots of talk about, I don't want to make it too reductive, but climate tech tourists on the investor side who became interested in climate tech. There's lots of reasons why people want to be investing in climate tech, and so they would dip their toes in the water but never really dive in and deal with all the complexities of it. Do you have the ability within that dataset to sort of figure out whether the climate tech tourists, first of all, did they ever exist? And if they did, are they still around?

Kim Zou: Yeah, it's a good question. So the count of investors overall this year declined. And so it was marginal, right? It declined 5%, investors doing more than one deal. I'd say a lot of that decline was from what you call tourist investors, those that dipped their toe in maybe did one deal over the last five years or so, especially in more software centric areas. So across all stages, across all verticals, unique investors that were active in 2023 was definitely below 2022 levels. And I would ascertain that most of those were those that had kind of trialed climate tech when it was hot and the cool venture thing to do, whereas now, it's really made up of more repeat investors or climate tech specific funds.

Shayle Kann: So I guess the last cut of the data that I'm interested to chat about is geography a little bit, which is you have data on where all the companies that raise money, climate tech companies that raise money are based. And it's an interesting question as to how the sort of climate tech ecosystem is developing where it's developing. So talk to me a little bit about the geography of where the dollars went.

Kim Zou: So in our geography analysis, I think unsurprisingly, the US and Europe kind of led the charts. About 80% of investment went into those two areas. Of the companies we've tracked, 19% were based in California, but that was pretty closely followed I'd say by 10% of that count. Being based in the UK, which having just recently moved to London, is actually a pretty exciting statistic. There's a lot of action happening here. What I think was a more interesting split was actually zooming into how these companies, how this investment split by vertical or sector level. And I think anecdotally, you can almost get that sense as well, going to these different geographies. So in California, a lot more what you think of as traditional hard tech, climate tech companies, like long duration energy storage, hydrogen, more of the talent and warehouse and facilities and resources that you'd assume need to build those technologies.

Whereas in Europe, we saw a lot more companies in the climate management quadrant. So to my point earlier on there being more regulation, things around climate risk emissions and sustainability reporting, a lot of those types of companies situating in Europe. And then in Southeast Asia and India, seeing a lot of plays in micro mobility, battery swapping where those geographies are more suited for those types of technologies. So it's really interesting to zoom in a little bit and see how climate tech looks different across geographies rather than just looking at the kind of total headline, 20% of companies in California number.

Shayle Kann: Yeah, to some extent, at least the sort of split by country I think has a lot to do with just where the market is for various technologies and where the incentives are, where the policies are supportive. We're going to see a lot more green hydrogen companies in the US, thanks to the IRA, than we would've otherwise. And emissions reporting requirements in Europe are further along than they are in the US, and so maybe we'll see more of those companies there. It would be interesting to speculate a little bit on this one. One region that has not seen nearly as much investment historically, but I would place a bet is going to show up on your rankings, at least higher the next couple of years, is Texas. There are emerging hubs in both Austin and in Houston. It's a big market for a lot of things right now for a variety of reasons, in energy certainly, in electricity, and in molecules. So I'm betting Texas gets higher up there.

The other area that I thought was interesting in the data that you presented is in Northern Europe where... H2 Green Steel is based in Sweden, so we talked about them, and that's a big number. But it was more than just that actually. There's a fair amount within Europe. Northern Europe has a fairly significant share of the overall funding.

Kim Zou: Definitely. I did a trip to Houston actually around this time last year. It was almost like a field trip where we visited a couple of climate tech startups, and they made the case that Houston is the place to be for climate tech. You have the talent you need, especially to build some of these more project construction heavy types of technologies. You have a lot of the customers or the off-takers, or even the partners that are there, a lot of the oil and gas majors that know how to develop these projects, and also just not as much competition. You can get better and cheaper access to labor to offices, warehouses, so I could definitely see the case for that. There was a great Houston climate tech report that a couple of folks I know well published last quarter that details that pretty well. And then on the Northern Europe part, I think obviously regulations will support emissions and sustainability reporting in those types of sectors, but I also think a lot of what's coming to head with CBAM is going to be a big driver on industrial decarbonization in Europe.

Europe takes a very sticks heavy approach to climate policy, and a lot of these companies that are trying to sell or operate in Europe are going to have to get their act together sooner rather than later on decarbonization, and that'll have a pretty heavy impact on some of these industrial sectors first.

Shayle Kann: All right, Kim. Well, we're just entering 2024, so if you could read the tea leaves thus far as to what you've seen in the first couple of weeks of the year, any indications of directionally where you think 2024 looks relative to 2023?

Kim Zou: Yeah. Look, I think we all kind of recognize that climate tech investment hit its peak in '21 and '22, but I'm still pretty positive on '24. I think '23 was a year where investors and founders alike played wait and see, right? They were waiting to see where the kind of macro environment would bottom out, waiting to see what would happen to interest rates, waiting to see what would happen with these inflation reduction act rules as well. And I think a lot of that has also gotten clarified at the end of last year. And so it feels like the market overall is much clearer in terms of what the rules are. I also think a lot of companies and founders that were playing wait and see in 2023 extending their runway are anecdotally also looking to raise this year. So I think 2024 is going to still be a pretty significant year for climate tech investment.

That being said, I think it's going to be an important inflection point for whether or not climate tech starts to be able to graduate out of venture and growth investment. It's been an area we've been tracking for the last four years, but we also talk a lot about the climate capital stack sophisticating moving beyond just venture and growth, and that's how solar and wind and a lot of these technologies from clean tech 1.0 have evolved. And I think that's going to be a big marker for success in climate tech as well, is if we can start to see these other asset classes in the capital stack start to finance projects and facilities in climate tech at scale. And I think that's what I'm really excited about in 2024, is the graduation at a venture, call it.

Shayle Kann: All right, Kim. This was a lot in a short period of time. There is even more in the report that you published, so I highly recommend everybody go check it out. But in the meantime, thanks so much for taking some time.

Kim Zou: Awesome. Thanks for having me on.

Shayle Kann: Kim Zou is the co-founder and CEO of market intelligence firm Sightline Climate, which also produces the weekly climate tech VC newsletter. This show is a production of Latitude Media. You can head over to latitude media.com for links to today's topics. Latitude is supported by Prelude Ventures. Prelude backed visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at preludeventures.com. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand theme song by Sean Marquand. I'm Shayle Kann, and this is Catalyst.

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