Exclusive: Non-equity funding for climate tech is taking off

Last year saw a diversification of cleantech’s capital stack that may signal just how quickly the market is maturing, according to data prepared exclusively for Latitude Media by Net Zero Insights.

• The top line: Non-equity funding of cleantech solutions made a major jump in 2023, reaching 30% of the capital stack. As more banks and other financial institutions become interested in the industry, its financing models are shifting.
• How it’s getting done: A record number of billion-dollar climatetech deals were closed last year, as the industry saw more mature technology ready for deployment. Deals primarily focused on facility construction and capacity expansion.‍
• The long view: Debt and grants are playing increasingly large roles in the energy transition’s capital stack, but analysts say this trend could lead to a more pronounced “valley of death” in coming years if mid-stage companies get left behind.

In 2023, financing dollars were largely directed toward getting things built.

Nearly two-thirds of 2023’s billion-dollar deals targeted facility construction, and a similar share of megadeals ($100 million or more) went toward capacity expansion. This pattern highlights the industry’s focus on tangible growth, including via manufacturing ramp-ups, new factory development, and product line commercialization.

The funding strategy of choice differs across project focuses. 

For instance, Net Zero found that capacity expansion and R&D projects both relied heavily on equity, which funded 81% and 80% of projects, respectively. Solar project developer Nexamp, for example, secured a combination of tax equity and debt commitments totaling $400 million for project development. 

Meanwhile, facility construction projects — which dominated the industry’s largest deals last year — adopted a more balanced stack, with 51% equity financing. Within those projects, batteries, electric vehicle infrastructure, and renewable energies accounted for more than 30%.

For instance, battery maker Verkor nabbed $2.2 billion in a mix of equity, debt, and grants to begin construction on the company’s first gigafactory. And Redwood Materials combined equity and debt in the form of a $2 billion Department of Energy loan to finance the construction of a new battery construction plant in Nevada.

“Climate is, by nature, inclined to a more diversified type of stack,” said Federico Cristoforoni, founder of Net Zero Insights. That’s because the problems cleantech is focused on largely require physical and infrastructure-based solutions, he added.

This increased reliance on non-dilutive funding, like debt and grants, may be a sign that the market is reaching a maturation point, Cristoforoni said, because as the market grows, more types of financing and larger rounds are needed. While equity funding will probably bounce back, he said, debt is likely to become a “very powerful financing tool” for the energy transition in coming years.

And Sofia Esteves, Net Zero’s head of research, warned that this change in the capital stack could come with complication.

“The challenge will remain the valley of death,” Esteves added, pointing to the phenomenon of tech companies struggling to move past development stages to full-scale commercialization. While major funding rounds are on the rise — indeed, the number of billion-dollar deals reached in 2023 was the highest Net Zero ever recorded — the number of those smaller rounds that are so crucial to younger companies declined at the end of last year. 

If that trend continues, the valley of death could become a growing problem, Esteves said. She recommended that the industry focus in the short-term on supporting these early-stage startups by making sure they have the dollars to put steel in the ground.