Climate tech is maturing and diversifying.
Two newly released reports by Net Zero Insights and Sightline Climate find that the climate tech capital stack has been expanding, with debt taking on a more important role, and consolidation in venture capital. These are signs of maturity, as the sector wraps up a second challenging funding year after peaking in 2022.
In 2024, total global venture funding and deal activity in private climate tech ventures is projected to reach $92 billion, slightly more than the $83.1 billion it reached last year, and still less than both 2021 and 2022, when it reached $92.1 billion and $108.3 billion respectively, according to Net Zero Insights.
As Sightline Climate notes, the challenges are partly due to rising interest rates and an “increased scrutiny of tech valuations,” which are contributing to making investors “more deployment-shy than ever.”
A surge in debt
Non-equity funding has been taking off for a couple of years now. In 2023, non-dilutive funding, which includes debt, grants, and other forms of funding, represented around 35% of the total global funding. This year, it rose to nearly half of global funding, with debt specifically making up 41% of the capital stack, up from 19% last year, according to Net Zero data.
The debt surge was notable in Europe, where a few “giga debt rounds” of over $1 billion each allowed the continent to overtake the U.S. in total funding for the first time. Thanks to those rounds, climate tech reversed its 2023 downward funding trend, the Net Zero report notes.
The rise in non-equity funding signals that banks and other financial institutions are becoming more interested in the climate tech industry, as mature technologies with lower risk profiles become available to finance. Similarly, the fact that the debt rounds are becoming so large — Net Zero estimates 11 debt rounds of over $1 billion in 2024 — signals a focus on market-ready technologies that need major injections of capital for large projects.
That said, the biggest debt deal of the year was a January 2024 $5 billion non-recourse project financing for Northvolt to expand a battery gigafactory in Sweden. The magnitude of the deal and the consequent groundbreaking of the project, which was hailed as a win for Europe’s industry at the time, take on new significance after the company’s bankruptcy last month.
Hard times for VC
Climate-focused VC funds saw a 9% decline between 2023 and 2024, according to Sightline Climate’s report, which notes that it’s now “the worst time ever” to raise a first-time venture fund, after a 2021-22 “free-for-all, with even first-time fund managers finding it easy to raise capital.”
While exit activity has slowly grown since 2022, according to Net Zero’s data, it’s taking longer for startups to reach an exit. Net Zero finds 405 projected exits globally in 2024, up from the 358 that occurred in 2023, but still less than the 450 recorded in 2021. As a consequence, LPs are more cautious about their commitments, and investors about their deployments. Sightline finds that dry powder from VC, growth, and infrastructure funds is down 8% compared to 2023, at $86 billion.
But it’s not as bleak as it sounds.
“The drop in VC could also be a sign that climate tech is maturing, that early-stage climate plays are maturing or entering a consolidation phase where growth equity and [private equity] become a larger part of the stack,” according to Sightline’s report, while “a more disciplined [investment] approach suggests that climate tech has entered a new era where capital efficiency and business fundamentals matter as much as potential climate impact.”
An optimistic outlook?
Overall, despite global challenges, investors remain bullish, with 70% of investors surveyed by Net Zero Insights anticipating capital flows will only increase in the coming one to three years, a sign of faith in the sector’s long-term potential. Pre-seed, seed, and early-stage investors in particular declared to be particularly optimistic about the future funding landscape.
The U.S. in particular is set for a 12% rise in total funding, “marking its first positive YoY growth since 2022 despite election-year uncertainty and broader market challenges,” Net Zero Insights notes. As the country transitions to a new administration, which will complicate market and policy dynamics for the climate tech sector, it remains to be seen whether the optimism will endure.
On the other side of the Atlantic, though, “investors in Europe can afford to remain optimistic on climate,” Sightline report notes.
“European climate funds have remained resilient,” the report continues, and “there’s a stronger and more stable economic case for decarbonization… than most other regions, thanks to the bloc’s longstanding carbon market.”
