Climate change remains one of the most important issues of our time. Experts have warned that we are moving in slow motion towards a climate change disaster unless we significantly reverse course on the rate at which we release greenhouse gas (GHG) emissions to the earth’s atmosphere. As a result, governments are increasingly signaling an inevitable policy response to climate change as action is taken to limit global warming to less than 2 degrees Celsius consistent with the goals of the Paris Climate Agreement. The expectation of government action to reduce GHG emissions is beginning to drive significant investment into companies focused on tackling the climate change challenge.
Climate Tech is an area of technology that is focus on reducing GHG emissions or addressing the impacts of global warming. Climate tech includes technologies that decarbonize energy, transportation or mobility, industry, and food & water. It also includes things like consumer services (e.g., circular economy commerce solutions, sustainable textiles and packaging, waste and recycling, ESG investing and fintech), climate (e.g., monitoring and remote sensing, climate intelligence and insight platforms, climate risk and insurtech, resilience and adaptation) and carbon (e.g., carbon tracking and accounting platforms, carbon offsetting tools and markets, carbon removal technologies).
Investments
As we look across the various climate tech sectors, it is helpful to understand how investment dollars are being deployed in the space. The team at Climate Tech VC has provided a detailed review of climate venture in 2021. Here, we highlight some of the key findings to give readers a sense of where the puck is going in this exciting new investment landscape.
The first trend to highlight is the increased investment volume in the space over the last year. In 2021, climate tech startups raise $39 billion across 605 venture deals. When comparing quarterly inflows year-over-year, the climate tech space saw a funding increase from $4 billion in Q4 2020 to $13 billion in Q4 2021 (see Figure 1). That is more than a 3x increase and could be a sign of things to come as more investors look to capitalize on the hot climate tech space.
When we double-click on what climate tech sectors are attracting the most capital, the clean energy sector is the clear leader. This is followed by the mobility sector and close behind is the food & water sector. These three sectors dominate the landscape accounting for about 90% of all 2021 investments in climate tech funding. The diversity of sectors that are attracting capital also proliferated in 2021 from just 4 unique sectors in late 2020 to 8 unique sectors in late 2021. This meant that more niche climate tech areas like consumer products and services, industrial, climate, and the carbon management sector began seeing capital inflows.
Figure 1 – Venture Capital funding in Climate Tech funding by Sector
Turning our attention to venture capital deals by stage, growth stage deals account for more than half of all climate dollars in 2021. That is not surprising as growth stage companies are larger, more mature, and attract capital at a higher valuation. The more interesting statistic to look at is not the total volume of dollars but the number of deals occurring at each sector. Across the mobility, energy, and food & water sectors, Series A deals accounted for the majority of the activity and later stage deals (Series B+) made up 40% of all activity (see Figure 2). This reflects the more mature nature of these sectors. Many of the companies that fall into these sectors were founded in the early 2010s and are now at a mature stage.
For the more nascent sectors (industrial, consumer, climate, and carbon) seed stage funding dominated. Seed-stage rounds accounted for about 30% of all deals, but less than 2% of total invested dollars given the relatively small capital raises that occur at the seed stage. For the emerging climate and carbon sectors, early-stage activity (Seed and Series A) made up 80% of the total deal count.
Relative to prior years, 2021 was a Cambrian explosion of climate tech. Early-stage deal activity boomed and more companies raise Seed and Series A deals than ever before. In total, Seed and Series A deals accounted for more than 60% of all activity. As the new cohort of climate tech startups matures, it is likely that we will see more later stage deals. These funding rounds could come quicker than history would indicate as large climate investment funds pour capital into the space.
Figure 2 – Venture Capital deals in Climate Tech funding by Funding Stage and Sector
Investors
Having detailed where investment dollars are landing in the climate tech space, we now dig into the investors that are deploying capital. In total, approximately 1,400 investment firms made at least one climate tech deal in 2021. The food & water sector attracted the most unique participating investment firms (456 firms in total) followed by energy and mobility with 381 and 363 participating investment firms respectively. In total, these three sectors made up two-thirds of all unique investments in climate activity in 2021. Notably, many investment firms allocated capital to the carbon sector for the first time ever, with that sector seeing the greatest year-over-year growth.
When we look at the climate funds that are actually making investments in climate tech, we see that 64 new climate funds launched in 2021. These included venture capital funds, private equity, and infrastructure funds. In terms of the size of these newly launched funds, two-thirds were medium to large funds with assets under management of $50-500 million. However, the majority of the cash invested comes from 15 new mega funds that were launched in 2021. Mega funds are those with assets under management of more than $500 million. These mega funds typically are looking to make infrastructure-type investments in ready to deploy technologies like renewable energy.
Implications for Climate Tech Companies
Climate tech focused firms have a huge opportunity in front of them. Not only is climate change an issue that is increasingly top of the agenda for governments and corporations around the world, but institutional money managers are now seeing climate tech as an investable asset class. Attracted by the potential for outsized returns, investment in climate tech is expected to remain hot in the coming years.
Climate tech start-ups can look to further their company growth and capitalize on investor interest by joining the growing list of accelerators focused on climate. One of the top accelerators in the space is called 100+ Accelerator. Launched in 2018, the organization provides a 6-month remote program for start-ups in the seed to series B stage. AB InBev was the founder of the 100+ Accelerator, but Coca Cola Company, Colgate-Palmolive, and Unilever have all since joined as founding partners. Google has even launched an accelerator focused on emerging climate tech. Google will focus on areas of climate tech that align with its core competencies in areas like blockchain, fintech, artificial intelligence, and cloud computing.
In addition to raising capital, climate tech start-ups will also need to compete in the growing war for talent among professionals with experience in the field. Those with engineering skills such as energy assessment, project management, and project design are in high demand in the renewable energy field. While those with expertise in environmental, social and governance (ESG) issues are in high demand across professional services, including at finance and investment firms, management consultancies, boutique advisory firms and real estate. In addition to advisory services, nearly every publicly traded company is required to provide stakeholders with annual sustainability and climate-risk reports. Climate tech start-ups with compelling growth narratives are likely those that will have the most success attracting investment and human capital.
Please Get in Touch
Frostbyte is working with a number of businesses developing new products and services related to climate tech. Our sustainability services are cost effective and the broadest in the industry. We deliver environmental and sustainability solutions to established firms in the energy, mining, chemical, and construction sectors. We also work with are clients that are interested in making a strategic shift in the field of climate tech. Many of our existing client see attractive investment opportunities in the business of decarbonization and climate change management. Frostbyte has a team of environmental specialists that can help you navigate regulatory reporting requirements, data management, and carbon market opportunities.
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