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Chart: What’s the state of climatetech startup funding in 2023?

VC investment in climatetech startups is down big in the first half of the year. But more startups are raising money than last year as investors prioritize smaller deals.
By Dan McCarthy

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Funding for climatetech startups this year is off to its worst start since 2020, but the situation is more complicated — and perhaps less dire — than that fact may suggest.

Just over $13 billion was invested in climatetech startups worldwide in the first half of 2023, according to new data from Climate Tech VC, which tracks investment in climatetech — down significantly from the nearly $22 billion startups raised in the first half of 2022

Venture investment helps get potential climate solutions off the ground by funding risky, early-stage ideas that might struggle to get money from a bank or more traditional sources of capital. Decarbonizing systems for producing cement, growing meat in bioreactors, pulling CO2 out of thin air, making home electrification easier — all of these are unsolved problems that startups are presently using venture money to try to figure out.

But the ongoing slowdown in this key segment of climate finance is not necessarily cause for panic, according to Kim Zou, co-founder and CEO of CTVC.

Rather, she said it reflects a shift in priorities among climatetech investors. Venture firms are now steering money toward smaller investments in earlier-stage climatetech companies and moving away from so-called megadeals” that pour huge amounts of money into more mature, capital-intensive startups working on things like EVs.

The data illustrates this story well: Though VCs are investing less money in climatetech startups overall, they’re investing in a larger number of companies. In the first six months of this year, 633 climatetech startups raised money, up from 586 in the first half of last year. The trend is even more dramatic for the earliest-stage startups — 34 percent more seed-stage companies received funding in the first half of 2023 than in the first half of 2022.

Meanwhile, the funding environment has been harsh for mature climatetech startups, which face more urgent pressure to demonstrate both profitability and a path to exit opportunities for investors, such as going public or finding a willing corporate buyer.

Much of this later-stage funding has gone to EV and energy startups in recent years, but the shift away from more mature startups caused each of these segments to see a 50 percent drop in funding in the first half of this year compared to last. Those markets are now relatively saturated,” Zou said, noting that instead, we’re seeing an uptick in early-stage activity concentrated in unlocking decarbonization, so things up and down the value chain — critical minerals, mining, EV charging, deployment of heat pumps.”

This year’s funding slowdown represents the continuation of a steady downward march from the boom times of late 2021, when venture capital investment reached historic highs not only for climatetech startups but in overall terms as well. But from Zou’s perspective, this trend could be perfectly natural.

2021 and the very beginning of 2022 was really the market peak, and some investors would say was almost too much of a peak — there were crazy deals, crazy valuations getting done, that were not sustainable,” she said. So one could also read this as, rather than we’re in a free-fall market decline, we’re coming back to pre-peak — a more sustainable investment ecosystem, where deals that should be done are getting done, at a reasonable valuation.”

But soon, she said, we’ll know if that’s the right way to look at things or not. 

The asterisk to that is that Q3 and Q4 are typically where we see the most activity,” she said. So really that’s where the question lies.”

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Dan McCarthy is news editor at Canary Media.