Field notes The Energy Transition for the Rest of Us

Catalyst N° 012 of 125 11 Jan 2024

2023 climate tech venture investment trends

with Kim Zou, co-founder and CEO, Sightline Climate

8 min readOriginal episode

In this note
  1. 01The question
  2. 02The answer
  3. 03The argument
  4. 04What you need to know first
  5. 05Details worth keeping
  6. 06Claims worth citing
  7. 07Where it’s contested

The question

Climate tech venture funding fell about 30% in 2023. What did that drop actually measure?

The answer

Mostly the disappearance of very large growth rounds, not investors leaving the sector: dollars fell roughly 30% to $32 billion while the number of deals was essentially flat, down 3%. Zou reads that as a market resetting to more realistic round sizes. The genuinely new signal buried underneath it is that Series A dollars fell 41%, the first early-stage decline in the four years she has been tracking the space.

03The argument

The headline number is real but it measures something narrower than it appears. Sightline counts venture and growth equity only, excluding project finance and debt, and within that universe the dollar total fell about 30% to $32 billion while deal count barely moved. Because climate tech leans toward hardware and manufacturing, it periodically throws off billion-dollar rounds that swing the aggregate on their own. The standout in 2023 was H2 Green Steel’s $1 billion for a Swedish plant, which Kann calls the year’s one genuinely enormous round and credits with much of the industry vertical’s gain. So the total is partly a measure of how many mega-rounds happened to close, and by that logic the seed and Series A market was still functioning. For context Zou offers PitchBook’s third-quarter figure of 39% down for venture overall, which makes climate marginally insulated rather than dramatically so, and she is careful that the year was not yet final.

Zou then pushes the reframe further, and this is the part that outlasts the numbers. She argues that absolute venture dollars is the wrong success metric for this sector in the first place. These companies exist to build plants, and the goal is to graduate out of venture into project finance and debt rather than to keep raising $100 million to $500 million growth rounds that are expensive and dilutive. On that view a smaller round sized to the next milestone is healthier than a round sized two or three times larger to hit a valuation the company is not ready for. The mega-deals that did happen support the point: the largest rounds went to companies with projects already in motion, and six of the ten largest deals had raised hundreds of millions in public or government financing over the prior two years, from the US Loan Programs Office or the European Investment Bank, which Zou treats as evidence that public capital is catalyzing the private rounds.

The catch is that the same fact carries a much less flattering reading, and Zou gives both. Many of 2023’s smaller rounds were not right-sized graduating rounds but bridges and extensions raised from existing investors to buy runway and avoid marking the valuation down, and she reports a significant drop-off in companies able to move up a stage at all. Kann adds that bridges frequently go unannounced, so the real trend is probably more pronounced than the data shows. And the Series A figure does not fit the mega-round explanation: count held flat or slightly up while dollars fell 41%, which is a price decline at the earliest stage, and Zou calls it the first time the macro downturn reached there.

Underneath the totals, the sector mix rotated. Food and land use, historically one of the big three alongside transportation and energy, fell 55% to $3 billion on the back of alternative protein’s public-market performance and a run of bankruptcies in indoor and vertical farming, and industry took its place. Emissions and sustainability reporting also fell, which Zou attributes to oversaturation by generalist investors who recognized a familiar business-to- business software shape, plus the observation that many of those companies turn out to be more consulting than software. Exits halved, driven by climate SPACs fizzling out. The investor base shrank about 5%, which Zou reads as tourists leaving and repeat investors becoming the core, and she treats that concentration as maturation rather than retreat.

04What you need to know first

Venture and growth
Equity investment in companies, from seed through late growth rounds. This is the whole of what the report counts. Project finance and debt, which is how actual plants get built, sit outside the dataset, and much of the episode’s argument is about the boundary between them.
Graduating round versus bridge or extension
A graduating round moves a company up a stage, typically at a higher valuation. A bridge or extension buys runway from existing investors without setting a new price, which is how a company avoids a public markdown. Both show up in the data as a completed deal; they mean opposite things.
Mega-round
A very large late-stage round, hundreds of millions to over a billion dollars. Climate tech generates them because the underlying assets are physical, and a handful of them can dominate any annual total.
SPAC and de-SPAC
A special purpose acquisition company is a shell that goes public first and then merges with a private company, taking it public without a conventional IPO. Climate tech used this route heavily in 2021.

05Details worth keeping

  • Sightline sorts climate tech into seven verticals: food and land use, transportation, energy, industry, climate management (climate risk, emissions and sustainability reporting), built environment, and carbon.
  • Zou compares each vertical’s share of funding to its share of emissions. Transportation is the long-standing overfunded one; energy and heavy industry are underfunded on that measure. She credits Tesla for pulling a generation of investors toward transportation, and says industrial decarbonization is now attracting purpose-built funds, helped by industrial heat pumps, green steel and cement, and policy support.
  • Her explanation for energy’s underfunding is investor sentiment that renewables are mature enough that the problem is solved. Kann pushes on this, noting electricity is only about 20% of US final energy consumption, and flags explicitly that he is editorializing about the venture opportunity there.
  • Notable exits: Nextracker’s IPO, which Kann places in the earlier cleantech era but counts as proof that climate hardware can go public; a renewables developer whose name the transcript garbles; LanzaTech completing a SPAC; and Occidental acquiring Carbon Engineering for $1 billion, which Zou calls the first unicorn in direct air capture and probably in carbon removal.
  • Proterra’s bankruptcy is the instructive failure. It had real revenue selling electric buses, unlike most of the de-SPAC cohort, and was still undone by inflation, interest rates and supply chain disruption. Its battery business was acquired by Volvo. Kann notes that weaker pre-revenue companies have hung on longer as effectively zombie public companies.
  • Geography: about 80% of investment went to the US and Europe, with 19% of tracked companies in California and 10% in the UK. The vertical mix differs by place, with hard tech such as long-duration storage and hydrogen concentrated in California, climate management companies in Europe where reporting rules bite, and micro-mobility and battery swapping in Southeast Asia and India.
  • Kann predicts Texas, specifically Austin and Houston, moves up the rankings; that is a forecast, not something in the data. Zou describes a Houston visit where startups made the case on talent, offtakers, oil and gas project expertise, and cheaper labor and space.

06Claims worth citing

All figures as stated on 2024-01-11 and describing calendar year 2023. The comparison against overall venture used PitchBook’s third-quarter report, not a final year figure, and Zou says so. Investment totals are revised after publication, so treat these as first-pass.

  • $32 billion in global climate tech venture and growth funding in 2023, down 30% from 2022. Zou
  • Deal count down 3%. Zou
  • Overall venture and tech down 39% as of PitchBook’s Q3 report, with the final number not yet available. PitchBook, cited by Zou
  • Late-stage and growth investment down 30%; Series A investment down 41% versus 2022, the first Series A decline in four years of tracking, with deal count flat or marginally higher. Zou
  • Food and land use down 55% to $3 billion. Zou
  • H2 Green Steel raised $1 billion for a plant in Sweden; Boston Metal raised $200 million. Kann recalls Commonwealth Fusion raising $1.8 billion a couple of years earlier as the kind of round that did not recur in 2023. Zou, Kann
  • Six of the ten largest deals had raised hundreds of millions in public or government financing over the prior two years. Zou
  • Exits down 50%; climate tech SPACs down 80% year over year; 80% of acquisitions had undisclosed terms, which Zou infers means many were small. Zou
  • Occidental acquired Carbon Engineering for $1 billion. Zou
  • Transportation: 15% of global emissions per the IPCC’s 2019 report but 30% of venture and growth investment since 2020. Energy: 22% of funding against 34% of emissions. Heavy industry: 10% of investment against 24% of emissions. Zou
  • Investors doing more than one deal declined 5%; repeat investors are defined as those doing four or five-plus deals a year. Zou
  • About 80% of investment went to the US and Europe; 19% of tracked companies were based in California and 10% in the UK. Zou
  • Kann counted close to 40 climate tech companies that went public via SPAC in 2021 and early 2022, most of them pre-revenue, and says he does not remember the exact number. Kann

07Where it’s contested

  • How much of the 30% decline is real. Kann proposes that the market was not really down 30% and that almost nobody simply raised a mega-round. Zou agrees in part, then supplies the Series A figure, which is a genuine price decline at a stage where mega-rounds are irrelevant. The stronger version of Kann’s framing is not what the data she presents supports.
  • Whether smaller rounds are health or distress. Zou explicitly gives both readings: right-sizing to milestones is better for founders and investors, and at the same time many of these rounds were bridges taken to avoid a valuation downtick by companies that could not graduate. She does not claim to know the split.
  • The dataset is acknowledged as incomplete. Both agree the missing pieces skew toward unannounced bridge rounds and unreported shutdowns, meaning the reported numbers understate the stress rather than overstating it.
  • The tourist-investor question is answered by inference. Kann asks whether climate tech tourists ever existed. Zou’s answer is that she would ascertain most of the 5% decline came from investors who did one deal and left, which is a reading of the composition rather than a direct measurement.
  • Acquisitions are not obviously good news. Zou notes acquisitions are not always a sign of a healthy exit market, and that some 2023 deals were buyers scooping up struggling companies at low valuations.
  • The 2024 outlook is a forecast and she frames it that way. Zou is positive on 2024 because the wait-and-see conditions of 2023 have clarified and runway-extending companies must return to market, but conditions her optimism on interest rates and inflation easing, and says the real test is whether climate tech can start financing facilities outside venture at all.

Cite as: “2023 climate tech venture investment trends,” The Energy Transition for the Rest of Us, note on Catalyst with Shayle Kann, January 11, 2024. CC BY 4.0. View the Markdown

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