Last year, climate tech seemed to be invincible while the venture capital and startup worlds were fretting about a downturn and scrambling to conserve cash. Climate tech investors and founders in 2022 may not have hit the heights of 2021 but they didn’t drop off a cliff either.
In the first quarter of the year, we started to see cracks in the firewall that separates climate tech from the broader tech industry: The space saw a decline of more than a third in both the number of deals and money invested compared with a year earlier.
Still, there are plenty of possible reasons why the sector’s sudden stumble was merely a misstep and not the beginning of a downward spiral.
For one, the Inflation Reduction Act may have encouraged some to close deals sooner than they planned to. Many founders I’ve spoken with said that the law, which was signed in August, was both welcome and unexpected. Not only did it provide support through new regulations and incentives, it also brought certain climate technologies into the national conversation.
As a result, some founders felt the need to speed up their plans. That might have left the pipeline a little dry in the new year.
“The correction for climate tech companies was mostly at entities that SPAC’d or went public as if they were a single winner-take-all entity.” Arch Rao, founder and CEO, Span
Then SVB collapsed. The bank’s failure didn’t hit climate tech as hard as some other sectors, but the bank had been friendly to climate tech startups, accounting for some 60% of the total financing for community solar projects.
But the real impact was felt at a deeper level: SVB’s collapse didn’t make running a VC firm or a startup any easier no matter what it focused on. “Operationally, if you’re running a firm, the SVB stuff put new deals down,” Abe Yokell, managing partner at Congruent Ventures, told TechCrunch+. “You couldn’t make capital calls; you couldn’t use your lines of credit or somebody on your syndicate could not.”
So, between SVB and the market reacting to a new regulatory regime, it’s no surprise that Q1 strayed a bit from previous trends.
But what does the rest of 2023 look like?
Yokell suspects that the pace of deals will largely hold up. “My suspicion is that on a deal-count basis, it’ll be pretty steady as she goes,” he said. “We’re still seeing a lot of flow at the early stage as well as the mid- to late-stage.”
But he cautioned that climate tech could see fewer dollars coming in. “What is different is that fewer companies are going out and trying to raise massive $200 million-plus rounds,” he said.Even when climate tech startups did land massive rounds, their valuations weren’t quite as high as they could have been in the past couple of years. In climate tech in 2021 and 2022, “there was not the broad run up in valuations that tech saw. Things weren’t getting done just to completely ridiculous valuations,” Yokell said.
“The high-water mark for some of these tech companies was so high that coming back to any semblance of rational comparables, for example, is a long way to fall. Whereas in climate, with some exceptions, we didn’t get up to this nosebleed section. So we have a lot less to fall to come back to market norms.”
But the companies that did have room to fall were companies that went public via SPAC deals. In the heyday of the SPAC craze, capital-intensive startups like battery and electric vehicle startups were drawn — or pushed by investors — to the public markets via reverse mergers.
Part of the problem, said Arch Rao, founder and CEO of Span, was how those companies and their investors viewed their position in the marketplace. “The correction for climate tech companies was mostly at entities that SPAC’d or went public as if they were a single winner-take-all entity,” he said.
That winner-take-all mentality, no doubt inspired by some pundits’ takes on Tesla circa 2021, helped to push some hardware-centric startups to valuations that couldn’t be backed up by their balance sheets or realistic expectations about their future market share.
But hardware companies like those tend to have long timelines that demand massive amounts of funding, which many investors shy away from. SPACs, though, gave such investors an opportunity to shortcut the process and cash out earlier than they would have been able to historically.
Last year, appetite for SPACs waned, which may have tempered some enthusiasm around climate tech startups among investors less experienced in the space. That might help explain why 2022’s numbers were off from 2021, and why 2023 has gotten off to a rocky start.
Still, deals are likely to pick up again as more generalist investors understand what it takes to invest in climate tech. Their path isn’t predetermined; after all, investing in climate tech is in many ways very different from SaaS or games or fintech.
But climate does have significant overlap with many sectors, and as generalist investors start testing the waters, their confidence will grow. The market conditions surrounding climate tech are too robust to ignore.