The climate tech startup bubble has popped. At least that’s what it’s starting to feel like for many entrepreneurs and investors.
Didn’t know there was a bubble? The last two years have been climate tech boom times. Startups tackling climate sectors such as energy, transportation and carbon removal have achieved sky-high valuations and had access to tens of billions of dollars of cheap, easy(ish) money.
In 2021, thousands of climate tech startups collectively raised over $50 billion from venture capital and private equity investors, according to analysts at Bloomberg Energy Finance. The same year, Silicon Valley Bank reports a record 104 climate tech exits valued at $114 billion. A bunch of those exits were thanks to the go-go SPAC craze, where private firms used "special purpose acquisition companies" to go public more swiftly, easily and with minimal transparency than ever before.
But now the overall tech market has turned. Spooked by an era of post-stimulus, inflation and a war in Europe, the stock market recorded its worst first half-year performance in decades. Not surprisingly, investors are responding by moving away from risk and into safer investments.
Of course it’s affecting the climate tech innovation ecosystem, which is made up of startups developing diverse products ranging from carbon accounting software to electric vehicle batteries to nuclear fusion projects. The investors, too, range across the board from general tech VCs that dabble in climate to climate-focused and vertical-specific funds to sustainability-minded big corporations.
Climate tech startup funding numbers for the first half of 2022 are just coming in and are a lagging indicator. According to the Climate Tech VC newsletter, venture capital dollars in climate tech startups dropped by over 20 percent compared to the second half of 2021, although the amount actually rose compared to the first half of 2021. The biggest hit from the 2022 numbers was for later stage climate tech companies, which saw funding drop by 39 percent between the first half of 2021 and 2022.
Bloomberg New Energy Finance found that climate tech startups raised $27.9 billion from VCs and private equity investors in the first half of 2022, which was again a 47 percent increase from the first half of 2021. However, $15.7 billion — or the majority — of that haul was in the first quarter, while the second quarter was flat. BNEF’s report notes: "This could suggest that investment in climate tech is slowing down, or not accelerating as quickly, as we expected, although it is perhaps too early to draw concrete solutions."
With a bear market and a recession still looming, this could be just the beginning of some kind of climate tech startup downturn, although it will affect startups disproportionately across sectors, at different stages of growth and at varying levels of risk.
People who are adapting are thriving. There’s no chill on the overall market. The chill is on last year’s business plan.
For those of you who have lived through a bubble and bust tech cycle before — or even the original cleantech bubble and bust of the mid-aughts — you know that exiting frothy times is not necessarily bad news for everyone. Investors will take the opportunity to get better deals, and quality climate tech startups will continue to be able to raise funding.
But a bubble-bursting means climate tech entrepreneurs will need to adjust their game plan. They’ll need to adapt, conserve cash, negotiate flat or down fundraising rounds, adjust to rising costs of capital and look at forms of financing outside of venture capital. It’ll also mean raising money could be more challenging overall, and companies will need to hit higher technical and market bars to try to maintain valuations.
Not all climate tech startups will make it through tight funding times. But the investors and entrepreneurs GreenBiz spoke with remain hopeful and cautiously optimistic there won’t be a repeat of the first cleantech bust — where a cleantech winter lasted a solid decade.
That’s because fundamental market dynamics including the sky-rocketing growth of electric vehicles, the rapid expansion of low-cost solar and wind and the high price of natural gas and oil all point to major growth right now for climate tech solutions. Fingers crossed: Climate tech is far too crucial for the future of the planet to be handicapped by shifting financial winds.
The valuation correction
Similar to what’s happening in the world of tech startups, climate tech entrepreneurs are seeing investors offer term sheets with lower valuations and more dilution of founders’ equity stake, compared to the term sheets of the prior two years. Startups raising funding in an "investors market" could also see more dubious terms as investors look to capitalize on lower valuations.
General venture capital tech investors that have portfolio companies in sectors that have been particularly hard hit by the financial turmoil — such as the crypto crash — could take an even more cautious approach. Many VCs will struggle this year to rebalance their portfolios toward less risky investments.
That means capital-intensive climate tech startups, such as ones that need to build factories to churn out solar hardware or next-gen biofuels, could struggle to raise money from general tech VCs in the short term. VCs that maintain a climate tech thesis could switch to software-based and capital-light climate tech investments. A similar shift happened in the first cleantech bust, as capital for building demonstration plants and factories dried up.
"On the VC side, it’s already having an impact," said Rob Day, co-founder and partner at Spring Lane Capital, a fund that provides project equity and growth capital for small-scale climate tech infrastructure. Day used to write the Cleantech Investing column featured on Greentech Media and lived through the cleantech bust firsthand. Day said for investing where "the exit drives the return," investors will "want to pay lower values," when the stock market goes down and the IPO window is shut.
So how do startups navigate trying to raise funding when investors are seeking lower valuations that could lead to flat or down valuations during their next funding round?
The founder and CEO of electric vehicle charging software startup WeaveGrid, Apoorv Bhargava, suggested: "Stay strong. Don’t let yourself get bullied around by investors changing their minds all of a sudden. Show how your fundamentals are in line with where the long term market is headed, and how you're still continuing to sequentially derisk building a massive business while tackling the problem of our lifetimes." WeaveGrid raised a $15 million series A round of funding in spring 2021.
Venkat Viswanathan, associate professor of Carnegie Mellon and cofounder of several startups, said that while the biggest climate tech funds are still plowing forward, smaller funds are watching and waiting. "The FOMO investments have died down," he said.
Viswanathan advises that founders approach investors where the typical check size is larger than an entrepreneur would need so that investors aren’t "playing the bargaining game to invest in your company." Investors are "trying to use the [down] market situation as a tool to bring down company valuations."
Seek financing outside of VC and adapt
Similarly, Day said, "Don’t slow down your growth plans," but look for "other sources of capital, while VCs take their step back." Day suggested looking outside of venture capital for future non-dilutive funding. Spring Lane Capital is one of a few newer funds that provide project funding for distributed climate tech infrastructure such as wastewater treatment plans, commercial electric fleets and anaerobic digesters.
Other groups such as nonprofit Prime Coalition are partnering with philanthropic investors to fund high-impact climate tech startups with long horizons. Prime has funded startups including carbon removal company Charm Industrial, lithium extraction startup Lilac Solutions and fusion energy startup Avalanche.
There’s also U.S. government funding out there, kicked off by the Biden administration’s climate agenda. The U.S. Department of Energy’s recently reawakened Loan Programs Office is in the process of deploying more than $40 billion of loans and loan guarantees for climate tech infrastructure projects. Loan Program Office head Jigar Shah told GreenBiz that in a tighter private funding market, the loan program has seen increased and renewed interest from entrepreneurs building climate tech infrastructure projects.
It’s important for companies to be able to survive this downturn, and so preserving cash will be important. As such, we have guided companies to extend runway as much as possible without sacrificing major milestones.
Shah said climate tech startups with compelling business plans can still raise money, but it’s about being adaptable to the new market. "People who are adapting are thriving. There’s no chill on the overall market. The chill is on last year’s business plan," Shah said.
Adjusting quickly and adapting to tough times is a hallmark of preeminent venture capital firm Sequoia Capital’s message in May to its portfolio companies — which range across tech from enterprise software to crypto firms to climate tech. Its "Adapting to Endure" presentation quotes Charles Darwin: "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."
Conserve cash and extend the runway
While startups shouldn’t handicap their own growth, they’ll need to maintain cash for a potentially extended downturn where funding will likely be more difficult to raise.
"It’s important for companies to be able to survive this downturn, and so preserving cash will be important. As such, we have guided companies to extend runway as much as possible without sacrificing major milestones," Christian Garcia, partner with Breakthrough Energy Ventures, told TechCrunch last month. Breakthrough Energy Ventures is a fund that includes investors Bill Gates and Silicon Valley VCs John Doerr and Vinod Khosla.
Monolith CEO and co-founder Rob Hanson told Climate Tech VC in an interview recently: "A large part of scaling a successful climate company is access to low cost capital. A large cohort of startups are about to enter the first Valley of Death at the same time, right as the cost of capital has gone up. Of course in any capital market, the most resilient, best performing businesses will survive. But it’s going to be a tough slog. ... Let’s just say that it’s going to get hot in the Valley… in a dehydrating way!"
Sequoia’s presentation notes that tech companies that move quickly when it comes to making tough decisions will have the most runway and are most likely to avoid a death spiral. The same applies for climate tech companies. "Do the cut exercise (projects, R&D, marketing, other expenses). It doesn’t mean you have to pull the trigger, but that you are ready to do it in the next 30 days if needed," says Sequoia in its presentation.
Some climate tech startups might find themselves with a small runway of cash and need to raise funding, but are unable to find terms that are favorable. "Survival >> Terms You Don’t Like," notes Sequoia.
The notion that climate tech will be uniquely immune to a downturn isn’t likely. Breakthrough Energy Ventures’ Garcia put it this way to TechCrunch: "I would say it [climate tech] is just as vulnerable, if not more vulnerable to recession. … Financial market headwinds certainly affect climate investing overall, and as tech is the bellwether for risk capital, headwinds definitely flow down to other sectors."
Investors point to capital drying up for later stage climate tech companies, but suggest that early stage companies will still readily have access to financing given the new climate funds raised. However, the valuation correction and investor derisking will affect all climate tech startups regardless of stage.
However, despite a potentially short-term funding cooling period for climate tech startups, investors and entrepreneurs continue to be bullish on climate tech’s importance and huge potential for market growth. Natural gas and oil prices are close to their highest in a decade. Global electric vehicle sales are soaring. And solar and wind accounted for 10 percent of the world’s electricity generation in 2021, up from 1 percent in 2020.
BNEF just released figures for renewable energy financing for the first half of 2022 and found a record $226 billion invested, "an all time high" for the first half of a year. Over $200 billion of that was for clean energy project deployments, which shows that despite rising costs of materials, investor appetite is stronger than ever.
Investors and entrepreneurs are optimistic that the climate tech startup sector will bounce back much more quickly than after the first cleantech bust. Day said: "The last cleantech bubble was a flavor of a month. Now it’s a mega trend."