We are not heading into a climate-tech winter

By Madjiguène Ndiaye, Investment Manager

Recent news headlines might make the casual observer feel like the sky is falling when it comes to venture capital (VC). The first quarter of this year was a veritable bloodbath, with global VC deal values dropping by over half compared with the same period last year. Rising interest rates, recession fears and the sense that valuations were unsustainably high coming out of the pandemic sparked a mindset shift that persists to this day.

Even climate-tech, a sector that bears exalted status in the eyes of many market-watchers, was not immune. According to Pitchbook, climate-tech startups raised $5.7 billion across 279 VC deals in the first quarter. That’s a 36% decline in deal value and a 31% decline in deal count from the previous quarter. However, this is against a backdrop of 2021 and 2022, two bumper years: in 2022 alone, the US invested more into climate-tech VC than across 2006–2011, often considered the peak of the “clean-tech 1.0” boom. 2023 was always expected to be something of a pullback, even if over the long-term it simply looks more like “normal”, sustainable growth.

From 1.0 to today

Indeed, it is helpful to frame the recent fluctuations in climate-tech VC against the clean-tech 1.0 cycle, which ended in 2011–12 with losses of up to 50% and the failure of several once-high-flying companies, such as Solyndra and A123 Systems. Some fear we face a repeat of that investment winter for climate tech. Such fears are unfounded, for three reasons.

First, the majority of the investments of the 1.0 boom focused on the energy sector specifically, a space where “green premiums” were still widespread at the time. Put simply, the costs of wind and solar technologies were still very high relative to both other types of energy and to today’s levels. The prospect that renewable energy would reach cost parity with fossil fuels was hardly a given.

We all know how that story ultimately played out: wind and solar (especially solar) are now the cheapest form of new electricity-generating capacity in most of the world. This proves that climate-positive technologies can be simultaneously good for the world and good for bottom line—providing a major psychological boost for their backers. Funders of decarbonization in other areas—from agriculture to mobility—can point to the electricity miracle in wind and solar as a proof point for their investment plans.

Second, the 1.0 clean-tech investment community focused largely on technology, often at the expense of viable business models. While technological innovation remains the foundation of the sustainability transformation, investors today are more discerning toward elements like scalability and financial fundamentals. A great technology that fills no market need will end up doing little more than languishing in a research laboratory.

Finally, the policy and broader societal landscape have become vastly more accommodating. Countries around the world are showering incentives on climate-positive sectors. The Inflation Reduction Act may drive the cost of wind and solar power generation to, essentially, nothing. Growing ranks of corporates are announcing net-zero goals. Contrast this to 2009, when a landmark bill meant to put a price on carbon failed in the US Senate, Europe’s Emissions Trading Scheme was still in a fragile early state and “net zero” was still more heavily associated with calories than climate.

Paving the road ahead

Of course, no one can predict the future. The road ahead for climate tech will likely face potholes, from macro-economic turbulence to a backlash against ESG bubbling up in pockets (a short-term political distraction, in my reading). None of these will be sufficient to derail long-term secular growth in the technologies needed to put the world on a more sustainable footing.