Investors pay up for decarbonization deals, bucking VC downtrend

In a year when VCs have slowed their investment pace in most sectors, their growing appetite for companies that help reduce carbon emissions stands out as a bright spot.

Through Q3, carbon and emissions tech startups have raised $10.7 billion in VC investment across 517 deals, according to PitchBook’s latest Carbon & Emissions Tech Report. That puts dealmaking in this vertical on track to surpass last year’s record of $13.6 billion across 656 deals.

 

 

Startups in the carbon and emissions tech vertical develop technologies that capture and store carbon and reduce emissions from sectors such as manufacturing and agriculture.

Money into this vertical has been flowing in response to a higher frequency of climate-related natural disasters, scientists’ warnings about the planet’s future and growing interest from consumers, according to John MacDonagh, an emerging tech analyst at PitchBook.

There was no shortage of sizable carbon and emissions deals in Q3, and private equity investors and corporations have been particularly active in recent large VC deals.

 In July, Swedish lithium-ion battery producer and recycler Northvolt raised a $1.1 billion convertible note from investors including Volkswagen, Goldman Sachs Asset Management and Baillie Gifford. Later that month, Xpansiv, an exchange for trading environmental commodities like carbon offsets and renewable energy credits, closed on a $400 million late-stage round led by Blackstone.

Another notable deal of Q3 is Monolith, which manufactures hydrogen from methane without releasing carbon dioxide. The startup secured a $300 million Series D led TPG and Decarbonization Partners.

In contrast to the broad VC ecosystem, which has seen valuations dip this year, prices for deals in carbon and emissions tech have been heating up for all stages, but most significantly at the early stage, where the median pre-money valuation jumped to $35 million, an 84% increase from last year.

 

 

Investor interest in this vertical is expected to grow as VCs take advantage of the Inflation Reduction Act signed in August. The legislation committed about $370 billion to combat climate change.

“Without government incentivization, there’s not much [that can] make people decarbonize,” MacDonagh said. Various city, state and federal government programs existed before the new law, but investors expect it to be a boon to the space.

Featured image by JOHN MACDOUGALL/Getty Images