Venture capital is drying up, but climate startups are bucking the trend

Yet there’s one sector that bucks the trend: climate technology.

According to Pitchbook’s latest data, carbon and emissions tech startups raised over $10bn in VC investment across 517 deals in the third quarter. That means 2022 was on track to significantly exceed 2021’s record of $13.6bn across 656 deals.

Even in the midst of economic uncertainty, the climate sector is still a popular investment target. Why might that be?

Consumer sentiment 

Consumer sentiment moves markets, as we’ve seen repeatedly in the past. When it comes to establishing sustainability as a core business function, consumer expectations are a huge influencer.

Climate and environment technology is not a new thing; awareness of climate issues and the exploration of how innovative tools can help meet objectives is well established. But while there has been significant investment in this sector over the past 20 years or so, there have been few landmark exits. Activity is now ramping up, so we’re likely on the precipice of major evolution in this sector.  

Growing investment 

Given the rate at which the climate industry is growing, there’s greater potential for large, industry-defining businesses to emerge. We’re therefore likely to see increasing flows into climate VC as the industry develops, and larger exits are realised. 

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Carbon emissions startups that were previously unobserved are now gaining interest thanks to greater awareness around how to tackle climate change. According to Pitchbook, valuations in carbon and emissions tech have also increased, with early-stage VC witnessing a median pre-money valuation jump to $35m – 84% up from 2021.

Furthermore, the money raised over the past 18-24 months means there’s a lot of dry powder. Firms will be assessing where best to invest their unspent cash reserves, with many moving away from volatile markets like crypto, meaning climate and environmental tech may become even more popular.  

Tech for good 

A final motivator behind VC interest in carbon emissions startups is ESG and the rising tide of ‘tech for good’. 

Limited partners are increasingly looking at the social impacts of their investments, so it’s unsurprising that climate tech is a popular choice. That isn’t to say that it’s only tech for good funds that are working towards this; more generalist VCs are also getting involved. A property technology fund may look at how commercial real estate could become carbon neutral, for example.

All sectors are currently thinking with their net zero hats on. Different areas of the market are converging, and this has knock on impacts, with climate tech often sitting at the centre of it all. 

The rising opportunity 

Investment in the carbon and emissions sector will only continue. The opportunities for VCs are therefore set to multiply over the coming years. Take the US Inflation Reduction Act of 2022 for example — $365bn is to be invested in energy security and climate change programmes over the next decade. 

When so much financial attention is being placed on the sector, it’s unsurprising that VC funds are watching the developments closely. We’re naturally going to see greater interest from private investors at the same time, as sentiment around tech for good drives future investment trends. 

Venture capital is an industry of outliers. It’s a never-ending battle and quest to identify the next unicorn startup that has the potential to revolutionise an industry, or create a new one altogether.

The end goal is to secure a major fund return with a category defining business. This is perhaps what VC funds see in carbon emissions startups. 

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