Europe’s startup ecosystem has been battered this year but climate tech founders have managed to avoid the brunt of the immense downturn so far.
Swedish sustainable steel manufacturer H2 Green Steel, French battery maker Verkor, and British clean energy startup Zenobe have raised billions of dollars between them in 2023, demonstrating the continued investor interest in the sector.
Venture capital investment into climate tech is set to drop by around a quarter to 12.1 billion euros ($12.8 billion) this year, according to analysis by Insider on PitchBook’s Q3 2023 European Venture Report. PwC’s global analysis of the sector also points to climate tech outperforming the norm, accounting for a tenth of private market investments in 2023.
That drop-off pales in comparison to other sectors like fintech or software-as-a-service, which are both predicted to record declines of over 60%, per Insider’s analysis. Venture capital investment into European startups more broadly is primed to slump by around 46% to 58.1 billion euros in 2023.
Startups operating in areas like energy, climate fintech, sustainable materials, and carbon removal have managed to shrug off the effects of the widespread dearth in funding. They’ve been helped by regulation on both sides of the Atlantic, an array of hefty grants, and an uptick in the amount of experienced founders operating in the sector, investors told Insider.
Legal obligations to reach net zero help startups
Climate tech has been somewhat insulated by an array of cross-sector regulations and corporate commitments that have sent countries and companies scrambling towards net zero, usually with a target of either 2030 or 2050.
Some of these regulations force businesses to report and slash their emissions footprint, which presents an opportunity for startups to help them do so – somewhat guaranteeing market demand.
These obligations have helped make climate tech startups “catnip to investors,” Sustainable Ventures’ Stuart Ferguson said.
The wider investment market has also woken up to the “giant commercial opportunity” that climate tech presents, according to Fabian Heilemann, founder of VC fund Aenu.
Heilemann said President Biden’s Inflation Reduction Act, loaded with climate-related subsidies, and the EU’s Green New Deal will provide “additional tailwinds for years to come.”
More experienced founders enter the fray
For Check Warner, a partner at Ada Ventures, one welcome addition to the climate tech sector was the large number of “exceptional” second or third-time founders who typically had exited an enterprise software-as-a-service play and turned their attention to impact.
One benefit of this: faster fundraising. “This is important in cases where founders are building ‘full stack’ companies that include both a hardware and software component,” Warner said.
There is still “significant technical and executional risk”, she said, because climate tech companies are often creating a new market, new material, or are working with both hardware and software – a step change from enterprise software.
The push to speed up decarbonization
The world cut its reliance on carbon by 2.5% in 2022, per PwC’s Net Zero Economy Index 2023 – demonstrating a decarbonization rate that is “far too slow,” according to Speedinvest climate investor Namratha Kothapalli.
It needs to be increased seven-fold to limit warming to 1.5 degrees Celsius above pre-industrial averages, the report noted. That means speeding up the removal of carbon dioxide across the whole economy, especially in hard-to-abate areas.
As a result, investors have turned their attention to companies that speed up this process, especially heavy industry and energy sectors, which represented 24% and 34% of annual greenhouse gas emissions in 2019 respectively.
Within energy, investors tipped demand response, virtual power plants, and hydrogen as areas to watch. Such companies include Norwegian energy darling Tibber, London-based energy management company Elyos Energy, and hydrogen startup Hystar, also based in Norway.
Valuations hold steady as deal flow slides
Climate tech has a habit of pulling investors into massive deals often due to the high upfront cost involved in developing the technology. Last year, European companies like electric vehicle manufacturer Polestar and batter-maker Northvolt raised 1.6 billion euros and 1 billion euros respectively.
2023 has been no different with H2 Green Steel raising 1.5 billion euros in equity for a green steel plant and Verkor landing 850 million euros in equity as part of a 2 billion euro mixed round for a battery gigafactory.
Larger deals have been evident at the seed stage too, said Lisa Barclay of Nesta Impact Investments. She noted rounds of £3 million ($3.6 million) to £6 million, which “suggests GPs are concentrating capital into fewer deals, as well reserving more capital for future rounds.”
Valuations have also been ticking up at the early stages, Sustainable Ventures’ Ferguson said.
The fund, which aims to lead pre-seed rounds as the first institutional capital into companies, has seen its average pre-money valuation and average round size more than double since 2021, despite the hype year largely being considered an outlier.
Average pre-money valuation has jumped to £2.75 million in 2023, and round size to £535,000 the firm told Insider.
Some sub-sectors are more deserving than others, investors said. Question marks remain on the valuations of plant-based proteins, according to Aenu’s Heilemann.
“There are many interesting plant protein companies and technologies, but many are still priced from the bull market period and we see the market asking for what are reasonable valuations going forward.”
Looking forward, there is downward pressure on exits, Sustainable Ventures’ Ferguson said. The dead IPO market is well documented but mergers and acquisitions have cooled too, he said.
Most corporations recognize the need to decarbonize themselves and their supply chains, but “no one’s rushing” to spend huge amounts on new acquisitions right now, Ferguson said.
Read the full article here