Executive summary
Record-breaking heatwaves and the Russia-Ukraine war’s reverberating impacts on energy infrastructure set an ominous tone for climate advocates in 2022, but climatetech companies and investors are rising to the challenge. The recent passage of the U.S.’s Inflation Reduction Act of 2022 will funnel significant government spending—$369.0 billion to be exact—to climate and energy security measures over the next 10 years and will likely boost climatetech investments in one of the largest regions for venture dealmaking in the world.
At first glance, year-to-date (YTD)1 deal activity may appear muted compared with the blockbuster 2021, but aggregate deal value and count remain high, surpassing the annual totals of several prior years. Dealmaking among some other investor types follows similar trends, as more parties recognize the long-term potential for climatetech innovations. Median deal sizes have risen across all company stages YTD. Median pre-money valuations have risen for angel & seed deals as well as late-stage VC deals, despite many notable valuation cuts to companies in other verticals. Exit activity, on the other hand, certainly reflects the difficulties investors across all sectors face at the end of their investment cycles, with aggregate exit value in the space declining 90.7% between Q1 and Q2 2022.
Since the onset of the pandemic, cross-border dealmakers have had to adjust to a new normal, including remote due diligence processes, global stock market declines, and soaring inflation. International climatetech investment has seen some dramatic shifts as a result, with investment from historically active geographies ebbing and newcomers stepping to the fore.
This report examines trends in climatetech venture activity and takes a look at cross-border developments in the space.
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Investment trends
Climate imperatives drive growth in dealmaking despite market headwinds.
Investment in climatetech has risen exponentially since 2016, following the signing of the Paris Agreement, which prompted nations across the globe to seek innovative solutions to climate change. 2021 was a blockbuster year for venture capital, resulting in climatetech VC deal value more than doubling year-over-year (YoY). 2022 then presented investors and founders with a unique confluence of challenges, including rising geopolitical tensions and stock market downturns. Despite these macroeconomic headwinds, investors are maintaining elevated levels of investment in climatetech, with deal value closed YTD exceeding the annual total for 2019 and nearly exceeding that of 2020. Value dipped 25.3% between Q4 2021 and Q1 2022 but subsequently grew 19.2% between Q1 and Q2 2022, when many other sectors struggled to sustain investors’ confidence.
Median deal sizes in the sector rose across company stages, with both angel & seed companies and early-stage companies growing more than 30.0% YTD. The median pre-money valuation for angel & seed deals grew modestly YTD, while the median valuation for early-stage VC deals declined slightly. Late-stage VC deals on the other hand experienced a 70.5% rise in median valuation, exceeding $100.0 million for the first time. Late-stage companies naturally amass greater aggregate deal value; however, the deal value disparity between Series D+ deals and earlier stages has not yet materialized YTD as has in past years, with only 14 deals in that category completed YTD. Poor public market conditions are weighing on companies that were previously strong candidates for near-term IPOs.
Climatetech first-time financing activity has exceeded its 2020 level, at just under $500 million, but it declined 29.3% between Q1 and Q2 2022 when overall climatetech VC activity grew. There are predictably fewer new entrants following the flurry of activity in 2021, when capital was plentiful.
Diversified investor types are committing to the space.
Investor participation in the space has evolved as the long-term vision for climate innovation becomes more attractive. Corporate venture capital (CVC) investors have ramped up their climatetech investments in line with traditional VCs. Nontraditional investors (which include mutual funds, hedge funds, PE investors, family offices, sovereign wealth funds, and more) began committing greater amounts of capital to climatetech venture deals around 2016 in order to gain exposure to the attractive returns generated by traditional VCs. These investors committed $13.4 billion to climatetech venture deals YTD, indicating continued interest and willingness to withstand longer periods of illiquidity despite shaky sentiment in other sectors. The median deal size for nontraditional investors has risen 56.3% YTD. PE growth investors entered the space in a major way in 2021, completing 27 deals totaling $3.6 billion. Activity has slowed significantly since then, but YTD deal value is still higher than any year prior to 2021, with an elevated deal count. VC firms that make at least one-third of their investments in climatetech are relatively aligned with the larger population of investors and have completed more deal value YTD than any year prior to 2021. Between Q1 and Q2 2022, deal value grew by 59.6%. Broader climatetech VC deal activity also grew in this period, albeit at a slower pace.
“Qualified opportunities tend to bring capital onto different continents. Prominent investors have claimed that the next wave of unicorns will be companies developing green hydrogen, climate-smart agriculture, green steel, and green cement and that borders will not exist for such investments.” – Stan LewandowskiCorporate Partner (Silicon Valley)
Global events continue to shape regional and cross-border investment trends.
Regional dealmaking data demonstrates that North America, Europe, and Asia maintain their dominance in the industry. The proportion of total deal value generated in Asia has declined over the past five years, a trend magnified by strict pandemic lockdowns in the region, which impeded traditional dealmaking processes. Asia historically ranks first or second in aggregate deal value behind North America, but YTD ranks third behind Europe. Europe is a leading proponent of progressive climate policy and is home to several climatetech unicorns. The start of the Russia-Ukraine war underscored the need to reduce reliance on fossil fuels and caused several nations to change their energy landscapes in order to remove Russia from their supply chain and supplement energy needs as winter approaches. European countries have increased natural gas and coal imports from Australia, Colombia, South Africa, and more. These changes will likely have a lagging effect on private market activity as companies and investors navigate a market with a renewed need for climatetech solutions.
These macroeconomic changes, as well as the COVID-19 pandemic, are naturally shifting the tides of cross-border VC dealmaking. Among the five most active countries for cross-border climatetech VC deal activity YTD, the US leads by a healthy margin in line with historical trends, followed by Sweden, Germany, India, and China. Prolonged energy challenges and varying approaches to pandemic restrictions could augment these activities in the coming quarters.
“Like all new legislation, it takes time to absorb what [the Inflation Reduction Act and Infrastructure Investment and Jobs Act] mean and how they will be implemented, which provides an opportunity to guide clients in assessing and understanding the long-term implications and align them with investment goals.”
Q&A
What trends or areas within climatetech are most exciting to you?
WATSON: Floating wind and carbon capture stand out, partly because of their ability to utilize traditional oil and gas technology. What makes floating wind generation possible is offshore rig technology, developed by oil and gas services companies, being redirected to design new platforms that support wind turbines, enabling them to “float” and access new sources of renewable energy, even in rough sea conditions. For carbon capture and storage, technologies developed to re-inject unwanted gases or other fluids to improve reservoir performance can now support carbon storage in depleted hydrocarbon fields. This means companies that are experts in extracting product from reservoirs underground can now reconfigure operations to inject carbon into the reservoirs. It is yet another example of how oil and gas companies can be part of the solution.
LEWANDOWSKI: I am excited about technology that can help us reach greenhouse gas (GHG) emission reduction targets and carbon neutrality in the next few decades. While climate change is accelerating globally, more nations and states continue to make net-zero emissions pledges, with most target dates by 2050. As climate change continues to pressure food production systems and undermine food security, I am also interested in ways technology can disrupt the food and agriculture sectors. As more customers focus on health, sustainability and freshness of the products they consume, more innovation will follow.
NUNN: For me, it’s the amount of capital pouring in across all sectors aimed at combating carbon emissions and how rapidly climatetech is maturing as an asset class. We are at a phase when a fair amount of previously unproven technology has become commercially viable, and less-risk-adverse investors—for instance, private equity funds and strategics—are looking to support these companies through their next growth phase. Climate change is a ticking clock, and the levels of investment and interest in climatetech are encouraging.
How do you anticipate legislation like the UK’s European Green Deal and the Inflation Reduction Act in the U.S. will affect climatetech companies? How are clients preparing for these changes?
NUNN: The Inflation Reduction Act of 2022 is important for democratizing low-energy costs by making climatetech more accessible to consumers across communities. We will likely see an uptick in small-scale investment at the household level and the emergence of new products tailored to individual and small business use. The Infrastructure Investment and Jobs Act, on the other hand, represents a massive influx of federal funding that, if it meets its full potential, can propel large-scale projects forward. Clients in the private market are grappling with how to understand the Infrastructure Act’s impact on investment strategy. Like all new legislation, it takes time to absorb what it means and how it will be implemented, which provides an opportunity to guide clients in assessing and understanding the long-term implications and align them with their investment goals.
WATSON: The European Green Deal focuses EU climate, energy, transport and taxation policies on reducing net GHG emissions by at least 55% by 2030, with a goal of reaching climate neutrality by 2050. Some EU member states are further along than others, however. In the UK, for example, legislation has been piecemeal: Some policy statements and objectives have been outlined, but the actual fiscal terms and benefit programs are not yet in place. We have been waiting for finalization of the Contracts for Difference (CfD) plan to produce low-carbon hydrogen, which is anticipated to happen by year’s end, with the first support contract for projects scheduled for 2023. CfDs incentivize investments in new low-carbon electricity generation in the UK by providing stability and predictability to future revenue streams and could be made available to support other energy transition technologies, such as green ammonia, green methanol and direct air capture.
LEWANDOWSKI: Given the EU’s head start, it is no surprise we’re still waiting for more definition around climate-related policies and incentives in the U.S., too. But the dollars devoted to clean energy technologies under the Inflation Reduction Act, the Infrastructure Investment and Jobs Act and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act will all turbocharge existing and soon-to-be-formed climatetech-focused ventures. Meanwhile, at the state level, California’s AB 209 directs $8 billion to programs focused mainly on industrial grid support and decarbonization, advanced energy and decarbonization technologies involved in food production, hydrogen projects, offshore wind infrastructure, equitable access to solar and storage systems, and direct air capture of atmospheric carbon. These incentives extend far beyond solar, wind and electric cars to include energy-efficient pumps for residential use, electric delivery vehicles, and much more. As a result, clients are revisiting projects under development to assess the impact of congressional and state actions on their short- and long-term plans.
Which climatetech business models or sectors do you expect will experience the most growth in the upcoming years?
LEWANDOWSKI: Since transportation is the largest contributor to GHG emissions—and will have the benefit of a plethora of new tax credits under the Inflation Reduction Act—I expect to see low-emission and zero-emission electric vehicles (EVs) become almost omnipresent. Mass customer adoption of EVs will greatly accelerate nations’ ability to reach air quality and climate goals. Further, the expansion of the Investment Tax Credit to include energy storage projects will likely enable broader adoption of related technologies by businesses and individuals. This stored energy may be used during costly periods of peak demand, thus improving grid reliability and affording battery owners new demand response-focused financial incentives. Direct carbon capture ventures should also see substantial growth, supported by innovation and a beneficial carbon pricing environment.
WATSON: Hydrogen electrolyzers are worth focusing on, in my opinion. There’s a belief that 80% of the technology needed to reach net-zero already exists. It is simply a question of upscaling and improving efficiency. There is a tendency for modern-day “climate alchemists” to search for their “philosopher’s stone,” which probably doesn’t exist. Even if it does, assuming we have 80% of what we need and time is of the essence, focusing on upscaling those technologies will most likely get us to the goal of net-zero. The climatetech challenge is to develop more and creative ways of doing the same thing on a larger scale and more efficiently.
NUNN: Climatetech drives horizontal change that spans business verticals such as energy, logistics, agriculture and transportation. I see the next step in climatetech as the application of technologies—software, artificial intelligence and digital infrastructure—for tracking emissions, deploying climate risk and financial software, monitoring carbon offsets, creating new marketplaces, and enhancing distribution systems across each of these verticals. In agtech, for example, precision tracking will be key to improving yield, efficiency and profitability for farmers and growers, which is crucial to sustainability and the future of global food security. Digitalization and the energy transition are inextricably linked, and I look forward to seeing the overlap take hold.
What are the greatest catalysts for changes in cross-border investment activity? Are there particular regions you are watching closely?
NUNN: I think with the large-scale, government-backed investments we’re seeing in the United States, Mexico is well-poised to see increases in both investment and manufacturing as it relates to climate technologies. Brazil also presents exciting opportunities for investors, given the size of the market and its vast natural resources. Agtech is gaining ground in both countries, receiving significant attention from both VC and PE firms. When I think about development in the United States, there is a natural spillover in terms of manufacturing to Mexico, which has an advanced, well-educated labor market. The level of investment in the U.S. will certainly create a ripple effect of cross-border investment activity across the region. I also think that we can expect some important innovations from Latin America to flow back to the United States.
WATSON: If you think of all the countries that export and import oil and gas, there is a clear cross-border element to the global energy trade. The establishment of rules for a global carbon market at COP26, an increasing desire among industrials to capture carbon, and the commercial opportunity presented by the emerging premium market for carbon sequestration are all examples of catalysts for change in cross-border activity.
LEWANDOWSKI: Given the recent growth of climatetech as an asset class, I expect to see a continued emergence of new ventures with North America, Europe and Asia (mostly China) as leading geographies. But while many capital sources focus on investments in one sector or region, talented early-stage startups, as well as more mature ventures, have often attracted investors operating “without borders.” Qualified opportunities tend to bring capital onto different continents. Prominent investors have claimed that the next wave of unicorns will be companies developing green hydrogen, climate-smart agriculture, green steel and green cement and that borders will not exist for such investments. As some of these technologies take more time from demonstration to commercialization, matching their time horizons with “patient” investors from around the globe will be accretive to both sides in the long run.
Exit trends
Exit activity declined further in the second quarter as public market volatility persists.
While climatetech venture deal activity carried on through the difficult market conditions introduced in early 2022, exit value experienced significant lagging impacts. Public markets worldwide sustained continued blows in Q2, which concerned investors and applied further downward pressure on exits. YTD exit value represents less than 10% of 2021 levels and declined 90.7% between Q1 and Q2 2022. Public listings experienced the most drastic decline in deal value YTD, while acquisition and buyouts ticked up. Investors may opt for more M&A and buyout deals to salvage returns if the public markets remain depressed. Companies may elect to raise additional rounds in place of exits in the near term. The overall median VC-backed exit size for climatetech companies rose modestly YTD, indicating that select players are still able to secure material returns despite the present challenges.
“Companies that have developed expertise in extracting hydrocarbons from underground reservoirs can now reconfigure their operations to inject captured carbon into those sub-surface structures. It is yet another example of how oil and gas companies can be a significant part of the solution.” – Gavin WatsonEnergy Partner (London)
METHODOLOGY
All private companies forming the population underlying the datasets in this report were tagged with PitchBook’s dedicated vertical of climate tech. PitchBook’s standard venture methodology was applied for all relevant transactions, which can be found in the PitchBook-NVCA Venture Monitor section. Only completed transactions were included. The geographic scope was global unless otherwise noted. For breakouts by industry or other verticals, each company had to be tagged with at least one other relevant vertical. For example, a company had to be tagged to both climate tech and mobility tech verticals. Given overlap between segments, it is possible double counting occurred, which is why relative proportions rather than actual figures were utilized to minimize the impact upon trend analysis.
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