2023 was a year to forget for founders as venture capital investment continued its collapse while thousands of startups went bankrupt.
Founders operating in the climate tech sector were somewhat insulated against the worst of the downturn, thanks in part to a series of regulations that forced businesses to reduce their impact on the environment.
“Through 2023, there have probably been many internal rounds propping up valuations,” Siobhan Brewster, a partner at impact fund Aenu, told Business Insider. “2024 will be the chickens coming home to roost.”
Venture funding to European startups was to be cut in half to $45 billion in 2023, Atomico predicted in its October report, considerably more than the 25% drop expected in investment to Europe’s climate tech startups. Deals for the likes of battery maker Northvolt and German heat pump startup 1Komma5 were standouts in 2023.
Investors told BI that climate tech would be defined by down rounds, layoffs, employees jumping ship, bankruptcies, and a lack of talent in hands-on businesses such as retrofits in 2024.
But the industry will still continue to benefit from strong regulatory tailwinds as well as a maturing financing landscape and an uptick in the volume of experienced founders operating in the space, they said.
Climate tech won’t escape VC gloom
Valuations are on an upward trajectory for a select few companies – such as those that are software-based and have second-time founders, investors said.
The less fortunate startups will have no choice but to take a haircut on their pandemic-era valuations.
Nick de la Forge, partner at Planet A Ventures, said this diversion of fortunes has already led to an uptick in structure in the industry, with investors tying a series of more demanding conditions to their funding.
Regeneration VC partner Michael Smith said the depressed funding landscape had also stirred a “record amount of down rounds,” sending the valuations of many businesses – and their employee stock options as a result – plummeting.
Startups that struggle to raise will face up to failure or a quiet exit, investors said. This is particularly true for capital-intensive startups as cash remains expensive in the high-interest rate economy.
Those that do emerge during this period will be “very lean efficient machines” that produce some fantastic businesses, Aenu’s Brewster added.
A good time to buy
Mergers and acquisitions (M&A) are on an upward trajectory, with companies that do manage to get funding gobbling up those who don’t. They know it’s a good time to pick up strategic buys, said Norrsken GP Agate Freimane.
It makes sense where companies can create economies of scale, where supply chains can be combined and made more efficient with software, Aenu’s Brewster added.
This is particularly true in carbon accounting, where the best-funded players will snap up strategic peers if it is cheaper and easier than building tools from scratch, per Planet A’s De la Forge.
Carbon accounting and ESG reporting sectors were buoyed by the introduction of the new European deforestation regulation and the Carbon Border Adjustment Mechanism (CBAM), which aims to put a price on the emissions created in the production of certain imports.
“Some founders have now started to do either niche carbon accounting companies or accounting of other sorts. They see this as a quick and very lucrative way for an easy exit,” De la Forge said.
Investors remain bullish on energy
Energy will continue to be a dominant theme in 2024, investors told BI. Russia’s war in Ukraine continues to be a driving force, while new and upgraded grid infrastructure is needed for the transition to net zero.
Many VCs are focused on scalable plays centered around software and data, such as using AI to map transmission line routes while factoring in environmental impact, platforms to optimize industrial energy use, and consumer energy efficiency tools.
Startups operating in the space are still grappling with the fragmented nature of the European market.
For example, in Germany, “there are basically no smart meters currently installed, or only a fragment of households have one,” said De la Forge. In contrast, smart meters are well established in the Nordics, said Creandum’s Staffan Helgesson.
Piotr Bukańsk, senior investment associate at Beringea, called for something akin to open banking to help stimulate the energy data market.
There’s also a huge talent crunch, Bukańsk added, noting that a fifth of the UK energy sector’s workforce is expected to retire by 2030. There are not enough skilled workers for installing heat pumps and other retrofits incentivized by recent policy, added Regeneration VC’s Smith.
Biodiversity is all to play for
After the UN Biodiversity Conference COP15 in late 2022, biodiversity “kind of exploded,” said Bukańsk. Voluntary frameworks setting out how corporates and financial institutions should report dependencies and impacts on nature were unveiled last year and will likely play out in 2024, Bukańsk added.
Biodiversity is earning a higher profile from both a regulatory and corporate perspective, but “everyone’s realizing that it’s an incredibly difficult nut to crack,” said Aenu’s Brewster.
“From the opportunities perspective, the problem is clear,” said Norrsken’s Freimane. What’s not clear is where those “pockets of opportunities” with both scalable tech and impact are, she added.
AI x climate tech
The intersection of AI and climate will also continue to gain momentum amongst investors – but it won’t be a huge disrupting force. Instead, it will supercharge climate tech tools and help people manage supply chain emissions data, investors said
A key application is where there are a lot of inputs, different data sources, and where smart decisions are needed in real time but the data is too complex for humans, said Planet A’s De la Forge. “This is what we’re focused on when we think about AI and climate,” he added.
