How to navigate the climate-tech growth-funding crash
Climate tech startups and investors have to navigate a harsh reality: Funding for mature growth-stage companies has fallen off a cliff.
Why it matters: Thousands of startups have been founded over the past three years that could have a much harder time raising crucial funds to help them grow into commercial companies.
By the numbers: In the first half of 2023, overall funding of climate tech startups dropped by 40% to $13.1 billion compared to last year. And funding into growth companies was responsible for much of that, crashing by 64% compared to last year (see chart).
Threat level: While climate tech startups had previously been a bright spot in a tightening venture capital market, climate entrepreneurs are now starting to feel the constraints.
- Tim Latimer, CEO of geothermal startup Fervo Energy, described it as: "Still tons of funding available for early stage, but growth stage has fallen rapidly. We’re funding more teams than ever but it’s becoming a bridge to nowhere."
What they're saying: Navigating this funding environment will require entrepreneurs to focus on getting their companies to commercial viability more quickly, with less runway, and with potentially more onerous terms through the fundraising process.
- Sean O’Sullivan, founder of early-stage climate investors SOSV, told Bloomberg: "What it means for any good startup is that they’re going to be suffering more dilution over the next 18 months than they would in the booming economy."
- Many startups, particularly capital-intensive ones, could struggle to make it through the "valley of death" between developing a good product and achieving commercial production or operation. "For companies, a one or two-year downturn could be the end of the day," said O'Sullivan.
- A tight funding environment means investors will get much more selective in who they back, says Kunal Sethi, founder of Prithvi Ventures. Sethi tells Axios climate startups need to stand out for growth-stage funding by focusing on their concept (wow factor), competence and capital to achieve price parity.
Big picture: For some climate startups that are looking for growth funding, venture capital might not be the best place to look.
- "Equity funding isn't always the only or best option," Sethi says. "Cost effective funding like project finance to fund the plant or manufacturing is equally important to scale and work towards unit economics."
- The Department of Energy's Loan Programs Office, headed by entrepreneur Jigar Shah, offers climate companies low-cost loans for emerging, riskier technologies.
- Fervo Energy's Latimer says, "If we actually want these technologies to get to market, we as a community have to do a much better job at growth stage and the bridge to bankability. That’s a different set of stakeholders and skills than early-stage."
What's next: Investors say there's enough "dry powder" (not yet deployed but allocated funds) available over the next two years to help some startups weather stormy waters.
- But companies will have to operate in "leaner" times. Founder Collective partner David Frankel says, "[L]ean times create stronger startups. How? A lack of resources forces people to become resourceful or removes them from the market."
- Harsh but true. Expect to see some shake out as climate companies face this harsh new reality.