Economic uncertainty has led to VCs slowing down their activities, signalling the end of the party for tech startups. While climate tech startups have long been considered recession-proof, that sentiment has changed recently. Data for the first six months of 2023 indicates that there was also slower funding activity in the climate tech space compared to last year. But with July 2023 being the hottest month ever recorded, the case for climate solutions is arguably stronger than ever. So, what’s the impact on the ecosystem?
Climate tech has suffered in 2023
A quick look at the data shows that the party is well and truly over. Dealroom’s latest analysis finds that venture funding for European climate tech companies dropped 43% in the first half of 2023, from $10.8 billion to $5.6 billion. This reduced investment is especially impactful for the sector, as climate tech companies often include B2B hardware companies that are harder to scale and require more capital than asset-light B2C companies.
This is a real blow to a sector that had previously survived other periods of economic strain, such as in 2022 when climate tech received a record $70.1 billion in funding while the tech sector as a whole faced an 18% funding drop. This resiliency had earned climate tech the reputation of being recession-proof.
Outliers still challenge the idea that climate tech is on the decline. Enpal, 1KOMMAFÜNF, Sylvera, Zeekr and SolarSpace all closed significant funding rounds this year, showing that there is still an appetite for climate tech from VCs willing to invest in companies they believe in despite the economic uncertainty.
But the overall fall in climate tech investment means the gap between actual funding and the amount needed to reach decarbonisation targets is still huge. The analysis suggests an extra $3.9 trillion of funding is required to close this gap and achieve net zero by 2050. This additional investment in climate tech could transform sectors such as steel, cement and transportation into greener industries. However, startups operating in these industries need enormous amounts of funding to power this transition.
There are still reasons to be optimistic
Despite legitimate concerns, there are still several reasons to remain positive about the state of European climate tech.
Firstly, European governments are (mostly) on the side of climate tech. Legislation designed to boost climate tech businesses is only getting stronger, with Europe following the U.S.’s lead after the Biden administration announced the Inflation Reduction Act to help stimulate domestic clean energy production. The EU’s Green New Deal and Industrial Plan indicate that the EU is invested in Europe’s climate tech scene, and this legislation will play a vital part in boosting the sector’s growth.
Secondly, net zero is being taken more seriously than ever before. Rising energy prices have only accelerated the urgency with which Europe is transitioning towards cleaner technologies, and the initiatives mentioned above are likely just the start of the measures the EU is willing to take to help the continent hit net zero by 2050.
Besides regulatory pushes, it’s also worth noting that climate tech companies have access to various additional funding outside of the traditional VC game. It’s hard to compare a quick commerce company with a climate tech company. One needs money to pay riders and inventory, while the other builds real IP and invests heavily in R&D. For climate tech, multiple funding options are available such as grants, off-take agreements and debt. VC funding is not the only option for climate tech. Therefore, founders are incentivised to raise non-dilutive capital sources during economic uncertainty to power their technology development.
Climate tech’s spark is set to reignite
While the data seems bleak, reasons outside the funding sphere spark hope. Europe is home to plenty of top-class universities, which provide fertile ground for some of the brightest climate tech innovators. University spin-outs often grow into businesses that tackle the most impactful issues, from carbon capture to software solutions. In times of stricter capital allocation, the next wave of climate tech companies will build their ventures in an even more capital-efficient way.
Moreover, the need for climate tech solutions has never been greater. As we’re regularly seeing new record high temperatures, we need technology solutions. A robust and established ecosystem and an increased number of utilities looking to transition their business models are potential allies in the transition.
The initially bleak-seeming data from the first six months of this year should be seen in a broader context. While it may show that climate tech isn’t totally recession-proof, it certainly doesn’t mean the end for the sector.
Looking at the bigger picture, megatrends actually point to the growth of tech companies. From university spin-outs developing promising real-world solutions to action by governments to stimulate the sector, the reasons to be optimistic are numerous. Yes, funding is slightly lower at the moment, but it is still significantly up from where it was just a few years ago. Climate tech continues to shine as the necessity for solutions is underpinned by the global news stream daily. Companies might have less access to traditional VC funding, but with debt and off-take agreements filling in, startups can continue to scale their solutions and help us all transition to a cooler planet.
As long as Europe, and indeed the world, continues striving to save our planet and reach net zero, climate tech will continue to thrive.