What does the 50% drop off in Global VC volumes mean for Climate tech?
The global venture capital picture has been very bleak with volumes down as much as 50% from the peak 12 months ago.
Why? In short, interest rates, exacerbated by some very negative geopolitical events. Venture capital thrives on low interest rates and, with rates so high, there are many other places to go, especially for institutional cash. This will create some downward pressure on valuations as far less capital is available in the short term.
According to Dealroom.co, for example, global VC volumes peaked at over 200bn USD deployed in q.1 2022, dropping to well below $100bn in q.3 2023*. That being said, venture capital has had huge growth for almost two decades and even at today’s volumes, it has fallen back to 2017-2018 levels.
How has Climate tech fared relative to global venture capital generally?
ClimateTech Investing covers an array of technology solutions designed to address climate change and its environmental effects. This can be done by reducing greenhouse gas emissions (mainly C02 and methane) or adapting our systems to environmental changes. ClimateTech covers a broad range of industries whether renewable energy supply, utilities infrastructure, transport, recycling innovation through to B2C businesses and circular economy.
ClimateTech has not been unaffected by global VC trends - with a year-over-year decline of more than 40% in total capital deployed, the amount of funding reaching climate tech start-ups in the first three quarters of 2023 has fallen to a level not seen since before the 2021 boom, according to PwC’s 2023 State of ClimateTech report. That being said ClimateTech has performed better than VC on average. ClimateTech’s share of the VC equity market rose to 11.4% in Q.3 2023 extending a decade long upward trajectory**.
Overall, however, whilst ClimateTech may have performed better than other VC sectors 2023 inflows do not spell good news for driving innovation and ultimately hitting net zero targets.
According to PWC, some CleanTech sectors still exhibit a sizable shortfall in start-up funding relative to their share of emissions. A small, and decreasing, share of investment went into ClimateTech start-ups focusing on high-emissions sectors such as the built environment (17% of emissions, 5% of start-up investment) and food, agriculture, and land use (22% of emissions, 8% of start-up investment).
But when looking at funding relative to technologies’ emissions reduction potential (ERP), we find a trend of increasing alignment. Now, we see investors putting more capital into start-ups that work on higher-ERP technologies such as carbon capture, utilisation and storage (CCUS); green hydrogen; and alternative foods***.
Does the deflated market represent opportunity for investors?
Leading ClimateTech investors interviewed as part of the PwC research suggest that the current deflated market could present an opportunity. Lower valuations mean there is value to be had, and funding promising climate tech start-ups could help corporate investors meet their own sustainability goals, as well as help address climate change and potentially deliver returns – possibly leading to greater levels of corporate investment and M&A activity****.
The OnePlanetCapital view
We are seeing 2 things on the ground so to speak. Firstly, a lot of value, good early-stage businesses being circa £4m as opposed to £6-7m due to a scarcity of capital.
Secondly, we are seeing very good businesses with good trading numbers raising with flat rounds. We do no think there is anything wrong with this - it just reflects the VC market. But from an investment point of view there is value in the market now which possibly won't be there in 12-18 months. From a pure VC investment point of view this is a good time.
We would generally concur with PWC that with valuations lower and capital scarcer there is likely to be higher M&A activity than normal, and we will need to see how this pans out over the next 6 months. Corporates also represent 50% of all acquirers as they implement net zero strategies. Another important factor underpinning the market.
The other point to mention when discussing CleanTech is that London and the UK are leaders in terms of investment volumes and M&A activity - London leads the way in M&A by a large margin - 82 CleanTech M&A deals happened in London in Q.2 2023. San Francisco came in second place with 23. Europe in general represents 60% of all M&A activity*****.
From an investor point of view VC is a long-term game and counter intuitively this is the time to invest.
https://www.pwc.com/gx/en/issues/esg/state-of-climate-tech-2023-investment.html
Appendix
*https://dealroom.co/
** https://www.pwc.com/gx/en/issues/esg/state-of-climate-tech-2023-investment.html
*** https://www.pwc.com/gx/en/issues/esg/state-of-climate-tech-2023-investment.html
OnePlanetCapital is an early-stage EIS VC focused on businesses that impact climate change. The One Planet Capital team is different from most venture capital firms in that it is a hybrid of experienced entrepreneurs who have built significant businesses backed up with an advisory panel of environmental expertise.
For further information contact Matthew Jellicoe - matt@oneplanet.capital
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