Catalyst with Shayle Kann - 2023 climate tech venture investment trends

Episode Date: January 11, 2024

Venture and early-stage investment in climate tech in 2023 was down 30% from 2022, according to market intelligence firm Sightline Climate. But is that a bad thing? In this episode, Shayle unpacks the findings of Sightline’s 2023 Climate Tech Investment Trends report with Kim Zou, co-founder and CEO of the firm, which also produces the popular CTVC newsletter. (Shayle is an adviser to Sightline, and Kim was also previously a partner at Energy Impact Partners where Shayle works.) Kim argues that smaller deal sizes suggest that the climate tech space is actually maturing. The data focus on venture and early-stage capital, rather than non-equity financing, which actually expanded in 2023, another sign that climate tech finance is becoming more sophisticated. Shayle and Kim also cover topics like: Why food and land use fell out of the top three verticals (and why heavy industry took its place). Major funding rounds, acquisitions, and bankruptcies in 2023. The role of generalist investors moving into climate tech. Zou’s predictions for investment trends in 2024. Recommended Resources: Latitude: Exclusive: Non-equity funding for climate tech is taking off Latitude: Clean energy capital is getting pricier Catalyst: Financing first-of-a-kind climate assets Sign up for Latitude Media’s Frontier Forum on January 31, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024. Sign up for Latitude Media’s newsletter to get updates on the tech and business frontiers of the climate tech industry. Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you’re a startup, investor, enterprise or innovation ecosystem that’s creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more. Catalyst is brought to you by Atmos Financial. Atmos is revolutionizing finance by leveraging your deposits to exclusively fund decarbonization solutions, like residential solar and electrification. Market-leading savings rates, cash-back checking, and zero fees. Get an account in minutes at joinatmos.com.

Latitude Media, podcast at the frontier of climate technology. I'm Shail Khan, and this is Catalyst. I think we all kind of recognize that climate tech investment hit its peak in 21 and 22, but I'm still pretty positive on 24. I think 23 was a year where investors and founders alike played wait and seat. It definitely was not the best of times. But honestly, it wasn't the worst of times either. It just was 2023.

a year in climate tech investing. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. Predictive, verifiable, and designed to perform when it counts. Learn more at energy hub.com. Trillions of dollars are flowing into clean and critical infrastructure,

but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Catalyst is supported by Fish Tank PR, an award-winning PR firm focused on climate and energy tech, renewables, and sustainability.

Fish Tank is known for generating prominent and effective media coverage for the brands they work with. If you want a PR partner that's thoughtful, shoots straight, and gets results, you'll like Fish Tank PR. To learn more about fish tank's approach, visit fish tankpr.com. That's f-i-s-c-h-fish-tankpr.com. I'm Shail Khan. I invest in revolutionary climate technologies at energy impact partners. Welcome. So, 2023 was kind of a weird year in the climate tech venture capital and private market

investing world. There were these two deeply opposing forces kind of fighting each other all year. on one hand, there were real meaningful reasons for momentum and optimism in the market. Most notably, in addition to the overall trend of climate change, there was a lot of policy tailwind that showed up, both in the U.S. and in Europe. There was a flood of new capital that had arrived over the previous three or four years to do well while doing good, and things were looking up. On the other hand, or maybe we call this one the other fist, there was the macro environment

with inflation and economic malaise and interest rates, et cetera. And obviously the effects that that all had on the broader tech investing in VC world. So all year, investors and entrepreneurs took on the time-honored tradition of talking about the vibes in the market, trying to clarify what exactly was happening. Well, the year passed, and so now we actually know, thanks in part to my friend Kim Zhu and her company's Sightline Climate, which just put out the first. comprehensive review of climate tech investment trends in 2023. Disclosure here. Kim used to work on my team at EIP, and I'm an advisor to her company's site line. But anyway, I brought Kim on to get a bit more into the details on what actually happened in this market last year and what we might expect it to mean moving forward. Here's Kim. Kim, nice to see you. Nice to see you again. Thanks for having me.

Of course, excited to talk about the year that was in climate tech investment in 2023, and mostly to talk about a bunch of cuts of the data that you guys collected and get a little bit into the weeds on it. But before we do, let's cover the highlights to start. So characterize the overall year in climate tech investing in 2023 and maybe contrast that with previous years. I know you've been collecting this data for a few years. Yeah. So I think to take a step back, just to caveat, what we mean when we talk about climate tech investment, in our investment trends report we recently published, we're specifically focusing on venture capital and growth. So it doesn't include, you know, project finance or debt, really looking at early stage capital financing climate tech.

This year, 2023, we saw a wait and see approach to climate tech. So there was $32 billion in venture and growth funding globally in climate tech, which was a 30% decline from the prior year. And I think, you know, that number isn't a surprise to most investors and founders that are operating in this space, both because of the macro downturn that we've seen impact all of venture, so it's not specific to climate tech. But also I think, you know, we all realized 21 and 22 was really the peak, the peak of the market for climate tech and venture as a whole. So the highlight, the key number is a 30% decline, but I think it's relatively in line with overall venture as well.

Yeah, we should mention that briefly. I know it's too early to actually have final year date. You guys are ahead of those who are trying to track the overall venture market, but what do we know about how that 30% decline in climate tech venture compares to the trend in overall venture? Yeah, I mean, we're dragging this data in real time, so we were we were quick in our feet to publish it right when the year came out. But Pitchbook released their Q3 report and ads of their Q3 and overall venture tech as a whole was down 39%. So we'll see what their final number ends up, but climate tech was marginally insulated, maybe, relative to overall tech.

Yeah, which is kind of interesting. I mean, I think you would have expected those of us in the market recognize that, like, there were a few sectors in 20203 that were relatively shining stars. You know, overall tech was way down. And then people talked about like, what's bucking the trend? It was obviously AI, but behind AI, people talked about climate a lot. So what you would have expected was a more muted impact on climate tech than on overall tech. And that seems true from the data that we've got so far, but maybe not as dramatic a difference as you might have expected,

obviously pending that Q4 data. Yeah. I mean, I think across the board, what really drives these large absolute numbers is large growth rounds and mega rounds. And I think relative to earlier years where we saw a lot of those mega rounds, we didn't see as many this year. And so deal activity was only down 3%. So you could call that even a tapering relative to 2022 rather than a significant decline.

So deals are still getting done, early stage seed series A still getting done. But that absolute dollar amount that declined was really driven by these larger growth deals that dissipated. Yeah, that's a really good point. So when you say deal activity, you mean deal count, just the number of investments that were made and down 3%. So let's just call that flat. that is a market difference, right? So same number of overall investments made, 30% less in dollar terms implies, as you said, either smaller overall or certainly fewer those big mega rounds.

And I do think that's one of the things that's always made climate tech a little bit misleading when you just look at the high-level dollar numbers because it is a sector, and we'll probably talk more about this later, that lends itself to big mega rounds because it leans hardware, it leans manufacturing, and that stuff is capital. capital intensive until you get these billion-dollar plus rounds periodically that really skew the numbers. So maybe it is true that actually overall the market wasn't really down 30%. It's just almost nobody. We'll talk about who the exceptions to that were, but like almost nobody raised the big mega-mega-mega round. Yeah. And I think in a lot of ways we've defined success, right,

in venture as that absolute dollar amount. But I think specific to climate tech, it might not make sense to define success as an absolute dollar in venture investment. Because at the end of the day, when we think about all this hardware and hard tech that needs to develop into projects, you want these companies to graduate out of having to raise $500, $500 million growth rounds and being able to raise first of a kind project finance or debt to build these larger projects. So in a way, success could be seen as being able to graduate out of venture and move on versus larger and larger growth rounds that are really expensive and dilutive for founders. Yeah, I mean, success really is exits, which we'll talk about a bit later, but same story,

right? Like, you know, the world in general had tended toward these really big private rounds, both in climate tech and more generally, rather than companies going public, even during the zero-interest trade policy world, but clearly that has dried up substantially. So that's clear overall. That also relates to the sort of question of, is it universal across stage? Like a lot of the conversations that folks were having over the course of 2023, and you could see this playing out in lots of markets where like the public markets and the broader macro economic environment starts to deteriorate, that has an initial effect on the stuff that's closest to the public

markets, which is later stage, and then takes time to sort of bleed back through the value chain to eventually have an impact at like seed and series A. How did that look in the data in 2020? There are significant bifurcation between early stage and later stage? Yeah, I mean, so we put this report out in H1, and the headline there was that late stage venture and growth plummeted 30%. That also holds true at the end of the year. So investment at the later stage dropped 30%. The big change in this end of your report was that we saw for the first time an impact in the early stage as well.

So deal count was still the same, if not relatively marginally higher. But Series A investment was down 41% compared to 2022. That's the first time we've seen Series A investment drop since we started tracking the space, you know, four years ago. And I think what that means, and maybe this is a symptom of larger venture, not just specific to climate tech, that's the first time this macro downturn is starting to impact the early stage market. We're starting to see early stage investors also pulling back rather than just later stage deals and growth rounds getting smaller. But it's a similar story, right, where deal count was flattish in early stages and dollar extra. was way down.

Because, I mean, one thing anecdotally that I saw a lot over the course of 2023 and expect that I will see more of now is like the company going out to raise a series A, let's say, and they set out to raise $30, $50 million, which in 2021 was like totally possible for not every company, but, you know, lots of good looking companies in climate tech. And that round became very, very difficult to raise. and it took like six months plus for them to sort of like learn that, reorient, go back out to market with a $15 million raise and then eventually get that done. And so, you know, I saw a lot of like in these rounds were completed, but they were completed a smaller number than certainly that same company would have seen two years earlier.

Totally. And I think there's two follow-up points to that. I mean, the first one is if we're talking about what does success look like, I don't necessarily think, culling back of round sizes is a bad thing. I think it's more realistic, more tied to milestones that these companies are trying to achieve. You know, raising two to three X over the amount you need and at the valuation you want so that you're only diluting yourself 20 or 25 percent, that puts you in a place where you're trying to, you know, achieve a valuation that you might not be ready to. So I think mathematically this could be a more realistic sort of fundraising environment for both the founders long term, as well as investors to be excited about these deals. And I think on the second point, the reason these, you know, deals are getting done,

but they're smaller, is also because many of these deals were less so what we call graduating rounds where these companies raised, you know, at the next later phase, but rather extensions or bridge rounds where maybe they were extending their runway by a couple million so that they wouldn't have to go back to market and face, you know, evaluation down-tick, but rather trying to extend their runway and going out to existing investors. So a lot of those smaller rounds, too, we noticed there was a pretty significant drop-off in companies that were able to graduate to the next phase, to the next stage. And so I think a symptom of that, too, is that deal sizes dropped off and therefore investment declined. Yeah, I think to the extent that the data set that you've got, which is basically as comprehensive

it could possibly be to the extent that it's not totally comprehensive, my guess is what's missing is even more of those bridge rounds and extensions. Right? Because those don't often get announced, but they have become the norm. Certainly were the norm in 2023. So there's probably even more of that. And the trend that you're describing is even more pronounced, I think, than the data would suggest. Let's talk about verticals.

Climate Tech, I've always said, like, climate tech isn't really a sector. We've sort of decided to call it a sector. sector. It's actually just a common theme across many different sectors. And so I oftentimes think it's more interesting to talk about the individual sectors than it is to talk about climate tech as a whole, albeit there is a lot of capital and interest in climate tech generally. Let's talk about sectors. What do you think of as a sector that sort of relatively speaking, like dollars were down across the board, but relatively speaking, what sectors saw more investment and what sectors sell less.

Yeah. And so just for those on the, those catalyst listeners that don't know our methodology, we think about climate tech across seven broad verticals that really encompass, you know, the way we eat, the way we move, et cetera, et cetera. So that's food and land use, transportation, energy, industry, climate management, which is what we call, you know, things like climate risk, emissions and sustainability reporting, and built environment and carbon. So those are kind of the seven verticals, categories we think of when we talk about climate tech. The biggest surprise in terms of verticals this year was really the decline in food and land use. Food and transportation, energy and food and land use have historically always been the big three.

We've even called them the big three in all of our reports because they're just so far in a way, you know, the largest sector is the most mature. This time around in 2023, appetite for food and land use evaporated. there is a distaste for food and land use, in other words. And we saw that that sector was down 55% in investment to $3 billion this year. And I think, you know, for those who have been tracking the space in the public markets, the performance of Beyond Meat and some of these other alternative protein, as well as a pretty significant trail of bankruptcies in indoor and vertical farming, have led to there being a pretty significant drop-off in food and land use.

Yeah, those seem like the two-based. categories that have been hit, like food and land use is a broad, it's a broad sector, but really where a lot of the dollars went and now a lot of the dollars evaporated is exactly what you just said. It's alternative proteins where there were just a ton of companies. So I think there is also there a particular need to kind of separate the wheat from the chaff and I guess that's also a food reference, not that I think about it. But, you know, there's a calling of the herd, I guess, additional agriculture-related reference. We can keep them coming.

I know. There. And then an indoor ag, as you said, that's been a category that's just received a lot of money, not as many companies, but a lot of money and that money has dried up pretty quickly. Yeah. As if it were a drought. Sorry, I had to add. Oh, there we go.

There we go. I mean, I think a big theme throughout this report, too, is that we started seeing almost like replacements on the leaderboard, if that makes sense. So before this year, industry actually grew a significant amount. That one has always been underfunded relative to the level of emissions coming from that sector. And it replaced food and land use in that third vertical spot. And I think overall we're starting to see what used to be the largest, most mature verticals in sectors, you know, take alternative protein, take emissions and sustainability reporting,

ones that were pretty saturated when it came to the count of companies, now starting to, for better or worse, have the air let out of the balloon a little bit or people losing their taste a little bit for those sectors. I guess on industry, because you mentioned it, that seemed like it was the biggest relative winner, at least from the overall dollar data. It seems like some of that is skewed by,

we talked about the big mega rounds. There was really one mega-mega-rowns. There was really one mega-mega-rower. round in 2023. There had been more in previous years, right?

Like Commonwealth Fusion raised $1.8 billion a couple years ago and stuff. But in 2023, there was one mega round that seems to have contributed a lot

to that industry vertical, right? Yeah. I mean, the one that everyone's been talking about, it seems like, in these later stage

growth circles in climate tech is H2 green steel. And I think if you look at, we track the top 10 largest deals in climate tech this year. If we zoom in

on industry, steel in particular had a pretty breakthrough year. So there was H-2 green steel, which raised a billion to fund a green steel plant in Sweden. And then Boston Metal was not insignificant as well. They raised $200 million also to build green steel, but more from an electrolysis standpoint. And I think what's notable about these large mega deals that happened in 2023, there's probably two things. in my opinion, that enabled these companies to raise such significant rounds. The first one is, most of these companies already had projects in motion, right?

So H2 Green Steel, they're building a massive steel plant in Sweden and Europe, where there's a lot of policy tailwinds, you know, think CBAM, that's enabling that project to kind of develop. And that's what that $1 billion round was really financing. The second major thing we're noticing across these mega deals is if you look at the funding they've raised in the last two years, I think six out of ten had raised significant hundreds of millions of dollars of public financing or government-funded rounds, whether that's from the loan programs office in the U.S. or from the European Investment Bank in Europe, they've all been able to – there have been case studies in public finance catalyzing these larger private.

funding grounds. Yeah, that's interesting. You mentioned another one of the sort of relative losers. I don't want to say loser, but markets that's been down year over year, which is a smaller total amount because it was never quite as big in the first place, but is notable, which is emissions and sustainability reporting, right? This was a category that, like, you know, I think there were real macro tailwinds for this category, but it also suffered from the lots of traditions.

tech investors getting interested in climate, looking for things that they recognize, finding B2B SaaS in the form of enterprise carbon accounting or whatever, and then maybe overfunding that sector. Is that the sense that you've picked up as well? Yeah. I mean, I think it's similar to the case of alternative protein, right, where there's a lot of market oversaturation of a category that people felt like they knew really well, whether it came to consumer tastes like alternative protein or enterprise software. And at the end of the day, I don't think the, I don't think the numbers or the milestones necessarily match to a lot of the valuation expectations or the funding rounds. And so in that sector in particular, it feels like a bit of a wait and see. You know, it's not necessarily

a market that needs. Carbon accounting isn't necessarily a market that needs 200 or 300 players. And also, I think a lot of them end up being a bit more consulting advisory base than, than traditional enterprise SaaS like generalist investors understood. So in many ways, that sector feels like it's been playing wait and see to figure out whether or not there's actually an opportunity there. However, we are noticing a lot of those companies either moving or starting to invest in Europe because of regulations like SFDR that are driving more kind of compliance requirements for that type of reporting, whereas in the U.S.

we're still kind of waiting to hear back on the SEC climate risk disclosure. Virtual power plants are becoming a reliable way for utilities to manage capacity, but enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched and being able to prove it from the control room to the living room. Energy Hub's platform handles the full picture, from near real-time forecasting,

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Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy. Join me for my brand new show, Critical Capital,

as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital on Spotify, Apple, or wherever you get your podcasts. Are you tired of overpaying for big-name PR firms, but not really knowing what they're delivering? Is your comms team wasting time reviewing lengthy messaging briefs and decks, instead of engaging journalists or producing content? Are you wondering why your competitors are getting press and you aren't? Fish Tank PR is an award-winning climate and energy tech, renewables, and sustainability.

FACIS PR firm dedicated to elevating the work of both early stage and established companies. Whether you need to position yourself as a thought leader in between project announcements or translate complex ideas and technologies into tangible, compelling stories that resonate with the media, Fishtankpr.com. Check out fishtankpr.com. That's F-I-S-C-H-Fish-Tankpr.com. Okay, so obviously the actual, ultimately the thing that matter is in venture capital world. is outcomes. And those outcomes can be positive. Those outcomes can be negative. And, you know, the sort of reemergence of climate tech is long enough in the tooth that we should start to be able to measure those outcomes. So let's talk about both sides of that, starting with exit activity.

What have we seen? I mean, 2003 was a weird year there. There had been lots of exit activity. And then 2023 is where it sort of turned overall. The IPO markets basically shut down. So did we see significant exit activity in 2023 and what did look like if so? Yeah. Exits did fall off a little bit in 2023. I mean, it's not a little bit, actually. It cut in half. So we tracked 50% less exits in 2023.

And this was really driven by SPACs finally fizzling out. I think we started to see that happen towards the beginning of 2022. But the count of SPACs were climate tech SPACs were down 80%. percent compared to the prior year. However, what's notable, you know, there's still acquisitions happening in this space, although as you probably know, acquisitions aren't always a sign of healthy success in the exits market, and 80 percent of those acquisitions were undisclosed, which, you know, if you have a successful, massive acquisition, you probably want to shout it from the rooftops, so we can assume a lot of those might have been smaller token acquisitions

that that might not be something to be as proud of. However, there were a few notable IPOs to kind of kick off this year, including NextTracker, which I'd say is more from the kind of clean tech 1.0 error, but still a sign of, you know, climate tech hardware being able to successfully IPO. There's also Enlight Renewables Development, a Renewables developer, that IPOed as well, and a few successful specs like Lanza Tech. That's been a climate tech darling for some time and was able to successfully back. On the acquisition side, I think the one that climate tech investors and founders couldn't

stop talking about this year was OXI's acquisition of carbon engineering at a billion dollars. So the first unicorn we've ever seen in DAC and probably carbon removal, that one's interesting. I think a lot of people have some hypotheses on how that acquisition happened and what was the, you know, strategic relevance for Oxy acquiring or Oxy acquiring carbon engineering. So I'd say there was some signs of green shoots in this space, but overall the kind of exit count was down 50% compared to the prior year. And then, of course, we should look at the other side of the coin, which is bankruptcies and companies that went out of business. I think as the market started to turn, the expectation, of course, was that you would see a higher proportion of that. overall, how much have we already seen in terms of companies shutting down or effectively shutting down?

Yeah. I mean, this is also one of those things where there's probably a lot more companies that went bankrupt or went out of business, but it didn't necessarily make the headlines. I think some of the more notable ones. The first one was pro terra. That was one where it's been, pro terrier has been around for a while. It's been a climate tech darling. They've raised from some of the largest climate tech investors like G2 venture partners. And at the end of the day, you know, inflationary pressures, higher interest rates, supply chain disruptions, they, despite making it to all the way to, you know, going public, they spacked, I think, in 2022, despite making it all that way, they still couldn't quite get over those hurdles. And I think at the end of the day, that's a, that's a symptom of these business models, which are reliant on long supply chains, which are reliant on, on, you know, hardware. and a lot of various factors outside of their control going their way. So they filed for bankruptcy, and then their battery business actually ended up getting acquired by Volvo. So that was another thing we saw this year, too,

where there were some acquisitions, but some of them were more so kind of acquisitions, scooping up companies that were struggling at lower valuations. Yeah, proterres are particularly tough one because, you know, there was, in the SPAC craze of 2021 and beginning of 2022, I tracked at some point, I don't remember exactly what the number was, but like close to 40 companies that I would call climate tech companies that successfully merged with SPACs and DSPACs became public companies. Most of them were pre-revenue and had never actually produced anything commercially yet.

Protera was not one of those, right? They did SPAC and they did SPAC or they did D-SPAC rather, but they're real business, selling real electric buses with real meaningful revenue. And so for them to be one of the earlier failures was, I think, a surprise to a lot of people because there are many other companies that are actually sitting there as public companies today. And some of them may become sort of zombie companies because they can't really raise capital and they're trading extremely low. But they've hung on longer than Pro Terra did. So I think Pratera being one of the early climate tech SPAC bankruptcies was surprising to many people. 100%. And I think overall, obviously we have, we're seeing a decline right now, but overall, I think it is a market where it's survival of the fittest. And pro terra was one that was a bit of a surprise because they had revenue and they had hit a lot of their milestones. But I do think, you know, some of these bankruptcies or out of businesses that are happening is a way to kind of put the market in a much more realistic position where hopefully,

ideally, it is survival of the fittest. It's companies that are able to, you know, build projects. It's companies that are able to deliver on time or deliver on time over a number of years. And I do think next year, because, you know, hopefully inflation and interest rates are coming down, those shorter-term hurdles that have disrupted a lot of these businesses that might still be, you know, in the clear, those types of hurdles can allow these companies to breathe a bit more. All right. Let's talk about, I think, one thing. that you guys have done with the data that you've got that I think is particularly interesting is I compared the volume of investment in dollars of any given sector within climate tech

to the amount of emissions that that sector represents to basically try to come at one weight of saying like what's underfunded and what's overfunded, just not necessarily relative to the economic or financial opportunity, which is obviously what the investors are really thinking about, but just from a societal perspective, like where are the dollars going and is that where the emissions are coming from. So in that, light, what sector do you think of as being overfunded and what sector do you think of as being underfunded? Yeah. So one of the, yeah, one of the analysis we like to do is understand the correlation between climate tech investment and emissions percentage. So the sector that was,

the vertical that has historically been the most overfunded is surprise, surprise, surprise transportation. And I think when you look at climate tech, a lot of what drove this, you know, second or third wave of climate tech investment was Tesla being the star of the show and driving a lot of interest in this electrification of transportation EVs. So we've tracked transportation accounting for 15% of total emissions as per the IPCC 2019 report, but receiving 30% of venture and growth investment since 2020. Whereas on the other hand, you know, energy deals or energy investment made up 22% of overall funding, but 34% of emissions and heavy industry made up 10% of investment, but 24% of emissions. However, I think, you know, with transportation being the largest historically

funded vertical, that trend has actually started to shift a little bit more. So we're starting to see more climate tech funds and investors tailor made for industrial decarbonization. As noted before, this has been the first time we've seen industry kind of take the place of food and land use. So I think the overall climate tech ecosystem and investors are starting to wake up to the opportunity in industrial decarbonization. There's a lot of excitement for solutions like industrial heat heat pumps in those areas. Obviously we talked about there's a lot of excitement

for green steel and cement. There's also a lot of policy tailwinds geared towards decarbonizing industry as well. That's, I think, pushing more investor interests into those sectors. And I think the other thing that had been holding energy back, which is surprising, right?

You would think climate tech is mostly energy, innovation, energy financing. But I think one thing that's perhaps held that sector back is this investor sentiment that in many ways the energy emissions challenge is solved because of the relative maturity of renewables. And we're talking about venture here. So I think the idea is there more venture-specific innovation, venture-scalable innovation for energy was maybe a question. But I think that's also starting to shift a bit more as well with more funding in hydrogen and energy storage driven by the Inflation Reduction Act.

I 100% agree with you that a lot of investors, new investors to the space, come into it with the belief that energy is solved, relatively speaking, or particularly that electricity is solved, relatively speaking. It takes them a while to realize that most energy is not electricity, right? That electricity is like 20% of final energy consumption in the U.S. 80% is not electricity anyway, but they start out with the perspective of, well, you know, wind and solar are cheap, and we've got lithium ion batteries, and a lot of them come in saying, well, okay, nuclear could solve the rest of it. And so probably we should be looking at a bunch of other stuff and eventually they learn more and more and realize that, like, one, it's not that simple.

It's not solved. Energy is huge. There's a million venture grade. This is my opinion, obviously. I'm editorializing. But I feel strongly that there's an enormous amount of what will be successful venture businesses to be built in energy, but that does take a lot of newcomers to climate tech a while to grok, I think. One thing that was interesting that was underlying a lot of this data is it seems like investors in climate tech, you know, we've been tracking this space for the last three to four years, and the climate tech market itself seems to have matured in its understanding of climate tech.

More and more investors are what we call repeat investors. those are doing more than four deals a year, so five plus deals a year. And so I think the overall sector is starting to understand which verticals have that emissions intensity, but also understand what areas of innovation across climate tech, whether it's energy storage or industrial decarbonization, are meaningful areas to put their dollars to work. That's actually another question I wanted to ask you, which is there's been lots of talk about, as climate tech was gaining steam and momentum

and becoming more prominent, there's lots to talk about, I don't want to make it too reductive, but, like, quote, climate tech tourists on the investor side, you know, who became interested in climate tech. There's lots of reasons why people want to be investing in climate tech, and so they would dip their toes in the water,

but never really dive in and deal with all the complexities of it. Do you have the ability within that dataset to sort of figure out whether the climate tech tourists, first of all, did they ever exist? And if they did, are they still around? Yeah, it's a good question. I think the, so the count of investors overall this year declined. And so it was marginal, right? It declined 5% investors doing more than one deal.

I'd say a lot of that decline was from what you call tourist investors, those that dip their toe in, maybe did one deal over the last five years or so, especially in more software kind of centric areas. So across all stages, across all verticals, unique investors that were active in 2023 was definitely below 2022 levels. And I would ascertain that most of those were those that, you know, had kind of trialed climate tech when it was when it was hot and the cool venture thing to do, whereas now it's really made up of more repeat investors. or climate tech specific funds. Okay, so I guess last cut of the data that I'm interested to chat about is geography a little bit,

which is you have data on where all the companies that raise money, climate tech companies that raise money, are based. And it's an interesting question as to how the sort of climate tech ecosystem is developing, where it's developing. So talk to me a little bit about the geography of where the dollars went. Yeah, so in our geography analysis, I think unsurprisingly, the U.S. and Europe kind of led the charts. About 80% of investment went into those two areas. Of the companies we've tracked, 19% were based in California. But that was pretty closely followed,

I'd say, by 10% of that count being based in the U.K., which having just recently moved to London is actually a pretty exciting statistic. There's a lot of action happening here. What I think was a more interesting split was actually zooming into how these companies, how this investment split by vertical or sector level. And I think anecdotally, you can almost get that sense as well going to these different geographies. So in California, a lot more what you think of as like traditional hard tech, climate tech companies, like long-duration energy storage, hydrogen, more of the kind of talent and warehouse and facilities and resources that you'd assume need to build those technologies.

whereas in Europe we saw a lot more companies in the climate management quadrant, right? So to my point earlier on there being more regulation, things around climate risk, emissions and sustainability reporting, a lot of those types of companies situating in Europe. And then in Southeast Asia and India, seeing a lot of plays in micromobility, battery swapping, where those geographies are more kind of suited for those types of technology. So it's really interesting to zoom in a little bit and see how these, how climate tech looks different across geographies rather than just looking at the kind of total headline 20% of companies in California number. Yeah, I mean, it's to some extent that at least the sort of split by country, I think, has a lot to do with just where the market is for various technologies and where the incentives are, where the policies are supportive. Like, you know, we're going to see a lot more green hydrogen companies in the U.S. thanks to the IRA than we would have otherwise. and emissions reporting requirements in Europe are further along than they are in the U.S.,

and so maybe we'll see more of those companies there. It'd be interesting to speculate a little bit on this one. Like one region that has not seen nearly as much investment historically, but I would place a bet is going to show up on your rankings, at least higher the next couple of years is Texas. There are emerging hubs, right, in both Austin and in Houston. It's a big market for, like, a lot of things. right now for a variety of reasons, in energy, certainly, in electricity and in molecules.

So I'm betting Texas gets higher up there. The other area that I thought was interesting in the data that you presented is in Northern Europe, where, I mean, H2 Green Steel is based in Sweden. So we talked about them, and that's a big number. But it was more than just that, actually. There's like a fair amount within Europe, Northern Europe has a fairly significant share of the overall funding. Definitely. I mean, I did a, I did a trip to Houston, actually, around this time last year. It was almost like a field trip where we visited a couple of climate tech startups. And, you know, they made the case that Houston is the place to be for climate tech. You have the talent you need, especially to build some of these

more, you know, project construction, heavy types of technologies. You have a lot of the customers or the off-takers or even the partners, right, that are there, a lot of the oil and gas majors that know how to develop these projects. And also just not a lot as, not as much comprehensive. competition. Like, you can get better access and better and cheaper access to labor, to offices, warehouses. So I could definitely see the case for that. There was a great Houston climate tech report that a couple of folks I know well published last quarter that details that pretty well. And then on the Northern Europe part, I think, I think, you know, obviously regulations will support emissions and sustainability reporting in those types of sectors. But I also think a lot of, what,

what's coming to head with CBAM is going to be a big driver on industrial decarbonization in Europe. I mean, Europe takes a very sticks heavy approach to climate policy, and a lot of these companies that are trying to sell or operate in Europe are going to have to get their act together sooner rather than later on decarbonization, and that'll have a pretty heavy impact on some these industrial sectors first. All right, Kim, well, we're just entering 2024. So if you you could read the tea leaves thus far as to what you've seen in the first couple weeks of the year, any indications of directionally where you think 2024 looks relative to 2023? Yeah, I mean, look, I think we all kind of recognize that climate tech investment hit

its peak in 21 and 22, but I'm still pretty positive on 24. I think 23 was a year where investors and founders alike played wait and see, right? We were waiting to see where the kind of macro environment would bottom out, waiting to see what would happen to interest rates, waiting to see what would happen with these Inflation Reduction Act rules as well. And I think a lot of that has also gotten clarified at the end of last year. And so it feels like the market overall is much clearer in terms of, you know, what the rules are. I also think a lot of companies that were companies and founders that were playing waitancy in 2023 kind of extending their runway are anecdotally also looking to raise this year.

So I think the, I think 2024 is going to still. be a pretty significant year for climate tech investment. That being said, I think it's going to be an important inflection point for whether or not climate tech starts to be able to graduate out of venture and growth investment. It's been an area we've been tracking for the last four years, but we also talk a lot about the climate capital stack, sophisticated, moving beyond just venture and growth. And that's how solar and wind, and a lot of these technologies from Clean Tech 1.0, have evolved, and I think that's going to be a big marker for success in climate tech as well, is if we can start to see these other asset classes in the capital stack,

start to finance projects and facilities in climate tech at scale. And I think that's what I'm really excited about in 2024 is the graduation at a venture, call it. All right, Kim. This was a lot. In a short period of time, there's even more in the report that you published. so I highly recommend everybody go check it out. But in the meantime, thanks so much for taking some time. Awesome. Thanks for having me on. Kim Zhu is the co-founder and CEO of Market Intelligence firm Sightline Climate, which also produces the weekly Climate Tech VC newsletter.

This show is a production of Latitude Media. You can head over to Latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Prilood-backs of visionaries, accelerating climate innovation, that will reshape the global economy for the betterment of people and planet. Learn more at preludeventures.com. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquan, theme song by Sean Marquan. I'm Shail Khan, and this is Catalyst.