After 2023’s wild ride, climate venture capital poised for strong 2024

It’s been a topsy-turvy year for cleantech venture investing, complete with unexpected corporate implosions.

2023 began on a somber note, with foreboding signs from the broader economy. Demoralizing interest rates, inflation and lingering supply-chain weirdness had investors and entrepreneurs on edge. Tech giants like Amazon, Google and Microsoft shed tens of thousands of jobs, and blue-chip corporates reined in their budgets. Disciplined climate startups cut their spending and hunkered down for a potentially long stretch of tough sales and no new funding.

Then, in March, prolific venture lender Silicon Valley Bank collapsed, followed by Signature Bank and First Republic. The reverberations are still being felt among startups and investors alike. In the cleantech space, many a SPAC bled out its once-inflated valuation; surprisingly, the casualties included electric bus-maker Proterra. The venture-backed company became the rare electric-vehicle SPAC that sold a real product to real customers, generating real revenue. It declared bankruptcy in August, and its once-mighty electric transit bus division was sold at the ignominious price of $10 million to Phoenix Motorcars, a publicly traded EV maker grappling with its own financial struggles.

But 2023 turned out to be ​“a tale of two halves,” said investor Zach Barasz, who previously worked at Kleiner Perkins’ Green Growth Fund, and later joined colleagues from that institution as a partner at G2 Venture Partners.

“The first half was slow in terms of investments and slower in terms of quality opportunities,” Barasz said. ​“In the second half of the year, that changed quite quickly, with many more high-quality opportunities. 2024 is going to be a very busy year for new investments.”

Cleantech financing went out on a cheery note this December when Congruent Ventures, a pioneering firm dedicated to seed-stage climate investing, raised a $275 million new fund after turning away offers that would have doubled that amount. It signaled untapped interest from the bigger institutions that invest in venture funds, indicating that they want to put more money into early-stage climate investing, as long as the investors seem to know what they’re doing in this still-emergent industry.

“We’ve been getting rejected our whole careers in this — that’s part of the fun,” Congruent Ventures co-founder and managing partner Abe Yokell told Canary Media. ​“We’ve been telling the same story since day one, and it has tipped. […] There is a massive amount of institutional…interest in investing in climate solutions.”

The tough times of early 2023

Cleantech startups entered 2023 still battened down from the 2022 market slowdown. This was true of venture capital broadly — Pitchbook called the first quarter ​“a rough couple of months” in which ​“fundraising’s momentum has all but come to a halt.”

Climate Tech VC tracked a 40% year-over-year drop in funding for climate-related startups during the first half of the year. But growth funding took the biggest hit, while seed funding actually increased.

Veteran cleantech investor Amy Francetic said her fund — Buoyant Ventures, with $81 million under management — signed just a few follow-on deals in the first six months. Part of the slowdown came from an unexpected moment that triggered ​“pencils down” on any new deals.

“The whole Silicon Valley Bank crisis in March threw everyone for a loop,” Francetic said. That bank was famous for offering venture debt and supporting startups and venture investors with a range of financial services. Its collapse threw many startups into financial jeopardy and raised fears of a domino effect taking out startups that banked there. That ripple didn’t materialize, Francetic said, because the feds stepped in quickly to backstop customers’ money.

“It certainly wasn’t as bad as we feared it could be,” she said. ​“But the services for venture-stage companies and venture capital firms — there hasn’t been a replacement for that as much as we need it to be.”

Healthy funding for early-stage, struggles for later-stage

The upheavals of 2023 created an uneven playing field for startups at different stages of development.

Early-stage companies seeking seed funding found a vibrant ecosystem of willing funders. But the pullback in later-stage investing left a gap for companies further along their growth cycle.

As Yokell put it, there’s now a ​“healthy” amount of capital for early-stage climatetech ventures. ​“High-quality companies are getting funded at seed,” he noted.

His firm’s oversubscribed new fund indicates that larger financial institutions are clamoring to put more money into that sector, too. One of the limited partners, the California State Teachers’ Retirement System or CalSTRS, is the largest educator-only pension fund with $300 billion under management; Nick Abel, a portfolio manager for sustainable investments there, told Canary Media the fund is building ​“a systematic platform to expand our investment in climate opportunities.”

Most of the fund’s involvement with venture investing had been through strategic partners, like Congruent or other funds. But CalSTRS launched a new sustainable private-markets strategy 18 months ago, and it has been building up its capacity for direct investment in climatetech companies, Abel said. The firm had allocated $1.3 billion for private-market sustainable investments as of this summer.

“The goal is to track the early and emerging entrepreneurs and cleantech companies as they grow and de-risk,” Abel said. CalSTRS can then invest in a range of formats across the pension fund, from venture all the way through to large-scale climate infrastructure.

More deep-pocketed investors seeking out climate investments will be particularly vital for companies that make it past the early stages. There aren’t many climate-oriented venture firms dedicated to late-Series A through C rounds — when startups are looking for something in the range of $15 million to $50 million, Yokell said. Maybe they’ve made traction on a climatetech product, but don’t yet have the kind of revenue that growth equity investors or mainstream venture-capital firms want to see. Startups reaching that stage face a world of ​“haves and have-nots,” he added.

B and C rounds are where G2 Venture Partners likes to focus, but they want to see evidence that companies have passed an inflection point in their trajectory.

“It’s a challenging stage to invest in: There’s a potential for false positives, thinking things are past an inflection point when they’re not,” Barasz said of the post-A rounds. ​“Over time, I do want to see a lot more capital in this missing middle.”

Congruent launched a $300 million ​“continuity fund” in April to help its portfolio companies cross the threshold to commercialization — giving a boost to startups that are climbing out of that funding chasm. Those that make it through the wringer and get revenue flowing find a broader ecosystem of funders for their later-stage growth rounds.

Looking ahead to a bustling year of venture deals

After the lean months of 2023, 2024 is shaping up to be a fundraising bonanza. A hungry mass of slimmed-down startups will need to replenish their larders, and funds that pulled back on investing this year have money to spend.

The volume of startups seeking new capital at the same time will create its own challenges. Francetic is advising her portfolio companies to get started now by reaching out to investors who have expressed interest previously because this fundraising cycle is likely to take longer than it has in the past.

“Focus on the revenues, focus on those commercial relationships,” Francetic said. ​“Don’t get out over your skis with expansion plans. Prepare for a little bit more austerity so you can have some staying power.”

Put that way, the trials of 2023 sound like more of a healthy reset for a market that got overheated with easy cash and bubbly narratives. Yes, more money needs to flow into the climate sector to keep pace with the overwhelming need to decarbonize all modern society. But throwing money at unsound businesses doesn’t speed the pace of decarbonization in the long run. To put that in historical cleantech terms, SolarCity’s venture-fueled growth rush ultimately reduced the leading rooftop solar installer to marginalia on Tesla’s balance sheet; Sunrun’s steady-as-you-go mentality helped it survive the solar coaster, and it has installed more than 6 gigawatts and counting.

“The fundamental rule of venture is remove the greatest risk, as fast as possible, with the least amount of capital, and size the operation to the opportunity,” Barasz said. ​“That wasn’t a trial a lot of companies went through when capital was freely available.”

With venture investors attuned to financial discipline, cleantech startups should have no problem coming up with their New Year’s resolutions.