Climate tech startups amassed $8.1 billion in the first quarter, nearing record-breaking funding levels, indicating that the subdued end of 2023 may have been an anomaly rather than a prolonged downturn.
The statistic, outlined in a recent report from PitchBook, indicates that climate tech has not experienced the same slowdown affecting the broader venture community.
As per the report, the value surged by nearly 400% despite a slight decrease in the number of deals compared to the previous quarter.
A closer examination of the $8.1 billion raised in the first quarter reveals that investors directed their focus towards materials, including green steel, battery materials, and minerals.
Three early-stage firms, namely Climate Capital, Lowercarbon Capital, and SOSV, closed the most deals: Climate Capital closed 94, Lowercarbon Capital closed 70, and SOSV closed 59.
However, despite these figures, this year began with fewer deals closing compared to Q4 2023. The total deal count decreased by 20% this quarter to 244.
An overview of the Top deals
1. H2 Green Steel
H2 Green Steel, a Swedish startup, took the lead by securing $4.5 billion in debt and $215 million in equity to finance a substantial new plant in northern Sweden.
The company asserts it can achieve up to 95% emission reduction by utilizing green hydrogen instead of coal in steel production. Initially, the new plant will manufacture 2.5 million metric tons of steel annually, with half of this volume already committed by customers for the next five to seven years.
H2 Green Steel’s endeavor follows a similar trend to Northvolt, a Swedish battery manufacturer, which attracted substantial investments for large-scale production facilities in the country.
2. Ascend Elements
Subsequently, Ascend Elements, a battery recycler, contributed an additional $162 million to its Series D funding, totaling $704 million for the round. With a post-money valuation of $1.6 billion, the company has achieved unicorn status.
Ascend Elements is competing in a growing market for recyclable battery materials, challenging Redwood Materials led by former Tesla executive J.B. Straubel.
3. Natron Energy
Continuing the emphasis on materials, battery producer Natron secured a $189 million Series B round to kickstart the establishment of a commercial-scale factory in western Michigan. Specializing in sodium-ion batteries, the company focuses on a type of battery that is less expensive than lithium-ion batteries but offers lower energy density.
3. Lilac Solutions
Last quarter, Lilac Solutions concluded a notable Series C funding round, securing $145 million to expand its ion-exchange technology designed to extract lithium from saline water.
Unlike the conventional method of lithium extraction in expansive evaporation ponds that consume vast land and water resources, Lilac Solutions employs a factory-like approach with enclosed modular units. This strategy aims to make lithium extraction economically feasible in the United States, a crucial requirement for automakers to qualify for federal tax incentives tied to domestic mineral sourcing for electric vehicles (EVs).
Financing needs to achieve objectives
Currently, it might seem tempting to view significant deals like H2 Green Steel’s as exceptional cases. However, doing so would overlook the reality that many climate tech firms, particularly those dealing in physical products rather than software, require substantial funding to effectively expand to commercial levels. At present, there are relatively fewer companies prepared to take this leap, but as early-stage firms progress, this dynamic is likely to shift.
Amidst large funding rounds and a decline in the number of deals, early-stage founders seeking immediate funding may find little solace. However, it’s worth noting that investors have been moving in this direction for several quarters. The enthusiasm seen during the pandemic led to soaring valuations, making it difficult to justify further investment without risking a down round.
In recent discussions, venture capitalists have indicated a preference for investing in companies that have customer traction and some revenue generated.
However, in the climate tech sector, the pool of such companies is smaller due to the technical risks involved. This bias towards established, revenue-generating startups is evident in the dominance of large funding rounds by well-established companies in the first quarter.
However, this situation is not sustainable in the long run. McKinsey estimates that over the next 25 years, the world will need to invest $230 trillion to achieve net-zero carbon emissions. This presents an opportunity that investors cannot afford to overlook, leading founders to rapidly innovate with novel technologies and business models to bridge the gap.
Investors have been engaging with founders right from the outset, but as early-stage companies contemplate scaling up, they often face a tough fundraising landscape.