Climate-tech startups specializing in carbon and emissions tech raised $7.6 billion in VC funding in Q3, beating the sector’s previous record by $1.8 billion and defying the fundraising slowdown.
The hot quarter for climate-tech companies rode a wave of mega-rounds to finance factories that government incentives have made more economical. H2 Green Steel, a company using hydrogen from renewables to make steel, raised $1.6 billion, and battery recycler Redwood Materials closed a $997.2 million Series D, according to PitchBook’s Q3 2023 Carbon & Emissions Tech Report.
“Eight deals above $250 million is very unusual for this vertical,” PitchBook emerging technology analyst John MacDonagh said.
Federal support provides substantially more non-dilutive funding for decarbonization companies than in other industries, helping climate-tech specialists evade the fundraising slowdown that has beset much of the VC industry. The US Inflation Reduction Act, which recently passed its one-year anniversary, has enabled transformative growth in fields like green hydrogen, EV supply chains, direct air carbon capture and renewable electric grid infrastructure.
Most of the biggest deals that closed in Q3 were intended to help build or develop new production facilities. The emerging segments of green mining and energy efficiency for buildings both logged their highest-ever quarters for VC deals value.
Compared to the SaaS and fintech industries, where investors have reassessed their expectations from 2021’s breakneck up rounds, the valuations for decarbonization companies have stayed relatively steady: Pre-seed, seed and late-stage companies all logged higher median pre-money valuations this year than in 2022.
VCs are particularly energized right now by low-carbon mineral mining and direct air carbon capture, driven by a growing need for mineral resources and carbon removal from the atmosphere in order to reach net-zero by 2050. Several blue-chip companies including Amazon and JP Morgan invested hundreds of millions of dollars in carbon removal credits this year.
Legacy automobile companies’ embrace of electric vehicles is also driving that growth. “There’s a natural, inevitable scale-up that’s coming from battery technology in response to an industry that’s fully embraced becoming completely electric,” said Todd Khozein, founder of climate-tech impact investor SecondMuse.
On top of everything else, the spigot of federal funding is also still going steady. In mid-October, the Biden administration announced the recipients of $7 billion in federal funding for renewable hydrogen hubs at locations across the country.
The record-setting quarter follows two depressed quarters for climate-tech fundraising, which in combination with the disruption caused by Silicon Valley Bank‘s collapse, had arisen some fears of a slowdown hitting green emerging technologies. Climate-tech companies frequently tap lenders to finance projects.
For now, the broader VC fundraising slowdown doesn’t appear to be impeding carbon and emissions startups from closing large rounds. The median deal sizes in pre-seed, seed, late-stage and venture-growth stages have all seen upticks in 2023 so far compared to 2022.
Momentum for climate-tech startups is also being driven by the accelerating effects of climate change. 2023 is on track to become the hottest year since at least 1940, according to the EU’s Copernicus Climate Change Service, and Antarctica’s sea ice levels at its winter peak hit a record low this year.
“The changing climate is just getting more real for more people,” said Khozein, who has noticed an uptick in family offices investing in climate-tech specialists. “It’s not just bigger storms, hotter summers. It’s that the weather is becoming more unpredictable.”
Related read: Q3 2023 Carbon & Emissions Tech Report
Featured image of a green hydrogen plant by VCG/Getty Images
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