Climate-tech startups focusing on carbon and emissions technology attracted a staggering $7.6 billion in venture capital (VC) funding in the third quarter of this year, surpassing the sector’s previous record by $1.8 billion. This surge in funding defied the overall downturn in fundraising and was largely driven by a series of large financing rounds supporting the construction of factories, aided by government incentives.
One notable recipient of VC funding was H2 Green Steel, which raised $1.6 billion in an early-stage round. The company utilizes hydrogen from renewable sources in the production of steel. Another significant funding round went to Redwood Materials, a lithium battery recycling company, which secured $997.2 million in a Series D round.
In addition to these manufacturing and recycling companies, green mining also experienced its most successful quarter in terms of VC value, with $394.9 million invested across eleven deals. The spike in deal value can be attributed to the significant government support available to decarbonization firms, which provides them with non-dilutive financial assistance. This support has enabled climate-tech startups to bypass the fundraising challenges that have affected other sectors.
The US Inflation Reduction Act, which is only a year old, has played a crucial role in advancing various areas of climate-tech, such as green hydrogen, electric vehicle supply chains, direct air carbon (DAC) capture, and renewable electric grid infrastructure. Additionally, the growing shift towards electric vehicles by automobile companies has further fueled the growth of climate-tech startups.
Most of the notable transactions completed in the third quarter were aimed at facilitating the construction or establishment of new manufacturing facilities. Both the green mining and energy efficiency for buildings sectors also experienced their most lucrative quarters in terms of VC deal value. Unlike sectors like SaaS and fintech, where investors have adjusted their outlook following significant valuation increases in 2021, decarbonization enterprises have maintained a relatively steady course.
According to PitchBook data, median pre-money valuations for pre-seed, seed, and late-stage companies have all increased in 2023 compared to the previous year. Pre-seed and seed funding increased from $2.0 million to $2.3 million, early-stage VC funding decreased from $5.6 million to $4.1 million, late-stage VC funding increased from $9.2 million to $10.7 million, and venture growth funding increased from $11.7 million to $14.5 million.
VCs are particularly enthusiastic about low-carbon mineral mining and DAC, driven by the growing demand for mineral resources and carbon removal to achieve net-zero emissions by 2050. Major companies such as Amazon, JP Morgan, Apple, and Microsoft have invested hundreds of millions of dollars in carbon dioxide removal credits, further fueling the interest in these areas. Additionally, the recent allocation of $7 billion in federal funding for renewable hydrogen hubs across the United States has sustained the inflow of funds into the sector.
This record-setting quarter comes after two lackluster quarters for climate-tech fundraising, which had raised concerns about a potential slowdown in green emerging technologies. Despite the broader VC fundraising slowdown and the disruption caused by the collapse of Silicon Valley Bank, carbon and emissions startups have remained resilient in securing substantial funding.
The impetus for climate-tech startups also comes from the escalating impact of climate change. Experts predict that 2023 will be the hottest year since at least 1940, further highlighting the urgency of addressing climate issues. Family offices have also shown increasing support for climate-tech companies, indicating a growing recognition of the importance of investing in sustainable technologies.
In conclusion, climate-tech startups defied the fundraising slowdown in the VC industry, setting records in Q3 with $7.6 billion in funding. This growth is fueled by government support, the increasing focus on carbon reduction technologies, and the pressing need to address climate change.