Venture capitalists are increasingly focusing on startups to address the climate crisis, reflecting a critical shift in investment priorities despite a challenging environment for venture capital in 2023. Overall investment in climate tech fell 14.5% to $41.1 billion, a decline from the peak in 2021. However, key trends and insights highlight the evolving landscape of climate tech investment, with a particular focus on nurturing nascent climate tech innovations.
Exit activity in the climate tech space has been muted, dropping 50.5% from $18.7 billion in 2022 to $9.3 billion in 2023. This decline highlights the long-term horizon inherent in climate tech, with founders needing to be prepared to build their solutions over a decade or more. Despite these challenges, there is an increase in the thoughtful use of capital in climate tech. The largest segments in the climate tech vertical in 2023 were low-carbon mobility, industry, grid infrastructure, intermittent renewable energy sources, with 50 VC deals exceeding $150 million, and nine exceeding $500 million.
Climate technology investment is influenced by wider trends in venture capital, including challenging macroeconomic conditions such as high interest rates and lower fundraising activity. Despite this, macro trends such as ecosystem degradation and pollution continue to drive the need for climate adoption. Regulation and policy, such as the Inflation Reduction Act in the United States, play a significant role in enabling climate tech deployment and technology development.
Consumer awareness and the push for energy cost reduction also drive the adoption of climate technologies, with high energy costs accelerating the uptake of home energy technologies. For early-stage climate tech companies seeking funding, a strategic approach is essential, starting with non-dilutive funding sources like SBIR grants and crowdfunding. Venture capital should be considered later, once the company has built a solid foundation.
The long-term outlook for climate tech remains strong, with VCs adjusting their expectations to accommodate the longer timelines required for hardware and infrastructure projects. The sector offers immense opportunities for startups to make a substantial impact on combating the effects of climate change. As VCs continue to invest in these startups, they are not only looking for financial returns but also investing in the future of the planet.
