Private and public sectors are driving demand
A closer look at this year’s report findings suggests that although climate tech investment may have slowed, wider investment into the transition to a net-zero economy indicates rising demand. Public policy is creating an environment suitable for climate tech start-ups as policy makers continue to connect climate security, energy security and economic security. Public sector climate initiatives are increasingly designed and communicated around questions of economic development and preservation rather than arcane environmental concerns. Public support is strong when solving environmental issues becomes a salve for economic woes – such as war-affected energy prices and inflationary and employment pressures.
For its part, the private sector continues to drive demand for net-zero solutions, focussing on balancing short-term opportunities with development of longer term solutions. Global coalitions are publicly strengthening the desire for climate tech, allowing investors to fund the scaling up of emerging start-ups. Likewise, regulatory requirements (along with investor expectations) are driving the need for enterprise software, with specialties such as greenhouse gas (GHG) emission accounting, supply chain traceability and environment, health and safety reporting. Indeed, this year’s report identified nearly 300 deals in the GHG data intelligence space since the start of 2021 and posits that the drop-off in the number and value of deals in Q3 of 2022 could be a response to product launches by major tech players.
An inefficient market causes concern
Two challenges face the effectiveness of meeting climate change and net-zero goals: Early stage funding, and ensuring that technologies are targeting the highest potential for emissions reduction.
An inequality in climate tech deals is becoming evident. Since early 2021, small deals, in both number and total value, have been declining. This is problematic as they are typically associated with the earliest stages of funding, critical to new innovation. At the same time, mid-size deals of between US$5 million and US$1 billion, associated more with later stage funding, have done well both in funding levels and the number of deals occuring.
On the other end of the spectrum, blockbuster deals over US$1 billion, which have been consistent for most of 2018-2021, have declined, and while numbers picked up in Q3 of 2022, their value has dropped sharply. The bottom line is that a top-heavy pipeline could lead to a potential dearth of quality start-ups to move from initial to later stage funding down the road.