Climate change technology startups raised $8.1 billion in the first quarter, a near-record amount and the fact that 2023 is so close suggests it may just be a sign of a prolonged recession. Suggests.
The numbers, included in a new PitchBook report, show that climate technology is not succumbing to the same slowdown that is dragging other venture communities.
According to the report, the number of transactions decreased slightly from the previous quarter, but the value increased by nearly 400%. A closer look at the $8.1 billion raised in the first quarter shows that investors are focused on materials such as green steel, battery materials and minerals.
Three early-stage companies closed the most deals. Climate Capital won 94 bids, Lowercarbon Capital closed with 70, and SOSV came in with 59 (this number is even higher if you include the Hax and IndiBio programs). Despite these tallies, he started this year with fewer deals closed compared to Q4 2023. Total deals for the quarter were down 20% to 244 deals.
Although the number of deals declined, climate technology startups raised the second-highest amount of money in the first quarter after last year's third quarter. Several notable deals helped keep the sector booming.
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Swedish startup H2 Green Steel has taken the lead, raising $4.5 billion in debt and $215 million in equity to fund the construction of a massive new factory in northern Sweden. The company claims that by burning green hydrogen instead of coal, it can produce steel with up to 95% fewer emissions. The new plant will initially produce 2.5 million tonnes of steel per year, and the company said customers have already committed to purchasing half of that amount over the next five to seven years. H2 Green Steel follows Swedish battery maker Northvolt in attracting major investment to build large-scale production facilities in the country.
Battery recycler Ascend Elements has added an additional $162 million to its Series D, bringing the total round to $704 million. The company is a unicorn valued at $1.6 billion post-money, competing for share in an increasingly competitive market for recyclable battery materials with former Tesla executive JB Strobel's Redwood Materials. .
Continuing the materials theme, battery maker Natron has raised a $189 million Series B round and begun construction on a commercial-scale factory in western Michigan. The startup specializes in sodium-ion batteries, which are cheaper but have lower energy density than lithium-ion.
Lilac Solutions also completed a major Series C last quarter, raising $145 million to expand its ion exchange technology that can extract lithium from salt water. Most of the world's lithium is produced in evaporation ponds, which require bodies of land and water. Lilac Solutions' approach is similar to a typical factory, with modular units making noise inside an enclosed building. It promises to make lithium extraction commercially viable in the U.S., and is needed if automakers want their EVs to qualify for federal tax incentives that rely on domestically produced minerals.
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While the numbers released in the first quarter may feel inflated due to these large rounds, they may also be the start of a trend where nine-figure raises become less of an anomaly.
It would be easy today to dismiss large deals like H2 Greensteel as outliers, but it also means that many climate technology companies, which often sell physical goods rather than software, have successfully This ignores the fact that achieving this requires large sums of money. Commercial scale. There are simply fewer companies ready to take the leap today. That should change as early-stage companies mature.
Large rounds and small numbers of deals may be cold comfort for early-stage founders who need capital right now. But the reality is that investors have been trending in that direction for several quarters. The boom shown during the pandemic has caused valuations to skyrocket, making it difficult to justify additional investment without a down round.
In conversations over the past few months, venture capitalists have told me that they prefer to put money into companies that have customer traction and some revenue on their books. In climate change technology, many companies still have a significant amount of technical risk and therefore much less capital available to leverage. Investor bias towards emerging companies that reduce risk and generate returns is reflected in the first quarter's numbers, which were dominated by established companies that raised large amounts of capital.
However, that momentum won't last forever. According to McKinsey, the world needs to invest $230 trillion over the next 25 years to reach net-zero carbon emissions. For investors, this is an opportunity too big to ignore, and founders are rushing to fill the gap with new technologies and business models.
Investors have met founders at the starting block, but when early-stage companies start thinking about scaling, they often encounter a difficult funding environment known as the “valley of death.”
As companies like H2 Green Steel, Ascend Elements, and others traverse this valley, the lessons learned will inform investors and startups on similar journeys. The playbook may take years to develop, but once it does, large rounds like those seen this quarter should start to become the norm rather than the exception.