Report highlights broadening base of investors supporting climate tech startups
While private market investments in climate technology experienced a decline in 2023, they outperformed venture capital and private equity in the same period, according to PwC's recently released annual State of Climate Tech report.
PwC's findings reveal a broadening base of investors supporting climate tech startups and an increased focus on technologies with the potential to reduce emissions.
In 2023, climate tech private market funding saw a decrease of 40.5%, while venture capital and private equity financing experienced a steeper drop of 50.2%. This decline can be attributed to factors such as geopolitical instability, lower valuations, higher inflation, and increased interest rates.
Despite the challenges, climate tech continued to gain market share for the fourth consecutive year, reaching a record 10% in 2023, up from 9.2% in 2022 and 7.2% in 2020.
A key trend highlighted in the report is a shift in investments toward startups focusing on emissions reduction solutions for industrial sectors. Their share of investment increased to 14% by the end of the third quarter in 2023, up from an average of under 8%. This shift was evident in the North American market, where these startups saw their share rise to 16% from 9% in just one year.
In contrast, the mobility sector, which historically attracted the largest portion of investment, saw a decline, dropping to 45% from a long-term average of 50%.
PwC also found a growing focus on technologies with enhanced emissions reduction potential, such as carbon capture, utilization, and storage (CCUS), green hydrogen, and alternative foods. Meanwhile, technologies with lower emissions reduction potential or more mature solutions like wind and solar experienced a dip in funding.
CCUS technologies were the only category within climate tech to witness an absolute increase in investment over the past two years. This surge was fueled by corporate commitments to purchase carbon removal credits and government incentives.
The report also found a shift in climate tech funding away from early-stage deals, which represented less than half of the total for the first time. Meanwhile, mid-stage deals accounted for more than 45%, up from approximately a quarter of deals four years ago. Investors attributed the decline in early-stage deals to concerns about scalability and startup hesitance to raise funds at lower valuations.
Furthermore, the report found that climate tech investment is becoming more mainstream, with an increasing number of first-time investors entering the market.