In record-breaking year for VC funding, climate tech is no exception

It feels like VC has broken every record there is to break this year—and funding for climate-tech startups is no exception.

By the numbers: While climate tech makes up just a fraction of all VC dollars—about 6% over the last few years—the industry has been steadily gaining attention from investors.

In the first three quarters of 2021, $30.8 billion has been invested in climate tech—already more than any previous full year, according to data from PitchBook. Climate-tech investments through the end of Q3 this year are already 30% higher than all of 2020. For perspective, global VC funding was more than $450 billion as of Sept. 30, per Crunchbase, already about 50% higher than the whole of 2020.

“We’ve seen over the first nine months of 2021, the same amount of deals as the entire previous year, while the capital raised was higher. That means the deals are getting bigger,” PitchBook analyst Svenja Telle told Emerging Tech Brew.

Companies in the EV ecosystem, which includes not only cars but also electric mobility, fleet electrification, battery technology, and charging infrastructure, accounted for half of all VC dollars raised within climate tech. Just in July:

• EV manufacturer Rivian raised $2.5 billion, in the largest climate tech deal of the quarter.
• Lithium-ion battery manufacturer SVOLT raised $1.6 billion in a Series B, making it the largest early-stage VC deal in climate tech.
• Battery recycling company Redwood Materials raised $775 million in a Series C round.

Exits are also setting records. As of September 30, 61 climate-tech companies have either gone public or have been purchased, up from 33 in all of last year. That amounts to more than $28 billion in exit value.

Why now? Confronting the climate crisis feels more urgent than ever this year, as countries continue to face historic flooding, wildfires, and storms. In 2020, the US alone experienced a record 22 weather and climate disasters that caused $1 billion or more in damage.

“We are moving into the new COP26 in Glasgow, where countries are really going to be faced with where we are standing right now with how to comply with the Paris Agreement,” Telle said. “We are not achieving the targets that we should, so there’s just a lot of momentum around it, public awareness.”

Also, the VC market has been red-hot all year for a variety of reasons. Part of the draw is that VCs sense urgency around the climate, but part is that there is just a lot of money sloshing around...everywhere.

And it’s not just the VCs: Institutional investors poured $51 billion into funds focused on sustainability, environment, and social good (ESG) in 2020, according to Morningstar—more than double the 2019 amount.

But for VC investors, the draw is always the potential for big financial returns—and the climate-tech space offers plenty of promise.

While about 65% of emissions reductions needed to reach net zero by 2050 can be achieved by existing tech and policy changes, the other 35% will depend on new technological breakthroughs, said Telle, referring to an IEA estimate from 2020. That translates to serious growth opportunities.

Some investors say the industry could produce as many as 1,000 unicorns—companies valued at $1 billion or more—in the coming years. From 2013 to 2019, returns on investments in the climate-tech space were on average five times higher than overall VC funding. Climate-tech investors could reap up to $150 trillion over the next 30 years.

Telle said clean-industry technology—things that fuel alternatives, mining solutions, and manufacturing innovation—is the fastest-growing business within climate tech.

“The segment has grown 484% from 2020 to 2021to date. And the sole reason for that is lithium-ion battery recycling,” she said. “We have seen tremendous activity in lithium-ion battery recycling.”

• Along with the massive Redwood round, Toronto-based battery recycling company Li-Cycle was valued at about $1.7 billion when it went public via a SPAC merger in August.

Another exciting area within climate tech is built-environment companies, Telle said. Buildings and construction are responsible for 39% of global greenhouse-gas emissions.

• Vancouver startup Nexii, which is working to reduce emissions and make buildings more resilient to disasters like fires and earthquakes, reached unicorn status in less than three years—setting a new record in Canada.

Zoom out: All of this cash is pouring in despite the massive losses to those who bet on clean tech in the late 2000s and early 2010s.

“Investors were scared after what happened with Clean Tech 1.0, but it’s different this time. Back then everything was focused on really R&D–heavy technologies in clean energy. This time it’s about decarbonizing the entire economy,” Telle said. “Something that is relevant for every single sector. And it’s the only way forward.”

Correction: We've updated this piece to note that Redwood Materials raised $775 million in its Series C round, not $700 million as initially reported.