Climate Technology State 2023: An Investment Analysis

As we have seen, the scale of climate technology investment has declined. Nevertheless, the sector still has clear appeal for investors. And the need for climate solutions is greater than ever. These dynamics, seasoned investors say, make for a challenging market — and one that can reward companies that exercise good judgment and discipline. Here are some investor ideas on how to approach a climate tech VC today.

Think outside the box

While interviewees agreed that the policy would encourage businesses to provide a more robust response to climate change, they were quick to point out that climate tech startups still need to be fundamentally sound. Extantia’s Reem said: 'We need pressure from politicians, as well as demand from corporate and consumers. But if a climate technology company can’t make money, it’s not going to scale and it’s not going to make an impact. And Capricorn’s Schultz warned against over-reliance on subsidies: 'A business model that predicated itself on getting money from the government is not a business model.’

’The way we see climate technology now, because it’s so hyped and trend-driven, [is] We focus more on the fundamentals of building good companies,’ said Peringa’s Phillipson. 'We are looking for strong businesses that can achieve potential profitability from our round of investment.’

Do counter-rotational movements

Some investors view the current decline as a necessary recovery from the heady times of 2020-21. „We had a couple of years where if you had a climate tech startup, people paid you,” Jacobsen said. 'Now the market is starting to work – you’re not raising because you’re a climate start-up, you’re raising as a startup.’

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This provides more opportunity for interested investors. 'Valuations have definitely come down, so we think it’s a good buyer’s market,’ said Christian Hernandez Gallardo, co-founder and partner at VC firm 2150. Schultz agreed: 'It’s good that the investment community is finding really strong opportunities.’

However, the relative lack of venture capital can complicate the deal in some ways. A challenge for investors, Hernández observed, may be convincing target companies to adapt to the new environment: 'Some founders have not yet reset the expectations to what the market actually has.’

Planning for the development phase

Building a good climate technology company requires more than an innovative idea. It also needs capital to grow. From an investor’s standpoint, the contract thesis is not about technical risk. It’s about the amount of funding needed to scale a business,’ Phillipson noted. 'Many verticals in climate technology will require a lot of funding to build factories or build broad infrastructure to scale.’

Investment of more than US$1 trillion in clean energy by 2023, for example, exceeds the potential of VC and private equity funds—according to the IEA. Hernandez noted, 'We need to reduce 25 gigatons of CO2 By 2030. That’s not going to happen from a small venture portfolio. We need a large amount of capital. Not just venture and private equity, but growth.’ It is therefore important for start-up founders to explore all possible sources of capital Government Loan and Incentive SchemesBeyond their initial venture investors.

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