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Copper Tip Energy

Venture Capital Funding for Climate Tech Dips 40% in First Half of 2023

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Climate tech has been an investing bright spot since 2021 in an otherwise dismal venture capital ecosystem, raking in deals as other sectors stagnated. But the first half of 2023 saw a decrease in climate venture funding, according to a new report from Climate Tech VC (CTVC), which tracks venture capital funding for climate tech across seven categories and over 60 subsectors.Funding during the first six months of the year totaled $13.1 billion. That marked a 40% decrease compared to the same period last year, according to the report. That change reflects an overall slowdown in venture capital investments, driven by larger macroeconomic forces like higher interest rates as well as sector-specific issues. In its report, CTVC noted that while “other market observers may promote larger climate market sizes,” it excludes state-backed and private equity investors as well as post-IPO, grant and other types of funding from its analysis.Growth and late-stage startups, particularly in the more mature transportation and energy sectors, saw the greatest declines. Venture capital is starting to shift from mature sectors like electric vehicles, which require large pools of capital to scale up, towards enabling technology like charging infrastructure, which is generally less capital-intensive, said CTVC co-founder and chief executive officer Kim Zou.

Startups focused on the built environment — which includes sustainable building materials and low-carbon heating and cooling, for example — were among the few bright spots. The sector saw a 7% increase in funding compared to the first half of 2022. Seed funding for climate tech overall also rose 23% compared to this time last year.

A large part of that rise can be attributed to deals with startups like Kensa Group, HeatTransformers and Gradient working in the heat pump space, which Zou said ballooned from $6 million to almost $200 million. Higher gas prices in Europe as well as new gas bans and Inflation Reduction Act tax credits in the US are driving a ramp-up in heat pump adoption globally.

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Climate tech companies raised $12.6 billion in the first quarter of 2023, according to BloombergNEF, the lowest quarterly funding tracked by BNEF since the second quarter of 2021. That figure includes private equity deals as well as state-owned enterprise funding.

BNEF data shows that, outside of high investments in mainland China, other markets like Europe and the US saw a more than 50% drop in first quarter funding compared with averages over the last four quarters.

Zou said “time will tell” whether this is a true slowdown or just a needed correction to an overheated market. Historically, the sector sees most funding deals in the latter half of the year, so if the slowdown continues through then, Zou said, “then maybe that’s a different story.”

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