For climate tech funders, physical projects still reign

In 2023, a two-year funding blitz for climate tech came to an end, with a 30% drop in total dollars over the course of the year. 

However, across equity, debt, and grant financing, one category of tech came out on top: physical solutions, ready at deployment stage. Digital offerings and breakthrough innovations fared less well.

• The top line: Despite the buzz around artificial intelligence and the digital layer, software solutions fell behind physical infrastructural ones in terms of funding last year. According to data released yesterday by climate tech intelligence firm Net Zero Insights, 80% of all venture funding raised in the last five years focused on adoption. And 70% of that funding went to physical solutions.
• The market grounding: The capital stack of clean tech projects is shifting, and non-dilutive funding is on the rise. The report found that 2023 presented a challenging macro environment that dragged down overall deal count, hitting frontier technologies particularly hard; funding for greenhouse capture, removal, and storage decreased by more than 50%, while funding for energy dropped by around 7%.
• The current take: Net Zero Insights founder Federico Cristoforoni told Latitude Media that AI “remains a pervasive buzzword” for a number of the companies that secured funding last year. “However, it is noteworthy that digital solutions, despite their prevalence, do not entail the same capital intensity as their physical counterparts,” he added. “This becomes especially apparent as markets attain maturity and stand poised for substantial scale-up.”

Net Zero Insight’s new report considers the last five years of climate tech deals that exceeded $70 million, including deals backing breakthrough innovation and those focused on adoption (deployment, decreasing costs, or increasing efficiency.)

Overall deal activity in climate tech was down in 2023 after a steady upward tick for the previous four years. In 2019, climate tech funding totaled $27.5 billion globally, and in 2022 it peaked at $102.5 billion. Last year, that total dropped to $72.9 billion.

But the segment of the industry that involves commercializing infrastructure — like building new factories — seems to have stolen the show even amid the downturn. According to Net Zero’s data, in the last five years a total of $192.2 billion has been tagged for funding the commercialization of physical solutions, compared to the $75.8 billion spent on similar-stage digital solutions.

Larger deals — those exceeding $100 million — had immense influence last year, when overall deal count was down. The industry’s biggest checks were primarily cut for facility construction projects, Cristoforoni said.

“This emphasizes a noteworthy advancement in the maturity of climate tech, solidifying its growth trajectory,” he added.

At the same time, it’s taking founders longer to fundraise, the report found. That holds true for companies of all sizes, though Series A and B companies were particularly hard hit by the relatively constrained flow of capital last year.

Net Zero’s data indicates that a significant slowdown in funding for series-stage companies occurred across nearly all energy transition sectors. The energy sector saw a 23.5% decrease in funding year over year, while the transport sector saw a decrease of more than 40%. These trends illustrate the looming tech phenomenon known as the “valley of death” in which companies struggle to take their product from the lab to the masses.

Venture investors continue to spearhead funding companies through to commercialization, the report found, though before the 2023 slowdown corporate and growth equity investments were also on the rise.