Investment in climate tech is there…for those who earn it
Let’s analogise improving the climate crisis with fixing a broken pipe. It’s a problem that demands an urgent response, it requires an efficient and long-lasting solution and as you’re trying to fix it, you have a bunch of lunatics banging sledgehammers around and creating further problems down the line.
All climate tech companies believe they have groundbreaking and original solutions deserving of investment. However, not all are equal. While some argue that investment is slowing and more competitive than ever, others suggest a significant level of funding is still out there for companies with a strong proposition and watertight business plan.
Our latest article explores the dynamic nature of climate tech investment and how can companies can give themselves the best chance to thrive.
Is climate tech investment slowing?
Bloomberg claims climate tech investment has stalled as investors rush to capitalise on emerging AI companies. In the third quarter of 2024, climate tech companies have raised approximately “$10.3 billion in equity across public and private markets putting full-year funding on track to fall about 50% this year, data from BloombergNEF show”. In contrast, AI start-ups have raised more than $21 billion.
Bloomberg argues it’s not solely competition from AI that’s caused the lull. Global turbulence, unstable economies and rising inflation have all contributed to the downwards spiral. Climate tech is also relatively immature compared to its AI counterpart and hence is perceived to come with a higher level of risk and less reliable form of profitability.
So what’s the good news?
Investment is out there – but it’s competitive
The sustainable business website Edie references how climate tech companies are often subject to ‘valleys of death’ – in other words, it’s so difficult for them to procure and retain funding that there is a risk of failure. This usually happens at the ‘scaling up’ phase where companies require significant levels of investment – particularly where new technologies are involved.
UK Tech News reported that general investment in tech firms had dropped significantly towards the end of 2023 and into 2024 due to a bleak economic climate and increased interest rates. However, Barclays reports that the UK’s current government has allocated £7.3bn in the Treasury’s National Wealth Fund to “drive job creation in clean energy and fund vital infrastructure and technologies using public financing”. This is designed to make the UK a compelling choice as a global innovation hub alongside other worldwide initiatives such as the European Green Deal. Barclays’s Sustainable Impact Capital itself has committed to investing £500m into climate tech companies by the end of 2027 to support them scaling up.
This should be good news for aspiring climate tech companies disheartened with 2023’s fall in funding. However, the UK’s commitment to supporting firms to launch and expand will not come without a caveat. Businesses still need to have a strong and compelling proposition which allows them to stand out in an oversaturated marketplace and convince investors they’re an asset. Considering the urgency of finding climate tech solutions, McKinsey & Co discuss the importance of ensuring speed to market.
“By focusing on the minimum requirements to prioritise speed to market, rather than designing for every possible customer need, companies can move more rapidly.”
While climate tech companies may face hurdles such as increased investment and expanding into unchartered territories, the appetite for sustainable solutions is huge and provides an enormous opportunity for firms who have done their research and are ready to go.
So how do investment-deserving climate tech firms stand out?
Charles Lesser, CEO of Apricum, an advisory firm who supports climate tech companies looking to raise investment, disputes the assumption that funding has dried up. He argues it’s the fact companies are failing to distinguish themselves in a crowded marketplace rather than the lack of investment itself.
“Adding to the problem, in Lesser’s view, is the fact that climate tech is disproportionately well-funded at seed stage, meaning there are too many companies working on the same thing. ‘There’s an assumption that these companies all deserve capital.’”
Disappointing news for climate tech entrepreneurs buoyed by their first round of funding and hoping this signals a gap in the marketplace for their proposition. Instead, Yair Reem, an investor at the German VC firm Extantia, argues that a lot of Series A round funding can be acquired based on technology alone, however from Series B on, companies need finely honed “product market fit and commercial traction, something not all founders have grasped.”
The article goes on to state how both Reem and Lesser argue that when numerous climate tech companies approach first round investors, they do so without having customers lined up or a tenable plan for attaining them.
Commercial Planning
One key way that companies can demonstrate their attractiveness as an investment prospect is by showing a roadmap to consistent revenue streams. A defined pathway to profitability will give investors confidence of a reliable return.
Many of our clients have spoken of their challenges with procuring investment – particularly in the face of a volatile global economy. One example is a company that builds IT systems that enable financial institutions to improve operational efficiency. Infrastructure changes in their target market happen no more frequently than five years and our client had to show a solid mitigation plan to investors.
The solution is in the system’s design, which enabled our client to position itself as a solver of several specific problems rather than a vendor offering only a complete system replacement. This is achieved by providing different platform components as stand-alone products in addition to the option of a full infrastructure replacement.
This has allowed them to gain quick entry into many new customers. The aim is to expand with each customer and develop a growing revenue stream over time rather than a full head-to-head tender for all of their business. As a result, they have been able to answer investor questions while providing solid evidence of a pathway to revenue growth.
Distinctive positioning
Our recent research shows that many companies are in danger of appearing homogenous and unoriginal due to an underdeveloped proposition and brand. The technology may be robust, but many businesses struggle to see what it takes to create an identifiable brand and strong market presence.
In addition to establishing whether certain companies’ products can genuinely produce long-term satisfactory returns, carefully thought-out branding is key. There is a misconception that B2B marketing must be serious and straightlaced, whereas B2C marketing is encouraged to be more creative, humorous and emotive. As a consequence, it’s all too easy for climate tech companies to put minimal investment into their messaging and branding only for it to severely disadvantage them later on as they fail to distinguish themselves in a crowded marketplace.
No-one is claiming raising climate tech investment is easy – particularly for a relatively new industry entering unchartered territories with emerging technologies. However, the global urgency for the potential solutions that these firms can provide should work in their favour. There is investment, capital and interest there – but only for companies who have carefully thought about every aspect of their commercial plan and proposition – from technology to long and short-term revenue growth to branding and market fit and beyond.
About Us
At Tech Partnership, we have extensive global experience in helping technology companies to stay relevant in an ever-evolving marketplace. We help our business partners to create a strong brand, intelligently position their offering in the marketplace and expand their client base. If you’d like to chat to our Managing Director, Chris Hopwood, about our previous work or your own specific requirements, please do get in touch for a chat on 07766 824209.
Sources
https://www.energyconnects.com/news/renewables/2024/october/tourist-investors-are-ditching-climate-tech-for-ai/
https://www.edie.net/how-can-cleantech-startups-access-more-funding-from-vc-and-beyond/
https://www.uktech.news/funding/vc-funding/vc-funding-2024-uk-late-stage-20240418#:~:text=VCs%20invested%20%C2%A32.4bn,third%20quarter%27s%20%C2%A35.1bn
https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/a-different-high-growth-story-the-unique-challenges-of-climate-tech
https://sifted.eu/articles/climate-tech-funding-gap
