Climate tech investment roars back with an $8.1B start to 2024

Climate tech startups raised $8.1 billion in the first quarter, near record amounts of money that suggest 2023’s quiet close might have been more of a blip than the sign of a protracted downturn.

The figure, contained in a new report from PitchBook, shows that climate tech hasn’t succumbed to the same slowdown that has dragged on the rest of the venture community.

While the number of deals was down slightly quarter-over-quarter, the value was up nearly 400%, according to the report. A deeper look into the $8.1 billion raised in the first quarter shows that investors focused their attention on materials, including green steel and battery materials and minerals.

Three early-stage firms closed the most deals. Climate Capital landed 94, Lowercarbon Capital closed 70 and SOSV came in with 59 (a figure that would be higher if you included its Hax and IndieBio programs). Despite those tallies, this year started with fewer deals closing compared with Q4 2023. Total deal count was down 20% this quarter to 244.

Despite the lower deal count, the amount of money raised by climate tech startups in Q1 was second only to Q3 of last year. A handful of noteworthy deals helped keep the sector buoyant.

Top deals

Swedish startup H2 Green Steel led the pack, raising $4.5 billion in debt and $215 million in equity to fund a massive new plant in northern Sweden. The company claims it can produce steel with up to 95% fewer emissions by burning green hydrogen rather than coal. The new plant will initially produce 2.5 million metric tons of steel per year, and the company says customers have already committed to buying half of that volume for the next five to seven years. H2 Green Steel follows Northvolt, a Swedish battery manufacturer, in attracting outsize investments to build large-scale production facilities in the country.

Battery recycler Ascend Elements followed by adding another $162 million to its Series D, bringing the total to $704 million for the round. The company, a unicorn worth $1.6 billion post-money, is vying for a share in an increasingly competitive market for recyclable battery materials, squaring off against former Tesla executive J.B. Straubel’s Redwood Materials.

Continuing the materials theme, battery manufacturer Natron raised a $189 million Series B round to begin construction on a commercial-scale factory in western Michigan. The startup specializes in sodium-ion batteries, which are cheaper than lithium-ion but less energy dense.

Lilac Solutions also closed a significant Series C last quarter, raising $145 million to scale up its ion-exchange technology that can extract lithium from salty water. Most of the world’s lithium is produced in evaporation ponds, which require gobs of land and water. Lilac Solutions’ approach looks more like a regular factory, with modular units humming inside an enclosed building. It promises to make lithium extraction commercially viable in the U.S., something automakers will need if their EVs are to qualify for federal tax incentives, which are dependent on domestic minerals.

A preview?

The numbers posted in Q1 may feel inflated because of those sizable rounds, but they could also be the beginning of a trend in which nine-figure raises cease to be exceptional.

Today, it would be easy to dismiss massive deals like H2 Green Steel’s as an outlier, but that would also ignore the fact that many climate tech companies, which often sell physical goods instead of software, need large sums if they’re to successfully reach commercial scale. Currently, there are simply fewer companies ready to make the leap. As early-stage companies mature, that should change.

Large rounds coupled with fewer deals may be cold comfort for early-stage founders in need of cash now. But the reality is that investors have been trending in that direction for several quarters. The exuberance that was on display during the pandemic caused valuations to skyrocket, making it challenging to justify additional investment without a down round.

In conversations over the last few months, VCs have told me they’ve preferred to put their money behind companies with customer traction and some revenue on the books. In climate tech, there’s a much smaller pool to draw from since many companies still harbor a decent amount of technical risk. Investors’ bias toward de-risked, revenue-generating startups is reflected in Q1’s numbers, which were dominated by established companies raising large rounds.

That dynamic can’t continue forever, though. In the next 25 years, the world will need to invest $230 trillion to reach net-zero carbon emissions, according to McKinsey. For investors, it’s an opportunity that’s too large to ignore, and founders have been rushing to fill the gap with novel technologies and business models.

Investors have been meeting founders at the starting blocks, but as early-stage companies begin to think about scaling, they frequently encounter a challenging fundraising environment, something that’s become known as the “valley of death.”

As companies like H2 Green Steel, Ascend Elements and others traverse the valley, the lessons learned will inform investors and startups who are on a similar journey. It might take a few years to develop a playbook, but once that happens, large rounds like the kind seen this quarter should start becoming the norm, not the exception.