Climate tech now accounts for 70% of built world’s VC investment - research

Climate tech investments now make up 70% of the built world’s VC investment, according to a new report by A/O, Europe’s largest built world VC investor, up from just a fifth five years ago.

Despite a decrease in total investment this year, reflecting the global funding slowdown, investment in building efficiency grew 73%, as the European energy crisis and global regulatory commitments catalysed investor interest.

Pressure to decarbonise the built world and accelerate the energy transition of the real estate and construction industry means that investing in built world decarbonisation has been somewhat insulated from a difficult funding environment, with the built world climate tech sector seeing a 17% fall in dollars invested, compared with a 36% year on year fall in the wider VC sector.

Total venture funding fell dramatically in the first half of 2023 (-32.3%), and climate tech also experienced a 40% decrease in the capital it attracted.

Built world climate tech, however, was much less badly affected with only a 13% decrease in investment. The built world climate sector is expected to raise $11.8 bn (€10.9 bn) in funding in total this year, down from $14.3 bn in 2022.

Despite the fall off in investment, there was an improvement in build world climate funding between Q1 to Q2 (+48%). A combination of the European energy crisis and the US Inflation Reduction Act (IRA) is continuing to drive interest in VC investment in energy themes, particularly built world technologies focused on efficiency, electrification and grid solutions.

Other themes, such as climate management funding for real estate companies focusing on climate risk have not fared so well. Venture investment in indoor farming tech and carbon capture and storage for industrial real estate is expected to fall by more than two-thirds this year.

In comparison, the wider climate tech sector hasn’t recovered as fast. In the first half of 2023, investment was down -40%. Overall, climate tech funding is expected to end the year down -26% compared to last year.

Gregory Dewerpe, founder and managing partner at A/O, said: 'The built world is not immune to the wider macroeconomic challenges in the tech and startup world in 2023.

'However, climate themes have proven more resilient relative to the wider venture market, and within the built world specifically, we have observed both a more muted downturn and faster recovery - highlighting the underlying tailwinds supporting this transformation and urgency of decarbonising construction and electrifying existing estates.

'It’s great to see Europe’s ecosystem continue to grow with early-stage investment in Europe on par with North America for the first time, showcasing that some of the most exciting innovation is coming out of the continent.

'As we get closer to 2030, there is increased pressure on global corporations to cut emissions and make progress on their net zero targets. This new generation of built world companies will be there to help them solve this urgent problem.'

The US remains the largest country for built world investment with startups and scaleups raising $5.6 bn in 2023, 4.0x the amount of investment than Germany, Europe’s largest hub, which raised $1.4 bn.

Over 80% of building materials investment went to the US, whilst Germany experienced an increase in investment in electrification installers such as Enpal, a green smart home installer, which raised $230 mln to expand beyond Germany. Despite this, funding has still fallen in the US, thanks to a decline in later-stage rounds which are disproportionately concentrated in North America.

For the first time, the top three cities for dollars invested in built world climate tech are all European (London, Berlin, Munich).

From that group London companies raised $990 mln, Berlin companies $629 mln and Munich $483 mln. Overall the UK came second for deals (98) and third for equity raised ($1.1 bn), ahead of Canada, France and China.

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