The climate tech sector is facing a funding slowdown as venture capital turns away due to the clash between the sector’s capital needs and fast-return expectations.
Why it matters: Despite urgent global calls to accelerate climate technology and cut emissions, investment in the sector is slowing, putting the once-robust funding ecosystem for climate tech startups under strain.
The details:
- Global climate tech investment fell from $51 billion in 2023 to $41.1 billion in 2024, a drop of nearly 14.5%.
- In India, climate tech funding fell from $1.66 billion across 157 deals in 2023 to $910 million in 2024.
- The average deal size in India has halved from $10.57 million in 2023 to $5.5 million this year.
- Clean energy, electric mobility, and AI-led climate solutions are still drawing interest, aided by government policy incentives and selective investor backing.
The central dilemma lies in the nature of climate tech itself, which demands long-term capital that conventional VC models are reluctant to offer.
What they’re saying:
- “Climate tech startups, unlike their software counterparts, require significant upfront investment and often take far longer to reach profitability—frequently beyond the three-year horizon that VC funds prefer.” – McKinsey report
- “The froth has cleared, and only ventures with clear, compelling business models—those that offer more than just ‘green’ branding—are commanding capital.” – Yair Reem, Extantia Capital
Despite the funding drought, new financial instruments like blended finance, project-specific instruments, and layered risk-sharing models are emerging to bridge the gap.
The other side: AI-powered solutions and adaptation and resilience technologies are bucking the trend, with AI-centric climate ventures raising $6 billion in the first nine months of 2024, a 20% increase over the previous year.
What’s next: The outlook for the climate tech sector is not entirely bleak, with signs of recovery in the first half of 2025, particularly in the United States. However, investors are likely to remain selective, backing startups with revenue traction and a path to profitability.
