In last week’s newsletter exploring corporate venture capital, we noted the decline in the overall venture capital market.

According to CB Insights, global VC funding fell 54% in Q3 compared to a year ago ($74.5 billion vs. $164 billion).

The reasons for the drop are plentiful: market corrections, historic inflation, record interest rate hikes, etc.

This cocktail of headwinds has resulted in a highly uncertain economic environment where the cost of capital is high and valuations are dipping.

Naturally, investors have dialed down the dealmaking from last year’s record-breaking levels.

For the most part, that is.

Despite this backdrop, there’s a sector in which deal activity has remained strong this year.

It’s one that day-one GritALTS subscribers will be familiar with and one that we remain long-term bullish on.

I’m talking, of course, about CARBON!

Carbon & Emissions Tech: Deal Activity

Carbon tech is still young, but its uses and applications are vast and expanding.

The universal need across industries to reduce emissions has given way to a broad range of startups in the space that specialize in various forms of decarbonization, including capture, removal, utilization, biological approaches (like forestry), and financial (like carbon credits and tokenized offsets).

So far this year, these startups have raised $10.7 billion in venture capital investments across 517 deals.

This puts them on pace to top last year’s record $13.6 billion (on 656 deals).

Certainly, a far cry from broader VC markets where valuations have dropped and the average global deal size has fallen 28% year-over-year.

Total deal values in the carbon and emissions tech space, on the other hand, have been increasing for 4 consecutive quarters.

Valuations are also rising: the median pre-money valuation was $35 million in the third quarter, an 84% increase over the same period last year.

In the same quarter, funds raised totaled $4.8 billion.

That’s just 11% below the total from Q3 2021 (compared to the 54% drop we noted at the top for overall venture capital over the same period).

Tailwinds = Secular

Behind the space’s resilient inflows is the global secular push to cleaner energies brought on by net-zero emission pledges.

Though pledges are far out (think 2030, 2050, and beyond), the processes necessary to achieve them are (very) capital intensive and require significantly long-time horizons (read: action now).

In fact, some of the most ambitious (and potentially game-changing) early-stage innovations are simply not a good fit for venture capital where return on investment and time are driving factors.

As such, governments around the world are incentivizing industries to adopt and develop these technologies that might otherwise be less attractive to investors.

A prime example—and one whose effects have yet to fully impact the carbon and emissions tech space—is the US Inflation Reduction Act (IRA), which will provide ~$370 billion in grants, tax cuts, and loans to fight climate change.

Though as we mention the true impacts are yet to be seen within this example, we can already see the acute effects in one niche of the space: carbon capture (specifically, post-combustion capture).

Simply put, post-combustion capture involves removing CO2 after (post) it’s been released (combustion).

Thanks to changes made by the IRA to the 45Q tax credit, this post-combustion process became a much more lucrative endeavor. The act also lowered the barrier to entry which attracted more startups who brought on more innovation.

Following these changes, in the second quarter, post-combustion startups raised a record $841.5 million.

That’s more than double the previous four quarters combined ($432.1 million)!

Wrapping up…

I’ve been pounding carbon since I started GRIT more than 2 years ago and the beat just keeps getting louder.

The example above is just one of many catalysts brought on by the IRA.

There are many others. Much too many for one newsletter.

The space is still in its early innings and as innovations advance, the risk premium on disruptive carbon tech will continue to be reduced further as progress turns into scale.

In the meantime, carbon prices are rising, global legislation & policy as increasingly favorable, and demand for offsets from corporations and consumers is rushing in one direction (hint: it’s not down).

Until next time…

-Genevieve Roch-Decter

Sources:

https://www.cbinsights.com/reports/CB-Insights_Venture-Report-Q3-2022.pdf

https://pitchbook.com/news/articles/climate-tech-inflation-reduction-act

https://pitchbook.com/news/articles/carbon-emissions-climate-tech-vc-inflation-reduction-act

https://files.pitchbook.com/website/files/pdf/Q3_2022_PitchBook_Analyst_Note_Postcombustion_Carbon_Removal.pdf

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