TLDR:
- Venture capital for climate solutions is slowly re-emerging, despite uncertainties in the market.
- However, the major issue lies in exits for venture capital investors in the climate solution sector.
In a recent article by Rob Day, it is highlighted that while venture capital investments in clean energy have shown growth and recovery potential, the major challenge lies in exits for investors. The article discusses the importance of exits for venture capital investors in order to keep putting capital into the sector over the long run. The two main ways for investors to make returns are through IPOs or acquisitions by larger companies. However, the Pitchbook report mentioned in the article shows a decline in exits for clean energy venture and growth investors in 1Q24.
The article points out that many of the startups in the clean energy sector are technology developers rather than project deployers, which limits their potential buyers to a small universe of incumbent companies. These buyers are often slow and unwilling to spend much on acquisitions, leading to challenges in fetching a premium for the startups. Despite this, venture and growth investors continue to primarily view the sector as a hard-technology innovation sector, focusing on technology rather than deployment-style business models.
Rob Day’s firm, which partners with early deployment-style businesses in sustainability, has seen successful exits where acquirers were bigger infrastructure investment firms rather than industrial OEMs. These successful exits have been in sectors like municipal composting and industrial wastewater treatment. The article suggests that more focus on deployment-style business models could lead to increased acquisition activity and successful exits in the future.
While technology-focused incumbent OEMs and infrastructure investors are potential acquirers for clean energy startups, uncertainties remain around when IPO windows will open and shut in the market. Exit activity has historically been a challenge in the climate solution venture and growth investment story, and the article warns investors to be aware of the unpredictable and sometimes unattractive exit paths they may face.
