“Trends in Investment & Expansion: Fintech, Healthtech & Climate Tech On the Rise.” – Guest contribution by James E. Mister

This year has proven to be much more than a post-pandemic recovery in venture investing, with early-stage funding in the US reaching historic levels: USD 70.3 billion invested in Q2 and USD 72.3 billion in Q3, surpassing USD 200 billion by the start of Q4. The US still accounts for nearly half of all VC activity (46 percent in Q3 across 4200+ deals) – the most of any region globally and in line with trends from previous quarters.

Global Venture Funding Climbs to New Record

US funding

Silicon Valley, New York, and Boston received two-thirds of all US VC funding in Q3, whilst burgeoning tech hubs Austin and Miami received 2 percent. Strikingly, however, as the global venture ecosystem has grown over the past decade, Silicon Valley’s share of global funding has shrunk (27 percent in 2011 vs. 19 percent in 2021), signaling a slow-but-steady shift away from the Valley’s preeminence.

SV share lessens

While VC standard-bearers Accel, a16z, Lightspeed, SOSV, Global Founders Capital, and General Catalyst have, YTD, led by deal count and percent of total deals, more traditionally private equity-focused funds like Tiger Global (TG), Insight Partners, Goldman Sachs, and Hillhouse Capital Group have shaken up the venture landscape and unleashed a great deal of capital (see chart “Private Equity Piles In”). Case in point: The pace and aggressiveness of TG’s dealmaking made it the top VC investor in Q2 and second most active in Q3; more importantly its funds have seen a 27 percent average annual return over the past 18 years.

PE piles in

In terms of sectors garnering investor interest, US funding has been dominated by the healthcare and fintech sectors: 22 percent of all dollars invested have gone towards healthcare while fintech now claims one-third of all new unicorns. Investor interest in these verticals is likely an outgrowth of pandemic-induced digitalization of healthcare delivery, leveraging insights from patient data, digital payments, consumer-driven investing platforms, and the increasing popularity of blockchain/crypto-enabled tech (e.g., NFTs). Blockchain/Crypto alone saw investment rise 384 percent vs. 2020, reaching USD 15.1 billion so far this year. Curiously enough, fintech and healthcare remain two of the most challenging sectors for international expansion in general, primarily due to regulatory safeguards centered around data privacy and security.

Growing at a Sustainable Clip: Investors Pivot to Decarbonization & Climate Tech

The past year has also seen a renewed urgency to address climate change; with less than a decade to reduce global greenhouse gas (GHG) emissions by half to avoid global warming above 1.5 °C and potentially irreversible dangerous impacts, VC has responded in a major way. Climate tech companies raised a record-breaking USD 32 billion YTD through October (not including EV or battery tech), a quadrupling in investment overall since 2016. Moreover, between 2013 and 2019 investments in the space grew five-times faster than overall VC. Nevertheless, it bears mentioning that there has also been a strong push to strengthen the EU funding landscape due to pervasive gaps in investment, despite the region outperforming both the US and China the past three years by number of climate tech patents (1.5x more) and companies founded (25 percent more).

The overall uptick in activity has been bolstered not only by the Intergovernmental Panel on Climate Change’s call for drastic action, COP 26, and measures like the EU’s Sustainable Financial Disclosure Regulation (SFDR), but also by the US rejoining the Paris Agreement and committing to halve GHG emissions by 2030 alongside anticipated trillion-dollar investments in grid infrastructure, electric vehicles (EVs), storage, battery tech, clean energy, subsidies, etc. This sea change has also led climate activists like Al Gore to launch a net-zero emission asset manager, automakers like BMW to accelerate circular economy efforts, and oil & gas giants like Shell to earmark USD 1.4 billion for energy transition tech, renewables, mobility, and logistics and commit USD 500 million to funds like G2, a Kleiner Perkins outgrowth. Early-stage evangelists are even redefining capitalism, opting to prioritize long-term sustainability commitments over short-term market returns.

VC investment in Climate Tech and number of deals

Climate tech is tackling decarbonization with the aim of reaching net-zero emissions before 2050 across mobility & transport, food, agriculture & land use, the built environment, energy, and heavy industry. Thus, as a segment it spans everything from EV and clean battery tech firms – such as those witnessing historic mega rounds, IPOs, SPACs, and market rallies like NIO, Rivian, Lucid, Tesla, and even Fisker – to carbon capture, storage, accounting, and trading platforms. Start-ups in the space are even confronting challenges posed by extreme weather events like wildfires, which impact the US West annually (see: Ororatech, a Bayern Kapital portfolio company that raised a USD 7 million Series A this year and is entering the US market). We also featured notable climate tech scale-ups from the US and Bavaria at this year’s annual Maifest conference, which was presented as a Sustainable Future Forum. Battery analytics platform TWAICE, a Bayern Kapital portfolio company from Garching, which raised a USD 26 million Series B this spring, offered live demos alongside the carbon accounting and forecasting platform Persefoni from Tempe, AZ, which recently announced its USD 101 million Series B (the largest climate tech fundraise ever).

As a whole, climate tech will continue to thrive despite a somewhat bleak macroeconomic backdrop: Inflation at a 30-year high; a looming global energy crisis; a global chip shortage; and ongoing supply chain woes impacting everything from manufacturing, retail and even the food industry. Ultimately, however, it remains clear that ensuring a sustainable future outweighs these and many other short/medium-term economic challenges.

Here is what investors and founders in the climate tech and ESG space are saying:

“Sustainability and climate action are top of the agenda for most global investors today. For example, as we reflect back on the past decade of COP agendas, it is remarkable that COP26 in Glasgow last month hosted most of the elite asset owners and managers to address the role of finance in mitigating climate change. The financial community’s ambitions and commitments being reflected in the USD 130 trillion represented by the Glasgow Financial Alliance for Net Zero (GFANZ), as announced by UN Special Envoy on Climate Action Mark Carney. The largest asset allocators – pension plans, sovereign wealth funds, insurers, foundations, endowments, corporations – are ready to put dollars to work in climate technology (e.g., smart grid, circular economy, waste-to-fuel, plastic alternatives, batteries, etc.), not just clean energy sources like wind and solar projects.”
– Olivia Albrecht, Global Head of ESG, TCW Group

“Despite virtually falling off the cliff in the late 2000s, climate tech investing has since made a much-needed comeback in the last couple of years, reflecting the general mood that concerted action to solve the Earth’s climate woes is needed now more than ever. Fortunately, this trend of increasing sustainability investing isn’t showing signs of slowing down anytime soon. With renewable energy costs plummeting and eco-consumerism becoming mainstream, sustainability investing is no longer just the ethical thing to do, but a highly profitable enterprise in its own right.”
– Samantha Huang, Investment Principal, BMW i Ventures

“I’ve been working in climate tech since 2011 and, today, investor confidence in start-ups in our space is on a completely new, unrecognizably higher level. During our pre-seed fundraise for Greenwork, this fall, I’d start describing trends in decarbonization and green trades jobs to traditional tech VCs and they’d stop me and say ‘We know, we’ve been researching this for the last 6 months’. I’m very happy to see the arrival of these new climate investors and I’m thrilled to watch some of the long-term stalwart entrepreneurs and investors in our space getting really big.”
– Sam Steyer, Co-Founder & CEO, Greenwork

“In 2021, we saw a boom in both the number of capital providers and total of VC dollars interested in sustainability markets as large institutional investors joined cap tables alongside strategic and impact investors. Unprecedented capital investment, regulatory tailwinds, and the influx of experienced company builders alongside premier technical talent will create an exciting landscape for climate tech in 2022. At Energize, we focus on digital solutions for energy and sustainability with an emphasis on near-term revenue potential. We plan to continue investing heavily in software companies that enable and accelerate the build-out of sustainable infrastructure like solar, batteries, electric vehicle charging and other carbon reduction technologies.”
– Tyler Lancaster, Partner, Energize Ventures (Lead investor in TWAICE)

James E. Mister is Managing Director of Bavarian US Offices in San Francisco.