Cleaning Up Episode 135 Edited Highlights – Kim Zou

This week on Cleaning Up, Michael welcomes Kim Zou, CEO and co-founder of CTVC (Climate Tech VC). Launched in 2020, CTVC is a leading climate innovation resource and newsletter with 50,000 weekly readers, providing data-driven insights and analysis into the latest deals and developments in climate tech.

CTVC launched their H1 2023 climate funding update at the end of June, reporting a 40% drop in venture funding. Michael wanted to hear from Zoe whether this was a moment of crisis or correction, and to compare notes on building a market intelligence platform, having jumped through so many of the same hoops building New Energy Finance.

Michael Liebreich Kim, CTVC has just released its H1 2023 figures. So, what did you find for the first half of this year?

Kim Zou In 2021, beginning of 2022, we saw a real peak in funding: $40 billion of capital into climate tech venture. This year was the first sign of the climate change venture market slowing down. And there's probably three main things we driving that. The obvious one is macro slowdown. So, it's not just climate tech venture funding that's dropped - overall venture market has dropped. And in a lot of ways, climate tech venture funding was relatively insulated from the larger drop. PitchBook tacked over 50% decline; we tracked a 40% decline in this first half of 2023, relative to the prior year. Still a big drop, but less of a drop. The second reason is we found that growth funding dropped 63% relative to the prior year's period. Lastly, to a large degree the exits market has closed up. One perspective is that 2021 period, 2022 period was actually an anomaly, where we saw this $40 billion peak. In reality, the levels we're at right now, the $13 billion in the first half of 2023, parallel the levels before the peak at the end of 2020. So yeah, one could say it's a decline, but it's also the bubble kind of deflating a little bit.

Michael Liebreich You've chosen a tough year to start your datasets, around 2020. I guess the question it raises is, what will it go back down to now? Will it continue to sort of collapse back to $5 and $10 billion a year, or will it sit at $20 billion, which can sustain the ecosystem?

Kim Zou Since 2020, we've tracked $117 billion of cumulative capital coming into the climate tech sector. And so, that's an important story too, right? It's not just that the last two quarters have declined, it's that there's overall been a lot of funding coming into the market. Q3 and Q4 will really be the tell-tale quarters. A lot of this data is noisy, right? Because you can attribute it to the larger macro market that's slowing down. There definitely is still interest in the sector. One of the additional tailwinds we're tracking for climate tech, differentiated from other sectors, is these larger public sector tailwinds. Obviously, we talk a lot about the Inflation Reduction Act and how that's driving all this geopolitical competition to be the first to be the best in decarbonisation and net zero. From the demand side that's driving a lot of interest in these new emerging climate tech sectors. Then there's also the private sector, where you have all these net-zero commitments that are coming out. And I think the biggest tailwind we're talking about now is just the climate crisis itself. I think we're in a different place relative to 10, 15, 20 years ago.

Michael Liebreich How is it playing out in a sectoral sense? What's on the up in terms of sectors?

Kim Zou I think the two big bright spots we saw in this H1 were industrials and built environment, and that's where you see energy efficiency play out. So, there's industrial energy efficiency at the factory level, there's residential energy efficiency at the building level. In built environment, we saw funding for that increase 6% over the prior year. A lot of that was driven by the new interest in heat pumps - heat pumps as a technology, but also heat pump deployment. Another big trend we saw in the report is more climate tech deals getting funded that weren't the obvious ones, the direct decarbonizers. Like Rivian, great, they're electrifying vehicles, easy climate tech deal. Now we're seeing a lot of these enabling technologies, technologies in mining, mining efficiency. Is mining climate tech, right? Mining is a very emissions-intensive industry. Now there's a lot of venture interest in how do we enable the energy transition, which is really a metals transition, by ensuring lithium and all these things get extracted at larger scale. But then it starts to get into hairy waters, where you're like okay, is increasing mining necessarily climate tech?

Michael Liebreich The other thing that's really hard is geography. There's technology coming out of Africa, Latin America. You're global, but is your information equally good everywhere?

Kim Zou About 80% of the funding we've tracked comes from North America and Europe. And that's not to say there isn't a lot happening globally. It's just that there is this information divide. I think we're seeing actually a lot of activity coming out of places like India, and Israel, even Singapore. We're seeing a lot of plays in electric two and three wheelers in India and battery swapping networks that you don't see in the US or Europe. In Singapore, we're seeing a lot of activity in alternative proteins and food because their equivalent of the USDA essentially allows for cultivated meat. In Indonesia and Africa, we're seeing a lot more truly distributed and decentralized energy networks being built, because they're not beholden to a massive, centralized grid. So, it's interesting to see these pockets of climate tech that we don't traditionally classify in the Western markets. China has always been an area we want to get better clarity on. A lot of that funding comes less in the form of traditional venture, private equity deals, more in state-owned enterprises.

Michael Liebreich One criticism of these figures is the peril of the average, that it's all distorted by one big deal. So, how do you deal with that?

Kim Zou Well, we're tracking these big deals at every quarter, in every year. So, I think the fact that these big rounds can happen is also a tell-tale sign of where we are with the market. So, if your data is one to one to one, throughout all these years, and these big deals start declining, I think that's a tell-tale sign that that part of the market is declining, and then you see that play out in average round sizes. So, in the H1 report we tracked, we tracked a 40% decline in funding. We tracked a slight increase in deal activity. And so, what that tells you is that most of the funding decline has come from that decline in those big rounds.

Michael Liebreich You mentioned this notion of the tourist investor. If they're not going to do hard tech, then they all chase the same digital tech, and we’ll get a series of horrible exits. Isn't that what the future looks like?

Kim Zou I think the key here is less so bifurcating between pure play software and pure play deep tech, which has historically felt like where there's been a divide. I feel like the sweet spot here is a hybrid. And so, when you think about climate tech, it doesn't just have to be super long duration energy storage, it doesn't just have to be all these novel electrolyzers. It can be, solar panels are commercial now, how do we get them deployed in as many houses as possible and as many continents as possible? And that's a hybrid approach where it's not pure play software, it's not just go out and use my design optimization software. You need installers, you need a business that can acquire and install these panels. But then you need software to enable it. So, I think that will be where we see a lot of successful climate tech companies.