By Lori Ioannou

Venture capitalists have gotten more cautious about funding climate-tech startups in recent years. But they see opportunities in several pockets of the sector, such as battery storage and technologies to improve the efficiency and reliability of the electric grid.

This year through June 30, venture capitalists invested $19 billion across 1,235 climate-tech deals globally, with U.S. deals accounting for $6.7 billion of the total, according to data from PitchBook. Global investment is down roughly 18% from the previous six months and about 9% from the first half of 2023, the data show.

VC investment in climate-tech startups has been falling since 2021, when venture capitalists poured $56.4 billion into the sector, according to PitchBook. Higher interest rates and a difficult environment for initial public offerings of stock -- one of the main ways venture investors cash out of startup investments -- are weighing on the market, as is uncertainty about the future of government climate policy ahead of elections in the U.S.

Many VCs say they are looking to invest in companies that don't require large infusions of working capital to scale, or that can join with multinationals with deep pockets.

Still, deal activity appears on track to equal or even exceed last year's amounts in certain areas of climate tech. Here's a closer look at some of the technologies VC investors are betting on:

Grid infrastructure

Startups focused on grid-infrastructure technologies raised $2.73 billion globally in the first six months of the year, according to PitchBook data. U.S. deals accounted for almost half the total.

"VC investment in electric-grid infrastructure is on pace to surpass all of last year's level of $4.37 billion," says John MacDonagh, a senior analyst at PitchBook who covers climate-tech VC, "and much of funding is going toward battery energy storage, new battery technology and AI and software and hardware for grid management."

Demand for electricity is surging, thanks to growth in electric vehicles and artificial intelligence, which will require a massive amount of electricity for data centers. That, in turn, is attracting interest in technologies that can shore up the power grid.

Battery-storage installations in the U.S., which were a little under nine gigawatts last year, could be over 20 gigawatts by 2030, according to a prediction by energy-research firm Wood Mackenzie.

Among the notable deals in this category, battery startup EnerVenue raised $308 million from a group of investors that included NEOM Investment Fund and SAIC Capital to build a gigawatt-scale factory in Kentucky. The company says its metal-hydrogen battery technology can withstand extreme temperatures and has low maintenance requirements that is ideal for utilities in need of flexible, long-duration energy storage.

"The opportunities that lie ahead in grid optimization and battery storage are enormous -- both globally and in the U.S.," says Po Bronson, general partner of SOSV, a pre-seed climate-tech fund with $1.5 billion under management and director of its IndieBio startup accelerator program, which has invested in a battery startup called AquaLith Advanced Materials this year.

Intermittent renewable energy

Startups developing technologies related to intermittent renewable energy such as solar and wind power raised a little over $3 billion across 128 deals globally this year through June, according to PitchBook. U.S. deals accounted for about $780 million of the total.

The intermittent-renewables sector is on track to match or exceed last year's venture funding of $5.9 billion "since the need is high for renewables, and countries are on the lookout for low-cost solutions," says PitchBook's MacDonagh. He notes that more than 90% of the VC deals in this area have been in solar photovoltaics, where sunlight is converted into electricity using semiconducting materials.

The largest deal in this category in the first half was a $520 million late-stage VC round for Nexamp, a national community solar developer and owner, to accelerate its expansion of solar and energy storage projects across the country. The financing was led by Manulife Investment alongside existing investors -- Management Diamond Generating, a Mitsubishi subsidiary, and Generate Capital.

Clean fuels

Companies developing clean fuels raised $1.64 billion globally across 105 deals in the first half, putting it on pace to slightly exceed last year's total of $2.59 billion, says MacDonagh.

Most of that amount -- $1.23 billion -- went to startups developing technology to produce and distribute low-emission hydrogen. (The mainstream method of hydrogen production involves emitting carbon dioxide.) Interest in these newer hydrogen technologies is being driven by government incentives worldwide, as well as technological advancements that reduce production costs, investors say.

Among notable first-half deals, Koloma, a Denver startup that produces geologic hydrogen through a carbon-free drilling process, raised $246 million in a Series B round led by Khosla Ventures and that included Amazon.com's Climate Pledge Fund and United Airlines' Sustainable Flight Fund. They join previous backers, including Bill Gates's Breakthrough Energy Ventures and Energy Impact Partners.

In other deals, BioBTX, a startup that turns mixed plastic waste into high-value chemicals and aromatics, raised about $71 million to build a plant in the Netherlands.

SOSV, meanwhile, is part of a group that invested $2 million in VIA BioFuels, a one-year-old company developing a process to make carbon-free jet fuel out of feedstock like cornstarch and cane sugar. It also is among a group that invested $1 million in Spiral Wave, a two-year-old startup that uses a cold plasma technology to remove carbon-dioxide from water and air and turn it into green methanol fuel.

Low-carbon mobility

Startups developing low-carbon transportation technologies, as well as electric-vehicle components and charging networks, raised $4.15 billion across 89 deals globally in the first half, according to PitchBook.

In the biggest deal, IM Motors, an electric-vehicle brand of China's state-owned automaker SAIC, was able to raise about $1.12 billion in financing from a group that included the Bank of China's investment arm to develop smartcar technologies and fund expansion in Europe.

While low-carbon mobility remains the biggest climate-tech category in terms of VC investment, that investment is down sharply from $13.79 billion in 2021 amid a pullback in funding for electric-car startups.

"There was a big bubble in the electric-auto industry that burst after a string of VC-backed EV startup failures -- e.g., Fisker, Proterra and Lordstown Motors," says Jonathan Geurkink, PitchBook's senior research analyst on mobility and the supply chain. "This has made VCs more cautious about backing new entrants," he says, explaining that EV startups are capital-intensive and face competition from EV automakers that are already entrenched, like Tesla and China's BYD.

Now, many VCs are focusing on technologies that improve the EV charging infrastructure, or ways to make EV components more powerful and lightweight, Geurkink says.

Battery startup Sila Nanotechnologies in June raised $375 million in June from a group led by Sutter Hill Ventures and T. Rowe Price to finish construction of a U.S. factory in Moses Lake, Wash. Sila's technology replaces graphite -- a key material in lithium-ion batteries -- with silicon anode, improving energy density and lowering costs and driving down recharge times.

Elsewhere, FLO EV Charging, which operates a network of electric-vehicle charging stations, raised $101.6 million to fund growth in the U.S. and Canada.

Monarch Tractor of Livermore, Calif., meanwhile, raised $133 million in July to fund the further development of its autonomous drive features and WingspanAI platform for new global markets and crop sectors.

Lori Ioannou is a writer in New York. She can be reached at reports@wsj.com.

(END) Dow Jones Newswires

August 27, 2024 10:00 ET (14:00 GMT)

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