Dry powder: A maturing market for climate tech funding

Despite a challenging environment in 2024, the continued flow of capital and the growing maturity of the sector point to a positive long-term trajectory for climate tech funding.

The amount of dry powder earmarked for climate tech stands at a healthy US$86 billion globally, according to Sightline Climate, down 8% from the end of 2023 as a result of increased deployment by an earlier vintage of mega-funds. New funds raised for climate investments increased 20% in 2024, leaving a significant amount of capital ready to be deployed.¹

While climate funds continued to attract capital in 2024, investors today are more cautious and more selective, focusing on capital efficiency and strong business fundamentals. This has resulted in a renewed focus on more proven businesses with mature technologies and a clearer path to profitability. Venture capital has also started to give way to growth equity, private equity, and infrastructure funds that offer relatively safe and predictable returns in uncertain economic times.

Despite the influx of new capital, a significant funding gap remains for companies scaling up from early stages. This "missing middle" presents a challenge for companies seeking to commercialise and deploy breakthrough technologies.

This is a real issue for startups in Australia: climate tech topped the number of deals recorded by Cut Through in the first nine months of 2024, but a large proportion were accelerator rounds.² At later stages, the sector depends heavily on international investment, although we have recently seen new government funding being deployed via the National Reconstruction Fund (NRF). Climate tech companies can help their chances of scaling successfully by engaging with overseas investors at a relatively early stage.

Climate tech funding in 2025 will hinge on several key trends. Successful exits will be crucial for maintaining confidence in the sector, as they will encourage Limited Partners (LPs) to continue backing climate tech investments at scale.

Second, given increasing investor caution in the sector, FOAK (First-of-a-Kind) projects will rely more heavily on blended capital approaches, including philanthropy, corporate balance sheets, and government grants and loans. Infrastructure funds are unlikely to invest in unproven technologies.

2025 will also provide more clarity on regional approaches to climate incentives, from tax credits to carbon market mechanisms and feed-in tariffs. The new US administration may prioritise deregulation which would expedite project development. However, uncertainty surrounding China's role in next-gen climate tech could increase costs and expose supply chain vulnerabilities.

Preferred sectors in 2025 are likely to include artificial intelligence (AI) and clean tech that is relevant to national security. AI-driven solutions are seen as helping to address energy infrastructure challenges, develop new materials, and optimise energy systems.

Finally, investors are likely to prioritise execution over ambition. Sectors like hydrogen and direct air capture face demand resets as a result of uncertain economics. BloombergNEF recently revised its forecast for green hydrogen production, predicting that costs could remain as high as US$5.09 per kilogram by 2050 – more than three times its previous estimate.³

BNEF data also points to a growing focus on commercialisation, with some VC firms raising funds specifically for growth-stage businesses.⁴ Against a cautious backdrop, solutions that are cost-competitive, scalable, and backed by real demand will find themselves at the front of the queue for funding.

To read more on this topic, download Sightline Climate’s The Climate Tech Capital Stack and New Funds report, sponsored by HSBC Innovation Banking.

The Cut Through Venture State of Australian Startup Funding Report examines the largest data set available on the Australian startup funding landscape. Click here to read more The State of Australian Startup Funding Report 2024