AMY: I think the overriding mood is one of realism and pragmatism. Some companies that raised at high valuations in 2021 and 2022 are now dealing with down rounds⁴ and given the spotlight has shifted to AI companies, the fundraising process for climate-focused startups is much tougher and more drawn-out.⁵

Along the way, we’ve seen product propositions change too. The ‘green premium’ (where customers paid more for goods and services from environmentally-friendly companies just because their offering was greener) seems to have faded.⁶ Now, founders’ products need to be genuinely competitive on price compared with what already exists in the market. Overall, I think that is a healthy development, even if it might make life a bit harder in the short term for these startups and scaleups.

To get a founder’s view of the funding environment, I chatted with Moletsane Mophethe, founder and CEO of Metal Morph, a startup that extracts critical minerals from water treatment plants, who recently raised a £700k seed round.

“The fundraise was more time-consuming, nonlinear and uncertain than I expected,” Mo said. “Much sits outside your control, so maintaining momentum requires a clear process and continued execution. The big difference was hard evidence rather than salesmanship, whether from customers, technical validations or grant awards. My one tip: keep building while you raise.”

AMY: It’s still hard to say, as strange as that sounds. Lots of climate tech is, by its nature, experimental. Many funds that were raised in the post-COVID period invested in companies that were developing new, innovative technologies with a long payback period.

That means it’s harder for them to demonstrate concrete returns to LPs in the short and medium term, which in turn might make it tougher to raise strong second-time funds.

There is also the question of branding and positioning. Some climate-focused investors are broadening their investment theses as technology and market priorities evolve, while investment is increasingly flowing towards areas where climate, AI and industrial infrastructure intersect. So I expect we will see some Article 9 funds (which have an explicit objective to make sustainable investments) shift to Article 8 or Article 6 status,⁸ which are not as prescriptive about the nature of the investments that fund should be making.

We did see a lot of investors jumping on to the climate train in 2021 and 2022 that are now rethinking the approach they took then.⁹ I recently heard the term "climate tech tourists" being used to describe investors who entered the clean energy and sustainability startup scene in the 2021 boom who have now largely retreated.

I heard one VC say recently that “some investors are good for first dates, but not for marriage.” That seems like a pretty good summary of the way some VCs’ investment theses shift with trends. Many investors are trying to follow the market momentum, and right now climate tech is not making the same headlines as some other technology sectors, for a variety of reasons.

AMY: Climate tech demands enormous ambition, and two clients I’m thinking a lot about are Low Carbon Materials and Mission Zero Technologies. There are few materials that emit more than concrete and asphalt, and this is the problem Low Carbon Materials is looking to solve, with new compounds that make filling potholes and laying asphalt close to carbon-negative.

Meanwhile, Mission Zero Technologies is tackling direct air capture, one of the toughest technical climate challenges¹¹ but with new technology. UnionDAC, a partnership between Mission Zero, Airhive and Progressive Energy, could be removing 40,000 tonnes of CO₂ from our atmosphere by 2032. Mission Zero is just one example of a founding team choosing to build and scale in the UK.

1. Tailor the deck to the investor. A sustainability-focused fund and a generalist venture capital investor are likely to have different mandates, questions and decision criteria.
2. Define the problem precisely. “Climate solution” is too broad to do the proposition justice. A specific problem statement helps investors understand the market need, the product and the path to impact.
3. Start earlier than you think. Founder feedback suggests that fundraising processes are taking longer than expected, so build additional time into the plan wherever possible.

Amy: Water tech is in a fascinating place in my opinion. Reliable access to fresh water is likely to become more important, We are proud to work with innovators like José Monge Castro at Segura, which is making safe water testing much easier and faster. Segura is just one example of many startups building in this space and it is definitely a vertical to watch.

AMY: We were delighted to attend and sponsor the Blue Earth Summit again in October; Blue Earth is a unique gathering of investors, founders, leaders, scientists and public figures, dedicated to sustainable thinking. I was delighted to see one of our clients, Lib Labs, pick up an category award.

Back in June, we launched our Extraordinary Bar at London Climate Action Week. It was a bar designed using natural, growing mycelium components, produced with the input of several HSBC Innovation Banking clients. It was a valuable reminder of the incredible technology our clients are imagining and creating, as well as an unforgettable moment for everyone who got to sip a drink at a bar that was grown, not built.

I’m never short of climate podcast recommendations! One I’d recommend is Outrage & Optimism. I think they do a great job of blending serious topics with candour and a dose of positive thinking.

The macroeconomic environment continues to create challenges for climate tech founders and investors.¹² Yet the UK climate tech economy is estimated to represent a $75 billion market. ¹³ Maintaining the UK’s position in climate and sustainability technology will require a strong pipeline of startup and scaleup funding but many elements will need to play a role including evolution of regulations, relentless new founders entering the sector and cooperative network of partners.

Thank you to Amy for sharing your insights. If you are building in climate tech and would like to discuss fundraising, scaling or your next stage of growth, contact your HSBC Innovation Banking relationship manager.