ClimateTech is experiencing a fundamental shift in startup exits, with mergers and acquisitions (M&As) far outpacing initial public offerings (IPOs). Over the past five years, the number of ClimateTech exits has declined compared to other sectors, and in 2023, IPOs, SPACs, and M&As in ClimateTech were down by 50%.
Despite the continued influx of $82 billion in new investment over the past year alone, this trend highlights a growing imbalance. Startups are getting funded, but exit opportunities remain constrained. And for VCs, the increasing reliance on M&A challenges the traditional return model.
Exit Trends in ClimateTech
From 2020 to 2023, ClimateTech was booming. More than 2,500 companies raised $150 billion across 4,000 deals. But when it came time for exits, the story was different.
- In 2023, SPAC activity collapsed by 89%, mirroring the broader downturn in public market enthusiasm for speculative climate bets.
- IPOs in ClimateTech slowed dramatically, particularly in the Transportation and Energy sectors. These sectors saw the highest number of public market exits but still fell short of expectations.
- Since 2020, M&A has accounted for 65% of all exits, indicating that corporations are the dominant dealmakers.
This shift reflects a deeper reality: ClimateTech IPOs are difficult to execute. Many companies require long development cycles, regulatory approvals, and CapEx investment, making them ill-suited for the high-growth, high-momentum expectations of public markets.
Why M&A Is Dominating ClimateTech Exits
M&A has become the default exit strategy for ClimateTech startups, happening earlier in their lifecycle. Several factors are driving this:
- Faster Liquidity: Acquisitions provide quicker returns than waiting for a company to reach IPO readiness, especially for capital-intensive technologies.
- Valuation Uncertainty: Many climate solutions operate in unproven markets, making valuations difficult and IPO pricing unpredictable.
- Strategic Fit Over Standalone Scaling: Corporations see acquisitions as a way to integrate climate solutions into existing supply chains, rather than letting startups build independently.
- Scaling Challenges: ClimateTech often requires significant capital investments beyond what VCs can provide. Large corporates offer deeper pockets and established distribution networks.
As a result, corporates now drive over 70% of ClimateTech M&A, and their participation is trending toward later-stage deals. In 2024, 61% of corporate-backed transactions were mid- or late-stage acquisitions, showing that larger companies prefer to buy proven technologies rather than gamble on early-stage innovation.
The VC Model at Risk: Why Early M&A Create Tension
This shift creates fundamental challenges for VCs. The venture model depends on a couple high-multiple exits to balance portfolio losses, but early M&A activity disrupts this equation.
- Limited Upside Potential: When startups exit earlier than expected, they often sell for lower multiples, reducing the outlier wins that drive fund performance.
- Shorter Holding Periods: The traditional VC timeline assumes a 7-10 year window before exit. Early M&A compresses this cycle, forcing premature sales.
- Valuation Gaps: M&A dealmaking is based on strategic value, not necessarily market comps, often leading to lower-than-expected returns.
- Fewer IPO Pathways: The declining IPO pipeline removes a key mechanism for maximizing investor returns, further complicating fund economics.
This reality is challenging for early-stage VCs, whose investment thesis often relies on a startup scaling independently before exiting at a premium in the public market.
Adapting to the New Exit Reality
Given the shift towards M&A-driven exits, VCs investing in ClimateTech will need to rethink their strategies by:
- Optimizing for Strategic Acquisitions: Investors may need to prioritize startups that align well with corporate buyers, ensuring smoother and more lucrative exits.
- Considering Alternative Financing Structures: Secondary sales or structured exits could help investors secure partial liquidity while maintaining upside potential.
Turning the Exit Challenge into an Advantage
Despite the hurdles, the shifting exit landscape presents an opportunity to redefine capital strategies and build investment models that better align with the realities of climate innovation.
M&A activity isn’t slowing down, and understanding how to position startups for successful strategic acquisitions could be the key to unlocking returns in the sector. The challenge is to align VC expectations with this new reality and ensure that companies continue to scale and make an impact.
