Venture capital (VC) has helped power the rise of ClimateTech, but the model shows its limits regarding climate hardware. Despite recent investment slowdowns, the sector still attracted $82 billion in new capital over the past year. But as capital pours in, viable exit opportunities remain scarce. Over the past five years, IPOs and SPACs have dramatically declined, leaving mergers and acquisitions (M&A) as the dominant exit pathway. This shift significantly impacts the entire climate capital stack, especially for VCs navigating the tension between early exits and fund-level returns.
Fewer IPOs, More M&As: A New Exit Normal
Between 2020 and 2023, over 2,500 ClimateTech companies raised $140 billion across more than 4,000 deals. Yet in 2023, total exit activity dropped 50%, with SPACs down 89%. Meanwhile, M&A has accounted for 57% of all exits in ClimateTech, and more broadly, M&A has accounted for 65% of all exits.
The bar has gotten higher for a business to IPO. The median company going public today needs $300–500M in ARR, and only the most capital-efficient, profitable businesses (valued around $5 billion) can command a respectable 7–10x multiple. That reality rules out IPOs for most ClimateTech startups, particularly those still in the early commercialization phases.
Why M&As Are Surging
Several dynamics are driving this M&A momentum:
- Accelerated Liquidity: M&A offers quicker exits, often before companies hit profitability or scale.
- Valuation Uncertainty: New technologies in evolving regulatory landscapes make IPO valuations risky and unpredictable.
- Strategic Synergy: Acquirers gain proven tech, and startups gain distribution, capital, and operational support.
- Corporate Appetite: With climate mandates tightening, corporates want to buy rather than build innovation.
What It Means for the VC Model
Traditional VC depends on a few blockbuster exits to carry the fund. IPOs are one path, but M&A can also deliver returns if the numbers work.
However, early M&A transactions often don’t deliver high-multiple exits, mainly when the company has raised multiple rounds. It’s not that M&A is inherently incompatible with VC returns. Capital-intensive startups require 4–6 funding rounds before reaching sustainability. Unless the acquisition price is substantial, dilution erodes the upside.
Additionally, some VCs may push for rapid scaling and early exits to match fund timelines. However, this can backfire if a startup is acquired too early to maximize its value, creating exits that satisfy strategic acquirers but fall short for investors.
There’s no contradiction here, just a mismatch in timing and expectations. VCs can succeed with M&A outcomes, but only if:
- The company is capital-efficient, raising capital strategically for the right business activities.
- The acquisition is priced based on future strategic value, not just current revenue.
- The fund has flexibility around exit timing and holding periods.
Adapting Across the Capital Stack
This evolving exit landscape demands creativity, not just in exit planning but also in how companies fund their path to scale.
The High Cost of Using VC for CapEx
Relying on VC to fund CapEx and production is an expensive strategy that often hurts founders and early investors.
- Expensive Dilution: Equity financing comes at a premium. Using VC dollars to fund CapEx can quickly erode founder ownership and investor upside.
- Misaligned Incentives: VCs can push for rapid scaling and short-term exits, which doesn’t always align with the timeline needed for hardware to reach full market potential.
Climate hardware startups should look to alternative financing models instead of relying on venture capital to fund CapEx.
Creative Financing Solutions
- Alternative Structures: Revenue-based financing, structured secondaries, and hybrid equity/debt models can offer partial liquidity while preserving long-term value.
- Capital Stack Awareness: Founders need a clear view of how much capital they’ll need, what kind, and at what stage, to reach sustainability without over-dilution.
Turning the Exit Conundrum into a Strategic Advantage
Venture capital has been critical in advancing ClimateTech, but alternative funding models are essential for hardware-based solutions. Understanding the full range of funding options is crucial for investors and founders navigating this space. To deploy climate solutions at scale, we need funding models designed for the realities of hardware innovation. That means rethinking traditional VC and embracing a broader, more resilient capital ecosystem.
The climate funding landscape is evolving, with new models supporting first-of-a-kind deployments and commercialization. However, to truly unlock climate hardware at scale, we need capital strategies that reflect the realities of building in this sector. That means expanding beyond traditional VC and designing a capital stack built for durability, not just velocity.
