As the first wave of climate tech companies matures, they face the critical test most clean tech startups failed: can they scale, become profitable, and ultimately, exit?
Of course, climate tech isn’t clean tech, and the ecosystem has come a long way since the first boom and bust. There is a strong demand for sustainable solutions from governments, the public, and corporations, driving innovation in the field. Technologies like renewable energy and storage have become more cost-effective, with the cost per watt for solar panels having decreased by 90% in the last decade.
Perhaps most importantly: corporate participation in climate tech is booming. In 2023, corporations accounted for over 70% of climate M&As, a trend that shows no signs of slowing down. Unlike the broader tech sector, where mergers and acquisitions are often seen as a fallback option in the absence of IPOs, climate M&As are quickly becoming the new normal.
The Drivers of Corporate M&As in Climate Tech
While mergers and acquisitions have long been a common strategy for corporations to gain market share, the motives in climate tech are slightly different.
- Environmental-Social-Governance: ESG has become integral to corporate strategy. With reporting becoming increasingly mandatory, corporations actively seek solutions to meet their sustainability goals.
- Regulatory Landscape: Regulatory incentives like tax credits and grants, combined with pressures such as carbon taxes, are further fueling corporate investment in climate tech.
- Long-term Strategic Outlook: Many Climate M&As are driven by long-term strategic incentives rather than short-term financial goals such as the desire to position themselves as sustainability leaders and future-proof their businesses.
Key Sectors
Zooming out to the wider climate M&A landscape, the energy, transport and circular economy sectors have seen the most exit activity in 2024. For example, in the US, industry giant Dow acquired plastic film recycling company Circulus in June to accelerate progress towards its 2030 “Transform the Waste” goal. In Europe, green hydrogen startup P2X was acquired by energy company Alpiq, and Hysetco joined forces with clean hydrogen project investor Hy24. While GHG capture and emissions control have seen fewer exits, the global trend towards decarbonization is expected to drive more deals in these areas.
Could M&As be the preferred path to exit in climate?
While the 2022-2023 IPO freeze made mergers and acquisitions more common across the board, there are several reasons why they’re here to stay in climate.
- Faster Path to Exit: Compared to IPO, M&As can offer quicker returns, often providing an exit before sustained profitability is achieved. This is particularly beneficial for climate tech companies, whose profitability paths often aren’t linear.
- Valuation Challenges: Due to the nascent nature of many climate technologies, valuations can be challenging, with uncertainty around future regulatory and market conditions. This contrasts with more established industries, where valuation metrics are typically based on financial performance.
- Strategic Fit: M&As can reduce the volatility of an IPO, especially in the uncertain and rapidly evolving climate tech sector.
- Scalability: Large companies can provide climate tech startups with the capital, distribution channels, and operational support needed to scale their solutions effectively.
Planning for M&As over IPOs
While the path to IPO is familiar to most, mergers and acquisitions are a different ballgame. Marrying purpose with profit is still key, however early implementation of government structures like ESG can make a company more attractive to corporations. Proactively building relationships with companies and PE firms is crucial, and so is being strategic in their exit strategy from early on. This allows climate tech founders to position their startups for successful M&A opportunities, ensuring they are attractive to potential acquirers and prepared for the complexities of the acquisition process.
Corporates are driving the Net Zero transition
Even as public markets are slowly recovering, we see M&As will continue to play a critical role in scaling climate tech startups. Corporate acquisitions can drive the widespread adoption of solutions, help organizations meet regulatory demands, and support the transition to a low-carbon economy. With over $6.2 trillion in investment needed to reach net zero by 2050, corporations play a big part in driving the movement towards a sustainable future.
At Net Zero Insights, we aim to power the capital flow needed by equipping leaders with climate tech data, insights, and research. By linking key players within the field, we strive to fuel ecosystem growth and accelerate progress towards the UN’s climate goals. Our vision is to become the trusted partner for leaders to access reliable and in-depth data on climate tech – from the lab to public market companies.
