Sharp declines in venture capital flows to impact startups impede progress towards the UN Sustainable Development Goals, and there is little sign of a pick-up in the near-term.
More evidence of the slowdown in impact investing by venture capital (VC) companies, which is hampering already remote chances of the world meeting the UN’s 2030 Sustainable Development Goals (SDGs), has been supplied in a report from Dealroom and ImpactCity.
The report, Impact Startups 2023, finds that funds raised via venture capital by impact startups targeting climate tech, renewable energy, the circular economy and social justice globally totalled $41bn (€38bn) at the end of October. That translates into a projected 36% fall for this year compared to 2022. This is in line with a projected 37% decline for the overall VC market, which is suffering from the effects of current global economic and political uncertainties, but it is still a major blow for the prospects of the startups that need to supply the lifeblood of future efforts to tackle climate change-related and social themes targeted by the SDGs.
The data also underscores a shift in fortunes for the sector, following a decade when it has outperformed the overall VC market. Impact funding has grown more than 12 times since 2013, while overall tech VC funding has grown less than fivefold, according to Dealroom.
The report, which was launched at ImpactFest in The Hague, was based on findings from Dealroom’s impact database, which holds data on over 17,000 so-called impact startups – scalable businesses focused on addressing at least one of the SDGs.
“We need impact funding to grow if we are to have a chance to hit the SDGs targets, even if a lot of responsibility in achieving the target is beyond startups and VC, and we need this growth, whatever the rest of the overall VC market does,” Lorenzo Chiavarini, Dealroom’s venture capital research lead, told Impact Investor.
Another trend reflected in the report is the seemingly greater resilience of the European impact VC fund compared to the US market. While North American impact VC funding stands at $13.38bn for 2023 so far, translating into a projected 58% year-on-year decline, the European funding total of $15.7bn, represents a projected fall of only 17%. This is the first year in which European impact VC funding has topped that of North America, according to Dealroom.
Climate tech VC funding has fallen by 35% compared to 2022, but private equity, project finance and debt are filling the gap. Climate tech companies raised a record of nearly $50bn in private financing other than VC. Private financing in total is projected to be similar to 2021-2022.
The report found that climate-related SDGs continued to attract the vast majority of impact investment. Climate tech-related areas such as carbon tech, lab grown meat, hydrogen, climate fintech and EV batteries, are among the fastest growing venture capital categories, according to the report.
Startups tackling social-related UN SDGs remained underfunded, as were startups in low-income countries. Only 5% of climate tech and biodiversity funding has gone to startups with headquarters in low-income countries in 2023. Similarly, there is also a scarcity of climate-focused funds established in low-income countries, hampering the development of a vibrant local VC sector.
The report also noted that the cost of capital for utility-scale clean energy projects in Africa is at least two to three times higher than in developed economies, limiting the number of commercially-viable projects to invest in.
Growth of Agritech
Among other sectors within impact investment, the report highlighted the strong growth of agritech in the last decade, with the combined valuation of regenerative agriculture startups increasing six fold since 2016 to $9.1bn. However, as Impact Investor reported in September, the agritech sector has been struggling to maintain funding flows to startups more recently, along with the rest of the market.
Circular economy startups are projected to raise $5.2bn in 2023, down only 17% from last year, but Dealroom said investment in EV battery recycling accounted for much of the sector’s relative resilience. By contrast, VC funding for circular economy startups in fashion and textiles has collapsed, totalling only $141m so far in 2023, compared to $572m in 2022 and $1.8bn in 2021.
What happens next for impact VC funding is uncertain. Chiavarini noted that overall VC funding is only just starting to stabilise. The amount for the third quarter 2023 was at the same level as the previous quarter, following declines in every quarter since 2021. Although impact funding had a very strong third quarter with $15.5bn of funding compared the second quarter’s $10.9bn, the increase can be attributed mainly to a few huge fundraising rounds, such as those for Northvolt and H2 Green Steel.
“It is definitely premature to talk about a rebound. We expect next year’s funding to be more in line with this year levels than 2021-2022, but no one knows for sure,” he said.