Investors Rotate Toward Industrial Decarbonisation Startups as Consumer Climate Tech Cools

What happened?

Venture capital investment data compiled by PitchBook and BloombergNEF shows a notable divergence within the broader climate technology sector this year: while funding for consumer-facing climate startups, such as electric vehicle charging apps and carbon offset marketplaces, has continued a decline that began in 2023, investment in startups targeting emissions from heavy industry — cement, steel, chemicals and industrial heat — has held comparatively steady, and in some categories increased.

Several notable funding rounds closed in recent months for companies developing lower-carbon cement chemistry, electrified industrial furnaces and green hydrogen production for industrial feedstock use, with investors citing the sheer scale of emissions from so-called hard-to-abate sectors, which together account for a substantial share of global industrial carbon emissions according to the International Energy Agency.

Key points

• Venture funding for industrial decarbonisation startups has held steadier this year than for consumer-facing climate tech.
• Cement, steel and chemicals together account for a large share of global industrial carbon dioxide emissions, according to the IEA.
• Recent funding rounds have targeted lower-carbon cement chemistry, electrified industrial heat and green hydrogen feedstock production.
• Government industrial policy incentives, including tax credits in the US and EU carbon border measures, are cited as supporting demand signals.
• Investors say hard-to-abate sectors offer large addressable markets even as returns typically require longer time horizons than software investments.

What we know

According to BloombergNEF's tracking of climate technology investment, funding directed at industrial decarbonisation, sometimes grouped under the broader label of 'hard tech' climate solutions, has proven more resilient through the recent broader pullback in climate tech venture funding than lighter-asset, consumer-oriented categories. Several funding rounds this year have gone to companies working on alternative cement binders that reduce the calcination process responsible for a significant share of cement's carbon footprint, as well as companies developing electric arc furnace technology and industrial heat pumps intended to displace fossil-fuel-based process heat in manufacturing.

Green hydrogen production aimed at industrial feedstock use, rather than the transport applications that dominated earlier hydrogen investment cycles, has also attracted continued capital, though several previously announced large-scale green hydrogen projects globally have faced delays or cancellations, according to tracking by the Hydrogen Council, reflecting persistent cost gaps versus fossil-fuel-based alternatives.

Background

Climate technology investment surged between 2020 and 2022 as venture capital flowed into a broad range of categories, from electric vehicles and battery storage to consumer carbon tracking apps and voluntary carbon offset platforms. Many of those consumer and lighter-asset categories subsequently faced a reckoning as growth expectations proved overly optimistic, several high-profile companies failed to reach profitability, and investor sentiment toward the broader climate tech category cooled alongside a broader venture capital slowdown driven by higher interest rates.

Industrial decarbonisation, by contrast, addresses emissions from sectors that are widely recognised as among the hardest to decarbonise using existing technology: cement production inherently releases carbon dioxide through the chemical process of converting limestone to clinker, regardless of the energy source used to heat the kiln; steel production traditionally relies on coal-based blast furnaces; and many chemical processes require very high temperatures that are difficult to achieve with renewable electricity alone. These sectors have historically attracted less venture attention than software or even clean electricity generation, partly because the capital intensity and long development timelines involved are less suited to typical venture capital return horizons.

Detailed analysis

The relative resilience of industrial decarbonisation funding reflects several converging factors. First, policy support has become more concrete in several major markets: the US Inflation Reduction Act's tax credits for clean hydrogen and carbon capture, along with the European Union's Carbon Border Adjustment Mechanism, which will begin imposing costs on imports of carbon-intensive goods including cement and steel, have created clearer demand signals for lower-carbon industrial products than existed several years ago, giving investors more confidence in the eventual market for these technologies.

Second, large industrial corporations themselves have become more active investors and customers for these startups, both through corporate venture arms and through offtake agreements that provide startups with revenue visibility unusual for early-stage companies. Cement and steel majors, facing increasing pressure from customers in construction and automotive supply chains to reduce embedded carbon in their products, have signed pilot agreements and, in some cases, taken equity stakes in startups developing lower-carbon production methods, according to disclosures reviewed by climate tech-focused investment publications.

Third, investors note that hard-to-abate industrial sectors represent enormous addressable markets precisely because so little of the underlying production process has been meaningfully decarbonised to date, unlike sectors such as passenger electric vehicles or solar power generation where the most obvious opportunities have already attracted substantial capital and competition. That said, investors and founders alike acknowledge that industrial decarbonisation startups typically require far larger capital commitments and longer paths to commercial scale than software startups, given the need to build or retrofit physical production facilities, obtain industrial customers willing to be early adopters of unproven processes, and navigate lengthy permitting and certification processes.

Why it matters

Cement, steel and chemicals collectively account for a substantial share of global industrial emissions, and the International Energy Agency has repeatedly emphasised that meeting international climate targets will be impossible without significant progress decarbonising these sectors, which have historically lagged behind power generation and transport in emissions reduction efforts. Continued private investment, alongside public policy support, is seen by climate researchers as a necessary complement to existing efforts, since public funding alone is unlikely to bridge the full scale of investment needed.

For the venture capital industry, the shift also represents a maturing of the climate tech investment thesis, moving away from categories that mirrored consumer software investment patterns toward the kind of capital-intensive, longer-horizon industrial investment that some limited partners have historically been reluctant to fund through traditional venture structures, prompting the emergence of specialised climate infrastructure funds better suited to these investment timelines.

What happens next?

Several industrial decarbonisation startups that have raised significant funding in recent years are approaching the point where they need to demonstrate commercial-scale production rather than pilot projects, a transition that industry observers describe as one of the most challenging in the sector, often referred to as crossing the 'valley of death' between demonstrated technology and bankable commercial projects. How well-funded startups navigate this transition over the coming one to two years will be closely watched as a signal for the broader sector's investment case.

Policy developments will also remain closely watched, particularly implementation details of the EU's Carbon Border Adjustment Mechanism and the durability of US clean energy tax credits, both of which materially affect the economics that industrial decarbonisation startups are betting on.

Insight Media Opinion

The rotation of venture capital away from consumer climate apps and toward industrial decarbonisation is, on balance, an encouraging sign of a maturing market correcting an earlier misallocation of capital. Cement kilns and steel furnaces were never going to be decarbonised by the kind of asset-light software business models that dominated the first wave of climate tech investment, and it is reassuring that investors are increasingly willing to fund the harder, more capital-intensive work that actually addresses the largest sources of industrial emissions.

That said, investors and policymakers should be clear-eyed about the risks ahead. Industrial decarbonisation startups face a much higher bar for commercial proof of concept than software companies, and the venture capital model's typical time horizons and risk tolerances are an imperfect fit for technologies that may take a decade or more to reach meaningful scale. Sustained progress will likely depend as much on stable, long-term policy support and patient infrastructure capital as on venture funding rounds, and governments should not assume that private investment alone will carry these critical but difficult sectors across the finish line.