Climate tech and sustainable investing to figure prominently in 2021 VC market

Becoming a successful investor incorporates an element of good fortune but the more astute practitioners possess the gift of anticipating the direction in which markets are heading. The onset of a new year is an apt time to try to foresee trends which will become ever more evident throughout 2021.

Although the Covid-19 pandemic took its toll on markets, data published by Pitchbook – provider of data on private and public markets – indicate that VC investment held up well across Europe with a record $46bn invested in startups during 2020.

The UK attracted $13bn of this from 27% less deals than in 2019 which reflects the trend across Europe: less deals, larger amounts. The green economy is becoming an increasingly important player in the VC market; a trend set to continue.

Climate tech – tackling climate change with technologies which reduce dependency on fossil fuel – has been a growth area throughout 2020 and there is no reason to expect any deceleration. According to Dealroom – specialist provider of data on startups, growth companies and tech ecosystems – European investment in climate tech has grown from about $1bn to almost $5bn in the last five years with the UK comprising $1.5bn of this.

A PricewaterhouseCoopers (PwC) report published in September 2020 attributed the increased investment to new regulations imposed on corporations. However, there is also a heightened awareness that the climate crisis has reached a level where innovative climate tech firms are central to the planet’s future. Amy French from London-based tech community, Level 39, expects “VC investment to follow the curve [of entrepreneurs innovating in climate tech] and invest in green”.

In 2020 three climate tech companies accounted for three of the biggest transactions: Swedish battery company Northvolt raised $600m in early-stage funding, Climeworks raised $110m and indoor-farming company Plenty brought its total fundraised to $500m.

It is also anticipated that more and more investors will be attracted towards organisations who provide transparency in their dealing with environmental, social and governance (ESG) issues. These corporations are not necessarily directly involved in green issues but have embraced guidelines such as the UN’s 17 Sustainable Development Goals.

Increased interest in impact tech, as this sector is often referred to, has given rise to a sophisticated investor who can distinguish between companies involved in greenwashing – ostentatiously drawing attention to environmentally-friendly acts to deflect from less laudable practices – and those with true green credentials.

The Covid-19 pandemic and movements such as Black Lives Matter meant that societal inequalities came under scrutiny during 2020 like never before. The awareness has spread to the financial world where issues such as diversity and inclusion have taken centre stage and led organisations to review the composition of their work force with a new focus.

Whether ethnic minorities and women are accorded the opportunity to progress in organisations have also become criteria which investors use to evaluate the companies they invest in. Francesca Warner, the founding partner of the innovative Ada Ventures and co-founder of Diversity VC, is emblematic of the new breed of venture capitalists who attach importance to the governance of the startups they work as much as the bottom-line returns.

Ada Ventures invest in overlooked founders and markets and Francesca Warner predicts: “I expect to see far more funding going to Black, Asian and ethnic minority founders and female founders in 2021 and in the decades to come”.