The Increasingly Horizontal Climate Software Opportunity

Through conversations with private market investors and sector experts, as well as organic market research, we’ve concluded that climate software will likely soon be widely viewed as a horizontal investment opportunity supporting a continually expanding set of cross-industry applications.

• Software as an enabler: software plays a vital role in advancing the clean energy transition because of its ability to buttress the efficiency and resiliency of energy and infrastructure assets, and enable broad enterprise adherence to regulatory and voluntary reporting and decarbonization trends. Software also appeals to a diverse set of private market investors and generates tangible economic value from the large quantum of carbon and ESG-related data generated by – and impacting – nearly every industry. Moving forward, we see significant potential for “hardware-as-a-service” models and full-stack hybrid / software solutions to provide some of the highest-upside opportunities for investors as the interdependencies of funding both categories become magnified to the broader market

• Tangible value creation: software innovation must co-exist with continued investment into renewable power, electrification, long-duration storage, and grid / distributed energy hardware assets, and can drive direct bottom-line impacts by: 1) providing emitters with a baseline to evaluate and implement emission reduction strategies capable of justifying future CapEx / development spend, and 2) offsetting the impacts of increasing grid complexity by simplifying predictive analytics and forecasting functions to ensure appropriate scoping and execution for new projects

• It’s still early innings: the overall market for climate tech software is still relatively nascent; some categories are further along the development curve than others, however there is a shortage of at-scale case studies to provide “benchmarks for success” when it comes to evaluating climate software GTM models and unit economics, which are slightly different than traditional enterprise SaaS profiles given their slower sales cycles and implementation and servicing-related COGS

• Time to be opportunistic: private climate software-focused funds are heavily concentrated at the early stages, where there has been robust company formation in the industry; there is a significant market opportunity for new investors to lead Series B+ rounds over the next year and beyond as these businesses compete for scale-up capital. Sector-focused funds leading rounds at this stage raised only 13% of the total funds raised across all stages from 2021 – 2022. “Pure software” investments continue to see the strongest YoY growth (~30% in 2022) in climate tech amidst a high interest rate environment and investor hesitancy to back long-duration hardware assets and pre-revenue development projects

• A global, interconnected ecosystem: climate tech is one of the most globalized innovation sectors we have studied, and national / regional legislation has accelerated the pace of climate tech innovation and accessibility of fundraising in certain geographies. The US and China – which have attracted the greatest private investments historically – have begun to shift focus away from mobility-related start-ups to emissions control / energy efficiency technologies, even as EV infrastructure continues to attract significant funding (including half of Q3 ‘23’s largest deals). Europe has emerged as the fastest-growing climate tech incubation hub since the height of the COVID pandemic

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