The global Q1 2023 funding decline could derail achieving the global net zero goal and impede the progress of the clean energy transition. Technological innovations in low-carbon manufacture, green construction, climate-smart agriculture, clean energy, sustainable mobility, etc are key drivers of the clean energy transition; whereas the growth, productivity and overall performance of these startups largely depend on the availability of funds. The funding decline may result in a rise in startup closures and derail achieving the demands of the climate transition.
Reports show that global corporate venture capital (CVC)-backed funding fell 12% quarter over quarter (QoQ), from $14.5B in Q4 2022 to $12.8B in Q1 2023. This marked the lowest quarterly funding level since Q1 2019, at $14.9B (see chart below).
Additionally, global venture funding experienced a 13% QoQ drop from $67.1B in Q4 2022 to $58.6B in Q1 2023. This is a slower rate of decline compared to Q4’22 and Q3’22, which saw drops of 18% and 31%, respectively. The reasons for this fall, according to BW Disrupt, include increasing interest rates on investments, high inflation, domestic and geopolitical challenges, and instability of the global banking system. The International Monetary Fund (IMF) in the World Economic Outlook report also added that the decline is due to global turmoil in the financial sector, high inflation, ongoing effects of Russia’s invasion of Ukraine, and three (3) years of COVID-19.
In the sustainability sector, global sustainable funds experienced an organic growth rate (OGR) decline of 1.4% from over 2% growth in Q4 2022. Only USD $29 billion was raised in the first quarter of 2023, down from nearly USD $38 billion in the previous quarter. According to a PitchBook report, climate tech startups raised only USD $5.7 billion across 279 VC deals in Q1 2023. This is a 36% decline in deal value and a 31% decline in deal count from the previous quarter. From its peak in Q3 2021, the quarterly deal value fell more than 50% in Q1 2023 (see chart below).
Indeed, Africa experienced its lowest startup funding decline since 2021. According to Disrupt Africa, only 87 African startups secured a sum of US$649,303,000 between January 1 and March 31, 2023, in about 150 recorded deals. Although we cannot categorically state the impacts of this funding decline on startups in the African sustainability ecosystem yet, we can however establish that Africa is most vulnerable to climate change and a global climate tech funding decline would impact the longevity of the climate crisis in the region.
Startups are generally referred to as the engine of economic growth. They drive innovation and generate wealth by creating new jobs, new products, and new services. Beyond this, climate tech startups create technologies that aid the mitigation and adaptation of the effects of climate change. Therefore, the impact of global funds decline on climate tech startups cannot be viewed only from the lenses of economic downturn or startup shutdowns, but also as a reflection of the urgent need for increased support and investment in climate tech innovation. Climate change is expected to cause approximately 250,000 additional deaths per year from malnutrition, malaria, diarrhoea and heat stress alone between 2030 and 2050, according to the World Health Organization (WHO). The direct damage costs to health are estimated to be between US$ 2–4 billion per year by 2030. Also, the United Nations report has warned that the world would face a catastrophic warming threshold within the next decade, and the Earth is estimated to exceed a 1.5 degrees Celsius (2.7 degrees Fahrenheit) warming target by the early 2030s. As the world faces the escalating challenges of climate change, the success and scalability of climate tech startups are crucial for driving the necessary solutions and transitioning to a sustainable future.
The ongoing funding decline is not an isolated occurrence. According to the IMF, growth is set to fall from 3.4% in 2022 to 2.8% in 2023, before settling at 3% in 2024. In view of the crucial role that climate tech startups play in the attainment of net zero goals and clean energy transition, it is important to discuss alternative startup funding measures. Some of these include;
- Equity crowdfunding is a viable, yet grossly underestimated financing measure for startups in Africa. The World Bank estimates the volume of crowdfunding to become $300 billion by 2025. As a forecast, Infodev (2013) estimates that the crowdfunding market potential in sub-Saharan Africa is $2.5 billion by 2025. This growing crowdfunding market in the continent can provide an alternative means for startups in the region to raise capital from alternative investors for their growth and survival. For example, Thundafund – a cape-town-based crowdfunding platform offers investors rewards based on their contribution to a startup. Also, Uprise.Africa provides an equity-based return for the capital raised. In 2018, Drifter Brewing Company raised almost R3.9 million ($175,521) from 235 investors in exchange for a 12% equity stake via Uprise.Africa, while a meat distribution business has also raised R150,000 ($8,776) to purchase refrigerated vehicles and stock on Thundafund.
- Invoice financing and invoice factoring are also potential financing options for startups. Reports show that Africa accounts for only 1% of the global factoring volumes estimated at €2.3 trillion, and this tiny fragment is dominated by South Africa, Tunisia, Morocco, Egypt, Mauritius, and Kenya. Bridger is an example of an invoice financing company that enables startups and businesses to finance their unpaid invoices for cash within 48 hours. Since its official launch in 2022, the company has cleared the unpaid invoices of 72 mid-sized businesses and financed about 120m Naira so far in invoices.
- Merchant cash advance (MCA) is another great option for startups that need quick access to funds but don’t have the collateral or credit score to qualify for traditional bank loans. In 2012, the South African-owned IKhokha launched a merchant cash advance service. Ikhokha vested interest in the product by offering cash advances to 250 merchants, which saw it disburse more than ZAR500,000 (US$33,500) worth of cash advances within the first week with an average deal size of ZAR19,000 (US$1,275) per advance. As of 2020, it has provided over ZAR1.5 billion (US$87 million) in funding to more than 7,000 businesses. Furthermore, Peer-to-peer (P2P) lending provides direct financing for startups without the involvement of third-party intermediaries (banks or financial institutions). According to Allied Market Research, the global P2P lending market size will grow to a record $558.91 billion by 2027, which in percentage terms compared to 2020 means an increase of almost 30%.
About the Author(s)
Olayide Oyeleke is an associate at The AR Initiative.
