With $370 billion in decarbonization included in the 2022 Inflation Reduction Act in effect, startups and climate-focused venture capital firms are gearing up to apply for funding in the new year.
At a Dec. 15 panel hosted by Houston-based VC fund-of-funds HX Venture Fund, partners at venture firms and founders discussed how the legislation was affecting everything from business models to future funding. Panelist Moji Karimi, CEO and co-founder of decarbonization startup Cemvita Factory, said his company was already making concrete plans about the available funds.
“We’ve already started building that into financial models because it’s very tangible at this point,” Karimi said.
Cemvita Factory raised $10 million in 2021 and has partnered with United Airlines to explore the production and use of sustainable aviation fuels.
Vic Pascucci III, another panelist and managing general partner at Chicago-based Energy Capital Ventures, said the firm was still waiting to see the full impact of the bill on startups, but the legislation’s focus on infrastructure was promising.
“Anything that supports infrastructure that innovation can build in no time is fantastic,” Pascucci said. “It’s still a bit of a wait-and-see, we see numbers, we see great potential, but there’s some worries about how to exit. But I think overall it’s positive.”
Michael Luciani, the event’s third panelist and a partner with San Francisco-based Climate Capital, observed that some companies had clear takeaways from the bill, while others were less sure of how and when grant funding could be integrated. Luciani said he noticed an acceleration of startups, but differing outlooks on the bill’s benefits meant a uniform distribution across climate-related sectors was unlikely.
“You have some companies that have a very clear takeaway, and it’s very easy to model that,” Luciani said. “Other companies might have a more difficult saying this is exactly how it models financially, especially if they might be eligible for grants. We’re certainly seeing an acceleration of startups but an unequal one, as the implementation [of the Inflation Reduction Act] is rolled out.”
Moderator Burak Powers, a strategy director of low-carbon solutions for Houston energy giant LyondellBasell, added that the company was already planning to move forward on applying for U.S. Department of Energy grants available through the bill, which he anticipated would open in early to mid 2023.
The panelists also discussed climate startup funding in the backdrop of unfavorable interest rates across the country. Luciani said market conditions were leading investors to negotiate terms that were friendlier to investors – including lower valuations.
“What’s unique about climate is that there is still a significant amount of venture capital or growth capital available, and yields are so big,” Luciani said.
According to Pitchbook, national exits were down 50% from historical norms in the third quarter of 2022, and the value of VC late-stage startup deals in the U.S. hit its lowest point in 11 quarters at $24.9 billion. Second-quarter figures showed that the Houston area saw a drop in deal flow, following trends in Texas and across the nation
Climate Capital and Energy Capital Ventures were part of Cemvita Factory’s 2021 Series A raises. Both firms target early-stage companies in their initial rounds of funding. Climate Capital was also part of a $10 million raise for AI grid forecasting startup Amperon in May 2022.
