Climate Tech IPO Window May Finally Open

Climate tech startups are capital intensive, have long timelines, and their technologies are often considered “first of their kind.” Moreover, the core value proposition is to address pollution, an externality that at best results in underpricing in the market. These are not characteristics preferred by stock pickers.

Nonetheless, public markets are responding favorably to climate technology startups, or at least some of them.

This week, nuclear power startup X-energy appeared to deliver a windfall to investors, including Amazon, with its $1 billion initial public offering. Retail investors couldn’t seem to get enough of the stock, with the stock soaring 25% in the first hour of trading. Also this week, geothermal startup Fervo announced that it had filed for an initial public offering (IPO). The size of Fervo’s IPO has not yet been disclosed, but private investors have valued the company at about $3 billion, according to PitchBook.

The move to go public is consistent with what investors told TechCrunch late last year. After years of lukewarm attitudes toward climate technology companies, they expected public markets to begin welcoming energy startups. Almost every investor asked this question said the startups most likely to go public specialize in nuclear fission or geothermal power. Fervo in particular is mentioned several times.

Thank you Data Center. The AI ​​craze has captured the growing demand for electricity and made it sexy and salable. Companies that were already betting on the upside were faced with a trend narrative that matched their technological maturity. Luck definitely favors the prepared.

IPOs also please investors, allowing them to return capital to LPs. The recent lack of IPOs has left a significant portion of climate tech funding frozen at a time when many funds are eager to start cashing out.

But it’s not just about cashing out.

Fervo and X-energy have followed the traditional route to the public markets, suggesting they are confident that a broad investor base wants to participate. If all it wanted to do was secure investor capital, the startup might have gone the SPAC route. (Some companies do.) But these two companies took the longer route.

But for all its success, broad climate technology will probably be left out of the IPO wave.

Companies that are not tied to energy markets must find other ways to continue their efforts without access to the vast amounts of capital that public markets provide. These differences suggest that the climate technology world is beginning to undergo a K-shaped transformation. This is a trend that Mark Cupta, Managing Director of Prelude Ventures, suggested when I spoke with him a week ago.

Companies stuck on the poor side of the IPO window still have individual investors they can rely on. But even there, a K-shaped trajectory begins to appear.

Last year, venture capital and growth funds raised about $6.5 billion, according to Sightline Climate. The same holds true in 2021, but today there are more funds, so each fund is now smaller. This can be bad news for entrepreneurs because they have less money to draw from. On the positive side, more competition can lead to better fundraising results.

At the same time, big money continues to grow. Infrastructure led climate technology fundraising last year, with 42 funds raising 75% of the sector’s total dollars, according to Sightline Climate. If you’re a company with mature technology that’s ready to grow to a large scale, that success will likely extend to the startup side.

Sightline said many new infrastructure funds are specializing in renewable energy, grid technology and energy storage. In other words, the K-shape isn’t going away anytime soon.