VC investments in impact startups worldwide fall by more than a quarter in 2024
Venture capital funding towards impact startups continues a sharp downward trend as VC investors lose appetite for climate tech, the latest Dealroom figures reveal.
Venture capital investments in impact startups are expected to drop by more than a quarter this year compared with 2023, according to figuresfrom startup data platform Dealroom published today.
Impact startups – companies that address one or more UN Sustainable Development Goals (SDGs) at the core of their business – are projected to raise US$37bn by the end of the year, according to the State of Impact 2024 report, based on data collected by Dealroom from 14,000 companies worldwide.
The yearly figure represents a 28% drop compared with last year, and a 60% dive from the all-time high of 2021, when impact startups raised US$89bn.
“This drop is especially worrying since none of the 17 goals is on-track to be achieved by 2030,” the researchers write.
The plunge follows a downward trajectory since 2021, which had been a record year for venture capital investing overall. But while in 2023, VC investments in impact startups had shrunk at a similar rate to the venture capital market overall, this year’s 28% fall compares with a much lower 4% decline in general venture capital funding.
The platform says its “litmus test” to determine whether a company is an impact startup is: “if you remove the impact you also remove the business”. Companies included on the Impact Database range from plant-based cheese company Willicroft to Kenyan social enterprise Copia Global and electric carmaker Tesla.
When looking at industry-specific data, impact remains the third most funded sector (bearing in mind that impact often overlaps with other industries), – but the impact sector’s decline in funding this year is the second sharpest. In comparison, enterprise software (which includes AI), already the most sought-after sector, is on track to grow by 28%, and robotics is on course to grow by 133%.
Is climate out of fashion?
Impact startups’ disproportionate struggle to raise funds appears to be largely driven by VC investors’ falling interest in climate-focused companies.
In the past five years, impact startups focused on climate-related SDGs, in particular climate action and affordable and clean energy, have attracted the vast majority of VC investment in impact (US$215bn and US$133bn, respectively).
But in 2024, VC funding towards those “climate tech” startups (as per Dealroom’s taxonomy) has dropped dramatically by 30%, according to Dealroom’s estimates. Meanwhile, unrelated research from BloombergNEF recently published shows an even worse picture, with climate-tech VC investment on track to drop by a whopping 50% in 2024.
Investors quoted by Bloomberg suggest VC investors’ enthusiasm for AI may have redirected capital away from climate tech startups, with one saying “AI has sucked the oxygen out of the room”.
The Dealroom research however highlights that while VC investment was declining for climate tech companies, they were raising increasing amounts of debt, private equity and project financing, which now made the majority of their investment sources as they become more mature.
Like in previous years, the research found that impact startups targeting purely social-focused SDGs have been underfunded: for example, those targeting reduced inequalities (SDG 10) have only raised US$4bn.
“Progress [on SDG 10] is hindered by the complexity of its targets, which cover income growth, social inclusion, equal opportunities, and financial regulation,” according to the report.
Top image: Freepik.
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