An Analysis of Capital Flows within US Climate Tech Venture Capital

Climate tech is one of the fastest-growing areas of venture capital investment in the world. Despite the rapid increase in capital available to this sector, research has not attempted to answer the question of whether the investing patterns within this field exhibit “rational” behavior, in this case defined as investment aligned with the ultimate goal of spurring decarbonization. This paper uses four datasets and three primary lenses to evaluate the current flows of climate tech venture capital: 1) Each sector’s share of GHG emissions 2) Late-stage commercial success of each sector 3) Predicted marginal abatement cost of each solution By combining these three lenses, the paper seeks to determine if investors, in aggregate, are allocating capital in accordance with their stated goal of combatting climate change. The research finds a substantial skew in the allocation of capital to different industries (summarized herein as Emissions Categories). Transportation and Industrial Processes consistently exhibit signs of overallocation, even when considering estimates of the relative capital intensity of Categories. Meanwhile, Atmospheric Carbon, Buildings, and non-fuel combustion portions of the Energy sector appear to receive under-investment. The paper highlights the potential for improved data collection and industry coordination to benefit the fidelity and tractability of future attempts to align climate tech venture capital with the ultimate goal of combatting climate change.