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(Bloomberg) — Climate tech startups are running into a major bottleneck: Funding for companies ready to build commercial-scale facilities is declining.

Investment dropped 20% in the first half of 2024 compared to the same period last year, but backing for growth-stage companies fell even further, according to a new report published Friday by intelligence firm Sightline Climate.

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Overall, investors poured $11.3 billion into the climate tech sector globally, with just $2.8 billion going to growth-stage startups. In comparison, companies at that stage saw $4.2 billion in investments in the first half of 2023. Sightline Climate’s data goes back to 2020, and the first half of that year — right as Covid-19 hit — is the only time growth-stage funding has been lower. 

Later-stage growth and infrastructure capital isn’t being widely deployed because funders are looking for startups with at least $10 million in revenue, a threshold that a lot of climate tech companies haven’t yet hit, according to Sightline co-founder and Chief Executive Officer Kim Zou. Investors are used to more mature infrastructure assets like solar, wind and battery storage, which are more bankable than emerging clean technologies like advanced nuclear, geothermal, carbon capture and hydrogen. 

As a result, climate tech companies in the Series B and growth stages are “stuck in a finance no-man’s land,” Zou said, noting venture capital is focused on lab- and pilot-phase projects, while project finance targets those that already have proven their worth at commercial scale. She added that if startups want to get over this “valley of death,” they need to focus on securing buyers for their services with binding agreements, whether that’s hydrogen, batteries or green steel. 

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There are even warning signs for young companies, with seed-stage startups experiencing a continued decline in deal activity since a 2023 peak. “When we talk to seed investors, the days of having a really great idea and a great conversation and automatically getting a seed check are over,” Zou said. Now, companies are being asked to undergo a more structured due diligence process. This mirrors a pullback in the overall venture landscape amid inflation and investor concerns about when interest rates may come down.

The good news is that startups with a feasible roadmap to project development at scale are still securing funding. In February, geothermal developer Fervo Energy raised $244 million in a strategic round led by Devon Energy Corp., for example. Fervo has put a large focus on providing clean firm power for data centers, which are hungry for energy thanks to the artificial intelligence boom.

Silicon anode battery company Sila — formerly known as Sila Nanotechnologies — and electric vehicle charging startup Electra led the pack in the first half of the year by raising $375 million and $330 million respectively, according to Sightline’s analysis. Both companies are relatively mature, and the fundraises are also a sign that transportation and battery companies with a large customer base are dominating the sector. 

Investors’ more discerning approach means startups are having to fully prove their worth. “Companies who are getting to those metrics, that are able to get over that first, second-of-a-kind project hump, are still getting multiple term sheets,” Zou said.

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