Investor Letter 2024
No doubt 2024 will feel like an eventful year to many people around the world, but as an investor in early-stage European climate hard tech companies, a few things stand out in particular: a resounding victory for Trump, trade wars with China, political convulsions in France and Germany, the decline of Northvolt, the failure of offshore wind auctions, and senior Eurocrats voicing remarkably pro-business policy frameworks. This is not to downplay the importance of e.g. war in Ukraine and Gaza, NATO expansion, the stockmarket dominance of the Magnificent Seven, or the emergence of AI, but it’s less clear what effects these will have on our immediate ecosystem.
To understand why we highlight these things, consider the following simplified bull and bear cases for how things could develop for European climate hard tech in light of recent events.
Team Climentum in December 2024
The bear case: the Trump administration realigns incentives in favor of oil & gas and escalates the trade wars with China, which shifts its attention to Europe as the primary export market. Political upheavals in France and Germany result in weak EU leadership and we fail to take an intelligent position on the geopolitical board, becoming a largely reactive price-taker. In addition, European investors see the decline of Northvolt and the failure of offshore wind auctions as the beginnings of “cleantech bubble burst 2.0” and decide to dodge & divest. In this world, even the greatest European climate tech founders and technologies would struggle to raise funds, grow rapidly, or find attractive exit pathways.
“Hey, you! Don't tell me there's no hope at all.
Together we stand. Divided we fall.”
The bull case: the Trump administration continues to push pro-innovation policies and remains largely neutral toward oil & gas. The trade wars with China plateau early to a “new normal” state largely focused on EVs and critical raw materials. Europe continues to mature at the federal level, navigating relations with the US & China in a manner that allows for continued successful execution of the Green Industrial Plan, as well as building momentum in nascent pro-business policies (currently being championed by von der Leyen and Draghi). In addition, a sizable core of European climate tech investors becomes discernable, distanced from the ZIRP-era investor-tourists and building strength based on business & market fundamentals - while viewing failures like Northvolt and offshore wind auctions as case studies in poor execution. In this world, European climate hard tech founders will thrive, as will their VC backers.
We will surely end up somewhere in between these extremes. But one thing feels certain: volatility will increase, driving more & faster hype cycles in specific subsectors. This may create opportunities for quick wins, but long-term investors will need to be particularly resilient to the siren song of FOMO. In this environment we believe that our particular focus on unhyped solutions with strong business fundamentals will serve us well.
It also seems safe to assume that Europe will continue to pursue policies for reduced dependence on foreign energy and critical raw materials. This implies an increased focus on non-fossil energy sources (including baseload), energy storage, industrial efficiency, and resource circularity - all of which are focus areas for Climentum.
There are other trends we expect will continue in Europe. Looking at the LP ecosystem, lower interest rates combined with increasing M&A and IPO activity should help increase appetite for VC as an asset class. This would be a welcomed development alongside the ongoing maturation of institutional LP approaches to climate tech investing, where we see strategic focus and mandates slowly & steadily moving in our direction. It’s worth noting that while this slow & steady pace frustrates some managers when markets are bullish, it is this same attribute that allows for these institutions to maintain a long term perspective and continue to allocate when markets are skittish.
“Relax. I'll need some information first.
Just the basic facts. Can you show me where it hurts?”
While appetite for climate tech is slowly building among institutional LPs, 2024 was clearly a year that highlighted the importance of fundamentals. No one questions whether decarbonisation will happen, but it is now more widely understood that we need to be cautious of business cases that rely on green premiums or voluntary carbon markets, take a first principles approach to foundational solutions like hydrogen, and show due respect for the challenges of equity-efficient financing and operational build-out of large assets (like Northvolt).
Looking around us, especially upstream and downstream, we’re also happy to see an increasing maturity of the hard tech financing ecosystem. University innovation & entrepreneurship programs seem to go from strength to strength, and there is no obvious shortage of strong pre-seed investors in the sectors & markets we target. More importantly, the gap in growth finance for climate hard tech is beginning to close. When we launched in 2022 there was a marked lack of growth stage equity investors, and an even more glaring lack of debt investors. While there is still room for improvement, it no longer feels like CapEx heavy climate hard tech companies face an inevitable “financial valley of death”. This is partly thanks to new entrants, but it is also thanks to existing financiers moving into the gap, including banks, private equity funds and infrastructure funds flexing their mandates into higher risk-reward brackets. At this point the challenge is not so much the quantum of funding, but getting to successful match-making in what is still an emerging field with little standardisation. That is why we have doubled-down on this particular area of support for portfolio companies.
Given our focus on unhyped sectors, 2025 shows more promise in some areas than others. Fueled by the relentless march of AI data center build-outs, nuclear power has clearly entered a hype state. The increasing capabilities of AI has also resulted in a surge of “AI for X” businesses, including the identification of novel high-performing materials, tempting generalist VCs with a desire for hybrid software/climate investments.
On the other hand, some sectors are cooling down, entering a post-hype phase. FoodTech struggled with lackluster consumer demand when the venture market began to cool in 2022. Heading into 2025 we expect to find attractive B2B opportunities in this space, maybe even in the form of down-rounds. We see a similar dynamic in the hydrogen space, where various reality checks have dampened sentiments considerably since 2022. As the dust settles, we will be open to great solutions focused on the top of the hydrogen ladder.
We expect a few additional sectors to be of particular interest in 2025. While critical raw materials (CRMs) are somewhat in focus with especially lithium mining receiving a lot of attention, the field of CRM circularity (including for lithium) remains somewhat muted. Also, in spite of glaringly volatile weather, greenhouse and other resilient agriculture technologies have yet to come into focus for many relevant investors. These pre-hyped areas could prove fertile ground for investments in the near future.
“Come in here, dear boy, have a cigar.
You're gonna go far, you're gonna fly high”
While we like to avoid hype as we enter investments, we are happy to leverage tailwinds (hyped or not) as they gain momentum behind our portfolio companies. For example, the AI boom is driving interest in ZeroPoint (for data center energy efficiency) as well as Kärnfull Next (nuclear power asset development) and Novatron (nuclear fusion reactor development). Separately, the growing public concern around microplastics and PFAS is driving interest in Wayout (decentralised water purification), which could also see deployments in Ukraine and Gaza as infrastructure is sadly dissolving. Finally, as trade relations with China are shaky, the allure of Rodinia for near-shored clothing production continues to grow.
Only one of our portfolio companies seems to be facing exogenous headwinds at this point. Aspiring to be the “source of truth” across stakeholders in the offshore wind sector, Aegir is likely to suffer when major stakeholders misstep as egregiously as they have recently. However, this could also prove to become an accelerant for the company as the failure of public actors to properly price offshore wind assets should lead to a demand for better data & insights for decision makers. We look forward to seeing how this plays out in 2025.
Looking back at 2024, we invested into three new companies, bringing the portfolio to a total of 13 for our first fund. As we make the final 3-4 initial investments in our first fund toward the summer of 2025, we are also beginning to prepare for our second fund, expanding our operational footprint to Norway while growing our teams in Denmark, Sweden, and Germany. Doubling down on our pursuit of unhyped sectors, ignoring FOMO, and focusing on business fundamentals, we are optimistic that 2025 will be a great year.
