Trend watch: funding trends & deal flow in 2026

Climate tech funding is entering a new era. After years of hype-driven growth and the subsequent correction of 2023-2024, the sector is stabilising at what investors call a "new normal." In 2025, venture capital and growth equity investment in climate tech reached $40.5 billion—up eight percent year-over-year—signalling maturation rather than resurgence. The first half of 2025 saw $13.2 billion deployed, down nineteen percent from the same period in 2024, with deal activity hitting a five-year low. Yet the story is more nuanced than these headline figures suggest. Capital is flowing to proven technologies with clear paths to deployment, while early-stage innovation faces headwinds. Understanding where value lies in 2026 requires grasping the dynamics of venture capital versus project finance, the sectors attracting investment, and the persistent challenges that separate fundable companies from those stuck in the "valley of death."

Why it matters

The funding landscape has fundamentally shifted

Climate tech is no longer a speculative frontier for venture capitalists chasing moonshots. The sector has matured into a complex ecosystem where different capital types serve different purposes. Venture capital remains essential for early-stage innovation—developing new battery chemistries, advancing carbon capture technologies, and piloting next-generation grid solutions. But as companies move from pilot to commercial scale, project finance becomes the dominant funding mechanism. Understanding this transition is critical for founders seeking capital and investors allocating portfolios.

The numbers tell a compelling story. New climate-focused funds raised $103 billion in 2025, with Europe capturing fifty-four percent of capital compared to just sixteen percent for the United States—a stark reflection of policy differences between regions. Yet fundraising outpaced deployment: only sixty percent of targeted capital actually closed, leaving $69 billion in pipeline. This capital overhang creates both opportunity and pressure. Investors must deploy funds within defined windows, potentially favouring later-stage, lower-risk opportunities over early-stage innovation.

Policy uncertainty reshapes investment strategy

Fifty percent of climate investors cite regulatory uncertainty as the top threat through 2026. The potential rollback of Inflation Reduction Act incentives in the United States, shifting European Green Deal priorities, and inconsistent carbon pricing signals globally are forcing investors toward "policy-proof" business models. This means backing companies that can demonstrate returns based on cost savings alone, without relying on subsidies or tax credits. Behind-the-meter solutions, software-as-a-service decarbonisation tools, and energy efficiency retrofits are attracting disproportionate interest precisely because their economics work regardless of policy outcomes.

Key concepts

Venture capital versus project finance: understanding the divide

Venture capital and project finance serve fundamentally different purposes in the climate funding ecosystem, and confusing them leads to strategic errors.

Venture capital provides equity investment in early-stage companies with high-risk, high-reward profiles. It funds research and development, pilot projects, and market entry. VC investors accept that many portfolio companies will fail, betting that a few outliers will generate returns that more than compensate. In climate tech, VC targets breakthrough technologies—novel carbon capture methods, advanced battery chemistries, fusion energy, and AI-driven optimisation systems. The median climate tech deal size in 2025 was $7 million, with median valuations around $44.5 million.

Project finance funds specific assets—a solar farm, a battery storage facility, a direct air capture plant—based on predictable cash flows from that asset. Lenders and investors assess the project's economics, offtake agreements, and operational track record rather than the company's overall potential. Project finance requires proven technology with established performance data. It typically comes into play after a company has demonstrated commercial viability.

The critical challenge lies in the gap between these two capital types. A climate startup may secure seed funding and even Series A investment to develop its technology, but face a "valley of death" when trying to finance its first commercial-scale facility. Fifty-one percent of investors identify first-of-a-kind (FOAK) facilities as the hardest to finance, and sixty-nine percent expect FOAK capital to shrink through 2026. This gap—where technology is proven but not yet deployed at scale—remains the sector's greatest bottleneck.

What's fundable in 2026: the hot sectors

Investment patterns reveal clear preferences. Energy infrastructure dominates, capturing thirty-six percent of total funding ($14.4 billion in 2025, up thirty-one percent). Within this category, specific subsectors are attracting outsized attention:

Batteries and energy storage continue their rapid ascent. U.S. utilities added over ten gigawatts of battery capacity in 2024 and plan to install over eighteen gigawatts in 2025. Base Power raised a remarkable $1 billion Series C for home battery leasing, backed by Addition, a16z, Lightspeed, and Google's CapitalG. The American Clean Power Association has committed $100 billion over five years for U.S.-made battery storage. Grid-scale installations are expected to double in 2025, driven by data centre power demands and grid modernisation needs.

Nuclear energy—both fusion and fission—experienced what investors describe as a "gangbusters year." X-energy closed a $700 million Series D for small modular reactors, with Amazon and Dow Energy as strategic partners. Private fusion companies have raised €13 billion cumulatively through September 2025, up from €9.9 billion in June—an eightfold increase since 2020. Helion secured $425 million in Series F funding, while Marvel Fusion raised €113 million in Series B. Nuclear's appeal lies in providing baseload power for AI data centres and industrial facilities that cannot rely on intermittent renewables.

Geothermal energy nearly tripled its investment in 2025, reaching $558 million. Fervo Energy's $462 million Series E exemplifies investor confidence in enhanced geothermal systems that can deliver consistent power regardless of weather conditions. The technology benefits from talent crossover with oil and gas drilling expertise.

Carbon capture is finally scaling commercially. Chestnut Carbon raised $160 million in Series B for carbon forestry projects. Heimdal, a Y Combinator-backed company, has built the largest direct air capture facility in the United States with the lowest cost per ton globally. While costs remain elevated (approximately $250 per ton for direct air capture), improving economics and growing corporate demand for high-quality carbon credits are attracting serious capital.

What's working and what isn't

What's working

Later-stage consolidation around proven winners. Investors are writing larger checks to fewer companies, concentrating capital in businesses with demonstrated commercial traction. Growth-stage funding surged seventy-eight percent in 2025 even as early-stage funding declined. This pattern rewards companies that have navigated the pilot phase and can show repeatable unit economics.

Energy-AI crossover. The explosion of AI data centres has created unexpected synergies. Climate startups serving data centre energy needs capture crossover capital from both climate-focused and tech-focused investors. Virtual power plants, grid flexibility solutions, and distributed energy resources benefit directly from this demand. Exowatt raised $90 million Series A specifically to provide clean energy for AI infrastructure.

Policy-independent business models. Companies that deliver value through direct cost savings rather than subsidy capture are attracting consistent interest. Energy efficiency solutions, demand response platforms, and behind-the-meter storage generate returns regardless of regulatory changes. This resilience appeals to investors concerned about policy volatility.

Corporate partnerships filling VC gaps. Strategic industrials are stepping in where traditional VCs hesitate. Corporations with decarbonisation mandates—major utilities, chemical companies, steel producers—are forging partnerships and providing growth capital to climate startups whose technologies serve their needs. These arrangements often include offtake agreements that de-risk project finance.

What isn't working

Early-stage funding drought. While headlines celebrate mega-deals, Series A and B funding declined approximately fifty percent from 2021 peaks. This creates pipeline concerns: fewer funded startups today means fewer scale-ready companies in 2028-2030. The specialist climate investors who drove the 2021-2022 boom are retreating faster than generalist investors.

First-of-a-kind financing. The commercialisation gap remains stubbornly persistent. Companies need $45 million to $100 million to build first commercial facilities, but neither VC nor project finance comfortably serves this range. Hybrid instruments—convertible notes, blended finance structures, coalition funds like the $300 million "All Aboard Coalition"—are emerging but remain insufficient to meet demand.

Investor participation decline. Total investor participation across climate verticals fell nineteen percent year-over-year. Carbon-focused investments saw the steepest pullback at forty-seven percent, followed by transportation at thirty-one percent. Some previously hot sectors—green hydrogen, for example—are experiencing corrections as early hype gives way to more sober assessments of demand and economics.

Interconnection and permitting delays. Even well-funded projects face multi-year waits for grid connection and regulatory approval. U.S. interconnection queues hold over two terawatts of potential capacity, with median wait times exceeding four years. Capital deployed to projects that cannot reach commercial operation represents an opportunity cost that chills investor enthusiasm.

Examples

1. Base Power ($1 billion Series C): This home battery leasing company exemplifies the energy storage boom. By aggregating residential batteries into a distributed grid storage network, Base Power offers both customer value (backup power, bill savings) and grid services (demand response, capacity). Its business model works with or without policy incentives, and its massive raise signals investor confidence in distributed energy resources.

2. Fervo Energy ($462 million Series E): Enhanced geothermal represents a compelling intersection of proven drilling technology and next-generation clean energy. Fervo's approach uses horizontal drilling techniques borrowed from oil and gas to access geothermal resources previously considered uneconomic. The company's path to powering data centres demonstrates how climate tech increasingly serves AI infrastructure needs.

3. Electra ($186 million Series B): Low-carbon steelmaking through electrowinning addresses one of the hardest-to-abate industrial sectors. Steel production accounts for approximately seven percent of global carbon emissions. Electra's electrochemical process produces iron without coal, and its Series B signals investor appetite for industrial decarbonisation even amid broader funding pullbacks.

Action checklist

• Assess your capital needs by stage. Match funding requirements to appropriate capital sources: VC for technology development and pilots, growth equity for commercial validation, project finance for asset deployment. Attempting to raise project finance before demonstrating commercial viability wastes time and credibility.

• Build policy-independent unit economics. Structure business models to generate returns through direct value creation—cost savings, productivity gains, new revenue streams—rather than subsidy capture. Investors increasingly discount policy-dependent models given regulatory uncertainty.

• Target the energy-AI nexus. Position solutions to serve data centre power demands where possible. This alignment attracts crossover capital and provides near-term revenue opportunities. Grid flexibility, storage, and baseload power are high-priority categories.

• Secure strategic corporate partners early. Industrial corporates can provide development capital, offtake agreements, and project finance credit enhancement. These partnerships reduce investor risk and accelerate time to commercial scale.

• Prepare for FOAK financing creativity. First commercial projects require unconventional capital structures. Explore blended finance, government loan guarantees, convertible instruments, and coalition funds. Build relationships with development finance institutions and patient capital providers.

• Document commercial traction rigorously. Investors prioritise proven business models. Paid pilots, binding offtake agreements, and demonstrated unit economics differentiate fundable companies from those stuck in development limbo.

• Diversify supply chains and demonstrate traceability. Battery and material supply chain transparency is becoming mandatory. Prepare for digital passport requirements and recycled content disclosures. Supply chain resilience reduces investor concerns about geopolitical risks.

FAQ

Q: Is venture capital or project finance more important for scaling climate solutions?

A: Both are essential but serve different purposes. Venture capital funds innovation and early commercialisation—without it, breakthrough technologies would never emerge. Project finance scales proven technologies—without it, solutions would remain perpetual pilots. The challenge lies in bridging these two, which requires hybrid instruments and patient capital. A healthy climate funding ecosystem needs robust activity across the entire continuum from seed to infrastructure finance.

Q: Which climate tech sectors are most attractive to investors in 2026?

A: Energy infrastructure dominates, particularly batteries and storage, nuclear (both fusion and fission), enhanced geothermal, and grid modernisation. These sectors benefit from the AI data centre power boom, which creates immediate demand for reliable, low-carbon electricity. Carbon capture is gaining traction as corporate demand for high-quality credits grows, though costs must continue declining. Industrial decarbonisation—steel, cement, chemicals—attracts strategic interest but faces longer timelines. Sectors experiencing pullback include green hydrogen (hype correction) and carbon markets (integrity concerns).

Q: What makes a climate tech company fundable in the current environment?

A: Investors prioritise commercial traction over technology novelty. Fundable companies demonstrate paying customers, binding offtake agreements, and clear unit economics. Policy-independent revenue models attract stronger interest than subsidy-dependent approaches. Strong corporate partnerships de-risk projects and signal market validation. Finally, realistic timelines and capital efficiency matter more than ambitious visions; investors have grown sceptical of companies that perpetually need "just one more round" before reaching profitability.

Sources

• Sightline Climate. "Climate Tech Investment 2025: $40.5B in VC & Growth Trends." Comprehensive analysis of venture capital and growth equity investment in climate technology, including sector breakdowns, deal activity trends, and investor participation metrics. Available at: sightlineclimate.com/research

• Silicon Valley Bank. "The Future of Climate Tech 2025." Annual report examining funding trends, investor sentiment, and sector-specific dynamics in climate technology investment. Available at: svb.com/trends-insights/reports/future-of-climate-tech

• TechCrunch. "Exclusive: 12 investors dish on what 2026 will bring for climate tech." December 2025 investor survey covering expectations for funding activity, hot sectors, and policy impacts. Available at: techcrunch.com

• CTVC (Climate Tech VC). "2025 Climate Tech Investor Pulse Check." Analysis of investor participation, fund deployment, and sector preferences based on comprehensive deal tracking. Available at: ctvc.co

• Crunchbase News. "Nuclear Fission Shows Continuing Popularity (With VCs, At Least)." Coverage of nuclear energy investment trends, including X-energy's $700 million Series D and broader sector dynamics. Available at: news.crunchbase.com

• American Nuclear Society. "Report: Funding growth for private fusion companies." Analysis showing cumulative private fusion investment reaching €13 billion by September 2025. Available at: ans.org/news

• U.S. Department of Energy. "Virtual Power Plant Market Liftoff." Government analysis of distributed energy resource aggregation potential and market development. Available at: energy.gov/liftoff