In 2023, global VC investments in clean energy start-ups, including EVs and batteries, fell considerably relative to 2022
The growing momentum of electric vehicles and their potential for substantial financial returns in the future have led to a boom in Venture Capital (VC) funding for EVs and battery startups in the past decade. Major car makers too have taken this path to fund startups or technologies developed by new entrants. This was also latched on to by India which had a significant share in global VC markets.
However, the latest Global EV Outlook 2024 by the International Energy Agency has found that the global VC investments in clean energy startups, including those in the EV and battery space, have fallen ‘substantially’ in 2023 in comparison to its previous year. “Early stage investments in start-ups developing EV and battery technologies dropped 20% to USD 1.4 billion in 2023 while growth-stage investments - that refers to the later rounds of financing – dropped 35% to USD 10.1 billion,” the report says.
Reasons behind the drop in Venture Capital funding in EV startups
The report lists various factors that led to a drop in VC funding in EV startups, some of which were geopolitical tensions, supply chain disruptions, high energy prices, and rising inflation and interest rates that helped limit the availability of higher-risk capital. The report also argues that as incumbents ramp up their own investments and manufacturing plans, barriers to entry for new players get higher, and so do investor perceptions of risk.
A cooldown was also observed following the post Covid-19 boom of 2021-2022, which was fuelled by investment restraint during the pandemic and the expectation of significant economic recovery packages afterwards, the report said.
However, despite the lump in funding, firms and startups did manage to rake in the moolah, getting VC investments higher than what was managed in 2019 prior to the Covid pandemic. The IEA report says startups developing EV charging technology attracted over USD 400 million in early-stage VC, and battery and battery component makers USD 260 million, together accounting for half of early-stage VC.
“There was also a surge for two- and three-wheeler start-ups, which raised USD 200 million in early stage VC in 2023, up from below USD 100 million in previous years. While early stage funding for electric carmakers has dried up, and in 2023 fell far short of the 2018-2022 rounds, investors continue to show interest in upstream and downstream segments of EV supply chains, as well as other EV types, especially if these can scale quickly,” it said.
Some examples of early-stage VC deals in novel battery chemistries in 2023 includes that of Chinese WeView (USD 90 million), United States-based Noon Energy (USD 30 million) and XL Batteries (USD 10 million), and Singapore’s VFlow Tech (USD 10 million), all of which are developing redox-flow batteries.
Even in the battery recycling space, some of the key deals last year included a USD 540 million round of growth equity funding to US-based Ascend Elements, a start-up that also received two grants from the DoE totalling USD 480 million in 2022. The company, which raised another USD 160 million in 2024, aims to build North America’s first cathode precursor manufacturing facility using black mass, the typical output of lithium-ion battery recycling, the report said, adding that Chinese Tianneng New Materials also raised a series A of USD 140 million, while French MECAWARE raised USD 40 million.
Fig 1: Modern electric micro car charging at plug-in EV station. Pic: GETTY
Venture Capital investments in Indian EV startups
Despite the overall lump, India came out as the only emerging market and developing economies (EMDE) apart from China that had a significant share in the global VC markers. The IEA says India accounted for 70% of the investments in start-ups developing electric 2/3Ws. Over the 2018-2023 period, Indian EV start-ups raised USD 2.7 billion, of which over 70% was for electric 2/3Ws.
“Government policy support has contributed to building investor appetite for the EV sector, and the high investment levels seen in 2022 and 2023 will warrant further examination in 2024 and beyond if the FAME subsidies are reduced or phased out. The investment potential in India’s EV sector is estimated at around USD 200 billion, suggesting there are still considerable opportunities ahead for Indian entrepreneurs and start-ups,” it said.
Investors also seemed to be bullish on new opportunities arising out of EV supply chains, novel battery concepts and critical mineral extraction. Over the 2018-2020 period, cumulative early-stage VC flowing to battery and component makers stood around USD 430 million, nearly 75% of which was for lithium-based battery chemistries.
“Over the 2021-2023 period, cumulative investments for batteries not only more than tripled, to nearly USD 1.4 billion, they also diversified. Lithium chemistries accounted for just 60% of the total, while the share of emerging concepts such as metal-hydrogen, redox-flow, solid state and sodium-ion batteries rose, growing from less than 15% to more than 25%,” it added.
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