The climate tech sector urgently needs more angel investors, who typically provide “patient capital” (or long-term investment that accepts slower returns), to address ongoing funding challenges.
High capital requirements and lengthy commercialisation timelines have made it difficult for start-ups to secure the investment they need. This comes at a time when fundraising values for start-ups in the sector are falling, further stalling growth for key players in the region.
Hester Spiegel-van den Steenhoven, co-founder of Epic Angels, Asia’s largest female-only angel investor community, highlights the need for greater support from angel investors in the climate tech sector. Unlike venture capital (VC) and private equity (PE) funds, which typically work within five to seven-year investment horizons due to their mandates, angel investors can commit to longer-term investments, making them vital for driving innovation in the field, she adds.
The sector has grown significantly, fuelled by the global energy crisis, corporate net-zero goals and regulatory support. However, data by research company Sightline Climate found that climate tech start-ups raised only US$11.3 billion ($15.1 billion) in 1H2024, down by a fifth y-o-y. Seed and Series A funding took a hit, alongside later-stage rounds.
AngelCentral’s chief angel and partner, Huang Shao-Ning, also notes that not all such investors can afford to be so patient despite being deeply interested in the space. This is especially true for backers like Huang, who has a large portfolio of direct investments. “Personally, I have a specific fixed size for each investment. Typically, this amount would help power these companies through a few stages, but it is not going to be enough for climate tech companies to hit their Series B stage and beyond.”
She adds: “This means that the companies will need to be very good at fundraising, which is difficult given the market landscape. So, I cannot see myself in that stretch with them. If I put the same amount of money in other sectors, I am able to access quicker returns, which is more practical for the overall portfolio.”
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Huang believes that there is a growing number of angel investors who are willing to facilitate the growth of climate tech companies. She notes that AngelCentral, which has trained over 1,000 such investors since inception, has members with sustainability backgrounds who are passionate about climate tech and are more willing to provide patient capital.
“As angel investors, we enjoy the process, the learning, due diligence and other factors that go into the capital that we put in. So it only makes sense to invest in something that aligns with our risk levels.”
Funding winter
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In Southeast Asia, early-stage venture capital funding dipped 65% y-o-y to US$4 billion as of May 31, the lowest level since late 2019, based on data by Preqin. In Singapore, early-stage investments saw an 8.2% y-o-y drop in volume in 2022 — reflecting investors’ shift of focus from growth to sustainability, notes research by Enterprise Singapore and DealStreetAsia.
However, Huang offers a different view — as the pandemic began to subside in 2022, there was a surge in early-stage investments, driven largely by the availability of cheap money from government handouts and low interest rates. As inflation rose and interest rates followed suit in 2023, the investment landscape shifted dramatically.
“Suddenly, the cost of investment, which had essentially been zero, became significant. As a limited partner (LP) in a few VC firms, I saw fellow LPs questioning VC firms’ investment practices during the high-interest environment,” says Huang.
VCs, who act as gatekeepers of these funds, were under pressure, she adds. When the market was booming, they felt compelled to chase valuations to stay competitive. In tougher times, however, LPs started demanding accountability, returns and overall performance. This led to a “funding winter” in 2023 for early-stage investments, says Huang.
The first half of 2023 was particularly challenging, marked by smaller funding rounds and reduced check sizes despite sustained interest in deals. However, the market has been gradually recovering, with renewed interest and activity picking up in the second half of this year.
“For instance, at AngelCentral, we’re seeing a record-high number of memberships and engagement. My coffee chats — which are like sales calls where I share what we do and gauge interest in joining as members — have been oversubscribed. Membership has now reached an all-time high. This surge in interest is a promising sign that confidence in the market is returning,” she adds.
This is even despite the lapse of the Angel Investors Tax Deduction Scheme, which was available from March 2010 to March 2020 to encourage individuals to invest in start-ups. Under the scheme, an approved angel investor who invested a minimum of $100,000 in a qualifying start-up was eligible for tax deductions.
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When asked if the scheme could be brought back to promote greater participation, Spiegel-van den Steenhoven replies: “I don’t know, I am not a tax expert,” implying that the incentives were not as significant a factor when making funding decisions.
Moonshot deals
Dealmaking has been challenging over the past two years, but the situation has improved, albeit not yet to pre-pandemic levels. Quality deals remain plentiful, particularly with the rise of companies that have demonstrated their ability to survive and thrive despite the challenges posed by Covid-19.
One such company that Epic Angels has invested in is Qarbotech, a Malaysia-based agritech start-up. As a syndicate, Epic Angels participated in Qarbotech’s US$1.5 million seed extension round together with 500 Global, Better Bite Ventures, ID Capital and EQT Foundation. Founded in 2018, Qarbotech raised RM3 million ($907,195) in seed funding led by 500 Global and grants from Temasek Foundation as well as Malaysia’s Khazanah Nasional.
The improving deal landscape paves the way for better exits. As an asset class, angel investing is high risk and can yield significant returns, although the outcomes can be quite binary.
Based on angel investment network AngelCentral’s Angel Behaviour Survey Report 2024, 41.7% of angel investors report positive gains on their portfolio, of which 16.7% have realised returns between one to three times their initial investment. 22% of the respondents report overall losses, while the remaining 36.1% do not track their portfolio gains. This suggests that many are not investing primarily for financial returns.
While Huang has not made any “big” exits from her portfolio, she has been getting “small returns” in the form of dividends along the way. Her most significant exit to date was with One Animation, a locally based media company and production studio acquired by a division of Blackstone-backed Candle Media in 2022. Huang made an early-stage investment in the company in 2015. The financial terms of the acquisition were not disclosed, and Huang has remained tight-lipped about the exit proceeds.
Acknowledging that there are still angel investors that pursue the asset class for moonshot opportunities, Huang highlights the investing landscape has evolved over the years. “In the past, when we saw 10 times or 100 times returns, it was largely driven by inflated valuations and the availability of cheap capital.”
She adds: “Investors nowadays are much more practical. Funds are no longer throwing money at sky-high valuations. Founders need to understand this new reality and adjust their expectations accordingly. They must justify their valuations with tangible fundamentals rather than relying on hype or name recognition.”
