The Tech Bear Market: Good, Bad And Ugly News For Climate & ESG Tech

The Tech Bear Market: Good, Bad And Ugly News For Climate & ESG Tech

The tech stock dominated Nasdaq Composite Index is down 30% compared to its November 2021 peak. According to Bloomberg, forward price/earnings ratios for publicly traded tech stocks have fallen from a 2021 high of 42 to the current level of 24. A combination of high inflation, interest rates trending upwards, uncertainty from the war in Ukraine and ongoing supply chain dislocations have moved financial markets into a “risk off” mindset. What are the implications of this technology bear market for firms operating in the previously high-flying EHS, ESG and climate segments?

Firstly, the good news. New investments and chunky acquisitions are still taking place. Last week, Insight Partners-backed AMCS Group, a circular economy digital tech provider acquired fast-growing EHS software vendor Quentic in a deal we estimate to be in the $420-$480 million range based on standard industry metrics. This week, Arcadia acquired 400-employee energy and utility data provider Urjanet to enhance its Arc energy data platform. Arcadia had recently raised $200 million in an investment round led by J. P. Morgan Asset Management. This shows that established firms with demonstrated product/market fit and positive cashflow can still expect to get healthy valuations between 10x and 14x revenue.

Secondly, the bad news. Firms which raised growth equity funding during the valuation bubble from mid-2020 to November 2021 will face a down round if they need to raise money in the next 12 months. Why? Valuations for businesses which have not fully proven out product/market fit and are not cashflow positive have fallen by more than 50%. At the end of 2021, amid a bidding frenzy, one sustainability software vendor sold for a 17x revenue multiple. Also in 2021, in a funding round, an ESG / carbon tech provider achieved a valuation above 20x revenues. In February 2022, just before Russia invaded Ukraine, carbon software vendor Watershed raised $70 million. The firm was founded in 2019, had around 50 employees and estimated revenues below $5 million. In the current “risk off” environment, valuations have reverted to more normal levels. For these ventures, the key market signal is whether investors from their last round reinvest.

Thirdly, the ugly news. Entrepreneurs looking for seed funding or Series A investments will need to work much harder and make the money last much longer than was the case six months ago. A lot of climate and ESG tech ventures launched by impressive founders were receiving term sheets from top-tier VCs like Sequoia and Tiger Global after a couple of meetings. Those days are over. Partners at PE firms are having to review their expectations of which portfolio firms will become unicorns or decacorns in the new economic environment. Investment discussions now focus on product/market fit, unit economics, efficiency growth and reducing cash burn to avoid raising cash every 12-18 months. Great teams and strong ideas will still get funded but at a slower velocity and lower volume.