This is what happened in startup investment in the third quarter of 2024: Explore the trends in sustainable investment, the impact of ESG frameworks on startup funding, and the rise of AI amidst concerns over its environmental impact.
The 2024 sustainable investment trend and its impact on startups
With significant elections and severe weather events affecting many parts of the world this year, governments are advancing sustainability and environmental regulations—investors are closely monitoring these developments. A Pitchdeck study of 527 respondents, including fund managers, private wealth, and investment consultants, found that around 33% said current economic and geopolitical events have influenced their focus on sustainable investing.
In this Pitchdeck study, sustainable investment was used as an umbrella term, covering both impact investment and the integration of ESG factors into the investment process. ESG is a framework for evaluating an organization's environmental and social impact, as well as its governance practices. Impact investment, meanwhile, focuses on generating positive, measurable social and environmental benefits alongside financial returns.
ESG's impact on due diligence
According to the study, 64% of respondents use an ESG framework as part of their investment strategy. Globally, the most cited reason for adopting ESG practices was the alignment of organizational missions and values with investment practices.
In Europe, ESG plays a critical role in due diligence, driven by current or anticipated regulatory requirements. Sectors poised to benefit from this focus include (in descending order): Energy, Water, Climate Tech, Healthcare, Renewable Energy, Agriculture, Education, Real Estate, and Food.
The study also revealed that environmental, social, and governance concerns have led investors to decline certain opportunities. 34% of respondents stated they rejected investments due to environmental issues identified during pre-diligence screening. Additionally, 27% cited social factors, such as a lack of gender diversity, while 33% pointed to governance concerns, including poor corporate governance practices.
A favorable climate for Sustainability startups
This environment creates promising opportunities for startups in sectors like Energy & Clean tech, Sustainability, and Healthcare, which are likely to benefit from regulatory support and growing investor interest. For instance, Biotech has led the largest number of acquisitions worth over a billion dollars in 2024 (Source: Crunchbase).
Startups that align with ESG and impact investing criteria are in a strong position to attract capital, particularly in regions like Europe, where regulatory requirements drive sustainable investments.
With 64% of investors incorporating ESG frameworks, startups with robust environmental, social, and governance practices have a higher likelihood of passing due diligence and securing funding. Founders need to emphasize how their businesses meet or exceed ESG standards to build investor trust and secure deals.
AI's dominance in global startup funding
While sustainable sectors hold potential, global investment trends show that AI has dominated in 2024. In the third quarter, AI funding surpassed both healthcare and biotech, the second-largest sector, which raised over $15 billion, according to Crunchbase data. AI led all sectors by attracting nearly $19 billion in Q3, accounting for 28% of total venture capital.
However, this surge in AI investment contrasts with sustainability goals, as AI's rapid growth is driving a significant increase in power consumption. A Gartner report predicts that AI could consume up to 3.5% of the world’s electricity by 2030. Notably, OpenAI secured a massive $6.6 billion investment at the start of Q4, which could value the company at $157 billion (Source: OpenAI).
Global startup funding in Q3 2024
Despite the growth in AI, global venture funding overall declined in Q3 2024, reaching $66.5 billion, according to Crunchbase. This represents a 16% drop from the previous quarter and a 15% decrease year-over-year, compared to the $78 billion invested in Q3 2023.
An analysis of global funding through the third quarter shows that seed funding has remained flat year-to-date but is expected to increase as more rounds are reported post-quarter. Early-stage funding is trending upwards by approximately 10%, while late-stage funding has dropped by about 20%. The largest global funding round went to Waymo, an autonomous driving service, which raised $5 billion from its parent company, Alphabet.
Continued consolidation in VC investment
In venture capital, the trend towards larger but fewer funds continues. The average fund size for startups hit a record high of $168 million in the first nine months of 2024. Besides a decline, North America remains the top region of focus for VCs, but Europe is gaining ground on Asia as the second most popular region for venture investment (Source: Venture Capital Journal).
In North America, VCs invested $40.5 billion across all stages in Q3, marking a 10% decline from the prior quarter but a 22% increase year-over-year, according to Crunchbase. However, these figures do not include the recent OpenAI investment.
Political uncertainty, such as the upcoming U.S. elections, may also impact cash flows. Around 30% of firms delayed or scaled back investments due to concerns over election-related uncertainty, according to a survey conducted by the Federal Reserve Banks of Atlanta and Richmond and Duke University’s Fuqua School of Business (Source: Reuters).
European startup funding in Q3 2024
Venture funding for European startups totaled $10 billion in Q3 2024, the lowest level since Q3 2020, according to Crunchbase. Funding in Europe fell sharply, dropping 36% quarter-over-quarter and 39% year-over-year. Among the top three European startup hubs, only Germany saw an increase in funding, both quarterly and annually.
Despite this decline, a rebound is possible in the fourth quarter. Venture investment in Europe has fluctuated during the current downturn, ranging from $12 billion to nearly $17 billion, offering potential for recovery in the coming months.
Sources:
Pitchbook
Garntner
Crunchbase
Venture Capital Journal
Open AI
Reuters