Climate tech VC ArcTern Ventures closes $450-million CAD Fund III from large institutions

ArcTern Ventures co-founder and managing partner Murray McCaig.
ArcTern’s LPs include TD, CPPIB, Allianz, OPTrust, Church Pension Group, and Credit Suisse.

Toronto-based ArcTern Ventures has secured $450 million CAD ($335 million USD) in commitments in the final close of its third climate technology fund.

This makes ArcTern Fund III more than double the size of the venture capital (VC) firm’s second fund. In an interview with BetaKit, ArcTern co-founder and managing partner Murray McCaig said that Fund III will be a “rinse and repeat” of Fund II but on a larger scale, and see ArcTern back more Series A and Series B stage climate tech startups across North America and Europe, and reserve more follow-on capital to support them.

These commitments make ArcTern Fund III more than double the size of the VC firm’s second fund.

ArcTern has claimed that these commitments exceed its $300-million USD Fund III target, but reporting from The Globe and Mail indicates that ArcTern was initially planning to raise up to $400 million. When asked about this discrepancy by BetaKit, McCaig claimed that ArcTern’s initial target was always $300 million. Regardless, Fund III’s final size represents a significant amount, especially in today’s challenging fundraising environment.

The VC firm’s latest fund is being financed by a bevy of big-name institutional backers. Fund III’s limited partners (LPs) include new investors Allianz, Church Pension Group, OPTrust, and Credit Suisse Asset Management, existing LPs TD Bank Group and the Canadian Pension Plan Investment Board, and other large, undisclosed players.

“They want to see you’ve been doing this for a while because experience matters,” said McCaig. “Now that we’ve reached that stage, we’re able to attract this capital. These are some of the biggest, smartest investors in the world, and it’s good to see they’re thinking about how to decarbonize and they see it as an investment opportunity.”

Speaking to what it was like raising a fund in this environment, McCaig noted that a “huge proliferation” of climate tech funds have been launched in recent years, which has made the space more competitive. This, coupled with a market downturn, made things a bit more difficult for ArcTern this time around. McCaig acknowledged that it took a lot of work, persistence, clear messaging, and strong performance to stand out amid this more crowded field.

ArcTern’s third fund will focus on “early growth-stage” companies that are developing software, hardware, and marketplace solutions capable of reducing emissions in fields like renewable energy, clean mobility, the circular economy, sustainable food, and agriculture and industrial decarbonization.

RELATED: Active Impact Investments launches third climate tech seed fund with $70 million in initial commitments

ArcTern was founded in 2012 on the premise that transitioning to a carbon-neutral economy “will disrupt all industries and present an unprecedented opportunity for outsized financial returns.” Formerly the MaRS Cleantech Fund, ArcTern is part of a group of Toronto-based VC funds that have come out of MaRS, alongside Amplify Capital, StandUp Ventures, and Graphite Ventures.

Today, ArcTern represents one of the world’s largest dedicated climate tech VC funds. Headquartered in Toronto, ArcTern also has offices in Oslo, Norway and San Francisco. The VC firm’s Canadian portfolio includes Vancouver’s Clir Renewables, Toronto-based discounted food marketplace Flashfood, Toronto energy storage company Hydrostor, and Vancouver-based AgTech firm Terramera.

ArcTern’s $30-million CAD first fund focused on pre-seed startups. Through its $200-million second fund, the firm broadened its geographic focus and moved to a later stage of investing. ArcTern finished making new investments out of Fund II last summer.

While its strategy will remain the same, Fund III comes with a leadership change for ArcTern, as the firm’s co-founder and former managing partner Tom Rand transitioned to operating partner in 2023. According to McCaig, Rand is taking a break to focus on writing a new book, but remains involved with ArcTern. McCaig and Marc Faucher, who joined ArcTern in 2020, continue to lead the firm as managing partners.

RELATED: Two years after Graphite Ventures spinout, MaRS IAF is ready to invest again

ArcTern has already invested in eight startups across Europe and the United States via Fund III, through which it aims to support 25 companies in total. While the VC firm has yet to make any investments in Canada out of Fund III, McCaig said it has been exploring opportunities north of the border, and hopes to back more Canadian startups provided they have a global focus.

“Being a fund that is a bit more international now, when we do make an investment in a Canadian company, we can really help them with international fundraising and business development that some other Canadian-only funds aren’t able to do,” said McCaig.

ArcTern Fund III marks the latest in a series of new cleantech-focused Canadian VC funds that have been announced in the past few months. Other firms to launch new funds since November include Diagram Ventures, Active Impact Investments—which like ArcTern, is also on its third climate tech-focused fund—and Spring Impact Capital.

Unlike some other climate investors that back more speculative solutions, ArcTern is focusing its efforts on where it can drive impact today. “For us, the carbon abatement and carbon reduction requirements in the next decade [are] absolutely critical,” said McCaig, who noted that Fund III will be “laser-focused” on decarbonization and startups capable of delivering both “a massive reduction in carbon emissions” and near-term revenue.

RELATED: Diagram Ventures announces new $60-million VC fund to build and back early-stage cleantech startups

“We’re looking for companies with some commercial traction, because not only do we want to see them growing top line [revenue] as rapidly as possible, but as we always say, you’re not having [an] impact if you’re not making money,” said McCaig.

ArcTern typically leads rounds and takes board seats. Its initial cheque sizes for Fund III will be between $5 million USD and $10 million, with up to a total of $35 million allocated in total per company, including for follow-on support. McCaig expects ArcTern to deploy 70 percent of Fund III across Canada and the United States and put the remaining 30 percent to work in Europe.

Per Crunchbase, Canada moved up the global cleantech ranks in 2023. Cleantech incentives rolled out by the Government of Canada and the United States have been positive news for the ecosystem. However, startups in the space have not been immune from current market conditions, and the recent Sustainable Development Technology Canada funding pause has made things more difficult for early-stage cleantech companies across the country.

McCaig noted that climate tech has not been as hit as hard as other sectors of the VC market during the economic downturn. “Why? Because more institutional money wants to go into this area. And I think we’re going to see an extremely strong bounce back.”

“The thing with climate tech is [it’s] a great place to put your money in the long term, because the climate crisis is only getting worse, unfortunately. We need innovative solutions, and there’s going to be an enormous amount of capital going into those innovative solutions over the next couple of decades,” McCaig said.

UPDATE (01/22/24): This story was updated to include information and comments from ArcTern co-founder and managing partner Murray McCaig.

Feature image courtesy ArcTern Ventures.

Josh Scott

Josh Scott

Josh Scott is a BetaKit reporter focused on telling in-depth Canadian tech stories and breaking news. His coverage is more complete than his moustache.

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