The Data Center Cooling Revolution - Part 2: Innovations, Market Momentum, and the Venture Perspective
Welcome to part two of our series on the future of data center cooling. In this post, we explore the market outlook, emerging technologies, and why this space is ripe for hard tech venture investment. If you haven’t yet, check out Part 1 here. For a wider look at the hard tech landscape, download the Hard Tech Report.
Market Momentum: A Rapidly Expanding Opportunity
The global data center market is experiencing explosive growth, fueled by digital transformation, AI, and the proliferation of connected devices. In 2024, the market stood at $242B and is projected to reach $584B by 2032. The data center cooling segment is growing even faster at a 16.4% CAGR, expected to reach $44B by 2030.
This growth is driven by:
The surge in data generation across industries
The rise of hyperscale and colocation data centers
The increasing importance of edge computing for real-time applications
Industry Landscape: Who’s Who in Data Centers
The growth in data centers today is dominated by hyperscalers, giants like AWS, Google, and Microsoft. Hyperscalers currently own and operate 41% of global capacity and this is expected to grow to over 60% of all capacity by 2029. Wholesale and colocation operators lease space and infrastructure to smaller players, and their market share is expected to continue to grow as enterprises shift their capacity from on-premise to leased spaces.
Data centers comprise four key components: the facility, equipment (including HVAC and plumbing), IT hardware, and software. For venture investors, the hardware layer, especially cooling technologies, offers the most compelling opportunities for technical advancement and impact.
Breakthroughs in On-Chip Cooling
Direct-to-Chip (D2C) Cooling:
D2C cooling uses cold plates in direct contact with server chips, addressing up to 80% of heat dissipation. This can reduce overall facility power needs by up to 27% when transitioning from air to liquid cooling. D2C systems are cost-effective and can lower total cost of ownership compared to immersion cooling.
Thermal Interface Materials and Heat Sinks
Thermal interface materials (TIMs) and heat sinks are solid-state solutions that help transfer heat efficiently from the chip to the cooling system. TIMs, often paired with cold plates, improve the interface between the chip and the cooling plate, reducing thermal resistance and enhancing heat extraction. Heat sinks, typically made from high-conductivity metals like copper or aluminum, further dissipate heat away from the chip into the surrounding environment or the next stage of cooling. These materials are essential for supporting overall system efficiency, especially as chip power densities continue to rise.
Breakthroughs in Rack-Level Cooling
Liquid Immersion Cooling
Liquid immersion cooling submerges entire server boards or racks in a dielectric (non-conductive) fluid, which absorbs and removes heat much more efficiently than air. This approach is especially effective for chips with thermal design power (TDP) exceeding 1,500–2,000 W, where traditional and even D2C cooling methods become insufficient. Immersion cooling supports high-density racks (10–50 kW/rack or more), making it attractive for hyperscale data centers looking to maximize performance per square foot.
The dielectric fluids used are engineered to be safe for electronics and can operate in single-phase (fluid remains liquid) or two-phase (fluid boils and condenses) systems. This method not only reduces the need for energy-intensive air conditioning but also eliminates water-cooling towers, providing significant energy and water savings. As server power densities increase, liquid immersion cooling is poised to become a key enabler for next-generation, ultra-efficient data center designs.
The Venture Perspective: Why Now?
We see the most promising venture opportunities in data center cooling at the server and rack level, where technical innovation can deliver the greatest efficiency and sustainability gains.
Why Hardware?
Cooling hardware, like direct-to-chip (D2C) and advanced liquid cooling, offers clear, measurable improvements in energy and water use. These solutions are typically sold directly to data center operators, creating a straightforward business model and a clear path to market.
Incremental Progress, Real Impact
Most advances in data center cooling are incremental, not revolutionary. As industry-wide improvements in Power Usage Effectiveness (PUE) have slowed, a series of small, well-executed innovations, particularly at the chip and rack level, can collectively deliver significant efficiency gains.
Business Models and Partnerships
Startups in this space usually sell equipment or components directly to operators, opening opportunities for strategic partnerships and acquisitions. Demonstrating technical differentiation and compatibility with existing infrastructure is key to success.
Looking Ahead
As demand for AI and cloud computing grows, so does the need for efficient, sustainable cooling. We believe venture-backed companies focusing on rack-level and on-chip cooling, leveraging advanced materials and system integration, are best positioned to drive the next wave of progress, and enable a more sustainable digital future while advancing planetary health.