VC funding gap puts Europe’s climate targets at risk, report warns

While Europe’s climate tech companies raised a record $13.2bn in 2022, investment is nowhere near the levels required to combat climate change, according to a new report by World Fund.

Specifically, analysts from the European climate tech VC, in collaboration with Cleantech Group and PwC, have found that investment needs are outpacing investment volumes at an exponentially increasing rate.

The numbers are telling. For the EU to reach its goal of reducing emissions by 55% by 2030, an annual investment of €1 trillion would be needed. By the same year, 29% of emission reductions would need to come from new technologies, such as batteries and renewable energy. And by 2050, 50% of emission reductions would need to come from technologies that are yet to be developed, as in the case of quantum computing.

World Fund highlights that in this environment, climate tech startups emerge as crucial drivers of transformation, but they require sufficient funding to do so.

“Climate tech startups are more than twice as likely to have a significant hardware component than a typical startup,” Daniel Valenzuela, the author of the report and World Fund’s Head of Impact and IR, told TNW. “This requires significant capital expenditure on R&D and tech infrastructure, as they seek to scale to the point where they’re actively removing carbon from our industries and economies.”

Since 2014, the EU has spent over €58bn in climate tech R&D from the Horizon Europe programme, with an additional €34bn in funding expected until 2027. This is accompanied by an annual €100bn investment from national R&D budgets.

Globally, this places the EU at the forefront of R&D capital allocation, ensuring the technological foundations on which to build businesses. But to retain this leading position, the report claims it’s critical to secure follow-up funding to scale these technologies.

This is where VCs can have a catalytic impact, according to World Fund. That’s because they’re able to support the fast technological and commercial de-risking of innovative climate tech solutions.

Yet, climate tech only represented 13% of the total VC funding in 2022. Specifically, the report identified that the largest funding gap is seen in later-stage VC, which targets the commercialisation of ready-for-market technologies. Namely, Series B funding accounts for a $13bn gap per year.

Valenzuela attributes this to two main factors. “On the one hand, we have seen new funds and first time managers come in, which are naturally smaller,” he explained. “On the other hand, there was a historic gap in Europe, and the players that do invest at that stage, are more generalists and only have limited capacities to understand the unique challenges and scientific lenses needed for scaling climate tech.”

But with climate action expected to create a multi-trillion dollar investment opportunity within the decade, it’s high time for both public and private actors to move faster. Especially for VCs, the report points to the growing role of science-led investment decision-making to gain a thorough understanding of the underlying climate science of a suggested target. This can range from the decarbonisation impact, to the technological barriers to be overcome.

“A well-directed scientific-led approach could overall unlock market dynamics towards climate effective solutions, overall accelerating the climate transition,” Valenzuela noted.

“Europe has the potential to lead the global climate tech revolution, and whilst we have lost a lot of time, it’s not too late to prevent the worst consequences of the climate crisis. We must grasp the full economic and environmental potential of the technological revolution unfolding before us,” said Danijel Visevic, Founding Partner at World Fund.

For the VC community, this means “doubling down” on areas such as climate deep tech and solutions to replace carbon-intensive industries, Visevic added.