VC funding hole jeopardizes Europe’s local weather objectives, report warns

Europe’s climate technology companies may have raised a record $13.2 billion in 2022, but investment is nowhere near the levels needed to tackle climate change, according to a new World Fund report.

In particular, analysts from the European climate technology VC, in collaboration with Cleantech Group and PwC, have found that investment needs are outstripping investment volumes at an exponential rate.

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

The World Fund emphasizes that in this environment, climate technology startups are proving to be key drivers of transformation, but they need sufficient funds to do so.

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

Since 2014, the EU has spent over €58 billion under the Horizon Europe programme.

The EU is thus at the forefront of R&D capital allocation worldwide and ensures the technological foundations for the development of companies. However, to maintain this leadership position, securing follow-up funding to scale these technologies is critical, the report says.

According to the World Fund, VCs can have a catalytic effect here. This is because they are able to support the rapid technological and commercial mitigation of innovative climate technology solutions.

Still, in 2022, climate technology accounted for just 13% of total VC funding. Specifically, the report found that the largest funding gap is for late-stage VCs aimed at commercializing market-ready technologies. That’s because there’s a $13 billion per year gap in Series B funding.

Valenzuela attributes this to two main factors. “On the one hand, we’ve seen new funds and first managers come in, which are of course smaller,” he explained. “On the other hand, there was a historical gap in Europe and the players investing at this point tend to be generalists with limited capacity to understand the unique challenges and scientific perspectives required to scale climate technology.”

But with climate action expected to create a trillion-dollar investment opportunity within the decade, it’s high time both public and private actors acted faster. For VCs in particular, the report points to the growing role of science-based investment decisions in gaining a thorough understanding of the underlying climate science of a proposed target. This can range from the impact of decarbonization to the technological barriers to be overcome.

“Overall, a targeted, science-led approach could unleash market dynamics toward climate-impacting solutions, thereby accelerating overall climate change,” noted Valenzuela.

“Europe has the potential to lead the global climate technology revolution and while we have lost a lot of time, it is not too late to prevent the worst impacts of the climate crisis.” We must harness the full economic and environmental potential of the technological revolution that is unfolding before us,” said Danijel Visevic, Founding Partner of the World Fund.

For the VC community, this means a “double down” in areas like climate deep tech and solutions to replace carbon-intensive industries, Visevic added.

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