Why US-Based VCs are Investing Big in European Climate Tech
American Venture Capitalists Driving Force Behind Europe's Climate Technology Market. What is Their Influence and How Can Entrepreneurs Attract Their Investments?
US VCs investing heavily in European climate tech
In the world of climate technology, uncertainty reigns supreme. New markets are emerging, winners are yet to be determined, and policies fluctuate, affecting the commercial viability of ventures. While the US established itself as a leader in funding climate tech ventures, Europe has been trailing behind. However, recent trends suggest a shift in the landscape, with US investors showing a growing interest in European climate tech startups.
Trends & Predictions
2023 proved to be a challenging year for venture capital globally, with a significant downturn in startup funding. However, the climate tech sector in the EU demonstrated remarkable resilience, only experiencing a 6% reduction in investments. This resilience is even more impressive when compared to the 40% decline in total US investment in the sector. Europe is catching up and nearly equaling climate tech investment in the US.
Julia Reinaud, Senior Director at Breakthrough Energy, credits this European resilience to the strategic direction set by the Green Deal and various national commitments to climate and energy plans. The supportive policy environment in Europe, along with precise targets like renewable energy quotas and sustainable aviation fuel goals, have provided direction and security for investments.
US Investor Participation in EU-based Deals
Over the past five years, there has been a notable increase in US participation in European deals. While US involvement experienced a slight decline in 2023, dropping to 16%, it is still significant considering the overall plunge in US investor participation in Europe across all sectors. Gabriel Scheer, Senior Director of Innovation at Elemental Excelerator, attributes this trend to the wealth of innovation and early-stage research in Europe, along with the supportive policy environment that presents an additional stimulant for US capital.
Scheer also highlights the unique urban design of European cities and the diverse market consisting of many countries and cultures, making Europe an ideal testbed for scaling a company. This growing interest among US investors creates a dynamic where once a few invest, others are quick to follow, eager for a share of Europe’s potential.
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Ticket Size
When it comes to investments, the trend is clear: go big or go home. US investors tend to participate in larger deals. While they only have a presence in 9% of deals valued between $0-1 million, this figure jumps significantly for larger investments. For deals valued between $10-50 million, US investor participation stands at 33%. It further increases to 37% for deals between $50-250 million and reaches 38% for deals exceeding $250 million.
This trend emphasizes the critical role of US capital in scaling European climate tech ventures, particularly those requiring substantial funds for production and manufacturing. The European ecosystem often lacks the necessary resources for such large-scale investments.
Country Differences within Europe
Climate tech investments in Europe are distributed across various countries. In the absence of US investors, France leads with 12% of deals, outpacing Germany’s 9%. However, when US investors are involved, Germany attracts 15% of such deals, surpassing France. Other countries like Switzerland, Sweden, the Netherlands, Spain, and Norway also account for a significant share of deals.
How do European Startups Attract US Dollars?
Understanding what US investors seek in European startups is crucial for those aiming to attract transatlantic capital. According to Gabriel Scheer, US investors’ criteria for European founders closely mirror what they look for in their US counterparts.
To attract US capital, founders should first prove their model locally by achieving success across different European markets. This step validates the business and demonstrates the ability to scale and adapt across different cultures and regulations, signaling potential to US investors.
Exploring a wide range of funding options beyond venture capital is also essential, especially for hardware startups. The US offers grants and other mechanisms that could be vital for growth.
Seeking advice from US-based VCs provides insights into the US market, helping tailor the approach to attract US investment. Building relationships with US investors and potential partners is crucial.
Startups should avoid the “engineer’s syndrome” by offering a vision that emphasizes not just technology but also market impact and potential. Understanding the target market, customer needs, and dynamics is key to success with a US VC.
Forming a strong team and strategic partnerships is crucial not only for attracting US investment but also for navigating the global market’s competitiveness and dynamics.
The Future of European Climate Tech
The increasing interest from US investors in European climate tech startups highlights the potential for growth in the European market. Strategic initiatives, such as the European Investment Fund and various national efforts to close the fundraising gap, further de-risk investment opportunities and stimulate US investors to get on board.
As the climate tech sector continues to evolve, the collaboration between US investors and European startups is likely to strengthen. The exchange of capital, expertise, and innovation will drive advancements in climate technology, benefiting both continents.
While uncertainties, such as economic conditions and upcoming elections, may impact investment patterns, the long-term prospects for European climate tech remain promising. The resilience of the European ecosystem, coupled with strategic initiatives, positions Europe as a destination for US capital and a hub for climate innovation.
Q&A:
Q: What are the main factors contributing to the growth of European climate tech startups?
A: The growth of European climate tech startups can be attributed to several factors. One key factor is the supportive policy environment in Europe, including initiatives like the Green Deal and precise targets set for renewable energy and sustainable aviation fuel. Additionally, European countries’ national commitments to climate and energy plans have provided direction and security for investments. The European Investment Fund and various national efforts to close the fundraising gap for startups also contribute to their growth.
Q: What advantages does Europe offer for US investors in the climate tech sector?
A: Europe offers several advantages for US investors in the climate tech sector. The wealth of innovation and early-stage research in Europe makes it an attractive investment destination. The unique urban design of European cities and the diverse market consisting of many different countries and cultures serve as an ideal testbed for scaling companies. Furthermore, the supportive policy environment, exemplified by the growth in sectors like offshore wind or micromobility, presents an additional stimulant for US capital to get involved.
Q: Why do US investors tend to participate in larger deals in Europe?
A: US investors tend to participate in larger deals in Europe because these deals often require substantial funds for production and manufacturing. The European ecosystem, although resilient, often lacks the necessary resources for large-scale investments. Therefore, US capital plays a critical role in scaling European climate tech ventures, enabling them to reach their full potential.
Q: What can European startups do to attract US capital?
A: European startups can attract US capital by proving their model locally and achieving success across different European markets. This demonstrates the ability to scale and adapt to different cultures and regulations, making them more attractive to US investors. Exploring a wide range of funding options beyond venture capital, seeking advice from US-based VCs, and building relationships with US investors and potential partners are also important. Offering a vision that emphasizes market impact and potential, along with a deep understanding of the target market, customer needs, and dynamics, is crucial to capturing US investors’ interest.
Reference List: 1. Europe’s VC Funding Landscape 2. Investors’ Predictions 3. Europe’s Struggle to Crack the North American GPS Market 4. Africa-Focused Funds Find Feet Amid Downturn 5. First Reported Crash of Cybertruck 6. Gender Pay Gap in European Tech
