As the world braces itself for another year of extreme weather events, energy has emerged as the dominant sector for VC investment in Europe.
That’s the finding of new research carried out by market intelligence company Dealroom. According to figures covering the first half of 2024, investment in European technology companies has risen by 12 per cent, with energy and climate tech attracting $5.6 billion. In comparison, the artificial intelligence sector – also identified by the report as a magnet for VC cash – secured investment totalling $2.6 billion.
Although one swallow doesn’t make a summer, the increase in investment – actually 16 per cent in the U.K. where I’m based – does seem to suggest that VCs are pulling the trigger on some of that dry powder that we heard so much about last year. In particular, the figures bode well for the development of technologies that may – either now or in the future – help to mitigate the effects of climate change.
The report singles out hydrogen as a technology that is proving particularly attractive to the investment community, with companies in that corner of the market raising some of the biggest rounds of the second quarter. For instance, Paris-based HysetCo (hydrogen powered taxis) raised €200 million and Green hydrogen company Tree Energy Solutions secured €140 million.
Yoram Wijngaarde, CEO and founder of Dealroom says investment in energy has tended to focus not on software but on businesses that combine engineering with innovation. “Infrastructure is raising a lot of capital,” he says. This capital is coming from a range of sources, including corporate investors, generalist VCs and specialists in the sector.
So what is the appeal? Gregory Dewerpe is the founder of noa. Describing itself as a “built-world” investment firm, it backs companies from Seed to Series B. As Dewerpe explains, noa has a very clear purpose. “What’s important to us is transforming and decarbonizing the world’s most polluting asset class,” he says in response to emailed questions. “Energy forms a major part of this climate focus. Reducing energy consumption in buildings and shifting the source of energy to renewable electricity is the biggest lever to reduce the carbon footprint of existing buildings.”
Dewerpe acknowledges that investment in businesses that are developing hardware in particular requires a degree of patience from investors, but this has to be seen in the light of the rewards. “The reality is that many climate tech startups are hardware-heavy and require a lot of time and capital to scale. Investors need to be aware of this but also aware of the potential long-term returns,” he says.
Customer Opportunities
The potential for high returns stems from the nature of the problem. Grids must decarbonize. Heavy industry is increasingly required to reduce its carbon footprint. Governments are striving to deliver on net zero policies. All of that means innovative companies are seeking to address a deep-pocketed customer base that is hungry for solutions.
For instance, Denmark-based Again has developed a technology that converts CO2 into chemicals that can be used by heavy industry. As things stand, the company has a carbon transformation facility running in Denmark and is working with chemicals company HELM on the development of low-carbon products.
“Our target market is large-scale chemical manufacturers who are under pressure to decarbonize their operations,” says co-founder Max Kufner. “The chemical industry is extremely reliant on oil or natural gas as a feedstock for its products, which not only creates high greenhouse gas emissions during production but also makes it extremely difficult to decarbonize.”
The Investment Outlook
Having funded its production plant with money from grants and private investors. Kufner is cautiously optimistic about the investment outlook in Europe.
“In Europe, there is a very strong appetite for investment to enable energy transition,” he says. “As the recent Dealroom data shows, more VC investment is going into European energy companies than into US companies. We have companies like 1KOMMA5°, Newcleo and H2 Green Steel which are transforming critical parts of the world from solar panels to nuclear energy and green steel. This demonstrates the confidence in European climate tech companies and the leadership that Europe is taking in the energy transition.”
There is an interesting comparison here. Europe also has high hopes for its AI sector but investment still lags behind that of the U.S.. In energy it is a different story. “I see Energy as over-indexing when compared to the rest of the world,” says Wijngarrde.
And that creates a major opportunity for Europe’s green tech and energy innovators to create market-leading companies. The challenge, perhaps, is to keep the investment coming. Companies in the sector tend to soak up a lot of capital. “There is a question as to whether the classic VC model is compatible with the capital needed to build these companies,” says Wijngaarde.
Ultimately, that’s a question for investors. Each will have its own strategy. Gregory Dewerpe outlines noa’s approach. “While we do invest in hardware, we look for companies that have the ability to create asset-light businesses as far as possible. “We are also conscious of capital intensity – we support businesses that are investing venture equity into R&D and working on products that have a clear path to commercialisation. We’re not fans of models that require capital to be deployed in manufacturing.”
There is widespread concern about lack of action on climate. Continued investment in green energy in Europe provides at least a small crumb of comfort.