How Europe’s green tech ‘scale-ups’ can help tackle climate change

The seeds of innovation have long flourished in Europe and its start-ups were set to enjoy unprecedented growth, supported by plentiful seed funding and a political backdrop that prioritized both a digital and green agenda. Then came coronavirus.

Innovators seeking investment in their “scale-ups” – start-ups seeing accelerated growth after demonstrating a product-market fit – which often require complex and long-term investment were suddenly faced with new challenges.

The current uncertainty has left Europe’s economy facing difficult times, and this is particularly true for start-ups. But while the previous funding glut may have dried up, at least in part, the continent’s strong innovation ecosystem is ready for the recovery.

A new World Economic Forum report, Bridging the Gap in European Scale-up Funding, explores the challenges facing technology innovators seeking to regain lost momentum.

Stalled momentum

Europe’s start-ups generated around 2 million new jobs in 2019, more than any other sector, according to European Commission-backed platform EuropeanStartups.co, and new tech sector positions increased by 10% each year to the end of the first quarter of 2020.

The Forum report looks at how recovery from the crisis can realign governments, start-up founders and investors to develop innovations that address climate change and digitalization.

Europe has strong fundamentals for innovation, growth and economic prosperity, ranging from a strong education sector to firm regulatory systems. Forward-thinking policies like the Green New Deal aim to decarbonize the continent’s economy by 2050, for example, and the European Commission’s Sustainable Finance Action Plan looks set to transform the region’s financial sector.

Climate scale-ups, and green-tech companies specifically, are a vital part of achieving Europe’s green transition. These companies contribute sustainable products, services or programmes across a range of sectors, including power generation, raw materials, transport, agriculture and pharmaceuticals, among others, helping to meet the European Commission’s six environmental objectives, shown in the diagram above.

Mind the gap

Yet Europe’s start-ups lag behind their US counterparts in their ability to scale up, especially with new technologies needed to realize the continent’s ambitious climate goals. US investment in start-ups remains 3.4 times greater than in Europe, with a quarter of companies reaching scale, compared to just one in eight European companies reaching scale, the report shows.

Since 2015, the US has seen 2.8 times more billion-dollar tech IPOs than in Europe, partly due to the liquidity offered by US stock markets, the abundance of US venture capitalists and the high investment appetite of asset-rich US pension funds.

Here are 4 key areas in which investors, entrepreneurs and policy-makers need to come together to help close the investment gap for tech scale-ups.

1. Streamlining access to public funding for innovative start-ups

While public money offers a way for governments to attract top entrepreneurial talent, securing public funding can involve start-up owners navigating a minefield of bureaucracy and different national requirements. Obtaining public funding must be made more efficient and accessible to entrepreneurs.

2. Applying blended finance models

Developing cutting-edge technology often involves lengthy research and development commitments, both in time and capital expenditure, which require long-term funding. Europe’s venture capital funds may not be prepared to finance long development phases, so a blended approach is needed which combines both public and private funding.

3. Making it easier for new companies to partake in public-private procurement

Young companies often have difficulty competing with established corporations to sell new products and services, especially during uncertain economic times. Integrating new products into COVID-19 support packages, for example, can increase procurement opportunities for both private and public buyers, and promote closer collaboration between start-up companies in the support package.

4. Improving the voice of European growth companies in policy-making and standardization

European tech scale-ups need closer involvement in shaping the political and regulatory framework that will impact their growth and direction. Investing in industry associations can help companies treading a similar path to collaborate and help policy-makers to understand new concepts and realize their potential.

Eliminating the funding challenges facing the next generation of innovators will help foster an environment where sustainable technologies can scale up and prosper, which is vital to meet the continent’s drive to decarbonize by 2050.