Europe needs to learn fast

A conversation with Jules Besnainou for our Whitepaper "Investing in climate tech: An opportunity for Europe". Jules Besnainou is the Executive Director of Cleantech for Europe, an initiative bridging the gap between clean tech leaders and policymakers. In his previous role as a Director at Cleantech Group, he advised the world‘s leading investors, corporates and governments on their cleantech projects.

While investment flow into climate tech declined globally in the second half of 2022, the European markets seemed more resilient than, for example, those in China and the US. What does that say about the state of European climate tech? 

It is good news that the investment landscape in Europe proved more resilient than elsewhere, but we are still experiencing acute funding gaps for clean technologies in the EU. While we are extremely good at funding research and early-stage companies, funding for Series B and beyond is still incredibly hard to find. Our data shows growth equity is the only category which declined in 2022. In other words, we are great at innovation but need to get much better at the industrialisation of clean technologies.

What are the consequences for affected companies? 

The story is often similar. The companies get acquired too early and on the cheap by a large corporation, or they get a lot of funding and demand from the US and move their business there. Some stay small, which means they will not generate the global climate impact they could have at scale. In short: Europe has produced a lot of climate tech in the last 20 years, but can you think of any global industry leader that has emerged from this?

How does this compare to the situation in the US? 

In the US, we see much more private as well as public capital. The number and size of VC funds targeting companies in their growth phase is much larger than in Europe. It is also much easier to go public as a scale-up in the US, and many companies successfully enter a technology stock exchange like the NASDAQ after growth equity rounds. In Europe, we neither have the investment culture nor the demand to provide a similar level of capital through this route. The Inflation Reduction Act in the US comes on top of this and offers simple, predictable and long-term public support for clean technologies.

Where does China stand in comparison? 

China has an edge in industrial policy. It is incredibly effective at scaling production capacities in a very short time, by providing a combination of incentives, demand, permitting, infrastructure and cheap capital. Look how they dominate the market for solar panels and, increasingly, wind turbines and batteries. They will aim for the same dominance in equipment like the electrolysers we need to produce all the renewable hydrogen we are planning on using. Europe needs to learn fast how to speed up the growth of whole industries from scratch. 

How can Europe close this gap? 

Europe focuses so much on its existing industry that it risks losing the next generation of industrial champions. If European money keeps focusing on the old economy, companies will lose their edge. To fix this, we must urgently address the needs of these newcomers, including simple funding mechanisms easily accessible to scale-ups, clear demand signals, accelerating permitting and certification, removing barriers to market access and building the necessary infrastructure to scale.

Where can European companies find the necessary funds? 

There is no shortage of money invested in Europe, but it is kept in banks, insurance companies and pension funds. Those institutions are not built to invest in new industries. For instance, their ticket size for investing in funds is at least €100 million per investment, a size that no cleantech fund in Europe can currently take in. What we need is a number of much larger cleantech VCs in Europe – ideally with public money seeding them. There is also plenty of public funding available, for example, the Innovation Fund, but applications are extremely challenging for innovative SMEs and most of the money ends up going to large incumbents. If we want to remain competitive with the US, this urgently needs fixing.

Why should public money support the growth of private investment vehicles? 

Public money can act as a catalyst for private capital to take some more risk. The European Innovation Fund (EIF) is a great example, as it has the potential to help institutional investors funnel more money into cleantech. The European Investment Bank is also increasingly acting as a leader in cleantech, helping private investors feel more confident to invest in the space.