4 ways to better fund Europe’s 'scale-ups' that tackle climate change

The seeds of innovation have long flourished in Europe. In 2019, its start-ups were set to enjoy unprecedented growth, with 99 companies reaching over $1 billion in valuation 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 – were suddenly faced with new challenges. Scale-ups require complex and long-term investment and face unique challenges such as untested business models, but it is critical to remember that they are also the creators of tomorrow’s life-changing technologies and highly skilled jobs.

The current uncertainty has left Europe’s economy facing difficult times, and this is particularly true for start-ups. But while funding has become more scarce, the case for investment in many of the continent’s growing tech companies remains strong.

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. Climate action was the number-one social cause for tech companies in 2019, and Europe’s legacy of industrial excellence and one of the best higher education systems in the world can help it lead a better and greener recovery after the pandemic.

Yet Europe’s start-ups lag behind their US counterparts in their ability to scale up, which is especially critical for the new technologies needed to realize the continent’s ambitious climate goals. Total 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.

As part of the Digital Europe initiative, the Digital Leaders of Europe community - comprised of founders, investors, corporate executives and policy-makers - identified innovation funding as one of the key issues for European companies in its 2019 Innovate Europe report. Now, their Bridging the Gap in European Scale-up Funding paper explores further how this relates to growth-stage companies (scale-ups), especially those using scientific innovation to address environmental challenges. Four ideas are presented within:

1. User-centric interaction with funding institutions. The ecosystem of European institutions offering funding for innovative ideas is robust, but navigating it can be confusing for founders and requires dedicated resources. Minimizing bureaucracy, treating founders as customers, and streamlining the process for both applications and funds disbursement could allow the best ventures to scale much more quickly.

2. Blended finance to support innovation. Successfully combining public and private funds can overcome the time and capital constraints on investment. Already used to mitigate risk on large-scale investment in developing regions, this approach can crowd in private capital, familiarize cautious investors with new asset classes such as growth-stage technology companies, and do so with a lower risk of loss compared to subsidies and grants.

3. More inclusive public and private procurement. The opportunity to work with a strategic buyer can present a lot more upside than a direct investment alone, especially for growth companies looking to trial products and collaborate with users to tailor their technology. More flexible frameworks and pilot projects can foster long-term growth.

4. Give founders a voice on regulation. New industries aligned with climate goals must be able to input on policy to ensure that the regulatory environment supports companies that are providing innovative solutions in their growth. For example, organizations such as the IPIFF for insect farming have gone a long way to support the development of new sectors.

Reducing 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. Governments, businesses and ecosystem builders can work together to trial these ideas and build out the capabilities needed to ensure that innovative and scientific applications aimed at climate solutions are not lost in the wake of COVID-19, and that recovery measures are taken in order that the future is shaped by innovation and sustainability.