There is a well-documented funding gap in Europe for companies scaling up.
Despite the fact that Europe creates more new startups than the US (and has consistently for every one of the past five years), the number of scale-up businesses in the EU, particularly unicorns, lags behind the US. While companies from the two regions have the same likelihood to scale to a $1 billion-plus outcome, the easier access to capital in the US has propelled more US companies to this milestone.
This creates significant headwinds for European start-ups, and is likely to be exacerbated for European climate tech companies, given the recent passing of the Inflation Reduction Act (IRA) in the United States, which mobilises over $370 billion to support the US’ green transition.
The positive news is that meaningful action is underway to address this first issue: bridging the funding gap in Europe. The European Investment Bank’s Scale-up Initiative committed €500 million to foster the growth phase of innovative European technology companies. And European managers, including us at Blume Equity, have raised dedicated pools of capital to invest specifically in Europe at this stage.
However, to truly address the funding gap for European growth stage climate companies, a European IRA equivalent that leverages the strength of the single market in partnership with a strong package of financial support is required. And, action is needed now. In the past three years, more climate-focused companies in Europe have been founded than ever before; however, as these promising companies look to accelerate growth once their market viability has been established, there is going to be more and more pressure to look to the US. European clean technology start-ups have attracted less than half as much investment as US counterparts since Washington unveiled the landmark package of climate subsidies and tax credits a year ago, industry research shows. If the US can provide them with both private capital for growth funding and public capital for subsidies, Europe runs the risk of losing home grown talent and critical IP.
We are seeing this start to play out; Northvolt, a leading Swedish manufacturer of lithium-ion batteries for electric vehicles, expanded production in the US. The IRA subsidises a factory in America by about $700 million, according to Northvolt. That compares to €155 million in incentives from Germany. Fortunately, Northvolt’s expansion in the US did not come at the expense of continuing to expand in Germany.
Europe’s response to the US’s IRA has been fragmented and underwhelming. While the US has used a ‘carrot’ via tax credits and climate subsidies, Europe has used a ‘stick’ with regulatory policy focused on penalising versus incentivising. Europe’s fiscal commitment pales in comparison to the magnitude of dollars behind the IRA. Europe must become a much more supportive environment for green companies scaling-up. There need to be similar incentives for European companies to ensure their competitiveness isn’t undermined by the vast capital favouring American companies.
As an American living in Amsterdam who has founded a growth equity climate-tech firm investing across Europe, I remain very bullish on the opportunity set in Europe. The number of high-quality European companies tackling climate change who have matured to the growth stage is incredibly promising. And Blume Equity is not alone in recognising this opportunity; investments going into climate tech in 2022 more than doubled its share of investment since 2021, according to Atomico’s State of European Tech 2023.
So as the wind begins to turn in support of these early stage companies, particularly from the private sector, the onus must now be on the public sector to provide a supportive regulatory environment, together with financial investment to cultivate the next round of tech unicorns. As always political support will be vital, and the next round of EU elections will be critical in showing the wider population are in favour of climate-friendly policies and a more interventionist role for national and EU leadership. Attention will be on the EU’s Strategic Agenda for 2024-2029, where EU leaders collectively discuss and agree the EU’s direction and goals for the next five years. Until then, private capital in Europe continues to need to lead the way, and we at Blume Equity are certainly staying busy.
I think Mariya Gabriel, the EU commissioner for innovation, research, culture, education and youth, says it best, so I’ll leave the final word to her: “I am convinced that we have the capacity and the will to make Europe the global powerhouse for startups, in particular in the new wave of tech innovations.”
The author is Clare Murray, managing partner of Blume Equity, a European growth equity firm.