How VCs and energy corporates are helping to fund the transition to a decarbonised economy

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The move towards a climate-neutral society represents the greatest transformation of our time and requires not only innovation but also considerable investment.

Proper funding is the only way to make new business models successful and achieve decarbonisation of the current emissions-intensive energy, heat generation, industry, transport and traffic sectors.

Start-ups and their investors make a significant contribution to achieving a climate-neutral society

The capital required to fund these start-ups has been traditionally provided in the form of venture capital (VC), but more recently it has been provided in other forms, such as energy corporates and corporate venture capital units CVCs.

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A study of over 50 investors found that

The interviews with VCs revealed a rather homogeneous picture regarding their investment activities

This was evident across all areas for the sourcing and screening process for start-ups, essential investment conditions, the level of the participation quota for initial investments, as well as typical requirements for business models and essential factors for success (above all, team expertise and general timing).

Venture capitalists are more cautious about hardware business models and prefer quickly scalable asset light business models

This is particularly in areas like artificial intelligence and machine learning when the investment focus is on energy and transport transition. Only a few VCs have considered the financing of new capital intensive technologies to be an option. Most consider a business model that involves a new hardware component if the hardware enables a digital, scalable business model.

Start-up evaluations under pressure – but not in all respects

In general, for 2022, we observed that start-ups were finding it much more difficult to raise fresh capital in both early and later stages than in 2021. However sustainability-related investments were far less affected by this problem.

Diverse Energy corporates

In contrast to VCs, the answers of the energy corporates that were interviewed on their investment behaviour show a much greater diversity. In line with this, there are also clear differences in the strategy and organisation of the investment activity, i.e. whether energy corporates have a corresponding corporate VC unit as a subsidiary, or as a fund with the corporate acting as key limited partner, or not.

Outlook and key learnings

Increasing focus on hardware business models

Investors are increasingly looking on complex and capital intensive hardware business models that address climate change. These include technologies aimed at reducing greenhouse gas emissions, such as fuel cells or technologies related to hydrogen production, storage and transport. Additionally, solutions ensuring a better management of the unavoidable consequences of climate change will become increasingly important in the coming years. Software solutions, especially in the field of AI, will continue to play a major role in successfully achieving the energy transition.

High expectations from deep tech start-ups – tomorrow’s unicorns?

Many market participants see the best growth opportunities for deep tech start-ups (where the technological innovation is at the core of the business model), especially in the climate tech sector, and expect the unicorns of tomorrow.

Energy corporates as innovation angels

With their market and technology expertise, energy corporates in particular seem well suited to take the risks at the early stages of deep tech start-ups.

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