Mike D’Aurizio and Christophe Defert

Previously in this series, we’ve made the case that climate tech has entered a new ‘intelligence era’ – where there’s a big opportunity to make all the climate infrastructure built over the last 25 years work smarter and more efficiently.

Crucially, this isn’t just a distant hope for a better future. This is a tangible near-term investment opportunity, with the potential to deliver strong financial returns and impact in lockstep.

In our view, however, there’s currently a major barrier to this succeeding at scale: a lack of capital to help startups with proven technologies scale up to become the successful technology companies of tomorrow.

In climate tech, this is the most significant funding gap. Happily, in the intelligence era, it’s getting easier to resolve it.

The start-up/ scale-up gap

For early-stage climate tech startups, there are numerous pre-seed and seed investors willing to bet on ‘moonshot’ potential, even before commercial proof exists. It’s true that there has been relatively less capital flowing into this end of the market in recent years, and the level of diversification is arguably not what it should be*. But promising technologies, with good scientific credentials, can still reliably get funding.

At the other end of the spectrum, once a company has established itself and scaled revenue meaningfully, there are later-stage and infrastructure investors that can step in and provide the capital required to build the company.

In our experience, the hardest capital gap for climate tech founders and their companies to navigate sits in between these two: the transition from Seed to Series A, and then to Series B. By this point, a company has typically shown that its technology works and found early commercial traction. Most pre-Seed and Seed investors do not have large enough fund sizes to support a company like this through the next growth phase; but it hasn’t yet reached the scale of revenue that de-risks it for later-stage investors, who are looking to put meaningful amounts of capital to work.

As a result, there are fewer investors around that want to underwrite this stage. We recently ran an analysis of over 150 climate tech GPs across Europe and North America, and by our reckoning there were about half as many funds looking to invest in this space as there were for seed and growth.

This capital gap is particularly acute in Europe: by Series B, Europe faces a ~$13.5bn funding gap relative to the US**. So European companies are systematically under-capitalised relative to American peers, at a stage of maturity when they most need growth capital.

Broader funding trends are compounding this problem. Although the headline total for global climate tech investment increased slightly last year (after three straight years of decline), this was primarily driven by a few larger, later-stage deals – in areas like nuclear, grid technology and data-centre power – rather than a genuine recovery across the market***. Seed-stage investment was down 20%. And Europe didn’t share in the rebound at all, with total funding falling to its lowest level since 2020.

Intelligence as an accelerant

Some of these emerging ‘moonshot’ technologies paint an exciting picture of what the future could look like. But we think that in the next 5-10 years, climate tech companies that have moved into the Series A and B stages represent a particularly attractive investment opportunity, both commercially and from an impact perspective.

Companies at this stage have already shown their technology works: that it can improve efficiency in the multi-trillion-dollar energy or manufacturing sectors, and has proven product-market fit. This is a very different risk profile from seed-stage investments (or even some of the biggest deals labelled as growth, which are in practice more like early-stage venture at scale). And there is a clear path to liquidity. If these companies can get the support they need to scale their operations, they can deliver compelling returns and impact right now.

Thanks to the intelligence era, this opportunity is becoming more significant. The software-, data- and AI-led companies that can make our existing climate infrastructure more productive tend to be more capital-efficient, higher-margin, and quicker to prove out commercially than the hardware investments of the prior 25 years. That combination – proven technology, efficient scaling, faster proof points, and tangible impact – makes the Series A/B stage more attractive to underwrite.

Over time, policy may be a useful tool in tackling capital gaps: reforms that free up domestic institutional capital to invest in a broader range of asset classes (like the UK’s Mansion House reforms) have the potential to unlock new pools of funding for climate tech start-ups.

But ultimately, the most effective way to attract more capital into this space is to show that investing in these startups, and helping them develop into the big scale-up successes of the next decade, can deliver meaningful financial returns and impact in the near term. The intelligence era provides us with a great opportunity to do that.

* S2G Investments: https://www.s2ginvestments.com/insights/report-illusion-of-crowds (“Roughly 1.7% of early-stage deals between 2021 and 2025 absorbed approximately 45% of the capital raised at that stage”)

** WorldFund: https://www.worldfund.vc/knowledge/series-b-funding-gap-in-european-climate-tech

*** Sightline Climate (CTVC) 2025 Climate Tech Investment Trends Report: https://www.ctvc.co/40-5bn-and-8-upturn-as-power-demand-drives-25-investment/