Eco-innovators are destined to receive the lion's share of VC investments

Recent developments in the venture capital environment have presented a mixed picture, particularly with the projection of a $45 billion reduction in funding for European technology startups in 2023. Yet, amidst this backdrop, a notable exception emerges: the climate technology sector, especially within construction and real estate, is experiencing a robust influx of investments.

According to a report published by A/O, climate technology initiatives focused on the built environment, the eco-innovators, are now attracting an impressive 70% of all venture capital investments within the sector. This marks a significant increase from just 20% five years ago. Notably, this sector's early-stage funding in Europe has surpassed that of North America for the first time, indicating a shift in investment patterns favoring European innovations in climate technology.

The “built world”

The term “built world” refers to human-made structures and environments designed for living, working, and recreation, encompassing everything from architecture and urban parks to infrastructure for roads, buildings, and operations. The importance of this sector cannot be overstated, as nearly 40% of global greenhouse gas emissions are attributed to buildings, a figure that is predicted to double by 2050 without intervention.

The insights provided by A/O highlight a significant shift driven by the energy crisis and increasing regulatory demands for the decarbonization of the real estate and construction industries. This context has shaped investment patterns distinctly within the sector.

Despite a general downturn in venture capital funding, with a more than 30% decline in the first half of 2023 and a 40% reduction in climate technology investments overall, the built world climate tech sector experienced a modest 13% decrease in funding. This suggests resilience within the sector to the broader economic hiccups affecting the tech and startup landscape this year. Climate-related themes, particularly within the built environment, have shown a capacity to withstand adverse market conditions and a quicker recovery trajectory compared to the broader venture market.

However, the distribution of investments within the sector has not been uniform. Technologies such as retrofit installation services, grid storage, infrastructure monitoring, and renewable energy procurement have attracted significant attention and funding. On the other hand, critical areas like water efficiency solutions and heat pump technology have not received commensurate financial support. This uneven allocation of resources underscores the need for a more balanced approach to funding, ensuring that all aspects of climate technology necessary for a sustainable built environment are adequately financed.

The analysis further reveals a key moment in financing built world climate technology, with Europe and North America achieving parity in investment dollars for early-stage ventures for the first time. This shift is underscored by significant growth in Germany and the UK, which saw increases of 73% and 27%, respectively, contrasting with a 32% decrease in the United States. Notably, the top three cities attracting the most investment were all in Europe—London, Berlin, and Munich—highlighting the region's burgeoning role as a hub for climate tech innovation.

This development marks a significant milestone for Europe's ecosystem, demonstrating its increasing prominence and capability to foster groundbreaking innovations in the built world climate tech sector. The achievement of investment parity with North America signals a broadening of the global innovation landscape, with European cities emerging as key players in developing sustainable technologies.

The contrasting fortunes of early and later-stage investments underscore the nuanced dynamics within the climate tech funding ecosystem. While early-stage ventures in Europe are thriving, attracting significant interest and capital, later-stage companies are navigating a more intense sea, indicating a critical area for targeted support to sustain the momentum of innovation and growth in the sector.

A dynamic scene

While the venture capital landscape may exhibit fluctuations with decreases and increases, such dynamics are inherent to the industry's ever-evolving nature. Maintaining optimism amidst these shifts is imperative, recognizing that resilience and adaptability are key attributes in navigating the realm of VC investments.

One prevailing trend remains evident: eco-innovators' ascent in receiving the lion's share of investments.

• Embrace change. Recognize that fluctuations in venture capital investments are a natural part of the industry's evolution.
• Stay optimistic. Maintain a positive outlook amidst shifting trends, knowing that opportunities often arise from hard times.
• Cultivate resilience. Develop the ability to bounce back from setbacks and adapt to changing circumstances in the VC landscape.
• Foster adaptability. Remain flexible and open-minded to new opportunities and emerging trends in the market.
• Invest in sustainability. Consider allocating resources towards eco-innovators, as they increasingly attract significant venture capital investments.
• Innovate with purpose. Explore ways to integrate environmental sustainability into corporate strategies and product development efforts.
• Collaborate for impact. Seek partnerships and collaborations with eco-innovators and sustainability-focused organizations to drive positive change.