European VC investment grows as money flows into energy sector

As another year of extreme weather events approaches, the energy sector has become the dominant VC investment sector in Europe.

That’s the finding of a new study by market intelligence firm Dealroom. According to data covering the first half of 2024, investment in European tech companies rose by 12 percent, with energy and climate technologies attracting $5.6 billion. By comparison, the artificial intelligence sector — also identified in the report as a magnet for VC cash — secured a total of $2.6 billion in investment.

While one swallow doesn’t make a summer, the increase in investment – ​​16 per cent in fact in the UK, where I live – seems to suggest that VCs are pulling the trigger on some of that dry powder we’ve been hearing so much about in the past year. In particular, the numbers bode well for the development of technologies that could – now or in the future – help mitigate the effects of climate change.

The report highlights hydrogen as a technology that is proving particularly attractive to the investment community, with companies in this market segment raising some of the largest funding rounds in Q2. For example, Paris-based hydrogen taxi company HysetCo raised €200 million, while green hydrogen company Tree Energy Solutions secured €140 million.

Yoram Wijngaarde, CEO and founder of Dealroom, says that energy investments tend to focus not on software but on companies that combine engineering with innovation. “Infrastructure is getting a lot of capital,” he says. That capital comes from a variety of sources, including corporate investors, generalist VCs and specialists in the sector.

So what’s the appeal? Gregory Dewerpe is the founder of noa. He describes himself as an investment firm “for the building world,” backing companies from seed to Series B. As Dewerpe explains, noa has a very clear goal. “For us, it’s about transforming and decarbonizing the world’s most polluting asset class,” he says in an emailed response to questions. “Energy is an important part of that focus on climate. Reducing energy use in buildings and switching to renewable electricity is the biggest lever to reduce the carbon footprint of existing buildings.”

Dewerpe acknowledges that investing in companies that are developing hardware requires a certain amount of patience from investors, but that should be seen in light of the benefits. “The reality is that many climate tech startups are hardware-based and require a lot of time and capital to grow. Investors need to be aware of that, but also aware of the potential long-term gains,” he says.

Customer Opportunities

The potential for high profits comes from the nature of the problem. Grids need to decarbonize. Heavy industry is increasingly required to reduce its carbon footprint. Governments are pushing for net-zero emissions policies. All of this means innovative companies are trying to reach a wealthy customer base hungry for solutions.

For example, Denmark-based Again has developed technology that converts CO2 into chemicals that can be used by heavy industry. The company now has a coal processing plant operating in Denmark and is working with chemical company HELM to develop low-emission products.

“Our target market is large-scale chemical manufacturers who are under pressure to decarbonize their operations,” says co-founder Max Kufner. “The chemical industry is extremely dependent on crude oil or natural gas as a feedstock for their products, which not only results in high greenhouse gas emissions during production, but also makes decarbonization extremely difficult.”

Investment prospects

Having financed the production plant with money from grants and private investors, Kufner is cautiously optimistic about the investment prospects in Europe.

“There is a huge demand for investment in Europe to enable the energy transition,” he says. “As Dealroom’s latest data shows, more VC investment is going into European energy companies than into the US. We have companies like 1KOMMA5°, Newcleo and H2 Green Steel, which are transforming critical parts of the world from solar panels to nuclear and green steel. This shows the confidence in European climate technology companies and the leadership that Europe is taking in the energy transition.”

Here’s an interesting comparison. Europe also has high hopes for its AI sector, but investment still lags behind the US. Energy is a different story. “I think energy is over-indexed compared to the rest of the world,” Wijngarrde says.

And that creates a huge opportunity for European innovators in green technology and energy to create market-leading companies. The challenge is likely to be keeping the investment flowing. Companies in this sector tend to be capital-hungry. “The question is whether the classic VC model is compatible with the capital needed to build these companies,” Wijngaarde says.

Ultimately, that’s a question for investors. Each will have their own strategy. Gregory Dewerpe outlines noa’s approach. “While we invest in hardware, we look for companies that have the ability to build businesses that are as low in assets as possible. “We’re also capital-intensive—we support companies that invest venture capital in R&D and work on products that have a clear path to commercialization. We’re not fans of models that require capital to go into production.”

There is widespread concern about the lack of climate action. Continued investment in green energy in Europe provides at least a modicum of comfort.