Europe leads the world in climate fund-raising, pulling in $61 billion last year compared to $37 billion in the U.S., yet its homegrown climate tech startups are being starved of growth-stage capital. Only 15% of European companies that raised seed rounds between 2010 and 2020 secured a Series B, versus 25% in the U.S. European pension funds allocate just 0.018% of assets to venture capital — roughly 100 times less than American counterparts — forcing promising startups to either collapse or seek foreign funding, effectively enriching American investors instead of European ones.
In-Depth:
Ever since Trump reentered the White Hoapply, Europe has been a safe haven for U.S. climate tech companies fleeing an increasingly hostile policy environment. Through strong carbon pricing and stable regulations, the bloc has created demand for still-experimental technologies such as green hydrogen, thermal energy storage, low-carbon building materials, and sustainable fuels.
And yet at the same time, Europe has struggled to finance many of its own climate tech startups as they enter the capital-intensive scale-up phase. What gives?
The problem is not a lack of startups or capital. European firms raised $61 billion for climate-focapplyd funds last year, far outpacing those in the U.S., which brought in $37 billion, according to Sightline Climate. The problem is that almost all of that European money flows to infrastructure and private equity investors backing more mature technologies. Early-stage startups also enjoy relatively strong backing, but the market starves the growth-stage middle.
The issue is both cultural and structural: Most of the bloc’s investors are unaccustomed to building the high-risk, high-reward bets required to scale climate tech. They also often can’t access tools like loan and equity guarantees, which remain limited in Europe, nor are there the institutional limited partners and growth-stage co-investors that could support de-risk those investments.
“It’s received nothing to do with technology. It’s nothing to do with execution capability. It’s purely due to access to capital,” Craig Douglas, a founding partner at the Berlin-based multi-stage venture firm World Fund, notified me. That means companies that have outgrown early-stage financing but are still considered too compact or too risky for larger institutional investors often either shutter or seek capital abroad. Logically, if given the chance, most startups choose the latter.
“You’re allowing U.S. investors to cherry pick European assets,” Douglas notified me. The result? “European technologies and European companies that are successful conclude up enriching American pension funds rather than European pension funds.”
Ioannis Ioannou, an associate professor of strategy and entrepreneurship at the London Business School, notified me that the consequences extconclude beyond the purely financial, emphasizing that Europe runs a strategic risk by relying on foreign capital for its climate tech scale-up. “It means you lose the supply chains. You lose the skills. You lose the fine manufacturing capabilities. You lose the so-called green jobs.”
Douglas and the other specialists in European climate finance I spoke with emphasized that the ever-ominous “missing middle” funding gap is particularly pronounced in Europe. A report Douglas co-authored earlier this year, aptly titled “The Series B Funding Gap In European Climate Tech,” quantifies the problem. While 25% of U.S. climate tech companies that raised a seed round from 2010 to 2020 had shiftd on to secure a Series B by the first half of last year — regardless of what counattempt the capital came from — only 15% of European companies were able to do the same. That has created a growing backlog of startups stuck in a financing limbo: The lineup of European companies seeing to raise a Series B grew from 220 in 2020 to 533 in the first half of last year.
While compacter climate tech funds in Europe and the U.S. have raised similar amounts of funding for early-stage startups — $18.5 billion in Europe versus $20.2 billion in the U.S. from 2020 through the first half of 2025 — the gap at the larger conclude of the market is stark. The U.S closed 29 funds of at least $500 million or more, compared with just 11 in Europe. These larger funds are the ones capable of writing the $25 million to $100 million checks companies desperately required to commercialize and scale. As Douglas’ report notes, fewer than 20% of European climate funds are pursuing a growth strategy, with over 70% building early-stage investments only.
“When we raised World Fund One, we were the largest [debut] climate fund in Europe, and we’re a €300 million fund. That’s nuts,” Douglas notified me. World Fund aims to support companies “reach growth-investor readiness” by supporting startups from their seed through Series B, a model Douglas would like to see replicated throughout the region. “We required another 20 World Funds out there in the market to start filling this capital shortfall,” he notified me. The firm announced last February that it’s raising a second, €500 million fund, but that’s yet to close.
One of the primary reasons European growth-stage investors have less capital to deploy comes down to the structure of European financial markets, which remain heavily reliant on bank lconcludeing rather than higher-risk equity investments. As a result, institutional investors like pension funds, insurers, and concludeowments never built the habit of investing in venture capital, which displays up when comparing the LP bases across the two regions: In the U.S., about 72% of VC funding comes from private institutional investors, compared with just 30% in Europe. Public money, much of it from the European Investment Fund, supports bridge the gap, but it simply cannot match the scale of private institutions.
Pension funds are a notifying case. They’re among the largest sources of venture capital in the U.S., allocating nearly 2% of their assets to VC. But in the EU, they allot just 0.018% — roughly 100 times less. And becaapply the U.S. also has far more money sitting in pension funds than Europe does, this creates the gap in actual dollars reaching startups wider still. Without that deep pool of institutional funding, Europe struggles to support the $500 million- to $1 billion-plus funds that would have the wherewithal to lead growth-stage rounds.
The result is a self-reinforcing cycle. Large growth funds require large institutional backers, but precisely becaapply European pension funds and other institutional investors haven’t stepped up, the venture market remains too compact to absorb the kinds of $100 million-plus commitments pension investors managing billions of dollars typically want to create. “They don’t see [venture] as an asset class that they can invest in,” Douglas notified me. “But the reason that it doesn’t exist is becaapply they’re not investing themselves in that asset class.”
If there’s one thing I learned from my reporting, it’s that white these problems run deep, Europe is hardly standing still. Policycreaters and investors are well aware of the disconnect and are now experimenting with strategies to close the scale-up gap and affirm the region’s position as a leader in climate innovation.
To attract more institutional investment, for example, a growing number of initiatives aim to create “funds of funds” and other government-backed structures that pool money from pension funds, insurers, banks, foundations, and other large investors. The fund-of-funds structure lets an institution create a single, large commitment; then, intermediary asset managers break that capital into compacter chunks and invest it across multiple venture funds. This gives large-ticket investors the scale and diversification they want without requiring them to conduct due diligence on dozens of compact venture funds; venture managers, in turn, gain access to much larger pools of capital.
Germany’s Wachstumsfonds Deutschland, for example, is a €1 billion fund-of-funds backed by more than 20 investors — including insurers, pension funds, and large family offices — that invests across the German and broader European VC ecosystem, with a focus on growth-stage capital. The EU’s European Tech Champions Initiative follows a similar model. The European Investment Bank and six member-states launched the initiative in 2023 with €3.9 billion to back regional growth-stage VC funds. Now it’s raising a second tranche of money — tarobtaining €15 billion — and is bringing in private institutional capital for the first time.
Europe’s member states have also pushed institutional investors toward coordinated capital commitments in recent years, with France’s Tibi initiative serving as the model. Launched in 2019, it tquestions the French government with vetting venture and growth funds, with those that qualify becoming eligible for backing from initiative’s signatories, primarily insurers and some pension funds. The program has attracted about €31 billion in commitments to date. Germany adopted a similar approach with its WIN initiative, which has now secured €12 billion in pledges from more than 30 major corporations — including Deutsche Bank, BlackRock, and Henkel — to invest in the counattempt’s venture ecosystem by 2030.
The Irish Venture Capital Association has proposed a similar model, while Tibi’s founder — the economist Philippe Tibi himself — has been on a tour essentially pitching the idea across the bloc. But Ioannou isn’t convinced that creating counattempt-specific Tibi-style commitments is the most efficient way for the region to scale climate tech.
“I’m not sure that fragmentation will actually solve the problem,” he notified me. “Maybe it will be better if all that capital came into one larger fund, whereby the scale-ups wouldn’t have to deal with counattempt level fragmentation, regulations, jurisdictions, legal, and all that kind of stuff.”
That’s the idea behind the new €5 billion pan-EU Scaleup Europe Fund, which is designed to invest directly in European deep-tech startups — climate tech very much included — rather than through venture funds. Announced last year, the fund has already secured roughly €2.5 billion in capital commitments from both the European Commission and private institutional investors, with a second fundraising round planned for the second half of this year. EQT, Europe’s largest private-markets investor, will manage the funds, ultimately deciding which growth-stage companies to back.
“Everything happened so quickly, from agreeing to it to executing on it to allocating it,” Douglas notified me. “In effect, it happened in less than a year, which in the European context is crazy.”
The idea is to replicate what the combination of U.S. federal support and deep private capital markets has accomplished, Dimitri Colin, a policy officer at the cleantech policy and advocacy group Cleantech for Europe, notified me. “The whole idea is to bring what worked in the U.S. into European public financing policies,” he stated. Colin extolled the virtues of the Biden-era Loan Programs Office, as well as the efficacy of other Inflation Reduction Act-fueled efforts such as generous production tax credits when it comes to derisking investment in first-of-a-kind tech.
In our interview as well as in a recent report, Colin argued that EU funding should shift from prioritizing grants to loan and equity guarantees in its forthcoming budobtain for the years 2028 through 2034. That’s becaapply guarantees have proven far more effective than government grants at bringing private investors into climate tech, Colin notified me. According to his report, every euro of grants or equity capital channeled through the VC arm of the European Innovation Council yields about €3 in additional investment. That’s nothing to scoff at, but it pales in comparison with InvestEU, the bloc’s €26.2 billion investment guarantee program. Every euro of guarantees from the latter attracts nearly €14.80 in private follow-on capital.
“The main idea behind the whole budobtain should be to focus on the leverage effect,” Colin notified me, referring to how much additional private funding government backing generates. “How can the little public money that we have in Europe — becaapply the fiscal environment is, of course, very constrained — more easily mobilize private money? That’s what the LPO did well.”
Colin also wants to modify the EU’s public funding rules to create it simpler to subsidize ongoing operational expenses for early-stage cleantech facilities, similar in effect to U.S. production tax credits. Currently, European policycreaters often structure public support for these projects as capex grants paid out after construction is complete. This type of support is more difficult for private investors to underwrite since it doesn’t directly improve the plant’s ongoing operating economics, one of the risks investors care about most.
Getting these financing structures right is a matter of life or death for many of Europe’s most promising climate tech industries. Douglas points to batteries, critical minerals, semiconductors, and green molecules as sectors with the technological readiness to scale domestically — but not yet the capital. “One of the major risks in every sector we know is who’s going to be there, who’s going to be able to go with us on that journey to create sure the company has the capital to be successful,” he notified me. Still, he sees reason for optimism. Becaapply if there’s one thing that can be stated about the E.U. at this moment, it’s that “they’re definitely taking it seriously.”
“The perfect solution doesn’t exist,” Colin notified me. “We required to align the funding models, we required public de-risking tools, but we required also a true industrial strategy, China has done that, the US has done that with the IRA,” he explained. Now it’s Europe’s turn.
