False Promises or a Beacon of Hope? - The Role of Venture Capital in Low Carbon Transitions: Integrating Venture Capital into the Multi-level Perspective - An Empirical Mixed-methods Research of the European Climate Tech Venture Capital Landscape

Abstract

Climate Technologies have become increasingly important with the ever-pressing climate crisis and its large-scale consequences. They will play a defining role in transitions toward a low carbon future. The most impactful technologies must be selected thoughtfully and developed to become commercially viable and applicable on a large scale. Within that development, finance and mainly venture capital (VC) play a critical role as start-ups face funding gaps, so-called valleys of death, to become the new paradigm. The Multi-Level Perspective (MLP) framework has depicted how niche innovations become the new regime in low carbon transitions but has neglected the importance and role of VC in this context. Therefore, our goal was to assess the importance of VC for a low carbon transition, the evaluation and selection of the most impactful technologies, and the current state of the Climate Tech landscape. The research deploys a mixed-methods approach, using qualitative data from 12 semi-structured interviews with leading VC funds operating in Europe. We infuse our interview findings with the most recent industry data in the Climate Tech space. Our results show that in the context of the MLP, several aspects have given rise to increased VC activity in niche climate innovations, such as exogenous landscape factors, regime actors, and niche factors. Furthermore, our framework incorporates VC into the MLP. It provides a better understanding of VCs’ role, specifically providing capital to start-ups and their technologies to bridge the two valleys of death. These valleys occur when start-ups move from a prototype or lab setting to a demonstration stage and lastly to a large-scale commercialisation phase, potentially significantly reducing emissions. We specifically zoom in on the VC funds’ selection process and the frameworks they use to assess start-ups’ climate impact and find that a lack of data and resources, but specifically a lack of methodology, makes this challenging and incomparable. VCs have widely adapted the life cycle assessment when estimating a start-up’s climate impact; however, this tool lacks standardisation. Moreover, VCs seek to be more scientifically accurate in their impact projections while ensuring pragmatism. We conclude with precise recommendations to practitioners, such as focusing on hardware and Deep Tech solutions, more patient capital, and pioneering into neglected Climate Tech areas.