Achieving global carbon neutrality will require technologies that are still in the development phase today. "Green" start-ups play a key role here: they aim to develop new technologies in the energy and climate sector and bring them to market quickly - which could make all the difference in view of the worsening climate crisis.
However, investing in such technologies is risky: they take a long time to develop and require a lot of capital.In a new study published in the journal Nature Energy, researchers have analysed the financing strategies for "green" start-ups - and show that a mix of public and corporate investment can significantly increase the chances of success.
High risk in the valley of death
"Climate technology start-ups often get stuck in the so-called 'Valley of Death'," says co-author Kavita Surana, holder of the Endowed Professorship for Data Ecosystems for Environmental Accountability at WU and researcher at the Complexity Science Hub Vienna. The "Valley of Death" refers to the phase of a start-up in which a technical innovation has to be scaled up to a commercial product - which requires high investments, especially for climate start-ups that manufacture technically sophisticated, physical products. Many young companies that develop innovative solutions to the climate crisis fail at this stage: "To develop technologies that help us on the path to net zero, they need a combination of private and public investment."
In addition to Kavita Surana, researchers from the University of Maryland, the University of Wisconsin-Madison and the Technical University of Munich were involved in the study. They analysed 2,910 "green" technology start-ups that were founded in the USA between 2005 and 2020.
The analysis showed that the chance of a successful exit increases by 155% if publicly funded start-ups also receive investment from companies. If a startup has at least one so-called corporate investor, this increases the probability of a successful exit by 110% compared to startups that only receive public funding.
"To increase startups' chances of success and incentivise meaningful funding, we need to understand the impact of combining different sources of funding," says Kathleen Kennedy, professor at the Center for Global Sustainability at the University of Maryland and lead author of the study. "Our analysis shows that corporations are strategic investors that prefer to support start-ups in their core business areas and thus provide important knowledge from their sector. This helps start-ups to grow and scale and gives them additional advantages - such as access to supply chains and other resources."
The analysis showed that corporations invest primarily in startups with technologies they already have experience of: 42% of investments by transport companies go to transport startups, while 59% of investments by agricultural corporations go to agricultural startups.
"Corporate investments in start-ups now correlate with success. This suggests that many companies have learnt from previous losses and could play a more important role in the development of new climate technologies in the future," says co-author Morgan Edwards from the La Follette School of Public Affairs at the University of Wisconsin.
In order to develop sustainable climate technologies, however, a combination of public and corporate investment has proven to be ideal. "Public funding is essential, especially in the early stages of 'green' start-ups," says co-author Kavita Surana. "These start-ups need capital to grow in the long term - and strategic investments by companies play a more important role than short-term financing by venture capital companies."
"These often longer-term investments by corporate partners with 'staying power' are essential for climate innovations, which are often technology-intensive and have development cycles lasting decades," confirms co-author Claudia Doblinger from the Technical University of Munich.
Recommendations for innovation financing
In their study, the researchers make three recommendations for evidence-based innovation strategies:
- Public funding can spur innovation, especially for startups working on challenging technologies
- Corporate investment brings positive results, especially for start-ups that have already received public funding and registered patents. To incentivise this, government agencies could specifically promote public-private partnerships with high-risk climate technology start-ups.
- The risk of failure for climate technology start-ups is also high with corporate investments. However, other private investments - especially from venture capital companies - correlate even more strongly with the failure of a start-up. According to the researchers, this is primarily due to "corporate shark" practices, in which the expertise of a start-up is siphoned off in order to strengthen an established company. Politicians should put a stop to these practices.
According to the researchers, it is crucial to utilise various sources of funding for the development of climate technologies. To this end, the authors have previously identified large companies and corporations as important investors in start-ups as part of a research project funded by the Alfred P. Sloan Foundation. By analysing the effects of different sources of funding on the creation and scaling of climate start-ups, this study aims to support policy makers in developing more effective strategies to promote innovation to address the threat of climate change.
Details of the study and further information
Link to the study: https://www.nature.com/articles/s41560-024-01530-w
