Writer: Amarachi Ugochukwu
Date Written: 15/01/2025
Venture capital (VC), in one sentence, is money invested into startups with high growth potential by VC funds. In exchange for equity, the businesses not only receive financial support for hiring and product development, they also gain access to the entrepreneurial expertise and network of fund partners and managers. Impact investing specifically refers to the redirection of funds, such as venture capital, into purpose-driven businesses. While impact investment theses are up to the fund and investor, popular investment areas include climate technology and education. This trend has gained significant momentum since the 2010s, with major VC firms like Andreessen Horowitz and Sequoia launching dedicated impact funds. Today, according to GIIN, there are over 3900 specialized impact investment funds globally, managing over $1.5 trillion in assets. Many of these are found predominantly in innovation hubs like Silicon Valley, London, and Berlin. The sector has seen remarkable growth, with impact-focused startups attracting record funding of $59 billion in 2023 in Europe alone (Butcher, 2023).
Key Investment Sector: Climate
The climate crisis is accelerating—2024 has been the warmest year ever recorded, with average global temperatures exceeding the previous decade’s record by 0.4°C. The situation is dire, and there are no signs of diverging from this path according to the NCEI. Rising temperatures and greenhouse gas emissions require urgent action, and “Green Growth” has emerged as a key, if not preferred, strategy for addressing these challenges. By replacing climate-harming production and consumption with innovations that reduce or even remove CO2 from the atmosphere, Green Growth combines business incentives with technological advancements to tackle the crisis head-on. Startups have unique positioning to lead this transition, offering scalable solutions fueled by venture capital investments and high growth potential. Stood side-by-side with research centers, startups stand out due to their additional financial incentive structure, which can also fuel economic growth. Considering this, even governments have begun to redirect funds into the private sector through innovation grants, with impact funds as co-investors.
Government involvement in impact investing
One such example is the EU Innovation Fund, specifically targeting European startups. This program, one of the world's largest funding schemes for innovative low-carbon technologies, supports projects that decarbonize European industry and advance climate neutrality.
In 2024, the European Commission awarded €4.8 billion in grants to 85 climate and energy projects across 18 countries. Among these, 16 projects focus on carbon capture and storage (CCS). This technology is essential for reducing industrial greenhouse gas already in the atmosphere, and reducing the burden on natural carbon sinks like the Amazon rain forest which has been heavily affected by deforestation. Additionally, the EU has allocated €65 million to support 17 cleantech startups through the Innovation Fund. These grants aim to accelerate the development and deployment of innovative technologies that can significantly reduce emissions and contribute to the EU's climate goals.
Critical innovation behind paywalls
It is evident that Green Growth, and thus startups, has become a focal point of the EU’s strategy to achieve carbon neutrality in 2050. However, while their impact in furthering climate technology is clear, the potential impact of critical green innovations sitting behind pay-walls is not. Some critics fear that the high barriers to entry in the DeepTech and ClimateTech sectors, along with equity free government funding could become dangerous. That is, lack of market entry and competition, with few equity-based stakeholders, could potentially develop into oligopolitsic or even monopolistic company landscapes. This will allow future climate tech companies companies to increase prices significantly, and while not unheard of (see BigTech), is likely to have negative ripple-effects when governments need to purchase and implement sustainable solutions nation-wide.
We see that impact investing, in many ways, needs to be a balancing act. Governments need to find the delicate equilibrium between harnessing the private-sector’s potential and mitigating the risks of direct market involvement.
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