More VC money than ever is going into impact-driven start-ups

Europe’s venture capital sector is increasingly investing in companies working on products or services that address sustainable development goals, with the share of total VC raised by so called impact start-ups increasing from 18% in 2019 to 37% in 2023, a year when €53 billion was raised by European VCs.

Among European countries, the Nordics and Baltics are leading this transition, according to a report released on Tuesday. In 2023, of €7.9 billion in venture capital investment in Nordic start-ups, 61% was in companies reflecting to the UN objectives. That was twice the percentage of VC investment in similar start-ups in any other region in Europe.

Europe is seeing a general trend towards VCs prioritising so-called impact-driven investments, which alongside turning in a profit also aim to deliver social or environmental benefits. As one example, over the past three years investment in European climate tech start-ups has tripled to €20 billion, of which €18.2 billion was raised in 2023.

Similarly, funding for deep tech start-ups, spanning a range of fields including AI-driven drug discovery and quantum computing, more than doubled to €17 billion over the last five years.

However, the report also notes that despite the steady growth of the European VC market over the past few years, the bloc is still lagging behind the US and Asian countries. The trend is more visible in late-stage financing for companies working in fields that require larger amounts of capital, such as clean tech, quantum computing or artificial intelligence.

The ‘Beyond Returns’ report, a collaboration between European Women in VC, Founders Forum Group, and Tech Nation, surveyed more than 300 European VC partners and limited partners and interviewed a number of investors.

The survey showed VCs and LPs are increasingly focused on impact-driven investments that have a positive social or environmental impact. “It’s so important to be investing. Not just for returns, not faster, but more intelligently and in more social benefits,” Kinga Stanislawska, co-founder of European Women in VC, one of the organisations behind the report, told Science|Business.

Among respondents, 31% said reducing carbon footprint is a top priority when choosing a fund or company to invest in, while 52% said advancing climate change initiatives is a top priority in the next year.

Scaling-up

Despite record levels of venture capital investment and success in bringing products to market, more public and private investment is needed to drive scaleable transformation.

“We’ve seen governments increase funding for VCs, but it’s essential that this investment goes into positive impact funds, funds that address society’s most pressing needs, to drive change,” the report says.

In terms of private investment there is a particular need to mobilise funds from institutional investors. Pension funds in Europe, for example, allocate just 0.01% of their assets under management into European VCs. “Only by catalysing more institutional investment into venture can we fuel the step-change innovations in technology that transform industries, unlock outsized returns, and make lives better in Europe and beyond,” the report says.

“To meet the objectives of the Green Deal and RepowerEU, additional investments of over €620 billion annually will be required, and the lion’s share of this must come from private funding,” Kerstin Jorna, the European Commission director general for the Internal Market, Industry, Entrepreneurship and SMEs writes in the report. “Venture capital has a key role to play in financing innovative companies developing technologies that are key to this transition,” Jorna says.

The report recommends a five-step plan to strengthen VC, including calls for policymakers and taxpayer-led institutions to catalyse institutional investment into the venture capital ecosystem; for VCs to prioritise diversity in their teams; and for the development of a better connected and more inclusive investor community.