VC funding for climate tech went off a cliff in 2025. What happens next?

Venture capital funding for European climate tech has cooled sharply this year, down to $9.6bn from $13.6bn in 2024, and far below the $23.9 billion peak in 2021. After a period of exuberant investment, the sector is now entering a phase of recalibration.

The hype bubble bursts

Lightrock partner Kevin Bone, who is working on the deployment of the firm’s €860m climate impact growth fund, described the 2021–22 surge in venture capital as a “hype wave” driven in part by what he called “climate tourists.”

“A lot of investors were piling into climate tech, especially software because that’s where they felt most comfortable,” Bone tells Impact Loop in an interview. Valuations, he said, had become detached from fundamentals.

“Carbon accounting businesses with five million of ARR for a billion-dollar valuation – it was nuts.” According to Bone, the market is now experiencing a “recalibration around discipline” focused on “the real market opportunities.”

That recalibration has come with its fair share of high-profile bankruptcies, typified by the collapse of Europe’s battery champion Northvolt in March. It has also prompted climate tech builders and investors to abandon green premiums for clean tech, as cost parity with fossil-fuelled industries becomes a core focus.

Zoe Peden, partner at Ananda Impact Ventures, noted another undercurrent that has become prevalent this year across European impact investing.

“We’d be deaf and blind to say that the impact ecosystem hasn’t changed, given that we’ve seen a number of funds moving towards defence… and sovereignty as well,” she tells Impact Loop.

A narrative shift

Geopolitical tensions – including Donald Trump’s re-election in the US and the war in Ukraine – alongside broader economic pressures, have pushed Europe to increase defence spending and localise manufacturing, sending ripples through the tech ecosystem.

Craig Douglas, founder partner at World Fund, argues that this drive for European resilience aligns closely with climate objectives, particularly in critical raw materials, regenerative agriculture, and robust energy systems.

“The narrative might have changed, but some of our companies are getting huge advantages from that,” Douglas tells Impact Loop.

Yet Douglas is pragmatic about the drop in VC funding for climate tech. Scale-up capital remains a major gap, especially in the so-called “Valley of Death” where companies often fail between Series A and Series B. “Europe has a problem when you actually get to scale up capital,” he says.

Bone echoed the concern. “There is definitely a lack of capital… and there does need to be other solutions."

Growth, debt, and dynasties

Where VC has pulled back, growth capital and debt financing have emerged as primary sources for asset-heavy climate hardware companies. In 2024, debt financing surpassed private equity as the largest source of capital for European climate tech, with over $20bn in loans issued versus $13.6bn in private equity, according to Dealroom data.

“That kind of shows a growing-up in the sector,” Douglas says. “Many [climate tech] business models shouldn’t need huge amounts of equity to scale. It’s good they’re getting more non-dilutive capital.”

Generalist growth-stage investors are also now active once companies demonstrate scale, offering “15-plus multiples” for businesses with strong turnover and growth, Douglas adds.

The rise debt and growth financing has helped annual energy transition investment surpass $2 trillion globally in 2024, more than double 2020 levels, according to BloombergNEF.

“Climate tech remains a massive, massive opportunity measured in the trillions,” Bone said.

Family offices, Peden adds, are another reliable source of capital – both for startups and VCs raising new funds.

“The old industrial families, they’re still leaning into impact,” she says.

What’s next for climate tech finance?

Macro-economic and geopolitical turbulence has disrupted the market, but investors see opportunity ahead.

Bone thinks there will be a swarm of climate tech companies, both in Europe and the US, pushing to list publicly next year.

“I think there’s going to be an unholy rush for people to do IPOs and SPACs in this space,” he says. Some good firms will come to market, but “there’s also some ones that will try to go public too soon, before the market closes.”

He believes there’s still enough growth capital around to allow private companies to remain private – Lightrock being one of the firm’s to provide it.

Meanwhile, Douglas welcomed the €5bn Scaleup Europe Fund, announced in October and rolling out next year. Backed by a cohort of public and private investors, the fund aims to deploy minimum cheques of €100m into strategic and deep tech companies across cleantech, AI, quantum computing, biotech and more. For climate tech scale-ups, it could bridge Europe’s persistent gap in late-stage capital.

Investors’ targets for 2026

Looking to next year, Peden expects momentum in sectors where Ananda was an early mover in Fund IV.

“Biodiversity is one of the areas that we’d like to do more investments in,” she says, noting that falling costs and advancing scientific maturity are opening up “a whole world of lots of applications that can be built in nature tech.”

Biosecurity is another emerging focus, she added, with antimicrobial resistance and pathogen detection becoming increasingly critical in a warming world. Ananda, now working towards its fifth fund, also plans to expand in ocean tech, space tech, biomolecular design, critical minerals, and extreme-weather prediction.

Douglas, meanwhile, also sees strong opportunities in critical minerals, something which has peaked investor interest in Europe, as the continent looks to wean itself of foreign supplies of materials critical to the clean transition, such as lithium, cobalt, and nickel.

Bone, focused on growth-stage investments, identifies data centre energy efficiency, grid resilience, and decentralised energy systems as key areas.

Largely, the investors agree that the market for climate tech remains vast. “The problems that were there before, are still there,” Peden said. “In fact they’re only getting worse.”