ClimateTech urgently needs debt capital
The transition of industry towards climate neutrality is not only a promising endeavour for the environment but also for investors. That's what Tobias Lechtenfeld, Executive Director of the Tech for Net Zero initiative, says. The network brings together almost 70 start-ups and scale-ups, as well as venture capital investors from the ClimateTech sector, that are based in German-speaking countries and have set themselves the goal of removing barriers to the founding, scaling and growth of Climate Tech start-ups.
„If you are making a long-term investment today, climate technology is probably one of the safest investments because the pressure on this transformation is increasing, and the return is also increasing as a result,“ says Lechtenfeld in the private markets podcast „Betting Billions“.
And yet, in Germany in particular, but also Europe as a whole, there is a huge financing gap that makes it difficult for developers of hydrogen systems, battery manufacturers and the like to drive their innovations forward on a truly large and therefore climate-effective scale. „In the credit sector alone, we currently see a financing gap of around 6 to 8 billion euros per year in the European market for financing the growth of clean tech companies,“ says Lechtenfeld.
There are reasons for this. The valuation of new technologies is complex and there is little historical data to guide investors. „This is particularly challenging in the lending sector, as we are talking about large volumes for customers with a significantly higher risk profile,“ says Lechtenfeld. It is therefore difficult for traditional banks to enter the segment as initial backers.
Focus on equity financing was Northvolt's undoing
Yet debt capital is so important when financing innovative and capital-intensive climate protection technologies. „You can't finance a new factory with equity alone – a large, established industrial group would never do that either," says Lechtenfeld. Yes, he adds, young companies can hardly avoid equity-based VC financing in the beginning, because „nobody else would be crazy enough to invest money in such innovations, even if they are already patented." According to the experts, only venture capitalists do that.
For ClimateTech founders, it is important to become creditworthy as quickly as possible and not to continue to rely primarily on equity financing. The equity approach harbours risks, as the Northvolt case has shown.
„Northvolt's absolute focus was on repeatedly raising new equity capital and then later also raising larger amounts of debt capital,“ says Lechtenfeld. However, equity investors are primarily focused on the value of the company. This can be driven up further and further by „well-set signals on the market“. But if the technology no longer keeps pace with the promises, the company has a problem, says Lechtenfeld. „At some point, half-finished battery systems were produced, resulting in a lot of rejects, which put a lot of pressure on profitability.“ To solve the problem, Northvolt raised more and more equity. „At some point, it was no longer possible to escape this spiral,“ summarises the expert.
To reduce the difficulties of debt financing for climate tech start-ups, Tech for Net Zero proposes, among other things, the creation of specialised credit funds. These could be based on planned production, purchase agreements with customers and financed assets, for example, and could also offer an investment opportunity for institutional investors such as European pension funds or insurance companies. Initial attempts in this direction have already been made in the USA and the UK. KfW's WIN initiative is also a step in the right direction.
