Myth‑busting funding trends & deal flow – separating hype from reality

Executive summary

Europe’s climate tech investment landscape has entered a new phase. While total global investment remained robust in 2025—venture and growth funding climbed to US$40.5 billion, up 8% from 2024—deal counts slid and early‑stage funding contracted.
In the first quarter of 2025, EU cleantech venture and growth investment dropped to €1.8 billion, an 18 % decrease from the previous quarter and well below the 2024 average.
The slowdown is not a collapse but a correction as investors shift from hype to execution.
This guide breaks down five myths about climate finance, outlines hidden trade‑offs, and offers a framework for navigating Europe’s evolving funding landscape.

Why it matters

Climate finance is a critical lever for decarbonisation. Europe’s climate tech sector raised more than €20 billion in 2023, outpacing the US that year and demonstrating the continent’s potential.
By early 2025, however, European startups raised just US$2.3 billion—their weakest quarter since 2020.
Investors are increasingly selective, favouring technologies with clear pathways to scale, robust unit economics and supportive policy environments.
Understanding the myths and realities behind these shifts helps investors allocate capital effectively and avoid misperceptions that can lead to missed opportunities or mispriced risk.

Myth vs. reality

Myth 1: Climate tech funding has collapsed in Europe

Reality: Investment has slowed, not stopped.
Global climate tech VC and growth funding reached US$40.5 billion in 2025, an 8 % year‑on‑year increase.
The EU’s Q1 2025 decline to €1.8 billion represents an 18 % drop from the previous quarter, but this follows a record €20+ billion raised in 2023.
Deal counts have fallen because investors are consolidating around category leaders and favouring larger rounds: series‑B deals ticked up while series‑C volumes hit a new low.
This contraction is a sign of market maturation, not failure.

Myth 2: There is no capital available for early‑stage deals

Reality: Early‑stage activity is tightening but pockets of opportunity remain.
Seed and Series A investment declined 20 % and 7 %, respectively, in 2025, and series‑A deal counts fell 22 %.
However, Europe continues to generate a high volume of hard‑tech startups thanks to deep science and R&D capabilities.
Policy frameworks like the Net Zero Industry Act and the Clean Industrial Deal pledge billions of euros in grants and procurement support, aiming to ensure 40 % of key technologies are produced domestically by 2030.
These policies help de‑risk demonstration projects and attract private co‑investment.
Investors prepared to engage early, provide patient capital and leverage public co‑funding can still access high‑growth opportunities.

Myth 3: Climate tech valuations remain inflated across the board

Reality: Valuations are diverging.
Deal count fell 18 % in 2025, and Series C investment plunged 32 %, signalling a “valley of death” for late‑stage startups.
Growth equity investment, however, jumped 78 % as investors doubled down on a small cohort of proven companies.
Mega‑deals clustered around energy security and resilience; six of the ten largest deals focused on firm power solutions and grid resilience.
In Europe, funding is consolidating into sectors where the region has an edge—green hydrogen, geothermal, direct air capture, and industrial heating—while mainstream segments like EVs see fewer new entrants.
Investors should avoid generalising valuations across sectors and instead evaluate company fundamentals and policy tailwinds.

Myth 4: AI is siphoning capital away from climate solutions

Reality: Artificial intelligence is becoming integral to climate tech investment rather than displacing it.
Investment demand is increasingly anchored to electricity and digital infrastructure, with energy and built‑environment verticals growing 31 % and 23 %, respectively.
Europe’s data‑centre build‑out is fuelling funding for grid flexibility, storage and advanced cooling systems, while AI‑enabled platforms optimise energy use, materials discovery and climate‑risk assessments.
In 2025, AI‑focused climate startups raised US$6 billion, representing 14.6 % of total climate tech investment.
Far from cannibalising climate budgets, AI is emerging as the infrastructure layer that accelerates deployment and reduces operating costs.

Myth 5: Exits are rare and returns are poor in climate tech

Reality: The exit market is contracting but remains active.
Exits declined 5 % overall in 2025, but acquisitions continued to account for 89 % of all exits.
Large corporations are actively acquiring startups to gain capacity and projects.
In France and the UK, several midsize climate tech firms were acquired by strategic buyers at valuations reflecting robust revenue multiples (e.g., renewable‑developments being folded into utility portfolios).
Investors should therefore focus on building capital‑efficient businesses with clear industrial customers and potential corporate acquirers, rather than betting on IPOs in the near term.

Hidden trade‑offs & managing them

Investors must understand the nuances behind the numbers. Some of the key trade‑offs include:

• Stage vs. certainty: Early‑stage rounds offer lower valuations but higher technical and market risk. Mid‑ and late‑stage rounds provide greater certainty but are increasingly concentrated in a few category leaders, leaving a long tail of companies starved of capital.

• Capital intensity vs. speed: Hard‑tech sectors like green hydrogen, geothermal and direct air capture require large CAPEX and long timelines. Conversely, software and AI‑enabled climate services scale quickly but face fierce competition. A balanced portfolio may blend capital‑heavy infrastructure with asset‑light digital solutions.

• Policy dependency vs. market pull: Many climate tech business models rely on public incentives (contracts for difference, carbon credits, grants). Policy support can unlock markets but also introduces regulatory risk. Investors should diversify across jurisdictions and favour companies with multi‑regional strategies.

• Maturation vs. oversaturation: Some segments (electric mobility, carbon removal) have matured, leading to fewer early‑stage opportunities and more consolidation. Emerging areas like long‑duration storage, e‑fuels, and climate‑adaptation services remain underfunded. Identifying under‑the‑radar niches can yield outsized returns.

Framework for investors

1. Map the policy landscape. Track EU programmes such as the Net Zero Industry Act, Clean Industrial Deal and national green‑investment banks. Assess how grants, loans and procurement rules influence technology adoption.

2. Focus on execution readiness. Prioritise companies with clear offtake agreements, pilot deployments and proven unit economics.
   Evidence of manufacturing readiness and regulatory compliance is more valuable than lofty projections.

3. Consider blended finance. Partner with public banks and philanthropic funds to share risk and stretch capital. Blended vehicles are increasingly used in infrastructure‑heavy projects (hydrogen hubs, energy storage) that require long payback periods.

4. Diversify across stages and technologies. Maintain exposure to early‑stage innovations while allocating significant capital to growth and late‑stage companies poised for scale. Spread investments across energy, built environment, industrial processes and adaptation technologies to avoid concentration risk.

5. Build exit pathways. Engage corporate partners early, structure investor rights to facilitate trade sales, and remain flexible to secondary transactions. Recognise that strategic acquisitions, rather than IPOs, will likely dominate exit routes for the foreseeable future.

Fast‑moving segments to watch

• Green hydrogen and e‑fuels: Europe continues to lead in hard‑tech sectors like green hydrogen, geothermal and BECCS, with policy support and rising off‑take contracts.

• Grid flexibility and long‑duration storage: Investment in energy verticals grew 31 % in 2025, with mega‑deals clustering around firm power and grid resilience.

• AI‑driven climate services: AI now powers roughly one in four climate tech investment dollars. Startups optimising energy consumption, predictive maintenance and climate‑risk modelling are gaining traction.

• Adaptation and resilience technologies: Funding for adaptation solutions is doubling its share of total climate investment. Water intelligence, climate‑risk forecasting and drought‑resistant agriculture are poised for growth.

• Industrial decarbonisation: Sectors like green steel, low‑carbon cement and industrial heating need large volumes of capital but benefit from strong policy support in Europe. Investors should watch for emerging champions with proprietary processes and offtake agreements.

Next steps checklist

1. Conduct a sector heat map. Identify which verticals are seeing capital inflows vs. contractions using recent data. Avoid crowded areas unless you have differentiated insight.
2. Engage with public co‑funders. Meet with EU, national and regional agencies to understand grant timelines and eligibility. Structure blended deals accordingly.
3. Prioritise due diligence. Review technology readiness levels, supply‑chain risks, and unit costs. Insist on independent technical assessments for hard‑tech investments.
4. Negotiate investor protections. Use liquidation preferences, anti‑dilution clauses and milestone‑based tranches to align incentives and manage risk.
5. Plan exit options early. Identify potential corporate buyers in adjacent industries. Structure board observer rights and information rights to facilitate a sale.
6. Monitor policy developments. Keep abreast of EU carbon pricing reforms, state aid rules, and US‑EU trade dynamics. Policy changes can materially affect revenue models and valuations.
7. Stay adaptable. Recognise that markets are shifting. Be prepared to pivot thesis areas as AI, resilience and hard tech evolve.

Sources

• Sightline Climate. (2025). Global climate tech venture and growth funding report 2025. Sightline Climate.
• Cleantech for Europe. (2025). EU cleantech venture and growth investment Q1 2025. Cleantech for Europe.
• Cleantech for Europe. (2025). European climate tech VC trends 2023–2025. Cleantech for Europe.
• European Commission. (2024). Net Zero Industry Act and Clean Industrial Deal overview. European Commission.
• Net Zero Insights. (2025). Europe's position in high-complexity climate tech investment. Net Zero Insights.
• Net Zero Insights. (2025). Regional climate tech investment comparison: US and Europe. Net Zero Insights.
• Sightline Climate. (2024). AI-focused climate startups investment analysis Q1–Q3 2024. Sightline Climate.
• Sightline Climate. (2025). Climate tech exits and acquisitions report 2025. Sightline Climate.