‘Deepwashing’ risks dampening progress in European climate tech investing

Today, deep tech companies — companies creating cutting-edge, transformative technologies based on scientific breakthroughs and R&D, and bringing them to market — are finally garnering more attention from the VC community. From synthetic biology to quantum computing and battery recycling technology, the most innovative deep tech companies today are creating solutions that have the potential to transform entire industries and address pressing global challenges.

Thousands of these exciting deep tech startups are based in Europe, and their founders are finally finding capital more readily available on home turf. European investment into deep tech remains strong, despite broader funding level drop-offs. Dealroom’s most recent European Deep Tech Report indicates a 60% increase in funding levels over the last 24 months, compared to 2020. This boom is also reflected in patents pending and R&D spending on moonshot technologies.

Europe’s climate-focused deep tech companies form a crucial part of this growing sector, and increasing investor interest is a big net positive. However, deep tech hitting the zeitgeist has been accompanied by a disturbing rise in climate-focused startups positioning themselves as more “deep tech” than they actually are. This is what we mean by “deepwashing”: companies without much evidence of meaningful R&D or any real science pitching their product as transformative. This is a problem, because it leads to vital funding being directed toward startups that will never fundamentally shift the dial.

By contrast, true climate deep techs are raising funding to enable them to deliver technologies with the capacity to decarbonise the global economy. And they’re needed. As outlined in a recent International Energy Agency (IEA) report, almost half of emissions reduction solutions in 2050 will come from technologies that are currently at the demonstration or prototype phase — and major innovation efforts must take place this decade in order to bring these new technologies to market in time. This is a mammoth task, but Europe is ready to take it on: In 2022, 42% of all climate tech dollars were raised on the continent, with investment into the sector growing 26% faster than the U.S.

Founders need to stop deepwashing

As specialist European climate tech investors, we are receiving “deepwashing” pitches from some solar, heat pump and micromobility startups, as well as from a few food tech companies.

We’re regularly seeing teams using a lot of words about their tech, but when you actually examine their company’s product, there is no fundamental technology innovation. The product is maybe a slightly better application of tech that’s already on the market today, or a series of minute changes that might sound impressive packaged up together, but in reality the business is not shifting the dial.

For example, we’ve seen solar startup founders pitching their companies as deep tech solar businesses, but scratch beneath the surface and there is no major tech innovation. The companies in question were often making installation innovations or a slight change in go-to-market strategy — and many of them could offer an edge for investors as a tech/optimization play — but they were not fundamentally changing the efficiency or capacity of a technology. A deep tech solar startup needs to be fundamentally increasing the efficiency of a solar installation, not better executing its deployment.

Out of over 100 solar companies we’ve seen, around 80% were not deep tech — and those companies that tried to sell themselves as such, we immediately marked down. To be clear, we could invest in both, but we label companies accurately. A great example of this is our portfolio company SunRoof. This innovative startup offers executional and operational excellence addressing part of the market that is not well served today, and is enabling more solar to be installed as a result. We believe it is a great execution play, an integrated proposition talking best-in-class technology with a different route to market — but at its core, it’s not a deep tech startup.

Going forward, companies need to get this right. It’s about what you accentuate and pitch yourselves as. And being upfront will help everyone involved, because if founders are honest about the uniqueness of their tech and excellence of their execution, they’re more likely to get investment from the right investors.

What investors should do about deepwashing

The responsibility for combating a wave of deepwashing also lies with venture capitalists.

Through years of experience investing in the sector, our team at the World Fund has found that a scientific approach can help identify true and impactful climate deep tech propositions. We use our “Climate Performance Potential (CPP)” measure, a science-based climate impact metric, which ensures that we only back technologies with the potential to remove a significant amount of carbon from the atmosphere.

This involves making a granular, quantitative assessment of every technology’s potential CO2 savings. As a VC, it is incredibly useful to have scientific and industry expertise on the team to help in carrying out these assessments. We have found our TAM, our “total avoidable emissions” metric, to be essential in avoiding becoming distracted by “shiny” but non-transformational solutions and products.

We compare similar technologies and alternative decarbonization pathways to determine which tech is the right tech to back and whether the tech really is different from others.

Many European investors are now adopting their own science-based methodologies for identifying true deep tech propositions, which is brilliant. We are also actively supporting this development through our work with Project Frame — a catalytic capital-focused think-tank that has done extensive work on defining what effective climate technology looks like and how it should be measured regarding climate impact. This extends to initiatives such as the Venture Climate Alliance, which begins the process of formalizing science-based approaches at the core hypothesis of an effective climate investment approach.

Combating deepwashing will also involve investors admitting what they don’t know and asking for hyper-expert advice — even if they have a technical background.

Every potential climate deep tech investor should be asking, “Is this a tech innovation that will actually give a competitive edge?” and then double-checking with experts in that sector on both technology and relevance. I know this is the case from personal experience working in battery space. I have deep technical knowledge of the sector but still often need to reach out to cutting-edge PhDs and professors for input and analysis on a company or sector. Investors with good technical knowledge may know the right questions to ask, but to accurately assess a deep tech proposition and to confirm whether it is relevant, then frontline, up-to-the-minute knowledge is often required.

The European climate tech ecosystem must get the memo

As we have seen with micromobility startups, when deepwashing efforts succeed, it ultimately leads to a disproportionate amount of funding being invested into easy-to-access climate tech trend sectors but with no differentiation. At this point, the majority of micromobility startups are commoditized, and in established markets the vast majority are no longer (and probably never were) deep tech companies. For example, the transport sector accounts for only 15% of global emissions, yet mobility companies received a disproportionate 48% of climate tech sector funding between Q3 2021 and Q3 2022.

Going forward, we need to see more capital going into the companies actually creating transformative technologies. It is vital that we invest in those solar companies pushing the dial, companies addressing the battery recycling issue, and innovators building solutions that will radically change energy consumption. Any distrust around the accurate labeling of deep tech companies will only drive capital away from these vital nascent spaces.

As European climate tech VCs, we have a duty to invest the funds we have forensically for the sake of the planet and our investors. If the growing pool of investors interested in climate tech can become focused on the companies with the most climate performance potential, it will allow first-rate European innovators to truly tackle the climate crisis and become the next generation of tech giants in the process.