Europe has built the most comprehensive climate regulatory system in the world.
From the Emissions Trading System to the Sustainable Finance Disclosure Regulation, the continent oversees the most structured set of incentives for decarbonisation any major economy has produced.
And yet, the financial system meant to scale these companies is failing them. In 2025, European climate tech startups raised €17bn in funding, according to Sifted data, a sharp decrease from the €27bn raised in 2024.
Looking at the sector’s American counterparts, Sightline’s Climate 2025 investment report shows that US investment in climate tech grew 27% in 2025. Only 15% of European climate tech startups also graduate from seed to Series B, compared with 25% in the US, according to a World Fund report published this year.
Europe creates the regulatory demand for climate solutions; it generates entrepreneurial supply — but it fails to connect the two.
The core problem is structural. Europe’s regulatory system and financial system are misaligned. The regulatory architecture creates markets for climate solutions, but the financial architecture cannot fund the companies that would serve those markets at scale. The gap is most acute at Series B, where startups move from prototype to production. Europe faces a $13.5bn funding gap at this stage compared with the US, according to World Fund.
The root cause sits with institutional capital. European pension funds manage over €3tn in assets, yet allocate a fraction of one percent to venture capital and growth equity. In the US, 72% of VC fundraising comes from private institutional sources; in Europe, that figure is closer to 30%, with public entities filling the gap. The European Investment Fund alone accounts for 31% of all European venture capital.
When European funds cannot lead growth rounds, foreign capital steps in. The investors who lead rounds shape governance, board composition, market strategy and ultimately where a company scales, hires and lists.
European taxpayers fund early-stage research through Horizon Europe, Innovate UK and national grants. European regulation creates the market and non-European investors capture the growth-stage value.
The case of Lilium illustrates this dynamic with uncomfortable clarity. Founded in 2015, the German electric aviation company developed vertical take-off and landing technology with clear decarbonisation applications. It raised over €1.5bn, mostly from US and Chinese investors. When it needed a €100m loan guarantee to bridge from prototype to production, the German parliament’s budget committee refused. The company went insolvent.
In October 2025, Archer Aviation, a California-based competitor, acquired all 300 of Lilium’s patents for €18m. A decade of European-funded innovation in electric propulsion, battery management, flight controls and ducted fan systems, sold for a little over 1% of the capital originally invested. European research, European intellectual property, American ownership.
The geopolitical cost is the most urgent. Europe is simultaneously trying to reduce its dependence on Russian energy, manage strategic competition with China and navigate an increasingly transactional relationship with the United States. Climate technology sits at the intersection of all three challenges.
Domestically scaled clean energy companies reduce fossil fuel exposure. European battery recycling and circular economy ventures reduce dependence on Chinese-processed materials. European-funded growth capital reduces reliance on American investors. Every climate tech company that leaves Europe to scale elsewhere weakens the continent’s position across each of these dimensions.
The economic cost compounds over time. When a company relocates or is acquired, the jobs follow. So do the supply chains, the management expertise, the technical talent and the intellectual property. The exit value, the tax base and the follow-on investment all migrate. The experienced founders who would have started the next generation of European climate ventures build their networks elsewhere instead.
The damage extends beyond individual deals through a broken feedback loop. Successful climate tech exits create the next generation of founders, angels, and experienced operators who seed the ecosystem’s renewal.
Every Lilium that fails or relocates removes a node from this network. Every European company that scales abroad takes its management talent, technical expertise, and returning capital with it. The result is a self-reinforcing cycle where the absence of growth capital makes Europe a less attractive place to start the next climate tech company.
The climate cost is the least discussed and potentially the most consequential. The conventional assumption is that it makes little difference where a climate tech company scales, because the emissions reduction happens regardless. This assumption deserves scrutiny. Companies scaled with US growth capital, governed by US-dominated boards, and listed on US exchanges will prioritise the US market for deployment.
Meanwhile, the European market, the one whose regulation created the demand in the first place, gets served later, by less innovative incumbents, or by imports.
Critically, the US policy environment has shifted. The Trump administration has withdrawn from the UNFCCC and IPCC and rolled back emissions standards. European founders seeking US growth capital are trading a stable regulatory environment for a volatile one.
The solutions to Europe’s growth-stage funding gap have been extensively discussed. Dedicated growth-stage vehicles such as the recently launched Kembara Fund and models like the French Tibi initiative are all sound proposals. The problem is that the argument for implementing them has been made almost exclusively in the language of venture capital returns. It needs to be made in the language of strategic security, economic sovereignty and climate outcomes.
Europe’s leaders have recognised the urgency in other domains. Ursula von der Leyen has called this Europe’s “Independence Moment” and the North Sea Summit committed to mobilising €1tn for offshore wind from 2031 to 2040.
The political will to invest in European strategic autonomy exists. It simply has yet to extend to the financial plumbing that determines whether European climate innovation scales at home or abroad.
Every year the growth-stage funding gap remains open and more talent and strategic capability leave the continent. The window to act is narrowing and the cost of delay is measured in patents sold for pennies, companies relocated for capital and a green transition that Europe designed but others may or may not deliver.