Start-ups are key drivers in creating a future-oriented energy world. By developing technological and digital solutions, they help make tomorrow’s solar products a reality and contribute to a renewable 24/7 energy supply. But the journey from product idea to successful business model is a long one. One core issue for start-ups: finding investors.
Vireo Ventures is a venture capital investor that supports renewable energy starts-ups on their way to success. We spoke to Managing Partner Felix Krause at Forum Solar PLUS 2023 about how his company selects future-proof start-ups and what they need to be successful.
What role do start-ups play in a future-oriented energy world?
Start-ups can’t transform the energy world on their own. The energy market is regulated too heavily and requires too much capital. However, traditional companies are often too slow, not agile enough and not cost-effective enough. We can make the energy transition more efficient, faster and cheaper, if start-ups and established companies work together. It’s about increasing the intelligence of each sector. The mobility, energy, heating and cooling sectors are currently like separate silos.
We can’t carry out the energy transition if we don’t break down these silos. We can deploy energy and lay cables from one place to the next, but the sectors need to be connected and controlled intelligently. We don’t believe that established companies are fully equipped to handle this. We do believe that they play an important part, but when it comes to connecting everything and making things smart – that’s best left to start-ups.
So you’re saying that only start-ups have the potential to connect different areas – also known as sector coupling – while large energy companies don’t?
Yes, when it comes down to the required speed. Start-ups are better equipped for entering these new markets because they’re much more agile, more cost-effective and they are prepared to test their product and introduce it to the market much faster than large companies that are held down by regulations and procedures.
Start-ups need to talk directly to customers and possibly launch an unfinished product to see how it is received by the market. Big companies tend to develop behind closed doors – and their products may be great solutions in themselves, but maybe out of touch with the market and often very expensive.
What challenges and opportunities do you see for start-ups, especially when it comes to the renewable energy sector?
The opportunities are huge because the market is huge. In order to make the energy sector – which accounts for 70 percent of all carbon emissions – carbon-neutral by 2050, we need to invest more than 130 trillion US dollars. That is why we, at Vireo Ventures, believe that this is by far the greatest investment opportunity of our century.
At the same time, the general market for start-up financing through venture capital funds collapsed in 2023 including in the climate tech area, which still fared better than other sectors. However, there is a heavy structural disbalance between Europe and the USA when it comes to the availability of growth capital. But we’re seeing light at the end of the tunnel.
Europe and Germany have recognized this financing gap, and policymakers are mobilizing private and public capital – at least for certain areas of focus such as climate tech. VC investments in general seem to be performing better than we initially expected for the year 2023. Many market participants also believe that interest rates will continue to rise, which should be a boost to the market next year. That’s why we’re optimistic about 2024 and beyond.
How does Vireo Ventures select start-ups to invest in? And what does an energy start-up need to succeed?
We invest in start-ups that contribute to an all-electrified world. We believe that everything will be electrified – directly or indirectly. But we also invest in start-ups that offer software solutions. For us as an early stage investor, the most important aspect is the team. We’re looking for teams that are prepared to go to hell and back for their product and their company. The founding phase, meaning the first few years, is challenging.
We want to see teams that are flexible enough to constantly rethink their business model. Who realize: “This approach may not be the best way to enter the market. We’ve realized that this other strategy works better. Why don’t we change it?” So they need to be flexible until they’ve found the best product-market fit. We invest in companies that have a proof of concept, meaning a rough prototype, and actively support them until they reach a proof of business phase.
Let’s talk about digital solutions: Does every new software that start-ups bring on the market actually create new and innovative business models?
We invest in solutions and business ideas that help electrify and decarbonize the world. Software is only a tool, but we believe it is indispensable for efficient and effective change. Not every new software technology has to be the most innovative. Timing is also important. A lot of technologies were being developed during the first big wave of clean technology between 2008 and 2010, but the market wasn’t ready back then. Take solutions for charging infrastructure, for example. Back then, the electric car market was struggling. This means that even the greatest solution was doomed to fail back then, simply because the market wasn’t ready.
Another aspect is that it is not always the best solution that catches on, but the one with the best sales concept and ability to execute. Just because you developed a good product does not mean that people will buy it – you need a story to sell it. There has to be a B2B and a B2C reasoning, meaning it has to solve a real problem for people to buy the product. You won’t sell it just by putting it on a shelf. It doesn’t have to be new, innovative or shiny, it can simply be companies modifying their existing solutions and introducing them to the market with better timing and a better story.
What are the current investment conditions for energy start-ups in Germany and Europe?
In general, the investment conditions are fantastic, because it is one of the few regions in the world that, for one thing, has committed itself to decarbonization, and now, due to geopolitical shifts, has to rely on new energy sources. In other words, Europe needs new solutions and new business models. However, the investment conditions for start-ups are still not ideal, the market remains difficult. The reasons for this include the macroeconomic factors I mentioned earlier as well as the different regulations of each European member state that make market integration in the energy sector difficult.
Add to that some chaotic market interventions that created uncertainty, at least in the short term. Unclear framework conditions are never good for investments. At the same time, thanks to the Inflation Reduction Act, companies are moving to the USA, or are building capacity there, which is detrimental for Europe.
Is there a particular sector in which most new business ideas are generated, such as heat, transport or electricity?
There is a lot going on in mobility, because the issue of charging is receiving a lot of attention. The heating market is also growing, partly as a result of government incentives. There are many start-ups in the area of heating networks and heating systems in buildings – two or three years ago, these topics were hardly even mentioned.
But we’re generally seeing many more and better start-ups across all focus areas than we did some five years ago. What makes us optimistic is that we’re seeing more and more founders creating start-ups in these areas, who, a few years ago, would have stuck to fintech or B2C/ B2B SaaS. They wouldn’t have considered going into energy, but now they’re realizing that they can make a difference here. And thanks to the sheer size of the market, there’s a lot of money to be made. So we’re very optimistic about the energy and mobility transition.
Felix Krause spoke to Sarah Hommel de Mendonça.