Green start-ups with red figures: lagging business performance

Climate start-ups are considered to be a major driver of the sustainability transition. However, research by Utrecht University shows that the climate and business performance of start-ups do not keep up yet. Achieving a positive operating result is particularly difficult for companies with a large potential contribution to reducing the global CO2-emissions. This is shown in an article that was published in the academic journal Business Strategy and the Environment. The article also contains recommendations to the government. “Ensure the right fiscal measures and healthy market conditions.”

The researchers came to their conclusions based on a set of analyses of 197 climate start-ups from Western-Europe. They identified which start-up characteristics explain its climate and business performance. “Start-ups with a physical technology generally contribute more to the sustainability transition than software start-ups. However, the latter grow faster and generate more revenues”, says innovation scientist and lead-investigator Jip Leendertse from Utrecht University in the Netherlands. “Start-ups are ideally suited to bring technologies to the market in which large companies are not interested, adds his colleague Frank van Rijnsoever. “Therefore, governments want to stimulate these climate start-ups. However, the market and ecosystem in which these start-ups operate is still insufficiently developed.”

Dilemma

The results of the researchers bring an import dilemma to light. For climate start-ups to fulfil their intended role in green growth they need to combine both performance dimensions. Leendertse: “A bankrupt start-up can’t have a positive impact on the climate.”

Silver lining

However, the results also contain a silver lining. The researchers investigated if there were start-ups that combined both performance types. This was indeed the case. Start-ups that work on a novel and hardware based technology are able to obtain significant investments, if their technology also contributes to reducing CO2 emissions. These investments are necessary to further develop the novel technologies. However, van Rijnsoever adds a warning: “Investments are important, but also based on a promise. It is not yet certain that they will lead to business performance. Investing in sustainable start-ups can be profitable, but it’s also risky.” Leendertse adds: “These start-ups are often more capital-intensive, but they then have the potential to be the engines of green growth.”

Recommendations

The researchers therefore advise governments to ensure that sufficient capital is available to develop these capital intensive technologies. “For example trough tax regulations that stimulate investing in sustainable start-ups or by expanding investment funds specifically focused on early-stage sustainable start-ups.” In addition, the market conditions for these start-ups should be improved. Van Rijnsoever: “You could think of governments acting more often as a launching customer for start-ups or by creating more market space through stricter environmental regulations”.

Article

Jip Leendertse, Frank J. van Rijnsoever and Chris P. Eveleens, ‘The sustainable start‐up paradox: Predicting the business and climate performance of start‐ups’, Business Strategy and the Environment (November 2020) https://doi.org/10.1002/bse.2667

The study was financed by Climate-KIC, part of the European Institute of Innovation and Technology (EIT). Jip Leendertse is a PhD candidate in the field of sustainable start-up ecosystems at Utrecht University. Frank van Rijnsoever is associate professor innovation studies at Utrecht University in The Netherlands.