Driving the Growth of Green Start‑ups in Canada

1. Overall policy issues in green start-up promotion internationally

Abstract

This chapter presents definitions and taxonomies for green entrepreneurship and discusses the main development bottlenecks faced by green start-ups internationally.

Introduction

Green start-ups make a critical contribution to countries’ economic and environmental goals. In Canada, the environmental and clean technology sector contributed CAD 87.6 billion to GDP in 2024, accounting for more than 363 000 jobs, and CAD 20.2 billion in export revenues (Statistics Canada, 2025[1]). This has been one of the key growth sectors for the economy over the past decade, with its economic footprint having increased by 73% since 2012. Green start-ups have played an important part in driving this growth of the environmental and clean technology sector. In 2024 there were 906 active green start-ups formed over the previous 10 years, accounting for 4.5% of Canadian start-ups and having received more than USD 10 billion in financing (see Chapter 2 for further analysis).

Given their strong economic and environmental contributions, many governments in OECD countries have developed policies to support green entrepreneurship and stimulate the creation and growth of more green start-ups. Establishing a clear view on what is meant by green entrepreneurship and green start-ups is an important prerequisite for the appropriate targeting, monitoring and evaluation of policy interventions. Further, designing effective and relevant policy supports in this area requires clarity on what the development bottlenecks are for green start-ups that policy can help to address. This chapter proposes definitions for green entrepreneurship, green start-ups, and other related concepts, before discussing the main obstacles that green start-ups face internationally and the challenges for policy.

Defining green entrepreneurship

There is not a single, consistent definition of green entrepreneurship that is applied between countries and organisations. Moreover, a range of different terms have historically been used to describe entrepreneurs active in this space, such as environmental entrepreneurs (Anderson, 1998[2]), ecopreneurs (Isaak, 2002[3]), sustainable entrepreneurs (Bergset, 2018[4]), and environmentally conscious entrepreneurs (Thierry Volery, 2002[5]). The widespread application of similar or overlapping concepts such as cleantech, climatetech and greentech adds further complexity.

For the purposes of policy development, definitions must be practicably measurable, so as to facilitate policy targeting and monitoring. With this in mind, the approach generally taken by governments is to use terms and definitions that are based on activities or sectors. The OECD has proposed the following broad definition for green entrepreneurship (OECD, 2022[6]):

Green entrepreneurship is the development and deployment of green goods, services and activities by new start-ups.

In order for the above definition to be applied in a practical context, it is necessary to establish a list of green goods, services and activities. An emerging consensus internationally is to consider green goods, services and activities as those that either:

• Reduce or prevent any type of environmental damage. These products and activities generate a net environmental benefit, such as carbon capture and storage projects or environmental restoration schemes.

• Emit less pollution and waste, or are more resource-efficient, than existing equivalent products, services and processes that have the same result. These products or activities generate a net environmental cost, but one that is smaller than established alternative approaches to producing the same product or service.

Taxonomies of green entrepreneurship

The definition proposed above encompasses a diverse mix of different types of start-up company with varying products, services, markets and business models. Given this diversity, green entrepreneurs cannot be considered a monolith, since they face very different challenges and have different policy needs. There have been attempts to develop taxonomies and typologies for green technologies, innovations and start-ups. Based on quantitative analysis of data from the German Startup Monitor – a representative survey of German start-ups – (Olteanu and Fichter, 2022[7]) propose a taxonomy of transformative entrepreneurship based on the priority placed on environmental and societal impact and the planned market impact in terms of growth and market share. The authors’ cluster analysis points to three types of sustainability-oriented start-ups:

• “Sustainability sensitive ventures”, which focus on achieving growth and market share and take into consideration environmental and societal impacts without making these a priority.

• “Biopreneurs”, which focus on environmental and societal impacts and place limited priority on market impact.

• “Sustainability transformers”, which place a high emphasis both on market and environmental and social impacts.

Other taxonomies categorise green start-ups based on the characteristics of the product, entrepreneur and strategy (Bergset and Fichter, 2015[8]), the degree of environmental orientation of the company’s core business (Isaak, 2017[9]), the internal motivations of the entrepreneur (Linnanen, 2002[10]), and the type and amount of environmental engagement and environmentally friendly business measures pursued (Schaper, 2005[11]; OECD, 2024[12]).

The latest edition of the European Union’s Community Innovation Survey defines several different types of enterprise innovations with environmental benefits, which can be obtained either during the production of the enterprises’ good or service (“within the enterprise”) or during the consumption of the good or service by the end user, as illustrated in Table 1.1.

Table 1.1. European Union Community Innovation Survey’s typology of business innovation with environmental benefits

Stage at which environmental benefits associated with the innovation are accrued
Production of the good or service	Consumption of the good or service
Reduced energy use or CO2 footprint	Reduced energy use or CO2 footprint
Reduced soil, light, noise, water or air pollution	Reduced soil, light, noise, water or air pollution
Protection of biodiversity	Protection of biodiversity
Reduced material or water use per unit of output
Replaced a share of materials with less polluting or hazardous substances
Replaced a share of fossil energy with renewable energy sources
Recycled waste, water or materials for own use or sale
	Facilitated recycling of product after use
	Extended product life through longer-lasting, more durable, or easier-to-repair products

Source: (Eurostat, 2024[13])

Meanwhile, the Government of Canada applies a taxonomy for cleantech products that groups them into the following 10 categories:1

• Smart grid and energy storage.

• Precision agriculture, forestry, and biodiversity.

• Mining, processing, materials, manufacturing and industry.

• Renewable and non-emitting energy supply.

• Energy efficiency.

• Water and wastewater.

• Transportation.

• Air, environment and remediation.

• Waste and recycling.

• Biofuels, bioenergy, and bioproducts.

Development bottlenecks for green start-ups internationally and the challenges for policy

There are well-documented market failures and liabilities of newness that constrain the creation and growth of young companies, particularly those with a strong innovative component. This creates a rationale for policy intervention to assist the development of high-potential start-up companies. These development bottlenecks are often amplified in the context of green entrepreneurial ventures, with many green technologies sharing a set of common characteristics that makes it difficult for the entrepreneurs to obtain the necessary funding and support runway to develop and commercialise their products and services. In particular, green entrepreneurs face:

• High capital requirements: Green start-ups generally face steeper capital requirements than other start-ups. Most innovative start-ups will need external funding in order to develop their products and bring them to market. However, green start-ups are primarily engaged in reducing physical harm to the natural world and therefore tend to cluster around physical goods and services. Developing hardware is, in general, significantly more costly than developing software, meaning that many green start-ups require large amounts of external capital during their pre-revenue stage. For example, the costs of demonstration and first commercial plants for sustainable energy products can run to several hundred million USD, far above the amounts that most venture capital funds would typically invest in a new enterprise, and often in excess of the venture capital fund sizes themselves (Ghosh and Nanda, 2012[14]; Randjelovic, O’Rourke and Orsato, 2003[15]). A related challenge is the long development timelines for many hardware-based green technologies, which imply an extended pre-revenue stage.

• Large spillover effects: Green technologies generate benefits that cannot be fully internalised by those developing or investing in them. By creating new knowledge that can be deployed across the economy and society, investments in any kind of innovation create positive spillovers that cannot be fully internalised by those making the investment. This “knowledge externality” results in suboptimal levels of innovation and knowledge-creation activities, through which potentially fruitful investments are not pursued by individual actors since they cannot capture the full benefits. This challenge exists across all sectors. However, in the environmental space, investment in new technologies is further constrained by the inherent “environmental externality” associated with the deployment of products and technologies that reduce environmental damage and thus generate global benefits that are very difficult to internalise (Rennings, 2000[16]; Cojoianu et al., 2020[17]). In this way, levels of green knowledge generation, innovation and entrepreneurship are constrained by the presence of a “double externality” comprising both knowledge and environmental externalities (Malen and Marcus, 2019[18]).

• Uncertainty: Information asymmetries on the future commercial viability of green start-ups’ business models are larger than for other start-ups. The commercial viability of any new enterprise is based on there being sufficient demand for the goods and services it produces. The demand for green goods and services often hinges on the presence of policies and regulations that provide a competitive advantage to green alternatives by restricting or increasing the costs of environmentally damaging activities (Basar, Oz and Rehman, 2024[19]). The policy stance of future governments is extremely difficult to predict, meaning that the demand for green entrepreneurs’ products is also subject to a high degree of uncertainty. Other sources of uncertainty include the public appetite for green goods and services and the emergence of enabling infrastructure to accommodate certain green technologies.

These factors together make it difficult for green entrepreneurs to access the finance they need to develop and deploy their innovative green technologies. In particular, their extended commercialisation pathways and steep capital requirements can deter venture capital funds (Hegeman and Sørheim, 2021[20]; Gaddy et al., 2017[21]), as can the high degree of uncertainty surrounding the viability of their products, services and business models. This challenge is amplified by competition for scarce venture capital resources from non-green start-ups – often based on software products – that can yield larger returns much more quickly than the hardware-based green start-ups that often face a very long and uncertain development horizon (Bocken, 2015[22]).

Research leveraging survey data from Germany, Sweden and Finland finds that innovative green start-ups do indeed face significantly greater challenges in obtaining finance than innovative start-ups in other sectors (Bergset, 2018[4]). With that being said, in their analysis of data from the National Venture Capital Association and the Cleantech Group, (Marcus, Malen and Ellis, 2013[23]) conclude that venture capitalists have adapted their operating practices to accommodate clean energy companies by extending larger amounts of money for longer periods of time. However, the authors also find that investors steer clear of the most capital-intensive and high-risk projects, echoing findings from elsewhere in the literature. Similarly, (Bergset, 2018[4]) finds that while there are a small number of venture capital funds that focus specifically on green investments – often backed by high-net-worth individuals as opposed to the larger financial and institutional investors behind traditional venture capital funds – these funds typically invest smaller amounts than other venture capital funds and are not currently of sufficient number or scale to meet green start-ups’ high financing needs.

Venture capital funds’ hesitance towards investing in green start-ups is to some extent justified by the data. Gaddy et al. (2017[21]) estimate that less than half of the USD 25 billion invested by venture capital firms into clean energy start-ups between 2006 and 2011 was subsequently returned, with the authors finding that investments into clean energy start-ups were higher risk and had lower yields than in other sectors. This issue is particularly pronounced for green deeptech enterprises (Gaddy et al., 2017[21]). Exit opportunities for investors in green start-ups can also be more limited than in other sectors where there are greater opportunities for buyouts from incumbent firms (Ghosh and Nanda, 2012[14]).

The implication of these factors is that there is a degree of misalignment between green start-ups’ business trajectories and the needs and expectations of venture capital investors – an investor group that is traditionally a major source of start-up capital. This means that public support for the commercialisation of green technologies is needed if green start-ups are to access the financial resources they need to develop into mature and established companies whose green products and solutions can be deployed in the economy and make a difference in the green transition. Governments should also consider how they can encourage or catalyse investment into green start-ups by other types of entities. One promising area in this respect is corporate investment into green start-ups, which has been increasing in recent years (Hegeman and Sørheim, 2021[20]). In contrast to pure financial institutions, corporates have a range of motivations for investing in new enterprises. For example, they might invest in a green start-up to gain insights into new markets or technologies, to support the development of complementary technologies for their own business, to boost their own innovative capabilities by learning from the entrepreneurial ventures they support, and – in the case of green start-ups – to support their own greening efforts (Dushnitsky and Lenox, 2006[24]; Dushnitsky and Lenox, 2005[25]; Hegeman and Sørheim, 2021[20]).2 Corporate investors might also be more willing to invest in green start-ups where they feel they have a superior understanding of the relevant markets and technologies than other investors would do, helping to alleviate the immense information gaps that otherwise constrain green start-up investment (Chesbrough, 2002[26]). Corporations might also be better suited to taking on the risks of investing in new enterprises whose development trajectory is highly uncertain owing to their larger size, deeper asset base and more stable cash flows, which can also enable these investors to accommodate longer development horizons. Business angels also play a role in alleviating financing gaps, with some angel investors investing in a value-oriented manner (Brettel, 2003[27]; Hegeman and Sørheim, 2021[20]). Through interviews with 14 green business angels in Germany and the Nordics, (Siefkes, Bjørgum and Sørheim, 2023[28]) show that angel investors provide not only funding but also forms of “sustainability-value-adding” activities such as strategic sustainability advice, monitoring, resource acquisition, and mentoring. 

While access to finance is a critical development bottleneck for green start-ups, there are also other challenges:

• Regulatory compliance. Across sectors, new and small companies often struggle with regulatory compliance given that they do not always have the resources, experience, or expertise of larger companies. This challenge is amplified for green start-ups, which often operate in highly regulated sectors. For example, in the circular economy, start-ups must navigate strict regulations surrounding waste access and usage (Kasana et al., 2024[29]), while permitting can be a major challenge and source of delay for renewable energy projects. In their analysis of task statements for different occupations in the United States, (Trebbi, Zhang and Simkovic, 2023[30]) find that environmental engineers and environmental scientists are among the 6-digit SOCs (Standard Occupational Classifications) with the highest regulation-task intensity. Regulations also vary widely between jurisdictions, making it challenging for start-ups to rapidly scale. Green entrepreneurs can therefore benefit considerably from assistance in identifying and complying with relevant regulations.

• Research, development and testing infrastructure access. Green start-ups often need access to specialised testing infrastructures and research facilities in order to develop their products and services. These can be prohibitively expensive for early-stage start-ups to access and may in fact be undersupplied by the private sector given the “double externality” associated with the development and deployment of green technologies.

• First customer acquisition. Besides deterring potential investors, the relatively unproven and often high-cost technologies proposed by green entrepreneurs can also create challenges in finding first customers, who are generally reluctant to take on the risk of being the first user of a new technology, product or service. This is where governments have rich scope to support green entrepreneurs, either by acting as high profile first customers or by helping to connect start-ups with large corporate buyers.

References

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Notes

← 1. Government of Canada Clean Technology Strategy. More info here: https://ised-isde.canada.ca/site/clean-growth-hub/en/clean-technology-data-strategy

← 2.  Research on United States firms’ investments between 2000 and 2018 shows that corporate venture capital investments into green start-ups are linked to an increase in green patenting activity among the parent firm (Bendig et al., 2022[31]).