Tove Larsson, general partner at Norrsken VC


April 10, 2024

Leaping over the valley of death: The critical need - and opportunity for - late-stage impact investing

A general partner at Norrsken VC offers advice on steps late-stage investors should take — and how it can benefit their funds

Tove Larsson

4 min read

European startups are tackling some of the world's most pressing issues, from climate change to resource scarcity. But a €6.6bn funding gap in Germany alone threatens to leave these inarguably important and thriving early-stage companies stranded in the so-called Valley of Death.  

A staggering 91% of 142 founders we surveyed for our recent climate hardware playbook – developed in collaboration with Speedinvest, Planet A and Net Zero Insights – reported difficulty securing growth capital, compared to just 32% for early-stage funding. 

The gap between early and growth stage has become even starker as investors have hesitated to back companies with higher CAPEX requirements (due to higher interest rates) and longer time to revenues (as these companies usually require quite some R&D before hitting the market).


We hope more growth investors will see this funding gap as an arbitrage that can lead to generating alpha returns. By and large, because of the funding gap, valuations are depressed. However, if you possess a deep understanding of the markets involved, the risk associated with such technology is often de-risked, demand is substantial, and the underlying market opportunity is massive. Biggest challenges = biggest commercial opportunity. 

Five steps late-stage investors should take

Here are our five cents on what to do — and why it could benefit your fund. 

Balancing risk

Deeptech companies pose a very different risk profile than software companies. In most cases, the deeptech solutions have almost zero demand risk. If the company is successful in building the intended product, it will fly off the shelf. Letters of intent (LOIs) can typically help investors bridge the gap here, showing there is real traction. 

This can be different from software companies, where demand risk can pose a real threat to the long-term outlook. 

From a portfolio construction perspective looking to diversify different risks can help drive fund returns, and deeptech companies have a key role to play here. 

Lower volatility

Deeptech companies address real, long-term challenges that are (unfortunately) here to stay, and will hence be less affected by shorter-term market turbulence. If you as an investor can model time horizons that allow for the longer-term outlook, which we have found works well within the typical 10+2-year fund model, you will enjoy a resilient asset class. 

Potential for outlier outcomes

For most of the cases we look at within the deeptech space, the “all-stars aligned” case is significantly larger than what we see in an average software case. Companies in these segments that go all the way will be massive companies. This offers an attractive opportunity for investors, again to build a balanced portfolio. Adding some of these moonshot opportunities can help drive fund returns. The potential outlier outcomes also mitigate the fact that ownership in more capex-heavy companies will likely be slightly lower at exit. 

Impact-weighted returns

Integrate measurable social and environmental impact alongside financial returns for a more holistic risk-reward assessment. Neglecting that impact can bring to a case, or the risk that ESG topics can pose can mean missing great opportunities and making wrong decisions. A lot is happening in terms of regulation right now, which will set the direction for which companies will be future winners, and we expect an over-allocation of deeptech here. Are you betting on the right horses?

Sector-specific expertise 

Building dedicated teams with deep knowledge of specific impact sectors like climate, deep tech, or the circular economy offers a significant advantage. Generalist funds can struggle to understand these complex industries, leading to less competition. As a sector specialist, you gain information arbitrage, enabling you to make contrarian bets unlike those possible in the herd-driven SaaS 

By embracing these changes, late-stage investors can secure strong financial returns while playing a transformative role in establishing Europe's global impact leadership. What’s more, growth investors have a huge financial opportunity and incentive here. Valuations at Series B and above have come down, and investors are shying away. Those willing have a chance to make the potential investment of the century at a very decent valuation.

Tove Larsson

Tove Larsson is a general partner at Swedish impact investor, Norrsken VC.