Facing the challenge of climate change, innovations that imply environmental benefits create business opportunities for entrepreneurs. This paper analyzes innovation capabilities of startups in Cleantech and how the innovation outcomes of those startups develop over time. Based on the Mannheim Foundation Panel and applying propensity score matching, a cohort of 567 Cleantech startups is analyzed and compared with a control cohort of non‐Cleantech startups. We find that startups in Cleantech have, on average, higher technological capabilities compared with all other startups. Our econometric evidence shows that Cleantech startups are more likely to combine existing technology in a novel way. Finally, we find that Cleantech startups develop more market novelties in subsequent years when compared with their control group peers.

Summary: Using the Mannheim Innovation Panel, we explore whether Environmental Innovator Firms (EIFs) have higher financial needs and are more financially constrained than Non-Environmental Innovator firms (OIFs). We find that EIFs are more likely to have higher latent financial need in comparison to OIFs. This implies that EIFs have latent projects that they have not yet realized, but would implement if they had the financial means to do so. EIFs adopting environmental technologies have higher financial needs compared to firms that do not. One tentative conclusion from this finding is that public subsidies might mitigate the financial restrictions of environmental innovation.