The failure of many investors to appreciate the specific requirements of clean tech startups is contributing to a "funding gap" that is threatening to undermine Europe's ability to establish itself as a clean tech hub.

That was the stark warning from a panel of clean tech investment experts speaking at the Library House Essential Cleantech conference in London yesterday, who argued that while firms are keen to invest in clean tech companies, they are often ill equipped to provide the relatively small-scale financing required by startups.

"Lots of companies want to play in clean tech, but they are setting the hurdles for entry into the market too high," observed Dave Raval, manager of the Carbon Trust TTP Incubator investment fund. "We were approached by one venture capitalist that wanted to invest £40m but was only willing to do so in a company with over £1m in turnover – wind and solar companies of that size are pretty rare."

He added that for many clean tech firms it was easier to raise £70m than it is to raise £2m - a scenario that makes it difficult for companies to transition from having a good idea to building a commercial business.

Justin Adams, business unit leader for venturing at BP Alternative Energy, agreed that there was a funding gap for early stage clean tech firms. "If the VCs aren't interested in early stage then we are not going to be able to find the companies to take further, as we can't do early stage," he warned, adding that European governments should step up efforts to promote early stage innovation and funding.

"We see far more innovative systems in California, the Boston, New England cluster and even China, than we see in Europe," he said. "In Europe, we have policies that are deployment friendly, but they are not innovation friendly. There is a danger we will end up deploying technology that is made in other parts of the world."

However, Luciano Diana, vice president and head of clean energy equity research at Morgan Stanley, argued that the investment community was addressing the problem and was becoming more adept at backing clean tech startups.

"We are increasingly seeing specialised clean tech funds, that are really knowledgeable about the issues," he said. "The market is maturing rapidly."

His comments were echoed by Patrick Sheehan, founding partner of Environmental Technologies Fund, who argued that some of the "tourists" that had initially flocked to invest in clean tech had "gone home" to be replaced by astute backers.

However, he warned that some investors still had unrealistic expectations about the nature of the clean tech market and the time it takes to realise returns.

"There are some funds now that will do early stage," he said. "But many still underestimate how much it costs and how long it takes to build these companies. "