Financing is regarded by the authors of both surveys as one of, if not the, biggest challenges for cleantech companies. However, the approaches of and conclusions arising from the two surveys reflect the contrasting fi nancial cultures of the UK and Germany, with the Anglo-Saxon ’equity investment’ culture in evidence in the UK survey, while the German survey assumes a more prominent role for bank finance.
We noted a distinct difference between the opinions of the surveys’ authors on the feedback on financing options secured by the responding companies – despite relatively similar results from both the German and UK surveys.
The Rushlight survey found that just under half of UK cleantech companies were financed by founders’ capital and just over half had succeeded in attracting third party investment – with around 12% having secured venture capital. The authors describe the number of companies attracting third party investment as “astoundingly low“. In the German company sample, founders’ capital made up 51% of financing – very slightly more than in the UK – with 10% of companies having attracted venture capital funding. The 10% figure was considered high by the authors of the German survey.
Although clearly an interesting contrast in interpretation, it is probably misleading to read too much into these opinions as each was made in the context of another observation: in the UK case, external financing was perceived as low in the context of a low level of grant funding (relative to the grants known to be available); in the German case, venture capital funding was perceived as high in the context of a stated preference by German cleantech companies not to seek external equity.
Of the German cleantech companies, 18% were found to have received bank credit. The UK survey did not undertake research into the level of bank fi nancing. However, the comments made by UK cleantech companies as part of the Rushlight survey underline the fact that obtaining bank fi nancing is regarded as a challenge – something which resonates with the German findings. The authors of the German survey note that a lack of capital for young cleantech businesses is one factor forcing companies to resort to venture capital funding despite their disinclination to do so.
While German cleantech companies are reluctant to seek external equity finance, 80% of the respondents to the UK survey expect to need external equity finance en route to market. Although a statement of an expected need for a form of finance does not necessarily equate to a preference for it, these results do appear to indicate a marked difference in attitude towards external funding on the part of cleantech companies in Germany relative to those in the UK.
For all that the approaches are different, each of these two surveys offers valuable information on cleantech companies. We summarise the results of both in the following sections.
German Cleantech Survey
Investing in Cleantech - It's all about knowing the difference!
Conducted by Mountain Cleantech AG in conjunction with Julian Steinmeyer of the Technical University of Munich
Mountain Cleantech AG (www.mountain-cleantech.ch), headquartered in Zurich, Switzerland, is a Venture Capital Firm focusing exclusively on clean technology and renewable energy. Mountain Cleantech invests in late stage Cleantech companies in Europe, with a strong focus on the German speaking region. Mountain Cleantech AG manages Cleantech Invest AG, a Bern and Frankfurt Stock Exchange listed Venture Capital Fund (ISIN: CH0034183175, Ticker Frankfurt: 4CT, Ticker Bern: CTI, www.cleantech-invest.ch) and is currently raising its second, closedend structure fund.
Julian Steinmeyer is a graduate from the Technical University of Munich and has substantial investment experience in the Cleantech industry.
The goal of the Mountain Cleantech survey of German cleantech companies was to evaluate the capital structure, future capital needs and preferred fi nancing options of German cleantech companies. The survey’s aim was to help cleantech investors understand the criteria (both financial and non financial) engaged by cleantech companies in making funding decisions. The study established that there is large potential for venture capital investments in Germany, with German cleantech companies facing a lack of capital to finance their existing operations and future growth plans.
The German survey was conducted from April to June 2009 amongst a sample group consisting of German cleantech companies from the following industry sectors: solar power (41%), wind power (14%), energy efficiency (14%), biomass (12%) and others (19%). The same survey was conducted amongst a control group of companies from traditional industries.
Large potential for venture capital investment in Germany…
The Mountain Cleantech survey results show that 48% of German cleantech companies currently need additional financing for their normal business operations, while 69% need additional financing for growth and expansion. The report’s authors conclude that German cleantech companies face a lack of capital to finance their existing operations and future growth plans. However, unlike companies from other industries, German cleantech companies are more reserved towards external equity financing.
... but German cleantech companies reluctant to consider venture capital
Entrepreneurs from both sample groups were asked to rank different forms of financing, according to their preference, on a scale of one to nine. German cleantech companies ranked founders’ equity as the most preferred financing option. Subsidies were ranked second, followed by secured loans and bank loans. External equity, be it from business angels, public or venture capital, was much less preferred.
The survey’s authors do not consider the preference against external equity to be a surprise, pointing out that this is a costly source of financing. They were, however, surprised to discover that cleantech companies are much more reluctant to consider venture capital than the control group of companies: venture capital ranked as the third most favoured form of finance amongst the control group.
Clearly German cleantech companies, in contrast to German companies from other industries, have reservations with respect to external equity financing. Factors such as references, network, track record in cleantech investment and personal aspects were found to play a much more important role for cleantech companies than for companies in traditional industries when it comes to choosing venture capital financing.
The main reason cited for the reluctance to choose external equity – and especially venture capital – by cleantech companies was the fear of losing control and independence. Other reasons given were a preference for flexibility in financing options – and concerns about the reliability of external investors.
The three most important attributes featuring in the selection criteria for German entrepreneurs in the process of choosing a venture capital investor were found to be:
• The investment conditions imposed by the investor (for example, the stated exit strategy);
• The reputation of the investor;
• The personal relationship with the entrepreneur.
Those entrepreneurs who consider the personal relationship with an investor to be important also typically rate the quality of the investor’s network and advisory board as signifi cant factors.
…but low correlation between preferred and actual financing sources
The survey results were used to conduct an analysis of the actual capital structure of cleantech companies, relative to the preferred financing options. This analysis demonstrated that the preferred financing options of German cleantech companies do not correlate with the actual sources of financing. Ironically, despite the reluctance amongst cleantech companies to consider venture capital investment, they are almost twice as often financed by venture capital than the control group (10% of cleantech companies compared to <5% of the control group). Self funding (capital from founders), the stated favourite option for cleantech companies, was ironically a less significant source of financing among the cleantech companies than among the control group – despite the fact that the control group ranked this option as the least preferred.
The German cleantech sector, according to the Mountain Cleantech survey, is financed mainly by own capital (51%). Bank credit accounts for 18% of funding and 10% of companies are financed by venture capital.
The authors suggest that the reason venture capital is an important financing source for cleantech companies – despite the stated aversion to external equity – might be the usual capital intensity of cleantech business models, combined with a general lack of bank finance for young cleantech companies. Entrepreneurs explain the variance between their stated preferred capital source and their actual fi nancing structure as due to a combination of limited personal resources and the reluctance by banks to finance young and capital intensive companies.
Subsidies influence financing structure of German cleantech industry
The high preference amongst cleantech companies for subsidies was considered by the authors to be remarkable, given that subsidies ranked just seven out of nine amongst the control group. The authors observe that subsidies constitute the cheapest financing option and seem to influence the financing structure of the whole German cleantech industry.
After subsidies, the next most favored forms of financing for German cleantech companies were revealed to be those with a fixed payment structure, such as secured credits and bank credits.
High future capital needs of German cleantech sector cannot be met by preferred form of financing
One of the key findings of the Mountain Cleantech survey was that all of the capital needs of cleantech companies cannot be satisfied by the preferred form of financing of those companies. This finding is especially significant given the high future capital needs of the cleantech sector – in particular the capital investment which will be required for growth.
Overall, the authors conclude that the study reveals the large potential for venture capital investment in Germany. But they emphasise that investors will need to adapt their investment approaches to match the funding preferences of German cleantech companies. Investors need to establish strong relationships with cleantech entrepreneurs to engage their trust.
The authors also suggest that the results from the survey provide an insight into why the vast potential of the German cleantech market remains almost untapped by international venture capital investors.
UK Cleantech Survey
The Rushlight Cleantech Survey - conducted by Eventure Media Ltd
Eventure Media Ltd (www.eventuremedia.co.uk) is an organisation that provides events, incubation services and broad support to developers of clean technologies throughout the UK and Ireland under the Rushlight brand. Eventure Media runs a number of events and activities designed specifically to assist the development, financing, strategy, operation and route to market for clean technologies with the ultimate goal of facilitating their successful deployment to achieve a sustainable future (www.rushlightevents.com).
The Rushlight Cleantech Survey aimed to gather a broad base of information on “cleantech development in the UK”. Cleantech development was defi ned as "the path that takes an innovation from an idea or ’lab bench discovery’ to the point of deployment in volume or market adoption."
Companies were not pre-selected, but the Rushlight survey was “made accessible” to most of an estimated 13,000 UK cleantech “developers”, which included research institutes and companies. However, the response from research establishments was observed to be “disproportionately lower” than had been expected. No control group was polled. The survey was conducted over a period of several months. The dates straddled the UK Government’s announcement of the Renewable Energy Strategy 2009, the UK Low Carbon Transition Plan, the Low Carbon Transport: A Greener Future paper, the UK Low Carbon Industrial Strategy and the Towards a Low Carbon Economy strategy paper on 15 July 2009. Accordingly, the survey provides views from both “before” and “after” perspectives.
Geographical clusters emerging in the UK
The Rushlight survey found evidence of the emergence of cleantech subsectors with a geographical bias. Some of these are the result of natural topography, but others appear to result from regional initiatives. For example, the Welsh Assembly Government's support for manufacturing businesses (to replace declining old industries) has been a magnet for electric vehicle and emission abatement technology companies – resulting in a powered transport cluster in Wales. Other geographical clusters include solar in the south and hydropower in the southwest and northwest.
The largest survey response levels were from the most prominent cleantech focused organisations: Envirobusiness; Regen SW; Renewables East; International Business Wales; and Envirolink NW. The uptake of grants for cleantech companies was found to be more likely in these regions – and is consistent with the amount of regional support provided for cleantech developers. At least one cleantech developer in each of the regions in England, Scotland and Wales has been granted funding of over £250,000. Northern Ireland has the lowest amount of grants awarded.
Less than half of cleantech developers receive grant funding
Most cleantech developers have not received a grant of any kind. The authors note that the UK Government has heralded a number of initiatives designed specifically to assist cleantech development, but that just over half of respondents to the Rushlight Cleantech Survey have received no form of grant support.
Although almost 20% of developers have received in excess of £250,000 in grant funding and a further 8% have received over £100,000, “the majority of cleantech developers are not aware of what is available, are excluded from applying, fail with their application, find/simply believe the process of requesting financial support to be too burdensome to participate or find the system of grant funding interconnecting with fiscal measures render grant finance not worthwhile”.
In terms of grants and soft loans, the sectors which have attracted most support include renewable energy, clean fuels and water. Hydropower, hydrogen/fuel cells and waste attracted the least grant and soft loan support.
Low percentage of developers attracting outside funding
Just over half of respondents have been successful in attracting third party investment, while 49% of cleantech development is self-funded by management. The authors find the low level of funding to be “astounding” when it is considered in the context of the low numbers who have raised grant funding – and that over two-thirds of respondents have launched their products on the market, or are within one year of launch.
Over 60% of the external equity funding which has been extended has come from private individuals, including business angels and friends and family – and less than 25% from VCs.
More than 80% of survey respondents expect to need external equity finance en route to market: stock markets are not recognised as a way to raise funds.
The two most signifi cant challenges for cleantech developers in the UK are finding investors and market recognition and adoption. Very few companies perceived new legislation or regulatory issues as being poignant. While investment was a common issue across all the subsectors, it was less marked for the waste and water companies than for the energy-based companies. In terms of sectors, marine energy faces the greatest challenges en route to market, needing a combination of funding, partners, technology, regulatory and market solutions.
UK cleantech companies fail to recognise competition
One interesting finding of the Rushlight Cleantech Survey was that competition is frequently perceived from a technology perspective rather than from the perspective of the customer. A large portion of cleantech developers – some 32.5% of respondents – felt that there was no competitive threat to their businesses at all (with the notable exception of the solar sub-sector, where multinationals were recognised as the main competition). It may be the case that those who see no competitive threat are developing technology which is expanding the market into a new area where no others are currently operating – truly disruptive technologies. However, as the survey’s authors point out, most cleantech solutions are designed to replace current high carbon alternatives and there are often competing clean technologies addressing similar legacy market propositions. The authors note that a number of the respondents who saw no competitive threat were in fact direct competitors of each other – and reach the disturbing conclusion that a significant number of UK cleantech companies appear to have a limited knowledge of their own markets.
Message to the UK Government
An interesting feature of the Rushlight Cleantech Survey was the option for respondents to provide a message or request to the UK Government. A wide range of opinions was voiced, of which 57% were critical and gave specific suggestions concerning funding. A host of highly subjective (anonymous) responses are contained in the full survey report. We have included a selection of the more opinionated below.
“VCs will not normally consider investment unless sales have already been established. Some mechanism needs to be in place so that demonstration projects can be set up for ‘all’ technologies that have potential.”
“Follow on funding for both R&D and expansion is a real problem. The Carbon Trust and the Technology Strategy Board / Energy Trust are a disaster in this respect - definitely part of the problem not the solution.”
“… UK public contracts…require >3 satisfi ed customers and 4 years trading accounts.…. If the UK is to get real innovation widely and quickly into use, then public procurement policy needs to change.”
“Consolidate the Qangos that support start-ups.”
“……… we have received zero support to date - despite looking. In contrast, we have just set up an office in Italy and have received significant support from the RDA in doing so. Indeed, the difference in approach and support has been almost breathtaking.”
“The business angel market has died, early stage is too risky and deal costs make it uneconomic for VC to invest in early stage. We need Government to plug this gap and operate as early stage investors holding equity in early stage companies as they do in failing banks.”
“Cancelling the 20p tax reduction for biodiesel as planned for April 2010 will kill the small scale biodiesel industry in the UK.”
“Take the emphasis off biomass for electricity generation and on to biomass for heating.”
“Dear Mr Milliband, last week’s announcements suggest that micro generators could benefit from input tariffs. Yet micro hydro is not included as an option.”
“Simplify grant application procedure and appoint [a] specialist grant 'guru' to 'handhold' company and bring funding sources to the company's attention.”
“Take a leaf out of the US recovery bill; clean technology funding applications are dealt with in 28 days, not 9 months as in the UK.”
“The UK is a terrible country in which to try to develop new technology. Government sponsored agencies are too risk averse to make the first move. VCs are short of cash and confidence. This country is missing out to the USA, Scandinavia and The Netherlands.”
“Be bolder and help us make this happen. We struggle for a few £100K of help despite all the spin, our US competitor gets $45M!”
