What makes an environmental innovation hub?

2012-01-18 Joerg Sperling of WHEB Partners

Jörg “George” Sperling, Munich-based partner at European cleantech fund WHEB Partners looks at which countries are producing globally-applicable environmental technologies and why

I spend a lot of my time on the road in Europe looking for companies developing clean industrial processes and energy-efficient solutions – some of which will ultimately enter the product lines or production lines of Europe’s leading industrial groups. Indeed, experience of the past 20 years has shown that government penalties on emissions and pollution are not simply a dead-weight cost to large industry. They can catalyse deep-rooted overhauls in efficiency and, therefore, productivity. The German chemicals sector is a case in point – environmental legislation, once feared, has helped turn it into the most efficient in the world, still able to compete globally.

Yet large companies cannot always fund the R&D to develop a multitude of niche solutions across the supply chain, many of which also have multiple applications across different sectors. A lot of the value that we provide as a later-stage VC is therefore in identifying and developing the best technologies. And, in doing so, we are able to build a picture of which factors make different countries into good incubators for environmental technologies.

Broadly speaking, this situation is determined by three main related factors – the industrial heritage of that country, the business culture, and the availability of sources of early-stage finance. The ‘perfect storm’ is a territory with a well-diversified industrial base that has not had access to abundant natural resources; an open business culture focused on growth; and governmental or private-sector sources willing to provide early-stage risk capital. The size of the domestic market is also factor but can be two-edged sword – a healthy domestic market allows a company to mature and generate revenue before looking overseas, but can also distract it from seeking out international markets and tailoring its products accordingly. The presence of tax breaks and other incentives can have a similarly uneven effect. While they are better present than absent, too generous a regime can inflate or obscure the underlying value of a company.

Heading from North to South, therefore, our experience has been as follows.

Norway’s growth has been very driven by oil and shipping, meaning there has been little hard incentive to create technology hubs. The one exception is the solar company REC which has developed and financed a number of spin-offs and a number of very interesting geothermal technology companies.

Its neighbour Sweden has, by contrast, had a different development. A lack of natural resources has created both a more diversified industrial base – extending to pharmaceuticals, automotive and high technology – as well as a focus on reducing energy intensity. The latter in turn filters down to a ‘green’ population who are willing to become early adopters of clean technology. Alongside this heritage is a mature and active private equity and venture community who seek out international partners. That said, Sweden’s openness also makes it a market where one can invest cross-border – as we have done in Petainer, itself a spinout from Rexham PLC – without the need for a local office or co-investor.

It is a similar story in Denmark, with the added benefit of it being easy to serve from Germany, both geographically and linguistically. Local investment in spin-offs, public sentiment towards both technology and the environment, and an open business culture makes Denmark both a tech hub and a pleasure to do business in.

The Benelux region has a both an outward-looking culture and a lack of natural resources. A long history of international trade and limited domestic markets furthermore encourage cleantech firms to look to international markets relatively early in their lifecycles – providing the incentive for them to grow and seek international partners.

Germany – my home market – is a more complex story. On the one hand, it is a very mature and diversified industrial nation with a famed bedrock of Mittelstand companies. Some of these have even seen the repatriation of manufacturing business that it was once assumed had been lost forever to China, as buyers tire of extended supply chains, long lead times and variable quality. Others, meanwhile, have turned to clean industrial processes and recycling in past years and been able to integrate these into large industrial supply chains (such as FriedolaTECH, which produces truck floorings and transport containers from recycled plastic). Although the industrial profile of Germany is suitable, however, the culture and financial atmosphere provides its own set of challenges for an international partner. The owners of privately-owned, mid-size businesses are often sensitive to losing control of their businesses to an international investor or much larger corporate.

The UK, lastly, is uneven and perhaps the most difficult to generalise about. Its move away from manufacturing to services has been so complete that the any hope of recovering industrial capacity from China – as Germany has begun to – is completely unthinkable. Yet the country is still in possession of certain world class niche capabilities which can, and are, being redeployed towards cleantech – even from such apparently unlikely areas as motorsport. The so-called Anglo-Saxon business culture mitigates toward investment, and yet both the grant regime towards early stage R&D and the Capital-Gains Tax regime on cleantech investment do not. With both public and private finances more precariously balanced than in other Northern European countries, namely those Eurozone countries that do not face the prospect of a looming Euro-adjustment crisis; as well as a more uncertain regulatory regime (witness the recent review of solar feed-in tariffs); as well as a greater public scepticism towards ‘green’ issues (witness the recent decline in public certainty in anthropogenic global warming), the UK’s role in cleantech development is uncertain. The immediate manifestation of this is that those companies that do create and patent disruptive technologies tend to be sold overseas years before the reach the kind of output or market presence that they might on the continent. In this respect, the UK could provide some rich pickings for Corporate VCs looking for mid-stage, off-the-shelf bolt-ons to their main industrial lines.

In general, WHEB sees a high level of symbiosis with corporate VCs – not only as an exit route, but also as a means of sourcing deals from non-core assets that are being spun out due to a change of strategy (as we did with Petainer from Rexham PLC). We also look to corporates to validate our technologies by licensing them or adopting them, as took place recently when Bayer licensed a clean pest control product from Exosect Ltd. And, lastly, we remain happy to co-invest with a Corporate VC that brings complementary value and networks to our own.