The theme of the Cleantech Connect Awards this year is ‘Celebrating the Entrepreneur’. In order to achieve success, in addition to personal qualities such as drive, ambition, vision and determination, an entrepreneur will also – almost inevitably – require access to capital to build a company. In most instances that means attracting external investors. Some entrepreneurs are more successful at fundraising than others. However, even the best entrepreneurs in the cleantech sector are currently finding it difficult to secure funding as the extended economic downturn takes its toll.
Signs are that total volumes of cleantech venture capital investment this year will show little, if any, growth and may even fall short of 2011 levels. And the bulk of that investment which is taking place is concentrated on later stage investment rounds for more mature companies. Early stage funding specialists can be found, some with a pure cleantech bias, others working more generally with innovative technology companies. Some funds have a particular niche: for example university intellectual property commercialisation companies such as Imperial Innovations and the IP Group in the UK. There is also funding for early stage technology companies in the UK from institutions such as the Technology Strategy Board. Elsewhere, in Germany the Fraunhofer Institute is an important funder at the start-up stage, while in Sweden Stockholm Innovation & Growth, or STING, (backed by the City of Stockholm, the Swedish Royal Institute of Technology and private companies including ABB and Ericsson) is an active provider of early stage funding.
A key challenge for venture funds in the current economic environment is to secure profitable exits from existing portfolio companies. Tough stock market conditions make IPOs the exception rather than the rule, so trade sales are the only option for many. But it’s a ‘buyers’ market’ for the large industrials – often making it difficult for venture funds to secure the returns they require on a trade exit. Fund managers are therefore retaining their investments for longer, and consequently need to keep funding them for longer.
While the tough economic conditions persist, these existing portfolio companies will require more and more funding if they are to succeed. In the meantime, the valuations at which later stage funds are prepared to invest can threaten the early stage investor with unwelcome dilution. Faced with pressure from their own investors to limit risks, some funds which were previously active in the early stage space have now narrowed their focus to exclude this segment of the market. And even amongst those with a clear mandate to invest in early stage companies, many haven’t managed to replenish their firepower during the financial downturn – so may remain short of cash for new investments until they achieve some successful exits from existing portfolio companies.
The flight to later stage investment is taking its toll in particular on companies with technologies which require large sums of capital over an extended time frame in order to break into an existing market or create a new industry. The wave and tidal industry is a case in point: this sector has become segmented into businesses which have been absorbed by large industrial companies – and those which are still struggling to secure early stage investment.
A case in point in a different sub-sector is Novacem, the Imperial College spin-out which received seed funding from investors including Imperial Innovations and the London Technology Fund. Novacem’s innovative technology involved the production of a ‘carbon negative cement’ based on magnesium oxide produced from magnesium silicates. Having failed to secure Series A funding, Novacem entered into liquidation and its intellectual property and technology was sold in October to Australia’s Calix. Imperial Innovations cited an “extremely challenging” (read ‘expensive’?) technology development programme for its decision to pull the plug on Novacem.
Imperial Innovations has also recently written down the value of its holding in another cleantech portfolio company, drivetrain developer EVO Electric. However, it appears very optimistic about the prospects for battery developer Nexeon, which has successfully raised later stage funds. Nexeon, coincidentally, has featured on the Cleantech Connect ‘Ones To Watch’ list for the last couple of years.
One difference between Nexeon and Novacem is that the Nexeon technology (a unique way of structuring silicon to extend battery cycle life and capacity) can function as a ‘drop in’ technology (it replaces graphite) for the lithium battery industry. Novacem, on the other hand, had high ambitions of displacing the existing Portland cement business – which was never going to be an easy task in a large global industry dominated by giant players.
The challenge of displacing large established incumbents is also a tough one for companies with new renewable energy technologies – such as those wave and tidal companies. Electricity utilities and oil companies are adopting renewables in varying degrees – but their core focus remains their existing businesses and they are rarely keen to upset the status quo. Their venture investment arms typically focus on companies with solutions likely to complement their existing businesses (for example biofuels for BP and Shell). Like the cement industry, there is an established status quo in the energy sector which will inevitably be difficult to displace – and virtually impossible without funding.
Perhaps a ‘cleantech Google’ – or a ‘cleantech Apple’ with the disruptive potential to eat into the market share of a giant like Microsoft – just isn’t possible in slow moving sectors such as energy or cement? Social media companies move quickly to disrupt existing markets and might be compared to the contestants in a competition like the X Factor – lots of ‘hype’, intensive media exposure and a fast track to fame, irrespective of substance (or – in some instances – profits). This may explain why they find it easier to attract early stage investment: the entry into the market is a rapid one and an investor can achieve a relatively rapid exit.
In contrast, in many (though not all) cleantech areas, early stage companies are perhaps more akin to Olympic hopefuls who need years of coaching and training and a lot of hard work – under the radar – before their moment in the spotlight once every four years. The risks are therefore higher for a cleantech investor. But the rewards for a successful cleantech investment are enormous. Cleantech offers the potential of an Olympic scale economic transformation when the cleantech champions emerge. But to get there a critical need is for early stage funding for innovative companies – even in sectors like cement which are resistant to change. Let’s hope the investors can step up to the challenge.