“Cleantech is the new energy sector. The old one will wither and die.” It’s a bold statement from Graham Ford, chief executive of solar technology firm Heliodynamics, but it’s hardly surprising if cleantech entrepreneurs are a little more evangelical than most.
The sector requires something of the pioneer’s faith. There’s money to be made, but competition is fierce, seed funding is scarce and many argue government legislation has failed to encourage investment away from traditional energy.
Yet recent investment trends in cleantech are encouraging. Driven by growing fears over climate change and sustainability, backing from investors rose from £103m to almost £230m in the UK last year, while funding across Europe more than doubled to £712m. But not everything in the sector is rosy.
Attracting investment
The lack of liquidity in capital markets is hitting everyone. For young green technology firms, it’s affecting the kind of business that attracts investment. Capital intensive businesses – large scale wind farms, waste-to-energy plants and solar installations, for example – may struggle to find funding in everything from venture capital investment to debt and asset finance and invoice discounting. However, companies with proprietary technology or intellectual property (IP) as their main asset are likely to fare better.
“Where you’re backing the development or commercialisation of unique or exceptional IP, you’re less reliant on providing debt to commercialise and develop your business,” says Sam Richardson, investment director at clean technology venture capital firm E-Synergy Ventures. “Where you’re investing in the technology, it will always be funded by equity providers, because it’s proper risk capital.”
VCs will form part of the solution, but the efforts being made by entrepreneurs also need to be supported by policy makers and the traditional energy sector.
“They’re ploughing the same furrow they always have,” says Ford. “Suggestions such as carbon sequestration [emission capture and storage] are a bolt on. Some quick, deep thinking is required. The energy structure needs to change rapidly.”
Richardson agrees, criticising the UK’s strict regulatory framework for holding green enterprise back. “The UK has always been stringent about enforcing regulations and has not been particularly commercial about it,” he says. “In the Gulf States, they’ll almost subsidise it. They make it much easier for businesses to invest in and scale up a solar park, for example, by removing the planning and regulatory issues.”
Green wash
The pace of change among policy makers and energy giants might be slow, but corporate firms’ focus on energy efficiency, rising utility prices and the move to a low-carbon economy should provide a very favourable exit environment for Cleantech firms with the right business model.
“There will be an upswing [in exits], depending on the prevailing economic conditions at the time,” says Richardson. “People will want to start acquiring and integrating these businesses when it becomes more critical for them to maintain market share.”
Green technology is already a hot area for entrepreneurship in the UK, but the gold rush might take a little while to arrive. First, a few key issues need resolving. Cleantech will have to bridge a traditional dichotomy between science and business, and also address the more deep-seated divide between economics and the environment. “Any investor should be looking at the return on the technology rather than the green wash benefits,” Richardson believes.
Since competition for funding is fierce, only commercially viable firms will attract it, despite a growing corporate trend to grandstand on green issues. “You risk a lot by financing something just because it’ll look good in your annual report,” he says.
Cleantech cynics argue that the sector is a vain attempt to justify the avaricious over consumption of resources by a bloated global population. Ford doesn’t see the argument as a simple either/or. “Living and consuming is what we do, but we need to control its rampant edge,” he says. “We’ll still need to keep the lights on. We can’t go back to a medieval lifestyle, there are too many of us. The key resource constraint is the limit to the CO2 we can have in the atmosphere, not the oil and gas running out. Everyone wants energy at the lowest cost, yet we couldn’t be paying a higher price in terms of environmental impact.”
Exit outlook
If the sector can provide the answer to something as fundamental as sustainability, current investment levels begin to look paltry. Indeed, figures from Library House suggest cleantech investment dipped in the second quarter of this year, reflecting VCs’ concerns over the global economic downturn.
Ford’s company, which makes advanced concentrating solar mirror arrays that maximise energy efficiency, is one of the few UK firms to prove its commerciality by achieving an exit. Heliodynamics was sold to Swiss renewable energy group Energymixx for £5.2m in June, and aims to sell its products to business and industrial clients in Italy, Spain, North Africa and the Gulf.
Founded in 2000, it got seed funding a year later, but had a tough time raising further money. “We got a little from the government, and raised VC cash in 2006. Ultimately, it wasn’t enough.” Ford came to the conclusion that his wasn’t an ideal industry for VC funding.
“The VC model requires fast returns to pay for the duffers,” he says. “The problem with cleantech is that there are a lot of ideas out there, most of which won’t succeed. With a few exceptions, the rates of return are quite modest, especially on things like solar, which is a highly capital intensive means of generating power. It’s something that delivers energy security that no other technology can, but you have to pay for that security.”
