Timing can be everything for entrepreneurs and investors alike. Not just in predicting from where the next big thing will arise, but separating the overhyped and faddish from the sustainable and profitable. The performance of the cleantech sector – in which firms are using technology in business models providing solutions to global challenges – has so far placed it firmly in the latter camp.
Reasons for the growth of interest in the sector include:
- The growing awareness of climate change, and the desire to do something about it. Stuart Evans is the CEO of zero-carbon cement producer Novacem. “Fifteen years ago, Novacem would have been a really interesting science project,” he says. “And the reason it’s a company, and an investment, is because of the problem. People want to use low carbon materials. I think that’s a very profound and significant change.”
- The desire to solve the problem posed by a shrinking set of resources competed for by an increasing population.
- The rising cost of energy.
- A shift in priorities since the global financial crisis: “As the developed world tries to get back onto an even keel, some of the solutions cleantech has chime very well with getting back to a sustainable level of income and spending as a society,” says Etienne Pollard, associate at global investor Good Energies.
- Government initiatives, including the £200m funding deal for wind power development and £1bn for the Green Investment Bank announced in last year’s comprehensive spending review. Colin Calder, CEO of PassivSystems, says: “We don’t think there’s going to be any slowing down in the government’s commitment to this particular sector. To be frank, this is one of the opportunities for growing the economy, helping to create new jobs and new wealth in the country.”
- The desire for secure indigenous supplies of energy: “Energy is a fundamental requirement for economic growth,” points out Dr Stephen Maher from investment fund Low Carbon Accelerator. “In a world where energy supplies are in shorter and shorter supplies, you have twin demands: how you feed a growing economy with energy and how you source that energy securely. A lot of people, including the UK, are dependent on importing energy. Cleantech provides an indigenous supply of energy.
For these reasons among others, the UK cleantech market is forecast to grow at 5% per year to top £150bn by 2015. This is four times as fast as the UK economy as a whole, projected to grow by only around 12% over the entire period. No surprise then that money has been flowing in: last year saw solid investment in the sector in the face of recession. Backing from private investors into cleantech companies rose from £103m to £227m in the UK in 2009 and the Cleantech Group has calculated that 2010 was a record year for venture investment into cleantech, with UK companies raising $450m. Global executive search firm Kinsey Allen predicts that venture capitalist and private equity investment in the sector could reach £325m this year.
Of course, investors and entrepreneurs alike have still experienced false starts over the last few months and years. “Solar was hit quite hard in the recession for example,” says Dr Maher, “and there are people nursing losses on solar investments; though it will bounce back. But most big pension funds, which take long-term views, are convinced in investing in climate change mitigating technologies. The amount of capital available to the sector will grow in the medium to long term.”
He adds: “We’ve seen investors focus away from larger scale, longer term projects towards things without long planning times and the need for so much capital.” The shift therefore is towards investing in smaller, entrepreneurial firms.
In today’s cautious environment, it’s natural that later stage companies with a proven commercial product will find it slightly easier to get investment. However this leaves early stage investors with a stronger appetite for risk able to snap up some bargains. As Dr Maher of the Low Carbon Accelerator says: “If you come in too late you can’t get a large enough stake in the business. We like to own as much as is feasible and have an influence on how these businesses grow.” The LCA therefore looks for young businesses which are scalable, have the ability to solve real problems and are easily integrated into an existing infrastructure – so quickly deployable.
One only need look at the EU’s target set in 2008 to source 20% of its energy needs from renewable sources, for example, to see that clean technology is only going to play a bigger part in the way we live and work. Opportunities for entrepreneurs and investors to take advantage of this potential are many and large.
“When you’re in a global downturn, you really want to be in a high growth sector,” says Colin Calder from PassivSystems. “There’s a vast amount of financial resource available to companies like ours; it’s a hugely exciting time.”
Etienne Pollard summarises cleantech’s appeal for consumers and investors alike: “If there’s value for society there will in the long term be value for investors. What you’re seeing with cleantech is that people have understood that there is long term value.”
“It’s a secular trend,” he adds. “You can either get on the train or out of its way.”
Profiled on the next page are some UK companies who have taken full advantage of the current interest of their sector and look set to do big things in 2011 and beyond.