The future of cleantech
Investors in the cleantech industry are not just funding the development of environmentally conscious business, argues Paul Corren. While the technology is developed to do that, it is also focused on reducing costs and improving efficiency
The cleantech industry offers a broad range of opportunities to investors, but defining the industry is not straightforward. Cleantech covers a multitude of different technologies and products, whether these are related to recycling, renewable electricity, or sustainable building. The term can be applied to any facet of industry that wants to improve its performance, and more crucially, reduce its costs.
At present, Scandinavia's cleantech industry is ahead of the UK's. Although the perception is that this is because Scandinavia is more environmentally conscious, this is not necessarily true. Sometimes, it is easier to make changes by leaping from a burning platform. Denmark is a prime example: in the 1970s it was coming out of a deep recession, reliant on increasingly expensive fuel imports. Denmark's changes were born more from economic than environmental necessity. Therefore there's no reason why innovation in other countries cannot see them catch up.
However, in our experience, cleantech firms, should and could do more to gain confidence and support from investors. Our advice may seem obvious, but it underpins every cleantech investment Corrent Troen has overseen and will no doubt continue to do so in the future. Firstly, cleantech firms must identify and exploit verifiable routes to market whilst having a viable business model in place to service that market demand. The environmental benefits of any technology should only be emphasised once strong commercial fundamentals and market potential are established.
Alex Hook, investment manager at NESTA, agrees. Speaking at a recent cleantech discussion, he explained that businesses must demonstrate a clear understanding of three things in order to represent an attractive investment opportunity: its target market and related value chain, the players within that market, as well as how and to whom it intends to sell its product to. Hook added that strong commercial propositions aren't restricted to cleantech companies that have had a eureka moment. He believes that continued development of innovation, with the goal of unlocking incremental cost and energy saving benefits to customers, is crucial to the cleantech industry as it represents a nearer term commercial opportunity. Chasing the eureka moment takes far longer.
Cleantech isn't about dealing with new problems. Trying to reduce vehicle emissions or finding sustainable sources of electricity are challenges we have faced for some time. What's new is government legislation that forces us to solve these problems in a clean and efficient way. Legitimate and innovative solutions to these problems had little access to capital ten years ago, but Hugh Parnell, chairman of Envirotech, believes this has changed. He thinks there are now plenty of private equity players in the market, although as an industry cleantech is still in its infancy - therefore accessing investment is a slow process.
Parnell is keen to stress that growing a business out of an innovative idea and then selling it at a significant gain in under five years is an unrealistic strategy. He thinks there are parallels between cleantech and how biotech was 15 years ago in that short-term capital gains are not easily achievable. This is why good relations between the investor and cleantech company are vital, as is pursuing fund raising strategies. Unfortunately, some firms may enter into unsuitable capital arrangements, perhaps choosing the wrong investor - who might want rapid returns, or opportunistically seek a premature public listing. This can seriously affect innovation development and investment readiness. Awareness raising programmes should assist start-up innovators to identify and pursue the most appropriate financing options.
Aaron Powers, co-founder of Agrinos, says it can be all too easy for investors to leave meetings about potential cleantech opportunities filled with an irrational sense of exuberance, mainly because the technology they are dealing with strives to solve some of our biggest economic, social and environmental challenges. He advises investors to be selective with whom they decide to invest, and also to be long-term focused. He also believes it is unlikely any return on investment will be made in less than five to ten years.
What cleantech needs is for government and industry to come together and agree long-term policy. Government has an important role in setting standards, policy and objectives. Hook believes long-term and consistent government policy will help investors reach a better understanding of the playing field, which he says will in turn iron out any ambiguity, making the industry a more appealing place to invest.
Many cleantech start-ups lack managerial and entrepreneurial skills, so they should consider recruiting external talent, like credible non-executive support and access incubation schemes. Initiatives to raise awareness and encourage more serial entrepreneurs should be developed in partnership with industry associations and government. At present it can take millions in investment to discover whether or not a cleantech development is viable - and this is before any revenue is generated. It is not unreasonable to churn through tens of millions before the innovation has reached the stage of being commercially viable. This can be a tough prospect for potential investors, therefore it is crucial to explore partnership options. Partnership agreements with industry for research and development, manufacturing and distribution will depend on the approach of larger corporations, but mechanisms to improve collaboration should be actively supported. This view is shared by Powers, who thinks the arrangement far better suited to managing risks, as it is also likely to be able to raise enough capital to overcome any teething problems on the way to generating revenue.
As well as cleantech covering many different areas of industry, there are different kinds of cleantech. Hook terms these ‘cleaner-tech' and ‘cleanest-tech,' and uses the automation industry as an example. He says that better combustion engines could represent, say, a 5-10% reduction in emissions, so there is a clear and valuable improvement. Whereas, the move to electric vehicles powered by hydrogen fuel cells, would represent cleanest-tech, reducing emissions by 80-90%. Cleanest-tech tends to require ripping out current infrastructure and replacing it with brand new alternatives. He adds that these costs many orders of magnitude more than cleaner-tech solutions, and takes far longer, necessitating long-term policy frameworks and a lot of patience and commitment from investors, although the rewards from cleanest-tech could be huge.
Importance of the consumer
Hook isn't sure if the consumer will be the main driver behind any cleantech revolution. He thinks it is a broad church, covering many industries, not all of which are aimed at the consumer. However, if there is to be a mass demand from green consumerism, technology will need to be transparent to successfully gain the trust of the consumer. Etienne Pollard, associate at Good Energies, agrees. He uses smart meters as an example: in which the consumer will need to know what data is being collected, as well as having access to that data. Pollard says that although the UK has lagged behind in the development of cleantech, there is no doubt the government is making efforts to create an environment for cleantech innovation to grow because this will inevitably lead to the job creation. he suggests that certain areas harbour more opportunities, and that there are easy opportunities available for those investing in energy efficiency, hardware and consumer goods development projects.
Improved reporting is also a factor in successful relations between investors and cleantech firms. As more and more cleantech firms list on public markets, particularly the UK's Alternative Investment Market (AIM), the delivery of information to investors could be further improved upon in order to maintain and heighten confidence, enable better analysis and further promote investor commitment to the cleantech space. So, there is opportunity for the UK to make its cleantech industry both an active and growing market for potential investors. The winners will be those individuals and organisations with the patience to await the return.
Paul Corren is a partner at London-based Anglo-Nordic law firm Corren Troen