Articles
The Future of Cleantech as an Investment Opportunity
Green Issues, August 2008
Capital investments in US clean technology (cleantech) companies grew by 41% to $961.7 million in Q2 2008, up from $683.5 million in Q1 2008. The highest total cleantech investment on record comes amidst a quarter in which overall venture capital investment was down by nearly 8%.
Driven by the rise in oil prices and the growing importance of the ‘green’ agenda to both consumers and businesses, this figure is expected to repeat itself in 2008 and now represents a major investment opportunity.
The cleantech sector only really emerged in 2004, although there were a few exceptions and some funds had targeted individual business segments such as solar, wind and bio-fuels for a few years prior to this.
But since then, cleantech has seen a number of differing fields really rising to the fore. Solar in particular was seen as the major green area for investment during 2005 and the focus on greener energy generation saw ethanol attract plenty of interest in 2006.
This latter trend has continued, and in the first quarter of 2008, the biggest bulk of cleantech investment (52% of the total) was made in energy/electricity generation companies, with 20% being made in energy efficiency companies.
Another trend over the last couple of years has been the switch in focus between the US and European markets. European investment in clean technology companies in 2007 was only a third of the $3.7bn ploughed into the field in the US, according to Cleantech Group, a specialist US research firm.
That’s a big change from 2005, when Europe attracted nearly two-thirds as much investment as the US. This may be due to the US being less adverse to risk and more enthusiastic about innovation, or just because the USA’s electricity network is in greater need of repair than Europe’s.
The US also tends to have more of an appetite for economic growth and has a culture that enables entrepreneurship, compared with the more conservative approach in the UK and Europe. Historically the US’s move into cleantech was somewhat slower than Europe’s, partly because the green agenda had been less important to corporates there, and partly because of the need to adopt stringent new regulation such as Sarbanes–Oxley.
However, now the weight of investment dollars is behind cleantech, the current position of US dominance is unlikely to reverse. Indeed, a change in administration in the US could see a ramping up of interest in cleantech as the green agenda grows in importance, and new legislation/regulation drives more corporates to adopt cleantech policies in the supply chain and elsewhere.
So what factors are now driving investment in the European cleantech sector today – and what should European entrepreneurs do to ensure they don’t fall further behind?
ICON Corporate Finance has been involved in advising technology and (more latterly) cleantech start-ups on funding for two decades. Amongst others, we’ve recently guided DeepStream Technologies, the Bangor, North Wales-based high-value manufacturer of 3D-shaped circuits through the funding process.
Our view is that cleantech, even with the current uncertainty in the financial markets, will continue to see massive investment over the next few years as organisations and venture capitalists farm the exploitation of new technologies, looking for killer applications and valuable investments.
The most important qualities for companies to demonstrate when seeking finance include world-beating IP, strength of leadership and strategy, partner ecosystems and market opportunities. In short, it’s not enough to have a brilliant idea – you need to demonstrate how you think it will work in practice in terms of markets, supply chain, distribution partners and leadership.
And as companies begin to compete for investment, mediocrity in all of the above will not be acceptable. As well as a world-class product, founders and CEOs need to surround themselves with world-class people who can take the business forward. The earlier companies can gain endorsements of their technology through customer orders and partnerships, the better they will fare.
CEOs also need to be prepared for things to go wrong, and for there to be plenty of trips and slips along the way. The best entrepreneurs will always be those who find a way through adversity and never give up. As a new sector, cleantech has a great deal of potential to be baffling for investors who are unlikely to be fully up to speed with developments in the marketplace.
For that reason, it’s vitally important to be extremely clear about what a technology does and how it will bring benefits to consumers or businesses. Again, the best entrepreneurs will have the skill to get investors excited about the potential that a new technology will have to save money or add value in some way.
Despite the comparative success of the sector, founders of cleantech companies are not going to have an easier ride from investors than their peers in other markets. However, all of the signs are that cleantech will continue to grow in popularity well into the next decade.
The regulatory framework will become more encouraging across the world as governments race to meet their obligations under Kyoto. Industrial growth in India, China and Eastern Europe will continue, putting more and more pressure on environmental resources. The only thing that will really help is new technology – changed behaviour will be important, of course, but will not be enough in itself to save the world.
The companies like DeepStream who come up with ways to control and measure energy use will benefit from regulatory changes and the growing corporate and consumer conscience about energy use. But they must have their story straight, they must have strong leadership and vision, and they must pull together proof points and potential endorsers as quickly as possible.
