The Cleantech Investment Billions

Investment in cleantech is growing fast, but where is all the money going and how do you get your hands on it?

Alan Bristow, CEO of ICON Corporate Finance and Mark Crosier, CEO of DeepStream Technologies, shed some light on the issue.

The second quarter of 2008 wasn’t exactly a boom time for venture capital (VC). According to Ernst & Young figures, VC investment was down by nearly eight per cent on the first quarter.

If you’re a cleantech company, though, the picture looks brighter. Spurred on by soaring oil prices, investment in US cleantech businesses was up 41 per cent in the first quarter, to $962 million (£545 million).

Oil prices may have subsided, but the long-term case for cleantech remains strong. So where is all the money going?

Cleantech is a rising trend

The cleantech sector emerged in 2004, though a few funds had targeted individual segments such as solar, wind and biofuels prior to this.

Solar was seen as the big area for investment in 2005, while 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 bulk of cleantech investment (52 per cent) was made in energy or electricity generation companies, with 20 per cent being made in energy efficiency companies. 

A disturbing trend for European companies is the increasing US bias of cleantech investment

Another trend over the last couple of years, and a disturbing one for European countries, is the increasing US bias of cleantech investment. In 2005, Europe attracted nearly two-thirds as much investment as the US, according to research firm Cleantech Group. Two years later, Europe’s share had fallen to just one third of the $3.7 billion ploughed into the US.

Of course, some of this could be attributed to the fact that the US’s electricity network is in greater need of repair than Europe’s. On the other hand, the US is commonly seen as being less risk-averse and more enthusiastic about innovation, and a change of administration could see a further ramping up of interest as the green agenda grows in importance.

Given that there seems little prospect of US dominance of the sector reversing, the question is what European entrepreneurs should do to ensure they don’t fall further behind.

Green investment

The most important qualities for companies to demonstrate when seeking finance include world-beating intellectual property (IP), strength of leadership and strategy, powerful partnerships and compelling 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.

As companies begin to compete for investment, mediocrity in any 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.

As a new sector, cleantech has a great deal of potential to be baffling for investors. Even specialists are unlikely to be fully up to speed with every development in the marketplace. For that reason, it’s vital to be crystal-clear about what a technology does and how it will bring benefits to consumers or businesses. 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. As industrial growth in India, China and Eastern Europe continues, putting increasing pressure on environmental resources, changing behaviour will not be enough in itself to solve the world’s problems.

Entrepreneurs 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.

ICON Corporate Finance has advised technology start-ups for two decades, among them DeepStream Technologies, a Wales-based manufacturer of 3D circuits.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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