Cleantech companies face significant hurdles in finding the cash to scale up
SURGING INTEREST
Entrepreneurs and investors are flocking to cleantech in search of business growth opportunities MONEY MISMATCH
A challenge for the sector is that startups need development cash, but investors want minimal risk and high returns KEY QUOTE
The EU risks missing key climate targets by failing to scale clean technologies and letting promising innovators scale in North America and Asia instead
Matthieu Valetas, of French business incubator Agence pour la Valorisation de la Recherche Universitaire du Limousin (AVRUL), smiles as he remembers the event. EL Smartgrid is an energy storage firm that, like other AVRUL protégées, was spun out of the University of Limoges, France. “Two years ago, we had a blackout in Limoges,” Valetas says. The only house with electricity was the house of EL Smartgrid’s CEO, he says. The story illustrates the value of cleantech innovation as Europe transitions to an energy system dominated by variable renewable energy. The kind of resilience that companies such as EL Smartgrid provide may soon be required in every house in a town, not just one. Energy storage is just one of several cleantech categories that need to scale up rapidly to help cut global emissions. Investors are said to be keen to back this effort. Research in March 2021 from Cleantech Group, a consulting firm, found venture capital investment into clean technologies across the European Union (EU) grew seven-and-a-half times between 2011 and 2020, to more than €5 billion. However, Cleantech Group warned much of that investment was focused on early-stage finance. The EU accounted for 23% of global seed-stage funding, the research found, but only 7% of cleantech growth equity, compared to 54% in North America. “The EU risks missing key climate targets by failing to scale clean technologies and letting promising innovators scale in North America and Asia instead,” Cleantech Group concluded in its report. GROWING PAINS Despite the increase in startup funding over the past decade, many nascent companies are finding it hard to even get early-stage finance. ReLi, a startup that is looking to recondition electric vehicle batteries for use as home energy storage units, moved its three founders and some interns from Sweden to Germany in 2021 to take advantage of Germany’s vibrant energy storage market but has struggled to find funding beyond an initial €15,000 through business competitions. The company started applying for grants in January this year, says ReLi’s Laura Laringe at the EU-Startups Summit, a networking event held in Barcelona, Spain, in May 2022. Grant funding has been slow to materialise, Laringe says, and ReLi is not the only startup struggling to get financial support from public bodies. Panagiotis Antonopoulos of advisory firm EU Grants Management Consulting, says startups that were awarded grants under the European Innovation Council (EIC) Accelerator programme in March 2021 were still waiting for the money as of May 2022. INTENSE COMPETITION European startups face tremendous competition just to get to this stage. The latest EIC Accelerator call closed in March 2022 after attracting around 1000 proposals, Antonopoulos says. Of those, just 50 won awards, he adds. The 95% that missed out indicates many good ideas may fail to get grant finance. Ivar Kruusenberg of PowerUP Energy Technologies, a firm which replaces diesel generators with hydrogen fuel cell-powered motors, received a rejection letter from an EU funding body just one hour before speaking to FORESIGHT Climate & Energy. “The reviewers say it’s not fulfilling the goal of reducing CO2 levels,” he says. Such setbacks would not be a problem if grants were just another form of finance, but for many startups getting some form of public sector funding is a prerequisite to attracting investors. “[In Germany,] they really want to play it safe,” Laringe says. When investors wish to back a startup business, they want to see some validation, says Antonopoulos. “A million euros from the European Commission is a good start,” he adds. MULTIPLE BENEFITS Grant money not only helps attract private capital but can also make a big difference to how quickly businesses advance. Laringe says ReLi has not been registered as a company because its grant application is for entities that have yet to be incorporated, meaning the business cannot sign commercial contracts and hindering its growth prospects. “Things are moving, but maybe a little bit too slow,” says Laringe. “We need more help from the government, like funds and grants that are not just for the 2% of startups. Most startups fail at this stage. They have something but cannot go on.” Grant finance can also help attract executive talent, another important ingredient in being able to go after private capital. Having industry experience on the payroll increases a company’s “investability”. When investors evaluate startups, “I think the major criteria is the team,” says Pierluigi Ferri of Elmira Industrial Supplies, which is seeking €600,000 to replace petrochemical precursors in industry with materials made from cashew nut shells. BIG MONEY Elmira’s cash requirement of less than a million euros is a typical early-stage cleantech funding amount. The fact that startups may not need much money to begin with should make them easy to fund. In practice, though, the opposite can be true. Financing parties may prefer larger transactions because they counterintuitively carry less risk for the same amount of effort. The due diligence involved in scoping a €500,000 investment is not much less than that required for a deal two or three times the size. The difference is an investor that is putting more than a million euros into a venture is usually backing a business with a decent track record. Another problem for companies in the cleantech space is that they frequently work with hardware-based innovations that have long lead times. Building a new energy storage system, for instance, can take years of research and development followed by very gradual market testing and adoption. Companies can fail at any point in this process and many have. SLOW EXPECTATIONS In the solar industry, media service Greentech Media found that 46 players had ceased trading or been forced to sell out or restructure during 2012 alone. This puts hardware developers at a disadvantage compared to sectors such as technology or finance, where innovation is more often digitally based and can be brought to market and scaled up quickly. “For many of these energy technology companies, the sales cycles are completely different to other types of B2B [business-to-business] companies,” says Henri Isohanni of Helen Ventures, the investment arm of a major Finnish energy firm. In the technology industry, he says, investors can usually expect to get a return within three to seven years. In cleantech, the wait is more likely to be between five and eight years, requiring patience and understanding on the part of the investor. “When you initiate discussions with startups and communicate three to five years is the sort of timing which you need to deliver on and pull the results from your pocket, it is not going to be a good and fruitful relationship,” Isohanni says. RISKY BUSINESS More than the longer timeframes involved, however, the big issue for backers is risk. “Talking to them, what we really find is that they want to have the risk really taken down by having reasonable revenues in place and good market validation,” says Kruusenberg at PowerUP Energy Technologies. This is ultimately a problem at all stages of the cleantech development cycle—and one that could pose a serious challenge to Europe’s energy transition. While there is abundant cash to fund low-carbon technologies, many of the ventures do not have a risk profile that is acceptable to investors. FUNDING MISMATCH The energy transition is “a revolution, not an evolutionary trend,” says Bruce Huber of Alexa Capital, a cleantech-focused corporate finance advisory firm. “We are doing a forklift upgrade, a wholesale digital change-out of our energy system, so this is not a pretty transition,” he says. “The traditional capital allocator model for risk and return doesn’t map neatly onto that.” The investment community is dominated by large organisations such as pension funds and sovereign wealth entities, he says. These look for long-term assured returns and do so by allocating capital across a range of investments with different risk profiles, from infrastructure to venture capital. “There is no shortage of capital for the top of the stack, going into infrastructure and private equity buyouts,” Huber says. These types of investments tend to offer modest returns but are safer places to deploy capital. “The challenge we have in this industrial transition is down at the high-risk, high-return area,” adds Huber. FINANCING OPTIONS The combination of risk, long development times and high capital intensity—the amount of money that needs to go into a venture compared to other drivers of production, such as labour—makes cleantech innovation hard to finance. This does not mean it cannot be done. It is possible to package high-risk ventures in ways that can help reduce the exposure for investors. Creating special-purpose vehicles can help reduce the impact of a business failure. Alternatively, investors can form publicly traded business development companies that are able to take on relatively high levels of risk by offering shareholders the prospect of higher returns. The problem is that these are hardly mainstream investment entities. They are usually created with specific deals in mind, and intricately engineered to suit the needs of the investor and the target. The complex nature of many cleantech ventures may require funding to be obtained from a variety of sources. “You can’t just stuff in a whole bunch of high-octane venture capital to fund infrastructure,” says Huber. “The numbers don’t work.” CHALLENGING OUTLOOK All this means that getting cleantech ventures from startup to maturity is a long and fraught affair. “We look at hundreds of companies every year and a lot just aren’t fundable. They really do need help to figure out how to structure their offering,” admits Huber, whose firm specialises in raising finance for cleantech ventures. This observation sits uneasily with the need to pour vast sums of money into decarbonising the economy. The likely cost of the energy transition is hard to gauge, with recent estimates ranging from around $1 trillion to $3.5 trillion a year. It seems unlikely such levels of investment could be achieved through special purpose vehicles or business development companies—or, for that matter, government grant schemes that take over a year to deliver funds. This is not just a matter of scale but also timing. The infrastructure needed for a low-carbon hydrogen economy, for instance, could at some point meet the risk-reward criteria that global investment funds are happy with, leading to significant flows of capital into the industry. However, it could take ten or 15 years for low-carbon hydrogen to achieve that level of maturity, Huber says. Yet in April, the Intergovernmental Panel on Climate Change (IPCC) essentially said the world had run out of time. CHANGING MINDSETS “The IPCC’s declaration that without immediate and deep emissions reductions across all sectors, limiting global warming to 1.5°C is beyond reach, must be taken extremely seriously,” said University of East Anglia’s Professor Corinne Le Quéré. “Every fraction of a degree of extra warming increases the risk of devastating climate change and severe weather events that have been set out by the IPCC and others.” Meeting that challenge may require a change in mindset about how we invest in the energy transition. Some funds, such as Breakthrough Energy Ventures, backed primarily by magnate Bill Gates, are focusing on initiatives where a single company could have a material impact on emissions. Elsewhere, investors could help cut emissions and get decent returns by backing cleantech segments such as heat pumps that use established technologies and can be deployed at scale now—even if they may lack the allure of a Tesla or an Ørsted. At the same time, public sector funding bodies may need to streamline their processes and expand their criteria so they can get more money more quickly to more entrepreneurs, helping to further stimulate private investment. Investors’ desire to balance risk and reward is understandable, but the risks associated with failing to curb climate change likely far outweigh the need for hesitancy in cleantech investing today. •
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Jason Deign