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Financing cleantech innovation – the venture capitalist perspective

In the third of our series of opinion pieces previewing Cleantech Innovate 2018, the UK’s leading showcase for game-changing low-carbon technologies taking place on 20th March at the Royal Institution, Jim Totty, Managing Partner at Sustainable Technology Investors Limited, shares his thoughts on the many opportunities that the growth in game-changing cleantech presents for venture capitalists (VCs).

 

Cleantech investment opportunities for VCs have never been so excitingThe ever-quickening pace of sustainability adoption is driving new and disruptive business models seeking venture capital investment. While the adoption times of new technologies continue to shorten, the long-term drivers of demand growth for sustainable energy, resources, water and food are as strong as ever. Institutional capital flows are now accelerating into sustainability, and the 2015 Paris Agreement has provided additional impetus.

We are seeing sustainable investment opportunities at an all-time high after the Brexit vote – the UK continues to be full of entrepreneurs who are passionate about building sustainable businesses. The UK government’s Clean Growth Strategy shows that of the G7 countries, the UK has reduced emissions per person fastest since 1990, and has the most productive science base. There are already 430,000 jobs in UK low-carbon businesses.

Current ‘hot’ cleantech investment areas include energy storage, transport, agtech, fintech, and the internet of things. Many game-changing innovations we are seeing involve the adoption of technological advances to tackle sustainability issues. Examples include the adoption of drones to solve challenges in agriculture, and internet of things solutions for energy infrastructure. In the water sector, advances in treatment and energy-efficiency technologies can deliver large bottom-line benefits for industrials and utilities.

Innovation is taking existing technologies such as electric batteries and artificial intelligence and using them to build the foundations of the new sustainable transport industry. As transport begins its journey to becoming electrified and autonomous, it will see more disruption in the next 10 years than it has in the previous 100 years.

However, a VC will think carefully before investing in a cleantech business. VCs think about risks all day long, and entrepreneurs must be able to assess their business model from an investor’s perspective. The key question is always ‘What risks are you exposing my capital to?’.

Examples of risk issues from the last 20 years of cleantech investment include:

Another critical piece of thinking is an understanding of the whole funding ‘ecosystem’ required to bring a technology to market. If a technology is capital-intensive then both management teams and investors have to identify where pilot plant and full-scale rollout equity can come from. If the investment ‘food chain’ is broken at any point then the ‘valley of death’ opens up and a business may be unable to progress. Venture capital occupies a critical part of the investment ecosystem in bringing clean technologies to market, and VCs have the skills, networks and knowledge to work with management teams to navigate these issues.

VCs are looking for three key ingredients in an investment proposal:

  • Large unaddressed market needs with long-term growth trends. Agtech and foodtech investments, for example, are being driven by a forecast growth in global population from 7.6 billion to 9.8 billion by 2050, combined with average calorie consumption per head growing 30% since the start of the 1960s.
  • Highly scalable business models. Where investors expose their capital to risk, they want to see a significant potential return upside that justifies the risk.
  • Proven management teams with a clear vision of their personal and corporate objectives. What size do I want to grow my business to? How do I want to achieve my personal liquidity event? Who might be the ‘A list’ of buyers of my business?

VCs are attracted by business plans that pull these ingredients together into a strong investment case. Now is a great time to build sustainable businesses!

 

You can register your place to attend Cleantech Innovate 2018 here.