Britain has some of the best credentials to develop clean energy technology – bountiful resources of wind, wave and tidal power and a strong science base, if a lack of sunshine – but the attractiveness of these areas for investors is arguably lacking compared to other countries. Companies working at the smaller scale of development of renewable energy devices and technologies are rife in the UK, but they say they are struggling to attract the investment they need to thrive in the wake of the recession.
It’s perhaps not surprising that a recent report from PA Consulting finds that we rank only fifth among 14 European nations as attractive for investors in clean tech – behind Austria, Norway, Denmark and Sweden.
Chinese investors and international funds may be showing “significant” interest in investing in UK infrastructure assets, as PA suggests, but meanwhile innovative young British companies developing the sorts of clean technology that could help decarbonise the economy say that it is often difficult to attract funds from either the private or public sectors. Stephen Voller, chief executive of Cella Energy, which has developed a method of storing hydrogen safely and cost-effectively, says: “What we suffer from is a complete lack of early-stage investment funding. The name ‘venture’ and ‘capital’ suggests risk, and suggests investment: but what most people want to do is invest later when the technology is proven.”
Mark Simmers, chief executive of Celtic Renewables, a Scottish firm that has developed a means of producing biofuels from the whisky-making process, says: “Where the issue lies is in taking businesses to the next level. There’s a limit to the amount of venture capital and investment bank funding, especially for pre-revenue businesses such as ours.”
In this context, individual investors with money to spend become important. Celtic Renewables is backed by a single private investor, while Cella has attracted interest from “high net-worth” individuals who pump money into the business in return for tax breaks under the government’s Enterprise Investment Scheme. “The other route is to go to strategic partners who understand your technology and can invest cash and also offer facilities and expertise. That’s how we’ve really funded ourselves to date: we’ve not had what most people would describe as venture capital – we’re too early stage,” says Simmers.
Awards from corporations can help: both Celtic Renewables and Cella have won modest, but important, sums from Shell’s Springboard scheme. Simmers says: “We entered Shell Springboard last year and won £40,000 as one of six companies with innovative low-carbon ideas. The funding is a mixture of that, plus our single private investor, who gets our idea, and also substantial support from Scottish Enterprise. They gave us an award, which supports technology development for small businesses.”
Maintaining such links is key, Simmers believes. “We need to make sure we’re linked in at the top of government and Scottish Enterprise. But it’s a challenging landscape. If you’ve got a good idea and good proposition then money is available, particularly in renewables. But there isn’t the bank finance available that there was four or five years ago – and there’s more competition for the money that is there.”
The issue of bank finance for manufacturing companies has been a hot one through the financial crisis and the recession. The manufacturers’ organisation EEF has consistently highlighted what it argues is a failure of banks to start lending again, especially to smaller firms. Voller says he has never secured funding from a bank. “I’ve been running my own companies for 15 years and never in that time has a commercial bank lent me any money. I don’t think it’s any worse than it ever was now. But commercial banks are in business to make profits, not take risks. One of the consequences of the crisis is that they are now even more risk-averse.”
Could the government do more to help? Voller suggests that increasing the tax breaks available under the Enterprise Investment Scheme might be a step forward. “It would make an awful lot more high net-worth taxpayers, people that have been successful in business and understand their technology, take a punt on a new business in the knowledge that they will get tax relief,” he says.
He adds: “The private sector’s much better at recognising winners. If you can stimulate the people who have been successful as engineers to go out and find these technologies and invest in them, it could have a profound effect on growth – and be more effective than any number of Catapult centres, or layers of government. We don’t have a lack of innovation – we have a lack of money.”
Dr Toby King is chief executive of Bowman Power, which has developed a novel way of generating electricity from the exhaust of diesel engines. The firm, which has been in business for eight years, initially relied on funding from its founding chief executive and investment from friends and family to thrive, although it has since raised more than £10 million in venture capital. King says: “We have something here that is simply very efficient at taking high-temperature exhaust gas and converting it into electricity. It is a British clean-technology success story, but we’ve struggled to survive at times. Even now, we’re still really on the cusp of profitability and need to raise money from time to time. But we can do it: we’ve raised £4 million as a mixture of debt and equity recently.”
Initial orders for Bowman’s technology came from companies in Germany making generation sets for burning biogas and wood gas which realised they could make more money by increasing their output of electricity thanks to a government subsidy scheme. The firm also won orders from an Australian company that makes diesel engine generators for the mining industry. In this case, the potential to save money by cutting down on diesel burnt proved attractive.
“Ever since the company started in 2004 there’s been a regular requirement for new funds,” King says. “I’ve worked in venture capital-backed businesses for my whole career, and they’ve always been engineering businesses, making things, rather than software or IT.”
He believes that, despite the dotcom bubble bursting in the noughties, digital businesses that have the potential to grow very quickly are often more attractive to investors. “If you’re looking at backing the next Facebook, where it goes from nothing to being worth hundreds of millions in a year or two, it’s different from looking at an engineering business that might not become profitable for five years or more. If you look at which companies are growing the fastest, very few of them are making products,” he says.
“But businesses can go down quickly too – and that’s perhaps more true of software or social media businesses than engineering. On the engineering side, on the other hand, it can be difficult to convince investors that your idea is a good one and will stand the test of time.”
It’s not just about the idea, either: once a company is up and running, manufacturing businesses pose special operational requirements. King says: “There are so many challenges – in terms of the infrastructure, the processes, the quality standards, the engineering rigour, the supply chain management – all the things needed to build a sustainable business quickly. But the business case can be more compelling and clear with engineering than with, say, a social media business.
“In terms of obtaining government money, it’s cumbersome and it’s hard work. I think a lot of companies get tempted to go after a piece of government money rather than staying focused on what their core strategy should be. You should focus on doing one thing well and you can’t be deflected from that.”
It can become counterproductive to spend too much time looking for government money, he adds: “Everyone’s going to say there’s not enough, and the process for obtaining what is there could be improved. But if the right grant comes up bang in your sweet spot, then sure, go for it. More generally, you have to be creative and innovative in where you look for money, and you have to be creative and innovative in the way you use it. How can I de-risk this business quickly?”
Match the clever idea to the market need
David Aitken, new ventures manager at the Carbon Trust, says it is “always tough” for clean-technology companies to raise money but that firms at later stages of their development are still attracting significant investment. “Earlier-stage companies are finding it more difficult. Over the last few years it’s been tough. Investors are looking for revenue and profit-generating companies. There’s a lot of interesting ventures out there and it’s not a desert: some are attracting money.”
But he adds: “Early-stage funding is challenging: you’re looking at a venture that is less developed, there is often less evidence about the market appetite in the form of substantial revenues, so you have to think about other ways you can make sure that an unmet market need is there.”
The Carbon Trust has been around for 10 years and is continuing to support smaller low-carbon businesses, especially in a new incubation partnership with General Electric. Aitken says: “One thing that is important for start-ups to identify is what the customer problem is that they are solving. Often with technology companies, they have developed something interesting, but they need to ask what problem they can solve. And you need to corroborate that with some evidence. It’s difficult at an early stage, because you can’t say: ‘look at all these sales I have made’.”
The right management team is also important, and investors will often focus on this, he adds. “Not just a technically strong team, but commercially strong. You need that because it’s quite a rollercoaster ride from interesting technical idea to volume production and sales."