Investment boost for 'clean' start-ups

Venture capital investment in clean technology businesses rose sharply in 2007, reflecting political and consumer support for a greener economy. The sum invested in fledgling UK companies working on environment-friendly breakthroughs climbed from £103m ($201m) to £227m, according to data company Library House. Similar growth occurred across Europe, where funds committed to clean technology start-ups jumped from €317m (£241m) to €712m. The sums are small by the standards of institutional equity, but there is a chance the money will fund some world-beating innovations – venture capitalists are prepared for a high proportion of their investments to fail, providing a few produce steep returns. Clean applications – which include renewable power, energy efficiency and recycling – are seen as particularly promising areas. “An awareness of cleantech has exploded across the world, with the US investing in biofuel,China in solar power and Europe declining to be left behind,” says Ed Hugo, an analyst at Library House.

According to Laurence Garrett of 3i, the UK private equity group: “Some venture capitalists have been investing in clean technology for a long time, but it has come to real prominence since Al Gore’s film An Inconvenient Truth brought climate change to the forefront.” Mr Garrett says venture capital investors are banking on three trends to support the businesses they are backing.

First, governments are providing financial incentives to encourage renewable power generation and energy efficiency, a trend he does not see being reversed in the UK by new nuclear capacity. Second, consumers are increasingly interested in low-carbon products. Third, hard-nosed entrepreneurs are promoting clean technology, once derided as the preserve of boffins and dreamers. “When you mix political will, consumer demand and the entrepreneurial spark, investment will fuel the trend,” Mr Garrett says. 3i has backed businesses such as chip developer CamSemi and Insensys, which produces control equipment to maximise the energy output of wind turbines.

Cynics question whether clean technology investment might simply be a financial fashion on a par with the late 1990s dotcom boom. However, Andrew Scott of Pelamis Wave Power, an innovative Scottish renewable energy business, says: “A lot of the drivers are not cyclical. Energy security will always be an issue.” The innovators of the 1970s may have been hampered as well as helped by direct government investment. These days public sector support is more often delivered indirectly through regulation, tax breaks and subsidies with the aim of luring risk capital from private investors. For example, the Portuguese government offers a subsidy equivalent to 16p per kilowatt hour for wave energy. PWP, which has raised £40m of venture capital investment, plans to install three wave generators in Portuguese waters.

The Library House figures show, however, that an enthusiasm for clean technology investment did not arrest an overall decline in total European venture capital committed during 2007, which fell from €5.64bn to €5.27bn. The proportion accounted for by investment in UK-based businesses fell to 22 per cent in the fourth quarter.

Return to Press Archive