Cleantech startups: a sweet spot for investors
- Clean technology is set to become a $2.2 trillion global industry by 2022
- Switching to renewable energy sources could have major economic and public health benefits
- This sector is poised for growth, and as Susanne Gløersen, a sustainable investment expert, says, “companies [that] deliver solutions that directly or indirectly address global sustainability problems represent clear growth cases”
- Startups in this sector typically need a lot of time for research and development, and are more suited for long-term investors
- Investments usually come from angel investors or VC firms
- Young companies could also try to attract funding from other sources, such as government loans and grants
A rapidly growing human population and climate change-induced events like droughts and heat waves pose a challenge that both governments and companies are trying to solve. These concerns gave rise to cleantech, a business sector that develops products, services, and technologies that optimise the use of natural resources and reduce our negative environmental impact. It grew in prominence in the mid-2000s when US venture capital (VC) funds alone invested over $25 billion in cleantech startups. Yet, by 2011, they “lost more than half of their total investment” and didn’t generate expected returns.
Falling gas prices, oversupply of cheap solar panels from China, and a lack of exit opportunities for investors slowed the growth of an otherwise promising industry. It also became apparent that cleantech companies require more time to develop products than investors expected. For instance, it takes up to 30 years to develop materials for next-generation solar panels. And even then, success is by no means guaranteed. Investors grew wary and became stricter in deciding where to invest. Cleantech startups with large capital needs or with inexperienced management teams didn’t stand much of a chance in attracting funding.
But despite these challenges, investments have continued, and clean technology is set to become a $2.2 trillion global industry by 2022. Only this time, both startups and investors know what to expect from each other.
The industry that can save the planet
Global investments in renewable energy sources like solar and wind energy are some of the largest contributors to the growth of cleantech, and in 2017, they reached a value of $279.8 billion, a joint report by the UN, Bloomberg, and the Frankfurt School for Climate and Sustainable Energy Finance concludes. Out of that amount, developing nations accounted for $177 billion, while developed countries invested $103 billion.
Switching to renewable energy sources and quitting fossil fuels could have major economic and public health benefits. For instance, by 2050, it could save up to seven million lives each year and create 24 million long-term jobs, while limiting global warming to 1.5°C or less. Other cleantech sectors are booming as well. There are more than four million electric vehicles on the road around the globe, and the value of this market is expected to reach $567 million by 2025. The market size for air pollution control systems is also on the rise, and it’s set to be valued at $98 billion by 2025.
No easy money in cleantech startups
Despite the obvious benefits and growth potential of cleantech, investors should still be aware of several key facts. Neil Yeoh, the deputy director of Echoing Green, a non-profit that supports ‘green’ startups, explains that “Rather than focusing on the current skillsets of the entrepreneur, early-stage investors need to get better at evaluating the potential of an entrepreneur.” In other words, they need to see beyond the current status of the company and assess its future performance. To that end, an ideal founder is a person with great passion, grit, and resilience.
Yeoh also warns that the cleantech industry isn’t a place for investors looking for a quick way to make money. Startups in this sector typically need a lot of time for research and development, and they’re more suited for long-term investors that are willing to take risks.
Many ways for entrepreneurs to impress investors
Cleantech startups, for their part, need to be aware that raising funding is now more challenging than ever due to a string of high-profile failures in the past. For instance, SunEdison, a renewable energy company, filed for bankruptcy in 2016 despite receiving at least $176 million in funding in previous years. Two years before that, KiOR, a biomass startup that had an IPO (initial public offering) valuation of nearly $1.5 billion failed as well. Nevertheless, investors are still looking to support promising startups. Richard D. Harroch, a VC investor, and Daniel K. Yost, a lawyer with a wealth of experience in tech counselling, shared their views on how cleantech startups can successfully attract much needed funding.
They argue that young companies must demonstrate they can eventually operate with significant profit margins and without “huge ongoing infusions of cash”. But the single most important factor in deciding whether to invest is the quality of the management team, and investors look for companies with experienced and passionate leaders. Showing signs of early success in the market, such as positive media coverage, the launch of a beta product, or customer testimonials can also help impress investors. And as startups often go head to head with well-established corporations, they need to understand the competitive landscape.
When it comes to financing, Harroch and Yost note that startups shouldn’t focus only on angel investors or VC firms, and could, instead, try to attract funding from other sources, too, such as government loans and grants.
New investment funds for cleantech startups
New investment funds geared towards cleantech are emerging in the private sector. One of the latest additions is Congruent Ventures, a San Francisco-based VC firm founded by Josh Posamentier and Abe Yokell, seasoned tech investors. Their $92 million fund will support ‘green’ startups active in sectors like “urbanization and mobility, food and agriculture, the clean energy transition and supply chains”. In Europe, the EIT Climate-KIC startup accelerator recently unveiled a list of the top 30 cleantech startups. It includes companies such as Handerek Technologies that developed a method for converting plastic waste into fuel, Zeleros that builds energy-neutral ground transport systems, as well as Refurbed, a startup that works on creating an online marketplace for refurbished electronics.
This sector’s time has come
Providing clean energy and protecting the environment are some of the most pressing issues of the modern world, and it’s high-time that cleantech startups come into prominence.
TS Lombard, an investment research company, expects that by the early 2040s, “half of the world’s energy will come from renewables”. Predicting the exact year for such an event remains challenging, though, as shifting public policies, technical challenges, and the state of the global economy all play a role in the switch to renewable energy. For now, countries such as Norway, Iceland, Germany, and Costa Rica lead the way in this field, due to, among other things, strong government support for the production and usage of clean energy.
The future of cleantech remains exciting and full of opportunities to build a more sustainable economy. This sector is poised for growth, and as Susanne Gløersen, a sustainable investment expert, says, “companies [that] deliver solutions that directly or indirectly address global sustainability problems represent clear growth cases”.