Green light

Investors are finally realising the financial potential of backing environmental technologies, and are providing engineers and scientists with a much-needed boost. Christopher Sell reports.

The development of environmental technologies was once seen as a worthy but woolly pursuit, with little to attract the hard-nosed investors of the City of London.

A combination of circumstances has changed that, and a growing amount of investment capital is available to back early-stage technology ventures in areas such as renewable energy and alternative fuels.

This is good news for the engineers and scientists working in the ‘green technology’ field, who previously found it tough to bridge the gap between research grant funding and the serious cash needed to create a growing business.

The converging circumstances behind the increased pool of finance available for environmental technologies are many and varied, but all stem from a growing consensus that action is needed to reverse the impact of climate change and provide sustainable, clean energy sources.

This has produced a frenzy of directives setting targets and limits – many of them backed by the force of law – from national governments and the EU.

Many of the requirements of these directives can be met only through technical innovation, forcing businesses to seek technologies that will enable them to change their products and processes.

It is this potentially huge new market that has attracted the attention of the investment community, which is always on the lookout for a growing sector.

Some of the new funds are being made available thanks to the efforts of organisations with an interest in promoting environmental innovation.

The Carbon Trust, for example, recently launched a commercial division called Carbon Trust Enterprises with a mission to develop businesses that meet its emissions-busting remit (The Engineer, August 7).

In another development, City financier AngelBourse has teamed up with the Environmental Industries Commission (EIC) to launch its ‘Gateway to Global Investors’, which will give UK environmental companies access to new funding opportunities.

To date, the involvement of venture capitalists, fund managers and angel investors has been minimal compared with activity in the biotechnology and IT industries.

However, with the UK’s environmental industry emerging as a major player in the global market – which in total is predicted to be worth $700bn by 2010 – early-stage finance will be a prerequisite to growth.

The EIC hopes that the service, which creates a network accessing all sources of finance, from institutional investors to hedge funds, will not only fill the investment gap, but also prove a major incentive to environmental technology initiatives.

Such a facility has been lacking in the past, according to Adrian Wilkes, executive chairman of the EIC. ‘From our experience, finding money to grow environmental companies is difficult because, on the whole, they are very small businesses. Almost half of our 310 members have a turnover of under £10m.

‘Small businesses will have a relationship with their bank, but when you look at the variety of sources of finance in the City – hedge funds, venture capitalists, angels and private investors – there is a plethora. The question is how to find them, which has always been an issue for the industry.’

Technical knowledge

Wilkes said this was not surprising for a group of entrepreneurs who, although they may have sound technical knowledge of their field of expertise and the markets in which it operates, are not familiar with finance.

‘Finding your way around the City is confusing,’ he said. ‘In the past, you probably would have had to do a lot of the research on your own.’

Wilkes confirmed that AngelBourse was analysing a range of sectors, with air and water pollution, contaminated land remediation, environmental consultancy and sustainable waste management just some of the growth areas the Gateway would look to aid.

The EIC has also organised a number of seminars for members and the wider industry to explain the processes involved in acquiring funding.

Campaigning organisations such as the EIC and the Carbon Trust are not the only ones that are driving investment in environment-focused initiatives.

Low Carbon Accelerator is an investment company set up specifically to focus on fields such as alternative fuels and energy generation and efficiency.

The investment group, which plans to float on the London Stock Exchange’s AIM market, claims to have identified a wide range of opportunities among businesses with the potential to become leading players in their respective markets.

One of Low Carbon Accelerator’s initial investments is innovative solar power company HelioDynamics, which is based in Cambridge and is developing technologies that can use energy from the sun more efficiently.

Chief executive Graham Ford said that until the arrival of Low Carbon Accelerator, his business had spent years trying to secure substantial funding over and above a few development grants.

‘We basically limped along as a company with this small injection of £150,000, which allowed us to progress through a number of prototype developments and business plan creations,’ he said. ‘Apart from that, all the directors put their houses or equivalent into it to fund the business on a shoestring.

‘The last five years have been dominated by a process of seeking to raise money. You can’t get into this industry and build it up by working out of the back of a van. You must have backing to get the product through development cycles, certification and launch.’

When he met Low Carbon Accelerator, Ford expected he would end up facing a board of venture capitalists who had no idea about the technology and didn’t understand the sector. In fact the financiers took on board both the business and technology case, and committed £2.5m of funding earlier in the summer.

So would HelioDynamics have folded if Low Carbon Accelerator had not approached it? ‘I don’t know about that, as we have been pretty tenacious,’ said Ford. ‘But we wouldn’t have made the progress we are currently making and wouldn’t be undertaking the expansion plans we are implementing. Instead, we would be focusing most of our management effort on continuing to persuade fund holders we were a good bet.’

According to Ford, a greater role for the financial community is good news for companies in the environmental sector, the development of which he says cannot be left to the government alone.

While sympathetic to the challenge the government has faced so far in trying to pick successful technologies – which Ford believes it hasn’t been all that good at – he claimed the overall approach was wrong.

Carbon footprint

The current feeling is that despite this being a global issue, the government is, understandably, most concerned with the UK’s own carbon footprint.

Ford and the government should realise that this presents the UK with a huge commercial opportunity. ‘It doesn’t matter whether it’s wind or solar, the important thing is we have an entire civilisation to re-engineer, and in a hurry, and that represents a sizeable business opportunity.’

He feels the government is further hampered by civil servants who simply have no experience of the cut and thrust of industry or the knowledge to make successful judgements.

In essence, said Ford, a winning company needed ‘a rich sugar daddy and a brilliant engineering mind behind it’, both of which he claimed were rare commodities and normally did not meet each other.

Investment funds such as Low Carbon Accelerator can provide a unique service by getting under the skin of earlier stage companies and be able to identify those that have the potential to succeed.