Published on September 27th, 2012 | by Amy Brown0
A high-stakes game
Peter Johan Plesner, cleantech expert for Invest in Denmark.
PHOTO INVEST IN DENMARK
A strong venture capital segment in the Nordic region is backing cleantech. But in choosing among the winners and losers, are they missing opportunities for changing the world?
The support of venture capital is a key ingredient in the success of the Nordic cleantech industry. Cleantech is now the main focus or a prioritized investment area for a number of established venture capital funds in the Nordics, like Vaekstfonden and Northzone in Denmark, Industrifonden in Sweden, vnt Management in Finland, and Energy Future Invest in Norway.
For every cleantech start-up that counts itself lucky for attracting the backing of a venture capital fund, there are many more who do not make the cut. In their criteria for what makes a good investment, venture capitalists could be missing out on potential breakthrough technology from smaller, less mature firms where the business plan or prospects to succeed in an international market may be less developed.
Venture capital funds often work on shorter time horizons, often looking to maximize the value of an investment within five years. For example, Northzone’s investment criteria makes clear it is looking for “a huge market opportunity. Although we think that niche businesses can be interesting, we’re really after globally attractive markets.”
For cleantech, development cycles tend to be longer and market opportunities not always evident at the outset. This creates a disconnect, and perhaps a missed opportunity, as innovation in cleantech can come very early in the value creation cycle.
Missing the first movers
“Venture funds are not very willing to take risks. They normally work with short deadlines with an expectation for a greater return,” says Peter Johan Plesner, cleantech expert for Invest in Denmark. “They are conservative by nature. As a result, they are missing out on some of the first movers in the market. There are a lot of winning technologies in cleantech, but there will also be a lot of losing technologies. It is hard to say which will succeed, particularly in an emerging area like smart grids, where the market is not yet mature but is expected to be a big growth area.”
Venture capitalists also want to see a clear business model early on, another barrier, says Sten Engström, manager of the cleantech unit for Invest in Sweden. “Swedish cleantech companies are often better at developing the technology than coming up with a business plan, but that doesn’t mean they don’t have the promise,” he says.
Companies with outstanding and market-specific technologies, like led (light-emitting diode) technologies, are “rapidly picked up by venture capitalists,” he notes. One such success story was the investment of sek 10 million each by Industrifonden and Midroc New Technology in 2011 in the Swedish firm Heliospectra and its intelligent lighting system for greenhouses that accelerates plant growth.
Other companies, he said, are not as well served by venture capital. “I understand their strategy but in Sweden we want to see a broader development of this area and that means venture capitalists might not be the best partners for some companies that are not on the fast track, or where the technology is not yet mature and could better benefit from say, government support to fund a demonstration plant.”
Enter the big guys
Too little seed money from venture capital over a period of time can lead to a situation where there are too few maturing, well-funded companies. Fortunately, for cleantech companies looking for that all-important financial backing, other sources are coming to the fore, not least large industrial companies looking to boost their own investments in the area, like Volvo Technology Transfer, saab Ventures, Stora Enso Ventures and ikea Greentech.
Cleantech Scandinavia, the main Nordic network of investors active in cleantech, noted that recently, additional models of funding are complementing venture capital. They predict that industrial/corporate venture capital has a much larger role to play in cleantech development going forward.
“We have been seeing a growing involvement of industrial companies in venture activities. Establishing venture arms presents an opportunity to enter strategic technology areas early in the development process, securing possible competitive advantage and optimal integration of innovations into the business. It is also a way for industrials to keep an eye on the forefront of technology development. On the other hand, venture participation from the industrial side brings additional value to cleantech entrepreneurs – there is a lot to be won from the R&D, testing and prospective client network of a large industrial company.”