Solutions exist, but companies seeking investment need to go beyond their home markets and expand their investor reach to win big in the race to net zero. First of a kind (FOAK) funding will be key, writes Andrew Coull, Director of Cleantech & Renewables at Gneiss Energy.
It’s a common challenge to many of Scotland’s leading climate tech pioneers – how to cross the investment ‘valley of death’.
To the uninitiated, this refers to the step between developing a prototype technology to demonstrate proof of concept and scaling up to full commercial scale and revenue generation.
You need investors to get there – to take a risk and bankroll your smart idea – with the prospect of future income and a healthy ‘exit’ to come.
Whereas software companies may be able to make this leap without a substantial step up in investment, asset-heavy climate tech solutions – such as the removal of carbon from the atmosphere, and new ways to produce and store renewable energy – are different.
Scotland has no shortage of high-profile, hugely innovative firms that fit this description but are struggling to step up due to a lack of available ‘growth equity’ funding in domestic markets.
In many cases, these technologies require substantial engineering projects, and they need investors with deep pockets, and patient capital, to deliver multiple models at scale, drive down costs and meet a market which may be immature or still emerging.
Here the valley is deep – often needing £30-100 million funding to bridge it – and is wide, with an average time horizon of seven years according to global consultants McKinsey, creating the so-called first-of-a-kind (FOAK) financing gap.
Cleantech unicorns exist – how could they not as the world gallops towards a lower carbon future? – and they quite possibly live on our doorstep, but whilst angel investors and venture capitalists (VCs) can spread risk in the early years by investing smaller cheques over a range of pioneers, a different type of investor and investment outlook is needed to provide the commitment required to take FOAK technologies to the next level.
How can we ensure that these hugely promising Scottish and UK low carbon innovators can bridge this finance gap to leap onto the world stage?
Investors can be found
The good news is that investors are out there – announced deals from international markets provide evidence as such – but it takes time, effort and a global outlook to secure them.
Increasingly, we now see the corporate venture capital arms of major international companies (CVCs), taking a significant and growing interest in FOAK climate tech.
These global firms, often in energy, engineering or related sectors, are spread throughout Europe, the Middle East, Asia and the US. They are more comfortable with heavy capex than traditional VC funds and can deploy significant amounts of cash over time.
The key is finding a good strategic fit. How does your technology contribute to their broader ambitions – and does it meet the objectives of the parent company as well as its CVC?
These discussions take time. Large corporates generally have a deep understanding of their core markets but are slow to move. It is essential to engage with the right people at the right level in the organisation and work with them to position your product strongly within their corporate strategy. In return for that patience and effort, CVCs offer an entry point to a large corporate balance sheet and an accelerated route to market and international growth.
The FOAK arms race
But of course, any growing firm with substantial ambitions needs more than just one CVC, and any funding round – especially above c. £30 million – will likely also require public funds, debt and other investor types.
Here, I believe, Scotland and the UK are falling behind. In Britain we have a strong early-stage investment eco-system underpinned by SEIS and EIS tax incentives to encourage angel investors and VCs to support UK ventures, whilst Innovate UK, DESNZ and other UK and Scottish streams can get firms to the valley edge.
But beyond that, we need additional support mechanisms to encourage larger corporate and institutional investors to step in where existing public funds like the Scottish National Investment Bank alone cannot deploy the quantum and the range of funding options required.
With FOAK funding, an arms race has begun, and we now need some bold thinking and big initiatives to help UK and Scottish climate tech pioneers take the leap. Failure to do so will mean we miss an opportunity to create a longer-term position for our economy in the global energy transition.
The US has stolen a march in this regard with $500 billion earmarked in the Inflation Reduction Act to invest in climate technologies, plus the US Department of Energy has $25 billion to provide non-dilutive funding to FOAK-stage ventures nationwide and more than $25 billion in loan guarantees for largely renewable-energy facilities.
The EU has budgeted more than $2 trillion in equity investments, grant money, and policy support through funds dedicated to the European Green Deal, and last year Germany unveiled a €1 billion deep tech and climate tech fund – backed by the state’s €10 billion ‘Future Fund’.
Clearly, we have some catching up to do – and fast.
Becoming climate tech leaders
McKinsey recently commented that “While the growth potential of climate tech is reminiscent of the spectacular rise of high tech over the past three decades, the key challenges to realizing that growth are vastly different. Getting enough capital, and enough time to build scale, will be particularly hard. But these challenges are solvable.”
In another decade, some countries will be capital-intensive climate tech leaders with thriving technology and engineering industries. Why not ours?
