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Venture capital: interest in eco-innovation

15/01/2013

Venture capital, or funds provided by investors to start-ups and small companies with the potential for growth, has poured into so-called “cleantech” sectors in the last few years.

In the United States in particular, investors have backed clean energy and transportation, though other sectors, such as recycling, have also benefited. Figures from the US National Venture Capital Association show a striking rise in the amount of venture capital investment in US cleantech: from $628 million in 2005 to $4.7 billion in 2011.

There was a decline in US cleantech venture capital investment in 2012, but observers expect this to be temporary. Consultants PricewaterhouseCoopers (PwC), who publish a quarterly survey of US cleantech investment (see www.pwcmoneytree.com), put the reduction down to economic uncertainty and caution ahead of the US presidential election in November 2012: investors were concerned that a Republican victory would have meant less support for clean technologies.

The cleantech sectors covered by the PwC survey are alternative energy, energy storage, recycling, smart grids, transportation and wastewater treatment: key sectors for eco-innovation, though eco-innovation can also take place in other sectors, and it is likely that not all eco-innovation is captured by the statistics from the cleantech sectors.

Investors are attracted to cleantech because of its high growth potential. Auditing firm Grant Thornton, in an April 2012 International Business Report on cleantech, found that research and development in cleantech is increasing, and cleantech companies are optimistic about their profitability, with 64% expecting an increase in the next year, compared to 40% for all companies.

Venture capital is also an important source of finance for new and young companies in the European Union. Speaking at the 13th European Forum on Eco-Innovation in Lisbon, 26-27 November 2012, Georgios Floros, head of equity and debt financial instruments in the European Commission's Directorate-General for Economic and Financial Affairs, said that venture capital funds raised in the EU from 2008-2011 amounted to €17.8 billion. This money provides seed capital for research into new ideas, start-up finance for new companies seeking to market those ideas, and later-stage backing to support company expansion.

Venture capital is also an option for public investment, especially in times when governments must stretch their budgets as far as possible. Floros said that the European Union is investing in venture capital funds through the High Growth and Innovative SME Facility (known as GIF), which is funded from the EU Competitiveness and Innovation Framework Programme (2007-2013). Via GIF, up to mid-2012, the EU had invested €376 million, spread across 30 funds.

Floros added that the EU investment had helped to leverage nearly €2.1 billion in overall venture capital – in other words, EU investment stimulated 5.5 times more private investment. The overall pot of money has benefited 236 “potential champions,” Floros said – innovative small and medium-sized companies with high growth potential. About 28% of the total – €573 million – has gone to funds specialising in eco-innovation

The experience of Vives II

One of the EU's investments has been in Vives II, a fund of €43 million created by the Université catholique de Louvain (UCL), Belgium. The GIF contribution is up to €15 million. Other investors include SFPI-FPIM, Fortis Private Equity Belgium, CDC Entreprises (France), ING Belgium, Sofina, AXA Belgium, Dexia Bank Belgium, IRD (France) and Nivelinvest. The fund is the largest ever initiated in Europe by a university. It supports high-tech start-ups and young companies, with a particular emphasis on eco-innovation.

Vives II is managed by SOPARTEC, a technology transfer company set up to create new companies based on UCL research. Philippe Durieux, SOPARTEC chief executive officer, says that the main mission is “transfer of technology for the benefit of society. Our long-term mission is to tackle societal issues”. These include environmental challenges, thus the emphasis on eco-innovation.

Vives II invests in companies located within 250 kilometres of Louvain-la-Neuve. Durieux says this is for “pragmatic reasons”. Vives II does not want to compete with London or Paris based venture capital firms, and wants “very hands-on” involvement with the companies it supports.

One successful Vives II investment (which followed on from earlier investment via the predecessor to Vives II, Vives I) has been in GreenWatt, a company headquartered in Louvain-la-Neuve. GreenWatt installs and maintains anaerobic digestion units that produce biogas from vegetable waste. The biogas plants can be installed on farms or food processing sites, and can absorb the waste that they produce.

GreenWatt anaerobic digesters are innovative in the process that they use. Anaerobic digesters typically require constant monitoring, and a supply of liquid manure. GreenWatt digesters can break down vegetable waste without liquid manure input, and are largely automated, requiring less staff oversight. GreenWatt units are also compact: they can manage the same amount of waste as conventional plants that are twice the size. Biogas produced by the units can be used as fuel for combined heat and power plants, or can be fed into the gas supply grid.

The first GreenWatt plant was acquired in 2009 by the largest endives producer in Wallonia, Belgium. Since then, GreenWatt has installed plants in France, and is looking at projects in South America. GreenWatt is one of more than 50 UCL spin-offs, which have generated more than 3000 jobs, according to SOPARTEC.

What venture capital funds look for?

When deciding whether to invest in a potentially eco-innovative idea, venture capital funds consider three main issues, according to Philippe Durieux. There should be strong intellectual property, the idea should address demand in a large market, and there should be confidence in the management team. The last of these is fundamental: even the best ideas will struggle if badly managed. SOPARTEC “does not invest in technology but in people,” Durieux says. Entrepreneurs should combine understanding of the technology in question with business acumen.

Speaking at the 13th European Forum on Eco-Innovation, Georgios Floros also outlined some of the key elements that venture capital funds look for: innovative technologies, promising and well-defined markets, experienced management, and a convincing growth strategy.

Eco-innovators should also be clear and realistic in their presentations to venture capital funds, Floros said. They should not over-focus on their technology or make unrealistic promises, but should demonstrate how their technology can meet a genuine demand. They should also show how they are differentiated from the competition.

Venture capital funds “receive a lot of applications and they have limited time to assess,” Floros said. “If you tell them you are unique they will probably not believe it. There are very good products, but no unique products”.