In association with

Environmental investment:

The investors’ perspective

The definitive survey report of private and institutional investors’

objectives and requirements for investing in the UK environmental sector

www.environmentalinvest.com

Page 1

Foreword

Business has a vital role to play in putting Britain's economy on a sustainable footing. This is

particularly true in relation to climate change and the low carbon technology and infrastructure

on which our ability to meet challenging targets for cutting greenhouse gas emissions depends

and which is central to our future prosperity. The EIC Environmental Investment Network makes a

huge contribution to ensuring that business fulfils this role in the most positive and effective way,

for the benefit of both our economy and our environment.

This survey, commissioned by the EIN, is therefore very timely and relevant. It comes at a time

when the recession and the need to get the public finances on a sound footing mean that

environmental goals have inevitably slipped down the political and business agenda. In my

view that is only a temporary situation. As soon as growth returns, hopefully before much more

time has passed, then green concerns will once more be prominent.

There are some important messages in the survey's results. Attracting investors is as an intensely

competitive process as ever. Indeed even though most respondents expect to raise their

investment in environmental technology appetite for risk is lower than before the recession. This

makes life tougher for many potential entrepreneurs because of the relative immaturity of much

of the environmental sector.

The fundamental importance of good quality management with the right skills mix and a

credible business model remains. But there is a feeling that Government could do more to help.

The regulatory framework must be one that stimulates rather than inhibits investment.

I am hopeful that the increasing need for new environmental business, which the EIN has

identified, will lead to improvements in both the financial incentives for various technologies and

for investors. Above all, as someone who is concerned to see Britain resume its leadership of the

green agenda, and who is active in both the business and political worlds, I hope that the policy

framework remains stable, predictable and increasingly supportive of investment in the

environmental industries.

Tim Yeo MP

Chairman of The Environmental Audit Committee

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Abstract

The International Energy Agency (IEA) has warned that $10.5 trillion must be invested in the next

twenty years to combat climate change and enhance global energy security1. Furthermore,

energy regulator Ofgem estimates that at least £200 billion of investment in low-carbon

technologies is needed in the UK over the next fifteen years, to meet electricity demand and

climate change targets2.

However, during the global economic downturn, investment in the environmental sector has

fallen dramatically. New Energy Finance recently forecast that global equity and venture

capital investment in 2009 will be between 26% and 32% less than in 20083. The significance of

this warning is that venture capital investment in the UK’s low carbon sector already fell

dramatically in 2008, 70% from that in 2007 to below 2003 levels4.

In July 2009, The EIC Environmental Investment Network (EIN)5 announced the results of a

nationwide survey of environmental technology developers and entrepreneurs, whose

innovations are part of the solution to mitigating and/or adapting to the impacts of climate

change. Respondents in this survey comprehensively identified that private and institutional

equity investment was their preferred source of funding to develop their environmental

businesses.

Environmental investment – the investors’ perspective was undertaken to complement this

previous investigation and establish private and institutional investors’ approach to the

environmental sector and to determine their objectives and requirements for investing in new

environmental technologies and services.

Respondents were asked a series of qualitative and quantitative questions to generate

objective data patterns and to also establish detailed opinions and experiences of investors.

These questions focused upon:

1. The environmental sector as a priority for investment;

2. The factors essential for considering an individual investment proposition;

3. Their objectives once committed to an investment proposition;

4. The impact of the global recession upon environmental investment; and

5. Their views of Government incentivisation to stimulate environmental investment.

This research project was conducted by Clarkslegal on behalf of the EIN from 7th July 2009 to 4th

September 2009. Respondents were chosen by utilising the EIN investor membership database

and supplemented by desk based research of the UK investment community. This generated a

sample of UK private and institutional investors, including business angels, venture capitalists and

1 http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=294 2 http://www.euronews.net/newswires/79619-power-market-needs-radical-reform/ 3New Energy Finance week in review: Volume VI – Issue 6 4 http://carbontrust.co.uk/publications/publicationdetail?productid=CTC756 5 The EIC Environmental Investment Network (EIN, www.environmentalinvest.com) is a partnership between The

Environmental Industries Commission (www.eic-uk.co.uk) and commercial law firm Clarkslegal LLP

(www.clarkslegal.com). The network has been established to facilitate investment in environmental technologies and

services.

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private equity organisations. 294 investors were contacted by telephone, from which 71

telephone interviews took place.

The following report, therefore, represents the objective and expanded responses of investors,

providing considered accounts of their perspective of and requirements for investing in the UK’s

environmental sector.

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Contents

Foreword 1

Abstract 2

Table of Figures 5

Executive Summary 6

Results 8

Commentary 18

Respondents’ suggestions for Government 23

References 28

Appendix 30

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Table of Figures

Figure 1: Environmental subsectors of most interest to respondents 8

Figure 2: Geographical range of investments 9

Figure 3: Respondents’ anticipated change in environmental investment activity

during the next two years

10

Figure 4: Respondents’ interest in environmental investment in the UK 11

Figure 5: Most important factors influencing investors in an investment proposal 11

Figure 6: Opinions of Government support for encouraging environmental

investment

12

Figure 7: Factors most likely to increase environmental investment 13

Figure 8: Respondents prepared to invest in start-up companies 14

Figure 9: Respondents that would take into account special considerations if

investing in start-up companies

15

Figure 10: Respondents that are happy to co-invest 16

Figure 11: Influence of public funding secured on an investment decision 17

Figure 12: Category of respondents 30

Figure 13: Minimum investment in an investment round 30

Figure 14: Maximum investment in an investment round 31

Figure 15: Minimum length of time committed to an investment 31

Figure 16: Maximum length of time committed to an investment 32

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Executive Summary

There is significant interest from investors in the environmental sector but long term

regulatory frameworks are required to translate investor interest into action in the

environmental sector.

This report confirms that investors have considerable interest in the environmental sector and its

potential for growth. 68% of respondents forecast their investment activity in this sector will

increase during the next two years. Respondents demonstrated this interest is spread across the

entire environmental sector, though the subsectors of greatest interest are renewable energy,

energy efficiency/management and waste management.

To interest investors, companies must focus on their management team and the market

opportunity. 26% of respondents confirmed that a good management team, with an

appropriate combination of commercial skills and market expertise, is indispensible when

considering an investment proposal.

However, at present, investor interest is not being adequately translated into tangible

investments. Recent studies have reported that levels of environmental investment have fallen

dramatically in recent months. For example, New Energy Finance recently forecast that global

equity and venture capital investment in 2009 will be between 26% and 32% less than in 20086.

Respondents also confirmed that Government needs to focus on setting long term regulatory

frameworks to stimulate investment in environmental technologies and services and individual

businesses can develop accordingly to sit within these frameworks. Only 20% of respondents

believe the Government is doing enough to encourage environmental investment. This fully

supports the results of previous survey7 conducted by The EIC Environmental Investment

Network, where 69% of environmental entrepreneurs across the UK suggested that the

Government is not doing enough to incentivise the sector. Respondents in this previous survey

also confirmed that legislation generates demand for their technologies and long term policy

commitments reduce the risks perceived in an investment proposal.

An important issue for Government to consider is that UK companies are competing

internationally for investment as only 37% of respondents, all of which are UK-based investors,

invest exclusively within the UK. UK environmental companies must have access to the

investment required to develop and commercialise their environmental technologies and

services to realise their environmental and economic benefits.

Nevertheless, the global economic downturn has impacted upon environmental investment.

Respondents to this survey acknowledged that because of the current economic climate, they

are generally taking longer to reach investment decisions and are more selective about which

commercial sectors and individual propositions to invest in. Furthermore, they identified that

banks are seeking later stage and less risky investment opportunities, of which there are few in

the relatively immature environmental sector.

6New Energy Finance week in review: Volume VI – Issue 6 7 http://www.environmentalinvest.com/Default.aspx?tabid=257

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Most investors consider investment proposals from a range of commercial sectors equally,

which can often be detrimental for many environmental proposals because of the infancy of the

environmental sector. Timeframes for receiving sufficient returns on investment may be longer

than in other sectors, management teams can often demonstrate only limited commercial

experience within the sector and the sector has produced comparatively few exits to date to

enhance confidence in current exit strategies.

Interestingly, however, investors are not clamouring for additional finance to be made available

and do not perceive extra funds as the solution to increasing investment in environmental

technologies. Just 13% of respondents identified that their environmental investment is restricted

by a lack of funds. Furthermore, a considerable proportion of respondents, 47%, indicated that

public funding secured by a company would not influence their decision whether or not to

invest in that company. This result supports another finding from this network’s previous survey8,

where only 8% of environmental entrepreneurs declared that they would approach the

Government initially for funding.

In summary therefore, investors propose that Government must act to ensure that UK

environmental businesses are competitive both domestically and internationally for them to

invest and for the UK’s environmental sector to flourish.

8 http://www.environmentalinvest.com/Default.aspx?tabid=257

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Results

The results of the survey and main themes identified are described in the following sections of

this report. A full copy of the questionnaire template used can be found in Appendix 2.

Q1: Which environmental subsectors are you most interested in investing?

Figure 1: Environmental subsectors of most interest to respondents

Figure 1 identifies that the three environmental subsectors currently with greatest investor interest

are renewable energy (18%), energy efficiency/management (17%) and waste management

(15%).

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Q2: In which regions do you consider investing?

Figure 2: Geographical range of investments

All investors interviewed in this survey are UK-based but only 37% invest solely in the UK. The

majority of respondents, 63%, invest overseas as well.

In addition to investing in the UK, 31% of respondents invest across Europe, 14% globally, 10% in

North America, 4% in Asia and 4% in the Middle East.

Therefore, UK companies are in substantial competition with international companies for

investment from UK investors.

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Q3: Over the next 2 years, how do you expect the extent of your investment activities in the

environmental sector to change?

Figure 3: Respondents’ anticipated change in environmental investment activity

during the next two years

68% of respondents forecast an increase in their investment in the environmental sector during

the next two years. Despite the current financial climate, none of the respondents anticipate

that their investment activity in the environmental sector will decrease over the next two years.

Where investors expected that their investment activity would stay the same, (32%), the main

reasons were either:

a. They are a pure environmental fund and therefore would continue to invest as they do

now or;

b. They are a generalist investment fund with set parameters as to how much can be

invested in any one sector.

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Q4: How would you rate the general level of interest in/appetite for investing in environmental

technologies currently in the UK?

Figure 4: Respondents’ interest in environmental investment in the UK

84% of respondents revealed that investing in environmental technologies in the UK is a high

priority for them, 9% of which suggested it is the highest priority. However, these results do not

include respondents that invest only in the environmental sector and therefore do not consider

other sectors. For this reason, only 55 of the 71 respondents answered this question.

Q5: In your experience, what are the most important factors affecting an

environmental company’s, or a technology developer’s ability to raise funding from potential

investors?

Figure 5: Most important factors influencing investors in an investment proposal

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Figure 5 demonstrates that when considering an investment proposal, the most important

criterion for an investor is a good quality management team (26%), followed by good market

timing/market opportunity (16%). Respondents concurred that a good quality management

team can be defined as one with the appropriate combination of commercial skills and specific

market expertise or industry knowledge.

Respondents also confirmed the fact that they want to be able to assume that the

management team are world class experts in their field and that investors are not interested in

teaching entrepreneurs anything in their chosen field. Additional comments were that the

management should have a track record, both as individuals, and as a team.

However, it was accepted that as the environmental sector is relatively immature, it is difficult (in

comparison with other sectors) to find individuals with a sufficiently detailed level of industry

knowledge and experience, combined with appropriate commercial expertise.

Market timing/opportunity was the most important factor for 16% of respondents when assessing

an investment opportunity. It was recognised that while some investment opportunities could

deliver great returns eventually, the investment has to fit with an investor’s own time scale and

the life of their fund. Additionally, if the market timing is wrong, the product may not be able to

sell in today's market and market timing/market opportunity is also clearly linked to the

scalability of the business. 8% of respondents cited scalability as one of their most important

considerations; they want to see that businesses have global opportunities.

Q6: Is the Government doing enough to encourage investment in environmental technologies

and services?

Figure 6: Opinions of Government support for encouraging environmental investment

The most popular response (37%) to this question was that the Government is not doing enough

to encourage environmental investment.

Page 13

However, it was generally acknowledged that Government is at least trying, but more often

than not directing its efforts in the wrong place or at the wrong stage of business. 28% of

respondents thought that the Government was doing enough in some areas, and not enough in

others.

Further details of respondents’ suggestions for Government to stimulate environmental

investment can be found later in this report, from page 23.

Q7: What factor would make you more likely to increase your investment activity in this sector?

Figure 7: Factors most likely to increase environmental investment

Only 13% of respondents stated a lack of funds as the principal reason hindering additional

investment. This statistic appears to confirm that additional funding provisions for environmental

investment would not provide an immediate solution for increasing levels of investment.

Furthermore, only 13% identified that greater quantity of dealflow would result in them increasing

their investment in environmental opportunities. This small percentage complements the 36% of

respondents who require a better quality of dealflow to increase their investment, suggesting

that there are adequate opportunities for investment in environmental opportunities today, but

many are of insufficient quality for investors to invest.

Of the many respondents, (38%), that cited “other” factors would make them more likely to

invest in the sector, outside of increased funds or better quality or quantity of proposals, the

following factors were identified:

“Government relaxing the rules on venture capital investment, making it more attractive for

organisations to invest in venture capitalists.”

“Greater corporate venturing.”

“A more stable financial climate.”

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“A greater track record regarding pricing and exits so as to give investors confidence in the

sector.”

“A clearer and more visible funding path for companies.”

“Stability of long term funding.”

“Government guaranteeing some sort of pricing structure.”

“Definition and longevity of Government policy and regulation, especially post Kyoto's 2012

deadline.”

“Increased Government support, e.g. match funding, tax incentives.”

“More later stage companies.”

“More Government harmony on policies and standards in this sector.”

“Pension funds allocating more funds to the sector.”

Q8: Are you prepared to invest in start-up companies?

Figure 8: Respondents prepared to invest in start-up companies

Figure 8 highlights that 65% of respondents would invest in start-ups9 and 35% would not.

However, many of those that do invest in start-ups stated that in today's climate, the start-up

would have to be especially convincing for them to invest in.

9 Throughout this survey, a “start up” company is defined as one that is pre-revenue

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Q9: Would there be any special considerations you would take into account when considering

investing in an environmental start-up company?

Figure 9: Respondents that would take into account special considerations

if investing in start-up companies

The vast majority of respondents, 87%, confirmed they take special considerations into account

when considering investing in a start up.

Although the key concern identified in responses to this question was managing risk, examples

of additional considerations included:

“Being able see a visible funding path further down the life cycle of the company.”

“Assessing and looking to minimise/spread the technology, market and customer risk.”

“Greater scrutiny of management team, especially in such an innovative sector.”

“Thorough due diligence regarding the company's intellectual property (IP) and whether

such IP can be/is protected (the earlier the stage of the company, the better protected the

IP needs to be).”

“Review of/seek co-investors.”

“Review of whether proposed investment may be strategic to existing business/other

investments.”

“Strong unique selling proposition (USP).”

“Understand market timing and the specific route to market.”

“Understand what customer traction there is, or may be.”

“The start up must be asset backed; it is no good relying 100% on management.”

“Understand how long the business will take to get to market.”

“The business model must be capital efficient.”

Of those respondents that stated they did not adopt special considerations when considering

investing in a start-up (13%), each one said that they would carry out the same due diligence

exercise as for any other investment, albeit, they would be extra meticulous in carrying it out.

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Q10: Are you happy to co-invest with other corporate or institutional investors?

Figure 10: Respondents that are happy to co-invest

An overwhelming majority of respondents, 98%, are happy to partner with other industrial or

institutional investors, and many highlighted that co-investment was actually a prerequisite of

the deal as it gave them confidence in what they were investing in.

While the majority of respondents were "happy" to partner with other industrial or institutional

investors, it was noted that general preference was to co-invest with other venture capitalists,

and/or partners that they had previously co-invested with. Several venture capitalists that were

interviewed cautioned that large industrial or institutional investors may complicate a deal by

shaping the terms of their investment to their benefit (and perhaps to the detriment of other

smaller investors), hence their preference for co-investing with familiar investors.

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Q11: Would you be more likely to invest in a business that has already secured some public

financial support?

Figure 11: Influence of public funding secured on an investment decision

As shown in Figure 11, a mixed response resulted as to whether or not public financial support10

for a company would increase the likelihood of respondents investing in a particular company.

Only a slight majority, 53%, said they would be more likely to invest in a business that had already

secured some sort of public financial support, whilst it was not a factor in the decision for 47% of

respondents.

Those respondents who are positively influenced by a company that has previously secured

public financial support explained that this demonstrated the company’s management had

been proactive in seeking public funding; that grants were an important means of getting a

business to a stage when it was able to attract outside investors (for example, grants may help a

business develop a prototype) and that public financial support is a means of extra cash for the

business which should lower the cost of capital for incoming investors.

On the negative side, however, some respondents said they would be concerned about what

conditions, if any, the public financial support carried with it; others were concerned at who in

the public sector would be managing the funding and how commercial an investment partner

they would be. Respondents also highlighted businesses must be economically viable

independently of any public financial support and not reliant upon grants.

10 Throughout this survey, “Public Financial Support” refers to a company that has secured public sector grants, loans

and/or match funding for their current investment round.

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Commentary

Investors are interested in environmental investments but the immaturity of the sector hinders its

attractiveness

An overwhelming majority of respondents, 84%, believe that investing in environmental

technologies is a high priority for investors, of which 9% suggested it is the sector with the highest

priority. Furthermore, none of the respondents anticipated that their investment activity within

the sector would decrease in the next two years.

However, recent reports have confirmed that venture capital investment in the environmental

sector has fallen significantly during the economic downturn. It has been calculated that

venture capital investment in the UK’s low carbon sector in 2008 fell 70% from that in 2007, to

below 2003 levels11. Although a short term recovery has been documented recently, venture

capital environmental investment in the third quarter of 2009 was still 42% below that for the third

quarter in 200812.

This strongly suggests that despite strong interest in the environmental sector, investors are

currently not converting this interest into investment. In fact, NESTA’s July 2009 report,

Confronting Climate Change, concluded “There is a bigger gap than ever between venture

capital investment and the outputs from research.13”

This issue was consistently discussed throughout this survey, uncovering several reasons why

investors may not commit to the environmental sector yet.

It was proposed that the environmental sector is possibly becoming “fashionable” and that

“cleantech” has become a “buzzword” within the investment community. However, because of

the current economic climate, it can be argued that investors are actually taking longer to

reach investment decisions in general and are therefore more selective about which

commercial sectors and individual propositions to invest in. A further recurring theme emerging

from this report was that because of the uncertain economic climate, investors may be inclined

to spend more time managing their existing portfolios rather than deploying further capital.

Therefore, it can be concluded that the current economic climate must be taken into

consideration when analysing the recent falls in institutional environmental investment.

Nevertheless, this survey has confirmed that private and institutional investors in the UK typically

consider investment proposals from several business sectors and do not, therefore, focus solely

on one, such as the environmental sector. Consequently, investors always look for proposals with

the greater commercial opportunity for them.

It has been widely accepted that banks and private investors have become increasingly risk

averse during the economic downturn and as a result, are seeking later stage investments. The

infancy of the environmental sector, however, generates fewer late stage investment

11 http://carbontrust.co.uk/publications/publicationdetail?productid=CTC756 12 http://cleantech.com/about/pressreleases/20090930.cfm 13 http://www.nesta.org.uk/areas_of_work/public_services_lab/assets/features/confronting_climate_change

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opportunities compared with other sectors, which therefore impacts upon its attractiveness

compared with other commercial sectors.

This study uncovered numerous examples where the appeal of the environmental sector within

the general UK commercial sector has diminished as a direct consequence of its infancy, such

as producing significantly greater timeframes before investors could receive sufficient returns on

their investment. Specific examples included the suggestion that the development of a new fuel

cell is very capital intensive over a long period, that tidal technology proposals are anticipated

to face significant engineering hurdles and finally, as wind power has previously been driven by

Government subsidies, that respondents view such a company’s financial statements with

increased scepticism. In addition, it was suggested that the infancy of much of the

environmental sector has produced fewer exits to date and therefore minimal precedence to

enhance investor confidence in new environmental business plans and exit strategies.

The major issue with applying general investment criteria to the environmental sector as a whole

is that such criteria may instantly dismiss an environmental proposal, when comparing with a

proposal from another commercial sector. A standard diligence model may therefore reject

many environmental proposals immediately, despite possibly being a very attractive investment

prospect relative to its peers.

However, as respondents confirmed they forecast their investment in the environmental sector

to increase in the next two years (Figure 3) and the environmental sector will take high priority,

(Figure 4), it can be expected that as investors become more aware and experienced within

the environmental sector and sub sectors, they will approach environmental investment

opportunities with a sector specific approach in the near future.

Clear and consistent support is required from Government to encourage environmental

investment

Respondents to this survey suggested that Government attempts to encourage investment in

the environmental sector are typically very rhetoric, lacked detail and were therefore

unworkable.

This report proposed that the UK Government's actions have limited effect in isolation and

assessment of these actions paints an incomplete picture of the environmental sector. It was

argued that the sector must be analysed and managed on an international scale, due to the

overwhelming global influence of the prices of oil and carbon, which themselves are already

regulated internationally.

Nevertheless, respondents did accept why Government are keen to proactively stimulate

environmental investment, particularly due to the subsequent creation of "green jobs." However,

they cautioned that creating green jobs in geographic locations where the "green industry" is

not suited would be counterproductive and suggested that if Government does wish to exert its

influence upon the environmental sector, then a clear and considered strategy is essential.

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This theme is supported by a recent report by Deutsche Bank14, which proposed that the UK, as

well as the US and Canada, needs to strengthen renewable energies and incentives to

encourage environmental investment. Deutsche Bank highlighted that countries such as China,

Germany, France and Australia have strong and consistent incentives in place, resulting in lower

risk profiles for environmental investment in their countries.

However, it can be concluded that Governments need to focus primarily upon setting long term

regulatory frameworks, from which individual businesses will develop independently to sit within.

The proposition that Government should not detract from setting long term policy and

regulation was a concurring theme throughout this study as Government intervention may

distort the underlying economic credibility of some environmental businesses. Coupled with the

result that 47% of respondents to this survey are not influenced by previous public financial

support for a company seeking investment, this may question the suitability of the new UK

Innovation Investment Fund15 as the most effective mechanism for incentivising environmental

investment.

UK companies are competing internationally for UK investors’ investment

Only 37% of respondents reported that their investments are exclusively made within the UK

(Figure 2). Therefore, UK businesses are competing on an international stage for UK investors’

investment.

Private investors proposed that Government should focus specifically on inward investment to

stimulate environmental investment within the UK. It was suggested that high net worth

individuals are reluctant to bring their capital to the UK mainland because of the prohibitive tax

regime. UK technology developers are already competing internationally for private sector

investment and it is an obvious argument that Government should seek to minimise restrictions

on the resources available to such businesses.

This report has identified that the infancy of the environmental sector in the UK has created an

air of caution towards this sector amongst the investment community. Furthermore, it was

suggested that this is accelerated by a smaller and more cautious appetite for risk in the UK,

than in the USA, for example. This suggestion was attributed to experiences in the USA, where

investors were described as being much happier to invest in earlier stage companies, and

having a more bullish attitude towards risk than in the UK.

Such a trend must be considered in planning support for UK innovation so that UK based start-

ups have more chance of attracting finance within the UK. Although climate change is, of

course, a global phenomenon, the Government has identified the environmental sector as

being the most likely to drive the UK economic recovery in the short, medium and long term. For

instance, the launch of the Low Carbon Industrial Strategy, “with the core objective of ensuring

that British businesses and workers are equipped to maximise the economic opportunities and

minimise the costs of the transition to a low carbon economy,16” aims for the UK to improve its

14 http://www.dbcca.com/dbcca/EN/_media/Global_Climate_Change_Policy_Tracker_Exec_Summary.pdf 15 http://www.dius.gov.uk/innovation/~/link.aspx?_id=A6E5E245D1AE42099A521F02839129A1&_z=z 16 http://www.berr.gov.uk/whatwedo/sectors/lowcarbon/lowcarbonstrategy/page50105.html

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global market position within the low carbon and environmental sector. To achieve this

objective, UK innovation must not be stifled by investors investing outside the UK.

The commercial opportunity prevails for investors, regardless of sector

The results of this survey demonstrate that no single environmental subsector dominates the

interest of investors. The three subsectors of greatest single interest to investors were renewable

energy (18%), energy efficiency/management (17%) and waste management (15%). However,

these figures are still significant minorities.

Respondents consistently affirmed that they apply standard principles to all environmental

subsectors when considering investment opportunities. The most common principles identified

are:

Capital intensity

Market timing and the lead times of a deal

The regulatory framework in which a sub-sector operated

Furthermore, investors confirmed that the following factors would result in them actively avoiding

investing in a particular subsector:

Predicted Internal Rate of Return is too low (e.g. 10%-20%).

Limited track record in the market of successful exits. This does not give investors the

confidence to branch out into sectors that they are not personally familiar with.

The current financial climate has made investors risk averse, so they are choosing to invest in

later stage technologies and companies that have a solid, reliable client base (i.e. those

who are not affected by the recession).

This affirms that investors will invest in the business opportunity with the greatest commercial

impact, even within an individual sector. As discussed previously, this often places

environmental proposals at a disadvantage, if they are being compared with investment

opportunities in more advanced and developed markets.

That said, this report has also confirmed the critical factors an investor considers when assessing

an investment opportunity. Although having a strong and proven management team was

comfortably the most important pre-requisite, the factors identified can be easily aggregated

into three distinct categories; team, technology and traction, a classification typically used in

the USA.

Within the context of this report, team, technology and traction are comprised of the following:

Team – management

Technology – unique selling proposition, intellectual property, proven solution/product, stage

of development, technological credibility

Traction – competition, value proposition, economic robustness, scalability, market

timing/opportunity

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Whilst this study has demonstrated that investors assign different values to each of these factors,

“team, technology, traction” is a useful adage for entrepreneurs to adhere to, to ensure they

have addressed the standard requirements of an investor when preparing an investment

proposition and consider these factors together.

For example, technological credibility is not sufficient to investors; the market opportunity must

also be demonstrated. Respondents in this study highlighted that as well as being credible, the

technology needed to solve a big enough problem for a big enough number of people,

highlighting issues with "incremental" technologies, for example, that claim to improve

something by less than 5%. The concern of such technologies is that by the time the technology

has come to market, the incremental difference will be even smaller, as the market is likely to

have developed in the interim. Businesses need to offer a significant improvement, or a

disruptive technology, to capture an investor’s interest.

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Respondents’ suggestions for Government

To further investigate responses to Question 6 (Is the Government doing enough to encourage

investment in environmental technologies and services?), respondents were asked to propose

particular actions Government should take to encourage investment in the environmental

sector.

It must be noted that these responses are the opinions of individual respondents and the

following are direct quotations of their suggestions and categorised in no particular order, for

ease of reading. Each respondent contributed to this question but no attempt has been made

to analyse trends from the following quotations.

Funding

“Subsidising companies directly is not the way forward because a lot of companies will fail

through other causes and the money is then lost. The Government should instead reward

them retrospectively i.e. once they are up and running and have proven themselves.”

“Need to increase Government subsidies for projects that are inherently riskier, for example,

anaerobic digestion. The purpose of Government subsidies is to encourage use of new

technologies, and therefore encourage risk.”

“Subsidies are certainly necessary for renewable energy.”

“It is good to offer incentives, but subsidies are not the right incentives. Companies rely on

Government to subsidise products/businesses that are fundamentally uneconomic. When

Government eventually decides to withdraw the subsidies, (usually coupled with a rising

reliance on them), this results in manipulation of the market mechanism.”

“When Government gets involved by way of subsidies, there is a danger of reaching a point

where protectionism creeps in e.g. China and the solar market. That is why it is important to

encourage trade liberalism.”

“Not in favour of match funding as it tends to fuel technologies to provide solutions for

problems that don't exist.”

“Need to encourage banks to lend more to projects.”

“Need a national fund that will invest in sectors that will never get financing from the private

sector because they are too risky e.g. nuclear. The private sector is never going to invest in

this, so it needs Government support.”

“Need to create a level playing field. Historically and at the moment, traditional energy (oil,

coal) is heavily subsidised by the Government.”

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“Government think they are being helpful by promoting regulation of the sector, but this is of

interest to later stage companies. They need to encourage investment in seed capital

funding.”

Policy

“It’s not about the amount of money Government is throwing at the problem, what is

needed is certainty of legislation and regulation.”

“All Government needs to do is develop a clear regulatory framework. Once that is in place,

people will develop businesses to sit within that framework, without further interference from

Government.”

“Policy is still too confused, for example planning permission.”

“They need to create a level playing field. Historically, oil and gas and other forms of

traditional energy have been heavily subsidised by Government. The same benefits must be

given to clean energy.”

“There is a need for joined up thinking. There are good incentives in some areas, and some

totally perverse incentives in others.”

“Need long range planning.”

“Relax VC [venture capital] rules, especially the size of assets/funding.”

“They need to introduce more tax incentives, no matter how small – tax incentives are an

incredibly effective way of shaping investment decisions.”

“Be more definitive regarding goals; go into more detail on the fine point.”

“Clarity of legislation will immediately create opportunities for investment.”

“Need a clear and consistent approach over the next 3, 5, 10 years (i.e. post Kyoto), but

having a 4 year cycle of Government is not helpful for this.”

“It is very hard to do business in the UK e.g. planning. There will always be a marginal chance

of success compared to e.g. Europe/US.”

“Regarding waste to energy, the issue is the contracting position. The PFI [Private Finance

Initiative] procedure is massive, lengthy and expensive but usually the contracts are for a

short amount of time. Need longer term waste supply contracts.”

“On a macro level, lower the complexity/red tape, and lower the taxes to keep

entrepreneurs here and make it worthwhile starting a business here.”

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“Need a clear plan. For example, in 2016 the EU directive on coal fired power stations starts,

and the Government are not ready for it.”

“They need to push through a price on carbon.”

“Sort out utilities: sub 1MW, need feed in tariffs. 1MW plus, need a price on carbon because

need to know what the return is going to be.”

“Need the end market to be there. Need regulation to be stable e.g. biofuels target been

bandied around. Need clarity/stability/timeliness of regulation which will create the end

market.”

“Too much tunnel vision; too focused on promoting certain types of technology over others;

difficult to plan long term; too many regulatory obstacles. The UK lags behind Germany and

the US in promoting energy efficiency. They are scrambling on waste, but that is more fire

fighting than a coordinated plan.”

“There is a lot of regulation to try and make investment in the sector more attractive, but the

solution to encouraging investment lies in encouraging seed capital funding - the regulation

is of interest to later stage companies.”

Where efforts should be directed

“They need to do more to close the funding gap; do more to help the “proving prototype”

stage.”

“It’s not a question of pouring money into the problem; it’s a question of incentivising

management and encouraging quality individuals to come to the sector. At the moment, it

is still more attractive for quality management to go into the software business.”

“UK has historically been a leader when it comes to environmental policy, but it is the US who

are leaders when it comes to the creation of appropriate stimulus packages. The UK needs

to take their lead from the US and earmark specific money for specific projects and

development. The UK operates a free market that is almost too free, because they are not

diverting money to specific causes. For example, the overall tax reduction benefits

encourage cigarette manufacturers as much as it does cleantech companies.”

“Support technologies/focus on R&D.”

“Start building renewable and nuclear power stations; invest in public transport.”

“Greater R&D support for early stage environmental businesses that still have significant

technology risk.”

“Incentives directed at the entrepreneurs are not going to have the greatest impact.

Incentives need to be directed at the industry and the consumers, this will create the pull

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e.g. in Germany consumers are encouraged/incentivised to supply energy back to the grid

and this has fuelled development of solar panels etc.”

“Need to provide incentives e.g. tax breaks for individuals/pension funds to invest in

cleantech funds, as opposed to other sectors. Need to be able to differentiate cleantech

from other sectors. If you are a wealthy person why would you invest in cleantech that is risky

and has a long wait for returns?”

“Government won’t commit to large projects (e.g. solar) unless it has something to do with

employment - all leads to distortion and bubbles.”

“The Government's fund of funds has a purely UK focus. To provide money to solely focus on

the development of technology in UK is wrong - lots of technology is being developed in

Europe that will be very useful in the UK.”

“Money should be directed at the companies/technologies rather than the investors. Aim is

to encourage development of technology, rather than encourage EIS [Enterprise Investment

Scheme] or tax breaks.”

Who should lead?

“Government is obviously interested in encouraging investment in this sector but is stuck on

what to do and how to make it work. They need to put the problem in the hands of business

people, rather than leaving it to non-commercial think tanks to find a solution.”

“Government don't understand why people invest e.g. feed in tariffs that were recently

announced. At the time, Government said investors would be happy with IRR [Internal Rate

of Return] of 5 - 8%, this is not true. Then set feed in tariffs so that ultimate return worked out

as 2 - 4% - this is just not attractive enough.”

“Areas that have been devolved to the RDA’s have been unsuccessful e.g. recycling.”

“Too much friction between the RDA's.”

“Need people with expertise advising on the sector.”

“Need joined up thinking. Need single, commercial, experienced person running the

department who understands the drivers, instead of the disparate group there currently is.”

General suggestions

“Countries should focus on an area and be the best at it. Problem is everyone wants to do

everything. Scandinavia have focused on wind, this is what the UK should be doing.”

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“Depends on whether you are taking a short, medium or long term approach to the

problem. Long term approach would be to change people's behavioural habits, versus short

term - introduce tech incentives for effective change.”

“Speed and clarity of decision making.”

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References

Cleantech Group. 2009.

Clean technology venture investment continued recovering in 3Q09 spurred by economic

stimulus investment.

http://cleantech.com/about/pressreleases/20090930.cfm

(Accessed 23 November 2009)

http://cleantech.com

Deutsche Bank Climate Change Advisors. 2009.

Global Climate Change Policy Tracker: An Investor’s Assessment.

http://www.dbcca.com/dbcca/EN/_media/Global_Climate_Change_Policy_Tracker_Exec_Sum

mary.pdf

(Accessed 23 November 2009)

http://www.dbcca.com

International Energy Agency. 2009.

The time has come to make the hard choices needed to combat climate change and

enhance global energy security.

http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=294

(Accessed 23 November 2009)

http://www.iea.org

NESTA. 2009.

Confronting Climate Change.

http://www.nesta.org.uk/areas_of_work/public_services_lab/assets/features/confronting_climat

e_change

(Accessed 23 November 2009)

http://www.nesta.org.uk

New Energy Finance. 2009.

Week in Review: Volume VI – Issue 5.

http://www.newenergyfinance.com/

NewsWires. 2009.

Power market needs radical reform.

http://www.euronews.net/newswires/79619-power-market-needs-radical-reform/

(Accessed 23 November 2009)

The Carbon Trust. 2009.

Investment trends in European and North American clean energy 2003 to 2008 – The rise and fall

of clean energy investment.

http://carbontrust.co.uk/publications/publicationdetail?productid=CTC756

(Accessed 23 November 2009)

http://carbontrust.co.uk

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The EIC Environmental Investment Network. 2009.

The Green Funding Challenge – Environmental investment goes missing in the recession.

http://www.environmentalinvest.com/Default.aspx?tabid=257

(Accessed 23 November 2009)

http://www.environmentalinvest.com

UK Department for Business, Innovation and Skills (BIS). 2009.

Low Carbon Industrial Strategy.

http://www.berr.gov.uk/whatwedo/sectors/lowcarbon/lowcarbonstrategy/page50105.html

(Accessed 23 November 2009)

http://www.berr.gov.uk

UK Department for Business, Innovation and Skills (BIS). 2009.

UK Innovation Investment Fund.

http://www.dius.gov.uk/innovation/~/link.aspx?_id=A6E5E245D1AE42099A521F02839129A1&_z=z

(Accessed 23 November 2009)

http://www.dius.gov.uk

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Appendix

Appendix 1 – Description of Sample

Figure 12: Category of respondents

Figure 13: Minimum investment in an individual round

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Figure 14: Maximum investment in an individual round

Figures 13 and 14 highlight the minimum and maximum quantities respectively of investment

that respondents are prepared to invest in a single investment round. Of the 71 investors

interviewed, 62 confirmed their minimum and 61 their maximum levels of investment.

Any responses received in US Dollars ($) were converted into Pounds Sterling (£) at a rate of 1 US

Dollar = 0.6 British Pound and any responses received in Euros (€) were converted into Pounds

Sterling at a rate of 1 British Pound = 1.1Euro.

Figure 15: Minimum length of time committed to an investment

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Figure 16: Maximum length of time committed to an investment

Figures 15 and 16 demonstrate the minimum and maximum length of investments desired by

respondents. It must be noted that not all respondents answered this question. Of the 71

investors interviewed, 56 confirmed their minimum and maximum periods of investment.

Of these respondents, 54% aim to hold an investment for a minimum of three years, while 30%

seek to commit for at least five years. Furthermore, 46% aim to exit an investment before five

years and an additional 24% before seven years.

Consequently, respondents seek to commit to an individual investment, on average, for a

minimum of 3.6 years and a maximum of 6.0 years.

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Appendix 2 – Questionnaire

1. Which environmental subsectors are you most interested in investing?

a. Renewable energy

b. Waste management

c. Waste and wastewater treatment

d. Monitoring and instrumentation

e. Biofuels

f. Air pollution control

g. Sustainable transport

h. Environmental consultancy

i. Energy efficiency/management

j. Contaminated land remediation

k. All of the above

l. None of the above

2. In which regions do you consider investing?

a. UK

b. Europe

c. Worldwide

d. North America

e. Asia

f. Middle East

g. Other

3. Over the next 2 years, how do you expect the extent of your investment activities in the

environmental sector to change?

a. Significant increase in investment

b. Slight increase in investment

c. Stay the same

d. Slight decrease in investment

e. Significant decrease in investment

4. How would you rate the general level of interest in/appetite for investing in environmental

technologies currently in the UK?

a. Very low priority

b. Low priority

c. Similar to that in other sectors

d. High priority

e. Highest priority

5. In your experience, what are the most important factors affecting an

environmental company’s, or a technology developer’s ability to raise funding from

potential investors?

a. Technological credibility

b. Business planning, including marketing analysis

c. Financial planning

d. Available bank finance

e. Government subsidies

f. Favourable regulatory system

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g. Quality management team

h. Other

6. Is the Government doing enough to encourage investment in environmental technologies

and services?

a. Yes

b. No

c. Don’t know

7. What factor would make you more likely to increase your investment activity in this sector?

8. Are you prepared to invest in start-up companies?

9. Would there be any special considerations you would take into account when considering

investing in an environmental start-up company?

10. Are you happy to co-invest with other corporate or institutional investors?

11. Would you be more likely to invest in a business that has already secured some public

financial support?

12. What category of investor best describes you or your organisation?

a. Venture capitalist

b. Private equity firm

c. Private investor (business angel)

13. What are the minimum and maximum levels of investments you would consider in any one

investment round?

14. What are the minimum and maximum levels of time you would aim to commit in any one

investment before exiting?