By guest contributor Philip Griffiths
In the last few years raising funding for business in the U.K. has become increasingly harder. This is felt even more so in the SMEs of the cleantech sector but are things starting to look up?
So far this year, 321,090 start-ups have been created in the UK. By the end of the year Companies House projects that this will be over 400,000. These start-ups and some more established growth businesses account for 60% of the jobs in the country and power 51% of the UK GDP. On average companies can transition from seed to start-up with just £2,143 but transitioning to growth stage requires sums of between £50,000 and £5 million. Funding is increasingly required from outside sources.
In the last few years the traditional sources of have been restrained. Despite government and Bank of England efforts to increase funding to SMEs (Small and Medium sized Enterprises) – such as Funding for Lending Scheme – overall bank lending to businesses decreased by £2.4bn in the fourth quarter of 2012 and a further £300m in the first quarter 2013. This is having a profound effect on businesses. The Startup Outlook Report UK 2013 produced by the Silicon Valley Bank (SVB) found that 53% of entrepreneurs say securing startup funding was ‘somewhat challenging’ while a staggering 36% found it ‘extremely challenging’. Further 25% of executives worry about how to fuel the next level of growth. A quarter of business needing funds to expand to the growth stage but only 10% believing they’ll get bank funding people are beginning to look elsewhere.
Professional are another option for start-ups. The British Business Angels Association (BBAA) estimates that total angel activity in the UK in 2009/10 was around £318m. The BBAA received 9640 business proposals of which only 238 were funded to the tune of £42.3m. This gave an average deal size of £178,000. The biggest problem with this type of investment is that deals tend to be top heavy on the level of due diligence and legal documentation required. Often this activity can cost a significant percentage of the invested funds as lawyers and consultants invoice on a post deal basis. Clearly this funding stream has not picked up the slack left by retreating banks and therefore alternative funding streams have become main stream in the last few years.
One of these alternatives is crowdfunding. Crowdfunding is the umbrella term for the collective effort of individuals who network and pool their money, usually via the internet, to support efforts initiated by other people or organisations. The independent charity NESTA revealed in its research that the UK crowdfunding market has grown to £120m in 2012 and is on course for double that in 2013. Further, in 3 years it could reach £15bn. Within the broad term of crowdfunding there are four different models, reward based, donation based, debt based and equity based. For start-up businesses with little or no cash flow, equity crowdfunding seems to be the most appropriate choice.
Of the 484,211 new businesses started in 2012, 2 % were in the cleantech sector according to SVB. This means that there were almost 9,700 new greentech companies and that they will be looking for funding. Fortunately these companies can get grants and loans from the government via various means such as the £3bn Green Investment Bank, the £2.6bn Regional Growth Fund, the privately operated Green Deal Finance company or via bodies such as the Technology Strategy Board and the Energy Technologies Institute. This is complicated by the fact that the process tends to be confusing and onerous in conjunction with requirements of matched funding. Therefore there is still a significant desire for private funding which cannot be met through traditional means.
At Ecopropagator we have engaged with projects that are looking for funding that ranges between £50,000 and £5m. We have spoken to companies who have revolutionary technology but are unable to get funding because the climate is so tough. Some have already raised significant sums in IPOs in the UK and abroad but want to use a service such as Ecopropagator to increase their visibility while raising extra capital. Additionally we have had a lot of interest from professional and institutional investors who would like to fund envirotech alongside the ‘crowd’. It is with this that we believe equity crowdfunding can be a vital source of finance for greentech companies that need capital to grow.
In July Storebrand, one of Norway’s biggest insurers and pension funds, announced that they would exclude 13 coal and 6 oil companies from its portfolio in order to reduce its exposure to oil sands. Dutch bank Rabobank recently announced that it too would exclude “unconventional energy extraction projects” – i.e. shale gas and oil sands – from it loans portfolio. They both did this citing environmental and social implications of the investments. Further a new report by Impax Asset Management showed that from 2008 until 2013 in the MSCI Index – which tracks 500 exchange traded funds globally – fossil-free strategies offered equal – if not slightly better – returns for investors. Institutional and professional investments are shifting to more responsible and profitable investments; they are moving into the green sector. This should make fund raising easier for the 9000+ new envirotech companies in 2014.
With a green goods and services sector of 128bn in 2011/12 and a growth rate of 5% the cleantech sector is going to need even greater sums of investment to ensure its expansion. This is even more vital for the SME greentech companies that do not have access to the large capital markets. By offering a boutique investment platform exactly for these companies which has access to professional and institutional investments in conjunction with the larger pension funds and banks who are looking at cleantech, it should be easier for the growth and job creating small and medium sized businesses of the sector to raise capital from 2014 onwards.
Philip works freelance for Ecopropagator producing articles, research and social media. He also works for Atos as a Project Manager. He believes that the world can be a greener place with smart initiatives which are easily achieved by the everyday man. Ecopropagator is one such initiative where green tech companies can get access to funding by tapping the investment potential of the ‘crowd’ in order to grow. This leads to innovation within cleantech and hopefully a greener world.