12.1 Greens rush in: CleanTech venture capital investments - prospects or hype?

Jesper Lindgaard Christensen , Department of business studies, Aalborg University, Aalborg , Denmark
Full Papers
  • cleantech inv JLC.pdf (158.0 kB)
  • When Aldrich and Fiol published their influential paper on industry creation, ‘Fools rush in? The institutional context of industry creation’ (1994) the primary focus was on the hindrances to industry evolution stemming from lack of legitimacy, which may prevent key stakeholders from understanding the nature and potentials of the new types of ventures. This adds to ‘normal’ constraints for industry evolution such as uncertainty related to new markets, capital constraints, untrained employees etc. Precisely the legitimacy may in this case, clean tech investments, be in place at a macro level of aggregation; it is widely recognized that such investments are needed and render societal value. It may be questioned, though, if the same holds on a micro level. Do investors and fund-of-funds institutions regard clean tech investments as hype and beyond the scope of a purely for profit investment strategy?

     There is growing interest in the clean-tech market. Despite this interest there is sparse knowledge on the growth patterns and prospects for this sector. This paper is focused upon the investment processes and –levels in the sector and focuses upon, but is not confined to, venture capital investments. One justification for this focus is the role venture capital has had in stimulating and disseminating technologies in emergent sectors.

     The pace of investment in clean-tech companies has in the past decade accelerated.
    The question is if the present trend in investments into the clean-tech industry is just another ‘hype’; a(nother) case of herding behaviour of venture capitalists? In a broader perspective an additional two more general research questions are underlining the research – what are the investment criteria of venture capitalists and secondly, how does venture capital expand into new industries. Whereas a number of even early papers addressed the investment criteria of venture capital firms the dynamics in how venture capital transfer into or emerge in new industries is scarcely researched.

     Denmark has had a long tradition for investments into environmentally friendly technologies, but has until now not succeeded to the same extent as in several other countries to attract notable private capital to the clean-tech industry. The paper is mapping the investments and assesses prospects for the future development of the industry in Denmark. The paper also speculates why Denmark on the one hand has well-developed technological and industrial strongholds in cleantech and well-developed markets for innovation finance (3rd in Europe after the UK and Sweden) but on the other hand have relatively little venture capital available for cleantech investments.

     The paper identifies important dynamics of these investments, such as environmental problems and concerns, increases in prices of energy and regulation. An enabling factor for industry development is the fact that the technologies involved are usually not particularly sophisticated and expensive; rather there is a large element of technology spillovers and adaptation from other industries. As a result of these drivers of the industry many cleantech segments are fast growing and large markets, something particular attractive to venture capital firms who typically are looking for scale-able, high growth opportunities. However, recent trends at the venture capital market show a focus on still larger companies and on second round financing of existing portfolio companies rather than new investments. This indicates that the industry as a whole has become more risk averse. Indeed the traditional perception of venture capital as being particular risk takers has been questioned.

     Just as doubts has been raised with respect to how rational, stage organized and planned venture capitalists decision making processes really are it may be questioned if decisions to invest in the cleantech industry are based on solid due diligence and forecasts or just expectations of further investor interest and rising share prices of this particular type of firms. Some characteristics of cleantech investments may scare venture capital away. In some segments, especially within energy, both the long time horizon involved and the amount of capital needed for development is often substantial and above what venture funds will be prepared or able to pay. Because many cleantech technologies are applications of existing technologies to new areas it is often difficult to achieve IPR protection. This may also be of concern for venture capital firms.

     Venture capital has the image of being exceptionally prone to take risks and exploit new opportunities.  Venture capital is regarded as a critical factor in the commercialisation of new research into viable businesses. According to this perception there should not be any strong path dependencies in how venture capital is allocated on industries. In practise considerable conservatism persist. Of course there is a number of fund managers who take in new types of investment areas and maybe even have visions of expanding whole new industries. However, the mix between these conservative venture capitalists and their more visionary colleagues is probably difficult to influence and dependent upon a number of factors. Moreover, there is likely to be an element of herding behaviour in venture capital. A few prominent players within the industry are setting the path to follow and the rest is following.

     It is found that the fact that Denmark has seen a large public funding of the technological development related to the now industrial strongholds within cleantech may contribute to explaining why venture capital investments have been sparse. Also the strong industrial base of start-ups within the industry may have limited the demand for external competencies of technologies, market and industry from investors; these were already present in the firms. Even if a demand was there investors would probably not be able to meet this demand as there is currently only limited investor competencies in this industry.  Moreover, investors also have only limited industry specific networks. In cleantech networks may be particular important because b2b sales rather than b2c is the rule, and this requires networks for penetrating new markets.