Open for business – that has been the resounding message of investors operating in the cleantech sector over the last few weeks. Listening to the excellent Ecosummit series of presentations and pitches from Venture Capitalists (VCs) and aspiring investees operating across the sector, it was striking to see that whilst cleantech is not immune to the coronavirus crisis, there is an underlying resilience and a determination to get deals done.
In so many ways, the pandemic has been an accelerator of pre-existing trends, proving that with a meaningful incentive – in this case not getting a potentially fatal virus – we can change. For all the evils of COVID-19, we have seen some incredible positives in how we can change the way we live, work and move, and how this can have such a significant impact on our individual and collective carbon footprints. What was previously deemed impossible and undesirable has become not only possible, but also shown us how our lower carbon lives can be better.
Whilst the fear of a return to the same old ways lingers, there is an optimism that changes accelerated by coronavirus can remain beyond lockdown.
Government leadership through financial stimulus.
Lasting change also needs the sticks and carrots of policy initiatives from governments who are willing and able to invest in a low carbon future rather than bail out those fading industries that dominated the last century. Around the world governments are grappling to get the health emergency under control whilst also introducing massive financial stimulus and recovery measures to kickstart economic growth.
In their recent ‘Global Renewables Outlook’, the International Renewable Energy Agency (IRENA) set out how governments can help replace fossil fuels and slash carbon emissions by building “more sustainable, equitable and resilient economies by aligning short-term recovery efforts with the medium- and long-term objectives of the Paris Agreement and the UN Sustainable Development Agenda”.
Encouragingly, we have seen this play out in recent weeks with governments pumping financial stimulus into the energy transition as a way of supporting and enabling their nation’s economic recovery. Last week saw President Macron announce an €8bn plan to revive France’s motor industry by increasing subsidies for electric and hybrid cars and supporting research into hydrogen power and self-driving cars. Macron said the aim was “to make France the leading country in Europe for the production of clean vehicles”.
Never one to be outdone, Chancellor Merkl announced a €130bn fiscal stimulus to mitigate the economic damage of the coronavirus pandemic including improved subsidies for electrical vehicles, and targeted cash injections to create hundreds of thousands of jobs in green and digital industries. Significantly, the stimulus package did not include incentives for the purchase of new petrol and diesel cars similar to the scrappage scheme that was introduced to help the German automotive sector after the 2008 financial crisis. The message is that times have changed and bailouts for the internal combustion engine are off the agenda.
Policy certainty driving investment appetite.
Regardless of coronavirus, the world is getting serious about deep decarbonisation. Policies introduced now to kickstart economic growth will go some considerable way in shaping the progress we can make in this decade to reach the 2050 net zero target. These same policies will also go some way in determining where VC and private equity investment deals are made.
Speaking as part of a Founders Forum event this week, Robert Trezona, Head of Cleantech at the listed VC company IP Group, outlined how the landscape for investing in clean energy and e-mobility start-ups has changed massively in the last two years due to the clarity provided by the 2050 net-zero commitment, and the key step of halving carbon emissions by 2030. Big corporates, the oil and gas majors, energy and automotive companies, and the broad range of investors operating in the sector realise that fundamental change is required now for there to be any realistic prospect of the collective mission being accomplished.
So, the good news for cleantech founders is that there is lots of money out there. As governments pump the market with favourable policies and financial stimulus packages, angel investors and VCs operating in the sector are understandably encouraged and incentivised to find and invest in those high potential, fast-growth rising stars. Further up the food chain, the big beasts from energy, automotive and oil and gas are poised to swoop with the big money deals providing the early stage investors the exit they need.
What’s the short-term investment prognosis?
Without doubt coronavirus has impacted deal flow over the last few months, with VC time and capital sucked up in providing financial and managerial support to their existing portfolio companies. Some VCs have also reported how the threshold for investments is perhaps that bit higher than last year due to the current market uncertainties. As for the VC arms of big corporates – particularly those from the oil and gas and automotive sectors – anecdotally the chequebooks have been put away whilst the parent companies haemorrhage money on more pressing priorities.
Clearly, a critical determinant of whether to invest in a start-up is building confidence and understanding in the competence and passion of the leadership team – something that can only be partially achieved on Zoom. Face-to-face contact is essential and until lockdown restrictions ease in the coming weeks and months, these physical connections will just not happen in the same way.
Speaking on a Hyperion Insight piece last week, Gerard Reid from Alexa Capital observed that the markets are clearly recovering and investor confidence is being restored. From Gerard’s perspective, the next window for raising money starts in September with investors and investees in preparatory mode over the summer months. Lots of conversations are happening, with VCs bullish about new deals being completed over the winter months ahead.
This positivity was echoed by Tomas Kemtys – a Partner at cleantech-focused VC Contrarian Ventures – on the latest Leaders in Cleantech podcast. For Tomas, the industry we operate in is just too important – yes, coronavirus is painful but nothing like the challenge of climate change that lies ahead.
In this decade we need to make radical progress in enabling fledgling businesses to develop and deliver the solutions that we need to force through the energy transition. I for one am confident that the post-pandemic economy will be founded on green growth with climate action and the energy transition at the centre of recovery plans. As a wave of ‘Green Deal’ incentive programmes roll out across Europe and beyond, the boards of cleantech start-ups and scale-ups should be confident that investment will be there to enable them to achieve their commercial goals.
So, the prognosis for cleantech investment? We really can’t afford not to.
9 June 2020
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