Corporate investment in clean technology innovation is a win-win opportunity. Viewpoint by Jamie Vollbracht, Head of New Ventures, Innovation, the Carbon Trust.
We live in challenging economic times. Furthermore, there are some fundamental resource constraints that aren't going away: the population is growing while the world is fixed in size and many of its natural resources are being depleted. Finding innovative, resource-efficient routes to prosperity is now an imperative.
Fortunately many such successful, innovative solutions exist, often residing in small but rapidly growing companies whose importance to the economy can't be underestimated. According to the European Commission some 85% of net new jobs in the EU between 2002 and 2010 were created by small and medium sized enterprises. Take Streetcar, the car-sharing club as an example. Started from scratch in 2004 with a new business model offering an alternative to car ownership in major cities across theUK, it was acquired by the leading American equivalent, Zipcar, in 2010. This year the combined entity which employs over 700 people was acquired by Avis, a leading car-hire company, for $0.5bn.
Successfully navigating the multiple challenges to commercialise the innovation at scale in this way isn't easy though. When fundamental technology developments are involved it can be even harder. Capital is often required to fuel growth, particularly in the early stages before profitability - and in some cases before revenue - materialises. Traditionally venture capital (VC) has been the source of that finance but Carbon Trust believes that there are limits to what equity investors seeking solely financial returns and the VC model can do in clean technology. Clean technology innovations face specific barriers that make them more challenging to commercialise. They often require regulation to drive uptake at the outset, commonly need significant capital and long timeframes to develop and usually compete in markets with powerful incumbents and established infrastructure designed around conventional solutions. For these reasons clean technology innovations rely on investors whose interests are aligned.
In principle corporates stand out as an attractive source of such strategic growth capital in clean technology as they rely on a pipeline of innovation that they can draw on to develop and grow. For much of the 20th century, the dominant form of corporate innovation was through in-house R&D - think researchers squirreling away in corporate laboratories to develop new solutions. More recently, as corporates began to recognise that not all the best ideas necessarily reside in-house, the concept of open innovation has come to the fore - looking outside the organisation for innovation and growth. Unlike other investors, corporates can deal with the longer timeframes and the capital intensity of many cleantech innovations. And fortunately, though their core businesses might be under pressure, unlike some governments, many corporates currently have significant positive cash balances to invest and are looking for the next attractive opportunity to pursue. In theory, this provides a win-win opportunity, if and only if the SME/corporate engagement can be successfully brokered and structured to overcome the multiple challenges including different attitudes to timeframes, risks and opportunity, the 'not invented here' syndrome and other corporate antibodies.
Until recently, many corporates used the same VCs described earlier, relying on them to nurture external early stage innovation for them by investing through so-called 'fund of funds' that became common during the early '90s. But this has proven far from a silver bullet. The VC model is only applicable to certain types of innovation and funds often operate at a distance from the corporate that invested in them whilst the 'shopping list' they pursue doesn't necessarily drive the strategic value corporates are looking for. What about the financial returns they deliver you ask? Well, if a VC delivers 10-15% returns (and only a select few do!) such returns on a $100m fund won't move the needle from a financial perspective for a major corporate. Corporates need orders of magnitude more. They need to drive profitable growth in line with their $multi-billion core business units.
The cleantech investment data reinforce this situation. Latest data from the Cleantech Group show cleantech VC investment in 2012 one third lower than in 2011. While this is partly down to the economic downturn it arguably also indicates increasing recognition that venture capital isn't the right source of capital for many of these technologies. VCs are rightly focusing on 'capital-light' parts of the market like software where the high returns they need for their business model might be possible. Meanwhile evidence is emerging to suggest corporate activity across all types of cleantech innovation is on the rise .
These trends in combination are driving the creation of new collaborative models, with corporates taking a portfolio approach, using a range of different models to effectively access external innovation and thereby drive growth. Take Unilever, which makes Flora margarine and Dove shampoo. It now relies on external input for 60 per cent of its innovation product line, typically made up of about 500-1,000 products. This is up from 25 per cent just a few years ago. Their portfolio of approaches includes investment vehicles, supplier networks, working with innovation partners and joint ventures with other major corporates.
We can also point to examples we are directly involved with, working as an innovation partner with corporates, as part of our mission to accelerate the move to a sustainable, low carbon economy. Take the Carbon Trust's £45m Offshore Wind Accelerator, a joint industry programme where we work alongside 9 major corporates including RWE, E.On and Vattenfall who collaborate with one another to reduce costs in non-competitive technology areas. Similarly, GE has a $5m partnership with Carbon Trust around infrastructure applications as one strand of their portfolio of open innovation activities.
This use of a portfolio of approaches to innovation taken by leading corporates has a number of benefits, in the same way that investors will use a portfolio of asset classes. To extend the analogy, different investment classes are suitable for different risk/return profiles, just as different approaches to innovation are more or less suitable to pursue specific challenges and opportunities. And as an investor, it helps to prevent the risk of being stranded with any one asset class that's not performing
The more corporates take this intelligent, portfolio approach to clean technology innovation, the more chance we have of finding routes towards sustainable prosperity. And that's a pretty exciting opportunity to grasp.
If you would like more information on this issue please contact James Sun at the Carbon Trust.