Today’s innovation in sustainability will set the stage for tomorrow’s great businesses.
Many corporates are taking the strategic view that adopting and adapting in this new world is fundamental to superior performance, more stable cash flow and delivering higher value growth. They see the increasing evidence of resource constraints, population growth and climate change, and turn this into a commercial opportunity to balance the threat. Public opinion is vocal and influencing board level decision making to place more capital in businesses that create positive change.
Investors and intermediaries are also on the case and searching for early-stage companies with differentiated technology, market opportunity, a business model that fits, and a team assured to deliver. There is a rich stream of 'deal-flow' into sector specialist funds covering a broad range of products and services that not only cut the cost of sustainability but also exhibit ways to make a positive social and environmental impact.
It goes without saying that those companies with exceptional growth potential, external validation and clarity on exit, both how and when, will take precedence when it comes to the successful closure of a funding round.
Identifying risk
Prior to any investment is identification and appreciation of risk. This comes in various forms; for example, scale up from where the development is today to an economic size. The more capital-intense, the higher the risk and the deeper pockets need to be. Very often start-ups assume that the market will accept a new entrant without reaction. In reality, the situation is much more dynamic and incumbents will continue to improve their range of products and services.
Apart from these risks, there is the somewhat unpredictable political and regulatory environment plus macro-economic factors beyond the control of all in this space. That said, the tide has turned and overall market sentiment is positive compared to the early years of this decade.
Governments continue to back the sector to promote both future wealth and employment. Within the UK, the Clean Growth Strategy was launched in 2017, and highly attractive income and capital gains tax reliefs such as SEIS/EIS incentivise investment during early development and move developments closer to the market.
A checklist
Investors face the challenge of selection from a vast volume and variety of opportunities. In order to make their choice, most have a due diligence checklist that includes the following in some shape or form:
- a differentiated product or service business model with strong scale potential
- a trading status - generating revenue if at all possible through early adopters (prior to this is mainly funded by grants and awards rather than equity or debt)
- letters of intent, endorsements from major customers and a sales pipeline to validate the market
- a completed business plan, including detailed financial projections for at least three years, examples and explanations to answer FAQs centred on customer needs and pain points
- justification of how much money is being raised by the application of funds that is consistent with the key technical and commercial milestones within the business plan
- Intellectual Property – a patent application has been at least filed. Even better if it has been granted as a step towards sustainable competitive advantage. Protection of know-how and rapid innovation prototyping are equally valid barriers to entry
- clear roadmap to exit within three to five years (considered a reasonable timeframe)
- as appropriate, HMRC Advance Assurance for the UK EIS or SEIS scheme
- an established, proven and appropriately qualified leadership team, preferably “been there and done that” and personally invested
- an advisory board that adds value through relevant experience and entry points to the market
The above may not be an exhaustive list but certainly indicative of what a company seeking investment can expect after engagement.
John Steedman, Associate Partner, Greenbackers Investment Capital Limited
Greenbackers are CleanTech specialists, operating a UK-specific VC fund (in partnership with Innvotec) and operating as fund brokers internationally for equity, asset and project finance.