Green start-ups lack funding

Start-up cleantech and green businesses lack funding.

By John Parnell

Micro-sized green businesses are struggling to source investment as private and public money flows to larger companies, an entrepreneur has told RTCC.

Credit has become difficult to find for all, from consumers to the upper reaches of the corporate world and even certain governments. However, as Prime Minister David Cameron pointed out in a speech earlier in 2011, small and medium sized enterprises (SMEs) are responsible for 50% of business turnover in the UK. Their share of private and public sector investment appears disproportionately small.

Despite much rhetoric about investment in a green economy, firms in the middle stage of development have a range of funding sources available, finding the seed capital to get off the ground can be difficult.

“Even after we won what is essentially a UK government contract for £330,000 over two years, we still couldn’t get an overdraft, not even for £500,” says Andreas Zachariah, CEO of start-up Carbon Hero. The company is developing an app, Carbon Diem, which detects your mode of transport and uses GPS to measure your carbon footprint from travel.

Despite Andreas’s business knowledge gained from a career in the city and the company’s award winning history, attracting private investment remains tough.

“The other problem you find is the scale of investments venture capitalists are interested in. Typically they are not interested in projects under £1m because they think the paperwork and the administration is not worth the trouble,” claims Zachariah.

With these channels unavailable Carbon Diem has relied on grants and prize money thus far.

“Our first funding was as a consequence of winning a Galileo Masters award in 2007. We were invited to pitch to the European Space Agency, which resulted in our first contract. As a consequence we moved to Holland for a year.

“Then we were contacted about the Technology Strategy Board (TSB). They were running a competition for intelligent and informed personal travel projects. We put together a tender for the TSB grant and that has been supporting our R&D exercise for the last two years. They took a risk and we are eternally grateful to them for doing that,” says Zachariah.

Dr Nick Gostick is the managing director of Inntropy, operator of the Nottingham CleanTech Centre, an incubator for small green business. He believes that tax breaks and other incentives could be used to encourage venture capitalists and entrepreneurs to invest in small companies.

“The involvement of incubators in the process can help as they will know the start up, have a business relationship with them, and so can condense a lot of the expensive due diligence,” says Gostick. “Another option is to force the banks kicking and screaming into the sector. At the moment they have no interest in the sort of technology start-ups that this country needs to repair the damage that the banks have done.”

The banks however, have traditionally become involved with companies at a later stage once much of the risk has been removed. Start-ups can help with this process by doing the due-diligence mentioned by Gostick and through thorough business planning.

“We see a number of really encouraging small businesses coming forward with great ideas, but we do encounter a number of entrepreneurs that come to us with an idea but without a robust business plan,” says Paul Turner, group community investment and sustainable development director at Lloyds Banking Group.

“That makes it very difficult for us to assess them. There is certainly space for more philanthropic equity. When they’ve got a great idea but they need help developing it that’s when they would really benefit. We can come into the equation better when the idea is developed and it is bankable,” says Turner.

This does not relieve the frustrations of Zachariah who says he also feels excluded from the UK government’s flagship Green Investment Bank (GIB), which has stated its intention to pump money into more developed enterprises.

“I suspect there will be an awful lot of PLCs helped by the GIB that have the public markets open to them, the banks and their shareholders at their beckon call,” he says.

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