Venture capital investments in the development of clean technologies: early conceptualization and estimation of the effects Anders Isaksson Umeå School of Business Umeå, Sweden [email protected]

1. Background and aim of the study

This paper analyzes how the shifting attitudes of capital firms towards sustainable technologies affect the early stages of development of firms in the clean technology sector.

Venture capital firms (VCs) are investment firms that are specialized in co-investing equity with entrepreneurs to fund early stage (seed and start-up) or expansion firms. Venture capital is in general seen as playing a catalytic role in the entrepreneurial process by creating value and triggering economic growth and renewal (Bygrave & Timmons, 1992, Isaksson, 2006). VCs also play a fundamental role in creating a sustainable society by investing in sustainable innovation and environmental entrepreneurship. Sustainability is the fruit of innovation, both in technological terms and in social terms, and innovation is often driven by the creativity and energy of young entrepreneurs and companies. Venture capital is expected to make a key contribution to the process of transforming innovative entrepreneurial ideas to successful mature firms. This can, for example, be seen in the significant interest the VC industry has shown in clean technologies, or cleantech as it’s often labeled (Eurosif, 2007, Novethic, 2009, UN Global Compact, 2009).

The concept of cleantech embraces a diverse range of products, services, and processes across industries that are inherently designed to (1) provide superior performance at lower costs, (2)

greatly reduce or eliminate negative ecological impact and (3) improve the productive and responsible use of natural resources (NUTEK, 2008) Cleantech Group, 2010).

VC investments in cleantech are one of the fastest growing VC investments segments around the world. In a survey of Swedish venture capital firms, cleantech was ranked the most popular investment segment in the future (SVCA, 2008). According to current statistics the Industrial/Energy industry was the third largest receiver of venture capital in the US in 2010, receiving approximately 15 percent of total funds invested (NVCA 2011). Statistics from Cleantech Group (2010) showed that the VC community in North America, Europe, Israel, China and India totally invested 5.6 billion U.S. dollars in 557 cleantech companies in 2009.

In a survey made by Deloitte and NVCA (2010) of 516 investment managers from nine different countries around the world (Brazil, Canada, China, France, Germany, India, Israel, UK and the U.S.) In seven of the nine countries cleantech was ranked as the number one industry sector in which they were planning to increase their investments in. In these countries between 72 to 92 percent of the respondents they would increase their investments in clean technologies.

Despite the interest in cleantech from the investment community, very little research has been done on sustainable venture capital investments in general and on cleantech investments in particular. Among the reasons for this might be lack of data and methodologically challenging definitions. Definitions and conceptualization of cleantech is still in its early phase with different and frequently conflicting concepts like “greentech” and “envirotech”. One reason for this is that cleantech incorporates a wide range of investment asset classes, technologies, and business sectors. Furthermore, available industry statistics is difficult to use in systematic research (e.g. lack of micro-level data). An important contribution of this research project is therefore to conceptualize the concept of cleantech.

However, the main aim of this research is to analyze cleantech venture capital investments in Sweden. Several important research questions will be answered, among others: 

Which cleantech sectors receive investments and which are left out?



Does venture capital financing affect the growth of cleantech firms (e.g. compared to traditional high tech investments or firms in general)??



Are cleantech firms different in any other way from other venture capital financed firms or firms in general (for instance in terms of size, profitability and financial stability)?

Finally, the paper discusses policy implications of our research. For instance: What kind of cleantech firms are more likely to face an equity gap? Can our data be used to identify main driving forces behind the growth of some cleantech sectors?

2. Literature review

To be added, see reference list

3. Method

A unique dataset has been collected for this research project and this is the first time the results from this dataset are being reported.

First, the total pool of Swedish venture capital firms (members of the Swedish venture capital association) was screened and a total of 77 active venture capital firms were identified. These firms had in total made 835 investments in 707 unique portfolio firms (PFs).

Secondly, a structured manual content analysis was performed (e.g. analyzing public available information and PFs and VCs web pages) to identify and collect variables for the dataset

(organizational number, type of business, investment year, size of investment and so on). . PFs identified as cleantech firms were furthermore categorized in different cleantech segments and sub-segments based on definition developed by the Cleantech Group (for example, segment Energy Generation and sub-segment Solar Power). The content analysis was performed using generally accepted processes in order to ensure intercoder reliability (Neuendorf, 2002).

Thirdly, based on the data collected in step 2 we were able to collect four year of historical annual report data from each PF using Affärsdata, a database that contains information on all registered companies in Sweden. Beside annual report data (income statement, balance sheet and key ratios on growth and financial health), this process also gave us data on industry affiliation, foundation year and number of employees among others.

3.1 Calculating a matched sample of industry average ratios

Dependent growth variables (employees, turnover and assets) and financial ratios (profitability, asset turnover, financial leverage and liquidity) are measured and compared within the group of PFs (e.g. cleantech versus other) but also compared to industry average ratios (matched sample based on size and industry affiliation). The matched sample was collected from Statistic Sweden’s financial ratio database.

Firms were divided into eight different size categories

Early Results and Implications

Energy generation segment (mainly solar, biofuels and hydro/marine sub segments) is the largest receiver of venture capital investment in Sweden (28% of total number of investments

in cleantech) followed by the manufacturing/industrial sector (mainly sub segment Smart Production) with 21% of total number of investments.

Cleantech firms show a higher growth rate than other firms (with an average growth rate in employees of 20 percent versus 11 percent of other VC-backed firms). When it comes to profitability and financial health, our preliminary findings also show that cleantech firms in general are less profitable and less financially healthy than other VC backed firms. As of now, it is unclear if these results can be explained by other factors (e.g. size or age). VC-backed firms are in general young and small, and many have not reached any level of significant turnover or profitability.

Both groups (total sample and sub-sample of cleantech firms) show higher growth rates than the matched control sample, indicating a value creation effect of venture capital investments. However, because these effects are measured in an early stage of the venture capital process, this value creation effect can most likely be attributed to VCs screening skills. We also expect to see that venture capital firms tend to avoid investing in cleantech segments with high degree of capital intensity.

The research presented in this paper will provide important contributions to investors, entrepreneurs, policy makers, researchers and educators. Investors and entrepreneurs can use these findings to gain better insights into the nature of their business operations and use the results as a benchmarking tool. Policymakers, who’s primary purpose is to stimulate the emergence of sustainable innovations and a sustainable society, can use the findings to better calibrate their policy instruments by, for example, focusing on high equity gap areas. For researchers and educators the conceptualization and operationalization of cleantech sector will provide fruitful grounds to further the research in the area.

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