Some Funding Fundamentals.

All other things being equal, and rather simplistically:

• Fundraising itself is a distraction, and worrying about cashflow and runway is a distraction. Distractions kill startups, so ideally founders should raise once and raise big.
• Founders (obviously) want to maximise the value in their business; therefore should raise at high valuations. Investors (obviously) want to minimise risk and maximise returns; therefore should fund slowly, investing small amounts, at the lowest valuations possible.
• If investor risk appetite is higher, investors will invest more, earlier. If valuations are good, founders will accept it.
• In the US, investors’ risk appetite is high and valuations are good. This is efficient; good founders get funding and can focus on growth. In the US, the supply of capital is high and investor competition is plentiful; good founders get good valuations and capital-intensive businesses can access lifetime funding security.
• In the UK, investors’ risk appetite is not high and valuations are not good. This is inefficient; good founders will limp from round-to-round. In the UK, the supply of capital is low and investor competition is limited; good founders get incremental valuation increases (often driving them to look to the US market) and capital-intensive businesses cannot access funding.
• Because capital is mobile and talent is fairly mobile, there is a significant risk of flight of quality away from the UK. Of 83 global Climate Tech Unicorns identified by HolonIQ (as of the end of 2022) four were from the UK (45 were from the US, 19 were from China). Of these four UK Unicorns, two were energy suppliers, one was a data/ratings supplier and the other is British Volt—of which, the less said, the better!

THE PROBLEMS.

There’s plenty of capital and there are plenty of projects but the pipeline between the two is inefficient and ineffective; the plumbing’s broken.

Intelligently deployed regulation can disincentivise finance from doing bad things, and that’s working well already, but it’s not good at redirecting capital to where it’s needed, or overcoming structural gaps in inefficient or sub-scale markets. Equally, the gaps need filling, they REALLY need filling. We seem able to fund easily (cheaply) scalable SaaS businesses but, while software might have eaten the world, it certainly can’t save it.

To roll out the required climate technologies at scale, we need to close this gap for capital intensive businesses, it exists between the VCs, who don’t have deep enough pockets to fund the necessary scaling, and PE/infrastructure investors who don’t want to invest in higher-risk, novel-technology sectors where races between technologies (think VHS vs Betamax) have not yet fully played out. Project finance is available for certain solutions, based on their Technology Readiness Level (TRL) but this falls prey to the same gaps and is generally too piecemeal to be relied on for rapid, uninterrupted growth. Necessarily large-scale first of a kind (FOAK) projects can be the hardest to fund but can equally offer the greatest impact. The International Energy Agency estimates that 60% of the technologies needed for a net-zero transition aren’t yet commercially viable.

THE SOLUTIONS.

Assuming we’re not going to massively increase the investment horizons of UK venture capital investors, and simultaneously vastly expand the supply of money into the UK market, I see two potential solutions:

Open Up More Effective Corporate Venturing.

Corporate venturers aren’t immune to business cycles, but in the case of investment in decarbonisation, with long-term commitments and broad-based buy-in, this should be one area where investment can be committed over the necessary timescales.

Of course, large corporates with deep pockets aren’t automatically well placed to find, assess, support and ultimately onboard new technologies and teams. The right corporate venturing programmes and accelerators need to be encouraged and they need to be established on Founder-friendly terms which also align with the long-term goals and ambitions of the funders, but such programmes already exist, they just need scaling up… massively!

Public Match Funding on a Sector-Wide Scale.

The UK needs to go all in on its decarbonisation and net zero commitment (it’s currently the closest thing we’ve got to an industrial strategy) and if we are as committed to this transition as we say, if we recognise its inevitability, we shouldn’t be afraid of using public funds to unlock growth, and we shouldn’t be worried about some assets remaining on the national balance sheet. This is science, innovation, industrial, environmental, and net zero leadership all rolled into one and should be presented as such.

However, governments aren’t great at picking tech-winners (in truth, nobody is, but governments are particularly bad because their pivots are viewed as U-turns, and their failures as weaknesses, not features of necessary risk-taking) so…

Firstly this should be match funding, alongside private sector funders; we have an operable example in the Future Fund, though I would loosen the scope to permit matching equity investment as well as convertible loan notes, to permit integration with the SEIS and EIS tax relief schemes.

Secondly, this should be at a sufficient scale to be a sector-wide bet; it should be capable of funding every qualifying business within the sector; final numbers aren’t in, but UK climate tech funding was around $8bn in 2022; therefore a $4bn allocation from the UK Government (less than is being spent on 2023’s policy of expanded free childcare for one- and two-year-olds in England) would increase the scale of the climate tech investment market by 50%, though this itself will need to grow massively in future years.

Scaling Up.

De-risking investments at growth-constraining points on the funding journey would make bigger cheques available to founders earlier in the company lifecycle and fund them for longer. This would have a positive effect on valuations which in turn will encourage founders to accept those earlier, bigger cheques and neither limp from round to round, nor look to overseas markets for later rounds.

Of course, much of this activity already happens but not yet on the ‘war effort’ / ‘moonshot’ scale which can meaningfully contribute to a sector-wide funding push. While I’m not much of an economic nationalist, I’d still prefer the UK to be playing its part in the global effort to mitigate global warming, and achieving Net Zero, exporting UK solutions, creating local, high-skilled jobs, and attracting global-scale businesses to remain in the UK, will more than pay for itself in terms of the public purse.