Early Stage Investing in Green SMEs: The Case of the UK

Abstract

How might a Green New Deal be applied to the early stage financing of Cleantechs? Amidst rising interest and adoption of Green New Deals in the US, the paper explores the need for more focused policy to address early stage long horizon financing of Cleantechs. We argue that insufficient focus has been applied to early stage investing into these types of innovative SMEs that could lower CO2 emissions across a range of sectors (including renewable energy, recycling, advanced manufacturing, transport and bio-science). Adopting a resource complementarity lens and borrowing from transaction cost theory, we illustrate and build theory through longitudinal UK case studies. These demonstrate how government policy can scale-up through international collaboration public-private, principally venture capital, co-finance to facilitate cleantech innovation with potentially game changing impacts on reducing CO2 emissions in order to meet the Paris 2015 Climate Change targets.

Financing Cleantech SME Innovation: Setting an Agenda

“…Essentially, market failures exist in the early stage Cleantech financing market. These are driven by a combination of information asymmetries and the under-valuation of social and environmental benefits (Owen et al, 2019). Put simply, the balance of risk versus reward is tipped against Cleantechs -the key businesses that are developing low carbon innovations to address climate change (Polzin, 2017).…”

“…Furthermore, that balance becomes more extreme against smaller, earlier stage innovative businesses that lack a track record and collateral (Carpenter and Petersen, 2002). Yet, as an abundance of SME innovation finance studies demonstrate (Owen et al 2019(Owen et al , 2019aLee et al, 2015, North et al, 2013Lerner, 2012Lerner, , 2010 these key innovation actors have potential to make significant contributions to sustainability transitions in a wide range of sectors, such as energy, transport, recycling, construction, advanced manufacturing and engineering, food and biotech (Polzin, 2017;Owen et al, 2019).…”

“…Within more mature finance markets, there has been a considerable rise in environmental impact investing, spurred by a combination of raised climate change awareness and post Global Financial Crisis innovations in entrepreneurial finance. These have included crowdfunding and peer to peer lending, green bonds, accelerators, new forms of business angel funding and seed venture capital, asset finance and blockchain approaches (Owen et al, 2019(Owen et al, , 2018Lehner et al, 2019). Arguably, government policies have been light touch and limited, with early stage, small venture investor tax breaks such as those in the UK and Republic of Ireland, encouraging private investment, but potentially skewing investments towards shorter term digital technologies (funding 'digitech' companies specializing in software and online solutions) which offer faster returns (Baldock and Mason, 2015).…”

“…These are typically SMEs that are developing low carbon technologies leading to climate change 'green' efficiencies across a wide range of sectors, including renewable energy, transport, recycling, advanced manufacturing, construction, food and biotech (Polzin, 2017;Owen et al, 2019).…”

“…By that reducing CO2 emission significantly and alleviate grave impacts of climate change. We argue that cleantech SME innovation financing should be an essential cornerstone of policies to tackle climate change, since such businesses have the potential to develop globally significant game changing technologies to address future low carbon economic requirements if they can successfully scale their business model (Owen et al, 2019;Lerner 2010, Popp, 2012).…”