Venture capital investments have a high failure rate. Investors go in convinced that there is a market need, a technology to meet that need, and a management team with the drive and skill to make it happen. Still, things go wrong. Are the reasons for the failures of cleantech (clean energy, clean water, resource efficiency) investments any different from other venture start-up areas?

The answer is yes. Cleantech failures seem to occur mostly between lab/demonstration and commercialisation – often referred to as crossing the “valley of death”. This is different from software inventions, which can usually be made commercially available but fail if they can’t seize the imagination of the market.

What is so different about cleantech?

There is a commonly-held view that the reason is lack of money. It is true that there is much more money available for early stage investments than for the later rounds. When scaling up an industrial process – for example to make chemicals from renewable feedstock, or solar panels, or electric vehicles – the quantum of money required is much larger than for a new online game or networking tool. But money is too simplistic an explanation, and it is often contradicted by facts. Many cleantech companies attract the financial resources they need and still fail to make it to commercial scale.

Usually, this is due to a failure to appreciate the quantity and quality of engineering resource required to go from lab or demonstration plant to commercial viability. So many presentations by companies trying to commercialise something like a new biofuels process show lab results, then results from a slightly bigger plant, and then perhaps a slide showing that in two years they will have their first full-scale commercial plant operating and revenues will be £100m a year soon after.

But quizzed about the engineering team needed to support this transition, the answer is “yes, as soon as we get this funding we will hire a director of engineering”. Yet if DuPont or BASF was at the same stage, they would be putting together a team of 75 engineers, including chemical, mechanical, controls, safety, etc. And it is not just quantity. The chemical engineers that DuPont would be using for the scale-up would be of much higher quality and experience than anything the start-up company could hire.

When making solar panels, there is an engineering challenge of controlling a large number of factors so that the material achieves high efficiency, day in and day out. Or for electric vehicles, how does one control battery quality, specify and select transmissions and provide the technical resources to support customers? Even the most successful company in electric vehicles, Tesla, took longer than expected to go from prototype to mass manufacture because they underestimated the engineering expertise required.

This engineering problem is compounded by the lack of expertise in most venture capital firms in just the areas we are talking about. Populated by people who cut their teeth backing software, telecoms or biotech ventures, they don’t ask the right questions about what it will take to get this innovation to commercial viability.

There is only one solution for most cases. For a cleantech company to be successful, they need a larger strategic partner who will become committed to scale-up and development. Examples of this approach include Alstom who have invested in Brightsource (utility scale solar thermal) and Tidal Generation (tidal power); ABB is working with Aquamarine (wave power) and Trilliant (smart grid); Siemens with Tendril and a number of other smart grid companies; Monsanto with biofuels company Sapphire Energy. Not just an investor, or an interested bystander, but a company willing to bring to bear its expertise and its engineering firepower to make it happen. Look for that to be in place and you will have a good idea who to back.

Bernie Bulkin is a director of Ludgate Investments Ltd and chairman of HMN Colmworth Ltd. He was chair of the Office of Renewable Energy for the UK government from 2010-2013, and a member of the UK Sustainable Development Commission. He was formerly chief scientist of BP.

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