Master Thesis CharlotteSteffensen Aug2009

Are You Scared of Cleantech?

Venture Capital Investment in

Clean Energy

Technologies

Master Thesis

Study Programme MSc Business, Language and Culture

‘Intercultural Management’

Name Charlotte Ledgaard Steffensen

Submission date 24 August 2009

Supervisor Associate professor Dr. Kai Hockerts

Taps 134791

Appendix C Confidential – Enclosed separately

Copenhagen Business School 2009


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”The warnings about global warming have been extremely clear for a long time. We are facing a global climate crisis. We are entering a period of consequences”

Al Gore, US Statesman


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Executive Summary

This research presents the results derived from 46 responses to a questionnaire sent to roughly 300 venture capitalist and entrepreneurs, academia and consultants.

It examines some of the barriers that venture capital investors perceive as problems when investing in the relatively new venture capital sector, clean energy technologies. It can be difficult for a new sector to find its space and obtain the desired and necessary funding, but this usually changes over time due to increasing importance and demand.

Previous studies from the beginning of this century show that there at the time seemed to be certain barriers that constrained venture capitalists’ willingness to invest in clean energy technologies. However, increasing awareness of and concerns about the environment and focus on solutions to help climate changes is likely to have changed the entire market, and therefore also the venture capitalists’ perception of the cleantech sector. Moreover, the institutional investment area is going through a transition towards more responsible investing, which is very likely to influence the venturing world too. Thus, this research sets out to discover whether these perceived risks revealed by previous research are still perceived as problems by venture capital investors, and thereby constraining a market that is otherwise in high demand.

The research is based on a hypothesis outlined on the belief that there has been a change taking place in the fast‐developing venture capital environment during the last 5‐6 years.

The findings revealed that some risk perceptions are the same and some have changed mostly in aid of investments in clean energy. To be more specific, is was found that within technology risk, capital intensity and time‐to‐market still constitute a risk for venture capital investments in clean energy technologies, whereas this study indicates that for what Wüstenhagen and Teppo call infrastructure, here investigated as level of government spending, this problem is not perceived as being as risky as before. There is an indication towards that the clean energy sector is not constrained by lack of government R&D to the same degree as it was. This could be subject for further investigation.

Further, the study revealed that regulatory risk is still perceived as a problem for venture capital investment in clean energy. Regulation and government intervention can work in aid of clean energy but might also influence it in a negative direction.

Moreover, an interesting finding is that the research is indicated that an exit route through a trade sale has become less of a problem for venture capital investors in cleantech.


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Next, this research also came to a conclusion on product market risk, which was that that the same indication applies for product market risk as for exit risk. The results of the analysis and the discussion indicate that the clean energy sector is not constrained by the fact that individuals are not willing to pay for social benefits making it difficult to gain financial value from clean energy technologies. Furthermore, the market seems to view new energy technologies with less scepticism than 6 years ago.

The research has developed an increased understanding of venture capitalists’ perception of the clean energy, ICT and life sciences sectors, but in particular of the clean energy sector, which this research set out to investigate.


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Table of Contents

1 Introduction ............................................................................................................ 9

1.1 Hypothesis ............................................................................................................ 11

1.2 Research question ................................................................................................ 12

1.3 Purpose and structure .......................................................................................... 12

2 Methodology ......................................................................................................... 14

2.1 Research strategy ................................................................................................ 15

2.2 Research design ................................................................................................... 16 2.2.1 Primary data collection ............................................................................................................ 17 2.2.2 Secondary data collection ........................................................................................................ 19 2.2.3 Analysis .................................................................................................................................... 20

2.3 Demarcation ........................................................................................................ 20

2.4 Assesment of research design's quality ............................................................... 21

3 Theory ................................................................................................................... 22

3.1 Venture Capital and Clean Energy ....................................................................... 23 3.1.1 Venture Capital ........................................................................................................................ 23 3.1.2 Impact of Venture Capital ........................................................................................................ 24 3.1.3 Cleantech, Clean Energy and Venture Capital ......................................................................... 25

3.2 Risk perceptions ................................................................................................... 27 3.2.1 Risks in clean energy venture capital ....................................................................................... 27 3.2.2 Five categories of risks ............................................................................................................. 28

3.3 Demarcation ........................................................................................................ 31

3.4 Sub conclusion ...................................................................................................... 31

4 Empirical Findings ................................................................................................. 33

4.1 Background for the empirical findings ................................................................. 34 4.1.1 Statements ............................................................................................................................... 35 4.1.2 Open‐ended questions ............................................................................................................. 35

4.2 Survey results ....................................................................................................... 35 4.2.1 Basic information Q2‐Q6 .......................................................................................................... 35 4.2.2 General Questions Q7‐Q8 ........................................................................................................ 38 4.2.3 Category of Product Market Risk Q17‐Q18 .............................................................................. 40 4.2.4 Category of Technology Risk Q10, Q11, Q13 ........................................................................... 41


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4.2.5 Category of People Risk Q14, Q15, Q16 ................................................................................... 43 4.2.6 Category of Regulatory Risk Q12 ............................................................................................. 44 4.2.7 Category of Exit Risk Q19‐Q20 ................................................................................................. 45

4.3 Qualitative data from survey ............................................................................... 47 4.3.1 Q9 ............................................................................................................................................. 48 4.3.2 Q21 ........................................................................................................................................... 50

4.4 Interviews ............................................................................................................. 51

4.5 Secondary data .................................................................................................... 52

4.6 Assessment of the study’s quality ........................................................................ 52

4.7 Sub‐conclusion ..................................................................................................... 54

5 Analysis ................................................................................................................. 55

5.1 Respondents’ background .................................................................................... 56

5.2 The five categories of risk .................................................................................... 57 5.2.1 Regulatory risk ......................................................................................................................... 57 5.2.2 Exit risk ..................................................................................................................................... 58 5.2.3 Product market risk .................................................................................................................. 58 5.2.4 Category of Technology Risk .................................................................................................... 59 5.2.5 People risk ................................................................................................................................ 60

5.3 Attractiveness and risk ......................................................................................... 61

6 Discussion ............................................................................................................. 62

7 Conclusion ............................................................................................................. 65

8 Literature List ........................................................................................................ 68

Appendices ................................................................................................................... 71

Appendix A: The Survey .................................................................................................... 72

Appendix B: Summery of Survey Results .......................................................................... 84


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List of Figures

Figure 1. Clean energy venture capital investments 2003‐2008. (Carbon Trust, 2009) ..... 10

Figure 2. Sector‐specific risks for energy VC investments. (Wüstenhagen & Teppo, 2006:83) ............................................................................................................................... 18

Figure 3. 11 statements from the survey. ........................................................................... 19

Figure 4. NASDAQ Composite Index. (NASDAQ, 2009)........................................................ 25

Figure 5. Sector‐specific risks for energy VC investments and ways of managing them.(Wüstenhagen & Teppo,2006:83 ............................................................................... 28

Figure 6. Sector‐specific risks for energy VC investments. (Wüstenhagen & Teppo, 2006:83) ............................................................................................................................... 34

Figur 7. Q2: Involved in cleantech as ................................................................................... 36

Figure 8. Q3: Investment stage ............................................................................................ 36

Figure 9. Q5: Industry experience ........................................................................................ 37

Figure 10. Q6: Percentage of work within cleantech .......................................................... 38

Figur 12. Polarity profile of the assessment of the 11 statements. .................................... 47


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List of Tables

Table 1. Q7: Significane test ................................................................................................ 39

Table 2. Q8: Significance test ............................................................................................... 39

Tabel 3: Q7+Q8: Anova comparison of means .................................................................... 40

Table 4. Q17: Significance test ............................................................................................. 40




Tabel 8. Q13: Significance test ............................................................................................. 43


Table 10. Q15: Significance test ........................................................................................... 44




Tabel 14. Q20: Significance test ........................................................................................... 46


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1 Introduction

This research examines some of the barriers that venture capital investors perceive as problems when investing in the relatively new venture capital sector, clean energy technologies. It can be difficult for a new sector to find its space and obtain the desired and necessary funding, but this usually changes over time due to increasing importance and demand.

Climate changes, global warming and an ever increasing need for natural resources is on the global political agenda and with this worldwide focus, the interest for clean technology solutions is naturally increasing too. The cleantech area ranges widely from energy generation, efficiency and storage to material, agriculture and waste ‐ but this paper focuses mainly on the energy generation sector.

The future supply of fossil fuels is uncertain in terms of both capacity and accessibility. Thus, the worldwide escalation of energy consumption, both in the Western world and in emerging economies, requires a further development of alternative1 and sustainable2 energy resources. Crucial to this development is both the entrepreneurial ideas of new solutions to the world’s energy problem as well as investors’ willingness to invest in these new technologies. It is presumed that this quickly will lead to increased focus on alternative energy production methods for which reason the venture capital industry in this area would boom to comply with the demand for funding.

Previous studies from the beginning of this century show that there at the time seemed to be certain barriers that constrained venture capitalists’ willingness to invest in clean energy technologies (Wüstenhagen & Teppo, 2006). However, increasing awareness of and concerns about the environment and focus on solutions to help climate changes is likely to have changed the entire market, and therefore also the venture capitalists’ perception of the cleantech sector. Thus, this thesis sets out to discover whether these perceived risks revealed by Wüstenhagen and Teppo are still perceived as problems by venture capital investors, and thereby constraining a market that is otherwise in high demand. Cleantech organisations and consultancies are regularly looking into the development of investments in cleantech in general and also clean energy specifically. By looking at figures from Carbon Trust3, it can be seen that there has been a significant increase in clean energy venture capital investments since 2003. See figure 1.

1 Alternative energy is understood as energy generated from resources alternative to the conventional type of energy, fossil fuels. 2 Sustainable energy is referred to as energy technologies that are sustainable in the sense that they build on inexhaustible resources like sun, wind and hydro power. 3 The Carbon Trust is an independent company set up in 2001 with the support of the UK Government. Its mission is to accelerate the transition to a low carbon economy.


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Figure 1. Clean energy venture capital investments 2003‐2008. (Carbon Trust, 2009)

However, despite an increasing global and political focus on the urge for developing alternative and more sustainable energy technologies, there seems to be a lack of academic research in this area. There has been produced a variety of literature on venture capital investment, however this theory concentrates on venture capitalists’ general risk perception. So far, academic literature seems to be lacking research on the intersection of clean energy technologies and venture capital investment.

The aspect of climate changes attracts the broader attention and is interesting because it is a topic that concerns us all and our future. By conducting this research, I hope to contribute by shedding light on the venture capital investors' apprehension when it comes to cleantech – an issue which apparently still is a challenge for the growth of the industry sector.

The research in Wüstenhagen and Teppo’s article “Do Venture Capitalists really invest in good industries? Risk‐Return perceptions and path dependence in the emerging European energy VC market” in 2006 investigated how the venture capital market expands into new industries and thereby encountered and identified some barriers that were perceived by venture capitalists as problems with regards to venture capital investments in the sustainable energy industry. Their data was collected in 2002‐2003. As mentioned above, the venture capital market is developing at a high pace, hence this research study sets out to test this theory and investigate whether there has been a change in the perception of this industry sector.


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At the Cleantech Forum XXII in Copenhagen in spring 2009, I met Tarja Teppo, who seemed thrilled that her and Wüstenhagen’s study had inspired to further research.

1.1 Hypothesis There is a time span of almost 6 years from when Wüstenhagen and Teppo collected their data up till today. Due to the fast development of the industry, increased global focus on the world’s energy consumption, current non‐sustainable energy production and climate changes, the barriers to venture capital invest are likely to be less pronounced today. Additionally, there has recently been a shift in institutional and corporate investors’ perception, who to a great extent have taken obligations towards social responsible investment (Randjelovic et al., 2003). The UNEP Finance Initiative and the UN Global Compact have developed the Principles for Responsible Investment, and UN Secretary‐General, Ban Ki‐moon states that “[t]he Principles are in essence a set of global benchmark for responsible investing.“ (UNPRI, 2009)and continues that he “applaud the leadership of the institutions that have committed themselves to this undertaking, and urge other investors around the world to join this historic effort.“ (UNPRI a, 2009) This increased focus on responsible investment among institutional investors supports the argument that there is a transition towards more awareness of investing in environmental friendly energy technologies. Moreover, the Obama administration’s focus on the environment and global climate changes is very likely to have an influence as well.

The question is whether and to what extent these aspects have had an effect on the venturing community. It is my hypothesis that this has had an effect. Following this, the belief is that venture capitalists do not perceive these barriers to pose the same degree of problems for clean energy investments as six years ago (Wüstenhagen & Teppo, 2006). Through this investigation, we shall come to see whether there are some indications that support this hypothesis.


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1.2 Research question Based on my personal interest in this area and the presumption of a development in the perception of the clean energy4 technology sector, it would be interesting to investigate the following research question:

1.3 Purpose and structure The objective of this thesis is to investigate venture capitalists’ perception of investments in clean energy technologies, and thereby provide some insight into this investment area. This research intends to test previous theory conducted by Wüstenhagen and Teppo and presented in an article in 2006, and add some new perspectives to this by providing a current view on how the development of the clean energy technology venture capital sector is progressing.

4 A definition on clean energy will be provided in chapter 3.

In which way have the barriers that venture capitalists earlier perceived as risks when investing in clean energy technologies changed?

This research question will be answered through the following sub‐questions:

• How does venture capitalists’ perception of risk when investing in the mainstream venture capital investment sectors ICT and life sciences compare with and contrast to the emerging sector of clean energy technologies?

• Which ones of the barriers are still perceived as problems for investment in clean energy technologies?


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After an explanation of the research strategy and design, demarcation and data collection in chapter two, chapter three will present the theoretical framing and the theories, which will form the basis for the analysis and discussion of the empirical data. This will be done by drawing on research in the area of venture capitalists’ risk perceptions, venture capitalists’ decision‐making criteria, and the limited research on clean energy venture capital investment. Moreover, this chapter will include definitions of venture capital and cleantech and clean energy technologies. Chapter four will present the empirical findings, which will be categorised and described. Chapter five will provide an analysis of the empirical findings from chapter four based on the theory presented in chapter three. Chapter six will provide a discussion of the findings in the analysis, and the conclusion in chapter seven will briefly sum up the discussion.


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2 Methodology

Chapter 1

INTRODUCTION

Chapter 2

METHODOLOGY

Chapter 3

THEORY

Chapter 4

EMPERICAL FINDINGS

Chapter 5

ANALYSIS

Chapter 7

CONCLUSION

Chapter 6

DISCUSSION


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2 Methodology

This chapter describes the approach taken to answer both the research question of whether venture capitalists still see possible risks as barriers to invest in clean energy technologies, as well as the sub‐questions described in the introduction. It will include an explanation of the research strategy, the research design, demarcation, and an assessment of the methodology used.

2.1 Research strategy The intention of this study is to investigate the current state of venture capital investors’ view on investments in clean energy technologies. There are different types of research methods, which can be divided into two main categories: qualitative and quantitative research (Muijs, 2004; Andersen, 2005).

Qualitative research is traditionally based on non‐numerical data and functions as an umbrella term for many methods such as case study, discourse analysis, etc. Quantitative data on the other hand is based on numerical data and traditionally analysed strategically. However, these two approaches to research methods are not mutually exclusive and can be combined (Muijs, 2004).

In 2002, Aliaga and Gunderson stated that quantitative research is: “Explaining phenomena by collecting numerical data that are analysed using mathematically based methods (in particular statistics)” (Aliaga and Gunderson, 2002 in Muijs, 2004).

The advantage of quantitative research is that it is rather flexible, as an almost unlimited number of phenomena can be studied in this way. However, is not favourable if you want to explore something in depth, as it is applicable for studies of breath but not depth. Furthermore this study is not good for developing hypothesis and theories, if you have a something complex to study or if you look for cause and effect (Muijs, 2004).

In spite of these disadvantages the quantitative research method is suitable for answering research questions, which: look for quantitative answers, investigate numerical change, explain phenomena using statistics to predict scores on one variable from scores on other variables and lastly which test hypotheses by looking at theory to create hypothesis and then using quantitative research to test this model (Muijs, 2004). Quantitative research has primarily been chosen for this study, as it is suited for answering this thesis’ research question, which is related to quantitative answers and hypothesis testing.

Therefore, the strategy chosen to execute the study is theory testing, to test the theory concluded from a research conducted six years ago by Wüstenhagen end Teppo (2006).

More specifically, the theory testing in this case will be a quantitative survey research, which will be explained more in depth below. It intends to provide a snapshot of the


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present situation as opposed to the research results, which I aim to testing. Secondly, it is a method to reach a broad area of distribution and to thereby make the study as representative and valid as possible. Quantitative method is a proven methodology in social science research (Andersen, 2005) and the results can, as previously mentioned, easily be formalised and categorised, which is very useful in this study as the intention is to test already existing data.

The methodological approach chosen has a deductive nature, as the aim of this research is to test an already existing theory. Had I instead chosen a theory building research, it would have been appropriate with the inductive approach (Eisenhardt, 1989). The strength of a deductive approach is that is provides a clearly defined set of data, which is easy to work with.

2.2 Research design In terms of the quantitative study’s research design, two approaches can be chosen: experimental and non‐experimental. Experimental design is the so called “scientific method”, as it originated in scientific research, while the non‐experimental design is common in social sciences.

The experimental design has a strict control of the environment and concentrates on the variable which is studied. Non‐experimental design has no control over extraneous influences. This means that while the experimental design has control over external actors, it may result in an artificial set‐up, which may not be applicable in the real world (Muijs, 2004).

Non‐experimental studies are more varied than experimental, and methods can be:

• Survey research (most popular in social sciences)

• Historical research

• Observation and analysis of existing data set

For this study, survey research has been chosen and therefore data has been collected by using a questionnaire.

Even though the survey study does not; have a control over the environment which can establish causality (like the experimental design), easily provide a deeper understanding of processes and contextual differences, or guarantee that respondents reply truthfully as self‐report is not easy, the survey has several advantages that work in favour of this thesis (Muijs, 2004).

The survey research was chosen, as it is highly flexible and can study the relationship between variables. Furthermore, the findings can be generalised as the set‐up is not artificial, and large amounts of data can be collected at a reasonably low cost and effort


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(unlike observations). Anonymity can also easily be ensured to respondents, which can lead to more frank answers and finally, the standardised questions makes it easy to establish comparability between respondents (Muijs, 2004).

This thesis is based on empirical data, which consists of both primary and secondary data. The primary data set is composed of quantitative data and to a certain extent of qualitative data. The secondary data is both qualitative and quantitative and will be specified shortly. The primary data was collected specifically to get an up‐to‐date status on the findings from Wüstenhagen and Teppo’s study.

2.2.1 Primary data collection The questionnaire is set up as an online survey primarily with closed‐end questions with a rating scale, which allows the respondent to choose one of several opinions with a level of agreement. In order to allow the respondents to provide answers that go beyond the lines set up by the questions open‐end questions are also included (Muijs, 2004).

The target group was venture capital investors with knowledge of cleantech and clean energy technologies. The survey was sent as a link in an email to roughly 300 persons, who mainly included of investors from European and international venture capital firms, but also institutional and corporate investors, researchers ‐academic as well as practitioners‐, and cleantech organisations. The mailing list mainly contained people from two sources.

• Participants at the Cleantech Forum XXII in Copenhagen 2009

• A list from a previous interviewee, a now newly retired venture capital investor, who kindly provided me with a list of 180 cleantech venture capital investors.

A multiple choice questionnaire will be used as it offers a way to reduce the time respondents will need to complete it, and therefore to increase the number of completed questionnaires. Furthermore, it provides answers, which are numerical and can be used statistically.

The quantitative findings constitute the main element of the generated data. I chose to focus on the 11 risks in Wüstenhagen and Teppo’s study, which were perceived as problems by venture capitalists. See figure 2 below.

On the basis of these perceived problems, I created a questionnaire consisting of 11 statements, which addressed each of these. See figure 3 below.

For the sake of convenience, I will use a specific terminology, when I mention different questions from the survey: Q1=question 1, Q2=questions etc. As for the 11 statements, they are numbered Q10‐Q20.


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Figure 2. Sector‐specific risks for energy VC investments. (Wüstenhagen & Teppo, 2006:83)

The respondents were asked to assess each statement in relation to their view on the venture capital situation today. The response set was close‐ended and the same for each of the statements: A scale from 1‐5, where 1= strongly disagree and 5= strongly agree.

Moreover, the respondents had to assess each statement in relation to three venture capital sectors, namely clean energy, ICT and life sciences.

In addition to the statements, the questionnaire contained two questions of more general character:

• How would you assess the general attractiveness of investing in the following sectors? (Q7)

• How would you assess the general risk of investing in the following industries? (Q8)

Lastly, the questionnaire contained a group of questions, which specifies personal information about the respondents. (Q1‐Q6) See appendix A for the full survey.

In addition to the quantitative data, the survey also enclosed two open‐ended questions, where the respondents had the choice to write explanations.


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Figure 3. 11 statements from the survey.

Furthermore, the qualitative data also comprise a few interviews. I started the research process by gathering qualitative research data to gain a deeper understanding of the research area and to obtain specifications of several key definitions. This was done by carrying through a pre‐study, which consisted of telephone. The interviewees are venture capitalists and work with cleantech. The interviews followed a semi‐structured interview guide, which was adjusted according to the working area of the interviewees (Salant & Dillman, 1994). The outcome of the interviews is confidential, for which reason the transcripts are included in an appendix separate from the thesis. See appendix C. However, the statements presented in chapter four are available.

2.2.2 Secondary data collection The broader understanding of the research area builds on secondary data and information, which provides some interesting view points for the analysis and discussions.


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I have used different sources, for instance academic databases like Ebsco, Business Source Complete and Savage, but also searched in newspapers and magazines, and publications of firms and trade organisations. The data is of both quantitative and qualitative nature. Search terms such venture capital, venture capital investment, cleantech, greentech, decision‐making criteria, sustainability, clean energy, sustainable energy, green investments and different variations thereof were used.

2.2.3 Analysis The data set from the survey turned out to be a sample of 46 usable responses. To be able to raise the level of generalisability, I have conducted a significance test on the raw data from the survey results. The significance level is set to the common value of 0.05. Usually, one can say that if there is a difference when comparing data, the difference is significant when the value is below 0.05 (Muijs, 2004). By this is meant that one can add more value to the difference that is significant than when the difference is not significant (significance test value above 0.05).

Furthermore, to compare the data collected, the mean and median value for the responses has been calculated and will be used when describing the empirical findings (Muijs, 2004).

The data will be analysed by using theories related to risks in a venture capital context. This is which risks are perceived to play a role and influence venture capital investors when they make investment decisions. Further, theories on venture capitalists’ decision‐making criteria when making investments are used to analyse the data.

I have chosen to follow the structure in Wüstenhagen and Teppo’s research, where they have divided the 11 risks within five categories. The five categories of risk will be worked up one at the time to maintain an overview and make the analysis easy to follow.

2.3 Demarcation This section will describe subjects and issues, which this thesis will not investigate.

Firstly, I have chosen to send the survey to venture capitalists, who work with cleantech in general or with clean energy technologies. Another possibility that would have gained quality to this study would have been to send out the survey to an equal share of ICT, life sciences, and cleantech investors to cover more broadly. However, the intention has been to follow the methodology of the study by Wüstenhagen and Teppo, who mainly researched people with the cleantech area. However, I am aware that the choice of only sending the survey to a cleantech sample, the validity of the responses may possibly be influenced by the fact that the respondents are biased because their focus is concentrated towards cleantech.


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My focus is on venture capital investments as a whole. Yet, I am aware that it would also have been interesting to delve into the differences of venture capitalists risk perception of the different investment stages, and as Parhankangas and Hellström point out “it is widely believed that early stage investments imply higher overall risks…” (2007:185).

Finally, it would have been interesting to investigate the difference of venture capitalists risk perception of clean energy in different parts of the world.

2.4 Assesment of research design's quality This section will asses this research design's validity, reliability and generalisability, which are key concepts within quantitative research (Muijs, 2004)

The choice of using different sources of primary data helps to ensure that the data collection can be aimed specifically at the research question and thereby increase validity of the research.

The response set in the survey, multiple choices, ensures that the respondents answer within the frame set up for them. However, it delimits the respondents’ possibilities of giving full explanation. To make up for this two open‐ended provided the possibility for further elaboration.

Furthermore, I have chosen to ignore the “Don’t know” answers because they do not bring value to the study.

I have formulated the 11 statements as ‘neutral’ as possible to avoid influencing the respondents in one or the other direction, this increases validity

In terms of reliability, I made the choice of only approaching venture capitalists within cleantech and clean energy technologies to stay as close to Wüstenhagen and Teppo’s study as possible in order to make my research as reliable as possible. However, I could have chosen to broaden the research by also adding venture capital investors from the two main stream sectors, ICT and life sciences, and thereby have avoided a possible bias in favour of cleantech. Due to respondents’ bias, some of the findings may reflect the respondents’ self‐perception.

In terms of generalising the findings to the entire population, a relatively high number of respondents are required. The survey collected a total of 49 responses of which 46 were useful. A higher number would obviously have increased the generalisability of the study. Nevertheless, the sample still provides some interesting indications, and moreover, the significance test showed that there are significant differences in larger parts of the statistical data.

The next chapter will describe the theories used in this thesis.


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3 Theory

Chapter 1

INTRODUCTION

Chapter 2

METHODOLOGY

Chapter 3

THEORY

Chapter 4

EMPIRICAL FINDINGS

Chapter 5

ANALYSIS

Chapter 7

CONCLUSION

Chapter 6

DISCUSSION


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3 Theory

This chapter presents the theories and the theoretical approaches that will be used for this research. The purpose is to provide a framework for this thesis, which will be used in the analysis and discussion of the empirical findings. The theories presented in this chapter can be related to the broader areas of financial theory and risk behaviour management.

Firstly, there will be a presentation of the keywords and key terms of venture capital, renewable energy, clean energy, cleantech and sustainability in a cleantech and sustainable energy context.

The second section deals with the theories related to risks in a venture capital context that is what risks are perceived to play a role and influence venture capital investors when they make investment decisions.

3.1 Venture Capital and Clean Energy This section first presents venture capital theory. Next an explanation of the impacts venture capital has on the economy. This will be followed by a presentation of the key terms renewable energy, cleantech, clean energy, and the key terms related to a venture capital context. Lastly, the investment sector of clean energy will be linked with venture capital.

3.1.1 Venture Capital When looking back in time, entrepreneurs have always had a capital need to develop and realise a new idea, a new product or service. Venture capital investment in one or another form has existed for many years and it has been one of different types of financing available for entrepreneurs or start‐up companies.

Today the venture capital industry is a well‐established industry, which provides capital to entrepreneurial ideas and technologies, to young and innovative start‐ups and growth companies. It is an important link in the span of investments that exist today. Other types of financing include business angels, corporate and institutional investors. However, the type of financing depends on the development stage of the business idea.

Typically, venture capital investors provide capital to high‐risk, immature entrepreneurial companies, which have a high potential for growth. Start‐ups and companies, which have a very limited operation history, are too immature to obtain a bank loan, and too small and risky for the institutional investment market. A venture capital firm usually raises a periodical fund, which will have a life span of 5‐8 years. Venture capital funds invest in a portfolio of new businesses, all with high risk because they enter at an early stage, but also, all with a significant potential to create an above average profit when they exit. The


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most typical exit routes are a trade sale an IPO5. The venture capital firms do not just provide money; they also contribute with business, managerial and market expertise and knowledge, and participate actively in decision making processes.

In return for the money and effort invested, the venture capital investors hold a share of the ownership, and eventually through the exit gain capital. These above perspectives are shared by a number of both academic researchers and practitioners (Gorman & Sahlman, 1989; Gompers & Lerner, 2001; Gompers & Lerner, 2004; Wüstenhagen & Teppo, 2006; BankInvest, 2009; Vaekstfonden, 2009). For the scope of this paper, I would like to draw attention to Gompers and Lerner, who in my opinion provide an exact definition of venture capital. They define venture capital as “as independent, professionally managed, dedicated pools of capital that focus on equity or equity‐linked investments in privately held, high growth companies.” (Gompers and Lerner, 2001:146).

3.1.2 Impact of Venture Capital Venture capital has a significant impact on economic growth and is perceived to be of great importance for global innovation. This is supported by both recent research and research dating more than 30 years back (Fried & Hisrich, 1988; Gorman & Sahlman, 1989; Gompers & Lerner, 2004; Wüstenhagen & Teppo, 2006; Ernst & Young, 2008).

Especially in the US, which is seen as ‘the home’ of venture capital, Silicon Valley has gradually become the centre of innovation and venturing. New and emerging economies like India and China also benefit greatly from venture capital, which makes the markets accelerate at high speed. However, there have been some major shifts in volume and perception of venture capital during the last 15 years, see figure 4 below. The peak in 2000 and the following down fall impacted world economies. Nonetheless, the entrepreneurs and their innovations are still out there, and the money always seem to flow back again after a regression, for which reason solutions to solve global climate changes have good chances of being evolved. As Gorman and Sahlman state, “The perceived importance of venture capital in economic growth has grown at a rate at least as high (if not higher) than the rate of growth of invested capital.” (1989:231).

5 Initial Public Offering


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Figure 4. NASDAQ Composite Index. (NASDAQ, 2009)

3.1.3 Cleantech, Clean Energy and Venture Capital So far, there has only been very limited research in the clean energy venture market. This is most likely due to the fact that is remains a fairly new industry and business area for venture capital investors. This is supported by Cleantech Group, which states on its website that it only in 2002 defined clean technologies as an investment area and has taken credit for the origination of the term ‘cleantech’, which I will return to shortly (Cleantech a, 2009).

In a general opinion, cleantech covers many areas ranging from energy generation, ‐storage and ‐efficiency to transportation, and from waste water over agriculture to materials. In a reputable Danish newspaper, cleantech is defined as working with as little energy effort as possible and reducing the amount of raw material as much as possible in order to minimise the influence on the climate (Berlingske, 2008). This definition can be said to generally cover what is generally thought of by cleantech, however, the definition lacks some substance and is not very precise.

Yet, as cleantech is related to business and financial aspects in this context, the definition provided by Cleantech Group seems more appropriate for this research. Cleantech Group defines cleantech as “…new technology and related business models that offer competitive returns for investors and customers while providing solutions to global challenges.” Moreover it “is driven by productivity‐based purchasing, and therefore


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enjoys broader market economics, with greater financial upside and sustainability.” (Cleantech b, 2009).

Renewable energy is energy generated from sources, which never run out such as sun, wind, and hydro power. On the other hand, the expression clean energy covers many different types of energy sources and the definitions vary widely depending on whom one is asking. Yet, clean energy is not necessarily from renewable sources, but energy which is carbon free. Therefore, it may also include nuclear power. This point is quite controversial and is often discussed by clean technology investors and organisations (Cleantech, 2009, Cleantechsummit, 2009, Axiomvc, 2009).

As mentioned earlier, there is not much research done specifically on venture capital investment in clean energy technologies. This is also emphasised in a 2007 Eurosif6 report commissioned by the European Commission: “Five years ago, a European study in this area was not really possible ‐ there were not enough players in Europe that had Venture Capital funds linked to sustainability issues.” (Eurosif, 2007). In 2003, Randjelovic et al conducted a study, which investigated the “phenomenon of environment related [venture capital]” also related to as green venture capital (2003:240). There is a slightly different terminology used in Randjelovic et al study in 2003 as opposed to Wüstenhagen and Teppo in 2006 who termed their research area “sustainable energy [venture capital market]” (2006:64). However, apart from ‘environment related’ and ‘sustainable’ it is noteworthy to notice the different scope of research. Randjelovic et al focus on clean technologies in its broader sense; whereas Wüstenhagen and Teppo have a more narrow focus in that that they only research energy within the cleantech area. Randjelovic et al‘s definition of green venture capital is “a high‐risk financial capital provision for eco‐innovative ventures, which offers the potential for financial returns, as well as contributing to sustainable development.” (2003:251). As mentioned above, Wüstenhagen and Teppo’s focal point is on clean energy, and therefore more in line with the research question of this thesis. Following the above presentation and discussion, I suggest that clean energy venture capital is defined as ‘independent, high‐risk financial capital provided to immature, high‐potential innovative growth companies or technologies, which have focus on and potential for sustainable energy development as well as potential for financial returns’.

This leads on to the area of risk and risk perception since risk plays a very important role in the venturing community. There are certain risks associated with investments in innovative growth companies, as they do not all make it all the way through to a successful exit.

6 Eurosif (the European Sustainable Investment Forum) is a pan‐European Non for Profit group whose mission is to address sustainability through financial markets.


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3.2 Risk perceptions For the general public, clean energy has most often been associated with the 1960s hippie culture and has not been recognised as a business area. However, this view is now changing due to especially increased fossil fuel prices and greater focus on climate changes. The market for sustainable energy has slowly emerged over the last few decades and attracts more and more attention to the business world. An emerging market needs funding, and for start‐up companies, the primary source of funding is venture capital (Gompers & Lerner, 2004).

3.2.1 Risks in clean energy venture capital This paper sets out to investigate to which extent the clean energy venture sector is still constrained by the risks perceived by venture capital investors six years ago.

Therefore, it is only natural to begin with a presentation of Wüstenhagen and Teppo’s findings (Wüstenhagen & Teppo, 2006). In their article, “Do venture capitalists really invest in good industries?”, the aim was to investigate “[w]hich drivers and barriers...venture capitalists perceive as influencing future growth of the sustainable energy VC market...” (Wüstenhagen & Teppo, 2006: 66).

They recognised five categories of risks that affects venture capital investments in clean energy technologies, namely product market risk, technology risk, people risk, regulatory risk, exit risk. Within these five groups, they identified 11 sector‐specific risks, which, at that time, made the fairly new clean energy industry less attractive to venture capitalists as compared to main stream industries. See figure 5 below.

However, these risks are most likely not the only reasons why sustainable energy constitutes a low share of venture capital investments. Seen in a larger context, there may be many factors that influence the venture capital industry and its investment decisions. This is also argued by Wüstenhagen and Teppo, who in their article suggest further studies to investigate other specific factors that influence the sustainable energy venture capital sector (Wüstenhagen & Teppo, 2006).


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Figure 5. Sector‐specific risks for energy VC investments and ways of managing them.(Wüstenhagen & Teppo,2006:83

3.2.2 Five categories of risks Following Wüstenhagen and Teppo’s research results presented in figure 5 above, the growth of the venture capital market for clean energy technologies is constrained by different risks.

Within the first category, product market risk, the first of two perceived problems is ‘conservative utilities as customers’. It is said that with a high market concentration on the energy market, there are only few buyers available, namely the energy utilities, and as long as they are not willing to adopt the clean energy technologies, it holds back the venture investments in this area (Wüstenhagen & Teppo, 2006). This is supported by Randjelovic et al, who state that investors refuse financing to start‐ups due to an awaiting market breakthrough (2003:248). Ruhnka and Young’s research also showed that market adoption is a risk for investments in young ventures (1991:121)

The other perceived risk, ‘societal versus private benefits’ addresses the issue of benefits for the end consumers. By buying sustainable energy, the end consumer adds societal value. However, it is not something that makes a difference for the end consumer in the everyday life, and when he thereby does not achieve a private benefit from it, he is not very like to buy it (Wüstenhagen & Teppo, 2006).


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The next category, technology risk, covers three risks. First, ‘long lead times’, which indicates that the time‐to‐market is too long in the clean energy sector compared to ICT. The next perceived problem, ‘capital intensity’, was one of the main barriers six years. It is important to mention that capital intensity is equal high according to Wüstenhagen and Teppo’s study (2006). The last problem within technology risk is external ‘infrastructure’. The authors suggest examining this risk as government R&D spending (2006).

The third category is people risk. Here ‘few serial entrepreneurs’ are seen as a problem; the area of clean energy is still fairly new, and there seems to be a lack of entrepreneurs with industry experience (Wüstenhagen & Teppo, 2006). This problem is also supported in the research by Randjelovic et al, who argue that both entrepreneurs and venture capitalists lack sufficient expertise and knowledge of the area (2003). ‘Good engineers, poor managers’ refers to fact that there is majority of engineers and too few managers within clean energy. This argument is supported by Ruhnka and Young, who in their study of risks at the different stages in the venture capital life cycle, identified a risk in that many entrepreneurs are poor managers and that many of them are not capable of effectively managing the development process of the venture (1991:121).The last problem that Wüstenhagen and Teppo addressed within people risk is ‘”green” image’ (2006). This goes back to the issue that was touched upon in the beginning of this chapter, namely that there apparently still exists a general prejudices against sustainable energy, which is conceived as a non‐profitable area (Wüstenhagen & Teppo, 2006). Randjelovic et al (2003) also state that many entrepreneurs play down the sustainability perspective of their business to better their chances of obtaining funding.

Moving on to the fourth category, regulatory risk, also referred to as political risk, we look at ‘energy policy framework seems unpredictable’ (Wüstenhagen & Teppo, 2006). This area ranked second highest in terms of perceived risks. Wüstenhagen and Teppo’s study revealed that venture capital investors feel constrained by the fact that it is difficult to predict both governmental subsidies for clean energy technologies, and regulations that affect the energy market. Also, it covers the matter that it is difficult for new market players to enter a market dominated by monopolists (2006). That regulatory aspects play a significant role for venture capital investment in clean energy technologies is also emphasised by Randjelovic et al (2003:250), who state that regulation can work both in favour of venture capital investment and again against it.

The last category is exit risk and covers ‘few success stories’ and ‘utilities unlikely candidates for trade sales‘. For the former, it ranked as the greatest barrier in Wüstenhagen and Teppo’s study and refers to that there only had been very few successful exits by 2003. As for the latter, their study also indicated that when a venture is ready for exit, electric utilities are not likely buyers, as they traditionally are not particularly innovative in comparison with life sciences, where innovation is the path to


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survival (2006). The exit risks are also recognised by Ruhnka and Young, whose study revealed that one of major risks for venture capitalists is that the chances for an IPO is not very high (1991:123). Furthermore, Megginson points out that “exit routes strongly differ between the USA and Europe, with IPOs being the preferred exit route in the USA but accounting for only 5% in Europe” (Megginson, 2004 in Wüstenhagen & Teppo, 2006:74). This is an interesting difference, and Wüstenhagen and Teppo’s research also supports this difference as their results revealed that the venture capitalists in their sample expected 80% of their exits to be through trade sales (2006:74).

Randjelovic et al touched upon a few other barriers to venture investment in clean energy technologies (2003:247f). They argue that “lack of a proper network” is a barrier, as venture capitalists and entrepreneurs meet and exchange and share experiences through such networks (2003:247). A network would also be the place to learn about new companies or investors. However, this barrier has changed dramatically over the last few years with organisations like Cleantech Group; and the virtual incubator Cleantech.org; online network groups and communities like Sustainable Investment Forum and CleanTechies Around the World at LinkedIn; and hundreds of conferences and trade fairs worldwide.

Wüstenhagen and Teppo address the issue of people risk by mentioning ‘good engineers, poor managers’; however, there is not much emphasis on the entrepreneurial capabilities (2006). This is in contrast to Macmillan et al, whose most important finding and main conclusion is that “it is the quality of the entrepreneur that ultimately determines the funding decision.”(MacMillan et al., 1985:128). Their results show that five of the top ten most important criteria for venture capital investment are linked to the experience and personality of the entrepreneur (1985). This means that the risk of the investment increases if the entrepreneurial quality is not sufficient. Yet, Macmillan et al’s study is from 1985 and the whole venture capital climate was different then as compared to now. Hence, considering the development over time, it is no surprise that this point of view has changed and as also the venture capitalists industry.

Parhankangas and Hellström have a somewhat different approach and focus on risky behaviour (2007). They argue that it is the experience of the venture capitalist that decides to what extend he or she see an investment as risky. The venture capitalist rather seems to perceive a risk as a challenge than as a risk (Parhankangas & Hellström, 2007). This means that venture capitalists are not too focused on the actual risk but motivated to seek the challenge as a result of increased experience. This mindset could very likely have an influence on the venture capital area of clean energy. As discussed earlier, Wüstenhagen and Teppo’s research indicates that investment in clean energy technologies seems to be constrained by a series of risks. However, if the investment


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behaviour has changed, it is likely that the perception of risk has changed as well. This is related to the very purpose and objective of this thesis.

Another theoretical perspective of risk perception that is interesting and applicable for this study is presented in an article by Ruhnka and Young’s article (1991). As mentioned above, they look at the major risks for venture capital investors at the different stages in the venture capital life cycle. However, when summarising their findings, they identified technology risk as one of the major risk and indicate that capital intensity is one aspect of that. Moreover, there are many risks related to people, among others that the entrepreneurs “unable to manage development” (1991:121).are poor managers. They also present market risk as a major risk which implies that the potential market is not big enough (Ruhnka & Young, 1991:121).

Research conducted by Mason and Harrison on risk for investments in technology‐based firms shows similar results, namely, that there is a perceived market and technology risk for investments in technology‐based companies (Mason & Harrison, 2004:318)). However, it has to be considered that this study deals with business angel investments.

The study conducted by Wüstenhagen and Teppo (2006) did not only investigate the perceived risks, they also provides some potential solutions to the perceived problems. See figure 5 above. When analysing the findings in chapter 5, I will draw in these possible solutions where appropriate to analyse, whether they have been useful, provided that there has been changes in the risk perception.

3.3 Demarcation I have chosen to focus solely on theory related to venture capital investment and have therefore excluded theories and frameworks that concerns other types of investment such angel investment, corporate and institutional investments. Neither have theories related to risk strategies for corporate investors been used as this is a different market space and therefore not in the scope of this research. Opportunity identification is a related area; however it is an area of theory more concerned with the entrepreneurial angle to venture capital investment. Moreover, theory on venture capital investment risks related to the different stages in the venture capital life cycle is not included.

3.4 Sub conclusion The theoretical background and perspectives, which I found relevant to understand and analyse the data in this thesis has now been presented.

Firstly, different key terms were presented. They provided views on venture capital and its impact on economic growth. I am inspired by Gompers and Lerner’s venture capital definition and endorse the opinion of Fried and Hisrich (1988), Gorman and Sahlman


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(1989), Gompers and Lerner (2001), Wüstenhagen and Teppo (2006) and Ernst & Young (2009) on their views on venture capitals impact on global innovation and economic growth.

In line with this and the overall perspective of this research, different views on renewable energy, clean energy and cleantech were viewed and discussed. Inspired by Gompers and Lerner’s (2001) venture capital definition, the definition of green VC by Randjolovic et al 2003, Cleantech Group’s definition of cleantech (2009), I suggested a definition of clean energy venture capital.

In terms of risk perception, Wüstenhagen and Teppo (2006) have inspired to this thesis, and their research creates the foundation for this paper. However, their view has been challenged by related theories, and researchers and practitioners’ point of views. This will be accounted for in the analysis in chapter five and the discussion in chapter six.

In the next chapter, the findings for this research will be presented, and will reveal the current state of mind of venture capital investors with regards to their risk perception.


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4 Empirical Findings

Chapter 1

INTRODUCTION

Chapter 2

METHODOLOGY

Chapter 3

THEORY

Chapter 4

EMPIRICAL FINDINGS

Chapter 5

ANALYSIS

Chapter 7

CONCLUSION

Chapter 6

DISCUSSION


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4 Empirical Findings

This chapter presents the results of the empirical findings and investigations for this paper.

It will begin with a brief description of the background for the empirical findings. Hereafter, the main section of this chapter will follow with a presentation of the quantitative part of the survey results. This second section will consist of (a) an orientation about the sample, (b) a description of the basic sample data, and (c) a presentation of the answers to the core questions and statements.

Thirdly, this chapter provides a meaning condensation of the qualitative results of the survey. Next, there will be short presentation of a few comments from the interviews. Finally, there will be a presentation of the secondary data.

Based on the theory introduced in the previous chapter, these empirical findings will create a basis for the analysis in chapter five, which is the next step in revealing whether venture capital investment is still constrained by venture capitalists’ perceived risks, as it was established in Wüstenhagen and Teppo’s study from 2006.

4.1 Background for the empirical findings This section will describe and explain the setting for the primary empirical data, which consist of two parts, namely the quantitative and the qualitative results from the survey. The aim of this paper is to test the theory of risk perceptions that Wüstenhagen and Teppo presented in their article in 2006. They have listed the problems that clean energy venture capitalists perceive as risks in five categories. The perceived problems within the categories are illustrated in figure 6.

Figure 6. Sector‐specific risks for energy VC investments. (Wüstenhagen & Teppo, 2006:83)


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4.1.1 Statements On the basis of the 11 perceived problems, I included 11 statements in the survey, which each represents one of these perceived risks. The respondents were asked to assess each statement in relation to their view on the venture capital situation today as was explained in the methodology chapter. The 11 statements can be seen in figure 3 in chapter 2. Each statement is numbered from Q10 to Q20 corresponding to the statements’ numbers in the survey. Please find the entire survey in appendix A and a summary of the raw data results in appendix B.

4.1.2 Openended questions There are two open‐ended questions in the survey, question 9 and question 21.

Question 9 aims at filling the gap between the time period in which the tested theory was created and today. Q21 elaborates on the statements Q10‐Q20, and provides a possibility of adding additional information and opinions.

4.2 Survey results This section presents the responses from the survey. The following will bring an overview over the professional background and location of the respondents, and the experience level within the cleantech sector of the respondents. Thereafter, selected findings will be presented. For the convenience of the reader it is suggested to have appendix B at hand when reading this section.

A total of 49 persons entered the survey. However, two respondents did not answer any questions in the survey and have therefore been eliminated. One respondent entered the survey, answered a few questions, skipped it and entered again, this time to answer the entire survey. Consequently, the faulty response has been eliminated. This means that the sample consist of 46 respondents.

4.2.1 Basic information Q2Q6 Of the 43 respondents in the sample, who answered question 2, the vast majority are involved with cleantech as venture capital investors, and accounts for almost 75%. The rest are dispersed over the fields of other investors, consultants, entrepreneurs, researchers and policy makers. However, it should be mentioned, that several respondents are involved with cleantech in several areas. Therefore, the total number of respondents comes to more than 100%. See figure 7.


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Figur 7. Q2: Involved in cleantech as

Question 3 addresses the respondents in the sample, who are investors. As in the case above, the respondents had the choice of applying more than one answer. Figure 8 below illustrates that a majority invests at the early stages, namely seed capital, first and second stage capital.

Figure 8. Q3: Investment stage


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In question 4, the respondents were asked in which part of the world they were based, and with 43% from Scandinavia and 43% from the rest of Europe, the majority of the sample is based in Europe, whereas 13% are from North America. The sample had one respondent from Asia. This matches fairly well with the sample that Wüstenhagen and Teppo had in their study (2006).

In relation to industry experience in question five, the results show that the majority of the respondents, 79%, has more than 3‐5 years of cleantech experience and that half of the sample has more than 6 years of experience. See figure 5. The mean is 3.4 and the median is in between group 3 and 4, which can be interpreted as 5‐6 years.

Figure 9. Q5: Industry experience

Question 6 shows how much time the respondents spend on the cleantech area. Here, there is predominance towards the ‘extremes’.

A little more than 1/3 of the respondents devote less than 40% of their time to cleantech, whereas 58% spend 60% or more of their time on issues related to the cleantech sector. The responses are weighted strongly towards one side with more than 42% of the respondents spending between 80% and 100% of their time on cleantech. There is one little group in the middle, which only reflects three respondents. See figure 10.


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The findings indicate that the respondents are either (a) heavily involved in cleantech, or (b) only spend a minor part of their time on cleantech. The median is 60‐80%.

Figure 10. Q6: Percentage of work within cleantech

4.2.2 General Questions Q7Q8 The replies to question 7 and 8, which are two general questions, will be presented separately and in relation to some of the results above. The response set was different for these two questions:

Question 7: a scale from 1‐5, where 1= Not attractive and 5= Very attractive.

Question 8: a scale from 1‐5, where 1= Low risk and 5= High risk.

For both questions, the respondents had to answer each question for three venture capital sectors, namely clean energy, ICT and life sciences.

The responses to question 7 (How would you assess the general attractiveness in the following sectors?) reveal significant differences between the sectors. The mean value for clean energy is 4.3, 3.4 for ICT, and 2.6 for life sciences. See table e 11 below. This means that the respondents find the clean energy technology sector quite attractive, whereas life sciences are not assessed to be particularly attractive. ICT is somewhat in the middle.


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Table 1. Q7: Significane test

Turning to question 8 (How would you assess the general risk of investing in the following industries?), the mean values are the same for clean energy and ITC and slightly above the middle between low and high risk. The mean for life sciences, on the other hand, is somewhat higher at 4.1, but the difference here is not significant. See table 2

Table 2. Q8: Significance test

When looking at the location of the venture capital investors, there seems to be a tendency for North American investors to assess cleantech as more risky than the Europeans do. The means are 4.0 and 3.4 respectively, but as there is no significant difference, it can only be seen as a supposition. See table 3 below. Additionally, North Americans (mean of 4.0) supposedly assess clean energy slightly less attractive than Europeans (4.7).


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Tabel 3: Q7+Q8: Anova comparison of means

The following sections will highlight the findings related to the category risks presented in figure 6 above.

4.2.3 Category of Product Market Risk Q17Q18 Product market risks consist of two perceived problems, namely (Q17) that it is more difficult to generate financial value since benefits tend to be societal, and (Q18) that market adoption risk is high due to conservative potential buyers.

Beginning with the former, Q17, the results of the survey reveals a certain disagreement with the statement that it is more difficult to generate financial value since benefits tend to be societal for all three sectors. See table 4.



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However, when comparing the three sectors, it shows that the respondents perceive this risk differently for the three sectors. The mean values are 2.4 for cleantech, 1.6 for ICT and 2.0 for life sciences. The results show that the opinion of the respondents is that it is more difficult to generate financial value within the clean energy sector than within the ICT sector. This mean difference is a significant difference.

The results of the latter, concerning a risk due to conservative buyers, show similar mean values for clean energy and life sciences at 3.3 and 3.2 respectively. See table 5.


This signifies that the responses are in between strongly disagreeing and strongly agreeing. The mean value for ICT is somewhat lower at 2.4, and the respondents therefore see this the barriers as less risky for the ICT sector.

When looking at the statistical data, the mean value for clean energy technology is significantly different from ICT.

4.2.4 Category of Technology Risk Q10, Q11, Q13 The second category of risks consists of three perceived risks. The responses to the first statement, (Q10) the capital intensity in these sectors is high, expose some interesting findings. The mean values for the three sectors differ considerably. As can be seen in table 6, the mean for ICT is 2.3, which can be understood as disagreeing with the statement. On the other hand, the mean values for the clean energy technology sector and life sciences are fairly high at 4.2 and 4.1 respectively. Moreover, following the statistical results, the significance test reveals that there is a significant difference between clean energy and ICT, as well as between life sciences and ICT.


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The situation for next technology risk looks similar. The statement (Q11) is that the average time‐to‐market is long. The mean values show that the respondents disagree on this statement for the ICT sector, whereas they agree to it for clean energy technologies and life sciences. The means are 2.3 for ICT, and 3.8 and 4.4 for clean energy and the life science sector respectively. See table 7. For this statement it also applies that the difference is significant for clean energy and ICT, and for life science and ICT.


The last statement in this category is that (Q13) the level of government spending on R&D in the respective sectors is high. The results focus around the centre and slightly to the left in the response set. The mean value for ICT is lowest with 2.4, which indicates that the respondents disagree slightly to this statement. The clean energy sector ends at 3.3, very close to life sciences, which has a mean value of 3.2. This indicates that the respondents slightly agree to this statement for these two sectors. There is a significant difference between the values for clean energy technologies and ICT. See table 8


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Tabel 8. Q13: Significance test

The findings within the technology risk category will be further dealt with in the analysis in the next chapter.

4.2.5 Category of People Risk Q14, Q15, Q16 In the third category of risks, there are three different statements. The first one (Q14) deals with whether it is easy to attract qualified start‐ups, the second (Q15) states that entrepreneurs tend to be good engineers but poor managers, and the last statement (Q16) states that the attractiveness of the sectors is reduced by the fact that entrepreneurs are driven by a desire to “change the world” rather than by making profits.

Beginning with the first statement, Q14, the mean values are thronged relatively closely at the upper side of the centre with values reaching from 3.1 for both clean energy technologies and life sciences to 3.9 for ICT. See table 9.

These values show that the respondents agree less with the statement regarding clean energy and life sciences compared the case for ICT. Even though the differences are not big, the significance test shows that the difference between clean energy technologies and ICT is significant.



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Moving on to the second statement, Q15, within this category, the mean values are not particularly different ranging from 3.2 to 3.4. They are grouped around the centre of the response set, and this could be interpreted as if the respondents neither agree nor disagree to this. See table 10


The results to the last perceived risk in this category reveals that the respondents do not agree to this statement for any of the sectors. The highest mean value is for clean energy technologies at 2.4. Life sciences has a mean values at 2.3, whereas ICT is lowest with 1.9. See table 11.


4.2.6 Category of Regulatory Risk Q12 Moving on to the regulatory risks, the statement (Q12) is focused on to what degree the respondents agree or disagree with that government support makes the three sectors attractive.

The mean value for clean energy technology is 4.1, 2.1 for ICT, and 2.8 for life sciences. See figure 12. The interpretation of these numbers in relation to the response set is that the respondents to a high degree agree that governments make the clean energy sector


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an attractive investment area. Moreover, they do not see government support as making ICT sector specifically attractive, whereas life sciences is placed roughly in the middle.

The significance test shows that there is a significant difference between both clean energy and ICT, and clean energy and life sciences. These results show that the respondents seem to perceive the clean energy technology sector as more attractive in terms of government support than both ICT and life sciences. This will be investigated further in the analysis in the next chapter.


4.2.7 Category of Exit Risk Q19Q20 In the last category of risks, there are two subject matters to look at.

Firstly, (Q19) the likelihood of a successful IPO and secondly, (20) the likelihood of a successful trade sale. The responses to the first statement revealed that the respondents are united around the centre of the response set ‐ that is between disagree and agree. The differences vary from 2.6 to 3.2, as can be seen in the table 13.


For the second statement (Q20) in this category, the likelihood of trade sales, the responses are also fairly thronged, but in contrast to the likelihood of an IPO, they are


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ranked somewhat higher. The mean values range from 3.5 to 3.9. There is no significant difference. See table 14.

Tabel 14. Q20: Significance test

However, when comparing the mean value from statement Q19 with Q20, it is interesting that the overall assessment is that the likelihood of a trade sale is somewhat higher than the likelihood of an IPO. This aspect will be dwelled more upon in the analysis.

The above section walked through the quantitative data from the questionnaire and the main findings in each category will be summarised.

To create a nice overview of the results concerning the 11 statements, a polarity profile has been developed. Here the mean values for each of the statements for each sector are presented in a summary. When examining the profile, the particularities are easy to recognise and thereby the polarity profile provides a well‐arranged picture of the data. This makes it easy to identify the highest and lowest ratings and where the biggest differences are between the sectors.


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Figur 11. Polarity profile of the assessment of the 11 statements.

4.3 Qualitative data from survey In addition to the quantitative data, the survey also contained two qualitative questions, Q9 and Q21.

Firstly, this section will provide an insight into how the respondents assess the change in the perception of investments in cleantech during the last 5‐6 years. 41 of the respondents in the sample agreed that there has been a change in the perception, whereas only two respondents replied that there had not been a change. 36 out of the 41


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respondents, who signified a change in perception of cleantech investment, provided an explanation. The entire set of explanations can be found in appendix B, question 9.

Secondly, this section briefly summarises the responses to Q21, which asks the respondents to describe which other risks, than those already mentioned in the survey, relates to the clean energy sector. 16 respondents in the sample have provided description. See appendix B, question 21 for the entire list of descriptions

4.3.1 Q9 “Cleantech is on the top political and economical agenda in a way that it has not been before.” (Appendix B)

This is a statement by one of the respondents, and captures the essence of what several respondents have answered. This shows that there has been a development in the political arena towards more focus on the need for clean technologies. However, it also implies that there is an increased focus on the economical perspective in cleantech investment.

A theme, which is often brought up in the media with regards to cleantech investment, is subsidies and favourable legislation. Several respondents touch upon this matter.

”On the positive side the political focus on climate change and tax incentive schemes encourage investments.” (Appendix B)

”Positive due to governmental intervention” (Appendix B)

Also Gianni Operto, investment director at Good Energies, supports this by arguing that ”Up to a few years ago the cleantech opportunity went unseen by the larger VC community. It was belaughed as being subsidized and overregulated, just as if life sciences weren't...” (Appendix B)

This last quote indicates that not only cleantech is subsidised. This is also the case for life sciences.

The next statement is in line with the previous one regarding political attention, but adds the aspect of climate changes.

”Increasing political awareness about the consequences of climate change in combination with increased commercial awareness and interest, has stimulated this.” (Appendix B)


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Climate changes are for many of the respondents a reason for a changed perception of cleantech investment. This next quote indicates more directly that the perception more specifically has changed in direction of more awareness of cleantech investments.

“Increased awareness due to environmental concerns (global warming) and oil prices.” (Appendix B)

Oil prices are mentioned as another reason for increased awareness of clean energy investments, and this is backed by several other respondents; however, another respondent, Michael Stuer Lauridsen, partner at New Energy Solutions at BankInvest, contradicts this by saying the following:

“Oil prices have dropped which makes investments in cleantech less attractive as there is a strong correlation between the two.” (Appendix B)

This indicates that the attractiveness of clean energy technologies may change depending on oil prices.

One of the statement s in the survey (Q17) was about societal value and financial benefits. One of the respondents provides an explanation in line with this, as he says:

”Due to the situation in the world with more of hurrica[nes], stormy weather, rain and the Al Gore presenta[...]tion for a couple of years ago has changed peoples mindset concerning energy consum[p]tion and other things that will destroy the climate.” (Appendix B)

This quote is backed by another respondent, who states that

“Due to the wider perception of both society and investors for the importance of climate mitigation, green investments have become more important. My guess is that the ROI of green investments is still more important than let's say a personal responsibility for our future, but also in that respect a change towards responsible investments is going on.” (Appendix B)

This indicates that there is awareness among individuals regarding an understanding of climate changes. Further, it may indicate that individuals see the attractiveness of clean energy technologies as solution to avoid climate changes.

Next, many of the respondents quote similarly that the perception of cleantech investment today as compared to 5‐6 years ago is that cleantech:

“has become more mainstream with opportunities for above average returns” (Appendix B)


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“[h]as become mainstream, some are even suggesting it's a technology bubble.” (Appendix B)

“has become a priority investment sector for many VCs and strategic investors.” (Appendix B)

According to the explanations, it seems as if the cleantech sector has become much more main stream than before. Additionally, it is mentioned that generalist funds are investing in cleantech and thereby indicating that cleantech is not only for special cleantech funds, but also, as another respondent adds, for the most established venture capital and private equity funds, which have already started investing in this area.

Lastly, corporate investor Stig Poulsen, Vice President at Danfoss Ventures, not only ‘predicts the future’, his quote also indicates that it is already a fact that

“[cleantech] has become the next big thing, and the third new big investment area.” (Appendix B)

4.3.2 Q21 The 16 descriptive responses to the question of other investment risks can, on the whole, be summarised in three categories that have already been dealt with, namely regulatory risks, technology risks and a few within market risks.

Several of the responses do reproduce the statements already dealt with in Wüstenhagen and Teppo’s study. Nevertheless, there are some interesting comments.

Within technology risks, one respondent points to that

“Integration risks are very high. The technol[o]gy can work well, but integrating into [existing] systems has proven to be difficult in some cases delaying the adoption by few years.” (Appendix B)

This is a noteworthy comment that will be dealt with in the analysis shortly.

Another aspect within technology risk is that of an investment sector with many competing products. On respondents states

“High diversity of companies/technologies involved in Cleantech” (Appendix B)

The argument is backed by another respondents’ assessment of other investment risk. He clarifies that

“Technology risk must be considered, particularly in light of many competing technologies trying to solve the same problem. Potential exists for a superior alternate solution, or partial solution.” (Appendix B)


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The main empirical findings from qualitative section of the survey can be summarised as political and government intervention, climate change, oil prices, political awareness of climate changes, and that cleantech as an investments sector as become much more mainstream during the last 5‐6 years.

The meaning condensation of the qualitative section of the survey will be used in the analyses to broaden the perspective.

4.4 Interviews The following is a few statements from telephone interviews conducted as part of the pre‐study.

That the clean energy sector is growing is argues by Even Bakke, former Venture Partner at BankInvest in an interview in 2008. He state that

The [cleantech] sector is growing by between 30‐40% per year in terms of investments, so it is a very strong sector. If you take the cleantech – the cleantech is now the 3rd largest venture area. Of course number one is IT, and I think number two is bio technique – medical technologies and number three is cleantech, so it has become a very, very big sector, and I think in last year in 2007, I remember the venture investment in this area was around 5 billion dollars, so it is a very active area. (Appendix C)

Another venture capital investor, Guus Keder, Partner at Axiom Venture Capital argue that

Cleantech is probably the largest wealth‐creation opportunity that we will face in our lifetime, It means that the world have to go through a tremendous change, and every time the world has to go through a tremendous change there is a chance to make money – fortunes ‐ to create wealth, and for me wealth is not only money but also to create a better place for people to live. (Appendix C)

Paul Simpson has a very interesting point of view on the aspect of ‘societal vs. financial’ benefit. He argues that

If I’m investing in a company I want to know how much they need me to invest, how much they are worth now, how much they think they can grow… I mean venture capitalists – obviously many people focus on the


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cleantech space from at venture capital side ‐ some of them driven by desire to environmental solution, but all still looking for financial return. (Appendix C)

4.5 Secondary data Governmental regulations may not only constitute risk on national level, it may also be an issue on a continental level ‐ for instance on a EU level. This slightly different but definitely related point is argued by a former Venture Partner at Bank Invest, Even Bakke, who emphasised a very interesting point when he stated that “the biggest impact that the EU could make for the VC funded companies is to assist them in cross boarder business development within the EU.” (Bakke, 2008).

In line with many of the statements in the primary data, Bjarne Henning Jensen, Partner in Vækstkapital at Vaekstfonden7, states that clean energy investments are seen as an area traditionally dominated by monopoly and the issue of strong governmental regulation and subsidies is important (Jensen, 2008).

Not everybody see venture capital investment in clean energy technologies as particularly risky. On the contrary, ‐ if we leave the academic world ‐ Peter Schrøder, Head of Investments in Partner Kapital at Vaekstfonden, states that one investment sector is as good as the other; it does not matter whether it is IT, biotech or cleantech, as long as the basic criteria of scalability and the business models are in place (Schrøder, 2008). Accordingly, practitioners do not necessarily see clean energy investments as any different to other more traditional investment areas like ICT and life science. Also head of the Danish Venture Capital Association, Ole Steen Andersen, support this argument and says that if there is a possibility of scalability is the decisive factor (2008). Further Schrøder argues that it is not the industry sector that matters, as it is the commercial possibilities (2008).

Recent reports from practitioners and consultancies have shown a great development in the energy venture capital area (Ernst & Young, 2008; Carbon Trust, 2009; Cleantech c, 2009), for which reason, I propose that that there has been a change in the risk perception by clean energy venture capitalists in line with the hypothesis.

4.6 Assessment of the study’s quality Following the presentation of the empirical findings and investigation, this section will provide an assessment of the quality of the study based on validity, reliability, and generalisability (Muijs, 2004).

7 Vaekstfonden is a state owned financial company, which operates independently in the capital market, and facilitate teh supply o venture capital in terme of start-up equity adn high-risk loan.


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Validity

For the thesis, I have primarily used primary data by collecting it myself from a survey. The advantage of this that the data relates directly to the research question of this thesis and therefore, it is more purposive than if I had only used secondary data, as I can be fairly certain that the respondents are referring to the subject, which I am investigating.

This is a theory testing research in a relatively unexplored area, and it would have been very difficult to carry out the research without the primary data.

The results showed that respondents more often chose the ‘Don’t know’ option for the assessment of ICT and life sciences. This is in line with that fact that the survey was sent to mainly cleantech investors.

By not only focusing on quantitative data, which constitute the largest share of data, but also using qualitative data, there is more validity added to the findings. Had I strictly used a single research method, for instance only quantitative data, the results may have suffered from limitations by that method. Therefore, by triangualating the empirical data for this research, I have enhanced the data validity.

I have a good data set is of good quality, however due to bias some of the findings may reflect a subjective opinion, which can be seen as a self perception of cleantech investors.

Lastly, it validates the findings that the mainly European sample corresponds to that of the theory tested.

Reliability

As for reliability, this study set out to test results that were obtained at an earlier stage and compare them to each other. I have investigated using both quantitative and qualitative primary data as well as secondary data to provide a more representative picture of the barrier that venture capitalists perceive as risks. By emphasising the quantitative method in this study, the measurement can easily be repeated to verify the reliability of the data.

The content of the data can be said to be relative consistent, however, the sample size larger than what became available could have raised the reliability level of the research results.

Generalisability,


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A qualitative approach opens up for exploring something in depth, whereas the quantitative approach is more suitable for studies of breath. The results of this research provide some indications of the characteristics of the whole population.

As the main part of the data used is quantitative, the study can be said to be statistical generalised rather than an analytical.

4.7 Subconclusion This chapter provided a presentation of the empirical findings and investigations. It presented different view to and angels of how clean energy venture capital investors perceive investment risks and the problems that there may be for investments in clean energy technologies, ICT and life sciences.

The different data sources all indicate that there has been a change in the perception of risk for venture capital investment in clean energy technologies.

Following this data presentation, the next chapter provides be an analysis of the empirical findings on the ground of the theory presented in chapter three to gain a deeper understanding of the research area.


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5 Analysis

Chapter 1

INTRODUCTION

Chapter 2

METHODOLOGY

Chapter 3

THEORY

Chapter 4

EMPIRICAL FINDINGS

Chapter 5

ANALYSIS

Chapter 7

CONCLUSION

Chapter 6

DISCUSSION


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5 Analysis

This chapter will provide an analysis of the empirical data presented in the previous chapter based on the theory presented in chapter three. The analysis will begin with a brief analysis of the findings regarding the background of the respondents in the sample. Thereafter, it will focus on the five categories of risk for investments in the clean energy, ICT and life sciences sectors and compare findings from statements to the results from Wüstenhagen as well as compare them with each other to (a) see whether the issues perceived as problems in 2002‐2003 are still perceived as being so, and (b) analyse whether any of the statements are seen to be create a bigger barriers than others. The last section will analyse the two general questions regarding the assessment of the attractiveness of investing in the three sectors, and the general risk of investing in the three sectors.

5.1 Respondents’ background 75% of the respondents identifies themselves as venture capital investors. The rest are entrepreneurs (16%), researchers (9%) and a few consultants and corporate investors). Wüstenhagen and Teppo’s (2006) research interviews are based on 100% venture capitalists, whereas their survey is respondents were 88% venture capitalist and the rest consultants. This means that the sample groups’ working areas are not identical; however, they do not differ to an extent that would influence this research much.

To the question of investment stage, the findings show that the venture capitalists among the respondents generally primarily invest at seed, first and second stage in the investment life cycle. Whether there is a difference in risk perception of investment in clean energy technologies is a parameter that is not dealt with; however, it could possibly add a new dimension to the existing theory by relating the findings to those of the 11 statements. This would be a subject for future studies.

According to the empirical findings, it is essentially a European sample with a total of 86% of the respondents based in Scandinavia and the rest of Europe, and 13% from North America. This distribution between European and North American respondents is coincidently very similar to that of Wüstenhagen and Teppo (2006), who in their survey had 82% respondents from Europe. It provides an advantage for the results of this research that the sample is almost identical to that of the theory that is being tested.

The respondents in this study have an average work experience of five to six years, which is somewhat lower than Wüstenhagen and Teppo’s sample. They had an average energy industry experience of 8.4 years. However, it is to be questioned to what extend this makes a difference for the results.


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Question six show the percentage of work spend on cleantech. The responses to reveal a distribution towards the upper or lower end, with a clear weighting on the upper end of working between 80 and 100% of the time with cleantech. When considering that the majority of the respondents’ (58%) works between 60% and 100% of their time with cleantech, it is expected that the knowledge level of the respondents is very high, this however, may at the same time lead to a bias in favour of cleantech. This industry bias is to be kept in mind as it may influence the replies to question 7‐8 and 10‐20.

5.2 The five categories of risk The statements, Q10‐Q20, in the survey are based on the perceived problems for venture capital investment in clean energy that Wüstenhagen and Teppo encountered during their research (2006). Each of the statements covers a problem that was perceived as a risk for venture capital investors, and they are categorised in five categories. This section will analyse the findings within these categories.

5.2.1 Regulatory risk The results of the survey as presented in the empirical findings reveal some interesting perspectives of regulatory risks. The mean value for cleantech is 4.1, whereas only 2.1 and 2.8 for ICT and life sciences respectively. As mentioned, this states that the respondents perceive that government support makes investments in the clean energy sector more attractive than in life sciences and ICT. The differences of the mean values among the three sectors are most pronounced for this statement when compared to the other ten statements.

The statement reads “government support makes this sector attractive”. However, turning this statement upside down would mean that no government would make this sector less attractive. It is common knowledge that legislation changes quite often, and this implicates that a regulation in aid of a market sector today may change and not support that same sector tomorrow. Seen in this light, the uncertainty of government support and regulation can constitute a risk for venture capital investors.

Following this, it can be interpreted that the respondents find that regulatory risk play a significant role for venture capital investment. This is in line with the research by Wüstenhagen and Teppo (2006). They explain that regulatory risk ranked as the second highest risk in their research. This means that it is of great importance for venture capital investors, whether it is regarding subsidies, regulations, or market areas with monopoly. Randjelovic et al supports this point of view in stating that regulation influences the energy venture capital community (2003).


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Moreover, one of the main findings in the qualitative survey data is that there is a general opinion that government intervention influences the clean energy venture capital sector. This also underlines the result of the quantitative findings.

Therefore, these finding indicate that regulatory risks are still being perceived as a risk by venture capitalists.

When turning to Wüstenhagen and Teppo’s proposed solutions to the perceived problems in their study, potential solutions for regulatory risk are increased understanding of the energy policies and lobbying. With time, it is very likely that the involved parties have developed an increased understanding for policy framework for the energy sector and the importance of lobbying.

5.2.2 Exit risk Another interesting relation is seen in the responses to the two types of exit strategies, IPOs and trade sales. When studying the two exit possibilities separately, the empirical findings revealed that there are no big differences among the three sectors of cleantech, ICT or life sciences. However, in a comparison of the responses to the likelihood of a successful IPO and a successful trade sale, the likelihood of a trade sale is assessed as being higher, with clean energy being highest at fairly agreeing to the statement.

It appears that it is easier to exit through a trade sale than an IPO. Related to risk, this can be interpreted as if to a trade sale is not perceived as being as big a problem for venture capital investors as an IPO. Ruhnka and Young also identified that exit difficulties are creating problems for venture capital investors (1991), but they do not specify the different exit possibilities in their study. However, Wüstenhagen and Teppo point out that a trade sale is the most likely exit route in Europe (2006). This underline the results of this research, as the majority of the respondents are Europeans.

Following Wüstenhagen and Teppo’s proposed solutions for the problems perceived as risk six years ago, there is still more to be done for exit risks. They suggest increased focus on the energy series at the stock markets. There has been an increase, but by far not enough. They also suggest power technology manufacturers as potential trade sale buyers, and this may be one of more reasons why clean energy trade sales ranked highest among the sectors and preferred exit routes.

5.2.3 Product market risk The findings regarding the societal versus financial benefit revealed that it is difficult to “see” the societal value in cleantech as opposed to life sciences. This could be due to that individuals, ‘the market’, regularly need medicine and therefore see a societal benefit in that. On the other hand, social value (.i.e. better climate) is not as tangible and therefore, it does not directly influence them. However, the mean values are placed towards the left


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on the scale which means that the respondents disagree to the statement for all of the three sectors that it is difficult to gain financial value and that individuals are unwilling to pay for societal benefits. Seen in the light of this, this risk may not be perceived to constitute the same degree of risk any longer. In addition to this, many of the respondents in the survey sample mention climate changes, fossil fuel dependence and the general mindset concerning this as a reason for change in the perception of risks by investing in cleantech.

Moving on to risk due to conservative buyers, the findings do not provide a one answer. The respondents do neither agree nor disagree to whether the market adoption risk is high because of conservative buyers. However, the findings indicate that the risk for ICT is somewhat lower than for the other two. Ruhnka and Young (1991) state that there is a market adoption risk for start‐ups in general, which supports these findings. Further, Randjelovic et al who looked more specifically to clean energy found that market adoption risk is a problem for new ventures (2003). According to the current research, it seems that there has been a slight change in the way venture capitalists perceive this aspect towards an opinion that market adoption risk is not perceived to constitute the same problem for clean energy as 6 years ago. This is also supported by the open‐ended responses in the survey in that there is an increased awareness of the need for clean energy technologies and the political focus on the importance of this.

5.2.4 Category of Technology Risk The findings show that capital intensity is perceived as high for cleantech and life sciences, whereas it is relatively low for ICT. This is in line with the theory presented in chapter 3. Wüstenhagen and Teppo argue that capital intensity for cleantech is a lot higher than for ICT. Ruhnka and Young support that capital intensity can be a constraint for start‐ups companies, and they state that technology risk is one of the major risks. Further, they emphasise that capital intensity constitute a major problem (1991).

The findings on whether the average time‐to‐market is are similar to those of capital intensity. Respondents agree to that the average time‐to‐market is long for clean energy and life sciences, and disagree to it for ICT. As mention above, it is in line with Ruhnka and Young’s research which is that technology risk is perceived as a problem.

Lastly, the level of government spending is addressed. Also, here it is found that the level of government spending for clean energy and life sciences are assessed had being slightly higher than for ICT but overall, for cleantech it is not assessed as being neither particular high or low.


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5.2.5 People risk The empirical findings show that it is not considered as being a particular problem to attract qualified cleantech start‐up entrepreneurs or start‐ups for the other two sectors. Further, the respondents assess that it is easiest to attract start‐up entrepreneurs for ICT. These findings are in line with the general expectations as the cleantech sector is not ‘as new’ as six years ago, and time is an important factor that can help to eliminate this risk, as it is common sense that with time comes experience. Wüstenhagen and Teppo also proposed time as being a possible solution to this perceived problem because “more experienced entrepreneurs will develop” with a more mature market (2006:84).

The collected data reveals that the respondents in reality do neither agree nor disagree to the statement that entrepreneurs tend to be good engineers but poor managers. The mean values are very close and group around the centre, which mean that there is no difference between the three sectors. With the mean values thronged in the middle, it indicates that it is neither a risk nor the opposite. However, research results by Ruhnka and Young show that many entrepreneurs are poor managers, yet, their research is from 1991, and there might have been a change within this area during the last 18 years. Wüstenhagen and Teppo suggest that market liberalisation will ensure more good manager for entrepreneurs within the clean energy sector (2006).

Lastly, the findings from the survey show that the respondents do not agree to the statements that the attractiveness is reduced due to that entrepreneurs are driven by a desire to ‘change the world’. However, the results indicate that the attractiveness of investing in cleantech seems to be reduced slightly more for cleantech than for the other two sectors, but as these differences are not significant, they are not to be generalised to the whole population.

As the results indicate that the attractiveness of investment is no reduced by entrepreneurs desire to change the world, this problem does not seem to constitute a risk to the same degree as six years ago. This is also in line with the many of the qualitative answers in the survey, where many respondents argue that climate change is on the world agenda. Further, Even Bakke stated in the interview that clean energy is a business area now equal to ICT and life sciences. In relation to this, it can be interpreted that the ‘save the world’ image does not constitute a risk any more.

Another category of risk mentioned is integration risk. As the empirical findings revealed, a respondent argue that integration risk constitutes a big problem. This was also addressed by Wüstenhagen and Teppo (2006) and dealt with as part of the market adoption risk.


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Generally, it can be concluded, as a respondent emphasises, that the climate changes are reason for political attention which has led to a changed perception of cleantech investments. This point of view can be seen to have been a factor that overall has influenced and continuous will influence the perception of many of the risks.

5.3 Attractiveness and risk The data concerning the attractiveness of investing in clean energy, ICT and life sciences sectors reveals large differences in the assessment in the three sectors. The mean for clean energy is 4.3 and is therefore being assessed as very attractive. At the other end of the scale is life sciences, which has a mean value of 2.6 and therefore is not assessed as being particular attractive. One important aspect in relation to this question is that the respondents in the sample are working with clean energy or overall with cleantech. Therefore, the result of this finding can be seen as no more than a self‐perception of the clean energy technology.

Moving on to the question about the general risk of investing in clean energy, ICT and Life science, the picture is to some extent different. The mean values are the same for clean energy and ICT, and show that the respondents assess the risk as slightly higher than average. The mean for life sciences is somewhat higher, 4.1, which mean that the risk is assessed as higher for investing in this sector compared to the others. However, as for, there has to be calculated with a certain bias, because the respondents are working with cleantech.

However, as for the question concerning attractiveness, the vast majority of the respondents are cleantech investors and will therefore be prejudiced in favour of Cleantech as compared with ICT and life sciences.

In the next chapter, the analysed findings will be discussed to come closer to an answer to this thesis’ research question.


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6 Discussion

Chapter 1

INTRODUCTION

Chapter 2

METHODOLOGY

Chapter 3

THEORY

Chapter 4

EMPIRICAL FINDINGS

Chapter 5

ANALYSIS

Chapter 7

CONCLUSION

Chapter 6

DISCUSSION


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6 Discussion

This chapter provides a brief discussion of the analysis in chapter 5.

It will debate a comparison of venture capitalists’ perception of risk when investing in clean energy, ICT and life sciences, and in addition discuss which ones are still perceived as risks for investment in clean energy technologies.

Firstly, the analysis demonstrates that there are considerable differences in the perception of risk for capital intensity, average time‐to‐market and to a lesser degree government spending, however, these findings are not particularly interesting as it is well‐known facts that clean energy technologies and life science products require intensive research of long duration as well as testing which require time and capital. These points are ‐ in addition to Wüstenhagen and Teppo (2006) ‐ also supported by Ruhnka and Young (1991), who imply that technology risks are perceived as problems for venture capital investments. On the other hand, the results also show that the levels of government spending are not assessed as being neither high nor low, therefore, it could be argued that this perceived problem is not as risky as before. This is, however, suggested to be subject of further research.

Next, the analysis of regulation risk reveals that there are sizable differences in the perception of risk for the three sectors. Following the analysis, it is argued that regulatory risk plays an important role for venture capital investment in clean energy technologies, and contrasts especially from ICT which is at the other end of the assessment scale. An addition to this, I would like to present at a statement by Even Bakke, former Venture Partner at Bank Invest, who argues and emphasise “the biggest impact that the EU could make for the venture capital funded companies is to assist them in cross boarder business development within the EU.” (Bakke, 2008). This underlines the important of regulative intervention to aid the clean energy sector. No literature at hand disapproves this finding, and with the research results obtained, my contribution is that there seems to be a very clear indication as to that this regulation is still perceived as a risk for venture capital investment in clean energy.

Thirdly, the analysis suggests that with regard to the exit risk, there does not seem to be any considerable differences between the different sectors, as could also be observed in the polarity profile. However, the risk perception of IPOs seems to be somewhat higher in comparison to trade sales. The results for IPOs were centred at the scale, whereas the results for trade sales indicated that the respondents do not perceive the risk for this as


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high. With support from Wüstenhagen and Teppo (2006), it is argued that this is due to that trade sales are generally the most preferred exit route in Europe. This is in line with that the majority of the survey respondents were Europeans. Following this the result is that indications show that the perceived risk for trade sales is not as strong as 6 years ago.

Fourthly, the empirical findings seem to be somewhat diversified when it comes to product market risk. However, as a result of the analysis, the overall picture for this category is that there are indications that points towards that the risk of investing in clean energy has become a little less pronounced than before.

Lastly, it appears that there have been some changes in the category of people risk. It is revealed in the analysis that it is not perceived as being a particular problem to attract competent entrepreneurs in neither of the sectors, and for ICT even less of a problem. On probable reason is that with time experienced people will develop (Wüstenhagen and Teppo). Therefore, the argument is that there has been a change in risk perception, but this is not seen as a surprise. Following this, the aspect of ‘good engineers, poor managers’ does not seem to have undergone any change in terms of risk perception for venture capital investments. For the last risk in the category of people risk, the respondents disagree with the statement that the desire ‘to change the world’ makes none of the three sectors less attractive for venture capitalists. And with global focus on climate changes and the strongly fluctuating oil prices, the clean energy sector does not seem to “suffer” under a poor image.

As an overall aspect, it is to be kept in mind that the respondents may be biased and there for subjective in their opinions on cleantech. This is due to that more than half of the respondents mainly work with cleantech. Therefore, they may generally see this sector as better and more attractive than the others.


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7 Conclusion

Chapter 1

INTRODUCTION

Chapter 2

METHODOLOGY

Chapter 3

THEORY

Chapter 4

EMPIRICAL FINDINGS

Chapter 5

ANALYSIS

Chapter 7

CONCLUSION

Chapter 6

DISCUSSION


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7 Conclusion

This thesis set out to investigate in which way the barriers that venture capitalists earlier perceived as risks when investing in clean energy technologies have changed. This research question was based on a hypothesis outlined on the belief that there has been a change taking place in the fast‐developing venture capital environment during the last 5‐6 years. This is due to the fact that there is an increased global focus on climate changes and the need for energy technologies alternative to non‐sustainable fossil fuels today. Moreover, the institutional investment area is going through a transition towards more responsible investing, which is very likely to influence the venturing world too.

Yet, is there still a reason for being scared of cleantech?

Firstly, in line with Wüstenhagen and Teppo’s results (2006), which this thesis set out to test, I found that some risk perceptions are the same and some have changed mostly in aid of investments in clean energy.

To be more specific, I found that within technology risk, capital intensity and time‐to‐market still constitute a risk for venture capital investments in clean energy technologies, whereas this study indicates that for what Wüstenhagen and Teppo call infrastructure, here investigated as level of government spending, this problem is not perceived as being as risky as before. There is an indication towards that the clean energy sector is not constrained by lack of government R&D to the same degree as it was. This could be subject for further investigation.

Further, the discussion revealed that regulatory risk is still perceived as a problem for venture capital investment in clean energy. Regulation and government intervention can work in aid of clean energy but might also influence it in a negative direction.

Moreover, an interesting finding is that the discussion indicates that an exit route through a trade sale has become less of a problem for venture capital investors in cleantech.

Next, the discussion also came to a conclusion on product market risk, which was that that the same indication applies for product market risk as for exit risk. The results of the analysis and the discussion indicate that the clean energy sector is not constrained by the fact that individuals are not willing to pay for social benefits making it difficult to gain financial value from clean energy technologies. Furthermore, the market seems to view new energy technologies with less scepticism than 6 years ago.

The research developed an increased understanding of venture capitalists’ perception of the clean energy, ICT and life sciences sectors, but in particular of the clean energy sector, which this thesis set out to investigate.


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However, additional research is needed to further investigate the areas not included in this research in order to attain a more elaborated picture of risk perception of clean energy venture capitalists. This is suggested to be carried out by including other than clean energy and cleantech investors to avoid biases.

Moreover, it is recommended to investigate whether the risk perception of clean energy investment differs depending on what investment stage the investor works with, or which parts of the world that the venture capitalist is from. However, this would require a more comprehensive study as the survey sample in this study turned out not to be extensive enough. Future research could be an extension to a combination of this study and Wüstenhagen and Teppo’s framework, or an independent new research.

It is early days for cleantech, a time at which venture capitalists can have real impact. Ray Lane of Kleiner Perkins said, "I think that energy is in the same stage that technology was in the late‐1980s. There's no Internet. No client/server. Corporations weren't looking to venture capitalists to see what is going on, they were looking to IBM, Sun, and Oracle. It was only during the 1990s that enterprise customers became more concerned with venture capital investments. The same is happening now in energy." Indeed, though a near‐term shakeout looms, the cleantech era is just beginning.

(Greentechmedia, 2009)


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Appendices

Appendix A: The Survey

Appendix B: Summery of Survey Results

Appendix C: Transcripts of Interviews – Confidential – Enclosed separately


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Appendix A: The Survey


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Appendix B: Summery of Survey Results


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1. Your personal data. Organisation

Organisations:

GrowthWorks Capital Ltd.

General Fusion

chrysalix energy venture capital

Sweden Cleantech Incubators

Aloe Private Equity

INSEAD

BankInvest New Energy Solutions

Danfoss Ventures A/S

University of Lund

Vækstfonden

WHEB Ventures

A.S.T.‐ Group

Tauw bv

bmp AG

PricewaterhouseCoopers

Mikkelsen

European Energy A/S

Good Energies

Bisman Fintech P Ltd

Danfoss Ventures

SVC

EIP

Axiom Venture Capital

Nomura

Positive Energy S.A.

Vækstfonden

Solvay Future Businesses (Venturing Unit)

SEED Capital

Syddansk Teknologisk Innovation A/S

Frog Capital

Good Energies

Max Stern Academic College of Ejek Yezreel


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Organisations:

Environmental Technologies Fund

Northzone Ventures

Medotech A/S

Danish University and Property Agency

Industrifonden


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Has there been a change in the perception of cleantech investment during the last 5‐6years?

If yes, please explain in which way.

• The opportunity is more attractive now.

• has become more mainstream with opportunities for above average returns

• I believe so many population in the world experiencing climate changing, unusualcalamities happening around the world realizes by more and more populationbelieve requirement of the Cleantech investment.

• Cleantech is on the top political and economical agenda in a way that it has notbeen before. Investors start to understand the strong forces driving the cleantecharea.

• Cleantech investing has become mainstream and most established VC/PE fundshave started investing in this space.

• Oil prices have dropped which makes investments in cleantech less attractive asthere is a strong correlation between the two. On the positive side the politicalfocus on climate change and tax incentive schemes encourage investments.

• There has been an increased focus on energy technologies rather thanenvironmental technologies in a broader sense (water, waste, air etc)

• Industry dependent upon political/regulatory initiatives. Investors moreinterested, when political initiatives are implemented

• It has become the next big thing, and the third new big investment area.

• The business case has improved ... the benchmarks for VC have improved aslo

• Has become mainstream, some are even suggesting it's a technology bubble.

• Hype is over

• ther is worlwide a better understanding for the future applications of suchproducts

• Due to the wider perception of both society and investors for the importance ofclimate mitigation, green investments have become more important. My guess isthat the ROI of green investments is still more important than let's say a personalresponsibility for our future, but also in that respect a change towards responsibleinvestments is going on.

• Political and social awareness of the need for and growth prospects of clean power

• Both a professionalisation of the area has undergone while also a lot of "stupid" money has started to flow

• Become more of a hype

• more positive assessment of the potential for high returns

• One of the reasons is the increase in the prices of natural resources. Another is


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the shift of sustainable enterprises towards cleantech. Third is the availability of technology in the cleantech energy sector. Moreover, there is a grwoing awareness of CDM benefits.

• It as acknowledged that cleantech investments are capital intensive and exits will take longer

• Huge number of players have entered the industry

• Cleantech has become much more mainstream. Generalist funds have invested in cleantech and a lot of money has been invested in this area. Government subsidies and stimulus money continue to make it a viable sector for investment.

• No change in perception for me personally. However, the world (read investment world) seems to be taking cleantech more seriously, but this awareness has built slowly. It also seems that many people still don't see the need for VC investment in this sector or don't understand that VC can play an important role in changing the the structure of the energy industry.

• Positive due to governmental intervention

• Cleantech investments has become more attractive (at least that is the general perception)

• Acknowledgement of differences between clean teach and other technology sectors. Expereince of last 5 years has led to early entrants providing a more educated (from a sector / technology perspective) investor base. Learnings from early movers strating to

• The Cleantech sector has gained in popularity. It has become a priority investment sector for many VCs and strategic investors.

• CT has become a very interesting area with lot's of money flowing in. Increasing political awareness about the consequences of climate change in combination with increased commercial awareness and interest, has stimulated this.

• Focus much higher world wide ‐ also by politicians and industrial leaders

• Increasing number of investors in the sector, creates more competition for deals and perception that deals may be better (not always so).

• Up to a few years ago the cleantech opportunity went unseen by the larger VC community. It was belaughed as being subsidized and overregulated, just as if life sciences weren't...

• becoming more mainstream

• Incresed worries that CT resembles BioTech. ICT much more predictable, shorter horizons, less capital required, and more developed exit market


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• Increased awareness due to environmental concerns (global warming) and oil prices.

• huge increase in interest in investing and public awareness of the need to invest

• Due to the situation in the world with more of hurricains, stormy weather, rain and the Al Gore presentattion for a couple of years ago has changed peoples mindset concerning energy consumtion and other things that will destroy the climate.


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Please describe other investment risks relating to the cleantech sector if they have notbeen mentioned previous in section I.

Response Text

• Government legislation may change; electrical utilities are very conservative,unproven science

• This is not a greenfield industry: established parties are pushing back and there is alot of regulation.

• Investing in dead‐end technologies that will not be long term sustainable.

• Often long time to market, and scaling often requires big investments

• Integration risks are very high. The technolgy can work well, but integrating intoexsiting systems has proven to be difficult in some cases delaying the adoption byfew years.

• Just to mention that in the current credit crunch environment, it will be difficult toobtain financing. But hopefully this situation will change.

• Purchasing in the sector is dominated by large companies and utilities, notconsumers. Time to market is extremely long. Payback time, not 'green', is thedetermining factors.

• ‐ Technology risk ‐ Ramp‐up risk ‐ Pricing risk ‐ Market maturity risk

• The technolgy and equipment provider are few and in some cases, they are notproven.

• Change of government policies or policies that run for too short a period

• non‐availability of qualified co‐investors, possibly resulting in underfundedbusinesses; insufficient government spending on basic energy research; stronglobbies of the incumbents; general disbelief that cleantech can replace fossiltechover time, insufficient understanding of the parameters and the dynamics; relativecomplexity of energy, renewable energy and energy efficiency issues in connectionwith climate change, security of supply; masking of the issues by governments (forinstance, the US claimed to have invaded Irak for democracy but the real reason isenergy).

• Change in government regulations Less investments by financial institutions

• High diversity of companies/technologies involved in Cleantech Evolution of theregulations difficult to predict

• Technology risk must be considered, particularly in light of many competingtechnologies trying to solve the same problem. Potential exists for a superioralternate solution, or partial solution.

• fluctuating (fossil) energy prices

• Changes in public policy ‐ R&D investments, taxation, global energy production ‐ alot more vulnerability than ICT


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Master Thesis CharlotteSteffensen Aug2009