Cleantech and innovation: another lesson for Europe

Serial entrepreneur and Dragon's Den star Doug Richards argues that Europe is in serious danger of missing the clean tech boat

No group of countries has been as passionate about climate change as Europe. Indeed when it comes to negotiating international treaties on the subject, Europe comes out fighting, never slow to accuse the US of dragging its heels on the issue. Yet many people believe that, although important, supra-national politics will not play the dominant role in defeating climate change.

By way of example, the figures show a miniscule predicted effect of the Kyoto Protocol on global carbon dioxide concentration. Of course, environmental campaigners make the obvious point that this was intended to be just the start. However, coming up for ten years after the Kyoto negotiations there is little concrete progress on a successor. It is hard to see how the aspiration expressed by the G8 to halve global CO2 emissions by 2050 is going to be achieved - particularly when set alongside the explosive economic growth of India and China.

Instead progress towards this objective is more likely through grass roots innovation. Regardless of the international framework of agreements and protocols, there is ample incentive for entrepreneurs and investors to commit to cleantech. National policy initiatives, such as feed-in tariffs in Europe and tax incentives in the US, together with energy security concerns and the recent hike in oil prices make investing in clean technologies perfectly viable already. The dramatic growth of cleantech investment by VCs in the US and Europe over the last five years is clear evidence of this.

How do Europe and the US compare in this crucial arena where actions are more important than words? The short answer is badly. According to Cleantech Venture Network, Europe has trailed the US in cleantech VC investment since records began and by an increasing margin each year. In Q3 2006, over $900m was invested in US cleantech companies compared to just under $150m in their European counterparts.
This top down view is consistent with the anecdotal evidence of where the action is. In almost every sector of cleantech, the key start-up and venture backed companies are in the US. In hybrid or electric vehicle development Tesla Motors, Phoenix Motorcars and Venture Vehicles lead the way in the US. It is hard to find companies at such an advanced stage in Europe. In battery technology, the picture is dominated by Massachusetts based A123 Systems. There is no major European player in this sector, although there are a couple of interesting developers of 'paper battery' technologies in Finland and Israel. In LED lighting, one of the most promising clean technologies in the energy efficiency space, there is again a dearth of European talent. Group IV Semiconductor of Canada is a leading player whereas major European hope ACOL is believed to have ceased trading in 2006.

The only cleantech sector where Europe is on a par with the US in terms of grass roots innovation is in solar where Apax-backed Q Cells has become a global player with a market capitalisation of billions of Euros.

Why is Europe failing in cleantech innovation?

We believe the reasons are the same as why Europe lags the US in innovation in general. Ultimately there can be only one major reason for the lower amount of venture capital invested in Europe compared to the US, and that is a lack of investment opportunities. The vibrancy of venture capital in Israel and the explosion of investments in China show that money flows where the opportunities are, even if that is outside the US.

Our analyses in several reports demonstrate the US and Israel have both been successful in stimulating innovation because they have focused on increasing the demand for venture capital (i.e. the number of investable propositions). In contrast, Europe has been obsessed by the idea that the supply of venture capital is the problem. The result is that while Israel has its incubator scheme and the US has its Small Business Innovation Research (SBIR) programme, both designed to fund proof of concept projects, Europe has promoted public sector equity investment. In our view, the European approach will be unsuccessful unless accompanied by a meaningful proof of concept scheme like SBIR.

Sadly Europe has the opportunity to forge just such as scheme from its Framework programmes. These are specifically designed to support research and development and yet they are particularly ill suited to small companies and entrepreneurs. The latest Framework programme, like its predecessors, once again puts the emphasis on complex multi-national collaborative projects rather than on quick and easy grants to SMEs.

It is vital that Europe put the required elements in place to boost innovation, not only in cleantech but in all areas. However, it is particularly regrettable that in an area where European rhetoric has been loud indeed, the US is leading the way on the actual solutions.

Doug Richards is a renowned entrepreneur and chairman of investment research firm Library House.

He famously starred as one of the "Dragons" in BBC Two's hugely successful Dragon's Den.