High net worth individuals, the Valley of Death, and the 'tragedy' of the Green Investment Bank

Last night, I had an evening that simultaneously proved both enjoyable and really quite depressing. The conflicting emotions came courtesy of the latest Green Alliance debate on Green Innovation and what the UK needs to do to deliver it.

The enjoyable aspect was the result of one of the most informed and articulate panels I have seen gathered to talk on this topic, featuring the coalition's youngest minister, Conservative MP and Treasury Minister Chloe Smith, former chairman of Shell and current chair of the Carbon Trust James Smith, Mark Preston of leading green venture capitalist WHEB Partners, and the staggeringly eloquent economist and occasional Newsnight contributor Professor Mariana Mazzucato.

You'd be hard pressed to find a more knowledgeable group to discuss green innovation, even if Smith's ministerial priorities meant she was confined to many of the usual coalition platitudes about green growth being a top priority for the government (although, that said, it was still hugely encouraging to hear a minister from the Treasury, often characterised as opponents to green progress, state categorically that she was committed to the greening of the entire economy).

But if the quality of the discussion was enjoyable, the content was deeply concerning. There was general agreement that while we have a tendency to talk ourselves down, the UK does early stage and corporate innovation really rather well when compared to other nations, and has a strong clean tech base on which to build, particularly in areas such as offshore engineering, IT, materials, and life sciences. There was also consensus that the green economy is offering huge commercial opportunities and as such is rapidly attracting the top managerial, engineering, investment, and entrepreneurial talent, creating an environment in which innovation should be able to thrive.

However, time and time again the conversation returned to one topic: the funding gap that early stage companies struggle to bridge as they attempt to move from a good idea to full scale commercialisation – a gap colloquially known as the Valley of Death.

This challenge is a perennial issue for all early stage firms, but, as Mazzucato explained, it tends to be particularly acute for green companies as they are commonly focused on infrastructure projects that are both high capital and high risk.

Preston neatly illustrated the scale of the challenge by revealing that of the 1,500 clean tech companies WHEB Partners looked at last year it could not even begin to entertain conversations with around 1,000 of them because they were simply too early stage. They might have had a great idea (although many of them almost certainly didn't), but there is no way they were going to prove compatible with current VC models. It is easy to blame VCs for this, as Preston acknowledged, but the fact of the matter is that fund managers act on behalf of investors and for obvious reasons investors' appetite for risk is much lower than it once was. As a result, VCs, once a valuable source of funding to help companies bridge the Valley of Death, now tend to advise promising early stage clean tech firms to contact corporate venture funds or try and woo high net worth individuals.

The problem, as three of the four panellists identified, is that the UK still has no co-ordinated policy response to try and tackle this potentially fatal funding gap.

Smith, who as former chairman of Shell knows a thing or two about complex engineering projects and innovation, argued that when you measure the UK against comparable economies they all have some mechanism for addressing the problem. Whether it's Germany's infrastructure bank, China's state loans, or America's national laboratories and more audacious approach to early stage investment, other countries have measures in place to drive investment, while the UK has little beyond the public-private Energy Technologies Institute – an institution Smith described as good, but far too small.

Of course, the UK is about to get its own institution for helping to bridge this funding gap in the form of the Green Investment Bank and its £3bn of government capitalisation. But, echoing the argument put forward by plenty of critics, Mazzucato described it as a "real tragedy" (she had to bite her tongue from using stronger words) that the bank would be hamstrung by an inability to borrow until 2015/16 at the earliest, and probably later given the government's difficulties dealing with the deficit.

A proper government-backed bank would have the power to lend at low interest rates to the high risk, high capital green projects that are never going to attract private investment under any circumstances, Mazzucato argued, in turn sending a signal to private investors that the UK was serious about green infrastructure and encouraging them to release some of the capital they are currently "hoarding".

She also argued that where governments did support green technologies they needed to get far better at negotiating terms that allowed them to share the benefits when the technologies worked. Noting how the US government basically underwrote the development of the internet, only to see private companies reap the rewards and then criticise the government for taxing them, she argued investments in green infrastructure should be better balanced to directly benefit the governments that bear much of the risk. Such a move would not only provide governments with much-needed funds, it would also deliver political cover when some of the technology bets they make inevitably fail and leave the taxpayer picking up the bill. It tells you everything you need to know about how weird our current political landscape has become that the Conservative Minister Smith was nodding along in agreement to the proposal that governments should negotiate contracts that give them a bigger upside from still essentially private sector activities.

The argument for a more ambitious Green Investment Bank is undoubtedly gaining momentum, particularly after Nick Clegg signalled this week that the government should better use its balance sheet to drive infrastructure investment. But Smith appeared to be having none of it, suggesting that there was quite simply "no money" for state largesse and insisting that the £3bn already earmarked for the Green Investment Bank will make a big difference.

All of which takes us right back to the start. There is a Valley of Death that many genuinely promising green innovators cannot traverse and the only mechanisms designed to help them are too small to help the vast majority. The government is aware of the problem, but unwilling or unable to deliver an adequate policy response. The net result is that green innovation will continue and we will enjoy plenty more success stories, but too often potentially important companies and technologies will fall by the wayside for want of early stage funding.

All green entrepreneurs can do is to continue to make the case for well tailored government support similar to that already in place in nearly every major economy in the world. In the meantime the future success of the UK's green economy depends to a large extent on the rich individuals and corporations who remain the only viable sources of finance for the green business giants of tomorrow.

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