Innovation in Venture-Capital Backed Clean-Technology Firms in the UK

Stuart Parris* and Pelin Demirel**

*Economics Department, The Open University, UK: s.parris@open.ac.uk

**Nottingham University Business School, UK: pelin.demirel@nottingham.ac.uk

The research leading to these results has received funding from the European Community's Seventh Framework Programme ([FP7/2007-2013] under grant agreement n°217466

(FINNOV project website: www.finnov-fp7.eu).

Outline

• Background and motivation• Investment trends & venture capital• Descriptive approach to emerging sector• Technology landscape• Profiling firms and investors according to

innovation preferences

Motivation• Analyse the relationship between innovation and venture capital

– Venture capital and innovation interlinked– Increased political emphasis on environmental issues– Growth of cleantech venture capital ($8bn, 2008)– UK – small firm innovation

Q: Is VC investment specialised towards funding innovative cleantech firms?

– What type of firms?– What type of investors?

UK investment trends

Source: Calculated from Cleantech Network venture capital database

Venture capital and innovation

• Risk vs. reward– High risk of failure– Variable returns across industries/periods– Strategies to reduce risk (staging, diversification, specialisation)

• Technology gatekeeper?– Selection and value added (Florida and Kenney, 1988; Hellmann and Puri,

2002; Zook, 2002, 2004)

– Spur to innovation (Kortum and Lerner, 2000)

– Patenting a key investment signal in some industries (Niosi, 2003)

• Funding R&D: Balance of support between R and/or D?– (Hall, 2002; Engel and Keilbach, 2007; Da Rin and Penas, 2007)

UK overview

• Finance:– Large Private Equity industry (£20bn, 2008)– Bias towards late stage investment (98% by value)– Technology aversion?

• Environmental industry– Laggard in the 1980s (Martin and Wagner, 2009)

– Environmental innovation from academia and SME (Cullen, 2009)

– Slow diffusion of technology from MNC (Chatham House, 2009)

Approach• Descriptive analysis of UK cleantech firms financed by

VC looking at relationship between innovation and finance at:– Firm level - patentee vs.. non-patentee firms; highly cited patents

vs.. non cited patents– Investor level - preference for patentee vs. non patentee firms– Network analysis - structure of investment environment with

respect to investor preferences

• Linking data on investment, SME firms and innovation (patents and citations)

• Assumptions:– Patents are a signal of innovative activity

– Citations are an indicator of innovative quality

Data• Cleantech Networks investment database

– Investment between 2001- Nov 2009– 239 UK firms (HQ in UK)– $1.7bn

• FAME database of UK SME– Information on turnover, headcount

• Derwent patent database– Details of patents granted by UK Patent Office (1963 and

September 2009)– Application and grant dates, citations, classification information

(IPC)

Innovation landscape of VC backed firms (1)

• Patents– 33% of firms sampled own a patent– 1% own more than 25 patents

• Citations– 39 highly cited patents (from 471 total patents)– 140 IPC classes – Citing patents from 671 IPC classes (n = 406)– Skewed distribution of all citation counts

Innovation landscape of VC backed firms (2)

Comparison of the most common IPC classes for the highly cited patents and the citing patents

Marine tidal power and electric generators

Manufacture of fuel cells

Valve gears (internal combustion engine)

Total

Highly cited patents

47% 14% 21% 82%

Citing patents

31% 26% 21% 77%

Are innovative firms treated differently?

• Patenting vs. non-patenting firms:– Much smaller turnover (£1.3m vs. £60.8m)– More VC funding (£9.8m vs. £5.3m)– More rounds (2.0 vs. 1.4)

• Cited vs. non-cited patenting firms– More patents (11.7 vs. 4.8)– More rounds (2.6 vs. 1.8)

• Timing– VC follows patenting/innovative effort

Firms16% of firms receive investment prior to first successful patent application

Are investors that support innovative firms different?

Investors with no patenting firms in their portfolio (n=135)

Investors with at least one patenting firm in their portfolio (n=140)

Variable Mean Std Deviation Mean Std Deviation Sig.

Count of PF 1.23 0.63 2.47 2.66***

Total round value 9.93 11.6 21 26***

Round value/PF 7.24 8.07 6.66 6.17

Approx. commitment 3.87 4.89 7.32 9.97***

Approx. commitment/PF 3.24 4.42 3.45 4.31

Primary ind. 1.14 0.39 1.93 1.44***

Centrality 0.01 0.02 0.03 0.03***

Seed round value 0.25 0.84 0.88 1.99***

Seed round/PF 0.15 0.45 0.27 0.67*

First round value 1.85 3.79 5.82 8.38***

First round/PF 1.47 3.39 2.31 4.55*

Values in $M

Investor portfolio

• Patentee vs. non-patentee firms– Larger investors in sector at early & late stage– Central network players– Generalist technology preference– Evidence of larger rounds for early stages only

• Highly cited vs. cited patentee firms– Larger investors with higher proportion of patenting

firms in portfolio– BUT no evidence of greater investment per firm

Investor organisationTwo strategies of investors supporting patenting firms:• Diversification:

– Prominent at the sector level – characteristic of the most active investors

– Smaller amounts of funding for individual firms– Investment preference toward later stages– No clear technology preference, but invest in patenting firms– Concentration of firms with highly cited patents

• Targeted:– Lower activity at sector level– Larger commitments to firms, especially at early stage– Engaging with patentee firms, but not highly cited patents– Working in peripheral groups covering smaller range of

technologies

Concluding observations (1)

• From an innovators perspective: cleantech investors are at exploratory learning phase– Loosely defined technology area – investor led– Identified a core group of investors but a lack of technology

specialisation– Main actors include: New specialist cleantech entrants, public

funds and incumbent investors– Patents as an investment signal: financial rewards but with more

scrutiny– Higher quality innovation not rewarded financially, and receives

even more scrutiny

Concluding points (2)

• From an industry perspective (and the environment):– Innovation funded in fossil fuel and new alternative technology

sectors– Patenting an investment signal – but innovation quality harder to

determine– Significant investment in firms without patents – what type of firm

& innovative activity?

Thanks for your time

• Email: s.parris@open.ac.uk

Innovation in Venture-Capital Backed Clean-Technology Firms in the UK

Stuart Parris* and Pelin Demirel**

*Economics Department, The Open University, UK: s.parris@open.ac.uk

**Nottingham University Business School, UK: pelin.demirel@nottingham.ac.uk

The research leading to these results has received funding from the European Community's Seventh Framework Programme ([FP7/2007-2013] under grant agreement n°217466

(FINNOV project website: www.finnov-fp7.eu).

Investor network coded for patent/non-patent investors, vertices scaled by total round value

Investor network coded for patent/non-patent investors, vertices scaled by average round value

Investor network coded for patent/non-patent investors, vertices scaled by first round value

Investor network coded for patent/non-patent investors, vertices scaled by average round value