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Commentary

From Tiny Acorns Mighty Oaks Grow

Sarah Barber, CEO at Jenson Funding Partners, calls for greater investor and policy support for the UK’s climate-tech sector.

Britain is second only to the US in terms of the number of climate tech startups and scaleups operating in the country – with 5,200 firms compared to 14,300 in the US, according to a recent report.

This fact, combined with the gulf in scale and maturity between the two nations’ venture ecosystems, is referenced by the report’s authors as evidence that the UK is “punching above its weight in terms of companies founded in climate tech”. It paints a rosy picture, as it should, given that many of Britain’s climate-tech firms are grounded in commercial reality. The UK’s climate-tech ecosystem has succeeded in large part due to following good old-fashioned ‘pick and shovel’ principles and retaining a culture of commerciality.

Add to this the fact that the value of the UK’s startup ecosystem has been a rare spot of cross-party consensus. Successive governments have backed early-stage businesses at their riskiest point through schemes such as EIS and then SEIS (Seed Enterprise Investment Scheme) as well as grants (e.g. Innovate UK) and regional initiatives (e.g. Zero Waste Scotland). The UK also has world-beating universities and research institutions, meaning a steady supply of talented entrepreneurs, academics and workers are constantly seeking out the game changing climate technologies of tomorrow.

Faltering ambition

Despite this, there are signs that the UK’s net zero ambitions may be slipping, not just because of current economic and geopolitical headwinds, but due to faltering investment appetite and the continuous pivoting of the current government. London Tech Week conducted a recent survey, in which nearly half (47%) of climate-tech leaders said they could not raise enough funding in the last year. There is certainly a build up of dry powder across the private markets as investors take a ‘wait and see’ approach to fluctuations, but there is a duty to continue to support and invest in these vital technologies at a nascent stage. Yes, ROI is important, but so is showing your support for the climate-tech of the future, and that can sometimes mean a longer commitment and investment time horizon.

Now is the right time to back early stage businesses. As former Governor of the Bank of England Mark Carney said: “Achieving net zero emissions will require a whole economy transition – every company, every bank, every insurer and investor will have to adjust their business models, […] This could turn an existential risk into the greatest commercial opportunity of our time.” With the “profound changes across society and the economy” referenced by Sir Patrick Vallance, the government’s former Chief Scientific Advisor, in the UK Net Zero Research and Innovation Framework, innovation will occur in every industry where technology, infrastructure, people, data and institutions intersect. The phrase ‘from tiny acorns mighty oaks grow’ is so apt here, as commercially viable innovation in this space is most likely to generate outsized returns.

The increasing gaps in climate-tech backing can also be seen when we compare government support in the UK to that in the US. While the UK was the first major economy to put a target of net zero by 2050 into law, the strategies and reality following this announcement have begun to falter. This has allowed others to make leaps where we’ve made steps. An example of this is the Biden administration announcing its Inflation Reduction Act to huge acclaim, as it set US$370 billion aside to help drive clean energy.

There is also a risk that western nations will plunge into a subsidy war, in which successive governments look to ‘out-subsidise’ the last in order to look like the better supporter of reaching net zero. This approach will simply lead to a drop in investment and innovation from the private sector, as they rely on the government’s latest subsidy to bring new climate-tech to market. The reality is that we need both sides to invest into climate technology, in a meaningful way, and with a long time horizon.

All the attributes

Britain has all the attributes to thrive in the more sustainable global economy of the future. To get there, we need an approach that doubles-down on what we’re getting right and stays a consistent course. Recent years have been dogged by political and economic uncertainty. And the venture capital system does not work perfectly: companies too often fall foul of a funding gap between Seed and Series A, which in climate-tech risks cutting off the crucial pipeline of innovation – and therefore inhibiting the ability to hit net zero.

We have the makings of good policies to plug this funding gap, but we still need to see more commitment from government and the private sector to ensure we see these climate technologies make it through these challenging times.

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