VCCI Stream 3: Responding To Cleantech Investment Challenges

Climate change is real and one of the most pressing issues facing the planet. This is a fact that has been confirmed scientifically time and time again and repeated as recently as Nov. 27 by the United Nations through the Emissions Gap Report 2018.

As a first step, Canadians could consider understanding the actions to take in our daily lives to lessen the impact on the environment. Corporately, Canadian investors and businesses are also looking to make a difference by tackling it head-on through advancements in clean technologies.

Canada is well positioned to take a leadership role in the cleantech sector due in part to our vast energy resources — we have the third largest crude oil reserves in the world, we are second globally on hydro-electricity production, and are the world’s fourth major exporter of natural gas. And it doesn’t stop there. Our energy spectrum also includes renewable energy production — wind, solar and biofuels, as well as energy storage solutions. Paired with the country’s manufacturing sector, Canada is well positioned to benefit significantly from cleantech’s promise.

Canadian cleantech companies have experienced significant funding last year, namely ecobee’s CAD $127M Series C and MineSense Technologies’ CAD $22.8M Series C financing. But the numbers paint a different picture if you stack cleantech against other sectors like information and communications technology (ICT).

According to CVCA InfoBase, Q32018 saw CAD $228M invested deals (10% of total dollars invested in the quarter) over 36 deals (8% of total activity) in the cleantech sector compared to ICT with CAD $1.6BM invested (69% of total dollars invested in the quarter) over 280 deals (64% of total activity).

And those are just the domestic numbers. Globally, investment in clean energy in Q32018 was at USD $67.8 billion, down 6% from the same period in 2017.

There’s tremendous opportunity in cleantech but there’s several factors contributing to a recent uninspired performance.

What are the challenges facing cleantech investment and why is government support important?

One of the first challenges impacting investment is the breadth of what is encompassed under clean technologies.

The public and regulators have begun to wrap their heads around what exactly is captured under the cleantech umbrella. And, just as these definitions become clearer, the tech and their applications rapidly change.

Cleantech has traditionally been viewed in the context of developments in support of water remediation, solar, biofuels and other renewable power generation. However, there are new developments related to AI, IoT and agri-tech that will impact climate change and resource management and these do not necessarily fit within the traditional definition of clean technologies.

Categorizing issues aside, there are hesitations due to the historical investment success within the space. A decade ago, Silicon Valley missed the mark on cleantech. This sent a chill through the industry and is still slowly recovering.

Finally, cleantech investments have a different profile from other IT-driven companies. Generally, capital requirements have traditionally been higher than a company’s ability to scale since the sales cycle associated with cleantech tends to be very long, ultimately contributing to slow revenue growth. This, in conjunction with minimal M&A activity in this space has resulted in poor returns and exit multiples.

Paving the way forward for a more robust future

The Canadian government continues to work with the international community to identify solutions and coordinate responses. At home, support for the cleantech sector continues to be a policy priority for the Government of Canada, as seen through the sector’s inclusion in several of the government’s major policy initiatives, including the Innovation Superclusters Initiative and contributing an additional CAD $50M towards increasing venture capital available to cleantech companies under VCCI.

The RFP for Stream 3 was announced on January 28. Information about the application process can be found here.

The Innovation Superclusters Initiative includes CAD $950M in new financing, matched dollar-for-dollar by the private sector and is expected to create more than 50,000 jobs over ten years and grow Canada’s GDP. The latest top-up into VCCI will support late-stage venture capital specifically for clean technologies and will foster greater adoption of green infrastructure and the deployment of emerging renewable energy technologies.

We’re on our way to resolving some of the challenges facing cleantech investment and offering a competitive advantage for Canada in the sector.