UNDERSTANDING BARRIERS TO FINANCING ECO-INNOVATION

Morten Larsen Oxford Research, Brussels 29 November 2010

Oxford Research A/SFalkoner Allé 20, 4. sal2000 Frederiksberg CDanmark

Oxford Research ABNorrlandsgatan 11103 93 StockholmSverige

Oxford Research ASKjøita 424630 KristiansandNorge

Today’s agenda

1. Brief background on the project – financing eco-innovation

2. SMEs’ view on barriers to financing– Based on survey of eco-innovative SMEs

3. Investors’ view on barriers to financing– Based on interviews with providers

of finance

4. Conclusions

Financing eco-innovation

Objectives of the study

• The objective of the study is to gain a better understanding of financing issues faced by eco-innovative SMEs in their early stages, as well as those faced by their investors

• Allow an improved design of instruments in support for eco-innovation at the European and national levels

Financing eco-innovation

Elements of the project

Literature review

Survey of SMEs Telephone and online (same survey) 450 answers from eco-innovative SMEs

Interviews with 40 financial actors Banks, Business Angels, VC fund managers

Final report (December 2010)

Carried out with EIM of the Netherlands

Financing eco-innovation

Barriers – view of the SMEs

Characteristic of the 450 SMEs in the survey

• More than 80% have less than 50 employees– 29% have 1-4 employees– 20% have 5-9 employees– 36% have 10-49 employees– 15% have 50-249 employees

• Most SMEs in the survey are less than 10 years old

Characteristic of the 450 SMEs in the survey

• The SMEs target a range of sub sectors– Most target Recycling and Waste

and Building and Construction– Energy has been limited on

purpose

• Most of the SMEs are expansion stage SMEs

• 27% are early stage

• Allow us to compare: early stage Vs. later stage

SMEs’ view on Internal barriers

What are the particular problems that eco-innovative SMEs face?

Top internal barriers:

• Limited resources dedicated to seeking or securing financing

• High administrative burdens

• Insufficient collateral available

The barriers are general barriers for innovative SMEs

SMEs’ view on External barriers

What are the particular problems that eco-innovative SMEs face?

Top external barriers:

• Financing available not tailored to small-scale investment needs

• Potential financial suppliers insufficiently engaged with eco-innovative industries

• Uncertainty of government regulation

These barriers are to a higher degree specific to eco-innovation

More SMEs mention external barriers as significant than internal

Financing eco-innovation

BARRIERS –

VIEW OF THE PROVIDERS OF FINANCE

Barriers for providers of finance

The criteria for providing finance are the same for eco-innovation as other sectors

Sub sectors are very different – it is difficult to generalise

General barriers for SMEs – also eco-innovative:• The teams focus on technology and not on

commercial aspects• Insufficient collateral available• Starts-ups or emerging sectors have no credit

history

Providers of finance also see particular challenges for eco-innovative SMEs which can make it more risky to provide finance

COMMERCIAL COMPETENCES

TECHNICAL COMPETENCES

PREFERED TEAM COMPOSITION

Barriers for providers of finance

Eco-innovation market featuresThe features are not unique to eco-innovation but are

more pronounced than for most other sectors

• Markets is for some eco-innovations driven by government regulation and subsidies

• Some eco-innovations are very capital intensive and it takes a long time to get a new solution to the market

• Some sub sectors are immature - with unknown markets and unproven business models

• Some sub markets are dominated by public sector and/or large potential customers and/or limited competition => few potential customers who are slow at adapting innovations

Capital intensiveCapital intensiveLess Capital intensiveLess Capital intensive

Short time to marketShort time to market Long time to marketLong time to market

Regulation-driven demandRegulation-driven demandMarket-driven demand Market-driven demand

Unknown marketUnknown marketKnown marketKnown market

Unproven technologyUnproven technologyProven technologyProven technology

Late adopters Late adopters Early adoptersEarly adopters

Market characteristics for some eco-innovations

Certain market features can make providers of finance reluctant to provide finance

Financing eco-innovation

Conclusions

• Eco-innovative SMEs and providers of finance point to many “standard” barriers for innovative SMEs

• But SMEs indicate a need for more small-scale financing options, engagement from potential financial suppliers and long term certainty of regulation

• Providers of finance use the same criteria for making investment decisions but investment conditions/market features vary from market to market and sector to sector

• There is a lot of focus on eco-innovation and many see a great market potential – but it is also a difficult sector to invest in and SMEs would like to see providers of finance more engaged.

THANK YOU

Dr. Kim Møller, Oxford Research, Brussels 29 November 2010

Oxford Research A/SFalkoner Allé 20, 4. sal2000 Frederiksberg CDanmark

Oxford Research ABNorrlandsgatan 11103 93 StockholmSverige

Oxford Research ASKjøita 424630 KristiansandNorge

Barriers - Early stage compared to later stage

Barriers are more significant for early stage than later stage

The difference is particularly strong for administrative issues (“protecting intellectual property rights” and “regulatory requirements”)

Very little difference between eco-innovation sub sectors