UNDERSTANDING BARRIERS TO FINANCING ECO-INNOVATION Morten Larsen Oxford Research, Brussels 29 November 2010 Oxford Research A/S Falkoner Allé 20, 4. sal 2000 Frederiksberg C Danmark Oxford Research AB Norrlandsgatan Stockholm Sverige Oxford Research AS Kjøita Kristiansand Norge

Todays 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 employees – 15% have 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

Barriers for providers of finance Eco-innovation market features The 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 intensive Less Capital intensive Short time to market Long time to market Regulation-driven demand Market-driven demand Unknown market Known market Unproven technology Proven technology Late adopters Early 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/S Falkoner Allé 20, 4. sal 2000 Frederiksberg C Danmark Oxford Research AB Norrlandsgatan Stockholm Sverige Oxford Research AS Kjøita Kristiansand Norge

Characteristic of the 450 SMEs in the survey Most of the SMEs are expansion stage SMEs 27% are early stage (seed + start- up) Most of the SMEs have developed product innovations (58%) Followed by process innovation (41%) and service innovation (33%)

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