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

1. 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

3. 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?

4. UK investment trends

5. 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)

6. 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)

7. 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

8. 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)

9. 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

10. Innovation landscape of VC backed firms (2) Comparison of the most common IPC classes for the highly cited patents and the citing patents

11. 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

12. Firms

13. Are investors that support innovative firms different?

14. 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

15. Investor organisation Two 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

16. 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

17. 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?

18. Thanks for your time Email: s.parris@open.ac.uk

19. 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

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

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

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

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