Funding gap threatens U.K startups

A lack of funding sources is putting the U.K. in danger of losing its cleantech startups, according to a new report from London-based researcher Greenbang and the University of Bath’s Innovation Centre.

Early-stage cleantech firms said they have to “jump through hoops” to get funding in the U.K., Greenbang Editor Dan Ilett told the Cleantech Group today. But in the U.S and the Middle East, money to cleantech is flowing more freely, causing some CEOs to ponder uprooting their companies, he said.

The biggest problem for early-stage companies is a funding gap, according to the report. Although Greenbang doesn’t put a dollar figure on the gap, the report says companies can find seed-stage funds but not enough money to develop prototypes.

Twenty-five U.K. companies raised $85 million in first- and seed-stage rounds in 2007, up from 23 raising $50 million in 2006 and down from 36 raising $103 million in 2005, according to data from the Cleantech Group. In the first half of 2008, 13 companies have raised $82.5 million in first- and seed-stage rounds.

Ilett said early-stage companies are having difficulty because there's less encouragement for entrepreneurs than in the U.S. Investors in the U.K. are more hesitant to give funding to entrepreneurs who have previously failed, he said. Also, government regulations make it difficult for startups to get to production, the report said.

The revelations in Greenbang’s report, the Clean Tech Start-up Company Index, are most dangerous for the tidal-power sector, in which the U.K. has established itself as a leader, Ilett said.

“Over all sectors, people were reporting a pretty tough time in taking conventional [funding] routes in the U.K.,” he said.

Ilett said British companies have had mixed success getting money from the Carbon Trust, a government-funded independent company with an investment arm to finance emerging clean energy technology businesses with commercial potential. Carbon Trust Investments has put £9.1 million ($16.1 million) into 11 companies so far (see Spying on sustainability and Solar jumps to the front of the pack).

One of the most appealing alternatives for U.K. startups could be Silicon Valley, Ilett said. In the second quarter of 2008, California-based companies received $794 million of the $2 billion invested in cleantech firms across the globe, according to research by the Cleantech Group.

In the 1990s, a similar investment trend led several U.K.-based companies and entrepreneurs to migrate to Silicon Valley during the IT boom, Ilett said.

“It’s early days,” Ilett said. “But it would be a shame if the U.K. lost its best companies to overseas.”