UK energy tech startups are struggling to scale – here’s why
The UK tech industry is booming, with startups raising more than £29bn in 2021. But some sectors are booming more than others. Recent data shows that UK energy tech startups are struggling to scale compared to other areas, such as fintech and AI.
There are 950 energy tech companies in the UK and yet 47.6% of them are “stuck” at the seed investment stage, according to a report by entrepreneur network Tech Nation.
Crucially, the ‘Emerging Energy Tech Report‘ found that for every UK energy tech startup at a seed or early growth stage, just 0.2 make it to a late-stage company. That’s compared to 0.6 when looking at startups across all sectors.
Later stage funding, from Series A and beyond, is often essential for a company to scale. And while some have successfully done so – including OVO Energy and Zenobe – there is the risk that comparatively more energy tech startups are doomed to fail.
“Not achieving a later stage investment is often fatal for energy tech companies because of the longer time to market and expensive staffing and raw material costs,” the Tech Nation report said.
Concerns over antiquated energy systems’ long-term effects on the climate, the UK’s net-zero targets and soaring energy prices have demonstrated the importance of innovative energy tech.
“As a cleantech company, we were surprised at the difficulties we’ve faced securing funding to take O-wind beyond the seed stage,” Matt Taylor, head of partnerships at wind turbine firm O-Innovations, tells UKTN.
So what’s putting investors off from backing UK energy tech startups? For many, it all comes down to the numbers.
Luke Smith, partner at venture capitalist firm Forward Partners, believes it’s because the “path to revenue is much longer than for other tech startups”.
He adds: “An applied AI company can build commercial traction with seed funding and then raise further investment to fund rapid growth. With seed-stage energy tech, it will take years and millions in further funding to prove out the technology before you can show any commercial traction.”
The accepted reality among those working in energy tech seems to be that investors are simply not always willing to take the risk when there are safer profits to be had elsewhere.
Fintech is a prime example of this, with UK companies operating in that area securing a combined $11.6bn worth in investments last year, compared to $1.5bn for energy tech startups.
“I think that all deep-tech companies have a difficult time securing funding, but energy tech companies in particular,” says RFC Power CEO, Tim von Werne. “This is because for the solutions to succeed, they usually need to be deployed at a massive scale, which means they will need large amounts of capital as they grow.
“Typical VCs and angel investors tend to see energy tech companies as too risky, with returns taking too long to appear.”
How can UK energy tech startups secure more funding?
Not having access to capital has knock-on effects for energy tech startups across the business, such as attracting the best talent.
Tech Nation’s report showed 45.9% of UK energy tech startups identified issues relating to the hiring of staff as one of the top 3 challenges preventing growth.
Jon Snade, corporate partner and tech investment advisor at Browne Jacobson, says that “access to UK STEM talent, combined with founder skills and market expertise,” was one of many “significant challenges in the sector”.
So, what then is the solution for small-scale energy companies, whose technology could be of global importance?
“It is always hard to tell investors what they should be funding, but ideally more would take a longer-term view of these potential investments,” says von Wern. “Government policy could do more to encourage sector-specific investments, similar to some of the tax breaks for investment in energy tech in the US. Until then, it will be investors with deep pockets who can afford to look for large returns in the future.”
The British government has certainly put an emphasis on public investment into new energy technology, announcing millions of pounds worth of investment into green tech, as well as investment partnerships with electric vehicle battery firms including Britishvolt, which received £100m from the government earlier this year.
Despite significant government backing, without a boost in interest from private investors, UK energy tech appears to be at risk of continuing to face the same challenges again in 2022.