June 27, 2024

Accelerating Finance for Green Small Businesses: Building a Sustainable Future

In recognition of World Micro, Small, and Medium-sized Enterprise Day on June 27th, this blog discusses the necessity for increased support and investment to help smaller businesses identify, measure, and showcase nature-positive investments, and examines the roles of investors, business intermediaries, and researchers in facilitating this process. (This blog also appeared on the Middlesex University website).

Blog by Robyn Owen and Amy Burnett

© kultur.work (designed with Adobe Firefly)

Research by CUSP researchers from GreenFin at Middlesex University working on the UK Natural Environment Research Council and Innovate UK Integrating Finance and Biodiversity (IFB) programme are making traction on how to improve the access to finance of early-stage entrepreneurial ventures that have a nature-positive mission to improve the biosphere.

The SME Nature Positive Finance research has the dual objectives of helping UK Small and Medium-sized Enterprises to address the Kunming-Montreal Global Biodiversity Framework agreement to protect 30% of land and water by 2030, whilst also feeding into the Taskforce on Nature-related Financial Disclosures (TNFD) which seeks to deliver an international standard for measuring the impacts of nature-positive businesses to inform finance markets on environmental impact risk and reward.

The project team worked with Raising Expert’s Finlay Kerr, an experienced professional fundraising coach, and Ollie Bream McIntosh and Catherine Wilder to develop the UK’s first SME nature-positive mini accelerator. The purpose of this endeavour was to find out what barriers to finance exist for these niche early-stage entrepreneurial innovators and how they might be overcome. This hands-on, action-based research offered rich insights into the process of investment readiness and the specific requirements of nature-based investing.

The role of accelerators

Since accelerators first appeared in the UK in London during the late 2000s, they have become increasingly present in the UK early-stage potential, high-growth venture market – acting as early-stage venture investors and investment readiness springboards to their further funding. They work on a principle of recruiting a cohort of startup ventures at a particular stage (e.g. before the first formal equity funding round, or a significant commercialisation round) and on specific themes, including environment and sustainability, with leading UK examples being Bethnal Green Ventures and Sustainable Ventures. Selected ventures join a cohort that is supported through small, often first-in, external investments and over typically 3-6 months to develop their business concept, management team and business networks, before seeking larger rounds of investment for commercialisation and scaleup.

More recently, variations on accelerators have appeared, which aim to build new ventures or more rapidly support ventures that are close to commercialisation or scaleup. Venture-builder studios include sustainability-oriented Carbon13 and Zinc; these develop new businesses by recruiting entrepreneurs to address key sustainability themes and build venture teams, drawing on networks of (often free) advisors. At the end of the build phase, the most promising venture teams pitch for initial investment from the accelerator sponsors and progress to a further stage of investment and support. An alternative for existing ventures with proof-of-concept and close to, or in, early commercialisation is the mini accelerator. This provides rapid investment readiness training for pitch decks, online video presentations and organised pitching events and seeks to match ventures with appropriate investors (see Greenbackers).

Our approach

Our mini-accelerator approach took place over 12 weeks, spanning from the cohort venture recruitment to the live in-person investor pitch. The recruited venture cohort consisted of 15 independent UK small business startups, typically micro-businesses with less than 10 employees, that specialise in developing nature-positive business outcomes. In doing so, we wanted to look beyond the UK’s predominant SME net-zero, low carbon focus and support early-stage ‘nature positive-tech’. Therefore, ventures were recruited that displayed a green mission to develop an innovative product, service or disruptive business model that incorporated supporting biodiversity and circular economy principles.

The ventures were supported through several sessions with the fundraising coach in developing their pitch decks and a three-minute elevator pitch video. These offerings were then assessed by the research team for potential environmental impact, market scalability and investor suitability (they had to demonstrate existing revenue or strong potential for market traction). The six highest scoring ventures moved forward to a ‘Dragon’s Den’ style live in-person pitching event to investors. The investors were recruited through environmental impact investor networks from across the UK and internationally.

Lessons learned

A primary lesson is that, despite receiving grant funds from Innovate UK and other UK public bodies, these ventures typically struggle to find follow-on impact investors and to present their case. They typically lack the knowledge and experience of how to present their business case and where to look for environmental impact investors. What is also evident from the impact investors, like Green Angel Syndicate, the UK’s largest business angel group addressing climate change, is that most successful applications come through trusted ‘warm contact’ channels, such as accelerators. However, for nature-positive ventures, the nascent market is still poorly understood by investors who struggle to put a financial value on the market. There is clearly a gap in the support market for these ventures, requiring launchpad and accelerator services to close information asymmetries between ventures and investors and generate a more fluid early-stage green innovation finance escalator.

Furthermore, a follow-up workshop with the ventures after they had pitched, pointed to the key components for this evolving new form of support:

Motivation is essential. Investment coaches can reinvigorate the entrepreneurs, spurring them forward and building their confidence. Business coaching is therefore fundamental to the success of the accelerator, offering an important combination of soft skills, such as confidence building and allowing business “thinking and planning space” as well as hard skills such as providing the entrepreneur with the required format business demonstration pitch deck components and presentation skills.

Mentorship and networking were considered vital elements that can cultivate innovation, address critical issues of stakeholder interests and governance in terms of market direction, promote ethical alignment and develop an evidence base for market traction and potential scalability. It was highlighted that entrepreneurship can be “a lonely, under-resourced activity where having a mentoring sounding board for ideas assists the learning curve.” Such a network of advisors and links to markets helps to build the business resource base. The work of the Connected Places Catapult SME programme is also key to supporting SMEs to advance innovative solutions through their commercial development programmes, networking and masterclasses. There is scope across the range of business support to go further in supporting nature-positive enterprise and investment.

Tech Stacking through joint venturing and business collaborations of complementary technologies and business models also offers tremendous opportunities which considerably increase the likelihood of successfully accessing business financing. Unsurprisingly, the cohort was very keen to develop the network, retaining newly established linkages between complementary venture services in the accelerator, as well as drawing on each other’s experiences and connections.

Branding and language are vital elements to venture investment promotion, alongside clear environmental indicators which connect the value of nature to financial return for the investors. Whilst support for carbon calculation is becoming more common in the UK for small businesses (see Small99), ‘nature-positive’ value remains difficult to present, other than through carbon capture metrics. How do we calculate the quantitative value of saving pollinating insects and birds, or improving soil quality and financialise nature? The UK’s introduction of Biodiversity Net Gain offers a regulatory starting point by attributing financial value to the quality of habitat and landscape uplift, but more is required to form effective science-based targets to offer the baseline information to inform financial market risk assessment. It was, therefore, unsurprising that the various ventures, which included biodiversity-friendly renewable energies, agri-tech, fashion and textiles, AI and robotics, demonstrated a wide range of calculations and approaches to estimating their environmental impacts, with a strong leaning towards carbon calculations, material efficiencies and end of life product calculations.

Conclusions

Our pilot study of how a mini nature-tech accelerator can assist the financing of early-stage, high-risk and frequently little-understood emerging green, nature-positive technology ventures demonstrated the clear need for more sophisticated financial intermediary services. These include the recently emerging launchpads, venture builders, tech stackers and mini-accelerators to facilitate a more efficient finance escalator operation in the early-stage green innovation market.

Whilst our focus was on supporting the demand-side of venture financing, there is also evidence that the supply-side early-stage investors, such as business angel networks, seed venture capital firms and corporate investors also require support to guide them beyond simply measuring low-carbon credentials. This investor carbon tunnel vision is supporting climate-tech, but often overlooking the wider value of nature-positive tech.

Our four main take-outs for practice and policy to support the development of nature-positive tech are therefore:

Create more financial intermediary services like mini accelerators to enable investment readiness, networking, tech stacking and access to appropriate impact investors.
Build the impact investment market by providing clear guidance tools and support to the investors to enable them to measure the financial value of nature and assess the risks and rewards of nature-positive tech ventures.
Deliver a clearer small business green innovation finance escalator roadmap for UK regions to enable improved access to impact investors.
Create a positive and self-reinforcing set of incentives to promote nature-based measurement and investment, particularly where this can be linked to localised or social benefits to maximise the promise of ‘sustainable’ growth and prosperity (see Incentivising ‘regenerative value’ to improve sustainability outcomes).