Banks and financial institutions see investment in scaling up bio-based technologies as “non-bankable” despite these initiatives offering clear paths to reaching government-set environment and climate targets.
Europe has long struggled with scaling its nascent technologies up into successful businesses, particularly when compared with the United States.
This has been particularly true for the bioeconomy, an advancing area not well understood by investors. These types of innovations often needs large, costly facilities to demonstrate their effectiveness.
“The biggest challenge is that in a very large number of cases the companies that need to build their facility are building the first of its kind,” explained Joško Bobanović from Sofinnova Partners, the oldest venture capital firm in Europe.
“Nobody’s done it before at that scale, so there’s an element of risk.”
Bobanović spoke last week in Brussels at an annual stakeholders meeting for the Circular Bio-based Europe Joint Undertaking (CBE JU), a €2 billion partnership between the European Union and the Bio-based Industries Consortium that funds projects advancing competitive circular bio-based industries in Europe.
While venture capitalists might be ready to jump at that risk scenario, banks are not.
“For venture capital firms that’s a low risk compared to the risk we have taken in trying to figure out how to engineer a chemical, for instance, and proving it in a pilot or demo facility. But when you talk to a commercial bank, they run for the hills,” Bobanović said.
The bioeconomy is a relatively new term, encompassing a wide range of goods, services and energy involving the use of biotechnology and biomass such as crops, forest residues or biowaste.
Alex Michine, founder and CEO of enzyme company MetGen, who worked in venture capital investment before founding his company, told the Brussels meeting that finding investors with a deep understanding of the bioeconomy sector can be hard to come by.
“We should jointly find more simplified language about what we’re doing,” he said. “I’m sure everyone here knows what enzymes are. But when I pitch to the bank, they know zero. So instead I talk about the products.”
According to Michine, this works the other way as well since the innovators behind these products and technologies are often academics who have little knowledge of the business or finance world.
“I enjoy every second of working with these small companies because there’s a huge challenge when the companies are a spin-off from a university, with the scientist who thinks that’s my baby, it works, I like it, but I have no clue what to do next. They have no legal support, no sales and marketing teams, no idea how to scale it up from the idea in the university to the outside world,” he said.
Filippo Giancarlo Martinelli, European ambassador at the Irish Bioeconomy Foundation and Coordinator of the BioeconomyVentures project, said the process should be tailored to the individual entrepreneur.
“Not every company has to go from lab to biorefinery. Maybe you’re not the right people to run a chemical plant. Maybe you should sell your technology to the Novozymes of this world,” he said.
Enabling innovators to know where to get capital, and financers to understand the bioeconomy can make them more comfortable with the risks involved.
“Different stages have very different challenges,” explained Martinelli.
“At the early pre-seed stage, investment is made in people. Then you have a shift into intellectual property (IP). Then you realise you cannot speak with banks because you don’t’ have tangible assets. You can’t get loans if you don’t have assets to secure it. You have IP, but banks don’t understand that.”
For that, public assistance is needed because governments better understand the importance of the bioeconomy in meeting environment and climate targets.
Michine agreed, noting that there is a €10 billion bioeconomy financing instrument from the European Investment Bank.
“But the big problem is that that EIB fund isn’t for start-ups. They’re not adventurous enough to fnd bio-based industry, they’re quite traditional,” he said.
Pavel Misiga, head of unit for the circular economy and bio-based systems at the European Commission, pushed back on the idea that the EU has no money for early-stage bioeconomy projects.
“Yes, the €10 billion EIB fund isn’t for start-ups,” conceded Misiga, who works at the Commission’s research and innovation department. “That’s why we initiated the European Circular Bioeconomy Fund, which has €300 million for SMEs.”
However, he says the Commission still has difficulties finding candidates for the fund. “Half of the capital comes from public sources, so they can take enormous risk. We’re asking how can we help companies in this stage where even venture capitalists are not courageous enough to go into that.”
So, who isn’t being courageous here – the public sector, private financers, or both?
Misiga insisted that governments are being more courageous than banks and venture capital funds, because they provide project development assistance to academics who don’t know what to do with their innovation.
However, public institutions have a responsibility to taxpayers and can’t throw money at innovations that haven’t demonstrated market potential, he adds.
“If the market for the products are there, with downstream users for bio-based products, I believe the venture capital is there to invest with no problem,” Misiga said. “That’s the key. If there are no future clients there, this is not a viable innovation.”
“The EIB provides debt, equity, guarantees – all kinds of instruments – but the majority of instruments really do not reach small companies simply because they don’t have capacity to provide all the information for the EIB to provide an investment,” Misiga continued. “So we need both VC funds and public funds in Europe, and we need to blend them.”
According to Misiga, there is also a need for “a new generation of policy” to give signals to the market, noting that “targets are important” in this regard.
However, he also cautioned against overreliance on regulation to make the bioeconomy thrive, saying: “We don’t have very good experience with centrally planned economies.”
From the venture capitalist perspective, Bobanović also argued against overreliance on policy to stimulate investment. “We have a tendency in Europe to rely on public financing to allow things to develop. But ultimately in a mature business there is private capital that goes into projects that make sense. So why don’t we think about ways of enticing commercial lenders to go into these types of projects, for example by providing a guarantee, like the US did with solar?”
Misiga said the Commission was looking into ways of providing more certainty for these investments, including a labelling scheme to distinguish more clearly between bio-based and fossil-based products.
The EU official also suggested that banks may still be reeling from the EU’s sorry experience with crop-based biofuels, which turned out to be less sustainable than thought and tarnished the reputation of the bioeconomy.
“They may be afraid of reputation damage if they invest in such a thing. The truth is there is no sustainable sourcing criteria for most biomass. There is a need to develop sustainability criteria for biomass.”
Bobanović suggested developing a consumer-friendly sustainability scale as the EU did with electronics. “On an appliance we have grades ABCDE. We need that for bio”.
How long it will take, however, is another story, Bobanović added. “It might take 10-15 years.”
[Edited by Frédéric Simon/Alice Taylor]
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