Part I: Cleantech-Focused Innovation Hubs, Incubators and Accelerators Funneling Early-Stage Start-Up Pipeline
Around 2008, investors believed cleantech was positioned to become one of the biggest economic opportunities since the Internet. There was a significant deployment of capital into this space as investors followed the hype in hopes of typical venture-like returns. In the immediate years following the crisis, the term cleantech carried a negative stigma, especially after the bankruptcy of Solyndra, a solar panel producer with over $500 million of federal funding, which did not help improve the cleantech sentiment. Investors struggled to raise new cleantech funds, exits were rare, and the flow of venture equity investments into innovative startups thinned.
This crash, however, proved to be a turning point for cleantech. It showed entrepreneurs and venture capitalists that the business models and investments strategies were flawed, and that cleantech needed to be redefined.
An improved cleantech space emerges
The term cleantech is more extensive than before. Investment strategies have changed, and business models are now pivoted towards fast-growing and scalable markets, like software and the Internet of Things, where returns can be recognized much quicker. Cleantech is recovering, U.S. entrepreneurship is on the rise and more innovative start-ups are successfully raising their first financing rounds. This success can arguably be explained by the recent growth in the number of cleantech-focused innovation hubs, incubators and accelerators that are bridging the knowledge gap for start-ups at all stages.
These organizations are expanding throughout the United States and solidifying their role as key enablers in this space. After the crash in 2008, there was a noticeable uptick in the number of innovation hubs, incubators and accelerators founded that were majorly or entirely dedicated to cleantech. In 2009, seven new organizations were founded, more than doubling the number of cleantech-focused commercialization centers in the United States. In the seven years following, 29 more were founded.
Both entrepreneurs and investors are benefiting from the emergence of these commercialization centers. Researchers and start-ups can now be more capital-efficient by utilizing preexisting labs and networks instead of creating their own, delaying the need to take early investments. These organizations are providing professional services that were previously not widely available or affordable, and actively assisting start-ups at all stages, from conception to commercialization. For investors, these organizations are pre-vetting cleantech start-ups to construct cohorts of the most promising start-ups for future deal flow.
What are cleantech innovation hubs, incubators and accelerators?
Although the terms “incubator” and “accelerator” are commonly used interchangeably, they all differ in their business models and respective roles in bringing sustainable innovation to market. Being relatively new to the cleantech space, there are slight variations within each type of organization; however, innovation hubs, incubators and accelerators tend to follow three similar structures.
If the three aforementioned organization types were viewed as a linear progression, innovation hubs would be the starting point. An innovation hub is an umbrella term for an organization comprised of universities, tech transfer centers, and research parks that bring concepts to products. These hubs provide physical workspace, lab access, and a network where researchers, entrepreneurs, business leaders and industry experts can collaborate. Innovation hubs are typically funded through government or university grants, corporate sponsorships or membership fees, and rarely do these hubs provide funding or make equity investments. Due to the emphasis on research, innovation hubs tend to deal with individuals and graduate students, and often times the research conducted at these hubs spin-off into start-ups.
While some may charge membership fees or take small equity stakes, most incubators are funded by university grants or subsidized by the government in order to stimulate economic development and job creation within the local economy. These organizations tend to work with early-stage start-ups that have left the lab with at least a prototype for one to two years at a time. During this period, start-ups share an office space with other start-ups working within the same industry to promote collaboration. Additionally, incubators provide financial and marketing services, venture capital and angel investor introductions, and a network of local business leaders, industry experts and mentors. Come graduation, a successful start-up will typically have a sharpened business model, a small team, a refined prototype and the necessary knowledge to take the next step towards raising its first financing round.
As the name suggests, accelerators quickly fine-tune start-ups for venture funding and commercialization through a rigorous three to four month program. Unlike incubators that tend to be fee-driven, accelerators are growth-driven, and a 3-8% equity stake in exchange for a $10,000-$50,000 seed investment is common for those that are admitted. Accelerators expect that with the small seed investment, the start-up will go on to successfully raise a Series A round and eventually commercialize.
These organizations are filling the gaps in the cleantech landscape, and benefiting both investors and startup alike.
In part two, there will be a deeper dive into the impact of these commercialization centers, specifically the recent increase in seed investments for innovative start-ups.