A Challenging Climate for CE Startups in London

February 16, 2024

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When it comes to addressing the urgent need to curb our carbon emissions, it is perhaps inevitable that we tend to think almost exclusively in terms of greening power networks and swapping petrol-guzzling vehicles for battery-powered ones.

Given that transportation and energy production account for around half of the UK’s emissions, that is understandable, but it means we overlook an important aspect of how we can go about curbing greenhouse gases.

An economy that hasn’t learnt to husband its limited resources, that is, one that is addicted to linear, ‘take-make-waste’ production cycles, will always tend to be profligate and polluting.

More than 90% of the materials we extract from the planet do not return to production cycles once they’ve served their purpose but end up as waste, much of it dumped in landfills.

This is wasteful in two senses – in terms of the pollution and blight it creates and secondly, the lost opportunity to curb emissions, especially carbon dioxide and the methane belched from waste piles that lie festering on the edge of urban areas.

While cutting down on all greenhouse gases is urgent, curbing the methane we pump into the atmosphere is particularly exigent, given that the gas is believed to trap approximately thirty times more heat than carbon dioxide.

CE Startup Opportunities: Waste Not Want Not

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Boffins and startup entrepreneurs see an opportunity here.

They realise that reusing and recycling materials is not just good for the environment – a truly circular economy might cut global greenhouse gas emissions by up to 40%, equivalent to the CO2 of the UK’s energy and transport sectors together – but it makes good business sense too.

By one estimate, the circular economy could be worth £77bn a year to the UK’s economy by 2030, not to mention create 100,000 new jobs in a reuse-recycle focused labour force, were the country to embrace the idea of reusing its castoffs with gusto.

The World Economic Forum is equally upbeat. They cite research by the consultancy firm Accenture that suggests the circular economy could be worth a bumper £3.5 trillion to the world economy by 2030.

Startup Financing

A 2023 report by BDO, a tax and business advisory, had both good and bad news as far as CE startup funding was concerned.

Momentum, it suggested, had certainly been built over the past few years among investors amenable to investing in CE startups.

Indeed, the number of CE businesses in the UK receiving backing had increased from 42 to 142 over the four years 2018-2022.

However, the report also cautioned that the current investment landscape is “not without challenges” – for each of the 142 deals completed in 2022, there was another early-stage CE business that had been unable to find a backer.

The frustrating thing for CE startups with a compelling idea is that the funding landscape is there. The overall UK startup scene was estimated to be worth over £8.6bn in 2023, making it the third most valuable startup ecosystem globally.

True, funding tightened across the board in 2023, with VC witnessing a downturn from its frothy 2021-22 peak, but still, Europe’s startups still managed to raise a not-inconsiderable £50bn across ten thousand funding rounds during the year, down 37% on the previous year.

Still, green-focused businesses managed to raise sizable amounts of VC last year. A whopping deal for H2 Green Steel, a Swedish steel producer, saw it raise £1.3bn from four financiers. Another cleantech outfit, this time a French battery manufacturer, Verkor, raised £1.2bn, with Macquarie Asset Management and the European Investment Bank stumping up the cash.

By contrast, Europe’s CE turned out to be the poor relation of the VC scene, raising a measly £1.4bn in 2023.

Show Me The Money

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A big part of the problem for CE startups is that investors are yet to be convinced by the strength of circular economy business models, says Solomia Boretska, CEO and co-founder of LendoCare, a London-based healthcare startup.

She eventually gave up in her pursuit of the £1m she needed to scale her product-as-service startup and instead decided to bootstrap her business with her cash.

Solomia’s case is instructive. Many CE founders are committed and earnest but sometimes lack the network, financial acumen and sometimes just the staying power to build a compelling narrative around their idea.

“It is extremely time-consuming to go out and seek the introductions and I just didn't have the capacity nor the network to meet the right people when my customers were my priority,” she says.

Adam Baron, a growth advisory director at BDO, acknowledges accessing VC capital for many CE startups can be challenging.

He says one reason CE startups sometimes fail to attract backers is that their capital requirements can be prohibitive, with UK-focused VCs historically keen on “asset-light investments”.

“To get their attention startups not only need a solid game plan but also a track record to prove they're worth the risk. In the tech investment game, it's not just about doing good – you've got to show the money,” he advises.

E-Waste Solution Opportunities

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In a disruptive startup sector such as CE, investors are also often more inclined to buy into ideas that have captured the public imagination and where the opportunity to pick some of the low-hanging fruit is evident.

E-waste (think obsolete iPhones and discarded laptops) is a good example. The narrative around e-waste has gained a lot of press recently and it is not difficult to see why – just a fifth of this type of waste is funnelled back into production cycles.

As a consequence, around £50bn of unrecycled material is sent to landfills or goes up in smoke at an incinerator each year.

The UK is a leader in producing this type of waste; second only, in fact, to Norway in per capita terms.

This meant Reboxed, an electronic goods recycler founded in 2020 by pals Phil Kemish and Matt Thorne, found the market receptive when they sought to raise capital last year.

Their plan, to recycle 100 million electronic devices by 2030, won over backers at ACF Investors, who stumped up £1.6m in seed capital.

The company will use the funds to develop its retail partner programmes, which allow corporate clients to recycle their used tech.

Pension Funds to the Rescue

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The good news for CE startups is that money should become more readily available going forward.

Nine of Britain’s biggest pension funds signed up last summer to a commitment that will see them allocate at least 5% of their funds to British startups and VC firms by 2030. The move could unlock up to £50bn in assets from private defined contribution (DC) pension schemes.

This should be a boon to the CE startups. According to a recent PLSA survey, 68% of British pension funds say they have already signed up to a zero carbon commitment.

Nine out of ten of them say they expect to become net-zero compliant by 2050 at the latest. One in seven aims for 2035 and a fifth hope to sport carbon-less portfolios by 2040.

For the 27% without net-zero commitments, 10% say they expect to have one within two years, the survey found.

This focus on emissions from some of the UK’s biggest institutional investors can only be good news for cash-strapped CE startups going forward.

The Future for London CE Startups

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Amsterdam has set itself the goal of becoming a fully circular city by 2050.

London hasn’t been quite as ambitious.

The mayor has vowed to make the capital a zero-carbon city by 2030 and updated the London Plan to encourage the adoption of a more circular economy ethos among planning committees.

As such, London’s private sector, especially its startups, will have an important part to play in driving the capital’s transition to circularity.

If it is to do so, however, investors will have to find their appetite for investing in disruptive CE startups.

Sometimes the market has to be given time to catch up, suggests Viola Jardon, Innovation Programme Director at the Cambridge Institute for Sustainable Leadership (CISL), who says startups can sometimes be “five to seven years ahead of the market”.

Indeed, Lendocare’s Solomia says she gets the feeling that the market has done some catching up recently and the investment tide might be finally turning in favour of companies like hers.

“There has been a shift in the last 12 months in investor thinking and companies who are generating revenue with a strong understanding of their market are beginning to be appreciated.”