June 2020
Investments in Academic
Renewable Electricity Generation Technology Spin-Offs
A Qualitative Study on High Capital Limitations for Underexplored Renewable Energy Sources
Yann Braune
Master’s Programme in Industrial Management and Innovation
Investments in Academic Renewable Electricity Generation Technology Spin-Offs
Yann Braune
Due to an intensified climate change discourse, renewable energy technologies find higher attention within the energy system and increasingly compete with traditional energy conversion systems. Electricity is progressively being generated through renewable electricity generation technologies (REGT) which harness naturally existing energy fluxes (wind, tide, heat, sun) and convert it to electricity. High investments are currently being made into well-developed REGT using explored energy sources such as wind, hydro or solar. In order to increase cost- and energy efficiency of REGTs, university research projects are developing new REGTs that harvest underexplored energy sources such as the marine energy source. These capital-intensive marine energy research projects are entering the market through university spin-off firms but are often confronted with funding gaps, for the current or future operations. Capital rich investors could provide these funds but are often investing in well explored energy sources rather than into underexplored but more cost- and energy- efficient energy sources. Utilizing a qualitative, grounded theory-influenced approach and combining empirical material of semi-structured interviews, data from a participant observation of an innovation system workshop attendance and data from continuous meetings with an academic REGT spin-off from Uppsala University, this study investigates 1) the drivers and barriers within the funding ecosystem for academic REGT spin-offs in Sweden, 2) the limited access of high capital to underexplored energy sources on the specific case of the marine energy source and 3) a potential common ground for investors with high capital and academic REGT spin-offs in order to allow an accelerated diffusion of the marine energy source. The results indicate that the physical properties of the underexplored marine source should not be accounted for as driver but rather as the foundation of an academic REGT spin-off. This frame allows to bridge practitioners of both the investment field and the academic field of REGT spin-offs through the degree of utilization. An inversion of relations, where not only entrepreneurs increasingly link their field of study to economy and business, but also investors adapt cross-disciplinary knowledge towards academia and natural sciences via the degree of utilization, could be beneficial for an accelerated diffusion of academic REGTs. Bridging practitioners of both fields through the degree of utilization and other means might together with a full commercial application and proof of marine REGTs reduce the funding gap of academic spin-offs in the marine sector and allow access to investors with high capital.
Faculty of Science and Technology Visiting address:
Ångströmlaboratoriet Lägerhyddsvägen 1 House 4, Level 0 Postal address:
Box 536 751 21 Uppsala Telephone:
+46 (0)18 – 471 30 03 Telefax:
+46 (0)18 – 471 30 00 Web page:
http://www.teknik.uu.se/student-en/
Supervisor: Karin Thomas Subject reader: Annika Skoglund Examiner: David Sköld
SAMINT-MILI: 2017
Printed by: Uppsala Universitet Keywords:
Renewable Energy Generation Technologies (REGT),
Underexplored Renewable Energy Sources, University Spin-Off, Funding Ecosystem, Funding Gap, Degree of Utilization
I. Popular Science Summary
Investing in a Green Future - Investing in Academic Renewable Energy Spin-Offs In order to achieve a carbon neutral energy system, where electricity is generated from only renewable energy sources, there is a need for other renewable energy sources than wind or solar power. The reason behind this is that wind and solar power are highly periodic and not working on a regularly and continuous base. This poses difficulties on engineers who aim for a stable electricity grid where the consumption of electricity is equal to the production of electricity.
More stable and more predicable energy sources such as the marine energy source (or often times referred to as ocean energy source) are therefore necessary when aiming for a carbon neutral energy system. While investments are very high for the well-explored sources of wind and solar power, university spin-offs in the marine sector are however receiving comparatively low investments. This study is therefore investigating the investment landscape of spin-offs from Swedish universities which build technologies to generate electricity from the marine energy source. More specifically, this thesis investigates driving and hindering aspects for these academic marine spin-offs. By analyzing data from interviews with an investment expert, governmental institutions and renewable energy spin-offs, the author aims at connecting the renewable energy spin-offs with investors. Connecting the investors and the university spin- offs could lead to more investments in the marine energy sector. This will accelerate the movement towards a carbon neutral energy system and a greener future for society.
II. Preface and Acknowledgments
This thesis was written by Yann Braune, a master student within the program of industrial management and innovation at Uppsala University with a mechanical engineering background from Switzerland. At this point, all people who contributed to the realization of this study shall be thanked and acknowledged.
A big thanks goes to my supervisor and senior lecturer Annika Skoglund, who enriched this study with her experience and know-how. She offered extraordinary support by guiding me, forcing me to think differently and helping me to find solutions. I would also like to thank Karin Thomas and the other members of the academic REGT spin-off Current Power who initiated the curiosity about the particular topic of this thesis. Lastly, I would like to thank all interview respondents who supported me by taking the time to answer the numerous questions I had.
III. Definitions
Degree of Utilization A measurement that can inform investors about the economic potential of the connection between a natural resource and the technology harnessing it
Funding Gap Amount of capital needed for the current
(Frankenfield, 2019) or future operations of the business or a certain project that has not been funded with capital yet
High Capital Investments Investments of considerable size enabling to build new, capital-intensive industries in comparison to investments in R&D Late-Stage Investor Investors with high capital who usually
invest at later business stages and not in early business stages
Underexplored Renewable energy sources that have not
Energy Sources been harnessed yet in a large and economic viable setting.
Underdeveloped Technology Often technologies that are based on research ideas, and efficient utilization of natural resources, which attempt to brake evolutionary innovation and lock-
in.
University spin-off (USO) Ventures created by graduates or
(Shane, 2004) university staff
Renewable Energy Technology harnessing a renewable Generation Technology (REGT) energy source and converting it to (Herrmann and Savin, 2015; Yu, 2017) electricity
Table of Content
I. Popular Science Summary ... I II. Preface and Acknowledgments ... II III. Definitions ... III
1. Introduction ... 1
1.1 Background ... 1
1.2 Problematization ... 2
1.3 Purpose of the Thesis ... 5
1.4 Delimitations ... 7
1.5 Disposition ... 7
2. Renewable Electricity Generation ... 8
2.1 Overview ... 8
2.2 Evaluating REGT ... 11
2.3 REGT in Sweden ... 16
3. Literature Review ... 17
3.1 Defining Academic Spin-Off ... 17
3.2 The Process of Academic Spin-Off Creation ... 19
3.3 Start-up Investment Theory ... 22
3.3.1 Emerging Phase ... 24
3.3.2 Rapid Growth Phase ... 28
3.3.3 Expansion Phase ... 29
3.4 The Funding Gap ... 31
4. Methodology ... 36
4.1 Methods ... 37
4.1.1 Continuous Interactions/Meetings ... 37
4.1.2 Participant Observation ... 38
4.1.3 Interviews ... 40
4.1.4 Secondary Data ... 43
4.2 Research Process ... 44
4.3 Limitations ... 46
4.4 Ethical Implications ... 48
4.5 Data Analysis Process ... 49
5. Analysis of Empirical Data ... 51
5.1 Empirical Data RQ1 & RQ2 ... 52
5.1.1 Drivers and Barriers of Academic REGT Spin-Offs ... 52
5.1.2 Positioning Academic REGT Spin-Offs ... 68
5.1.3 Venture Finance VS Project Finance ... 75
5.3 Empirical Data RQ3 ... 87
5.3.1 Spin-off Initiatives ... 87
5.3.2 Late-Stage Investor Initiatives ... 91
5.3.3 Interplay of Spin-offs & Investors ... 93
5.4 Analysis – RQ3 ... 97
6. Discussion ... 102
7. Conclusion ... 106
References ... 108
Appendix ... i
A. Recapitulation UIC-Workshop ... i
B. Interview Guides ... vi
1. Introduction 1.1 Background
Scientists have emphasized the urgency of the climate crisis over the last decades. The continuous rise of global carbon emissions has many reasons. An ever-growing population comes with a growing requirement for energy. Global energy demand rose by 2.3% in the year 2018 and the International Energy Agency (IEA, 2019) is expecting the demand to grow by more than 25% in the next 20 years. This goes along with carbon emissions increasing on a rate of 1.5% per year (WEF, 2020). To limit global warming to 1.5-2°C compared to pre-industrial values by the end of the century, carbon emissions need to decrease by 3-6% per year between now and 2030 (IPCC, 2018). Even though measures are still far from leading to that limit, governments and organizations are increasingly engaging into lowering carbon emissions (WEF, 2020). These engagements can take the form of offsetting carbon emissions through carbon binding projects, circular economy initiatives or organizational and national carbon emission policies. Replacing fossil fuels through renewable electricity generation technologies (REGT) are an important means to reduce further carbon emissions.
Organizations, research centers and governments have increased their focus on renewable energy technologies in order to enable and accelerate the replacement of fossil fuels. Within this movement, the role of universities has significantly progressed due to a rising commitment from society towards long-term sustainability (Geenhuizen and Nejabat, 2016). Initial research projects of new REGT are entering the market through different kinds of commercialization- initiatives. Among them are university spin-off (USO) firms which are established by graduates or university staff (Shane, 2004). The commitments from university, state and industry do under certain circumstances lead to more efficient and reliable REGTs, overcoming economic constraints and therefore posing a competition to the conventional energy sources (Hussain et al., 2017).
Some countries have been able to replace fossil fuel and rise the share of renewable energy significantly. Sweden for instance generates 58% of electricity from renewable energy sources, including hydropower (Swedish Energy Agency, 2019). Hydropower and other energy sources such as solar power and bio-fuel, are nowadays in many industrialized countries well-explored energy sources being harvested by mature and well-developed renewable energy technologies (Tran and Smith, 2017). These sources will however not be able to cover all the energy demand of society due to (amongst other factors) their geographical restriction and intermittency.
To make an energy system carbon neutral, there is a need to fill the energy gaps created by irregularity and lack of wind, or solar radiation. Energy storage solutions or other, yet underexplored renewable energy sources could fill this gap. USOs are therefore increasingly doing research on underexplored energy sources and building their business model on yet underdeveloped technologies. One underdeveloped renewable energy source that could contribute to a carbon neutral energy system is the marine energy source (or often times referred to as ocean energy source) (European Comission, 2020a).
1.2 Problematization
According to Ocean Energy Europe (2020), marine energy is a suitable partner to the established energy sources of wind and solar energy since it is very predictable, produces at different times compared to wind and solar and furthermore enables a better balance of the electricity demand and supply. These aspects, together with the fact that, USOs can operate under high uncertainty in an economically viable way (Janssen and Moors, 2013) could indicate that renewable energy USOs could be successful in their mission to take underdeveloped REGTs to the market. However, several aspects such as lacking market knowledge, lacking commercialization skills (Vohora et al., 2004) and the resistance of the traditional energy regimes (coal, gas, and nuclear energy) (Geels, 2014) do pose barriers for a single renewable energy USO to change and disrupt the current energy system with yet underdeveloped technologies. These barriers together with high market and technology uncertainty result in a slow acceptance and diffusion of the underdeveloped REGTs. Due to the high risk and high payback time of marine energy investments, investors choose to invest only small amounts of capital (see Figure 1).
While the explored energy sources (hydropower, solar, wind, and biofuel) are finding significant financial backup, the opposite is the case for underexplored energy sources such as the marine energy source. Investors with high capital (i.e. organizations, institutions, and banks) are investing in mature REGT solutions using solar, wind or hydropower as energy source rather than new emerging, yet underexplored and capital-intensive energy sources. This investment landscape varies between different countries and continents and can even be non- existent in some parts of the world since economic advancement and regulations play an important role. There is however a commonality across developed countries when it comes to the lack of knowledge among investors and the match between energy source and technology and the potential future economic profitability (Skoglund et al., 2010). On one hand, high amount of capital is being invested into “the known” renewable energy sources that are explored through well-developed technologies. On the other hand, the “unknown” renewable energy sources remain underexplored since, as the term suggests, it remains unknown what the economic value could ultimately be. With increased knowledge dissemination about climate change and sustainable solutions the academic community has been inclined to pursue more cross-disciplinary thinking (Schaltegger et al., 2018). This has made the research community look into REGT solutions with the prospect of merging economic with social and environmental sustainability. The financial sector however is mainly interested in the economic basis for making investments in REGTs, which is why their decision making is lagging behind the cross- disciplinary research and policy agenda. Whilst researchers are aware of the economic and environmental value of e.g. the underexplored marine source, investors tend not to be yet.
In order to assess economic viability of an energy source in connection with a certain technology, investors could use the Degree of Utilization (Skoglund et al., 2010). The higher a degree of utilization, the better the economic viability of the source in connection with the technology harnessing it. According to Leijon et al. (2010) wind and solar sources and their respective technologies account for a degree of utilization of only 12-32%, while marine and geothermal energy sources and their respective technologies can account for a high degree of utilization ranging from 69-86%. Even if these numbers might be overestimated to some extent, it shows that there is a high potential in the underexplored energy sources. Yet, investments remain restricted for the underexplored energy sources, raising the discussion of an investment
“discrepancy” (i.e. illogical compatibility between two facts) at hand where social and economic opportunities are missed.
Harvesting the marine energy source means departing from existing practices and implementing new and different technology in the energy system which is why marine technology can be labeled as a rather radical innovation as opposed to an incremental innovation where there are only minor changes to an existing energy system (Schilling, 2013). Radical innovations in the energy sector have many barriers to overcome. Besides technical development, market condition and competition, renewable energy sources face further hurdles such as broad social acceptance and the need to provide energy at a lower price than other technologies (Hopkins and Lazonick, 2012). With these challenges, the financial risk of supporting an emerging REGT university spin-off until it is able to reach economy of scale and capture market share is too great for many early stage investors (Hopkins and Lazonick, 2012) such as venture capital firms, accelerators or family offices. It is the state that is actively supporting the diffusion of underdeveloped REGT and with it the green transformation, through policies on both the demand- and supply side (Mazzucato et al., 2015). While the demand side focuses on regulations and policies, the supply side focuses on the provision of finance such as subsidies, investments or tax incentives (Ibid.). It was ultimately through the supply side, and more specifically state funding, providing the initial push and early stage high-risk funding to the emerging USOs so that they could establish the underdeveloped REGTs (Ibid.). With the initial push, other early stage investors joined the investment landscape of underexplored energy sources and continue to invest. While these early stage investors have limited capital and limited risk tolerance, later stage investors (i.e. companies, institutions, and banks) have high level of capital to commit for the long-term, but little or no technological risk tolerance (Saarinen, 2011). The radical innovations harnessing underexplored energy sources are however very capital intensive, especially in the case of marine technologies since they are to be implemented offshore in a very rough environment. Since high capital is not available to the underexplored energy sources, this results in funding gaps (i.e. lack of capital) at different business stages within REGT university spin-offs.
Though this issue has been raised in literature (Bloomberg New Energy Finance, 2010;
Saarinen, 2011) , and policy makers emphasizing the need to somehow bridge investment gaps at early stages of technology development in the energy area through organizations that have monetary muscles, the question is still open: How can one better understand this lack of availability of high capital, to the specific case of underexplored renewable energy sources and underdeveloped technologies, to be able to bridge the early business stages of REGT university spin-offs with investors who usually invest at later business stages in more mature
1.3 Purpose of the Thesis
Even if an increasing scholarly interest has been paid to the commercialization of renewable energy (Lehtovaara et al., 2012), and drivers and barriers for renewable energy (Meijer et al., 2019; Hallberg and Lindgren, 2016; Shivakumar et al., 2019) as well as the entrepreneurial process of environmental technologies (Sadegh-vaziri, 2013), fewer studies have addressed the aspects surrounding the commercialization of REGT projects through university spin-offs.
More specifically, the Swedish investment landscape of academic REGT spin-offs appears to be lacking in-depth studies using the view and data of several different stakeholders involved in the commercialization of academic REGT spin-offs. Geenhuizen and Nejabat (2016) do for instance only include one stakeholder, namely (amongst other north-west European countries) Swedish REGT USOs, in their qualitative study about factors determining the successful reaching of the market. In another qualitative study by Alf Steinar Sætre et al. (2009) the discussion revolves around USOs as technology commercialization per se. The study takes a broader approach around technological USOs and not only specifically REGT USOs.
Moreover, it is again only the Swedish USOs being included in the sampling and no additional stakeholders that play a role within the commercialization of theses USOs.
In a first step, this study is therefore going to investigate the general investment landscape of academic REGT spin-offs in Sweden from a more holistic perspective. This first assessment and investigation will provide the basis for the second step of this study which aims to investigate the restriction of high capital investments to underexplored energy sources and underdeveloped academic REGT that are supposedly more cost- and energy-efficient. This second step will lead to the core of this thesis which aims at identifying to alleviate the, in literature widely discussed, Funding Gap (Colombo and Piva, 2008; Wilson, Wright and Kacer, 2018; Mazzucato et al., 2015) that new emerging ventures and more specifically REGT university spin-offs face. While literature revolves around the state or other early stage investors
“bridging” this funding gap at early business stages of academic REGT, this thesis will take a different angle and discuss the potential role of late-stage investors within the funding gap.
The scope of the thesis is therefore to fill the knowledge gap of firstly the investment landscape of academic REGT university spin-offs in Sweden and secondly the role of late-stage investors within the funding gap to some extent by investigating the following research questions:
Research Question 1: What are the drivers and barriers in the funding ecosystem of Swedish university spin-offs harvesting underexplored energy sources through underdeveloped REGTs?
Research Question 2: What are the reasons for limited high capital availability with regards to the funding gap for underexplored energy sources that underdeveloped academic REGT in Sweden aim to harvest?
Research Question 3: How could both academic REGT spin-offs, and capital-rich late-stage investors find common ground to narrow the funding gap and accelerate the movement towards more energy- and cost-efficient energy sources and technologies?
Answering these research questions will complement existing knowledge about drivers and barriers in the Swedish funding ecosystem, and contribute to theory about the funding gap for underdeveloped REGTs harvesting underexplored renewable energy sources. The study will in addition provide practical value for academic commercialization processes and REGT spin- offs, as well as late-stage investors, in order to accelerate the diffusion of underdeveloped energy sources and with this accelerate the movement towards a future of an economic viable system of 100% renewable electricity.
1.4 Delimitations
Even though the investment landscape might look similar in other Nordic or even European countries, this study is delimited to the investment landscape of Swedish university spin-offs of renewable electricity generation technologies. The first step of this study is not to generate a clear and full picture of the investment landscape but rather a foundation to discuss the main issue of high capital being restricted for REGT USOs harvesting underexplored sources. The thesis will therefore only focus on three of the main stakeholders acting in this landscape, namely the REGT university spin-offs of Swedish universities, late-stage investors and governmental institutions. While governmental institutions act through both supply and demand policies (Mazzucato et al., 2015), the focus within this study is on the supply side.
Additionally, the priority will be kept on the supply side of grants and investments and not subsidies.
Furthermore, this thesis is focusing on the generation of electricity and the technologies used in that case and not on other renewable energy technologies (RET) that can be used for more than mere electricity production (e.g. combust biofuel to run aviation engines). Rather than applying the more established but less specific term renewable energy technologies (RET), the term renewable energy generation technologies (REGT) is applied similar to other studies (Herrmann and Savin, 2015; Yu, 2017). Lastly, while one can discuss when an underexplored energy source can be labeled as such, and this leading to a discussion of which renewable energy source is currently underexplored, this thesis will narrow down the scope to only one of them, namely the marine energy.
1.5 Disposition
The study is structured as follows. Chapter 2 introduces the reader to the renewable energy market in Sweden and provides a theoretical background about renewable energy sources and the link between the natural resources and technological and economical aspects. A general overview of the different renewable electricity generation technologies as well as tools to compare renewable energy technologies will be presented. In chapter 3, the theoretical frame of the research questions will be explained. Chapter 4 describes and discusses the data gathering and data analysis process of this thesis. Chapter 5 presents the empirical data and its analysis beginning with the empirical material and analysis pertaining to research question one and two.
This builds up to the empirical data and analysis of research question three. In chapter 6 the data will be discussed from a holistic perspective while also presenting an agenda for potential future research. This will be followed by a conclusion in chapter 7.
2. Renewable Electricity Generation
In order to create an insight into the investment landscape of academic REGTs in Sweden, one does need to understand the empirical context of renewable energy generation technologies as well as the renewable energy market in Sweden. Both will be introduced within this chapter.
2.1 Overview
A general electricity system consists of a power plant generating the electricity, transformers that convert the electricity for efficient transport or distribution and the end user. In-between the power plant, the transmission, distribution and end use there are substations that connect, convert and ultimately provide safety to the power grid (Técnico Lisboa, 2018).
Figure 2: General energy system (Técnico Lisboa, 2018)
If we now focus on the power plant, one can split it up into the energy source and the technology that converts the natural energy into electricity. Whereas a fossil power plant is harnessing a non-replenishing energy source, renewable energy sources are continually replenished by nature either directly from the sun (e.g. thermal energy, photo energy), indirectly from the sun (e.g. wind power, hydro power) or from mechanisms of the environment (e.g. tidal energy, geothermal energy) (Ellabban et al., 2014). To understand the discussion around REGTs, the author created an overview (see Figure 3) by using knowledge attained through personal studies (i.e. bachelor degree) and secondary data of different small-scale, scientific internet sites.
Figure 3 displays the five elemental sources for renewable electricity generation namely solar, water, wind, geothermal, and biomass energy on left side, while the different technologies harnessing these sources are displayed on the right side.
Figure 3 shows that water as well as wind can be further split up. Both have onshore energy sources that are well exploited (onshore wind power and hydropower) whereas the offshore energy source is largely unexploited in the case of marine energy and exploited to some degree for offshore wind power. While hydropower is well commercialized and well developed (Tran and Smith, 2017) in many countries around the globe, marine power remains unexploited on the big scheme meaning that not many technologies have been implemented in large commercial settings yet (Nachtane et al., 2017).
Figure 3 : Renewable electricity generation systems (Source: Author)
There has however been substantial research on marine energy as an energy source and possible technologies linked to it during the last decades. Apart from hydropower, geothermal, solar and wind energy are also well developed and commercialized when compared to other REGTs.
Even though geothermal energy technology is well developed and at a mature stage (Tran and Smith, 2017), some argue that it still remains an untapped renewable energy source on the big scheme (Zheng et al., 2015). Figure 3 is supposed to merely introduce the reader to the different sources and their technologies. There are many different kinds and variants of technologies that are using each of these five renewable energy sources and Figure 3 only intends to provide a rough overview. The marine energy source for instance includes such sub- sources as salinity gradient and temperature gradient, which were not shown in Figure 3 due to the low development stage of related technologies. When discussing the total share of renewable energy technologies within a country, it is important to note that the share of renewable energy generation and consumption varies across regions and countries due to the dependency on the availability of resources, the development of technologies and governmental policies (Tran and Smith, 2017).
2.2 Evaluating REGT
In order to understand the discussion around cost- and energy efficient REGT, the following chapter is going to introduce relevant concepts to evaluate different renewable energy sources and technologies.
Intermittency
The variability of renewable energy sources, the so-called intermittency, poses difficulties when integrating the REGT in the existing power system. The intermittent sources disrupt the conventional methods of planning the daily operations and pose challenges to the management of the electricity grid (Heuberger and Mac Dowell, 2018) which “prioritizes safety, reliability, and affordable pricing of electricity” (Tran and Smith, 2017, p. 1379). According to Tran and Smith (2017), there is no standard way of how research and regulatory communities around the world describe and quantify intermittency of renewable energy sources. As a result, one finds electricity markets operating on different timescales such as day-ahead to minute-to-minute planning. Therefore, the intermittency-information needed will vary between regulators and grid operators resulting in different modeling methods that will determine how grids evolve and system integration is done (Carrara and Marangoni, 2017).
Many renewable sources, with an exception of hydropower, are intermittent by nature such as solar, wind or wave (Leijon et al., 2010). Atmospheric conditions change and impose this variance on the energy sources. Whereas tidal streams, tidal range (height difference between high and low tide) and wave power are intermittent as well, they have a significant advantage over other renewable energy sources: they are very predictable, and the endless flows create reliability for future energy availability. Deep ocean currents on the other hand flow continuously in the same direction with low variability and offer a reliable and non-intermittent energy source (Michaelides, 2018). A recent study (Hu et al., 2020) has even shown that there is an increasing trend in global integrated oceanic kinetic energy since early 1990 which indicates a significant acceleration of the global mean ocean circulation in low as well as deep ocean depths. This trend leads to a higher energy potential of the marine energy source. Apart from marine energy, geothermal energy is also fairly reliable and non-intermittent. The advantage of non-intermittent sources is that they can operate almost continuously at their rated power which is positive since the industry gets paid for the energy produced (kWh) and not for the size of the power plant (rated power).
Dispatchability
A dispatchable electricity generation can be dispatched based on the current electricity demand.
Dispatchable technologies are very flexible when it comes to load and peak matching within short notice (Expert Panel on Energy Use and Climate, 2015). Fast dispatchable processes can happen within seconds (e.g. hydropower). Medium dispatch times can take minutes (e.g.
geothermal power) and slow dispatchable times take hours (biofuel power generation).
Opposite to dispatchable technologies, there are non-dispatchable technologies such as solar, wind, and marine power which cannot be dispatched within the moment of notice (Tran and Smith, 2017). The reason behind this is the high dependency of environmental conditions and linked to this the intermittency of these sources (Losi et al., 2015). Because of this dependency, some renewable energy sources can be important in some regions and not applicable in other regions at all.
Geographic location
The geographical location is key when determining the availability of renewable energy sources. While some areas appear to be abundant others are very limited to certain renewable energy sources (Tran and Smith, 2017). Hydropower technology can only be used in areas with height-difference or onshore currents (e.g. rivers) which Sweden for example is rich of. Solar energy can vary significantly on an international but also on a national level. Similar geographical limitations can be applied to wave, tidal streams and currents as well as other renewable energy sources. Environmental protection of certain areas and energy sources has to be respected when exploiting renewable energy sources.
Scalability
In order to generate large amounts of renewable energy, technology units are set up into power plants. Overall plant efficiencies, capital cost and operating cost, and hence return-on- investment do however differ with the different REGTs. Efficiencies of large-scale setups can differ significantly from small-scale setups. Emerging REGTs are developed at small scale in laboratory or prototype conditions, while the practical efficiencies at larger scales can differ dramatically. Therefore, scalability determines the feasibility of larger, more profitable power stations (Tran and Smith, 2017).
Distributed vs Centralized generation
In a centralized electricity generation, the end-user is usually far away from the producer.
Therefore, high-voltage transmission lines are constructed to provide electricity to the customers. Hydroelectric dams, geothermal plants, wind and solar farms are recognized as centralized REGTs (Tran and Smith, 2017). Generating electricity for larger regions is easier with large-scale centralized REGTs. There are however losses in the transmission lines, significant usage of land, high capital cost, local environmental impact and technical complexity (EPA, 2018). Due to geographical availability or limitations of REGT centralized energy generation is not feasible everywhere. The alternative option is the distributed generation of energy where on-site electricity meets the energy demand close to the end-user (Massey, 2010). Popular forms of distributed REGTs for residential use are currently solar panels and small wind turbines. In the commercial and industrial sector distributed REGTs range from solar, wind, and hydropower to biomass. Due to the effect of scaling, distributed REGT is however often less efficient (EPA, 2018). Furthermore, an ongoing issue of the deployment of distributed generation of energy is that the implementation is largely determined by the broader social acceptance (Wolsink, 2012). The deployment of distributed generation will not advance if there are no only few actors willing to be part of it.
Energy storage
The intermittent nature of some renewable energy sources can be overcome by the implementation of energy storage. The question of electricity over or under production of REGTs remains a primary issue in the diffusion of REGTs. Energy storage can aide the integration of REGTs into the electrical grid system. There are three different types of energy storage systems (Denholm et al., 2011): 1) Power quality storage that can be used to stabilize transients and regulate frequency. Therefore, discharge time must be short, ranging between seconds and minutes. 2) Bridging power storage is used for bridging gaps in supply and has a discharge time ranging from minutes to hours. 3) Energy management storage is used for load leveling and firm capacity and has discharge time of several hours. Depending on the storage type there are different technologies. Today, the only renewable energy source with significant storing capacity is hydropower (Leijon et al., 2010). Even though energy storage systems can help to overcome intermittent aspects of renewable energy sources, is does not address the problem at hand which are economically attractive REGTs (Skoglund et al., 2010) that can compete with fossil energy technologies.
Degree of Utilization
In order to label and design an energy generating technology that is more cost and energy efficient than others, one can use the concept of the Degree of Utilization (U) as a first indication (Skoglund et al., 2010):
𝑈𝑈 = 𝑊𝑊
𝑃𝑃 ∗ (365 ∗ 24ℎ) ∗ 100
𝑤𝑤ℎ𝑒𝑒𝑒𝑒𝑒𝑒 𝑾𝑾 = 𝑎𝑎𝑎𝑎𝑒𝑒𝑒𝑒𝑎𝑎𝑎𝑎𝑒𝑒 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑒𝑒𝑎𝑎𝑒𝑒𝑒𝑒𝑎𝑎𝑒𝑒 𝑑𝑑𝑒𝑒𝑎𝑎𝑑𝑑𝑎𝑎𝑒𝑒𝑒𝑒𝑒𝑒𝑑𝑑 𝑡𝑡𝑡𝑡 𝑎𝑎𝑒𝑒𝑑𝑑𝑑𝑑 [𝑊𝑊ℎ] 𝑎𝑎𝑎𝑎𝑑𝑑 𝑷𝑷 = 𝑒𝑒𝑎𝑎𝑡𝑡𝑒𝑒𝑑𝑑 𝑝𝑝𝑡𝑡𝑤𝑤𝑒𝑒𝑒𝑒 𝑡𝑡𝑜𝑜 𝑝𝑝𝑎𝑎𝑎𝑎𝑎𝑎𝑡𝑡 [𝑊𝑊]
The degree of utilization connects the physical (renewable) source, electricity output and economic gain (Skoglund et al., 2010). It compares the electric energy delivered to the grid compared to the installed and rated power (maximum electrical power that the unit/plant can generate) on a yearly basis (Leijon et al., 2010). While a high degree of utilization is economically more attractive it also stabilizes the electric grid due to its low intermittency.
Leijon et al. (2010) compared the degree of utilization of different renewable energy sources and concluded that solar and wind energy account for low degrees of utilization (12-32%).
When applied efficiently, wave, marine currents and geothermal energy sources can account for a high degree of utilization (69-86%). Research does however show that the potential of high degrees of utilization is not yet applied within the industry (Skoglund et al., 2010).
Moreover, REGT is often over dimensioned when compared to the energy source it is using meaning that the rated power is too high for the energy source output. This generates more short-term revenue for the organization developing/manufacturing the REGTs but more short and long-term cost for the customer. This business model will hinder the development of REGTs and ultimately pose a barrier to global carbon emission reduction.
Economic Tools
While the degree of utilization offers a first indication of the economic competitiveness, there are other more accurate economic tools such as the system cost and the levelized cost of electricity.
The system cost consists of the capital cost and the operating cost. The capital cost of REGT is usually measured in USD/kW. It is heavily dependent on the project size, type of technology and geographic location. Established REGT such as wind, solar, hydropower or geothermal power have lower installed cost and uncertainty compared to underexplored sources such as
Furthermore, the project size and geographic location play an important role in the capital cost.
Installing larger and more numerous units often reduces initial capital cost in terms of $/kW.
Local policies, price of electricity, resource limitation and government incentives further influence the capital cost (eia, 2013). The operating cost or operating and maintenance (O&M) cost can be broken down into fixed O&M cost, which are expenses that do not change significantly during the generation of energy (staffing, administration, routine equipment maintenance), and variable O&M cost which fluctuate during the generation of energy (Tran and Smith, 2017). The variable O&M cost predominantly depend on the raw material supply cost. Since REGT are using renewable energy sources, the cost for raw material (with the exception of biomass power generation) is essentially “free” (Tran and Smith, 2017).
The levelized cost of electricity (LCOE) indicates the cost of each energy unit produced (kWh or MWh) by considering all cost and incentives (Tran and Smith, 2017). This is different to the system cost where the cost of each power unit is measured. This tool allows comparison across different REGTs in order to evaluate the competitiveness on an economical level. The information about the LCOE of underexplored sources and underdeveloped REGTs is limited due to their lacking market implementation. Therefore, case studies aim to estimate their LCOE (Tran and Smith, 2017). The LCOE is highly dependent on the technological development level, the different modes of power generation for a REGT, and geographical locations (social and energy wise). In a study of the U.S energy information administration (EIA) Tran and Smith (2017) found that geothermal, on-shore wind, and hydropower have the lowest cost while also having low variance (i.e. small range) in LCOE . Solar photovoltaics, biomass and offshore wind show higher variance and higher cost. Studies on the LCOE of untapped sources are not as numerous due to the fact that technologies have not been established on a wider scheme yet.
LCOE of these sources can only be estimated with the help of assumptions and models. Astariz, Vazquez and Iglesias (2015) for instance compared offshore-wind energy generation to tidal and wave energy generation. Wave energy (325 €/MWh) generation had a significant higher LCOE compared to tidal (190 €/MWh) and offshore wind (165 €/MWh) energy generation.
One should however take these numbers with caution since LCOE is highly depending on many factors (e.g. the model of the researcher, the size of the power plant etc.).
2.3 REGT in Sweden
In Sweden, the electricity production in 2017 consisted primarily of hydropower (40%), nuclear power (39%) and wind power (11%) (Swedish Energy Agency, 2019). This makes hydropower and wind power the biggest renewable energy technologies in Sweden’s generation of electricity. Solar power accounted for only 0.12% in the year 2017 but is seeing significant increase throughout the last few years (67% rise from 2017 to 2018) (Swedish Energy Agency, 2019). Together with the use of biofuel, renewable energy sources accounted for 58% of Sweden’s electricity generated. With Sweden decommissioning their nuclear power plants over the next years, renewable electricity generation technologies will have the opportunity to fill the electricity generation gap (Hong et al., 2018). Even though the sources of sun, hydropower and wind are well-developed, they could still be used more cost- and energy efficiently through other, non-dominant technologies that are emerging from research projects and university spin- offs (e.g. develop modular and light weight wind blades). The nuclear decommission furthermore creates an opportunity for the underexplored marine sources since they offer a lot of energetical potential. This potential is however depending on the availability of tidal streams, currents and waves. When comparing Sweden to other European countries, the resource potential is fairly limited (Andersson et al., 2017). Coastal wave power potential is estimated to be at 30 TWh per year (8% of Sweden’s total energy consumption in 2017) and Baltic sea wave power potential at 8 TWh (2%) (Bernhoff et al., 2006). These estimates do however not account for the prevalence of low energy waves which is considered to reduce cost-efficiency (Andersson et al., 2017). Moreover, tidal power is considered to be negligible in Sweden while current power might indicate some potential (Andersson et al., 2017). When comparing these figures to the wave energy potential of the US west coast with 1570 TWh (Jacobson, 2011) (more than 4 times of Sweden’s energy consumption in 2017) one can see Sweden’s limited marine power potential. The domestic waters are nevertheless regarded as well-suited for test activities (Claesson et al., 1987). This led to multiple academic research projects in Sweden using marine power as renewable energy source. The uncertain market potential of marine technologies places these projects in an unclear position in the future national energy system.
The rational for policy initiatives has therefore been unclear: Either deploy the technologies in Sweden or create an industry in order to supply the global market (Andersson et al., 2015). The unclear rational creates market uncertainty and poses a hurdle to the commercialization of university spin-offs. Therefore, Swedish university spin-offs in the marine energy sector have extended their market field and either moved their headquarter to energy-potent locations (Seabased to Norway) or built new offices in energy-potent areas (Minesto in the UK).
3. Literature Review
After the introduction of the theoretical context of renewable electricity generation and the empirical context of the particular case of Sweden with regards to REGTs, this chapter will introduce the reader to academic entrepreneurship. More specifically, the context of university spin-offs will be presented since these entities play a major role in the research of underexplored energy sources and the development of new REGTs. This together with the theoretical and empirical context of REGT presented above will allow to understand the nature of the academic REGT spin-offs in Sweden that seek to commercialize underexplored sources and underdeveloped technologies.
3.1 Defining Academic Spin-Off
Creating a knowledge-based economy has emphasized the role of universities commercializing their research (O’Shea et al., 2005). The necessity to build a closer relationship between research and its application has driven the development of various entrepreneurial initiatives in academia (Allen, 1984). In general, academic entrepreneurship can take different shapes of activities such as large scale research projects, consulting and contracted research to name a few (Klofsten and Jones-Evans, 2000). Moreover, these types can be further distinguished by the degree of external contact with the industry. One of the most central academic entrepreneurial activities is however the creation of spin-off firms (Walter and Auer, 2009).
The definition of a spin-off is important since the measurement of the university spin-off incidences in any geographical area can vary significantly depending on the adopted definition (Radinger-Peer and Sedlacek, 2017). Shane (2004) defines an academic spin-off as a new company that was founded to exploit intellectual property (IP) developed within an academic institution. In practice this means that the newly created entity becomes officially and legally registered. One should however note that there are no conditions on the duration the entity exists, the growth trajectory and the capitalization degree. Organizations commercializing IP outside of academic institutions through current or former university members are therefore excluded from this definition (Radinger-Peer and Sedlacek, 2017). In order to protect the academic IP, spin-offs can use patents, copyrights or other legal mechanisms. In other cases, the IP leading to academic spin-offs is merely taking the form of knowhow or trade secrets.
Academic spin-offs can also be created by licensing the inventions of the university (Shane, 2004).
Academic spin-offs are according to Shane (2004) valuable not only to universities but also to society in at least five ways: (1) enhancing local economic development, (2) useful for the commercialization of academic technologies, (3) improving the research mission of universities, (4) ventures of disproportionally high performance, (5) generating more income to universities than licensing to established organizations. Research at universities is therefore among other points supposed to enhance social and economic development. National policies do however take varied approaches to encourage university-based entrepreneurship (Hvide and Jones, 2016) and therefore also the creation of spin-offs. The so-called “professor’s privilege”
is a concept used to describe the ownership of intellectual property at universities (Pettersson, 2018).
Concerning the professor’s privilege in Sweden, the patent act introduced in 1949 states that
‘‘Teachers at universities, colleges or other establishments that belong to the system of education should not be treated as employees in the scope of this law’’ (SFS 1949:345: §1).
This means that academic employees were not subjected to a new law that gave employers the IP rights developed by their employees. In practice, the IP developed by an academic researcher belongs to the scientist and not to the university (Pettersson, 2018). Similar legislation was introduced in other European countries in Western Germany (1957), Denmark (1955), Finland (1967) and Norway (1970) since they had specific legislation for the intellectual property of employees; which the U.S. or the United Kingdom never had (Pettersson, 2018). In the last 20 years however, many European countries have introduced laws that significantly altered the rights to university-based research (Hvide and Jones, 2016). One of the reasons behind this is the belief that U.S. universities are more successful in the commercialization of their research than those in countries with professor’s privilege (Mowery and Sampat, 2009). Germany, Austria, Denmark, Finland and Norway introduced new laws that ended the professor’s privilege. The national research systems moved away from a system where the research had the full intellectual property right to a system more similar to the U.S., where the researchers usually hold only a minority of the rights (one-third) and the university the majority (two-third) (Hvide and Jones, 2016). Taking the example of Norway and using data from Norwegian workers, firms and patents, Hvide and Jones (2016) find that there has been a decline of about 50% in both patenting and entrepreneurship of university research after the reform. In Sweden, the law introduced in1949 is still in place but has led to controversial debates in the country (Pettersson, 2018).
3.2 The Process of Academic Spin-Off Creation
Creating an academic spin-off encompasses multiple stages. Literature has addressed the process by creating models describing the process of the spin-off creation. The stage gate model by Ndonzuau, Pirnay and Surlemont (2002), a model moving linearly from one stage to another, used the in-depth data of 15 universities around the globe and developed a general four stage model: (1) generate business idea from research, (2) finalize new venture projects using ideas (3) launch spin-off from the projects (4) strengthen the spin-off’s economic value. Wright, Vohora and Lockett (2004) further built on this model, while Shane (2004) provided a more elaborate model consisting on five stages: (1) research - opportunity recognition, (2) Opportunity framing – Entrepreneurial Commitment, (3) Pre-organization – Threshold of credibility, (4) Re-orientation - Threshold of sustainability and (5) Sustainable returns. In order to reach the next stage, critical junctures must be passed. The first phase consists of gathering academic knowledge where new technology is researched and IP created. After recognizing an opportunity of commercialization, it needs to be framed and tested. The hurdle in this phase is to reach the necessary entrepreneurial commitment. After reaching the entrepreneurial intention (state of mind), entrepreneurial commitment (acting) occurs through a re-organization of the available resources. Reaching credibility of a concept is the hurdle in this phase. Finally, in order to be viable on the market, economic, social and environmental sustainability must be demonstrated.
While these models are rather general and lacking detail on the idea creation process, opportunity picking process and funding process N. Pattnaik and C. Pandey (2014) aim to address these gaps by providing a multistage holistic model for creating university spin-offs.
This model deconstructs the general stages into more specific ones (see Figure 4). The model was slightly adjusted to keep the focus on the creation of spin-offs and no other entrepreneurial academic activities
Figure 4 : Multistage holistic model for creating university spin-offs based on Pattnaik and Pandey (2014)
The research stage in the multistage holistic model is described by taking capabilities as a precondition to research. The capabilities are then the foundation for the identification of competencies. Both terms are inherently closely related to each other but there are subtle differences. While capabilities are used to describe the ability of an organization or unit, competencies relates to the ability of an individual (Nagaraja and Prabhu, 2015). Applying these terms to the model indicates that the university spin-offs have their origin in the ability of the university, its resources and knowledge. Identifying and using the competences, the abilities of the individual researchers are key on the path to an academic spin-off.
The model furthermore distinguishes different sources of funding that are at the very origin of the idea generation. This idea generation either consists of pure research, the research intended to advance knowledge in the respective field (that can then be used for the applied research) or the applied research, the more empirical research. The research is then tested on validity, reliability and viability (Pattnaik and Pandey, 2014). The third stage consists of the disclosure of research, the decision of filing a patent and the exchange with the technology transfer office of the university which is responsible for the commercialization of research that takes place at the university. The model concludes with stage four, the generation of economic or social value through an academic spin-off.
The Multistage Holistic Model describes the process of competence identification, the research for radical or incremental innovations, the patenting decision process and ultimately the spin- off creation. The whole process appears to be linear and non-iterative but Vohora, Wright and Lockett (2004) argue that spin-off creation phases are iterative and non-linear where earlier decisions and activities need to be re-evaluated. Even though the main intent of N. Pattnaik and C. Pandey (2014) is to introduce a simple model of the spin-off creation process, they do not discuss the difficulty of reaching the spin-off creation phase and maintaining a sustainable economic value generation. One can distinguish between institutional barriers and regional barriers (Shane, 2004): The institutional barriers entail the tension between academic and commercial output, the lack of business and commercialization skill and inefficient technology transfer offices. Since academic spin-offs are often lacking market insight their IP often represents a technology push, meaning that it is the research and development driving the technology and not the market. In order to be economically successful, the founders need to align the IP to the market. This is different from spin-offs originating from private organizations where the market knowledge is in general profound, resulting in the development of a market pull-technology (Walter and Auer, 2009). Regional barriers include regulatory, administrative, partnership and financial hurdles. According to a study on the barriers for USOs in Vienna by Radinger-Peer and Sedlacek (2017), the difficulty of securing funding and attracting investors is one of the two biggest hurdles in the creation and maintenance of academic spin-offs. Since both Sweden and Austria tend to have similar university innovation processes (Trippl et al., 2014), one can assume that Swedish University spin-offs face similar difficulties in finding necessary funds. There is therefore a significant knowledge gap in the Multistage Holistic Model by N. Pattnaik and C. Pandey (2014) regarding the stage between the creation of a spin- off and the generation of economic and social value. The following chapter aims to fill this gap
3.3 Start-up Investment Theory
The process of building a new venture is to some extent similar for spin-offs and start-ups.
While there are some differences within the respective funding ecosystem (e.g. university funding the research, which is not the case for start-ups) they are comparable. Since there is more research on the funding-process of start-ups, it is the theory of the latter that will be presented here. After describing the fundament of the funding ecosystem of academic REGT spinoffs, the discussion will be brought back to the research questions at hand, which revolves around the Funding Gap of REGT USOs developing technologies for underexplored energy sources.
University spin-offs usually develop radical, tacit and early stage technologies (Shane, 2004).
This results in a need for large investments into further technical development before the products can reach the market (Jensen and Thursby, 2001). Another difficulty in obtaining funds is related to investor uncertainty. High uncertainty and long payback time are factors resulting in few economic incentives for investors to invest (Rasmussen and Sørheim, 2012).
According to entrepreneurs interviewed by Ernst & Young (2013), a global assurance, tax and consulting firm, access to funding is the most important area where improvements would help entrepreneurs to succeed. Since the risk of failure changes along the entrepreneurial growth of a business, the source of funding changes accordingly.
The model of The Funding Ecosystem for Entrepreneurs proposed by Ernst & Young (2013) gives an adequate first insight of the funding path and stakeholders that entrepreneurs face during the different development stages (see Figure 5). The author added specific investment periods (POC, series A,B,C, and mezzanine) and the Valley of Death period to the funding ecosystem to introduce further information.
Figure 5: The funding ecosystem for entrepreneurs based on Ernst & Young (2013)
In general, one can distinguish different revenue levels between three development phases:
1) Emerging phase, 2) rapid-growth phase and 3) the expansion phase. The graph in Figure 5 indicates that there are many different stakeholders that enter the funding of start-ups in different phases of their development. It also shows at which revenue levels the stakeholders are willing to invest their capital. Whereas entrepreneurs (self-funding), family and friends invest small amounts at the very early stage of a start-up, formal venture capital funds or the public (IPO) invest at a much later stage when substantial revenues are generated by the start- up. The following paragraphs are going to introduce the different stakeholders from Figure 5 starting with the investors in the emerging phase, going over to the investors from the rapid growth phase and concluding with the investors from the expansion phase. The reader should be aware of the fact, that some investors might chose to invest earlier or later than depicted in Figure 5 since the development boundaries are diffuse and differing from industry to industry.
Therefore, one should utilize Figure 5 merely as an introduction of the funding ecosystem rather than taking it as a rigid overview.
3.3.1 Emerging Phase
The emerging phase consists of the proof of concept (POC), pre-seed and seed stage where no revenue is created yet, as well as the Series A period where the first revenue is being generated.
The phase where no revenue is generated yet and only expenses occur is also referred to as Valley of Death and is, as the name might suggest, specifically critical in the process of building up a successful start-up. The Valley of Death often proves to be a difficult time for fund-raising since the business model has not been proven yet (Fernando, 2019). To kick off a start-up and to validate the business idea, the entrepreneur needs to develop a POC or in case of the Lean Start-Up method (method to shorten product cycles and to prove success or failure quickly), a minimum viable product (MVP). It is called MVP since it is the very first iteration of the business idea that should allow to engage customers and other stakeholders with a minimum amount of effort (Eisenmann et al., 2012). After the POC/MVP follows the pre-seed stage that could also be referred to as the research phase where the viability of the idea gets assessed by the entrepreneurs. The entrepreneur determines what costs might occur, formulates a business model and generally starts growing a seed of an idea into a business.
It is here that potential investors will want to understand the company’s initial business model.
One way of providing this is through the Business Model Canvas (or Lean Model Canvas) which helps start-ups and spin-offs map out their business plan in a visual and structured manner for potential investors. After figuring out the basic direction of the business the entrepreneur moves to the seed stage where the company gets oriented towards a broader market place and deeper customer understanding takes place (Zenn, 2016). The capital provided in the seed round often moves beyond the founding team and funds product development or facilitates early revenue generation where the emerging phase moves to the start-up stage next.
Here, the first revenue is being generated. After the start-up period, follows the first round of
“Series-funding”. The Series A period, that according to Zenn (2016) many people in the funding ecosystem visualize when thinking about start-up funding, is where the entrepreneur works closer with investors to refine and improve original concepts, partnerships and to grow the start-up team. The last period of the emerging phase is where the start-up is set up for future growth and success. The emerging phase has different capital providers such as entrepreneurs
& family & friends as well as early stage business angels, crowdfunding, the government, incubators & accelerators, and early stage venture capital (VC) firms. Since there are different types and sizes of VCs investing at different periods, VC firms is not going to be explained within the early stage phase but in the rapid growth phase (see chapter 3.3.2 Rapid Growth Phase).
Entrepreneurs (self-funding), Family & Friends
Among the entrepreneurs investing in a start-up, it is often the creator of the business/business- idea him/herself investing in the venture. This process, often referred to as bootstrapping, is defined as investing one’s personal capital to directly fund the new venture (Wright, 2017).
Entrepreneurs choose this model since it comes at a lower repay-risk. Money lost is theirs alone and they do not need to repay anybody. Moreover, funding oneself means keeping more of the ownership stakes or future equity of the business. In the US for example, 93% of entrepreneurs have invested some of their capital in the new venture (Daniels et al., 2017). However, this self- funding process is often born out of necessity due to lacking interest in the business or lacking networks that could enable access to capital (Wright, 2017). When self-funding is only possible to some extent, entrepreneurs reach out to family and friends who often want to enable and support the launch process of the new venture with more favorable interest rates on the loans they provide. Friends and family can also enable future investments through their own networks and thus become advocates for the company (Wright, 2017).
Angel Investors
Business Angel investors are, non-institutional, high-net worth, private equity investors. Often referred to as Angels, they are aiming at high-risk, high-return ventures in return for shares, income and ultimately capital gain (McKaskill, 2009). Angels are often investing in industries and businesses they are knowledgeable about and where they can offer mentorship. This raises the image of an investor who funds new ventures due to personal interest or sense of social responsibility (Wright, 2017). One might however argue that social responsibility and high- risk, high return are contradicting each other. Even though the Funding Ecosystem for Entrepreneurs model shows otherwise Deffains-Crapsky and Klein (2016) argue that some angels do fund an entrepreneurial project through the entire growth stage while others merely invest in early stages as a bridge for later stages. The researchers furthermore stress the fact that the role of angel investors remains understudied which makes it hard to discern the percentage of entrepreneurs searching for funding and entrepreneurs being funded through angels.
Crowdfunding
Crowdfunding allows entrepreneurs to advertise their business ideas to a global network of potential investors. Potential investors typically receive nonmonetary compensation in the form of early access or exclusive prototypes in exchange for their investments. There are however also equity-based crowdfunding systems such as fundedbyme.com where a company seeks for funding by offering its shares to crowd investors in exchange for partial ownership. In general, entrepreneurs appreciate the flexibility of investor-paybacks as well as the free advertising that comes with these crowdfunding campaigns (Wright, 2017). Wash and Solomon (2014) state that there are several crowdfunding sub-models where either an “all-or-nothing” or an “keep- what-you-get” strategy is pursued. Whereas entrepreneurs in the “all-or-nothing” strategy only pursue the project if a certain investment goal is achieved, the “keep-what-you-get” strategy enables entrepreneurs to keep every investment, regardless of whether they meet their goal.
Crowdfunding facilitates a direct interaction with customers which in turn can improve iterations of the project (Mollick and Kuppuswamy, 2014). Furthermore, high-performing crowdfunding projects result in higher publicity which results in entrepreneurs being able to raise funds outside of the crowdfunding platform (Wright, 2017).
Incubator & Accelerator
Broadly speaking, accelerators and incubators help to build initial business ideas, identify customer segments and secure resources (Cohen, 2013). Moreover, they often provide workspace, networks and mentorship to entrepreneurs they have accepted (Wright, 2017).
While accelerators are aiming for “accelerating” the growth of a new venture, incubators aim at “incubating” disruptive ideas in order to improve business models. According to Cohen (2013) accelerators and incubators differ in four key ways. 1) Duration: Accelerators graduate firms in a short, pre-set time period (usually three months) while firms at incubators graduate from anywhere between one and five years. 2) Cohort: Ventures usually enter and exit the time- limited accelerator programs in groups known as cohorts. In incubators there is stronger communal identity between different founders. 3) Business Model: Most accelerators are privately owned and take equity in the participating ventures. Some of the accelerator managers are also active as angel investors, providing additional funds. Incubators are mostly publicly owned and generally do not have their own investment funds. 4) Selection: Accelerators usually accept ventures in batches (once or twice a year) due to their time-limited programs. Incubators accept and graduate ventures on a continuous base. Therefore, it is more often accelerators providing funds to entrepreneurs, rather than incubators.
Government
In order to bridge the funding gap of start-ups and spin-offs, nations have introduced several initiatives that vary from country to country. While some are explicitly aimed at academic spin- offs, some are supporting the initiation of technology-based ventures in general (Rasmussen and Sørheim, 2012). According to Rasmussen and Sørheim (2012), public institutions are usually focusing on three different stages in the emerging phase of new ventures. The three funding phases are called proof-of-concept (POC) funding (alternatively proof-of-principle or verification funding) , pre-seed funding and seed funding. POC funding is aimed at lowering technological uncertainty at an early stage by supporting technological verification. Pre-seed funding aims at supporting business plans, networking and strengthening the entrepreneurial team in order to increase the attractiveness for external investors. The seed funding is targeting the lack of interest from private investors and aiming to replace them by providing direct funds to the new venture. Examples in Sweden are programs such as Vinnova or the Swedish Agency for Economic and Regional Growth (Tillväxtverket) aiming primarily at the pre-seed stage.
Other entities such as Almi Invest provide funding at the later occurring seed stage or even later stages.
Apart from national funding programs there are also international funding programs such as the EIC Accelerator program for SMEs (small and medium-sized enterprises) by the European Innovation Council which supports “top class innovators, entrepreneurs and small companies with funding opportunities and acceleration services.” (European Comission, 2020b)
