Lack of Funding Slows Down Chemical Start-Ups – and Climate Protection
ResearchChemical start-ups can make substantial contributions to the ecological transition of the economy. They develop processes to make industrial production more sustainable and find climate-friendly methods for generating energy. Still, chemical start-ups cannot grow to reach their full potential as they lack sufficient funding. A recent study by ZEW Mannheim on behalf of the German Chemical Industry Association (VCI) shows that fresh impetus is needed to finance growth, especially through venture capital.
The ZEW study indicates that about two-thirds of chemical start-ups lack funding. Venture capitalists are particularly reluctant to invest in this sector. Merely 0.2 per cent of all VC investments in start-ups in Germany go to chemical start-ups. Dr. Christian Rammer, researcher at the ZEW Research Unit “Economics of Innovation and Industrial Dynamics” and author of the study, says that this phenomenon is due to certain industry-specific characteristics. “Long investment phases of five to ten years are quite common for start-ups in the chemical industry, and investments are usually higher than in other industries, often exceeding one million euros per start-up. In addition, exit options are limited and the target markets, where other companies are often already active, usually offer only limited prospects for short-term growth.
The majority of VC investments flow into the IT and biotechnology sectors, where investment costs for start-ups are comparatively lower than in the chemical industry. In the chemical industry, start-ups often require highly qualified staff and expensive equipment to be able to produce prototypes or laboratory applications on a large scale. Another problem are the strict regulatory requirements that have to be met in order to obtain the necessary permits for production and the construction of plants.
Gerd Romanowski, director of “Science, Technology and Environment” at VCI, says: “Planning and approval procedures can also slow down young high-tech companies. Approval processes are an obstacle for one in three chemical start-ups, mainly because of their long duration and the considerable administrative and documentation effort involved.”
Chemical start-ups often drive sustainability
However, chemical start-ups in particular are devoted to key issues, such as sustainability, climate protection and the energy transition. For more than a third of the sector’s start-ups, ecological issues are central to their business model. In addition, nearly half of them offer sustainable products and services or are currently working on implementing them. Yet start-ups cannot realise their full potential because they lack funding. As a result, the high demand for climate-friendly solutions cannot be met.
According to the study, several approaches could help to improve the growth financing of chemical start-ups: “In its start-up strategy, the Federal Ministry for Economic Affairs and Climate Action must take into account that chemical start-ups face greater challenges than young companies in other sectors when implementing state VC funding instruments. These challenges include high financing needs, stricter regulations and often long investment phases. In consequence, chemical start-ups are often less appealing for start-up financing,” says Christian Rammer. “However, long-term investments into markets with growth prospects are key to successful climate protection.” Romanowski adds: “Barriers to innovation due to complex regulations and lengthy approval and authorisation procedures must be removed wherever possible, especially when it comes to innovative products and applications that are urgently needed for climate and resource protection.”
In Germany, there are currently around 350 start-ups offering innovative products and services based on technologies and knowledge of the chemical industry. Every year, 25 to 30 new chemical start-ups are founded in Germany.
