There is a business tool that colour codes personality types to ensure dynamic team working. Applying this to the clean energy investment space, are fiery-red ‘my way or the highway’ entrepreneurs natural bedfellows with the detail-focused ‘blue’ investors in fledgling clean tech enterprises?
Does the ‘sunshine yellow’ optimism of technology inventors overcome the sceptical ‘grey’ fund managers?
Investment in European cleantech has been scarce over the past couple of years. Investors blame the financial crisis, poor historic returns and regulatory uncertainty. There is a common perception that many cleantech companies have solutions to problems that either don’t exist or which no-one will pay to solve. So what can businesses needing capital do to improve their chances of securing investment ?
There is no one-size-fits-all approach. Cleantech is not a uniform sector, just a series of overlapping industry segments of which only some are of interest to any individual investor. It is prudent therefore to allow 6 months to get to a commitment (not the actual cash) which is why maintaining up to 12 months of operating runway is critical because of the time consuming fundraising process.
Being realistic on valuation and allowing scope for new investors to achieve their (reasonable) return requirements is a price worth paying to avoid the risk of running out of funds.
Company owners should be mindful of the level of reward they are looking for and the risk they are prepared to assume in return, will have a significant impact on strategy, fundraising and exit timing.
At any point in time, shareholders should be able to answer the question: how much would I sell this company for right now or what will the position be in one or two years’ time? This is an issue often ignored.
Many companies don’t have the luxury of choosing investors, but experience suggests small syndicates with diversity of approach, experience and connections work better than sole investors or large groups. Each will have an industry view and early understanding of their agenda will predict their behaviour once they are a part of the business.
Investment structure (voting rights, liquidation preferences, etc.) should be appropriate to the particular circumstances of each investment but erring on the side of simplicity is often advisable. Agreements that constrain a business from taking normal commercial decisions without requiring board or shareholder input, or which allow individual shareholders disproportionate influence can lead to stalemate, often with disastrous consequences.
Always engage an experienced adviser with a relevant track record who will add value across the board, including conducting due diligence, highlighting strengths and weaknesses and positing the questions investors will ask around projections and valuations. They can also improve business plan and investor presentation materials, reduce the burden on management and bring structure to the fundraising process as well as play a significant role in reaching an acceptable deal.
Size matters - undersized businesses are often regarded as having unproven management teams, overreliance on fewer customers and insufficient market presence to withstand competition. In such circumstances, a company should consider opportunities to acquire or merge with other relevant businesses to rapidly scale up.
In the right circumstances, ‘playing hard to get’ can create competitive tension, a powerful means of achieving best value. This does not necessarily require the company to be put up for a public auction but do not to jump into exclusivity with any investor until they have provided a detailed set of terms. Equally, don’t overplay your hand as that can result in a failed deal.
Finally, put yourself in the investor’s shoes; don’t assume that they have prior knowledge of your business and answer the questions they are asking, not those you think they should ask. Remember, they see lots of deals and you need to stand out from the crowd.
Turquoise International is a merchant bank specialising in Energy and the Environment. Established in 2002, Turquoise offers in-depth industry knowledge and extensive capital raising, transaction advisory, and investment management expertise and track record.