'Cleantech' may be a new term for some but already there's talk of a bubble in the sector, following on the heels of the 'dot-com' and housing bubbles. Considering that much of the sector, which of course includes renewable energy technology, is capital-intensive with long development cycles compared to IT, the numbers are certainly impressive – investment in new energy totalled US$148.4 billion last year, up 60% from the previous year, according to New Energy Finance. And as of May 2008, the European Venture Capital Journal estimated that 1600 venture capital funds and private equity houses are actively looking at the renewables sector internationally.
So does this mean we are on the verge of a bubble? A bubble can be defined as an imbalance between fundamentals and valuations. This in turn creates “unrealistic expectations and assumptions,” as Anton Shihoff, CEO of Viridor Capital in London, UK, puts it. As the oil price surges ever upwards and renewable energy is taken more seriously, it is highly likely that valuations will be driven even higher, as investors rush to get in on the latest trend.
What does bubble talk mean for early stage renewable energy companies seeking funds?
On the one hand, it's good news that there's a lot of interest out there in cleantech – and a lot of money. Even better, most of the venture capitalists are not sitting back and waiting for entrepreneurs to walk in the door – or to email their business plans to 'bizplans@'.
They are pro-active, actively seeking out promising companies in their favoured cleantech sectors, be it wind, solar, or tidal for example. Some talk of being entrepreneurial investors. However, no matter how devoted to cleantech they are, risk is never far from their thoughts. Thus any talk of bubbles will impel investors to be more wary before committing funds, scrutinising all plans more thoroughly and, quite often, following a company's progress for some time before investing.
More research, better presentations, a little humility
This does not mean, of course, that you can sit back and wait for an investor to come visit. You need to get on their radar. At a recent NESTA conference on innovation, a panel of investors agreed that entrepreneurs need to be more ambitious, seeking out the right investors – and looking across borders. The panel's moderator, Ernie Richardson, Managing Partner, MTI Funds, said, “I am surprised by how little research entrepreneurs do on investors,” while Sherry Coutu, a NESTA trustee, urges entrepreneurs to be “networked” across borders, not just focusing on the UK.
Most definitely, too many cleantech entrepreneurs, in their enthusiasm for their own technology, lower their chances by failing not only to research potential investors but to devote enough time and clear focus to their own business plans. Jon Moulton, CEO of Alchemy Partners, also on the NESTA panel, said: “We see a lot of presentations and a lot of bad managers. They show you a spreadsheet but they don’t know what's on them. They are often arrogant, brushing aside questions.”
Rob Day, principal of Massachusetts-based @Ventures, also warns against what he calls over-optimism. “If entrepreneurs are too optimistic about the pace of adoption of their technology, their plans for capital needs and cash burn will be mismatched with reality. We tend to favour management teams that hope for the best but plan for the worst”.
Clearly, these comments reflect a less than ideal state of communications between investor and entrepreneur – on occasion.
Beyond “disruptive technology”
What else are venture capitalists looking for? Discussions with a number of high-profile investors in the cleantech sector confirm that good – or even revolutionary or “disruptive” technology – is not enough. They also want to see good market knowledge and convincing sales strategies. They want to see strong management teams and some evidence that the entrepreneur has given time and thought about the route to market. Some want to see a potential for very large returns. This applies even to very early stage companies.
One thing is certain. Belief in a cleantech product or technology is not enough. Market analysis is key.
Gina Domanig, managing partner, Emerald Technology Ventures, Zurich (formerly SAM – Sustainable Asset Management), a veteran of many business plans, reports a “grave” lack of market analysis. “Every technology has its application, and we need to know the real potential market,” she says. “If someone can’t see that some vague projection like capturing 1% of the total market is not good enough, this [in] itself indicates a lack of business acumen.”
Even very early stage cleantech companies need a strong management team to attract the attention of investors. Here Domanig notes a significant difference between European entrepreneurs and their US counterparts, saying that the Europeans often fail to “shoot high enough” when assembling their team. “American companies are better at this. Even very early stage ventures try to find people with proven management success, while too many European first-timers do not get these people in early enough.”
Dr Steve Mahon, CIO of Low Carbon Accelerator, agrees. “Direct experience of the marketplace is invaluable,” he says. “Try to get hold of those who have it. Hold out for the right person.”
But why worry about heavy hitters when you’re devoting so much energy to your technology? In Domanig's view, the two are two sides of the same coin.” It's not just a matter of you having a great patent. Who's going to translate the patent into a commercial success?”
As Rob Day of @Ventures adds, “the economic value proposition to customers and the path to market must both be clear – and the economic proposition should be validated.”
The investors all agreed that early marketing should accompany your drive towards a prototype, not follow it. That means that even very early stage seed money seekers should think about the route to market and any problems they may encounter. If a company has a cleantech innovation that saves incrementally on energy, in PV for example, how are you going to persuade an established company to try it? How do you open up sales channels? Even if you are not ready for a commercial contract, it would be advisable to get some trials going as soon as possible. Companies need to create a buzz. It sounds obvious, but investors – and future customers – want to see real customers, or real potential customers, and real endorsements.
Not just fat cats
Companies seeking funds should of course be aware of the investment strategy of any potential investor or venture capitalist house. What renewable energy sectors have they invested in? Most will tend to restrict their investment to one or more sectors that they know well, as they will have established a network for market intelligence and, quite likely, co-investment opportunities.
For example, some may see the wind sector as already mature, offering less opportunity, while others will seek a niche in the sector, such as small turbines or gear boxes. In solar, supply of silicon and irradium is a big issue. If you are to get the funding, you need to know the market and anticipate the tough questions.
What stage investment does your prospective investor go for? Do they grant early seed money or look for companies coming up to an IPO? What is a typical deal size? Most important, entrepreneurs should realise that many venture capitalists have hidden depths and need to be viewed without undue cynicism. In other words, in this new age when the ethical investment trend has boomed to confront climate change, venture capitalists are not necessarily ruthless “fat cats” out for a quick profit at any cost. Of course, all investors want a profit, but some will take more risks and wait longer than others. If global warming is seen as a profitable opportunity, all the better.
In fact, while many venture capitalists in cleantech come out of banking, industry or management consulting, others are serial entrepreneurs-turned-investors. So they often have hands-on experience of a start-up – and heightened awareness of the pitfalls.
For example, Jon Bonanno, president of Principle Power in San Francisco, founded at least three companies before deciding to devote his time to cleantech investing, starting as an angel investor in Sierra Nevada Solar and Cool Earth Solar. Others, like Shihoff of Viridor, came out of renewable energy companies, in his case, Finavera Renewables.
Others wear investor and entrepreneur hats concurrently. For example, Bob Metcalfe, interim CEO of Green Fuel Technologies in Cambridge, Massachusetts, is also a general partner of Polaris Venture Partners, which recently invested in Green Fuel. What does this mean for the entrepreneur? Be aware that your potential cleantech investor may be more than a fat cat. At the very least, read his or her biography.
And you may have quite a few biographies to read since cleantech investors tend to join a syndicate, rather than become a lone venture backer, as Rob Day points out. “Think of all your potential investors as potential business partners,” he says. “You’ll be sitting around the same board room table for several years so personal fit is important.”
Of course, many venture capitalists are looking for large returns, even when considering an early stage cleantech company. Tucker Twitmyer, managing partner of EnerTech Capital in Philadelphia, says, “even at an early stage we want to see a technological and business model that looks promising in the near term.” He also wants to see a “capable-looking” management team and the potential for large returns.
Nick Pople, a fund manager at Ludgate Environmental in London, which launched its Ludgate Environmental Fund last year, stresses the active investor role. “We tend to focus on deals where we are the lead investor. We add value by growing businesses through a combination of merchant banking support and pure VC backing.”
Ludgate, an early investor in Ceres Power and Hydrodec looks for post-prototype, pre IPO stage companies. However, Pople added, “even if they’re quoted on AIM, a lot of companies in this space still need VC support.”
Believe in angels
Given the interest in cleantech, it is not surprising that 'angels' are coming forward, keen to help nurture – and fund – emerging companies. For example, the Keiretsu Forum Angel Network has recently set up a cleantech investment committee headed by Bonanno of Principle Power. A new company, Principle recently closed a deal for US$1.5 million in convertible debt with the funding round oversubscribed by more than 50%. The investors included eight Keiretsu Forum investors as well as a number of international investors. Principle, an early stage investor, is looking at run of the river hydro as well as offshore wind and solar projects.
Bonanno sees the emergence of 'angel networks' as highly positive. “It's difficult to be a lone angel investor in cleantech as it's so capital intensive. But with an 'angel network', potential angels can get together to look at the risks and the system efficiencies of various projects. They eventually whittle down their list.”
In conclusion, it's a competitive marketplace, even for cutting-edge cleantech technology. Can you win? You can certainly improve your chances by trying to look through the eyes of any potential investor.
Dr Mahon of LCA sums it up: “There's a lot of nonsense around cleantech right now but the same principles apply: good product and a good team to take advantage of the opportunity.”