Cleantech is the investment opportunity of the decade So where is the money?

Clean 15 Series

In a post-recession era (or, at least, so we hope), it seems that the world has sat up and taken notice of cleantech. According to the definition found in Wikipedia “Cleantech is a term used to describe knowledge-based products or services that improve operational performance, productivity, or efficiency while reducing costs, inputs, energy consumption, waste, or pollution.”

It would seem that in this decade all roads will lead to cleantech for future growth and for many reasons. If you are an environmentalist, the road will lead to cleantech because of a serious concern with regard to climate change and global warming. Responding to those challenges in your view would require a significant effort to ramp up the cleantech space in record breaking time. Scientist cannot agree on the timeframe, but most are pretty confident that we are in the process of some form of climate disruption that could have serious consequences attached to the outcome if we are not prudent with regard to our response.

Energy and resources

If you are in the energy and resources sector, there has been much debate about peak oil and its ramifications on our economy and our economic path forward. There is also a concern that the projected rate of growth for the emerging economies of China and India may out pace the global ability to respond to the potential challenge of peak oil or at least a plateau in oil production. The potential of this is very disruptive according to the late Matthew Simmons, the U.S. Department of Defense, the CEO of Oil and Gas giant, Petrobras, and a host of others. According to this group we may have already peaked in oil production, while new discoveries are not large enough to offset growing demand from the emerging world. If your source of information comes from the International Energy Agency, we will need to find the equivalent of four Saudi Arabias to supply the demand for energy. The global energy industry is a whopping $7 trillion, with most of the methods, systems and infrastructure either aging or in decline.

Public sector

If you are in the public sector, your main concern may be job creation. We have heard a lot about green jobs in manufacturing, IT, and retrofitting. According to the Clean Technology Growth and Go To Market Report we can expect the cleantech sector in Ontario alone to grow exponentially. The opportunity is real, and many governments in the world are betting the farm that the cleantech industry will augment growth in the coming decade.

Private sector

If you are in the private sector, you may take a closer look under the hood and unwrap the “cleantech buzzword package”. All of a sudden it starts to become obvious that cleantech may not be cleantech at all, but is actually inline with sound fundamental business. Cheaper, faster, better and with less waste, it is really the main component of sustainability and longevity. This creates higher returns in the long run especially when long-term risk factors are taken into consideration. Environmental risks, regulatory risks and reputation are all factors that will become increasingly important in the next decade.
So where, then, is the money for all these new cleantech firms that seem to be the most important market sector since Rockerfeller hit oil back in the last century?

Capital for cleantech

I decided to ask the question: If I were a start up cleantech firm where would I find capital? I asked this question to a good friend of mine hoping to get some clear perspective on what was happening in an industry that seemed to be going through a major transformation. Ben DuPont is the Managing Director of newly formed Yet2Ventures. DuPont’s fund made headlines this year after they tied up with a Japanese investment firm JAIC and invested in 35 companies. In 2010 there were not very many new funds created and putting together a fund of this nature in the current economic climate was impressive to many in the industry.

Yet2 Ventures leverages its connections to the Fortune 500 to match investors to start-ups. I also got some great insight from the folks of Ernst & Young.  Ernst&Young partner, Franco Hasou, has a focus on the cleantech industry and was kind enough to share the latest report done by Ernst and Young on the trends that they are seeing in the Venture Capital industry. This topic has been one of great interest and DuPont had a few thoughts.

“There has been a lot of speculation that clean energy might be the next Biotechnology or Internet revolution.  While I think this would be great, lets’ explore some of the hurdles: that VC and clean energy business models might not mesh well ,that we might need other funding sources.  Here are a few observations:
Amount of capital needed: Starting a clean energy company can be extremely expensive and out of reach of the normal $300M VC fund. For example, Solyndra, a photovoltaic company has raised close to $1.5B in equity and debt financing.

Payback does not justify the risk: Most clean energy companies require the construction of commercial plants for energy production, which may or may not be successful. This can be extremely capital intensive, as mention above, and have not defined exits strategy

Lack of exit options: Investments in clean energy companies are extremely illiquid.  Most VC Funds are set up on a 5 to 7-year model.  It could take longer than that to build and test the commercial viability of most new clean energy plants.  Additionally clearly developed eco-system where incumbents buy promising startups has yet to develop in the sector (think Apple, Microsoft, & Cisco).

Managerial experience: The three important factors for determining an investment in VC are 1) Management 2) Management and 3) Management.  In the clean energy sector most of the entrepreneurs come from large companies, primarily utilities.  They lack the experience in starting an early stage company, thus adding to the risk.

Energy is a regulated commodity: The price of energy is regulated in some markets. As the cost of inputs rises, the profit margins shrink adding one more risk to commercializing a new technology.

So if Venture Capital can’t fund clean energy, who will?  Will VC’s change their model like Element Partners and the Potomac Energy Fund?  Will large strategies step in like DuPont’s bet in bio-fuels?  Will the governments provide financing or incentives?

His last point was very interesting as this is exactly what the Canadian government did with the Sustainable Development Technology Canada model. The SDTC now has the largest investment portfolio of cleantech projects by any organization of its kind and is working at bridging the gap, while expanding its technology adoption efforts.

Next issue we will have a look at some of the key “take away” points from the E&Y and hopefully lay out a few strategies and ideas for cleantech companies as they cross the chasm of commercialization.