Frequently Asked Questions
1. Will government subsidies and incentives last long enough or will governments change their policies?
Federal subsidies to fossil fuels
http://switchboard.nrdc.org/blogs/csteger/the_woodrow_wilson_center_and.html
http://wilsoncenter.org/events/docs/ELI_event.pdf 
2. Is it possible for the project to stand on its own legs without external / government support?
Avoid capital-intensive projects unless it is clear how they can be financed either through corporate or government guaranteed support. However, be careful about relying on government subsidies for economic viability. Assume governments will change their minds in the current environment – they will.
Fantastic progress has been made in many renewable energy technologies. In certain areas, such as on-shore wind, it is reaching the goal of grid parity in pricing. Solar is becoming competitive with low-cost Chinese suppliers that pose a growing threat to western suppliers.
But there is evidence that government subsidies in many countries are being reduced, leading to investment uncertainty. The capital-intensive nature of the renewables industry did not deter enthusiasts when banks actually lent money and credit was cheap. However, it is now a huge problem for new developments and will hinder the further development of the less-proven technologies such as wave and tidal.
3. Should I be wary of my industry requiring government certification or approval?
Be careful of markets requiring government certification or approval, which can be expensive in terms of delayed sales. This is a problem that EU governments in particular seem to be reluctant to address.
An example is products designed for energy-efficiency buildings. These often involve new materials that are not covered by the standard certification procedures required by the construction sector.
4. What kind of distribution partners do I need to get?
When it comes to distribution partners, big is not always beautiful and avoid leaping into exclusive arrangements. Large corporates tend not to be good at creating new markets but are good at exploiting them when they show potential. Hence small, hungry partners can often produce better results at an early stage.
Exclusive arrangements can hinder an exit. It is much better to slice and dice the market with a range of partners, many of whom could be exit options, and hence create a “competitive tension” among them. There is nothing like creating the framework for an exit auction at an early stage.
5. What are the exit options available in this business?
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).
6. What are the ways by which valuations could be increased for the business?
Be realistic about valuation: Having 10% of something that is worth something is better than having 100% of something that is worth nothing.
VC investors evaluate an investment on the basis of being able to show how a 5-10-fold return can be made within 3-5 years. They will have views based on market research showing possible exit values within this time frame and will use this to determine their entry valuation – this is part art, part science. At the moment, the reduction in M&A and IPO activity, coupled with scarcity of funds, has lowered entry valuations. With this being likely to continue, 2009–2010 could be vintage years for VC funds with money to invest.
7. What is the kind of capital investments that could be required?
8. What are the key market, technology and regulatory risks?
Outlook for cleantech investment in 2010:
http://www.financierworldwide.com/article.php?id=5514
9. What is the initial investment needed?
10. How easy is to get funding for these clean tech projects?
As the market for clean technologies matures and new investment models become recognised, the funding gap will become increasingly surmountable for high quality opportunities. Drawing from licensing and partnering techniques seen in sectors such as biotech, and focused state support, there is an undoubted future for capital intensive cleantech, and increasingly creative approaches are being looked at to address funding gap.
For instance., Sustainable Development Technology Canada (SDTC) has approved $48 million in new funding for the development and demonstration of clean technologies that benefit the environment and economy. In US, President Obama has awarded $2.3 billion in tax credits for clean energy manufacturing projects across theUnited States. A 30 percent tax credit has been provided for investments in manufacturing facilities that produce clean energy products including solar, wind, energy efficiency and energy management technologies.
11. Pay - back period?
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.
12. Will there be incentives and subsides for these projects?
13. Will manpower be easily available?
Hire people who are more experienced and cleverer than you – easy to find but difficult to do. This is called strengthening the team and succession planning.
Investors can take two approaches to this. Some raise succession planning at the last minute as a fait accompli, which is not conducive to an ongoing working relationship. Others raise it early during due diligence and often incorporate an independent review of the management team as part of the due diligence process.
If we cannot come to an agreement on succession planning with management during due diligence, we do not invest – this is typical of most investors. Such planning is a crucial part of any investment because the skills required by top management change as a business develops.
14. Are we the early movers in this field, are there are strong players in this industry?
Chances are that you will be an early mover; since many opportunities in cleantech segment are at a very nascent stage. Nothing to worry about as being an early mover has its own advantages. You can test waters and slowly gain foothold when the industry matures and hence be a market leader in that field.
15. What will be the status of this industry in 10 years from now?
The field of renewable energy today is at the stage where the computer industry was in the early 1970s, and the Internet industry in the early 1990s. The opportunities to innovate, lead and make a significant difference are immense for both individuals and businesses. Renewable energy, along with the related fields of cleantech and sustainability, has the potential to make an even bigger difference to the world than had the computers and Internet.
Cleantech could be the economy’s next boom as was the Biotechnology or the Industrial Revolution.
16. Are there some absolutely new skills we need to acquire in order to succeed in this business?
A competitive energy workforce requires much more than technicians and building retrofitters. Scientists, engineers, high-tech entrepreneurs, and advanced manufacturers will play a critical role, just as they have in strategic sectors like infotech, aerospace, and biotech.
The energy workforce deficit and education gap will substantially limit the nation's ability to lead the clean-tech industry and accelerate clean energy development.
If we do not immediately implement a national strategy for energy leadership - including smart investments to educate the energy generation - we will miss a historic economic opportunity.
17. Are there possibilities for joint ventures/partnerships and technology transfers?
18. How do we ensure that we are not too early into the market?
19. Will I need to educate the market about my product or is there an existing need?
20. How do I anticipate the follow-on costs?
There are often high costs involved for cleantech companies in commercialising products or technology and often these costs arise later in the companies’ development cycles. The increasing cost of investment can price VCs out of the market in later financing rounds and is often where large utility companies or corporate venture partners come into play. VCs should be conscious of any ‘pay to play’ provisions in their investments which might bind them to participate proportionately in later stage financings or else suffer penalties such as the loss of preferred share rights or a board seat.
21. Does the company need a scientific advisory board with experience to understand the underlying sciences of clean technology ?
Cleantech is a multi-disciplinary field which encompasses a broad range of business ideas and technologies. Consequently, venture capitalists (VCs) tend to specialise in certain sub-sectors in order to keep up to date and maintain a level of specialist knowledge in those sectors. Companies should ensure that they target VCs experienced in investing in their specialist sub-sector.
VCs need to genuinely understand the science behind the technology of their portfolio companies so they can make informed investment decisions, spot trends and growth areas and make appropriate valuations. To attract investment, companies need to ensure that their management team has the requisite level of knowledge and understanding of the company’s technology to be able to deliver on the business objectives. For this reason, companies may appoint a scientific advisory board comprising of sector experts to bolster a company’s internal scientific expertise.
22. Will the business require experienced management personnels?
(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.)
Hire a useful board of independent non-executive officers who can genuinely open doors, are willing to do so and are strong enough to make investor directors listen.
Again this can change as the business develops but these individuals are chosen for their senior-level contacts in target markets and their expertise in exits.
Dealing with large customers and distribution partners often entails a ‘pincer’ movement with the company working at the operational level and the non-executive officers promoting the company at senior level thereby, hopefully, shortening the decision-making process.
23. Will government subsidies and incentives last long enough or will governments change their policies?
Federal subsidies to fossil fuels
http://switchboard.nrdc.org/blogs/csteger/the_woodrow_wilson_center_and.html
http://wilsoncenter.org/events/docs/ELI_event.pdf
24. Is it possible for the project to stand on its own legs without external / government support?
Avoid capital-intensive projects unless it is clear how they can be financed either through corporate or government guaranteed support. However, be careful about relying on government subsidies for economic viability. Assume governments will change their minds in the current environment – they will.
Fantastic progress has been made in many renewable energy technologies. In certain areas, such as on-shore wind, it is reaching the goal of grid parity in pricing. Solar is becoming competitive with low-cost Chinese suppliers that pose a growing threat to western suppliers.
But there is evidence that government subsidies in many countries are being reduced, leading to investment uncertainty. The capital-intensive nature of the renewables industry did not deter enthusiasts when banks actually lent money and credit was cheap. However, it is now a huge problem for new developments and will hinder the further development of the less-proven technologies such as wave and tidal.
25. Should I be wary of my industry requiring government certification or approval?
Be careful of markets requiring government certification or approval, which can be expensive in terms of delayed sales. This is a problem that EU governments in particular seem to be reluctant to address.
An example is products designed for energy-efficiency buildings. These often involve new materials that are not covered by the standard certification procedures required by the construction sector.
26. What kind of distribution partners do I need to get?
When it comes to distribution partners, big is not always beautiful and avoid leaping into exclusive arrangements. Large corporates tend not to be good at creating new markets but are good at exploiting them when they show potential. Hence small, hungry partners can often produce better results at an early stage.
Exclusive arrangements can hinder an exit. It is much better to slice and dice the market with a range of partners, many of whom could be exit options, and hence create a “competitive tension” among them. There is nothing like creating the framework for an exit auction at an early stage.
27. What are the exit options available in this business?
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).
28. What are the ways by which valuations could be increased for the business?
Be realistic about valuation: Having 10% of something that is worth something is better than having 100% of something that is worth nothing.
VC investors evaluate an investment on the basis of being able to show how a 5-10-fold return can be made within 3-5 years. They will have views based on market research showing possible exit values within this time frame and will use this to determine their entry valuation – this is part art, part science. At the moment, the reduction in M&A and IPO activity, coupled with scarcity of funds, has lowered entry valuations. With this being likely to continue, 2009–2010 could be vintage years for VC funds with money to invest.
29. What is the kind of capital investments that could be required?
30. What are the key market, technology and regulatory risks?
Outlook for cleantech investment in 2010:
http://www.financierworldwide.com/article.php?id=5514
31. What is the initial investment needed?
32. How easy is to get funding for these clean tech projects?
As the market for clean technologies matures and new investment models become recognised, the funding gap will become increasingly surmountable for high quality opportunities. Drawing from licensing and partnering techniques seen in sectors such as biotech, and focused state support, there is an undoubted future for capital intensive cleantech, and increasingly creative approaches are being looked at to address funding gap.
For instance., Sustainable Development Technology Canada (SDTC) has approved $48 million in new funding for the development and demonstration of clean technologies that benefit the environment and economy. In US, President Obama has awarded $2.3 billion in tax credits for clean energy manufacturing projects across theUnited States. A 30 percent tax credit has been provided for investments in manufacturing facilities that produce clean energy products including solar, wind, energy efficiency and energy management technologies.
33. Pay - back period?
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.
34. Will there be incentives and subsides for these projects?
35. Will manpower be easily available?
Hire people who are more experienced and cleverer than you – easy to find but difficult to do. This is called strengthening the team and succession planning.
Investors can take two approaches to this. Some raise succession planning at the last minute as a fait accompli, which is not conducive to an ongoing working relationship. Others raise it early during due diligence and often incorporate an independent review of the management team as part of the due diligence process.
If we cannot come to an agreement on succession planning with management during due diligence, we do not invest – this is typical of most investors. Such planning is a crucial part of any investment because the skills required by top management change as a business develops.
36. Are we the early movers in this field, are there are strong players in this industry?
Chances are that you will be an early mover; since many opportunities in cleantech segment are at a very nascent stage. Nothing to worry about as being an early mover has its own advantages. You can test waters and slowly gain foothold when the industry matures and hence be a market leader in that field.
37. What will be the status of this industry in 10 years from now?
The field of renewable energy today is at the stage where the computer industry was in the early 1970s, and the Internet industry in the early 1990s. The opportunities to innovate, lead and make a significant difference are immense for both individuals and businesses. Renewable energy, along with the related fields of cleantech and sustainability, has the potential to make an even bigger difference to the world than had the computers and Internet.
Cleantech could be the economy’s next boom as was the Biotechnology or the Industrial Revolution.
38. Are there some absolutely new skills we need to acquire in order to succeed in this business?
A competitive energy workforce requires much more than technicians and building retrofitters. Scientists, engineers, high-tech entrepreneurs, and advanced manufacturers will play a critical role, just as they have in strategic sectors like infotech, aerospace, and biotech.
The energy workforce deficit and education gap will substantially limit the nation's ability to lead the clean-tech industry and accelerate clean energy development.
If we do not immediately implement a national strategy for energy leadership - including smart investments to educate the energy generation - we will miss a historic economic opportunity.
39. Are there possibilities for joint ventures/partnerships and technology transfers?
40. How do we ensure that we are not too early into the market?
41. Will I need to educate the market about my product or is there an existing need?
42. How do I anticipate the follow-on costs?
There are often high costs involved for cleantech companies in commercialising products or technology and often these costs arise later in the companies’ development cycles. The increasing cost of investment can price VCs out of the market in later financing rounds and is often where large utility companies or corporate venture partners come into play. VCs should be conscious of any ‘pay to play’ provisions in their investments which might bind them to participate proportionately in later stage financings or else suffer penalties such as the loss of preferred share rights or a board seat.
43. Does the company need a scientific advisory board with experience to understand the underlying sciences of clean technology ?
Cleantech is a multi-disciplinary field which encompasses a broad range of business ideas and technologies. Consequently, venture capitalists (VCs) tend to specialise in certain sub-sectors in order to keep up to date and maintain a level of specialist knowledge in those sectors. Companies should ensure that they target VCs experienced in investing in their specialist sub-sector.
VCs need to genuinely understand the science behind the technology of their portfolio companies so they can make informed investment decisions, spot trends and growth areas and make appropriate valuations. To attract investment, companies need to ensure that their management team has the requisite level of knowledge and understanding of the company’s technology to be able to deliver on the business objectives. For this reason, companies may appoint a scientific advisory board comprising of sector experts to bolster a company’s internal scientific expertise.
44. Will the business require experienced management personnels?
(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.)
Hire a useful board of independent non-executive officers who can genuinely open doors, are willing to do so and are strong enough to make investor directors listen.
Again this can change as the business develops but these individuals are chosen for their senior-level contacts in target markets and their expertise in exits.
Dealing with large customers and distribution partners often entails a ‘pincer’ movement with the company working at the operational level and the non-executive officers promoting the company at senior level thereby, hopefully, shortening the decision-making process.
Reference:
Related Links:
- Venturing into a Cleantech Business
- Basic framework to understand the clean tech business
- Difference between conventional and clean tech business
- Do's and Don'ts
