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The Angels And Demons Of Clean Tech Investment

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"The Angels And Demons Of Clean Tech Investment"

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By Adam James

Allocation of capital is one way society expresses its values. That’s why Chris Thile recieving a MacArthur Genius Award is one of humankind’s greatest redeeming acts, and why Kim Kardashian’s net worth is so damn frustrating. It goes without saying, then, that finding ways to finance clean energy and address climate change should be a high priority for civilization, if self-interest ranks among our top values.

Decarbonizing electricity markets is a core task in the effort to tackle climate change. However, clean energy faces strong headwinds from cheap fossil fuels in the marketplace. Fossil fuels have benefited from a long history of subsidization, government investment, continued externalization of their environmental impacts, and the ability to plug into a grid that’s literally built to accommodate them. Given these conditions, a strategy for increasing clean energy’s market share requires developing policies to bring down the costs of clean energy, in addition to accurately pricing carbon and correcting market failures like pollution.

One way to drive costs down is through increasing access to capital for early-stage clean technologies. There are certainly challenges in early-stage clean energy financing (pre-venture capital/seed stage), but there are also several innovative solutions.

The Demons: Challenges for Early-Stage Clean Energy Financing

Clean energy is a tough gig to be in. It is, after all, up against the most powerful industry in the history of the world. But lots of early stage technologies have to compete against massive, entrenched incumbents. Why should early-stage clean energy have a harder time than, for example, new computer software or an “even smarter” smartphone? I sat down with David Miller, an Angel investor with the Clean Energy Venture Group, to try and get some insight about the “demons” faced by early-stage clean energy startups:

Demon 1: Extended time cycles for development, sales, and deployment. Miller explained that time cycles at every stage of clean energy are simply longer or more complex than those in industries like pharmaceuticals or software. Initial development cycles for energy technologies tend to be as capital and time intensive as pharmaceuticals, and certainly more than software. But the sales cycles are also extended because communication with the relevant actors in the market (often, utilities) is notoriously difficult. The process for getting those technologies adopted by big companies can be years rather than months.

The deployment time cycle is where the difference gets even starker. Energy systems are frankly less welcoming of new products than telecommunications or internet systems (despite some similarities), and while the creation of a more transactive market will certainly alter this dynamic, we are not there yet. Turnover in the energy system occurs across large scale infrastructure and over long periods of time, overlaid by many levels of regulation. Innovation in this context is a tough beat since achieving scale requires integration into a complex network, and not just a good or better product.

Demon 2: Lack of policy support. Finally, the policy landscape for clean energy is a mess. The lack of stable policy signals for clean energy, combined with the policy support for fossil fuels at every stage of development, creates a very intimidating atmosphere for investors looking to place their bets on clean technologies. To illustrate, note the historical drop-off in wind investments with the stop-and-go PTC extension fight. Letting fossil fuels pollute for free creates a huge market distortion, and absent any carbon policy, this is likely to continue.

The Angels: Entrepreneurial Approaches to Early Stage Investing

David Miller belongs to a group that’s quickly adapting to overcome these challenges: angel investors.

Angel investors put small amounts of money into companies that sometimes have already received seed funding, but are not yet at the stage to attract venture capital. It’s a risky business, and as a result, angels have classically looked for very large returns on their investment within a short period of time (5-7 years) or good internal rates of return over longer periods. However, because of the challenges explained above, there is rarely enough time for even the best clean technology to achieve market penetration and start generating those kinds of returns. There are exceptions, of course, but this is the rule.

Angel investors play an important role in early-stage investment because they, along with government, operate within the “technological valley of death” that exists between R&D and proof of concept. Angels generally like to see a proof of concept before they invest, and their financing is what takes that concept to the next level where it can attract venture capital. In other words, angel investors bet on technologies that have modeled well in the laboratory, but haven’t yet received enough money to get a solid initial demonstration of that technology to a customer base in the real world.

So what are some solutions angels are employing to overcome these early-stage financing challenges?

Angel Solution 1: Networks. Angel networks allow individual investors to pool capital and share information, enabling higher quality investments. In some cases, sharing risk enables networks to tolerate a longer timeline on returns (say 7-10 years instead of 5-7) that could make all the difference with clean technologies. The Cleantech Angel Network and Clean Energy Venture Group are two such programs specifically focused on clean energy, but plenty of other angel networks have a clean tech component. Some venture groups are already using this model to invest in clean energy.

Miller, of Clean Energy Venture Group, insisted that angel investors in clean tech can both “do good” and “do well.” It just requires an understanding of the challenges outlined above, and a particular approach to the companies they are investing in. “Doing good for the climate” he noted, does require picking companies whose technologies have the potential to scale rapidly and be high impact. “Doing well” requires a longer term approach to the investments. But this is justifiable, he believes, because clean energy, as one of the largest industries in the world, has a certain inevitability to it as the climate challenge becomes a more determining factor and fossil fuel extraction becomes more difficult. This does mean that some of the technologies that angel networks, like the Clean Energy Venture Group, are getting in on at the ground floor have the potential for explosive growth.

Angel Solution 2: Crowdfunding. Another model that can be utilized by angels is crowdfunding, which has gotten much attention at the deployment level, but far less for its potential importance to early-stage clean tech financing. In essence, crowdfunding allows a wide range of investors (who aren’t necessarily formally connected) to take part in a project through smaller individual investments.

This kind of thing used to be basically impossible. While crowdfunding existed, funding portals were restricted to exchanging products for funding instead of offering an equity stake in the company. However, Title III of President Obama’s JOBS Act (signed into law last year) opened up these “funding portals” to small-scale investors seeking an equity stake in companies, as long as intermediaries register with the SEC and the total investments are under $1 million.

I couldn’t find any clean tech specific networks launched in the U.S., likely because the SEC regulations governing these entities are still under review (but see Symbid in the Netherlands for an idea of what is to come). However, it’s likely that existing crowdfunding portals like Kickstarter, AngelList, and Gust will get involved. These platforms have the potential to make a huge impact on early stage clean energy tech. As Walter Frick notes over at BostInno, while $1 million isn’t much for the later capital-intensive phases of clean tech development, it’s a huge deal for early stage companies.

Angel Solution 3: Matchmaking. A good example of a group that’s tackling the matchmaking idea is Ultra Light Startups, which put on the Future Energy Pitching Session at the ARPA-E Energy Innovation Summit.

At the Future Energy Pitching Session, a select group of startups had 3 minutes to pitch their idea, followed by an interactive question and answer session and then feedback from the investor panel. While the companies were peppered with questions from the investors, a definite trend emerged. On the one hand, how are these companies planning to break into markets dominated by big, incumbent players? On the other, what is their core innovation, and how do they prevent fast followers who mimic your product?

The feedback given by the panel centered on a few themes. First, almost every company was told to “partner up” with big companies in the field. This increased the chances that breakthrough technologies would be able to get to the market quickly, and would ensure startups have access to lower cost capital. As many of the investors noted, particularly in the case of “build, own, and operate” schemes, startups should not rely on their high cost capital. Second, investors encouraged startups to get very comfortable with parametric comparisons against other products and alternative pathways. For example, startups inventing better components for natural gas vehicles should not only learn to defend their core innovation against competing natural gas vehicle technologies, but also defend trends toward natural gas vehicles over electric vehicles or hybrids. This also hedges against the “fast-followers” trend by creating a well-thought out and unique contribution to the energy space, instead of just another app.

Adding to this advice, David Miller told me that startups have the most success when they have a well-rounded team (with members who focus on technology, sales and marketing), a customer base that they have already approached, and some kind of proof of concept (presumably seen by those customers) that can be taken to the next level with funding. Later, Daniel Goldfarb (a partner with Greenstart) echoed this advice — but also noted that many startups fail because they don’t have anyone on the team working to incorporate design thinking into their product. Having a more nuanced understanding of their customer base, including the difference between market segmentation and market classification, is crucial to designing a product that will overcome the apathy that consumers often feel about their energy use. Greenstart has a unique tact to addressing this problem by “joining the team” along with the companies they invest in, and offering design services. But for startups not receiving this kind of treatment, adding a product expert who understands both the engineering of the technology and the customer is essential.

Conclusion

Cost-effective clean energy will require utilization of a broad range of financing tools, intervening at different points in the technology lifecycle. Soliciting early stage financing is particularly troubling for clean energy companies, due to the challenges inherent in energy markets. However, solutions such as networks, crowdfunding, and matchmaking could be poised to direct some of the 300,000 plus angel investors, representing investments totaling $22.5 billion in 2012, into clean energy.

It’s important to remember that angel investments are only one aspect of early stage funding, and that real success requires approaching the whole value chain with smart solutions. There are many great ideas on how to move the ball forward on attracting seed funding, and on the next steps for venture capital in the clean tech space. Even with angel funding, there’s still a very high threshold to get venture capital with up to 98 percent of applicants rejected. However, with SEC rules pending and millions of dollars in capital in the wings, angel stage investment is certainly a prime candidate for moving capital off the sidelines and into the game.

Adam James is the Special Assistant for Energy Policy at the Center for American Progress. He can be reached at ajames@americanprogress.org, and on Twitter via @adam_s_james.

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20 Responses to The Angels And Demons Of Clean Tech Investment

  1. Mark E says:

    The overriding demon is our own failure to under-appreciate how connected everything is, ecologically. Investors work hard to protect themselves by using “OPM” (other people’s money). They further protect themselves by funneling the money through corps, which provide the investor with liability protection.

    Thus, investors want to charge ahead to deployment before considering the full web of ecology. If there’s a problem, it’s someone else’s problem, and the investors move on to the next fairy godmother and the next project.

    HOWEVER…. remember the lemon juice bandit, who over-estimated his own competence.
    http://opinionator.blogs.nytimes.com/2010/06/20/the-anosognosics-dilemma-1/

    A good rule of thumb is to speak up to ask
    “What about the unknown unknowns?”

    and then run like hell from anyone who wants to bury that question, unanswered.

    • Good point about unknown unknowns. Exercising its convening function, the government could at least set up a system for robust moderated technical dialog before deployment. The public should have a forum to out the fatal flaws of a big deployment proposal, so insider access does not trump technical merit. Crowdsourced knowledge might discover the unknown unknowns that siloed experts lack the background — or even interest — to investigate.

      • Mark E says:

        Nice idea, but the way it works now the politicos always look for cover for their own behinds. To say “no” based on unknown unknowns they can’t deflect criticism – it is inherently a matter of personal conviction, something most politicians seems to find abhorrent. No, they always have to have a “legitimate” reason as if this type of wisdom were false.

        I’ve often reviewed the history of various standards for worker exposure to radiation at these sorts of meetings. How we kept sending guys back in, and only after they dropped dead lowered the standards again…and again… and again…. the classic example of unknown unknowns.

        They don’t care. Such reasons are “not legitimate”.

  2. Gingerbaker says:

    Decarbonizing electricity markets is a core task in the effort to tackle climate change. However, clean energy faces strong headwinds from cheap fossil fuels in the marketplace.

    Sigh. Another article on how to save humanity through an entrepreneurial solution. The entire article – about how to somehow make renewables compete in a marketplace that doesn’t want them.

    Screw the marketplace – this is the future of mankind we are talking about.

    How about an article on *not* using the marketplace, but rather how to solve the climate change problem through a Federal project?

    • Mike Roddy says:

      Or, a stiff carbon tax. The oil and coal companies fight this because they know it will be their doom. They would prefer to doom everyone than lose out on a few nickels.

      • And the irony of it all is they could make tremendous profits developing clean energy. They have the resources to do it. Instead they insists on being dinosaurs and putting more and more of their capital and resources into unconventional fossil fuel sources. What gives with these people?

    • Andrew says:

      Market-based solutions become increasingly absurd with each new scientific revelation of the severity of our plight.

      If we lived in a democratic society run along even semi-rational lines, we would have long ago nationalized all energy production and redirected the profits of fossil fuels toward R&D for renewables.

      There is a time when radicalism and rationalism converge, and we’ve reached it. This site and the movement in general would benefit greatly from admitting this and considering more rational solutions.

      • Mulga Mumblebrain says:

        ‘Market-based solutions’ is mealy-mouthed cant for the rule of the parasitic grifters of the financial caste. To see a supposedly sapient species deliberately destroyed by the fanatic machinations of a tiny claque of tribalist cultists who have placed money above everything, even their own descendants, let alone those of others, their ‘civilization’, even their own species, is simply preposterous and unbelievable. A society that has definitively placed the worst individuals into positions of absolute power is not just a tragedy, but a derisory one as well. We have become a cosmic bad joke.

  3. SecularAnimist says:

    Gingerbaker wrote: “how to somehow make renewables compete in a marketplace that doesn’t want them”

    Renewables are plenty competitive, as article after article on this site have demonstrated.

    It’s not “the marketplace” (an abstraction) that “doesn’t want them” — it’s the corporations that profit from selling expensive coal-fired and nuclear-powered electricity that don’t want the competition from renewable energy technologies. Especially distributed, end-user renewable energy technologies (primarily commercial and residential solar PV), which drastically reduces demand for grid power.

    And those corporations are using their wealth and entrenched political power to block, obstruct and delay the growth of renewable energy for as long as they can get away with it.

    Which won’t be much longer.

    • Gingerbaker says:

      It’s not “the marketplace” (an abstraction) that “doesn’t want them” — it’s the corporations that profit from selling expensive coal-fired and nuclear-powered electricity that don’t want the competition from renewable energy technologies

      Those corporations who are using their political power to game the system for their profit – that IS the free market. Because there is no ‘free market”, there is only entrepreneurs operating in a corrupt system of lobbyists, kickbacks, media manipulation, propaganda, and corporate welfare.

      THAT is the market, and that market is fossil fuel-based and it actively resists renewable energy. Which is why we have accomplished so little in the way of eliminating carbon-based fuels over the past thirty years.

      You are correct to say that renewables are already competitive. They are more than truly competitive, because the cost of CO2 emissions is never part of the equation.

      And therefore, this idea that renewables need to compete economically in the marketplace is an absurd idea, an idea that must be discarded. We can not expect the fossil fuel marketplace to allow renewables to flourish. Thirty years of experience PROVES this.

      We need to stop making arguments that renewables can or may or must compete in the so-called “free” market. We need to ignore the free market and build a national renewable utility. And we need to do it in the next 5 to 10 years, or our grandchildren will be living in a post apocalyptic landscape.

      • Mulga Mumblebrain says:

        You are absolutely correct. ‘The Market’ is the money power of the morally insane and narcissistically malignant rich. A market only works efficiently and justly where market participants have as near equal ‘market power’ as practicable. In capitalist markets that means, overwhelmingly, money power. So efficient markets require income and wealth equality. In our omnicidal Rightwing global dystopia (anti-Utopia?)where inequality is unparalleled and growing at an accelerating pace, ‘The Market’ has become a death machine driving us to oblivion, piloted by human monsters.

  4. BSDetector says:

    Do you really think more angel funding is going to move the needle?

    The question is how do we fund the $100M at scale plant.

    We don’t need “20 baggers” we need 12% low risk IRRs.

  5. Davos says:

    What about the demon of “extraordinarily conflicted siting litigation process” where by investors are scared off by the 8-10 year fail-at-any-time lawsuit/appeals window, often manipulated by the very type of environmentalist counted upon to herald the enlarging infrastructure of renewable energy?

    They’re having the darndest time in Massachusetts (for example), and the chief opposition are environmentalists in the Berkshire Mountains who prefer their vistas the way they are. You can copy and paste opposition to nearly all types of green energy in similar veins across the country (not just wind energy obviously).

    Any anecdotal story about a few small installations here and there in the US is a red herring to the obvious elephant in the room that green energy investment is also scared off by the demon of due process when siting hits home.

  6. SecularAnimist says:

    Davos wrote: “a few small installations here and there in the US”

    What are you talking about?

    Wind power alone accounts for 35 percent of all new electric generating capacity installed in the USA over the last 5 years (more than nuclear and coal combined), and in 2012 became the number one source of new generating capacity, providing more than 40 percent of all new generating capacity brought online last year. The USA now has a cumulative total of more than 60,000 MW of wind power installed. And renewable energy in all its forms provided 55 percent of all new generating capacity brought online in 2012.

    Solar is still smaller than wind but it is growing at a prodigious rate, mostly in the form of relatively small, distributed PV installations — and large, utility-scale solar power plants are just beginning to be built now. Solar is poised for explosive growth.

    It’s still far short of what’s needed, but to call this “a few small installations” is just wrong.

    • Gingerbaker says:

      Thirty years of environmentalists pushing market-based incentives has resulted in this:

      Solar still produces less than one percent of our power.

      Thirty. Fracking. Years. ….. one percent.

      Solar is great, but this bullishness on *how* we approach renewable energy is going to kill mankind. We need to nationalize our renewable energy system, and get it built in the next 5 to 10 years, or civilization is doomed.

      Is it so hard to keep our eyes on the ball?

      • Mulga Mumblebrain says:

        Whereas in China, where the ruling power is political, rational and far-sighted, (rather than the neo-liberal orthodoxy of the West, where money is the real power, and is hyper-short-sighted, opportunistic and intensely single-minded in the pursuit of maximised, short-term, profit)renewable development is growing at an accelerating pace. Yet our MSM brainwashers never cease denouncing China for every fault that the malignant imagination can invent.

    • Davos says:

      Nice try… on many different fronts no less.

      You’re going to have to move beyond the euphemism of ‘generating capacity’ to get to the real world of what the relative contributions each energy type currently puts into the mix. (same goes for the near future too).

      60,000MW of capacity is a fun number to throw around, but most of us know better when it comes to actually working to meet daily energy demand. It’s great that the new energy installations are predominantly green-er energy types, but that’s not the gist of my comments.

      Now…the ‘real’ point of my post is about the demon that exists but yet is (still) ignored by the environmental community because it is the demon within. The lion share of any serious green energy installations have huge hills to climb with regard to siting/lawsuits/appeals, etc. that push costs well over initial projections, increase design-to-permit-to-installation times by almost a decade, and scares off investors unless all their initial investments are accompanied by guaranteed financing to bail them out when the project plan goes south.

      And who are the folks that light the first torches to sink these green energy installations? The local environmentalist. If you were honest with yourself, you would agree. It doesn’t matter how many installations have supposedly come online with their 60,000MW of ‘capacity’– if you’ve read your ‘wedges’ papers on what is actually required in real generating power to get the job done, we’re still small sauce, and hamstrung on ramping up the deployment because of the siting due process.

      Furthermore, the glorification of wind and solar is fine, but (again) an honest look at the wedges needed to get us to where we need to be also calls for Biomass and Nuclear (among others)…. Are you really willing to say that environmentalists who live locally to a proposed siting of such infrastructure are going to lay down their NIMBYness for the sake of the planet? It would be awesome to see, but alas.

      Or, if you want, we can redo the energy mix of ‘wedges’ toward a sustainable planet, kick out everything you don’t like until we’re left with what: wind, solar, and geothermal(carbon capture?) Not going to look good. You’re only other option is to also cut energy consumption in to little bits, which will not be a successful plan either.

      The point remains: New energy infrastructure (of any kind, but in this context green energy) faces local opposition. That opposition is often spear-headed by the well-educated/motivated environmentalist that knows all about these things, including their weaknesses. A little sacrifice at home will do wonders to getting the sort of new, rapid deployment necessary (including investor confidence of a green-lighted project within a sensible time-window).

  7. Omega Centauri says:

    Whether its an extremely experimental technology from a startup, up a newish technology from a bigger player (think solar panels, or LED lighting), there is a perception of risk on the part of the buyer. What if the equipment doesn’t work as promised, can I get my money back? The manager of some part of an enterprises operations can take the tradition approach, which for him is low risk, or he can try some new product that claims it will save him money in the long run. He’s likely to think, plan A -even if it goes wrong no grounds for being fired, plan B, if it goes south and I’m in the umemployment line.

    So a big part of the inertia to overcome, is lack of trust. This also applies to financing, if a loan is required, you have to convince a banker that his risk is minimal. Using equipment that doesn’t have decades worth of history behind it, doesn’t cut it for conservative bankers.

    • Gingerbaker says:

      Which is why it seems crazy to leave the survival of the human race to bankers and homeowners.

      Even states can not afford to make the sort of investments we need in renewable energy. Only the Federal government can shoulder that burden, and since it is a national crisis, by rights it is a burden they must carry.

      • Dennis Tomlinson says:

        And the same could be said for the construction of a new, smart distribution grid. And since there is (theoretically, at least) still a modicum of We the People in government, that would make We the People the owners of our national electric utility. [Karl and/or Groucho would be proud.] Ergo, residential electricity could be virtually free, up to a ration-able limit.. There would, obviously be costs for maintenance and other overhead, but that burden could be easily shouldered by corporate users (a sneaky way to tax the seemingly “untaxable”). [BTW Ginger, loved our work on "Toad".]