Making the Business Case For Early Stage CleanTech Investment, Deployment

Current Motor’s “Mini-Fleet-In-A-Box: Nanogrid Station + Electric Motorcycles” on display at the 2016 ARPA-E Summit Showcase

Emerging technology in the clean energy space generates much excitement and there is no shortage of aspiring innovators hoping to make a difference. But many of these clean tech innovators are dealing with a “significant fall off in traditional early-stage investment right at a time [when] we need capital,” said John MacWilliams, associate deputy secretary of the U.S. Department of Energy.

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The International Energy Agency predicts that $13.5 trillion needs to be invested in low carbon technologies between now and 2050 to implement the climate investment pledges made to the UN by world leaders.

“Having been an investor most of my career, I don’t know many fiduciaries who knowingly want to lose money,” MacWilliams said speaking as moderator on a recent panel titled “Where’s the Money? Current and Future Trends in Energy Investment.”

“We know there is plenty of capital in the world, but is there an investment proposition here that makes sense?” MacWilliams asked his fellow panelists at the Advanced Research Projects Agency-Energy (ARPA-E) Innovation Summit in Washington, DC on March 2.

The ARPA-E is part of the US DOE and charged with promoting and funding research and development of clean tech and other advanced energy technologies. MacWilliams credited ARPA-E as a government entity doing its part to “stimulate investment” in clean tech. But without bringing in venture capital and private investors as active participants, clean tech development will fail to gain any significant traction.

MacWilliams also mentioned a new U.S. DOE initiative, the Clean Energy Investment Center, to help spark private investment in early stage clean tech by giving investors access to technologies developed by the DOE’s national labs.

A New Venture Capital Model

Mike Biddle, managing director at Evok Innovations, and former CEO of plastics recycling company MBA Polymers, said his investment firm is doing its part to bridge the funding gap with clean tech energy products.

“Just since December [Evok] has looked at over 100 deals in this space,” Biddle told the audience. “I think…the entrepreneurs in the room looking for money feel that the investors have fled the early stage space, particularly the traditional venture capital investors and I think there is truth to that. I think a lot of them have moved into the later stage.” The key reason is that early stage clean technologies take 10 years or more to get to commercialization, so “the numbers don’t work for traditional venture capital,” he said.

Two Canadian oil companies, Suncor Energy and Cenovus Energy, along with the BC Cleantech CEO Alliance, formed Evok as a clean tech fund to “accelerate the development and commercialization of impactful energy solutions to address the most pressing environmental and economic challenges facing the oil and gas sector today,” according to a release. The fund is seeking to raise $100 million, with Suncor and Cenovus having committed $50 million to the fund for over the next decade.

Evok’s corporate connections benefit the companies they invest in by helping them find partners to develop their pilot projects and find their first customers. In addition to providing early stage capital, Evok will provide some financing to help get the company’s first pilot up and running, says Biddle.

Evok has a unique model for a venture investment fund. As a non-profit, Evok’s first priority is on the impact its investments make on the environmental metrics, not on the financial metrics.

The improvements the fund focuses on include greenhouse gas reductions, land restoration and water efficiency. And the firm’s compensation plan is designed around whether the startups they invest in deliver their environmental impact, Biddle said.

“It’s a huge difference in what motivates me to pick the companies I invest in versus a traditional VC,” he said.

But Biddle stresses it is important to realize a return because if it cannot do so, then it won’t be able to deliver on its environmental/sustainable promise.

“These companies…have to thrive, not just survive,” he said.

Biddle faced his own challenges in trying to raise money 17 years ago for his startup, MBA Polymers, when clean tech and sustainability were not part of the VC community lexicon. Biddle’s startup was “pegged as an environmental company, which to investors meant you were going to automatically lose money,” he said.

Despite these challenges with his first company, Biddle found corporate partners who “were interested in our technology and that understood the commercialization of that technology,” he said. That evolved into a joint venture with these partners that required Biddle put down only 10% equity to build a very expensive plant, but where his firm was still majority owners because they brought in the technology, he said.

“We used partners in two ways,” Biddle said. “First, to provide the initial equity, and then to use their debt raising capacities.”  The partners were then able to take the technology to the market.

But Biddle acknowledged new challenges innovators face today. The key to winning funding is “to show how they [can be] economically efficient and not just resource efficient,” he added.

“People today say it’s even harder because all of the VCs left this early-stage space,” Biddle said. “So I think that is really the conundrum that we are under.”

The good news for clean tech developers are the many alternative sources of funding that were not available to Biddle 17 years ago – including government loans from ARPA-E, crowdfunding and new angel investors who really understand the space and are filling the vacuum left by venture capitalists, Biddle said.

BASF’s Strategic Investment Preferences

Pulakesh Mukherjee, principal at BASF Venture Capital, laid out the challenges he faces as a corporate venture capitalist. A key consideration is how investing in the startup would be of strategic interest to BASF and what resources they can bring to the table for the startup other than money.

BASF invested in Arcadia Biosciences, a developer of bioengineered crops, which went public in 2015.

BASF, the largest chemical producer in the world headquartered in Ludwigshafen, Germany, is focused on creating chemistry for a sustainable future, according to its website.

“So when I’m talking to a start-up, one of the questions I have is what do you expect from BASF?” Mukherjee said. If it is just money, he tells them there are better sources to find financing.

Even though they are strategic investors, generating strong investment returns are still important, he said. “When I go to the investment board I cannot say, ‘This is a technology that will change the world, and by the way we will not make money.’ That does not make sense.”

And asking whether there is money to be made is irrelevant in a trillion dollar energy market, Mukherjee said.

“The question to be asked is what is the right model and how to make money in this space and when is it the right time to form the company,” he said.

BASF always invests with partners as an investment syndicate and takes board seats, Mukherjee added. He also praised programs run by ARPA-E.

“A lot of what ARPA-E does actually fits very well to BASF because most of them are hard sciences – energy storage, material, chemistry, and that fits absolutely perfectly,” he said.  Other areas they will look at include technologies that can be applied to the oil and gas and agriculture sectors.

Mukherjee highlighted some examples of how his firm benefited from ARPA-E. In one instance when BASF was searching for “new magnets” the first place they looked for partners were the 14 companies and university programs funded by the ARPA-E’s REACT program for developing cost-effective alternatives to rare earths, the naturally occurring minerals with unique magnetic properties that are used in electric vehicle motors and wind generators.

In another example of how they work with U.S. DOE labs, he noted that BASF has more than 20 people working on cathode materials for battery storage and the basic license came from the DOE’s Argonne National Laboratory.

Innovation is a big part of BASF’s continuing focus, as they have over 5,000 university collaborations around the world, joint developments with other companies, a venture capital unit and a focus on acquisitions, Mukherjee said.

Clean Tech Deployment Capital

Peter Davidson, CEO and co-founder of Aligned Intermediary, has heard from large institutions seeking ways to invest money in clean technology infrastructure projects, such as solar, wind, water, and energy efficiency. But they’d rather invest directly in those projects than through funds. Adding to that challenge is the need to invest a minimum of $100 million per investment due to the size of their infrastructure programs, he said.

The money that pension funds, insurance companies, endowments and other large institutions have on their balance sheets “dwarfs” the money in venture capital and private equity funds. But there is no easy way for these large institutions to invest, as there are very few private equity or infrastructure funds dedicated to green infrastructure with a fee structure attractive to these investors, says Davidson.

“Those are the investors we have to start creating products [for] and make it an easily investable decision for them,” he said.

In fact, pension funds are making direct investments in clean tech projects. On March 23, the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the US, announced that it acquired a 25 percent stake in Desert Sunlight Investment Holdings, LLC. That firm owns two solar photovoltaic power generation facilities near Palm Springs with a capacity of 550MW.

“Infrastructure has been one of our best performing programs and is an important part of the CalPERS portfolio” said Ted Eliopoulos, CalPERS Chief Investment Officer. 

Early Stage Challenges

While Davidson focused on late stage deployment of proven technologies, Mukherjee, of BASF, points out that it is very difficult for early stage investors and the model needs to evolve to show why clean tech investing is financially viable for venture capital investors.

Family offices are very interested and corporates are “doing a lot”, but there is a major gap in “de-risking the technology so that [more] corporate investors can come in,” and those technologies can then attract project finance capital from institutional investors during their deployment stage, he said.

Evok’s Biddle said the core clean technologies are science-based and take a long time to get from lab to pilot stage to “big scale.” He agrees that there needs to be a new model relevant to high technology risk investors.

“So we have a lot of wind in our face,” Biddle said. “How do we apply investment vehicles to early stage? How do we apply that to this high risk, where it is not yet proven like a REIT, where commercial viability is not yet proven?”

Still, Biddle said with the challenges come huge opportunity.

“I think it’s going to be in the material and science breakthroughs that are the core to making these commodities deliver their promise efficiently,” he said. “And that technology that delivers that will have value, and will generate the returns.”

Mukherjee of BASF said the old model of building, owning and operating is not the best VC model because it takes too much capital.

“You can’t hype your way into sustainability,” he said. “The economics need to work.” Startups today need to work with the incumbent corporate partners who can take the technology market, he said.

Davidson of Aligned Intermediary also said energy is very capital intensive and acknowledged that the DOE has played a huge role in jumpstarting early stage projects that had been cost prohibitive.

“The DOE financed the first five utility scale solar farms in the US,” he said. “Everybody thinks solar is such an easy and investable commodity now, but these developers could not raise money to build utility scale solar. They could not raise the debt financing.”

He also reminded the audience that this happened in 2010 and 2011 and is not “ancient history.”

“Since then 28 utility scale solar facilities exist and they are financed very easily by institutional investors and lenders,” Davidson said. “So that is an incredibly important catalytic role that the government does.”

The World Bank’s New Committment to Climate Action

And the World Bank is doing its part by investing $30 billion per year in an effort to battle climate change, says its CEO Dr. Jim Yong Kim during another Summit panel discussion. Their focus is expanding the adoption of renewable energy in developing markets that are “hugely affected” by climate change, such as Pakistan, Vietnam and Africa, he says.

To drive development of low carbon energy sources in these markets, the World Bank focuses on putting together “bankable” projects through expert project preparation and on providing “first risk” financing, which can then attract private sector capital to invest in their projects.  “We take first loss if it doesn’t go well” which provides comfort to their private sector financing partners, he says.

The World Bank recently announced that it would spend 28% of its investments directly on low carbon energy and sustainable agriculture  projects, and that all of its future spending would take account of global warming.  Their goal is to help developing countries add 30 gigawatts of renewable energy and develop climate-smart agriculture investment plans for at least 40 countries by 2020, according to its new Climate Change Action Plan announced on April 7.  “This is a fundamental shift for the World Bank. We are putting climate change into our DNA” says John Roome, the World Bank’s senior director for climate change.

World Bank CEO Dr. Jim Yong Kim

And speed of deployment is of the essence if we are going to keep atmospheric warming below the 2 degree celcius limit needed to avoid catastrophic climate change, says CEO Kim. “We need to move at lightening speed to create huge and demanding markets for all new clean technologies.”










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