By Gerard O'Connor for AccountAbility Outsourcing, Inc.
July 2010
Each major technology advance in the New England economy, starting with the whaling industry, has presented its own set of challenges with respect to financing, i.e., the process of matching capital to risk and opportunity so as to best enable innovation by the entrepreneur and maximize return to the investor.
Today, clean tech entrepreneurs across the region are dealing with their own challenges in raising capital to get their companies off the ground. There is no shortage of “glass-half-full” analyses of the current clean tech VC market — one recent story cheerfully proclaimed 2009, in which clean tech VC investment fell by almost $3 billion or 37% from the previous year, to have been “the second best ever” for the space. But for the most part, anyone running a clean tech startup knows that a VC-led Series A round of any significance is a hard accomplishment to achieve today.
In the early days of the burgeoning clean tech space, it was a popular notion to compare various aspects of the clean tech/renewable energy space to past VC-enabled technologies such as biotech, telecom, or software. While it is always tempting, and sometimes useful, to evaluate any new phenomenon using past knowledge, there are limitations.
The inescapable reality is that clean tech differs fundamentally from those past VC-supported industries. The major markets for clean technology are power (generation, transmission and storage) and transportation (innovative fuels and vehicles). Not only is there plenty of supply in these industries, but the way we purchase and consume their outputs is deeply ingrained in our culture. Of course, some innovations in clean tech, such as IT-enabled efficiency solutions, actually do match up to the traditional VC model, with an identifiable addressable market, a new product with known development timeline and risks, and more or less believable projections as to revenue and profit. But many clean technology innovations are aimed at convincing users to switch from a solution that, on the surface and at the point of consumption, at least, is already working just fine.
This, of course, does not mean that energy technology is averse to innovation generally. The history of the “traditional” electricity industry in the U.S. is full of breathtaking technological advances — but they have been mostly aimed at making the supply of electricity more abundant, easier to consume and cheaper. As for external costs in the form of environmental degradation, pollution, and the like, on the whole we have tended either to fail to recognize them or to ignore them as too remote. One of the classic rules of pitching to VCs is to identify the customer’s “point of pain.” The pain we feel watching oil-covered pelicans on TV, real as it is, is not felt when we make a purchase decision by turning the ignition key or flicking the light switch.
For these reasons, and in today’s generally challenging economic environment, closing the funding gap for clean tech startups through venture capital can be inherently more difficult than for those companies that have driven the VC model over past generations. This leads to some basic rules for clean tech startups in planning their capital budget and fundraising strategies, whether you are trying to increase your chances of Series A VC funding or seeking to go another route to close the capital gap:
1. Assess Government Funding Sources. Get a handle on the role you need or want government funding to play. The federal government has become a key potential investor for many clean tech startups, with programs like SBIR, ARPA-E and other agency-specific funding helping early stage companies bridge the funding gap. Some entrepreneurs have declined to pursue government funding, because they see it as an unpredictable and time-consuming distraction. Admittedly, the support of the U.S. government for clean technology development has been halting and unpredictable at best, especially compared to that of, for example, China. And companies can’t assume that federal money will be there, even if their technology is superior. You should critically assess the RFP or funding opportunity to make sure that your company’s technology is a good fit and worth spending the time to apply for. Companies that are applying for government funding should also be upfront and realistic about their chances for and uses for such funding in discussions with VCs and other private equity sources. Don’t include government funding in your projections unless you have secured it.
2. Drive Policy and Legislation. Perhaps the most significant requirement to achieve a clean, sustainable energy economy in the U.S. is to muster the political will to recognize the current massive external costs of subsidizing the status quo, from human health to the environment to national security, and to spend political and actual capital necessary to shift some of these subsidies toward clean technology options. Of course, that is easy to say and hard to do. Individual clean tech entrepreneurs can play a role in this effort, by introducing themselves and their ventures to their representatives and political leaders, joining industry and policy groups and making the case for their efforts. In addition to supporting legislative initiatives, government representatives may also be instrumental in helping to make the case for local funding based on jobs created.
3. Who decides to buy? Figure out who will make the decision to buy your product or service. Is it a utility? A business or individual end user? Also, where will the dollars come from? Will a government entity make a purchase decision in the form of a tax incentive or rebate? It sounds obvious, but too many clean tech entrepreneurs make the mistake of assuming their revenue model into existence without challenging it. Additionally, this analysis may lead the company to identify and seek potential non-dilutive sources of funding, such as utilities and manufacturing and channel partners.
4. Know who the real competition is. Renewable energy entrepreneurs are accustomed by now to being importuned not to “compete against the grid.” The option of the status quo is a competitive threat for any disruptive technology, but perhaps especially so for clean tech companies. The companies that succeed will be those that are able to make a realistic and persuasive case, to investors and especially to decision-making customers, that their product is the right choice compared to the option of business as usual.
These are only a few general statements about the many unique challenges facing the clean tech field. Entrepreneurs seeking to raise capital should be sure to take account of the above factors and develop resources and tools to use to address them. Those who can differentiate on these factors might both improve their chances of private funding and identify other sources.
For more information on strategies for clean tech startups and venture funding, please contact Jerry O'Connor.
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