Cleantech Finance Insider

Renewable Energy Startups, the Keys to Success

Today's post is the first in a 3-part series describing what I look for in companies that are seeking risk capital investment for the renewables space.

The first key criterion is about the entrepreneur and his senior managers. There must be a balance between passion and pragmatism.

Finding entrepreneurs who are passionate about changing the energy industry is easy. Finding the ones who also can and will adapt their ideas to accommodate market and industry realities is harder.

The passion needed to succeed here is no less than in any other start up field. In fact it may be higher due to desires (or early investors’ mandates) to maximize performance across as many as three different bottom lines (financial, environmental and social).

Also entrenched incumbents, be they utilities, refineries or other well established market participants, can make market penetration all the more difficult. It will be passion and determination that sees the entrepreneur through all of the hurdles.

Yet passion without pragmatism to balance it is quixotic. I have seen many otherwise promising entrepreneurs who were so convinced of the “rightness” of their renewable energy efforts that they felt that determination alone could be enough to overcome all obstacles.

The old saw “success has 100 parents, but failure is an orphan” tends to be quoted to point out human nature’s desire for self-aggrandizement, but there is more to it. Start-ups will need to make many friends and allies along the way to success, often by compromising initial goals. Those unable or unwilling to make such compromises are unlikely to succeed. “A bird in the hand is worth two in the bush.” “Some battles are not worth winning.” All of these old sayings have special value to the passionate, yet pragmatic new energy entrepreneur.

The successful entrepreneur must ask himself these things:

• How important is this to you?
• What level of sacrifice are you prepared to make?
• Are you really ready to completely commit your professional life (and a good part of your personal life) into making your vision come true?
• Are you willing to bend with the compromises that will be required?
• Are you able to build a board of directors or advisors who can and will be your pragmatic “backstop?” Will you listen to their advice?

How he answers these questions will go a long way toward predicting the success of his venture.

Start-Up Finance: Conventional vs. Cleantech

While there are many similarities between newly created companies in the cleantech space and those of other fields, every entrepreneur needs to be aware of some important differences as it will apply to his prospects for success.

Most other venture investments aim to provide to the market a product or service that has one of three traits:

• “Cool” services that we didn’t know we needed until we saw them – such as social networking
• Dramatically improved efficiency in accomplishing well-established business tasks like sales automation
• A solution to a heretofore intractable problem such as a new cancer drug

On the private equity/project finance side, investors are backing projects that meet a different set of criteria:

• Widely recognized, generic services or products that are in limited supply such as electricity
• Products or services whose values are very well-defined for a predictable period of time, usually measured in years
• Projects whose markets and delivery technologies are so well understood that lending institutions are willing to extend non-recourse debt to the project

(Jargon watch: non-recourse debt means that should there be a failure to pay on time, the lender can only look to the assets of the project, itself a separate company, to satisfy the shortfall. The developer's home, for example, would not be at risk because of a failure in the project.)

Cleantech and renewable energy ventures tend not to easily fit into any of those categories. Cleantech ventures, as often as not, offer an alternate way to accomplish an existing task, in an environmentally friendly way, at minimal ADDITIONAL cost.

One of the difficult factors in evaluating these investment opportunities is the fact that the value of the environmentally superior solution is most often not quantified or quantification is dependent upon governmental mandates, which can and do vary from jurisdiction to jurisdiction, state to state, country to country and year to year.

Nonetheless, this segment of venture investing has captured the imagination of the popular press and to a certain extent, the institutions who put money into venture funds. In 2007, VCs invested over $2.2 billion in cleantech startups according to recent statistics released by PriceWaterhouseCoopers.

In a similar vein, renewable energy projects received over $55 billion in 2006 and are expected to grow to over $225 billion by 2016 according to a report from Clean Edge, Inc.

So as different as the renewable energy business is from more classic entrepreneurial fields, there are still many people getting their ideas funded and many more that will in the coming years.

What will define these successful cleantech entrepreneurs? I will leave that topic to be explored tomorrow.

Plug-In Vehicles - Part II

While I pointed out yesterday that EVs can cause some serious problems for utilities and their distribution systems, they nonetheless have and continue to be proponents of the technology. As EV's begin to make inroads into the private automobile market, utilities will have to move from conceptual advocates and come to grips with its realities for them. They will basically have two ways to respond. The generation side will see this as a politically correct load building opportunity and hope for a way to accommodate it. The distribution part of the utility will see reliability numbers (and their bonuses) going down and will want to dig in their heels.

Utility regulatory agencies and governing bodies could break this dilemma by authorizing broad capital projects to reinforce the distribution system to withstand the new loads. But that means higher rates for customers. Raising rates, even for the best of reasons, is dangerous for elected or politically appointed executives.

How will it end? I can’t say for sure. The technology of EVs is developing faster than the policy around implementation. My best guess is that like new medicines, some places will approve distribution system reinforcement spending sooner than others. Will it be fast enough to support the emerging companies developing such cars? I have my doubts. Like FDA drug approvals, utility and regulatory policymakers can be agonizingly slow to move. As a venture investor and project financier, I'm wary of markets with such prospective serial gatekeepers.

I'll keep my powder dry for now.

Plug-In Vehicles - Be Careful What You Wish For

There is an awful lot to like about plug-in or plug-in hybrid vehicles. Their high efficiency directly addresses both the geopolitical problems of fossil fuels and are low in green house gas emissions. So what's not to like?

Well, how about freezing in the dark (or if you are in California, sweating in the dark)?

One of the greatest potential train wrecks around renewables is in the area of electric vehicles (EVs). The conventional wisdom is that utilities should like EVs (or plug-in hybrid EVs, PHEVs) because they will generally be recharged by the owner upon his arrival at home, after the peak generation demand has past. It would appear to be a win-win-win. Utilities get some off-peak sales, owners get economical transportation, and the nation lessens its demands for imported oil.

The problem is that local neighborhoods and whole suburbs do not draw their peak demand during the day. Most people are at work then. Their homes draw maximum demand upon their return. They turn on the air conditioning, start cooking, and get a load of laundry going. And soon, plug in their cars. Just because there is generation capacity 100 miles away, it doesn’t mean that the local substations or even the lines and transformers out on the distribution system can handle this new load.

I've seen some studies that say the average electric vehicle will DOUBLE the peak demand of the average home that recharges one. Further, they also say that demographically, EV ownership is expected to be clustered in certain neighborhoods. So not only will we see pole top transformers going off like roman candles, but we can expect to have to reinforce entire feeders and substations as well.

So how will this all come our? Tomorrow, I'll describe what I think the big, difficult choices will be for utilities and their regulators as the EV wave continues to gain momentum.

Where do I begin...

You can't pick up a newspaper these days without reading about this start up getting millions of Silicon Valley VC money for a new energy company or hundreds of millions of private equity and bank loans for a biofuel plant or windfarm.

What is going on here? What makes for a winning cleantech start up? How do good-sounding ideas go wrong? Where should we be heading as a nation (or planet) when we look for our cleantech solutions?

I'll be tackling these and other topics of interest in this blog. I welcome your feedback and ideas.