Recently, the Northwest Energy Angels convened a breakfast briefing on cleantech investing, and I had the honor of moderating a panel headlined by Clean Tech Nation author and Clean Edge managing director Ron Pernick; Kirk Washington, a Partner at Yaletown Venture Partners; and Susan Preston, General Partner for the CalCEF Clean Energy Angel Fund.
As our region continues to look for ways to create jobs, innovate and become a leader in clean energy, here are four key takeaways from the discussion.
Kirk Washington of Yaletown was direct in his assessment of what he and his firm likes to see in new ideas. The key is “capital efficient” businesses — or firms that need minimum of outside capital to get off the ground. The best way to drive capital efficiency?
“Through customer money,” he says.
In other words, companies should strive to introduce products as fast as possible, even if that means engaging with customers with a product that is not fully featured. “Getting objective feedback earlier helps make sure you’re developing the right product,” he said. Washington also stressed the importance of building the whole organization – sales, marketing, support, supply chain – rather than just focusing on the technology.
Catch 22? Not necessarily.
There are many ways to involve customers, especially as strategic partners, early in the process. We’re starting to see this a lot in the biofuels space, as large oil companies with big balance sheets increasingly are willing to fund construction of facilities if certain milestones for production and scale can be met.
Susan Preston made a poignant distinction between “necessity” economics and “luxury” economics. She believes that the more a product or service can solve a problem (a necessity) the better the chance of it seeing large-scale commercial success. Gone are the days when consumers will pay a “green” premium, and absent regulations or mandates, corporate customers will always seek the lowest cost option.
Early-stage cleantech companies would be wise to engineer their products and services with a focus on performance and cost rather than “green-ness.” There are some good examples of this in the chemicals space, with startups like bioplastics manufacturer Newlight Technologies.
Let’s assume that you can create a product or service that performs as good or better for the same or lower cost than the incumbent. And let’s also assume you have some traction with customers. Scaling any type of production company, energy provider or biotech needs capital – and likely a lot of it. In today’s challenging funding environment, what’s a startup to do?
Ron Pernick talked about several innovative ways to fund clean energy companies. The first is to enable clean energy companies to form Master Limited Partnerships (MLP), which are like traditional limited partnerships except that they can be traded on a public stock exchange. Traditionally, MLPs are limited to companies that are focused on the petroleum, coal and natural gas industries.
However, opening up MLPs to renewables could be a shot in the arm for the industry, given that MLPs are a proven method of raising large amounts of funding at a relatively low cost. In fact, U.S. Senator Chris Coons of Delaware has proposed the Master Limited Partnerships Parity Act to level the playing field. At just 200 words long, the Act is simple and direct. Anyone involved in large scale energy development should root for its passage.
But what if you’re not developing a 500mw solar array? What if you need funding to build a demo of an electric bike or a prototype of a new battery storage system? Will the new “crowdfunding” concept, which was enabled by President Obama’s JOBS Act earlier this year, be an option?
The answer from the panel was a resounding … “maybe.” All three of the panelists expressed some concerns about the overall quality of investors, as well as the quality of the offerings themselves. There was strong agreement that investing personal money – no matter the amount – is not a trivial act. Panelists would like to see more detail from the SEC about crowdfunding guidelines and regulations before giving a final opinion.
One thing that could be attractive about crowdfunding, with the assumption that the concerns noted above are made moot by regulations, is that it could be a great way to “top off” a round of funding in conjunction with an angel group which has done the core due diligence for others to leverage. crowdfunding could be highly complementary. At the Northwest Energy Angels, we often times can provide much, but not all, capital needed to fully fund a round.
If crowdfunding takes off, it could be a valuable asset for entrepreneurs and angels alike. Crowdfunders could leverage the professional due diligence of an angel group or venture capitalist, and those groups could leverage the aggregated funding power of individuals.
The three panelists agreed with the ability of the cleantech industry to create jobs and increase our national energy security. With extreme weather events increasing and rising ocean levels, it’s not a matter of if the U.S. will adopt more and more clean technologies, the only question is how quickly. Importantly, since the cleantech industry is a global industry, the U.S. needs to make sure it stays on top of this critical technological wave or yield economic sector leadership elsewhere.
Byron McCann is co-chairman of the Northwest Energy Angels, the first early-stage investment group in the United States to focus exclusively on cleantech industries.