Venture Capital Finally Gets Smart??
05/11/09 19:45
The New York Times reports that cleantech. venture capital (VC) is shifting its investing $ from alternative energy (Alt-E) to efficiency. Finally! And (I speak as a VC...)
Beside efficiency’s often greater environmental benefit than Alt-E, efficiency investments have three significant benefits for investors:
1. Lower technical risk. Efficiency startups, such as smart electric meters, or more efficient lighting, use technology that already exists - it just needs to be designed and deployed in an economical business model. That means less chance the startup will fail.
2. Lower financing risk. Alternative energy startups often require huge amounts of investment to develop their technology and the build plants to build it. In a VC world that is investing less than half as much as it did in 2008, “capital efficiency” to get to breakeven reduces risk of failure, and helps ensure investors get a return even if the company doesn’t achieve a billion $ IPO.
3. No “valley of death.” Once the Alt-E company has developed its product and built its manufacturing plant (whew!), it still hasn’t succeeded because it now becomes dependent upon hundreds of millions or even billions of dollars of “project finance” to build projects (e.g. wind farms, solar powerplants) using its technology. Project finance is debt (e.g. bonds) issued to the power customer (e.g. a utility, or a county, state or country) to build the project (wind farm, solar farm) which gets paid of from the power generated (usually at a fixed guaranteed price) over 10 to 20 years. Unfortunately, with banks not lending even to typically credit-worthy entities, project finance has dried up.
We know one alternative energy CEO who has over a billion dollars of orders, but is within 90 days of “flame out” because of the lack of project finance. Ouch.
We’re glad VCs have seen the light (pun intended) and are turning to more efficient investing!
Beside efficiency’s often greater environmental benefit than Alt-E, efficiency investments have three significant benefits for investors:
1. Lower technical risk. Efficiency startups, such as smart electric meters, or more efficient lighting, use technology that already exists - it just needs to be designed and deployed in an economical business model. That means less chance the startup will fail.
2. Lower financing risk. Alternative energy startups often require huge amounts of investment to develop their technology and the build plants to build it. In a VC world that is investing less than half as much as it did in 2008, “capital efficiency” to get to breakeven reduces risk of failure, and helps ensure investors get a return even if the company doesn’t achieve a billion $ IPO.
3. No “valley of death.” Once the Alt-E company has developed its product and built its manufacturing plant (whew!), it still hasn’t succeeded because it now becomes dependent upon hundreds of millions or even billions of dollars of “project finance” to build projects (e.g. wind farms, solar powerplants) using its technology. Project finance is debt (e.g. bonds) issued to the power customer (e.g. a utility, or a county, state or country) to build the project (wind farm, solar farm) which gets paid of from the power generated (usually at a fixed guaranteed price) over 10 to 20 years. Unfortunately, with banks not lending even to typically credit-worthy entities, project finance has dried up.
We know one alternative energy CEO who has over a billion dollars of orders, but is within 90 days of “flame out” because of the lack of project finance. Ouch.
We’re glad VCs have seen the light (pun intended) and are turning to more efficient investing!
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