Cleantech Finance Insider

It Always Takes Longer Than You Think

I’ve had the pleasure to be very busy with a client looking to raise a 9-figure sum for his overseas biofuels installations.  It goes without saying (but I’ll say it anyway) that we still are in the midst of tight money conditions.  Nonetheless, I was able to find a European investor who was interested and in March of 2009, we saw a term sheet.

Well, my work here is done.  Not really!  It took the remainder of the Spring and all Summer to get to a signed agreement, an agreement that formally laid out under what conditions actual money would be invested and for construction to begin.

Perhaps this is a good place to stop and back up a bit.  What, exactly, is a term sheet?

A term sheet is a letter of intent to invest in a company or project created by the prospective investor.  It is usually not legally binding or only has a small part that is legally binding.  It does set out the general expectations of the investor, the funds they want to put in, what they expect to get for those funds and the conditions under which they will release the money to the entrepreneur.

In the case of technology companies seeking venture investment, the term sheet is mostly about the valuation and special rights that the investor would get.  The conditions for release of funds are mostly driven by confirmation of assertions made by the company and the development of the legally binding agreements.

Project investment term sheets (like the one that my client has) are of similar complexity on the valuations but rather than validating facts about the company, conditions on release of funds often include more hurdles that must still be met.

Every deal will be different and every investor can have different hurdles that he MUST see cleared before writing the first check.  The most common topics of “must have” items to release funds are:

• Site control of the land for the project
• Fully negotiated power purchase/off-take agreements
• Long-term feedstock agreements
• Independent feasibility study
• Key permits and/or local government letter of no impediments
• EPC contract
• Major component purchase agreements
• Technology license

If they are complicated but aren’t legally binding, why bother with a term sheet at all?  It is a compromise.  Not every offer to invest is accepted.  The comprehensive legal documents require both time and often six-figures worth of legal expenses.  As an investor, you just don’t want to sink those kinds of resources into a deal only to find some insurmountable disagreement with the developer.

The goal of the term sheet is to describe the proposed deal in sufficient detail and clear enough language to give both sides the confidence that comprehensive legal documents describing this deal will be signed.

So how hard should a project developer negotiate on a term sheet offer?  First off, remember it is still a term sheet, not the full legal document set.  Not every issue will be solved or every cost enumerated.  Getting a legal review is always wise.  Just don’t let the lawyers try to rewrite the document or turn it into legally binding agreements.  You can burn up a lot of precious money (that you may not have) by letting the lawyers run free at this stage.  It is completely fair however, to push back on the big issues-ownership splits, voting rights, management structure and compensation to the development team. 

Most investor groups that I know are limited by their own manpower in how many deals that they can do and oversee in a given year.  An offer of a term sheet to a project developer is a strong endorsement of their belief in that project.  But they need to know if they can reach an agreement on terms that they will find satisfactory.

How hard of a negotiating position you can take with the prospective investor will be determined by several things: the other opportunities that the investor has, how highly they think of your compant or project AND what alternatives you as the entrepreneur have to this investor’s money.

While every deal is in deed different, one rule holds true for negotiating all term sheets, a smaller percentage of something is worth more than one hundred percent of nothing.

Carpe diem!

Surely There is a Job for me in Cleantech!

I’m going to take a departure from directly blogging on cleantech to comment about a trend that I am seeing.  Tech refugees are trying to move into cleantech.  I know this because I get contacted a couple of times each week by friends, acquaintances, friends of acquaintances and outright strangers asking for job leads.

I have to admit that the idea isn’t so bad.  Some of the better cleantech entrepreneurs that I’ve run across had earlier successes in information technology.  So then, what does it take to succeed in cleantech?

As readers of my earlier blog entries know, cleantech is really two very different fields of business depending on what you are trying to accomplish.  The first type of cleantech business is product or service development.  This can be very similar to IT start ups and some cleantech start ups ARE IT startups – use of software to address the pain that businesses or individuals feel when they try to make more use of cleaner technologies.

The second type of cleantech business is that of a project.  Projects generally make use of established technologies to provide a clean/cleaner commodity or service.  Projects must stand on their own two feet financially and are often developed by a small group of experts who understand the waste remediation, clean water, renewable energy or whatever commodity they intend to supply.

Which is the easier field to break into?  As in many things, it depends.  Cleantech project developers often need lots of help creating their project and keeping it on track.  They rarely have any money to pay people until all the plans are finalized and the big money has signed on to pay for construction.  The big money doesn’t tend to come on board until:

1.     Comprehensive project business plan is written

2.     A site has been obtained or controlled by option

3.     Raw materials, feedstock or other inputs are locked up for a lengthy period

4.     A proven conversion/production technology provider selected

5.     Firm contracting for the output of the plant is obtained with a multi-year duration

6.     Feasibility study has been written

7.     Key permits obtained or other elimination of the risk of intervention by major 3^rd parties

A smart job seeker will see numerous places where his or her business skills will readily transfer into this space.  Did I mention that independent project developers generally don’t have any money to pay for people to do this work?

Paydays for project developers come few and far between but they can be large.  It isn’t unusual for a small development team of a handful of people to split up a 7 figure developers’ fee upon closing of long term finance of the project.  By that time, the big value-add opportunities are over and the salaried, more mundane (but no less difficult) jobs emerge of build it well and run it cheaply. You have to have deep pockets to play this game.

The cleantech product company is quite different from this and will be much more familiar to the IT veteran.  These companies often get their start from venture capital.  They need to build and sell early, imperfect models of what they’d ultimately like to make and they need to cultivate their customers across the continuum as Geoffrey Moore has so well described in “Crossing the Chasm.”

So if this is so familiar, shouldn’t it be an easy transition?  Yes and no.  The challenge here is that in these tight money times, no one wants to pay you to learn.  That means that cleantech start-ups are looking for either domain expertise for the markets they serve or technology expertise with the tools to be used in making their products.

Like most industries, cleantech fields have their own jargon and nomenclature. I recommend doing whatever you can to get familiar with the industry segment that you want to break into.  Having a common language with practitioners in a field is a key element to creating rapport with them.  Having rapport is key to gaining consideration of you as a candidate.

So, once you are ready, where do you find leads?  Not in the places where most people look.  Monster, Hot Jobs, even Craig’s list will from time to time show openings that you feel qualified for and interested in.  By the time the opening is in public view, it’s a job-hunter donnybrook.

HR is fully engaged in weeding out as many resumes as possible to minimize intrusion on company management.  Since they are not necessarily domain experts, they may resort to buzz word bingo on your resume.  You tout your knowledge of polycrystalline silicon power generation technologies but get overlooked because they only want people with “photovoltaic” experience.

The point is that if you are looking for a job in cleantech, especially trying to transition into cleantech from another field, you need to network like crazy.  Find the events where people go who are already in the industry.  Career counseling is way beyond the scope of this blog but lots of help can be found around the general topic of career transitions.

With so much excitement around cleantech, every metropolitan area will have events, trade shows and promotional organizations springing up on the topic.  Be a volunteer!  Angel groups, business plan competitions, economic development seminars and so on.  Get involved.  Learn who the shakers and movers are.  Get some recognition for yourself. Become a mover and shaker.

I am convinced that we are on the leading edge of a massive wave of cleantech employment.  Riding that wave, like surfing will require that you get out where the big waves are, be prepared when your chance comes and at the right time paddle like heck and be read to ride.

So, Where Have You Been?

I’m sure that my regular readers have noticed the absence of postings for a couple of months now.  I have a good excuse.  I moved my investment banking licenses under Source Capital Group, Inc. based in Westport, Connecticut. 

Because the regulator (FINRA) has seen some I-banking bloggers use the medium to sell or advertise some investments, it can be an issue.  Such selling is a big no-no in the securities world (we’re supposed to Know Your Customer) and firms are required to keep a Compliance Officer on board who is in charge of keeping things kosher.

Now that I’m settled into the new firm, and by the gracious permission of our firm’s Compliance Officer, I resume your regularly (OK, irregularly) scheduled web log.

In the renewables project finance world, the big question remains “is anyone doing any deals?”  If you were to try to guess by looking at the press releases, you’d say so.  I’m not so sure how many deals are actually being signed since the financial meltdown of this fall.  What we’re seeing today are deals that were very far along the investment process during the summer and have only just been publicized.

I’ve spoken to a friend at a big-name (and still standing) bank that does a lot of renewable project lending.  I asked him point-blank “are you guys loaning any money to projects these days?”

His answer was, “not really.”  My friend went on to add “we are working on deals, but to generalize, they are things that are very familiar to us, like the second phase of a wind farm that we’ve already loaned to the first time.  We know the people and the resource so it is easier to get through the credit committee.”

Another aspect that I had not anticipated is that for now, the banks that I’m talking to prefer LARGER deals.  You read correctly.  They really do still have money to put to work (at least some of them do).  So in addition to looking for deals that have components of familiarity to them, they want deals that are big enough to put a couple extra sets of eyes on to check and recheck the project’s viability.

But what about the equity players?  Because of the structure of most private equity funds, they have long term commitments from big institutions-pension funds, endowments, etc. that they can draw down as they need it.

The challenge is that most renewable energy projects are built with a mixture of debt and equity.  If the project is built with all equity, the returns to the investor may fall below the threshold required by the fund.

I will readily also point out that there are tax equity funds that invest in all-equity deals for the tax benefits they deliver.  The challenge that they face is that tax credits are only valuable if you have a tax liability.  There are a lot of tax equity fund investors who, thanks to Wall Street events, may not have or have doubts about their future tax liabilities.

So pretty much the whole industry is moving at a slower pace for the last couple of months.

When will it end?  When will things get better?

As the great Yogi Berra once said, “prediction is very hard, especially when it’s about the future.”

Based on the bankers that I’m talking to and the partners at the project finance funds, I think that we will see attitudes (and check books) turn a corner now that we’re in the New Year.  The continuing de-levering of the economy will mean that money will still be tight by 2007 standards, but new deals will start getting done with more and more frequency.

In the meanwhile, I’m focusing my time on clients who have all equity investment opportunities.  They aren’t as big as the levered deals of recent years, but at times like these fewer moving parts (especially when some of the parts are unavailable) make for easier deals to get closed.

Come on 2009!

Is There Too Much Renewable Energy?

Some of you may have seen an article in the NY Times last week addressing the speculation that the growing integration of renewables in general, and wind power in particular may be creating big problems for the utilities that run the electric power network in the future.

This is not the first time the issue has come up.  In fact, it was a particular area of interest and study back in my days as a researcher at Pacific Gas and Electric during the 1990's.

In recent years I've seen many technical articles and whitepapers addressing the concern.  To grossly oversimplify, there are circumstances whereby the generators on the wind turbines (if you have enough of them) are thought to be able to adversely interact with the grid to drive voltages and or frequency out of allowed tolerances, causing a big outage.

One analogy might be watching a new driver learning to handle the clutch pedal.  In the fits and starts of applying and removing gas to the engine and torque to the wheels, it is possible to kill the motor. "Killing the motor" of the grid should be avoided!

Some Canadian utilities have put a temporary upper limit on how much wind power they'll accept. Others around the world are considering the same. I recently had a chance to speak to an old colleague, a transmission system engineer from my PG&E R&D days.  He currently works for the the State of California and spends a lot of time studying these problems.  With California's aggressive plans for renewable energy integration, it is clearly a question that needs to be answered.  "What WILL happen when we put all of this renewable energy into the grid?"

His reply surprised me. It seems that integrating big wind farms into the transmission grid is not a big concern in California.  The ability to predict output from wind farms is pretty good on an hour by hour basis with relatively little minute-by-minute changes. The system operators have good telemetry on those sites. The types of problems that might be caused by adverse interactions between the generators and the grid are well understood.  There are readily available devices that can be put at the interconnection point to mitigate for any such interactions.  In short, it is an engineering problem with engineering solutions.

What startled me was he went on to say "I'm more concerned about is what happens when all of Gov. Schwarzenegger's million solar roofs come on line."  He added, "no one at the utility knows where they are.  The distribution system has very little telemetry. Solar power output can quickly and dramatically change with cloud cover. The distribution system has always been hard to model with its inherent  complexity of customers, branches and interconnections.  Now with the introduction of thousands of "hidden" generators, we don't have a good handle on if or how it may cause problems.  I don't THINK that there is a problem with distributed PV, but we know that we need to keep an eye on this issue."

Somewhere, out there, a PV developer-entrepreneur is reading this, shaking his fist in the air and yelling "FEAR ME, utilities!"

Crossing the Cleantech Chasm pt. 2

Over the last few months, with the precipitous rise in petroleum prices, we've seen the call from many politicians and thought-leaders for an "alternative energy Manhattan Project" or "the renewable energy equivalent to the Apollo program."

At the risk of sounding ungrateful for the attention to the industry that I work and personally invest in, I think that this is misguided.

These two historically significant exercises in national will had a key point in common that is critically missing from the requirements of the next energy solution. Both of these efforts were based on MNO budgets. Money No Object. They were about the demonstration of our political will and technical capabilities, not about cost effectiveness or affordability.

If it was determined to be in our national interest to build a 100MW photovoltaic power-plant in orbit above the earth and to microwave the power down to a receiver station in the Mojave desert, we could do it.  The question is would it be easier and cheaper than two frame 7F, 50MW GE gas turbines?  Probably not so much.

The unique challenge is that we need to develop not only novel solutions to our energy supply problems but to do so in a way that is either directly cost competitive or close enough that relatively modest public policy efforts can make them so (e.g. tax credits, feed in tariffs, etc.).

The problems we face with petroleum is two-fold. First, is the high and growing demand for a product whose price is controlled by a cartel. From a pure Michael Porter competitive forces viewpoint, if you can't find an alternate supplier you had better find a substitute product.

The second problem is the more talked about issues of climate change. The high and getting higher levels of CO2 in our atmosphere are at best, worrisome and at worst, disastrous. Compounding this problem for us is that, on a statistical basis, most people in the world don't care.  

They care about getting out of poverty. They care about food, clean water and better transportation - immediate needs for family and self that overwhelm what might be in so many years. In short, the renewable energy solution that they need is the one that is cheaper than fossil fuels.

In each case, as painful as price increases around crude oil are, they make us that much closer to a cheaper  solution to both problems around the world as well as at home.

Now that we have admired these world-class problems, what might the US government (or other capitalism-based government do to solve them?

In part 1 of this story, I identified a chasm of funding for new technologies. They can best be characterized as projects too expensive to attract venture capital and too new to attract debt.

If I may criticize my own industry, others in it tend to call for government intervention (subsidies, credits, etc.) all too often to help our cause. Since I have been relatively quiet on this topic, I now feel that it is my turn to ask.

There has been a program in the US Federal Government's Small Business Administration to invest in venture capital. I know because Fluke Venture Partners, where I am a limited partner has the SBA as a special limited partner. The SBA takes a special position whereby they get a limited but preferred return on their investment. FVP gets to nearly triple the size of their pool of investable funds. The other limited partners get the prospects of the lion's share of the returns after (and only after) the SBA takes their cut.

While this SBA program is now being curtailed, I think that it or a similarly structured debt fund is an excellent approach for solving our new technology funding chasm-the chasm that impedes the commercial scale deployment of new, innovative energy technologies.

Now some will say "aren't there government loan guarantee programs that would accomplish that?" Actually, no. While there must be exceptions, every loan gaurantee program that I've come in contact with was either administrated directly by a government agency (=very risk adverse) or by a commercial bank that lacked depth of industry or technology experience.  In both cases, guarantees seemed to go to the firms that did the best job of schmoozing the administrator rather than advancing the state of the industry.

The creation of such a project finance fund would allow the government to direct where the money goes generally - project finance for first commercial scale (call it 50MW) use renewable energy technologies while allowing talented fund managers with real track records to pick those projects that have the right mix of talent, technology and risk mitigation.  

But this is a presidential election year, small chance of that happening.  Oh well.

Crossing the Cleantech Chasm pt. 1

Working in the field of clean technologies and renewable energy with all of the popular press coverage I often get asked "wow, things must be really looking up for you!" While I do stay busy enough to keep out of trouble there is a structural issue with the larger industry that concerns me.

In the '90s there was a fabulous book called "Crossing the Chasm" devoted to an analysis of how new technologies (especially software) get started and either thrive, stagnate or altogether die. It is a must read for entrepreneurs and technology marketers of nearly every stripe. The author, Geoffrey Moore, describes the first to buy as "innovators" and those that soon follow are "early adopters." The next stage of buying is by the "early majority" and this is where many products fail. The few who have a high degree of pain have already bought the product. Where the innovators and early adopters are separated by "cracks" in the bell curve of adoption, the early adopters and early majority are separated by a "chasm." 

While the structural reasons for the chasm are different for cleantech, ours is no less deep or wide. Sharp entrepreneurs with good ideas can raise funds to prove them out (usually from venture capitalists). Innovative technologies on the benchtop can also usually find the funds to build a small pilot plant to begin to examine the commercial promise therein.

When the firms begins to look for money to build that first fully commercial plant, that is when they fall into the chasm. Consider how long have we all read about the promise of cellulosic ethanol yet how few commercial plants have been built.  In this case the chasm isn't a challenge of product marketing, but one of finance.

I often (all too often) find myself telling a client that his technology looks great and that banks will line up to loan him money to build the 2nd, 3rd or 4th plant in the series. "But why not the first?' they ask. "If the banks won't give us the money, can't we just go to the venture capitalists and get it?"

These questions form the crux of our dilemma.

A cursory examination of renewable energy news will quickly reveal word of big banks both domestic and especially European who are lending hundreds of millions of dollars to build wind or solar power projects. The difference between the deals you read about and that of our erstwhile entrepreneur boils down to confidence and familiarity.

The manufacturers of the panels or turbines in the deals we read about are large companies. They can and do offer performance or availability guarantees. Those companies are big enough to make good on their guarantees if needed.  Just as important, these deals are not novel. Banks don't have to ask themselves "Is this going to work?"  Instead the questions are much more in the vein of comparison. "Does this deal look enough like the others that we've seen that we should feel OK making the loan?"

The reason that banks look at the problem this way is that their upside is their interest payments. Their downside risk is default. If the project is in default, they must try to sell it to recoup their principal. If the plant went into default due to some unforeseen technical problem, who would want to buy it?  In short, for new technologies the banks have the risk exposure of a venture capitalist with much more limited prospects for reward.

Well what about building the plant with all equity from venture capitalists? While VCs are much more familiar with taking on the higher risks, very few cleantech projects offer the "home run" big return possibilities that are the mainstay of the VC industry.

For an energy project to have such returns (depending on capital costs), you might have to make power at $.02-.03/kWh and sell it at $.10/kWh. There just aren't very many opportunities like that out there (but if you've got one, please contact me ASAP!).

That leaves us with the cleantech financing chasm-projects that are too novel to attract debt financing but don't offer the stupendous returns that attract venture capital.  What's a developer to do?  Next time I'll weigh in on some ideas to solve this problem. 

Curb Your Enthusiasm

No this post isn't devoted to a sitcom about comedy writers but is instead directed at entrepreneurs who are pitching their ideas to prospective investors, especially the professional kind.

As I've posted on before, the cleantech entrepreneurial team (or any team for that matter) will need to exemplify a balance of passion and pragmatism. One of the ways this can manifest itself early in the fund raising process is investor meetings.

Earlier this year I was talking to a group of executives from a company that had a small pilot plant for turning a waste stream into potentially profitable recycled products. Their pitch to me went something like this (10 minutes compressed into one paragraph):

"We've got this secret process that takes waste XXX and turns it into AAA, BBB, and CCC valuable products. We can show you our pilot plant. We know where there are acres and acres of XXX that people will be ecstatic to pay us handsomely to get rid of. We figure we can get $aaa, $bbb and $ccc for the output. It's a license to print money. Are you going to invest in us or not?"

This was so wrong in so many different ways, but let me try to break it down. First, the executives were confused about the role of the meeting. I was there as a prospective placement agent, to help them find investors, not acting an angel. Secondly, they were confused about the role of the investor meeting had this even been one.

When you are meeting with prospective investors it is important to be cognizant of the realistically achievable goals. Investment in a project or venture is not an impulse purchase. What is an achievable goal of an investor meeting? Curiosity.

Different investors will want to drill down on different parts of your plan. You will not and cannot know what all of those are in advance to cover in your PowerPoint. The only reasonable goal will be to tell a compelling story about your opportunity and ASK for questions. If you aren't getting any questions, you aren't getting any interest.

One of the main criteria I use in vetting prospective clients for fund raising is how will they perform in front of investors that I connect them with. I not only have an responsibility not to waste investors' time with bozos, but spending time on deals that will never get funded is just a waste of my time too.

The main way that I vet such deals is to put on my VC hat and ask the questions that I would ask if I WAS investing my own money in the deal. In the case above, I drilled down on the scalability of the pilot plant and the threat of competitors.

When I asked about the engineering challenges of scaling the pilot plant by 5x, the CEO replied, "there's absolutely no problem." That is pretty much always the wrong answer and investors will generally feel lied to when told that. Either the company doesn't know what the problems might be or they are afraid to tell me. 

Eventually I did learn what their engineers were most concerned about. It turned out to be some mechanical engineering issues with the XXX handling system. Fairly simple mechanical engineering problems at that. OK, now I can begin to believe that you have thought about the problems and they are solvable.

"We have no competition." Oh man, those are the ultimate non-starter words with investors. If you have no competition then there must not be any need for your product. You either have competitors or substitutes or both and you need to be honest and well versed on how you are differentiated from them.

In many cases, the investor will already have an idea of who else is playing in the space because he's already taken meetings with such companies. Further, saying that you have no competition can sound like you aren't even looking very hard. If you don't know of other competitors, you need to cite the substitutes and tell the investor "We haven't seen anyone else with an approach like ours to the problem. Have you heard of any?"

I guess that the best way to frame the process is that you should present yourselves as informed optimists with a winning idea. Encourage good questions and take them seriously. Use the questions and your answers to engage the investor in substantiative dialog about the opportunity. It will take more than one meeting, but when the flow of questions begins to subside, then you may approach the funding questions, if the investor hasn't raised them already.

Where Do Things Go Wrong, Part 2?

The top ten list (in no particular order) of reasons seemingly good cleantech projects die continues. We pick up where we left off last time at number 6.

6.  The technology is unproven at commercial scale.  This is real challenge in the cleantech space.  Promising developments in the lab just are not going to normally get funded on a large scale.  The best example lately is cellulosic ethanol.  There have been news articles about breakthroughs at the small scale for over a decade but no one has built or is even contemplating constructing 100 million gallons/year plants that dominate the corn ethanol production space.  What pilot scale or small commercial plants that are being built are almost all taking advantage of big government grants or loan guarantees.  The bottom line it that it will be nearly impossible to build the first big plant of any given technology.

7.  How else can I say this, the investors just aren't that into YOU.  I've blogged before about "bankable" entrepreneurs and how certain qualities seem to attract money.  Ultimately, investors are investing as much in you, the developer, as in the project itself.  This doesn't mean that all hope is lost.  Development can be a team sport and a good developer won't be afraid to go out to recruit the talent that the investment community perceives to be missing.  Much of the time, the unspoken question from investors is "Can this guy manage and complete the project?"  If you can find someone who has just successfully managed the construction of a project like yours, then your team can become very bankable even if you, alone, are not.

8.  The project just has too many moving parts.  Consider a plan to develop one parcel of land to have both wind and geothermal power production.  One piece of land.  One transmission upgrade.  Greater efficiencies in O&M.  What's not to like?  Well investors are not very comfortable with such deals.  Most renewable energy projects will use a combination of debt and equity to reach financial attractiveness.  There also is a tendency for investment analysts to specialize in one technology over another.  So both the equity guys and the debt guys will have multiple people judging the project.  There may not be any one who feels comfortable endorsing the entire project.  Anyone of them saying "no" kills the deal. This is especially true for the debt investors who are looking at default risk.  For them, two technologies looks like twice the risk.  There is no credit given to a project that only goes a little broke.

9.  Officials who ought to cooperate, don't.  This is an easy one to get caught on.  Working on cleantech project development tends to make the entrepreneur very popular at cocktail parties.  You are admired in the community.  It doesn't mean that everyone is willing to help.  One of the biggest projects that I have ever worked on (a high voltage transmission line) was counting on an agency of the Federal government to make a bid on use of the line to fix some serious reliability problems and enable the importation of significant new supplies of renewable energy.  How could a governmental agency not support the idea?  The question that every developer needs to ask is "whose bonus is increased or promotion insured by helping me?'  In this case, there was no one.  Four years and $15 million in preliminary work later, there is still no deal.

10.  I know that I said that these are in no particular order but I did save this for last because I'm running into it more often than ever.  The project won't get done because it is politically out of favor.  I've had more than one biomass project lately that is getting the cold shoulder because some investors don't want to get caught up in the food vs. biofuels debates.  These projects are using wood waste or other energy crops grown on land unsuited for food crops.  It doesn't matter.  Perception IS reality. More and more, if the feedstock was grown in soil it is being blamed for increasing costs at the grocery store.  Investors don't want that kind of PR black eye.  Developers of biomass based energy projects will have to be very careful to stay in front of the perception wars on this one.

In part one, I mentioned that every successful cleantech project seems to die ten times before it finally lives.  While I haven't covered all of the possible causes of death, I hope that I've illuminated enough of them that you will be able to anticipate some, understand the others and bounce back from them all.  I wish you success.

Where Do Things Go Wrong, Part 1?

One of the ways that I try to help overly optimistic entrepreneurs to get their arms around the business risks their energy projects face is to ask them to imagine that its two years from now and they are being interviewed about the tragic failure of such an impressive firm.  What are you telling the reporter about where things went wrong?

I've heard successful project developers say that every good project "dies" 10 times before it truly lives. 

Most of us have heard the stories about Fred Smith, founder of Federal Express getting a C from his Business School professor for the idea of FedEx.  He also is famous for having flown to Las Vegas and played blackjack until he had won enough to make the next payroll for his company. Clearly, even great ideas may not be immediately recognized and certainly are not guaranteed a smooth ride to long term profitability.

Let me then try to summarize the "top ten" (with apologies to David Letterman) reasons that good projects die.

1)  Can't get the product to market economically.  For electric power projects, this is most often a transmission access problem.  Either the transmission line that is "right there" is already fully loaded or the costs of extending the lines to the project are just too onerous for the project to afford.  For biofuels projects the problem is more along the lines of transportation of the ethanol/biodiesel to a blender where the composite fuel is mixed and made ready for retail sales.

2)  "No problem" permits become insurmountable problem permits.  I've seen projects with significant environmental benefits get caught up in local politics that resulted in previously issued air quality permits being revoked over some very dubious reasoning but undeniably heavy politicking.  

3)  Window of time to raise funding isn't long enough.  This may sound self-serving as someone who does project finance fund raising but it is important to realize that there are several forces that are at odds here.  Developers naturally want to show their project to be as complete as possible.  Landowners, once they are made aware of the prospective value of their property, don't want to give long options to develop.  Prospective investors HATE feeling rushed.  The net-net of this is that developers need to begin their search for investors while they have at least six months of "runway" left.  Better to show them a deal that isn't yet fully cooked than one that's about to spoil.

4)  Off-takers are not "credit worthy."  It isn't enough to make your energy at a market competitive price.  Investors will want to see that the parties that you are selling to have deep enough pockets that they will make good their promise to buy at the agreed price even if the prevailing market price goes lower.  In the electric generation sector, this means that there is a strong preference by investors to see power purchase agreements with utilities rather than re-marketers.  On the biofuels side, it means a preference for deals with big oil rather than small, local retailers of B100 or E85.

5)  Investors just aren't that into your project.  As nice as the project looks on paper, the returns promised just don't seem to get investors to bring out their checkbooks.  Often times that means that you will need to look at bringing in a strategic investor who stands to gain a big supply contract, market stature or other value in addition to the basic IRR of your project.  Warning to developers, this usually means that you will need another six months of runway time to find, woo and close such investors.

Next time, I'll finish off this top ten list.  Until that time, I wish you good luck.

When Silence is Golden

I had a friend ask me "why would a company ever want to be in 'stealth mode'? Isn't it important for the company and their products to get known ASAP?"

  

While it is only natural for an entrepreneur to want to tout the value and promise of his idea, sometimes that can be counterproductive to his long term success and even make raising money more difficult. Take the case of the wind farm developer. He has to lock down his options on use of the land before he can get any financing. The louder and longer he talks in the community around the site, the harder and more expensive those rights will be.

A similar case can be made on the technology venture front as well. I was at a major trade show some while back and a bootstrapped new company (which I'll cleverly call NewCo) had made a big commitment to exhibiting at the show.  It was touting a very innovative product for sale to utilities to help them meet some vexing environmental requirements at a very reasonable price.  As a cleantech investor, I was interested in learning more about the company behind the product.

If you are old enough to remember Tom Peters's book "In Search of Excellence" you'll also recall his advice to practice "Ready, Fire, Aim" execution of ideas.  The underlying premise of which was that companies tend to over-analyze their moves rather than making an educated guess, get it in the market and adjust from there.

This start-up was more following the execution plan of "Fire, Fire, Fire."  The show floor had every alpha and beta product they could box up.  Getting samples to the handful of utilities who showed real interest was taxing production capabilities. They did however, generate a lot of booth traffic with the product including inquiries from prospective competitors.  

Some of those prospective competitors even came back to the booth multiple times to talk to the young engineers who were flattered to have such attention and intelligent questions asked about their creation.

While I'm pretty sure there were some utilities who signed up to test the product, I haven't seen any word of purchase commitments and it's probably too early to expect them.  Also with development times as they are I still don't know if new, competing products are being feverishly engineered by more well-established companies in the field.  Nonetheless I was struck by this idea.  What if NewCo had taken a different approach?

Dream with me, for a moment if you will.  What if NewCo were able to quietly identify the types of utilities that would have a natural inclination to try their product?  They might also quietly strike up product evaluation arrangements. By taking on the prospects in a more controlled fashion, they could allocate scarce production units to the most promising utilities all the while keeping their financial "burn rate" under tight control.

When the Pacific Gas and Electric or other marquee utility is ready to put up the big purchase order, it is time to prepare the PR blitz. It's also a great time to get get serious with the venture capital community.  

On that well-planned day, NewCo announces its product, a big name launch customer and a war chest of money to build out production capabilities and its sales force.  The prospective competitors are saying to themselves "where the hell did these guys come from?" and berating their R&D staff for not having developed it first.

As long as NewCo can build on this early momentum and continue to land customers, the existing players can only try to play catch up until one of them finally says "we can't continue to let this growth opportunity elude us.  We have to buy NewCo out."

And that, ladies and gentlemen, is how entrepreneurs make money in the cleantech game.