How to finance a green-tech revolution

If you're looking to bankroll a green-business revolution, boring old banks and the government are looking just as effective as flashy venture capitalists.

Tech investors from Silicon Valley to Shanghai are betting billions of dollars on breakthrough green technologies, with many hoping to repeat the success of Google or Amazon in the energy industry. It's a shift that has helped create the buzz around clean energy among entrepreneurs, politicians, and in industry.

But despite a lot of attention on high-risk ventures, experts say the financing engine for the clean-energy economy needs to be a hybrid, drawing on both venture capital and on more staid funding sources, many of which are hamstrung by the global capital crunch.

"Venture capitalists are critically important for starting new innovations and getting businesses incubated. But what hasn't happened to date is getting large-scale capital to help bring those businesses to commercial scale," said Bracken Hendricks, a senior fellow at the Center for American Progress think tank and expert on green jobs. "We need the policies and financial mechanisms to turn early start-up companies into global powerhouses."

Using a baseball analogy, venture capital is all about hitting home runs--one company could deliver 10 or 20 times the initial investment within five or seven years. To get that, venture capitalists traditionally seek out companies that have a proprietary technology that sets them apart from the pack.

But many businesses that create green collar jobs are not a clean fit with that high-risk, high-reward model. Although they still require financing, companies that manufacture wind turbines or do home energy audits, for example, don't require technology breakthroughs.

"If you care about investing in clean energy for job growth, venture capital may not be the way to go," said one investor who requested anonymity. "Government spending should be doing more to support service industries."

Government funding could, for example, be used to retrain tradesmen to retrofit commercial buildings to be more efficient, he said. Meanwhile, large-scale energy projects, such as a solar power plant, rely largely on bank-issued debt and, increasingly, government loan programs.

Running the numbers
There are signs that entrepreneurs and investors in the green-tech field are getting a better grip on how to finance their ideas. The key is to pull money from different sources at different stages, say investors.

Whereas four years ago, venture capital firms--many of which were new to energy--would have put $100 million into a biofuels or solar manufacturing facility, many now realize those types of investments are better suited for institutional investors and banks.

Venture capital company Accel Partners sees a "second wave" of tech-oriented investors focusing on less capital-intensive businesses in energy efficiency, energy storage, smart grid, and consumer-oriented green companies.

"The concept of figuring out what is the best capital for entrepreneurs is still getting sorted out and is not extremely well understood, frankly, even by venture capitalists," said Rich Wong, a partner at Accel.

One thing that has become clear is that there needs to be coordination among the different types of financiers out there, said Bilal Zuberi, an investor at General Catalyst Partners. "The financing aspect for clean-tech companies is being better considered and thought through," he said.

For example, a group of entrepreneurs that has invented a great new way to produce biofuels could use venture money to develop the technology. Then it needs debt and equity, most likely from another source, to demonstrate that it works at the forecast cost. Once it has been proven, it needs funding to build more factories and start delivering product.

"Before it was 'Build it and they will come.' Now, it's 'Build it and find the right investment partners,'" said Zuberi. "VC funds like us now have a Rolodex of project finance players, large banks, and large debt institutions. Four of five years ago, we didn't know any of them."

A green bank?
To date, many green start-ups are struggling to break into that commercialization phase, in part because over-extended financial institutions have scaled back lending. Making matters harder, banks and private equity funds are wary of risk introduced from unproven technologies or new business models.

Consider the case of Geoff Chapin, the CEO of home weatherization company Next Step Living in Boston. When Chapin was looking to raise money earlier this year to grow the business--which is hiring--he discovered venture capital was a poor match because investors would end up owning most of the company. Instead, he went with angel investors, which generally invest smaller amounts.

"Our business is lower risk but the returns aren't ten-fold, they're four or five fold--in that ballpark," he said. "In the past, small companies have been able to go to banks, but they were not willing to finance anything that didn't have long track records."

Photos: Green tech grows in Boston

At the opposite extreme of a small service-oriented business in the clean-energy economy are large renewable energy projects, such as wind, solar, or biomass plants. These, too, are typically structured to deliver lower but more predictable returns than a tech-oriented start-up.

Since the financial turmoil has slowed those types of projects, government funding is a vital source, say entrepreneurs and investors. Hundreds of auto, battery, smart grid, and renewable energy companies have applied for Department of Energy loans or grants. Some DOE projects have been awarded, such as the $2.4 billion investment in plug-in electric vehicles which will be matched by private funding, but much of the money has not yet been disbursed.

"You're looking at a new industrial revolution, whether it's in solar, wind, transportation, auto, aerospace--these are huge mega economies within our economy. It will take a different model than venture capital, where you hire a few software engineers and you start a Google," said John Waters, the CEO of plug-in electric vehicle company Bright Automotive, which has applied for auto manufacturing loans.

Because capital is so tight, solar companies that don't succeed in finding sources for project finance will struggle, said Mike Hall, CEO of Borrego Solar, which sold a stake in the company to a Taiwanese manufacturer to finance its expansion. "The limiting factor now is really access to capital. Everybody that wants to be successful over the next 18 months needs an alternative strategy," he said.

One of the most important provisions being considered in the energy bill is the Green Bank, argued Hendricks. The House version of the bill would take money from auctioning carbon permits in a cap-and-trade system and create a revolving loan program for clean-energy businesses. A $10 billion fund would unleash hundreds of billions of dollars in private investment, Hendricks predicted.

Policies that mandate renewable energy and efficiency at utilities and put a price on carbon emissions are important, too, because they create a market signal that the country values low-carbon energy, he said. "(Policy) helps create certainty for companies trying to build a business model around clean-energy technology," Hendricks said.

[jaguar717]

"Policies that mandate renewable energy and efficiency at utilities and put a price on carbon emissions are important, too, because they create a market signal that the country values low-carbon energy"

That's quite the Orwellian mouthful. Whenever one of these Al-Gore-lites starts talking about government "partners" and business plans based on the right "policies", just translate it to honest English: "My product's prices cannot hope to cover its costs. But rather than having to produce something feasible to convince people to buy it, I'd rather have a thug politician subsidize me, make other options unaffordable, and in general hand me the unearned."

Sorry, but artificially forcing energy prices to skyrocket to make infeasible projects "profitable" isn't a market signal. It's a government fiat designed to sweep aside market signals and force a sub-par product onto the lowly serfs. If it's a legitimate venture, people will be willing to fund it for the real returns it will generate, and it shouldn't need to be paid for with the earnings of those who don't choose to buy it.

[Mattman704]

@jaguar717: I could not have dreamed of being able to say it better myself sir. Having a professional Mechanical Engineer as a Father, I've had this (disturbingly) unique and factual view of energy production for quite some time, even before "Green" technology was cool. In his own words, the reason we're still using petroleum/coal on a national scale to power a good portion of our infrastructure and pretty much our entire vehicle fleet is BECAUSE IT'S STILL THE ONLY ECONOMICALLY VIABLE AND WIDELY DEPLOYABLE ENERGY SOURCE(S) THAT WE HAVE! Jaguar717 hit the nail on the head when he commented on artificially forcing energy prices to skyrocket: They HAVE to cause current energy prices to skyrocket, because all their infeasible (for now anyway) technologies are still in the God-awful experimental highly expensive and not deployable on a mass scale stage.

[freemarket--2008]

So we should go back to using leaded gasoline, pull all troops and naval ships from the middle east and if the climate warms floods a few countries and maybe FL and NY, that's just too bad, right?

These are hidden costs which we will pay one way or another.

[bj1126]

LOL jaguar717 I thought the same thing after reading this:

"To date, many green start-ups are struggling to break into that commercialization phase, in part because over-extended financial institutions have scaled back lending. Making matters harder, banks and private equity funds are wary of risk introduced from unproven technologies or new business models."

Yeah it has absolutely nothing to do with the fact that the new business models don't create a profitable company without government intervention huh?

With energy production being the foundation of society it scares me to death when these social engineering buffoons talk about artificially increasing prices to "create new markets".

[Endbringer]

Where in the Constitution does it give our federal government the power to pick winners and losers in the marketplace? Where does it give them the power to create this cap-and-tax scheme?

jaguar717 is correct. Most of the green technologies out there are still in the development phase. They are not economically viable, yet. Doesn't mean they won't be, just that they aren't ready to replace our dependence on fossil fuels. To go ahead and reduce economic output, which ultimately will reduce the incentive to actually invest in these technologies, is just insane.

[ferricoxide]

Nothing "Orwellian" about it. It's simply the way things have been done since the first monarchs granted the first monopolies to early businesses. That's pretty much the history of commerce since the first post Roman Empire banks came into existence. Government selects the winners and losers - usually at the behest/demand of powerful financial interests. That precedes "Orwellian" by, what, at least five centuries (of the modern epoch)?

[carlhage]

One of the problems with green-tech financing is the unpredictability of the brown-tech competition. We have traditionally subsidized dirty tech via income tax money, e.g. virtually free land to mine coal, taxpayer funds used to clean up toxic waste dumps, fantastic military spending to secure imported oil, increased health insurance to pay for the extra hospitalizations due to polluted air, etc. We don't make dirty, imported, climate changing energy pay a cost for the impacts that create real costs. Then to compensate, we apply the two wrongs to make a right, and use taxpayer funds to subsidize clean alternatives (further subsidizing the dirty alternatives).

Now with the proposed cap-and-trade system, the price differential between CO2 free and CO2 spewing technologies could vary more wildly than the $30-$150/barrel-oil, e.g. the European trading system that varied $10-$30-$0.20/ton. Moreover, the invisible hand of the market in this system is designed to accomplish the minimum-- not what is economically practical. Suppose future solar technology makes solar cheaper than coal as Google's RE<C project-- the proposed cap-and-trade, automatically lowers the price of coal as solar gets better.

The unpredictability of pricing adds a penalty to financing green-tech. What we need is some price stability-- e.g. laws that limit the swings on the price of CO2, and make it guaranteed to only increase. By taxing pollution instead of income, we could use that money instead of income taxes to subsidize new clean-tech, and maybe cut income tax or issue a refund/rebate. If there is a price penalty for pollution, then less incentives are needed, and green-tech doesn't need to compete with the artificially lowered price of brown-tech.

I suppose cap-and-trade and our current on-and-off incentives are better than nothing, but in general they are bad for green-tech finance. I agree with the post above as a good assessment, but what is omitted is our political death-grip on the backwards economic system that goes against the green-tech market.

[ShofarNexus]

A real way to save a massive amount of energy is more efficient software. Our feature-rich server farms and ?throw more hardware at it? mentality can easily be outdone by simply doing the core work necessary and leaving out the fluff. For a vast number of needs using ShofarNexus on a Via Isaiah chip or Intel Atom instead of Windows/SQL Server, or Linux/Oracle on a four quad-core Xeons means the electric bill, including A/C, can add a lot to the bottom line.

[MOEisME]

Why is it always mass market? What about small companies that are actually using current technology to enhance productivity in a specific application or industry? Modern Outpost is an example of one that customizes flexible solar panels for people who work &/or play outdoors miles from any conventional power source. There are electric vehicle companies that produce state-of-the-art vehicles for specific needs. Just because everyone in America doesn't have one in their backpack or garage, does not make a technology 'fringe'. Maybe the US is falling behind in many industries simply because they are swinging for the fence all the time. Looking for the killer app. Remember: Apple & Microsoft were garage companies without significant markets when they started.

[jwl1940]

"Since the financial turmoil has slowed those types of projects, government funding is a vital source, say entrepreneurs and investors. Hundreds of auto, battery, smart grid, and renewable energy companies have applied for Department of Energy loans or grants. Some DOE projects have been awarded, such as the $2.4 billion investment in plug-in electric vehicles which will be matched by private funding, but much of the money has not yet been disbursed. "

I was surprised to see that among the first recipients of the gov. funding is a transplant and one of the auto companies that helped create the current mess. Where is the DoE on companies like Bright Automotive or Fisker?? They've asked for $400 m and have incredible pedigree. The gov. should recognize innovation when they see it -- a little [money] can go a long way!