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."
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.