Why diluted investments are diluting cleantech’s impact

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Recently there has been significant discussion about what constitutes financial success in cleantech. At a minimum, VCs want 10X returns on a few deals to get excited about a sector. The company I founded, SunEdison, and many other deals fell short of this goal, good returns, but not 10X returns. So now most cleantech funds have to go back out to investors with sub-par return results and raise a new fund – not an easy thing to do these days.

Some folks, like my friend Sunil Paul, are pushing the CleanWeb. This is an asset-light investor play that is an offshoot of what Sand Hill Road VCs like to do, companies like Sidecar and Opower.  Given that 20 percent plus of all energy can be offset with ICT (Internet Communications Technologies) this is a very plausible way to go.  However, this is unsatisfying for me.

Fundamentally, energy efficiency and asset light approaches are essential, but not a sufficient solution set to bring us to 80 percent or more emissions reductions necessary to get us on the right path for climate change. We have to be able to deploy advanced technologies in vehicles, electricity generation, agriculture, water, building retrofits, and other core sectors.

Since 2010, I have been experimenting with a new approach in a small fund I helped start with Bernie Zahern called “Clean Feet”.  This fund takes, as a given, that there are hundreds of VC-backed cleantech companies since 2000 that have hit their technology milestones, and hundreds more since the R&D boom of the 1970s that are ready for deployment. However, they are experiencing a valley of death around raising non-dilutive capital for project deployment.

One company we supported, Skyline Innovations, has developed a new monitoring system for solar thermal projects to enable them to be sold using a ”heat purchase agreement” similar to the solar power purchase agreement we developed at SunEdison. We invested $3 million in project equity into their first projects and are receiving quarterly distributions that allow us to pay a current cash yield to investors every quarter.  We also received a small amount of warrants in the company since the company wanted to align our interests beyond the project investments and pay us for the hundreds of hours of “free” consulting we provided on standard contracts and customer approaches.

The measure of our success is that the company was so well prepared after our efforts that they landed a $30 million non-dilutive investment commitment from Washington Gas.  Our net return on the project financing is above 13 percent after tax unleveraged and the warrants are already doing so well that we have a chance of reaching 20 percent returns after 9 years.

We have been able to replicate a version of this model for two other companies and have just identified three more candidates. The trouble is that we do not neatly fit into any investor buckets. We are certainly not a VC, since we are not taking any technology risk and are not investing into companies.

We are not strictly project finance because our companies require more hand-holding, and in any case, most project investors don’t want to invest small amounts like $3 million because it is just too much paperwork. We are probably closest to “real estate” since we provide a current return and then upside on the value of the company. The cash distributions are much higher than real estate though and our projects are naturally depreciating unlike the land in a real estate investment.

Not fitting neatly in a bucket is confusing for folks — so raising money has been slow and steady — not what I am used to after the rocket ship I experienced at SunEdison.

A lesson for me, though, is that I do think that the Clean Feet model is a game changer.  Companies need non-dilutive project capital to reduce the amount of money they raise into the company that reduces returns. At SunEdison if we had more non-dilutive capital in 2007-08 we would have easily returned 10X to investors when we sold the company in 2009.  More importantly, the Clean Feet model recognizes that there are hundreds of technologies across multiple sectors that are sitting under-appreciated that need some VC money but mostly need non-dilutive deployment capital.

More recently, I was approached by an entrepreneur, Stephan Ouaknine, who has started a fund similar to Clean Feet called Inerjys. It is structured a bit differently with both a growth equity and project finance side to the house, but the concept is the same – we have to stop loading cleantech entrepreneurs with so much money they are destined to ‘fail’ from a 10X point of view. We have to help these companies attract non-dilutive capital.

Another way to say this is that there was over $200 billion invested in cleantech deployment last year. Most of that was non-dilutive capital for wind and solar.  What Clean Feet does at a small scale and Inerjys hopes to do at a $1 billion scale is to help prepare companies to attract non-dilutive investment from this very conservative $200 billion stream of money. The more diversity of technologies we can fit into that stream the more likely that stream can grow and the more likely we can achieve our climate change goals.

The technologies are ready, are the traditional investors in VC and project finance willing to change their approach?

Jigar Shah is CEO of Jigar Shah Consulting and a partner with Inerjys. Shah founded SunEdison in 2003 with a new business model, the solar power services agreement business (SPSA). The SPSA uses mature technologies and required no new legislative action. The SPSA model launched solar services into a multibillion dollar industry. SunEdison now has more solar energy systems and megawatts under management than any other company.

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